Lack of accountability haunts Bay, Wall streets

When the bubble bursts, the suits look after one another


Diane Francis

Financial Post


August 7, 2001

The lack of accountability among politicians is bad enough. Then there's Bay Street.

Bre-X poster boy Egizio Bianchini of BMO Nesbitt Bums was recently promoted to chief investment banker for mining.

Lest we forget, Mr. Bianchini was the biggest cheerleader for years behind the growing gold reserves "miracle" called Bre-X, which turned out to be a complete hoax. Mr. Bianchini's unwavering belief in the Bre-X gold find led Nesbitt clients merrily into oblivion. It ended up being an $8-billon swindle.

His promotion was mentioned in a piece by the Wall Street Journal naming him as North America's best mining analyst for the second year in a row, according to undefined Journal criteria.

No kidding.

"As an analyst for 12 years, he honed his stock-picking skills based on balance sheets, low debt-to-capitalization ratios and finding companies that have cost-effective and growing gold reserves. Last year, he was one of a handful of analysts who banked on gold," said the Journal.

Meanwhile, a recent unrelated settlement in the United States to an investor over advice given raises the question about accountability and culpability. These are two issues that Bay Street, and Wall Street, certainly don't want to deal with. That's because the suits look after one another.

Of course, everyone makes mistakes. But here's what Mr. Bianchini wrote on March 25, 1997, and, as mistakes go, it's a whopper.

The day before Bre-X asked for a halt in trading the company was trading at roughly $15 a share. This was down calamitously from weeks before as a result of other bad news and nagging rumours that something was fishy. These rumours were coming as a result of independent drilling audits being undertaken in Indonesia by Bre-X's partner, Freeport-McMoRan of New Orleans.

Even so, the fearless Mr. Bianchini faxed clients and brokers that day and forecast that Bre-X stock would hit $29 soon.

"Our sources indicate that [Bre-X partner] Freeport's initial sampling of the deposit has indeed come up well short of Bre-X's announced grades," wrote Mr. Bianchini. "However, this has not been substantiated, as Freeport is not making any public statements regarding its Busang due diligence. If indeed there is a discrepancy between Bre-X's and Freeport's initial sampling, we are of the view that it is more likely related to the sample preparation or sample assay procedure employed. That is to say that it is likely that the assay method used by Freeport may not give an accurate representation of grade. In addition, the protocol for sample-preparation procedures for this deposit must ..."

Blah, blah, blah.

The story ends in tragedy. Bre-X never hit $29 a share. It was halted and never listed again because it was a complete bust. Mr. Bianchini and his firm have been sued by lots of entities.

Of course, he wasn't the only one caught up in this nonsense. And perhaps this story illustrates another problem in our capital markets.

The much-avowed free enterprise spirit applies to the rest of us -- dog eat dog and may the top dog win. Losers take nothing.

This issue was brought to my attention recently during a lunch with a CEO in Toronto. The lack of accountability and protection of colleagues in the investment banking world is a particular pet peeve of his, especially now that the speculative technology bubble has burst.

"The high-tech fiasco is a case in point," he said. "Morgan Stanley, Merrill Lynch, brokers in Toronto run their own private equity system. The analysts help the salesmen and the multiples and trading values were so out of line that these analysts had to invent ways to measure stocks."

"Trillions of dollars of capital was destroyed at the retail level by this system," he added. "The IPOs were presold to big institutional clients, analysts touted these stocks and salesmen put retail investors into them, buying out the IPO participants."

"Just look at the Nortel story. The same analysts that were touting that stock at excessive prices are probably still all there. You've got to wonder," he said.

Sure do.