Investors Scrutinizing the Regulators

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Fox Guarding the Hen House


More than they could chew


Thursday, June 15, 2006


The Gazette's Paul Delean was the only Montreal reporter to cover the Markarian-CIBC court case in its entirety last year. Here are his impressions

What was the braintrust at CIBC Wood Gundy thinking?

Banks and brokerages generally go to great pains and expense to avoid the kind of negative publicity and unflattering dissection Wood Gundy was given in Montreal Superior Court when forced to defend its seizure of $1.4 million from a retired Montreal man and his wife who'd been misled by their Wood Gundy broker.

The couple, Haroutioun and Alice Markarian, were clients of Harry Migirdic, a former Wood Gundy vice-president who devised a scheme by which trusting clients like the Markarians unknowingly signed guarantees covering the trading deficits of other Migirdic clients (including his uncle in Turkey).

As stock markets tumbled in the late 1990s, the deficits snowballed. By the time Migirdic spilled the beans to his superiors in 2001, the two accounts he had the Markarians guarantee for complete strangers were in the red to the tune of $1.4 million.

With Migirdic admitting - just before getting the axe - that the Markarians had no clue about the guarantees, you might expect CIBC (which made a profit of $1.6 billion in 2001) to take its lumps, being as it had kept Migirdic in its employ despite several rule breaches over the years.

Instead, the financial institution took the heavy-handed stance that the guarantees the Markarians signed still were valid and, over their protests, liquidated their accounts to cover the debts.

That ill-considered decision ended up opening a huge can of worms for the brokerage.

If it thought the Markarians would accept the loss of their hard- earned money without a fight, it figured wrong.

Not only did they have the firm intention to contest what to them clearly was an abuse of power, they had the financial resources to hire a first-class legal team to mount that challenge.

Quebec City lawyers Serge Letourneau and Suzanne Gagne deftly picked hole after hole in the CIBC case, turning up emails that showed the brokerage had concerns about Migirdic but didn't follow them up, showing it had made no serious effort to communicate directly with the Markarians or the money-losing clients whose accounts they were guaranteeing, illustrating how Migirdic repeatedly was given the benefit of the doubt by his superiors, even when transactions were questionable.

They even uncovered an out-of-court settlement with Rita Luthi, a Migirdic client whose account the Markarians had unwittingly guaranteed to the tune of $350,000. When Luthi sent a lawyer's letter to the brokerage in 2001 complaining about her losses and demanding $220,000, it agreed to give her $115,000, on condition it stay confidential. The brokerage still kept the money it took from the Markarians to cover the losses racked up in her name.

CIBC made no settlement offer to the Markarians until summer 2004, three years after the original seizure, when it proposed $250,000. It upped that to $1.5 million just before the Superior Court trial that began in January of 2005, and $1.5 million plus interest and costs during the 25-day trial, but to no avail. The Markarians and their lawyers wanted punitive damages at that point and felt they had a case strong enough to warrant them.

The brokerage's defence - that Markarian was a sophisticated businessperson and should have read the fine print and known better - might have gone over better if its in-house team of professionals had demonstrated any diligence of their own. As for the CIBC claim of being a victim, too, it rang as hollow as many of its excuses and objections.

For example, it didn't want to turn over a "buy ticket" requested by Letourneau for one trade because its lawyers couldn't see the relevance. When it was eventually produced, the ticket linked a series of trades that showed Migirdic flipping shares of a stock called Applied Micro Circuits Corporation from one account to another. By the time the AMCC shares ended up in the Markarians' accounts, 10 days after the original purchase for someone else, they'd already lost 37 per cent of their value - but the couple were still charged the original purchase price.

Throughout the trial, Superior Court Judge Jean-Pierre Senecal often seemed taken aback by CIBC's actions, or lack thereof.

In one memorable intervention, after CIBC Wood Gundy head Tom Monahan said Markarian was a knowledgeable, sophisticated businessman and, therefore, not "vulnerable," Senecal noted CIBC also had knowledgeable, sophisticated employees. "Why should he (Markarian) be responsible for everything, because he's a sophisticated businessman, and not Wood Gundy, with many more sophisticated employees?"

The trial was a public-relations nightmare for CIBC Wood Gundy. It came across as greedy, arbitrary, defensive, lax in its compliance and callous toward customers whose only real mistake appeared to be placing their trust in one of its brokers.

And the judgment is not the end of its troubles, because there are several other former Migirdic clients waiting for their turn in court.

"CIBC must assume responsibility for the fraud.
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