The trials of a banking giant

CHRIS WOOD November 18 1985

The trials of a banking giant

CHRIS WOOD November 18 1985

The trials of a banking giant


Next week Nova Scotia county court Judge N. Robert Anderson is expected to announce a decision in a controversial fraud case involving the Bank of Nova Scotia (BNS). If the bank is found guilty, it will become the first Canadian chartered bank ever convicted on criminal charges. During the past three weeks the bald and bearded Anderson has listened quietly in a windowless Halifax courtroom as two Crown prosecutors argued that the bank deliberately misled the Toronto-based Investment Dealers Association of Canada (IDA), which represents 65 of the country’s 99 stockbrokers and securities firms, about the financial position of Atlantic Securities Ltd. (ASL), a small Halifax broker which collapsed in 1981. As the trial ended last week, a BNS lawyer insisted in his summation that the Crown’s evidence proved “no dishonesty at all” on the part of the bank, Canada’s fourth-largest financial institution with assets of $58 billion, 25,500 employees on six continents and 1,200 offices in 52 countries. But for the Scotiabank, the trial is only the latest in a string of public embarrassments.

In the past 2V2 years the BNS has twice been embroiled in investigations of profits generated by Caribbean drug smuggling, including a controversial million-dollar loan that it extended to Bahamian Prime Minister Sir Lynden Pindling. And last year the bank successfully defended itself against seven charges of fraud and one of conspiracy in Saskatchewan—the first criminal charges ever laid against a Canadian chartered bank.

Still, BNS spokesmen say they are not overly concerned by what they regard as a few isolated events in a far-flung empire. For one thing, none of the charges has yet resulted in proof of intentional wrongdoing by bank officials. “These incidents create a lessthan-positive image for the bank,” conceded Robert Pattillo, a BNS spokesman, “but operating as widely as we do, these things are bound to happen.”

Last week’s proceedings in Halifax arose from the collapse of Atlantic Securities in November, 1981, three years after the firm was purchased by a group of investors led by former Halifax lawyer Terrance Power, who became its secretary. Following ASL’S failure, the IDA, which guarantees investments made through its member companies against loss due to malprac-

tice or bankruptcy, paid $273,000 to ASL clients who had lost money in the firm. Power was charged with 19 counts of fraud, theft and breach of trust. In July he was found guilty on 11 of the charges. Later, he was sentenced to four years in prison.

The IDA claimed in court that it decided to grant membership to Atlantic Securities partly on the basis of BNS assurances that ASL had $100,000 on deposit with the bank. Crown prosecutor Adrian Reid pointed out that BNS branch manager Lloyd Rhyno sent a letter to the IDA on Feb. 9, 1979, stating that the $100,000 was “available upon demand.” Two weeks later the

association sent ASL a “uniform subordination agreement” which, in essence, pledged the money to the IDA in the event of a collapse of ASL.

According to testimony, on Feb. 26 a bank official telephoned the IDA to clarify the document’s meaning. Two days later bank officials called on officers of ASL —whose office was directly above the branch—and had them sign a form which effectively froze the $100,000 and allowed the bank to seize it at any time. In April, 1981, seven months before ASL collapsed, the bank seized the money. Said Reid: “The bank had no intention at any time of parting company with this $100,000.” Rhyno’s Feb. 9 letter to the IDA, he said, “was a total misrepresentation.” For his part, BNS lawyer Harold

Wrathall blamed the IDA for failing to make its requirements clear to the bank. He told the court that bank officials did not understand the association’s subordination agreement. Said witness Joseph MacDonald, a Halifax lawyer who has worked for the bank: “It is a very complex document. One of my partners and I spent three days trying to figure out what it meant.”

One day after the trial began, Solicitor General Perrin Beatty told Parliament he had ordered a report on allegations that Canadian banks are involved in laundering illegal drug money in the Bahamas. Four Canadian banks—The Royal Bank of Canada,

Canadian Imperial Bank of Commerce, Bank of Montreal Bahamas Ltd. and the bns—account for 80 per cent of local banking in the Bahamas.

