BUSINESS ECONOMY

A high-stakes saga

BRUCE WALLACE December 2 1985
BUSINESS ECONOMY

A high-stakes saga

BRUCE WALLACE December 2 1985

A high-stakes saga

BUSINESS ECONOMY

It was billed by its promoters as a high-risk, high-romance investment. When it was founded in 1981, East Coast Energy Ltd. of Halifax appealed to the Maritimers who dreamed of tapping the promised riches of offshore oil and gas exploration. As the first publicly owned energy company in Atlantic Canada, ECEL claimed many prominent politicians and businessmen among its investors, including Brian Mulroney; Fred Doucet, now a senior aide to the prime minister; his brother, Gerald Doucet, a Halifax lawyer and an Ottawa lobbyist; and the presidents of several large Maritime companies. But on June 25, 1985, the Nova Scotia Supreme Court ordered ECEL into bankruptcy. The company—which was set up to invest in oil and gas exploration and distribution—left $3.74 million in debts to seven creditors and left its nearly 1,100 shareholders—many of them small Maritime investors—$9.4 million out of pocket. Said Frank Lewis (Lew) DeMone, a retired army major in Isaacs Harbour, N.S., who lost his $5,050 investment in ECEL: “I was really sold a bill of goods. I feel we got conned.”

Maclean's has learned that the RCMP is now conducting an investigation into the collapse of ECEL. Sgt. Nigel Green of the commercial crime unit at H (Halifax) division of the RCMP would neither confirm nor deny the force was conducting such an inquiry, but Maclean's has learned that RCMP officers have contacted at least two people familiar with the company. Maclean's has also learned that in October, 1984, nine months after ECEL had defaulted on payments to other creditors, it continued to pay large legal bills to the Halifax law firm of Gerald Doucet, a cofounder of ECEL, for legal advice.

Those payments are also under investigation by the Official Receiver’s Office in the federal consumer and corporate affairs department, which began a routine investigation of ECEL’S involuntary bankruptcy in July, 1985. Next month the department will call several new witnesses—only one witness testified last July—for further questioning about $525,000 in legal bills paid to the law firm of Doucet and Associates. Maclean's has learned that many of the cheques for payment to the law firm were cosigned either

by Fred Doucet or by Edmond Chiasson, a member of Doucet and Associates who doubled as ECEL’S corporate secretary. All telephone calls from Maclean's to Gerald Doucet were referred to Chiasson. When contacted at his Ottawa office, Fred Doucet acknowleged, “If any cheques were issued, I was the person that signed them.” But he said he had little recollection of ECEL dealings because it was “so long ago.” Indeed, Doucet, whose shares have been in a blind trust since September, 1983, declared he was “not aware of a bankruptcy.”

The company’s collapse has already created ruffled feelings among some of the prominent Tories involved. In October, 1985, Austrian-born multimillionaire Walter

Wolf, once a Mulroney backer, filed a suit against Fred Doucet in the Ontario Supreme Court in which he alleged DOUCET-ECEL’S chief executive officer from October, 1982, until September, 1983, when he left to become a senior Mulroney aide—made misleading undertakings concerning the company.

The lawsuit is scheduled to be heard early in the new year. Meanwhile, Wolf has told Maclean’s that “senior people” in the Prime Minister’s Office have telephoned him to discuss the case.

Politics and business were intertwined throughout ECEL’S history. The company was in2 corporated on June 8, 5 1981, by Gerald Doucet, a former Conservative I cabinet minister in I Nova Scotia, and Gor§ don Crowell, a Calgary

energy consultant. Fred Doucet, one of Mulroney’s closest advisers, joined shortly afterward. Driven by what one investor termed “Atlantic gold-rush fever,” the Doucets raised $2 million by approaching wealthy Maritimers willing to invest in a locally owned oil and gas company. The first board of directors included David Read, a Nova Scotia restaurateur who has raised money

for Mulroney and was appointed to the board of Petro-Canada in December, 1984, by Mulroney; Philip Oland, the chairman of Moosehead Breweries Ltd., Canada’s largest independent brewer; and J. William Ritchie, the president of Scotia Bond Co. Ltd., a Halifax brokerage firm. Said James Macleod, a former president of ECEL: “They were a blue-chip bunch.”

