Investors Scrutinizing the Regulators

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Fox Guarding the Hen House

In defence of David Berry

Barry Critchley

Wednesday, July 13, 2005

When David Berry, the former head of the preferred share group at Scotia Capital, was dusted on June 30, he achieved a special distinction: He became the last person at the firm to have a compensation scheme based on direct drive -- which is also known as "eat what you kill."

Berry was the beneficiary of a contract that paid him a fixed percentage of the action: The larger the profits, the larger his payout. In recent times such contracts -- at least in bank-owned firms -- have been largely eliminated.

Not only was Berry, who declined comment for this column, punted out the door, his firm took the highly unusual step of reporting some of his alleged trading transgressions to Market Regulation Services. And for good measure, after declining to comment the day before on Berry's departure to this newspaper, the story, in lurid detail, appeared in Canada's other national newspaper.

"It's sneaky and cheap.'' noted one market participant.

Many who contacted this columnist were less than impressed with the actions of the bank, given Berry has made Scotia a ton of dough.

"Their objective was clear. They wanted to get him off that contract," said one source. "If they wanted to get Dave off the deal they should have paid him what they had to pay him including a bonus and severed him properly. That's the only way to do it."

This source said Berry -- who has been with Scotia Capital for about a decade -- had a deal that paid him, at least in the early years, 20% of the group's profits. When Berry signed that deal, Scotia Capital was a bit player in preferred shares. One competitor estimates Scotia Capital captured 60% of the business with Berry behind the wheel.

"He had a better grasp of all the market players and how to put buyers and sellers together."

"If you can make $80-million for the company, why shouldn't they pay him 20%? That's a good deal for everybody. And sure it means that Berry makes more than [senior management] which ruffles their feathers," added another.

"They never were happy with the direct drive."

Another market participant said: "It's very odd for a company to find one of their own employees in violation of some very minor stuff and then tell RS about it. If they find some minor transgression through their internal audits you'd think they would give the employee the opportunity to clean up and not just finger him to RS."

Adds another participant: "Scotia has to realize that it bears some responsibility for having allowed for these transactions to take place. It's not clear to us that any clients suffered any injury as a result of Berry's supposed transgressions."

As for the alleged transgressions, it's not known whether they are new or whether this has been part of the way he did business for years. If the latter is the case, then why did the bank decide to take action now?

"In my mind, it was the contract that got the ball rolling. That was the impetus for compliance to start looking for any violation. And I guess they kept looking before they found something," said one observer.

Another participant disagreed with the characterization, in a recent newspaper article, that Berry was overly flashy. "He is very low key. Sure he makes a s---load of money. And he does have a fancy car which he rarely took to work. Normally he takes the subway. In the summer he rides his bike," he added, noting that one of the so-called fancy parties mentioned in the article was the annual Charity Toy Tea.

One person who has been to the Berry household estimated it occupies about 5,000 square feet -- half the size noted in the other paper. "How many guys live in $5-million houses in Toronto? The guy made a lot of money."

"Who gives a s--- that he drives a Ferrari and paid cash for his house," said another.

"Do you think his boss has a mortgage and drives a Hyundai?"

We asked Scotiabank the following questions:

- Was the bank trying to get Berry to unwind or cancel his contract?

- Was the matter of Berry's compensation ever discussed at the board level?

- Were the transgressions Berry is alleged to have made something he has done for years or something new?

- Has RS, as part of its regular audit of the firm, ever uncovered any of Berry's transgressions?

- Has Scotia ever tipped off another employee to RS?

Scotia declined comment on the first two questions. For the next two questions, it said it will await the outcome of the RS investigation. "We will let them do their work," said a spokesperson. For the fifth question, the bank said it has provided the regulators "with information about possible breaches."