Beatty’s directive was sparked by newspaper reports of a year-long Bahamian royal commission investigation into drug dealing. In a report released last December the commission documented loans made by the BNS to Prime Minister Pindling of $1,055,000

between 1977 and 1983. At one point in 1982 Pindling, whose salary was $7,300 a month, owed the bank monthly interest and mortgage payments of about $12,000. BNS officials refused to discuss the loans. Said the BNS’s Pattillo: “We were satisfied that the notes


The commission was also unable to identify the source of more than $180,000 in payments made to Pindling and his wife, $114,000 of which was deposited in the BNS. Bank officials told the commission they were unable to locate deposit slips or other records that might have indicated the source of $67,000 of the money. Two of the three royal commissioners found no evidence that Pindling accepted drug payoffs. But the third

commissioner, Drexel Gomez, bishop of Barbados, said that he found it “impossible to say that payments [to Pindling] were all non-drug-related.”

In an unrelated case in January, the bank lost a final appeal in U.S. Supreme Court against a $2.3-million fine for refusing to release bank records from its branches in the Bahamas and the Cayman Islands to a Miami grand jury investigating drug and income tax

offences. The bank, which had fought the request since March, 1983, argued that the U.S. court was ordering it to violate laws in the Bahamas and Caymans that prohibit disclosure of such records. Said Pattillo: “We view ourselves entirely as victims caught be-

______ tween two countries.”

In September, 1984, Judge Gene Maurice of the Saskatchewan Court of Queen’s Bench found the bank not guilty on seven counts of fraud and one of conspiracy to commit fraud arising from the 1976 bankruptcy of C.P. Kaufmann x Ltd., a Regina-based I chain of more than 20 * furniture and departS ment stores. In his deci-

1 sion Maurice said he

2 found no “intent to deö fraud” on the part of ^ bank officials and bank£ appointed managers u who took control of the

failing firm in October, 1976. For three weeks the bank approved some Kaufmann checks, notably for payroll, while stopping payment on others, particularly those for the store’s suppliers. The prosecution alleged that the bank misled Kaufmann’s suppliers by accepting inventory that it knew would never be paid for and then kept the stores open long enough to sell most of the goods while seizing the sales receipts. As a result, BNS salvaged $1.2 million in unsecured loans to Kaufmann while dozens of creditors were left with $8 million in unpaid bills when the bank forced the chain into bankruptcy. Within months of the court decision BNS settled privately with many of Kaufmann’s unpaid creditors, some of whom had sued the bank in civil court.

BNS lawyers fought to keep both the Saskatchewan and Nova Scotia cases from court. Bank lawyers delayed the Halifax trial one year by unsuccessfully arguing before two levels of the Nova Scotia Supreme Court and before the Supreme Court of Canada to have the charge quashed. In Saskatchewan BNS lawyers delayed the laying of charges for more than three years by appealing to the director of public prosecutions, the deputy attorney general and finally to Roy Romanow, then the provincial attorney general. At one point they threatened to sue the Crown attorney who laid the charge.

Audrey Brent, now a lawyer in private practice in Saskatoon, recalls that she and two policemen met two BNS lawyers in March, 1981, at the 15thfloor office of the Saskatchewan director of public prosecutions in Regina’s new City Hall. After she told them of the decision to proceed with prosecution, one of the BNS lawyers, Gary Semenchuck of Regina, rose from his seat and in a loud, angry voice threatened to sue her for malicious prosecution should the bank be acquitted. “I couldn’t believe it,” Brent told Maclean's. “I thought he was going to attack me. I wanted to charge him!”

Regardless of the publicity resulting from the acquittal in Saskatchewan, the Halifax trial and the Caribbean problems, the business community does not appear to be concerned about the effects of the cases on the bank’s reputation. Said Roy Palmer, a Montreal-based bank analyst with Alfred Bunting & Co. Ltd. of Toronto: “The only thing that affects their standing in the investment community is their profitability.” So far this year, the bank is earning money at a slightly higher rate than last year, when net income totalled $272 million—more than $1 million for each business day.

— CHRIS WOOD in Halifax with MARC CLARK in Toronto