But the Maritime board members had little knowledge of the oil business. In fact, many of those associated with ECEL told Maclean's that the Doucets relied mainly on political connections to the Nova Scotia government for the successful operation of the company. Said one ECEL director: “Fred Doucet left the impression that he had all the contacts, and could talk to the premier whenever he wanted.” Doucet repeatedly assured investors that ECEL—through its 25-per-cent holding in ICG Scotia Gas Ltd., a dormant company set up solely to obtain a gas distribution licence—would be the

company chosen to distribute gas from Sable Island, an offshore oil and gas field, to the province’s mainland. The contract has not yet been awarded. But, said the same director, “for a year and a half Fred promised us that the announcement [of the granting of the contract] was imminent.”

Despite the elusiveness of the contract and net income of only $52,560

through the first nine months of 1982, ECEL continued to expand. In September, 1982, the company bought a oneper-cent share of the high-profile Venture gas project off Sable Island for $10.5 million from Nova Scotia Resources Ltd., a provincially owned oil and gas company. The following month Fred Doucet began receiving an annual salary of $70,000 as the company’s first chief executive officer, and the company made plans to raise the money to pay for the Venture deal by floating a $9-million public stock issue.

For that issue, ECEL began looking for the first time to investors from outside the Maritimes for capital. Among the participants were Mulroney ($15,000) and former PC party president Michael Meighen ($7,500). Among those who turned down Doucet’s overtures was industrialist Stephen Roman. Indeed, the share issue, sold through Toronto stock brokers McLeod Young Weir Ltd.(MYW), failed to attract sufficient interest, and it

was undersubscribed by $1.6 million. But on Dec. 15, 1982, Wolf agreed to buy 33,333 shares at $15 each.

As part of his lawsuit against Fred Doucet, Wolf claims he bought the shares because Doucet told him that ECEL would be listed on the Toronto Stock Exchange by March 31, 1983. But the TSE refused to list the company’s stock. As well, the Venture holding was proving to be a drain on the company’s cash flow because, as a part owner of the project, ECEL was responsible for meeting its share of drilling costs, which had to be paid out monthly to Mobil Oil Canada Ltd., Venture’s developer. With the undersubscription of the stock offering, ECEL turned elsewhere for money.

By mid-March of 1983 Fred Doucet was working hard on Mulroney’s leadership campaign. At the same time, Doucet began negotiations with Petroleum Royalties Ltd. (Petroy), a Calgary-based oil company with an estimated $35 million in assets, $10.3 million in debt and declared revenues of almost $2.8 million a year. The original plan was for the two companies to merge, an action that would have left Petroy shareholders with a majority holding in the merged company. Declared Crowell: “It would have been politically untenable for the east coast oil and gas darling to have come under western control.”

Instead, ECEL signed an agreement in November, 1983, to acquire Petroy for $2.5 million in cash and $13.2 million in ECEL shares. But the anticipated revenues did not materialize. According to ECEL directors, Petroy’s debt had been understated during negotiations. Petroy’s debt payments actually left it with a $75,000 net loss in the first half of 1983. Said Ralph Fiske, a Nova Scotia real estate developer who became chief executive officer of ECEL after Fred Doucet left to work full time for Mulroney in September, 1983: “When we learned what the true situation was, it was too late.”

Rather than rescuing ECEL from its cash problem, the absorption of Petroy left the merged company, still called East Coast Energy Ltd., $13 million in debt. For his part, William Blackstock, who along with his brother George, owned about 80 per cent of Petroy before the merger, testified at last summer’s examination into ECEL’S bankruptcy that ECEL failed because “the eastern directors did not arrange the $15-million financing they promised” at the time of the purchase. After the TSE rejected ECEL’S application for a listing, the company assumed Petroy’s existing listing on the Alberta Stock Exchange. ECEL shares opened on Nov. 21 at $5.50 and rapidly began dropping.

