“What could Jensen be up to? Certainly the firm and Global are better payoff bets than Macadamia,” Dozer said conclusively.
St. James told Dozer about Jensen’s financial statements, how they came into his hands in Jensen’s office.
“Holy shit,” Dozer said under his breath. “Insolvent! If Jensen Holdings is insolvent, how could it have invested $23 million in Macadamia in the first place?”
“Maybe the same way it invested in other companies: syndicate money at high interest rates. Every investment would have to pay big-time to generate a decent profit after operating expenses and interest. And not every investment pays off. When Jensen can’t pay the syndicate, they’ll squeeze him until he does, force him to take from other investments or family. Threaten him and anyone he might care about. Syndicates never lose. If they do, someone dies.”
“You say Jensen isn’t stupid. But all this sounds stupid to me,” Dozer concluded.
St. James shrugged at the phone.
“If Stevens didn’t steal the money, why are we still messing around with this? Why don’t you just tell Global the claim isn’t valid?” Dozer said, his voice pained.
“Consider this, Dozer: Jensen’s back is against the wall. Jensen Holdings desperately needs cash. But it has no legitimate source. No one throws cash into an insolvent company financed by the syndicate. So he trumps up the theft story to create a lawsuit against Stevens’s firm. But he’s too emotional and stressed to think it all through before suing. It doesn’t occur to him until after that cash can easily be traced from Holdings to Macadamia. And once it’s in Macadamia’s bank account, Stevens can’t touch it because he doesn’t have signing authority. De facto proof Stevens couldn’t have stolen it.
“With the lawsuit issued and no real evidence for theft against Stevens, Jensen has no choice but to switch the claim to negligence. Stevens didn’t do proper due diligence before advising him to invest. Without that, Jensen would have no claim at all. He needed the money badly and had to manufacture something to justify a claim.”
“Wow!” Dozer said with more than a little surprise in his voice. “When you put it like that, it’s the only thing that makes sense.” He paused a beat, then said, “But why would the syndicate invest in Jensen Holdings in the first place if it was losing money? They’d demand to see financial statements, the same as any other investor, statements that you say aren’t pretty.”
“If I was a betting man…”
Dozer chuckled as he cut St. James off. “You are a betting man, Hamilton.”
“Smartass! What I was about to say was, I would bet anything Jensen has another set of financials. More rosy, showing enough profit to justify the syndicate lending.”
Dozer whistled. “One helluva dangerous game! Syndicate catches on, old Jensen’s dead. No ifs, ands, or buts.”
“Not to mention his family. But maybe Jensen has a larger plan, an escape of some sort.”
“What the hell could that possibly be?” Dozer said slowly.
“Be damned if I know.”
They talked of other possibilities for a few more minutes before clicking off.
St. James and Anna dedicated Sunday to shopping, replenishing wine, and topping up the groceries she had purchased while he was in Washington.
To help him shadow them, St. James told Dozer they’d be walking through the ByWard Market.
The Market was surprisingly quiet for a weekend. A few couples were strolling hand in hand, window shopping, perhaps searching for a place to have lunch. The sky was grey, looking like snow could be on the way even though temperatures didn’t seem to support the white stuff. Produce vendors had long since folded their stalls and retreated for the winter.
They met Denzel on Dalhousie, on his way back from checking Anna’s apartment.
“Any sign of a break-in, Denzel?” St. James asked.
“No sir. I go three times a day, just like Erasmus said. No sign of anything, Mr. St. James.”
“You can call me Hamilton, Denzel.”
“Yes, Mr. St. James.”
St. James smiled.
“You’re a good man, Denzel,” Anna said in a comforting voice. “I feel my apartment’s in good hands with you.”
“Thank you,” he said and walked off without another word.
When they returned home, the message light was flashing. Janice McPherson had called to say that the dean and students were wondering how his recovery was coming and were asking if he would be returning to the classroom anytime soon. St. James heard anxiety in her voice, no doubt from covering for him for such a long period.
St. James knew he had to re-engage soon. He didn’t want the university thinking he didn’t care. The problem was that he was at a very critical stage in both the Stevens and CISI cases. Not easy to put aside a case and pick up the pieces later. Momentum is always lost. Leads dry up and trails go cold. But still, he had a responsibility to the university and to the students. That had to be fulfilled too. So he decided he would teach Friday and phoned a greatly relieved Janice to tell her so.
Chapter 55
Monday morning St. James walked into Cameron Anderson’s office and was handed a dozen or so files by Anderson’s executive assistant.
“I’m putting you in a locked office two doors down,” she said authoritatively. “Here’s the key. If you leave for coffee, washroom, or anything else, lock it. What’s in those files is highly confidential and this place has wandering eyes.”
“Absolutely,” he said, feeling slightly like he was being scolded before he had done anything wrong.
With the files under his arm he made his way down the hall to the designated office, where he connected his laptop to the internet and opened the first shareholder file: Anderson’s.
