Double Shot of Scotch

by Cleveland, Peter

  “I can assure you, Miss Tomkins, I am not wasting your time. Nor are we anywhere near finished,” he said, slightly annoyed with the interruption.

  Dunlop stepped in. “Please continue, Hamilton.”

  Graves rolled his eyes and his wider eyebrow twitched.

  “I toured both plants and found them to be exceptionally clean and orderly. Neither Basil nor William tolerated sloppiness in their plants, or with records. The likelihood of significant inventory errors occurring because of poor procedures or management at the plant level seemed unlikely. Karen confirmed there’d never been a problem with inventory procedures since she’d been working at CISI.

  “Jennifer Quigley said there were only ever two changes in inventory counts coming from Britain. In both cases they were quantity adjustments at Plymouth, ones Basil had already corrected himself, without prompting from head office. There was no history of uncorrected errors at the plant level. And Basil and William didn’t operate in a way that would suggest collusion.

  “I discovered that Basil Hughes was building a new house and his wife was on a spending spree to decorate it. And Basil and William were looking to invest further in real estate, to purchase a rental property. I mention this only because it’s behaviour outside their norm. But nothing turns on it. They saved for years to make the investment. The fact that they were looking to make a property investment at the same time the inventory adjustment occurred was only a coincidence, just enough to bring them up on the radar screen.

  “There had to be something larger going on.

  “I asked for electronic copies of inventory documents from Karen, Jennifer, Basil, and William, independent of one another, so they’d come to me separately from each computer; presumably the same document, just from three different sources for each plant.

  “I carefully compared them to one another.

  “On the face of it they were all identical. The same counts for the same species. The same dollar amounts for each line item and the same totals for each plant. I repeated the process with hard copies. There were no differences whatsoever. I was about to chalk the exercise up to a dead-end but couldn’t seem to let go. I had a feeling something was different. Then, I found something very interesting. Something peculiar.”

  Everybody felt the tension.

  “I moved the cursor to the electronic copy sent by Basil. In the upper left corner of the screen it showed the document typeface and font size as Book Antiqua 12. Basil insists everyone in his plant use Book Antiqua. That was confirmed by the plant accountant and by Jennifer when I returned to HQ.

  “When I moved the cursor to a cell on Jennifer’s electronic copy it also showed Book Antiqua 12. That meant she did whatever she had to do in the normal course of her duties, and then saved the document in the same format she received from Eli in Plymouth. Book Antiqua 12.

  “Portsmouth uses Times New Roman 12. Jennifer’s file for Portsmouth was in Times New Roman 12 as well, further evidence that she saves files in the same font she receives from plants. Again, I confirmed this when I returned from England. She said almost every plant uses a different font, but all use a 12-point type. I checked every plant, and she was right.

  “I asked Jennifer if there was any logical reason to change the typeface from the originals sent by plants to something else. She said no. ‘It would be extra work just to please the eye,’ is what she actually said.”

  “Where is all this going?” Graves demanded, whipping off his horn-rimmed glasses for dramatic effect. “Please God. Let there be a point.”

  St. James ignored the outburst.

  “The difference came when I compared everything to Karen’s electronic documents. When I moved the cursor to a cell on her spreadsheet it showed up as the font Century 12. For those unfamiliar with themes and fonts, the difference between Book Antiqua 12 and Century 12 is so small you would have to be looking for it to actually see it. There’s a slightly greater difference between Times New Roman 12 and Century 12, but really, who looks that closely.”

  “Why did you?” Andre Fox asked without thinking.

  “Because I am engaged to make sure there is no wrongdoing, and wrongdoing often hides in odd and sometimes very tedious places.”

  Andre nodded slowly, feeling foolish for asking the obvious.

  St. James went on. “No one changes the theme of a document prepared by others unless they work on it themselves. Unless they make changes. Then they tend to save in their own preferred theme. That told me the odds were that Karen made changes.”

  “I most certainly did not,” Van Hoyt blurted out defensively.

  St. James continued. “Then there were the conflicting instructions to trawlers on count day.

  “I met Captain Thorne, captain of The Mistress, one of the three trawlers with catch full to capacity travelling to the UK plants on count day. He recounted the confusion over inventory instructions. First radio communication told him to bring catch to Plymouth, then later to Portsmouth, then after that to Plymouth once again. He wondered what the hell was going on. Never happens, he said.

  “None of the contradictory instructions came from Basil or William. Surprisingly enough they came from head office, from here, from accounting, not operations. Both Basil and William, in separate communiqués with Captain Thorne and the other two trawler captains, asked where they were taking catch for processing. All this was subsequently corroborated by Captain Thorne’s logbook, Eli, Basil, and William. All gave the exact same account of communications on that day. They would not ask where catch was going if they were in the loop with Toronto. Very unusual to say the least.

  “I checked with two of CISI’s competitors. Both said plant managers and trawler captains decided where catch would go, the COO participating only if there was doubt or disagreement. When I asked whether there’d be any reason for the decision to fall on head office accounting, they laughed. For accounting to be responsible for directing catch made absolutely no sense. It would be like trawler captains making human resource decisions for head office, one COO said.