That same month McLeod Young

Weir refused to underwrite a new public share offering for ECEL. MYW did agree to push the issue on a “best efforts basis,” but company officials told ECEL directors that the public offering should be “aborted” because its failure would harm the energy company’s public image and seriously threaten the financial stability of the company. Maclean’s has learned that one of the reasons for MYW’s refusal to underwrite the issue was confusion over who actually controlled ECEL. The Doucet brothers’ holdings had dropped to less than 10 per cent after the Petroy purchase. ECEL had a complicated share structure with numerous share classes which created uncertainty over who had real control.

The turmoil at ECEL intensified in December, 1983, when Crowell resigned as president and three months later resigned his directorship. Crowell had asked the directors to lighten ECEL’S debt load by reducing the company’s stake in the high-profile Venture operation. They refused.

As a replacement for Crowell—who had not received a salary as president —Ralph Fiske hired James Macleod, a Calgary oilman, at a salary of $160,000 a year. Macleod told Maclean’s that when he was hired Doucet told him that “financing is coming” to keep the company operating. “But as soon as I got my hands on the company minutes, I knew they [ECEL] were already down the tube when they hired me.” Macleod said that soon after he arrived, Doucet and Associates submitted a bill for $298,877 for legal services. He added that included on the invoice was a charge for “a strictly personal phone

call that I had with Gerry [Doucet].” Macleod refused to pay the bill and, together with Fiske, negotiated to have it reduced to $155,000. Added Oland: “I was rather shocked at some of the bills he sent in. Perhaps that is why [Gerald Doucet] was not a director—so he could keep sending bills in.” Not only was Gerald Doucet uninterested in becoming a board director, he also asked not to be acknowleged as a promoter of the company on the prospectus filed for the November, 1982, share offering. After what one director described as “arm-twisting,” Doucet’s name appeared in a footnote. The Doucet law firm handled nearly every as-

peet of ECEL’S business. Many of the cheques to Doucet and Associates were cosigned by Fred Doucet and, after Doucet left the company, by Ed Chiasson. Said Chiasson: “Just about everything would be sent to us for consideration. Both Fred and the board were very hesitant to do a great deal without saying, ‘Let’s make sure these guys look at it from the very beginning.’ ” Chiasson acknowledges that he felt some “discomfort” when signing cheques payable to the law firm of which he was a partner for ECEL work that he had done himself, but he told Maclean’s that the amount of money billed was not excessive.

In total, ECEL paid Doucet and Associates $525,000 for legal services, $155,000 of it in October, 1984, when the company’s directors were meeting in an attempt to avoid Petroy’s bankruptcy. ECEL continued its attempts to sell off Petroy’s properties to meet debt obligations. But in November, 1984, the Bank of Montreal, which was owed $10 million, placed Petroy into bankruptcy—later collecting just $6 million for its assets.

Finally, ECEL directors decided to sell the one-per-cent stake in the Venture project. But in September, 1984, gas had mysteriously begun seeping out of West Venture well N91. The underground blowout delayed bringing Venture gas production on-line. Efforts to sell the Venture holding in Calgary reportedly brought a top offer of just $3.5 million, far below the $10.5 million it had cost. But last February provincially owned Nova Scotia Resources Ltd. bought back ECEL’S Venture share for $7 million.

Still, the loss of its most prestigious property signalled the end for ECEL. By April the company’s bankers would no longer cover Macleod’s paycheque, and he resigned, ECEL’S last president, William Blackstock, was in charge when the Canadian Imperial Bank of Commerce, to which ECEL owed $3.7 million, forced the company into bankruptcy last June. Since then, two bankruptcy trustees from the Toronto accounting firm Peat Marwick Ltd. have tried to sell off ECEL’S remaining properties. So far, they have succeeded in selling just one ECEL gas well.

The investigations of the Doucets’ stewardship of ECEL and the Wolf court case will likely reveal even more details about the controversial firm. And disillusioned investors in the Maritimes will be among some of the most interested observers. Recalled Fiske: “I wanted to believe everything I heard and I was taken in by the sales effort.

I went for the whole bait.”

BRUCE WALLACE

CHRIS WOOD