Anderson had 400,000 CISI common shares and had been granted options to purchase an additional 600,000 at $18 per share. A quick internet check showed CISI shares trading at $54.
“Hmm. Anderson would make a tidy profit. Buy shares from the company at $18 and sell them immediately for $54. A $36 profit per share. Not bad,” he mumbled.
The rest of the file consisted mostly of correspondence between Anderson and Andre Fox outlining details of his remuneration and the dos and don’ts of selling stock as an insider. No correspondence with financial institutions. Anderson had not borrowed money pledging CISI shares as collateral.
The next file was Van Hoyt’s. She had purchased CISI shares and then immediately borrowed $300,000 from the Bank of Montreal, pledging the shares as collateral. St. James guessed it was for remodeling the new house. Correspondence said the pledge was collateral for a term loan, no margin against the shares.
The remaining files held documentation that revealed that twenty insiders had borrowed money in one way or another using CISI shares as collateral. What St. James couldn’t tell was whether the shares were held on margin or just straight collateral for term loans like Karen’s.
St. James’s cell vibrated. Anna’s number flashed on the call display.
“How’s it going?” she asked.
“Plodding along,” he said with little enthusiasm.
“Cheer up. You’ll get there. What is it you’re actually doing?”
St. James took a few moments to explain.
“What’s a margin account?” she asked.
“The simplest way to explain it is to use an example. Say you invest $100 in shares and the bank is willing to lend you $60 for your investment. It expects you to contribute the remaining $40, which in this case is 40% of the original purchase, the bank’s exposure being the other 60%. In a margin account the bank’s exposure can never rise above the 60% of current market value. If it does, you are obligated to pay the loan down until the bank’s exposure is reduced to 60% of market value. Your 40% represents an ongoing security margin, a cushion to absorb losses should the bank be forced to sell your shares for less than your loan. That’s why the 40% cushion must be maintained at all times. It’s your skin in the game, so to s
peak.”
“I don’t understand,” Anna said slowly.
“Well, if the $100 in shares drops to say $90, the bank applies its 60% formula and concludes the share value will only support a $54 loan. That means you must now put up $6 to reduce the loan from $60 to $54 in order to maintain the 40% margin between the shares’ market value and the amount of your loan.
“If you don’t put up, the bank sells your shares until the loan equals 60% of market value or all the shares are sold, whichever comes first. And if the loan isn’t completely paid off after all the shares are sold, the bank comes after you personally for the difference.”
“So you have to be sure the market price will go up to even consider buying on margin?” she said quizzically.
“Yes, but you can’t know everything going on in a company; not even the people who run it know everything. So you can never be sure that the share price will actually rise. At best it’s a crapshoot.”
“Then why do people buy on margin?”
“Beats the hell out of me,” St. James said with a chuckle.
Chapter 56
St. James pulled up CISI’s website and recorded the average daily share prices and trading volumes for the six weeks prior to and following the publication of last year’s financial results, looking for the impact on public trading. Did share prices go up or down? Did trading volumes go up or down? What would share prices do with or without the $95-million inventory adjustment? Somehow or other he had to determine who would have the motivation to drive up the share price.
Before the release of the financial reports, shareholders expected the company to exceed profit expectations, as it did every year. There was no indication to the contrary, either from within the company or from analysts.
With a $95-million adjustment, the company easily exceeded shareholder expectations; without, it would be significantly below expectations, greatly disappointing shareholders. They’d punish the company for sure, sell shares, flood the market, drive share prices down.
He closed his eyes for a beat, considering who would benefit from an inflated inventory adjustment, and concluded that there were two very distinct groups.
The first included shareholders who had purchased shares below current market prices. They were motivated by the opportunity for gain if profit expectations were exceeded; a group inclined to purchase additional shares, driving market price up. Greed motivation.
The second included shareholders who had purchased shares above current market price. They were motivated to avoid losses if profit expectations fell short; a group inclined to sell shares, driving market price down. Fear motivation.
Greed and fear. St. James believed every buy–sell decision boiled down to one or the other. Greed to make money, fear of losing it.
Either group could be motivated to include the $95-million adjustment. The first question was which group would have the greatest motivation. The second question was who within that group had enough at stake to risk wrongdoing. The third question was who would be in a position to effect wrongdoing, if indeed it had happened. Who had the most to gain? Who had the most to lose?
Gains, in military terms, are like taking a hill from the enemy. Once you take it, you want to keep it. It’s a badge of honour. Gains are a shareholder’s badge of honour. Losing realized gains while chasing additional ones amounts to a setback.
In St. James’s mind, the answer to the first question was the group motivated by fear. The negative psychological impact that comes with the potential for loss seemed to far outweigh the potential for gain. The investor loses a hill.
Additional gains is pursuing something you don’t have. Sure, you’re disappointed if you don’t succeed, but you’ve lost nothing other than opportunity. Real loss hurts, a lot, and can mean financial disaster. Opportunity loss means you live to win another day.
