The impromptu board of directors’ meeting held on the morning of Dec. 14 was an ominous sign. It had been more than six months since the 12 directors of Osler Inc., a 102-year-old Toronto-based brokerage firm, had met formally as a board. Inside Osier’s luxurious boardroom, the 10 Toronto-based directors were welcomed by the familiar voices of the company’s Montrealbased directors, Michel CÔté and Robert Carrier, on a speaker phone. Osier’s usually gregarious chairman and chief executive officer, Venard (Len) Gaudet, entered the room somberly and stood nervously behind his chair. “I am very sorry,” Gaudet declared before revealing to the directors that Osier did not have enough capital to carry on its day-to-day business. “The president and I are on our way to advise the Toronto Stock Exchange, and I have little doubt that they will shut the business down.”
With that admission, Gaudet set into motion one of the most extensive trading investigations ever conducted on Bay Street. Osier’s directors learned about the company’s capital shortfall for the first time on Dec. 14. Three days before, a disgruntled official of a client of Osier’s, Canadian Co-operative Credit Society (CCCS), was informed that the broker would renege on a deal. As a result, the credit society and the federal government warned the exchange on Dec. 14 that there was a looming crisis at the brokerage firm.
Immediately, TSE officials appointed Clarkson Gordon to examine Osier’s books, and a special committee of the exchange’s board of governors approved a $10-million loan from an industry contingency fund. Meanwhile, following Gaudet’s stunning announcement, exchange officials asked for—and received—his resignation and that of two other senior company officials, president Paul Cohen and Patrick Anthony
(Tony) Chesnutt, an executive vice-president. The TSE’s investigation into why the company lost $35 million in eight months focuses on the close relationship between Osler and CCCS.
Already, Osier’s corporate fate has been all but decided. In mid-December, the exchange appointed Robert Morgan, a former TSE governor, as the firm’s chief executive. Morgan hastily negotiated the sale of Osier’s retail branches and most of its assets to Toronto-based securities firm Midland Doherty Ltd. for an undisclosed amount.
However, that deal, scheduled to close last week, had not been signed by Saturday night.
Although both the Ontario Securities Commission (OSC)—the provincial body that regulates much of Canada’s securities industry—and the TSE have refused to comment on the investigations, one official close to the inquiries confirmed that they are focusing on the trading activities of Osier during an
eight-month period from April, 1987, to last December. The TSE has alleged in affidavits submitted to the Ontario Supreme Court as part of a receivership action, commenced on Jan. 8, that two separate transactions produced losses of $25 million and between $9 million and $10 million, which wiped out the firm’s $12-million capitalization.
The investigation has already uncovered what TSE officials called cer tain "irregularities," and that in turn prompted the osc to place Osler into receivership on Jan. 8. Maclean's has learned that, since then, several other agencies, including the RCMP, the Ontario Provincial Police and the federal superintendent of financial institutions,
have become participants in the investigation. And this week, the OSC, under chairman Stanley Beck, is scheduled to begin its first hearing into the matter.
Osier’s problems began last April, when the company suffered an estimated $8-million loss on a large securities purchase by one of Osier’s bond traders. According to two senior officials at Osier, who asked not to be identified, Gaudet found out about the loss in mid-April and decided not to inform the TSE because the amount represented Osier’s total capitalization. The Osier officials said that if Gaudet had informed the TSE, it probably would have put the company into receivership.
As a result, Gaudet arranged to counterbalance the loss by selling treasury bills to CCCS at abovemarket prices, according to the Osier officials. In that way, Gaudet could take the loss off his company’s books. The arrangement, which is legal, would require Gaudet to
buy back the bonds at a premium later.
At the same time, Osier’s accountants, Coopers & Lybrand, were conducting their annual audit, which began in late March. Court documents obtained by Maclean’s show that the transactions with CCCS were oral only: no contracts or receipts were entered into Osier’s financial books. That, they say, is why Osier’s auditors and the TSE, which conducted its annual surprise examination of Osier last August, did not uncover any irregularities. In November and December alone, Osier and the credit society engaged in three deals that required the broker to buy back treasury bills for a total of $475 million. Then, on Dec. 11, the credit society’s senior managers discovered from officials at Osier that the broker did not have enough money to buy back $335 million in treasury bills.
At the time of Osier’s default, the credit society’s accountants, Deloitte Haskins & Sells, were conducting their year-end audit but had not noticed any irregularities in the books. Since then, Keith Bell, director of the trust, loan and investment companies division of the federal superintendent’s office, which regulates the credit society, confirmed that “a series of transactions have been identified” by the department’s team of seven investigators who examined CCCS’s books during an emergency examination the week of Dec. 14.
That investigation began immediately after the credit society informed Bell of the problem with Osier. Finance Minister Michael Wilson and Thomas Hockin, minister of state for financial institutions, also were informed about the investigation. According to Bell, a department official has been present at CCCS and will report the credit society’s findings back to Ottawa. And CCCS’s board of directors is scheduled to meet this week to discuss the internal review, conducted during the past five weeks.
Meanwhile, one credit society money market trader, Thomas Bourne, has been suspended from work pending CCCS’s review, according to people close to the matter. Said O. J. Tuters, vicepresident of finance at CCCS: “He has not been dismissed, but he is not in the office until the investigation is complete.” Officials told Maclean’s that Bourne may have been a participant in dealings between Osler and CCCS.
While Bay Street buzzes with rumors, securities regulators have taken the lead in attempting to discover what went wrong at Osier. So far, police agencies have received briefings from the OSC, but have not launched investigations of their own. But industry insiders caution that more revelations may emerge.
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