  “Basil and William had to know where the catch was going in order to arrange after-hours shifts to process. Day shifts had finished. Night shifts would have to be called in. And that takes advance notice. Many employees have young families and need time to make arrangements if called in for the night. They couldn’t just jump on a moment’s notice.”

  St. James turned to Jenkins.

  “When I met with you, Henry, I asked why Accounting directed trawlers instead of you or the plant managers. You were the chief operating officer, responsible for worldwide operations. That would normally be the COO’s responsibility. And according to the organization chart, plant managers report to you.”

  Henry, pale and gaunt, said, “That’s correct.”

  “Yet instructions to trawlers came from accounting. When I asked you about that, you said Cameron asked Karen to manage year-end processing to maximize production and, hence, inventory value and profit. You normally managed this process and are more than capable of maximizing profit. Having Karen manage it was a departure from the normal chain of command.”

  “Absolutely right,” Jenkins said with more energy, and sounding vindicated.

  Anderson gestured to interrupt.

  “Actually, Hamilton, that’s not entirely correct. I didn’t ask Karen. She asked me if she could. She thought, as worldwide financial information came in on the last day of the fiscal year, she should be able to make decisions on a dime, to maximize profit. There wouldn’t be enough time to discuss this with Henry and then for Henry to negotiate the appropriate decision with plant managers and still have time for trawlers to get to the chosen plant. The day was too volatile. Because my goal was to maximize the year’s profit, she had a point, so I smoothed it over with Henry. It was a one-time thing.”

  “I surmised that,” St. James offered empathetically. “Nice that you confirm it. But it was the one and only time Karen assumed the role. I viewed that as a significant
event.

  “With all this at play, it was clear something was wrong.

  “When I returned from England, I asked Karen the cause of confusion concerning the instructions.” St. James turned to Karen. “You told me you debated where the catch should go, Plymouth or Portsmouth, and you finally decided on Plymouth. It was Jennifer who jumped the gun and sent conflicting messages to trawlers. That’s what you said. That also seemed strange to me. Jennifer does not seem the type to make such a call without being instructed to do so. As a matter of fact, Jennifer told me she only takes instruction on plant communications from you, Karen, and that she’s not authorized to send instructions on her own. ‘That’s how you get fired around here,’ is what she said.”

  Van Hoyt remained still, without expression.

  “After hearing Karen’s explanation, I contacted the company’s auditor, Marcel Lapointe, to review inventory documentation in his files. Because Karen had already authorized his cooperation, he didn’t need to ask permission a second time. I was grateful for that because Karen could have retracted permission. So, Marcel and I carried on. He was very cooperative.”

  The directors were looking at one another, not believing what they were hearing. Mumblings around the table caused St. James to stop.

  “Ladies and gentlemen, while I appreciate the shock value of what I am telling you, it requires full attention to follow the case to the end. This is a very serious issue for CISI and there’s a lot more to come.”

  The room went quiet. St. James cleared his throat and continued. “I compared Marcel’s hard copy of inventory documents with those provided by Karen, and once again with electronic copies from all parties. The inventory numbers in Marcel’s file were substantially different from those in the documents provided by plants and head office accounting. Marcel’s files showed much higher levels of inventory.

  “I asked Marcel to scan his proof-of-inventory papers onto my computer. When he did, I checked the typeface and font size and found it all to be Century 12. Since head office files were normally saved in the same fonts as received from plants, Marcel’s copies could only have come from one person … and that person was you, Karen.

  “To be sure, I went through the same procedure for the other eighteen plants around the world. They were the same. The total $95 million adjustment was laid out in Marcel’s files in Century 12.”

  “This is outrageous, Nelson,” Van Hoyt cried. “Are you going to let him accuse me like this?”

  “As chairman he has no choice but to hear Hamilton out, Karen,” said Anderson in a stern voice.

  Graves was stone-faced.

  “We are coming closer to the reason for all this,” St. James assured.

  “My investigator determined Karen’s husband’s company was in fact insolvent, underwater by millions, too far gone for Karen’s $100,000 bonus to be of any help to him. In other words, Karen couldn’t have been motivated to manipulate records because of her husband’s insolvent state. Her bonus was a drop in the bucket when it came to his obligations. Nowhere near enough to save him or his company.

  “Karen and her husband had just bought a house not far from Nelson’s. She borrowed $300,000 to renovate it, pledging shares in CISI as collateral for the bank loan. She was smart enough to purchase the house in her name only, on the strength of her salary, not jointly with her husband. She wouldn’t lose the house when her husband and his company went bankrupt.

  “So I asked myself, why would Karen be motivated to manipulate company records? If it wasn’t financial, something else had to be going on. She couldn’t have been worried about losing the house. She can afford the mortgage on her own.”

  “This has gone far enough,” said Graves in a harsh tone. “This meeting is adjourned.”

  “It’s not adjourned until we all agree it is adjourned,” Dunlop barked.

  Everyone mumbled agreement with Dunlop in one way or another, except of course Graves and Van Hoyt.

  “Then, I began to look beyond Karen’s inventory manipulation for a different motivation.

  “I turned my attention to who would benefit from an inventory adjustment of $95 million.