All that led St. James to consider who’d be at risk of losing the most if the $95-million profit didn’t exist. Those who purchased shares on margin were the obvious conclusion. Who’d have to cough up the most if shares plummeted below margin thresholds? That was money that those shareholders might not have had. That would be strong motivation to influence share price, if you had the power to do so.
The problem was that St. James didn’t know who, if anyone, had bought shares on margin. Somehow, he’d have to determine that. It wouldn’t be easy. It was information brokerage houses would never divulge, an ethical choice that St. James respected.
An easy way to begin eliminating suspects might be to assume every share purchase was margined, whether they were or not. Those who wouldn’t be out-of-margin, even without the $95 million in extra profit, could be eliminated right away. There’d be no margin call to avoid, no motivation to manipulate inventory just to stay in margin.
To estimate how much the share price might decline without the $95 million, he looked at ten public companies of similar size and share volume to CISI that had disappointed shareholders without advanced warning. What was the reaction? Did shareholders sell shares immediately? If so, by what percentage did volumes increase and prices decline?
From volume increases and price declines experienced by the ten companies, he developed what he called a Punishment Index, which measured the average percentage that share prices declined in response to bad news from the company. When he applied the Punishment Index to all ten public companies, he was amazed at how little the results varied. Not perfect, but a reasonable indicator, accurate enough for his purpose.
He applied the Punishment Index to CISI’s market price immediately prior to year-end to estimate how much prices might have declined without the $95 million in extra profit. Then he compared the price decline to each shareholder’s holdings, assuming every loan was margined at 60%.
When all was said and done, the original twenty suspects suddenly became five. Five shareholders who would be out-of-margin if last year’s profit had been $95 million less.
He sat back for the first time in three hours, satisfied with the reasonableness of his assumptions and the results he had generated. The problem with all this was that if no one’s shares were margined, there’d be no margin call to avoid. It would be another dead end.
Chapter 57
St. James still hadn’t received Dozer’s surveillance reports on Karen Van Hoyt, Blakie, and Graves. The information from those reports could define next steps with the CISI case. So he emailed Dozer and invited him to dinner at the Royal York for six that evening.
St. James had to check that the plants’ inventory totals equalled head office records. There was no reason to believe they wouldn’t. But it was critical to prove that it was the same total on the audited financial statements blessed by Marcel. That meant meeting Jennifer Quigley, the lady in accounting responsible for Plymouth and Portsmouth.
The internal phone directory said Jennifer Quigley’s extension was 2567, and she answered right away. St. James introduced himself and asked if she could spare a few minutes. Five minutes later, she was standing in the doorway of St. James’s temporary office.
Jennifer was slim and petite, maybe five-three, with short black hair, large blue eyes, and a huge, warm smile.
“Please sit down,” he said as they shook hands.
“I was wondering if we would meet,” Jennifer offered, obviously pleased to be included in the investigation.
St. James smiled.
He stated the obvious to break the ice. “As you know from our emails I was in England last week with the Hughes brothers.”
She nodded. “Yes.”
“Regarding inventory count documentation, has there ever been a case when you’ve had to make changes?”
Jennifer thought for a moment.
“Only twice that I recall.”
“Hmm. And what gave rise to those changes?”
“In both cases Basil meant to make corrections before sending stuff but was too quick to press send.”
“I see. I take it you made the changes?”
>
“Yes, exactly as he requested.”
“Did either case occur during last fall’s inventory?”
“No sir. This was two or three years ago.”
“Okay. Would you ever make changes without authorization from a plant manager?”
Jennifer looked surprised by the question. “Oh, never. Ownership of schedules and documentation rests with the plants. If I notice something odd, I email to see if it’s right or wrong. If it’s wrong, they authorize me to make changes. Then I email the amended documents back for final approval. If right, it’s left the same.”
“Has anyone else ever asked you to make changes to inventory documentation?”
“No. No one.”
“Not even Karen?”
“No.”
“Are you aware of Karen or anyone else making changes to documentation after you’ve finished your work?”
“I wouldn’t know. If someone made changes, it wouldn’t necessarily come back to me. I don’t know what happens when everything gets consolidated.”
“I see. When you’re finished your work do you send the results to Karen directly?”
“Yes, of course,” she said.
“Jennifer, can you think of any reason why anyone would change the typeface from the original author’s?”
She paused for a moment. “No, not really; not a practical one, anyway. We all have our preferred font. But it would be extra work just to please the eye. And chances are you would never see the thing again anyway.”
St. James smiled.
“Tell me a little about the instruction confusion with trawlers last count day.”
“On count day, Portsmouth had no fish to process while Plymouth was receiving too much. Karen wanted all fish processed at year-end. Processed fish has greater value than whole fish. And higher value means higher profit.”
St. James nodded.
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