TORONTO -- Some of Canada's largest pension funds are re-evaluating their relationships with RT Capital Management Inc., following a stock market manipulation scandal that has shaken Canada's asset management business.
Another major client, Northern Trust Global Advisors Canada, Toronto, has said it won't send any more money to Toronto-based RT Capital until it has additional information about the situation.
Northern Trust administers the Diversified Fund of Canada, a commingled, multimanager fund used mainly by Canadian pension funds. RT Capital is one of the managers of the fund.
RT Capital, with about C$34 billion (U.S.$22.8 billion) in assets, is Canada's second largest pension fund money manager and a subsidiary of Royal Bank of Canada, the nation's largest financial institution.
Following a yearlong investigation, the Ontario Securities Commission and the Toronto Stock Exchange late last month charged that RT Capital orchestrated a total of 53 month-end "high closings"-- manipulating the prices of stocks to artificially inflate the performance of its pension fund clients -- on 26 stocks from Oct. 30, 1998, through March 31, 1999.
The charges in the OSC report say that RT Capital intentionally engaged in trading activity designed to create or maintain upticks -- or prevent downticks -- in the closing prices of securities. Twenty-six Canadian equity securities, all listed on the TSE, were the subject of the high-closing activity. On several occasions, the trading strategy involved executing cross-trades involving RT Capital client accounts in order to effect the desired closing prices. The trades had no legitimate investing purpose for the client, the report said.
According to the Ontario Securities Commission, assets held for IBM Canada Ltd., Missaussauga, Ontario; DaimlerChrysler Canada Inc., Windsor, Ontario; and Noranda Inc., Toronto, were used by RT Capital to orchestrate the high closings.
Those companies, as well as Sears Canada Inc. and Alcan Aluminium Ltd., are some of the firms for which RT Capital manages pension fund assets.
"There will be some assets that will leave (RT Capital) almost immediately," predicted John Gilfoyle, a consultant with Watson Wyatt Worldwide's Toronto office. "Others will wait for the results of hearings scheduled to be held over the next few weeks."
Waiting for meetings
The executives interviewed for this article, however, said that while they are concerned, they were waiting to meet with RT Capital executives before making their decisions.
"We are seriously considering our options and moving as rapidly as the facts permit," said Mike Gallimore, president of Northern Trust Global Advisors Canada, a division of Chicago-based Northern Trust Co.
He said Northern has not decided if it will withdraw any money from RT Capital. He wouldn't say how much the firm has with RT Capital through the subadvisory relationship, just that it is "substantial."
The City of Toronto, which has five employee pension plans with a total of C$2.83 billion, suspended a transfer of C$6 million to RT Capital last month. "Our benefits fund committee (which is being advised by Frank Russell Canada) wants to do its own investigation," said Cindy Bromley, spokeswoman for the Toronto finance department. The city has C$116 million in two equity accounts with RT Capital, one for its Civic Employees plan and the other for the Fire Department employees plan. "We want to see if the fund needs to be protected, if there are any losses to the fund," she added.
Christopher J. Phillips, a spokesman for Frank Russell, said the firm wouldn't comment on its advice to the city.
Said Mike Quinn, spokesman for IBM Canada: "We've not made any decisions on RT Capital yet."
Douglas Brown, director-economics and pension investments for Noranda, which has 20% of its pension fund invested with RT Capital, said: "We've made no decisions about leaving them; we have meetings coming up with them." According to the Canadian Pension Fund Investment Directory, the fund had C$1.02 billion as of Dec. 31, 1998.
Mr. Brown said that although he "has no idea if it (the high closings) cost us any money," the impact on costs and fees for the pension funds involved is expected to be light. "We don't expect to see any extra costs, but if there are losses, RT Capital has said they will make us whole."
Fee structure
In making its case, the OSC report said that management fees for pension fund accounts were determined by the size of the assets under management, with the percentage increasing as certain threshholds of asset value were crossed. The OSC report also pointed out that four RT Capital employees charged with carrying out the scheme received bonuses based on their performance as portfolio managers or based on the firm's profitability.
The four employees from RT Capital's equities department who have been charged by the OSC with orchestrating the high closings include Peter Larkin, senior vice president and head of the equities department. The others are a vice president-portfolio manager and two senior equity traders.
Five RT Capital directors were charged with lax supervision.
The TSE also charged 13 employees from 11 brokerage firms with violating rules against manipulative trading in connection with the case. Twelve of traders have reached settlements with the TSE.
Mr. Larkin and other members of the equity department at RT Capital have been suspended by the firm. They maintain their innocence.
`Hands-on' manager
According to Patrick Walsh, a consultant with SEI Inc., Toronto, Mr. Larkin is very much a "hands-on" manager, involved in choosing stocks for the firm's portfolios.
"Without him present to manage the portfolio, it raises questions about how the rest of the equity team will be able to carry on," said Mr. Walsh. "They have a large team, but he (Mr. Larkin) was a key decision maker."
Moreover, he said, "the issue is not just asset management, but the corporate controls within the organization. This is a large and sophisticated firm. Do they have a sophisticated compliance system in place?"
David Moorcroft, vice president of corporate communications for Royal Bank of Canada, said, "RT Capital has one of the best compliance manuals in the industry. It was not sufficient in just one area -- high closings."
He said that the four people from the equity department charged with making the high closings should be treated more harshly than the five people who are charged with being lax in their supervisory roles.
But Helen Bain, vice president of externally managed assets for Air Canada Pension Trust, Montreal, said: "I think the control system within the firm needs to be tightened up and should be a lot tighter."
Royal Bank of Canada has until July 19 to settle the charges. If a settlement isn't reached, a hearing held on that date will examine the charges and the OSC will mete out punishment, which, similar to Securities and Exchange Commission sanctions in the United States, can bar those charged from doing business in a securities firm temporarily or permanently, force RT Capital to institute rule changes and levy fines.