  “Cameron provided insider shareholder files for those who pledged CISI shares for personal loans. One loan was significant. $2.5 million borrowed, pledging 500,000 shares as collateral. Isn’t that right, Nelson?”

  “Nothing wrong with having loans pledging shares,” Graves snapped.

  “No there is not,” St. James agreed.

  “Then what are you insinuating?” Graves demanded angrily.

  “People around the table probably don’t know Karen worked for you at IBM.”

  Once again directors expressed shock with various degrees of intensity.

  “Why was this kept from us?” Blakie asked angrily.

  “I don’t think it was deliberately kept from you, David,” St. James consoled. “She joined under the old board and the previous CEO. By the time you came on board it was irrelevant. She was already here, and you would have no reason to look into her background.”

  He paused and turned back to Graves.

  “You promoted her to senior roles at IBM, helped build her career. She owed you.”

  “She earned every promotion. Extremely competent,” Graves emphasized with gritted teeth.

  St. James nodded. “I agree. She is very competent. You helped her get the CFO position here. Provided a reference to Cameron’s predecessor. I checked with Human Resources. Your signature’s there.”

  “Where is this going?” asked an impatient Harold Tewkesbury.

  “You’ll see in a moment.

  “I believe, Nelson, your stockbroker will confirm that the money you borrowed was on margin, invested in CISI shares. You had an agreement with the brokerage side of the bank to pay interest only. That means the loan wasn’t being paid down on a regular basis. The original amount is still owed. Because you weren’t paying the loan down, you had no margin room for the share price to drop. You’d be significantly out of margin if it did. You’d be called upon to put money in to meet margin requirements.

  “If you didn’t have money to meet a call, the bank would sell your shares at any price; whatever it took to reduce your loan and their exposure to a loss. But significant share sell-offs often drive prices down even further. The market becomes flooded with sell-side transactions, triggering even larger margin calls as prices drop further. Wealth can be wiped out overnight; lives ruined. That’s what you were afraid of, Nelson. You didn’t have money to bring shares back into margin, should the share price plummet. Your high lifestyle and excess borrowing put you between a rock and a hard place.”

  Graves remained silent and stone-faced.

  St. James paused for a couple of beats before continuing. “I prepared an analysis of each insider’s loans, together with prices paid for shares at the date of purchase, and the number of shares pledged as collateral to financial institutions where loans originated. Making certain assumptions about margin arrangements, only one shareholder would be significantly out of margin if the share price was pummeled because CISI did not meet its profit expectations. That shareholder was you, Nelson.”

  Whispers dominated the room once again. St. James raised his hand and the room returned to quiet.

  Graves remained expressionless.

  St. James continued. “CISI was not going to meet its numbers last year for the first time in many years. No guidance had been issued to the public. Shareholders would be taken completely by surprise. In all likelihood panic-selling would follow. Share price would be driven down, most certainly below your margin threshold, Nelson. It only had to drop fifteen per cent for you to get the dreaded margin call from your broker. My calculations suggested it would have dropped by at least twenty-five to thirty per cent, maybe more. It would mean financial ruin for you overnight, Nelson. You were afraid, in a desperate state of mind. You had no choice but to confide in Karen, the woman you helped promote at IBM. Karen owed her career to you.”<
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  “This is preposterous. Outrageous allegations,” Graves huffed.

  St. James turned to Karen.

  “It’s all true, isn’t it, Karen? He reminded you of everything he had done for you. Made you feel guilty. Obliged you to help him in return. So you did. You had to.

  “The two of you put your heads together. The plan had to involve activity you controlled completely, Karen, without need for collusion. No one else could be involved. No witnesses to worry about. Just you and Nelson. And you trusted each other. That made it easier.”

  Gasps filled the room, yet again.

  “My Jesus,” Dunlop mumbled.

  St. James continued. “That plan materialized into an inventory adjustment as the only way for the company to meet profit expectations, to avoid shareholder disappointment and panic, and to prevent share price from being punished, plunging enough to trigger Nelson’s margin call. But it couldn’t be just an arbitrary adjustment. It had to be supported. After all, it would be audited by Marcel. It had to stand up to scrutiny.

  “So you, Karen, created email trails to Plymouth and Portsmouth, instructing trawlers where to land, separate emails ordering trawlers first to Plymouth, and then to Portsmouth, and then back to Plymouth. I read those emails. None of them were replies to all, and none of them carried the history of previous emails to trawlers and plant managers.

  “Each communication looked like a separate instruction for three trawlers to go to two different plants at the same time. A single instruction to three trawlers to go first to Plymouth. Then, a different instruction to the same trawlers to go to Portsmouth. And the same for the trawlers to Plymouth a second time. Making it look like three trawlers were going to Plymouth and three trawlers were going to Portsmouth. But there were only three trawlers in play. The instructions were made to look like six trawlers, making the trawler inventory double what it actually was.

  “The same duplication happened all around the world on count day; journal entries prepared only by Karen. No one else would see them, except Marcel, the auditor. General journal entries were the route Nelson and Karen chose to inflate inventory. That’s how the adjustment got so large.” St. James looked at Van Hoyt.