The Meltdown over Atlas Cold Storage
Hot questions on a cold case
What the OSC said in the Ontario Court of Justice
What the OSC said in a news release on February 27th, 2007
What the OSC said in a Corrected news release on March 02, 2007
Hot questions On A Cold Case
Terence Corcoran
Thursday, March 01, 2007
Before we get to the Ontario Securities Commission’s Atlas Cold Storage meltdown, this news just landed from the commission’s public relations department: “OSC issues new resource to help families research RESPs.” The new resource is a brochure on education savings plans, aimed at average investors, according to Perry Quinton, manager of Investor Communications at the OSC, who adds this eye-opening bit of shockingly original advice: “Before you commit to any investment, careful research can help you protect your money.”
For this boilerplate, in a field that is overflowing with consumer books and media information, why do we need the involvement of a government regulator? More useful to the public would be a new OSC brochure on how to fathom the OSC’s own malinvestment of time and millions of dollars in money-losing dead-end prosecutions. Some of the key areas of research would be:
- How does the OSC decide to prosecute?
- What threats can and does the OSC make to force people to capitulate and settle?
- Does the OSC fully disclose all information it has when it launches court cases?
- Why do so many OSC actions run off the rails?
- What are the consequences within the OSC of bungled cases?
- What happens when the OSC manipulates news releases to make it look like the case it just lost might have been won if only its witnesses weren’t so stupid or the courts so misguided?
These and other questions remain unanswered, especially in the wake of the latest train wreck, the OSC’s abandonment on Tuesday of its three-year-old prosecution of Patrick Gouveia, former CEO of Atlas Cold Storage. He had been charged with having overseen allegedly misleading Atlas financial statements. Four weeks into the trial on Tuesday, the OSC respectfully asked the court to dismiss the case due to new evidence that it said would make it difficult to prove its case.
The court agreed. But late Tuesday — at 6:08 pm ET, on my computer–the OSC issued a trim news release saying that it had “discontinued” the trial because the ability of “a key witness” to provide “useful testimony” had been “impaired.” This witness’s evidence “was tainted,” apparently because the witness had failed to disclose information earlier when he should have.
The impression, deliberately conveyed, is that the problem is a technical matter of a witness who failed to fully provide information earlier in the case. That failure “impaired” the witness, and the case could therefore not proceed.
What actually happened, however, appears to be something entirely different. Indeed, the OSC itself told an entirely different story when it appeared a few hours earlier before Madam Justice Rebecca Shamai of the Ontario Court of Justice. OSC lawyer Glen Jennings did not say one word about an impaired or tainted witness. Instead, he said the OSC had spent weeks examining new evidence, interviewing 13 new witnesses, and conducted a “comprehensive review” of the new evidence “in the context of the entirety of the prosecution materials.”
The two versions of Tuesday’s events, the OSC news release versus its court presentation, are reproduced on this page. What the court statements show is the tip of a much deeper story that needs further airing.
The “key witness” in the OSC news release would be Nick Hodgson, a partner with Ernst & Young’s Business Risk Services group, a forensic division of the accounting giant. In 2002, Mr. Hodgson was commissioned by the Atlas board to conduct a forensic review of Atlas’s accounting treatments, including its handling of certain expenses. The fact that Ernst & Young was Atlas’s auditor implied a bit of a conflict, but he nonetheless did the work.
His report was handed over to the board and the OSC, which the OSC then used as the foundation for its eventual pursuit of Mr. Gouveia and other Atlas executives for issuing misleading financial statements.
On Feb. 2, in the middle of the trial of Mr. Gouveia, Ernst &Young revealed in court that it had other documents and evidence that had not been turned over to the court or to the OSC or Mr. Gouveia. The evidence included interviews with 14 Ernst & Young executives and staff, members of the audit team that had been auditing Atlas’s financial statements.
The effect of these interviews, apparently, was to undermine if not demolish the allegations that Mr. Gouveia and other Atlas executives had manipulated or wrongly directed the creation of financial statements that misrepresented the company’s true financial condition. Among the issues was the company’s treatment of takeover costs as capital expenses rather than current expenditures.
As I understand it, the new evidence from Ernst & Young’s audit staff — plus fresh information from an OSC reexamination of 13 of the same auditors — shows that the financial statements were prepared with appropriate regard for accounting standards. Certainly there was nothing to support the prosecution of Mr. Gouveia.
As the OSC said in court, “Given the new information that has come to our attention … and the comprehensive review that we have conducted in light of it, we have determined that the prosecution no longer has a reasonable prospect of conviction.” In other words, the OSC reviewed the content of the case and decided there was no case.
One wonders why Ernst & Young had not revealed the existence of detailed interviews with their audit staff who had worked on Atlas. But more important, how come the OSC did not think to conduct interviews with the actual auditors of Atlas’s financials, to get the facts, before it prosecuted Mr. Gouveia and his financial executives?
Just another question for the OSC brochure on how the OSC operates.
What the OSC said in the Ontario Court of Justice
February 27, 2007
Madam Justice S. Rebecca Shamai: Good afternoon.
Glen Jennings, OSC lawyer: Good afternoon, your honour.
Shamai: Mr. Jennings.
Jennings: It’s Glen Jennings, Doug Hunt and Melanie Adams for the Ontario Securities Commission. Scott Fenton, lawyer for Patrick Gouveia, former Atlas CEO Scott Fenton, Jeffrey Leon and Tracey Pratt. My client is in court today, your honour.
Shamai: Yes, perhaps he would like to come before the court.
Fenton: Yes. Mr. Gouveia, would you just come around the divider.
Shamai: Mr. Hunt.
Hunt: Your honour.
Shamai: Mr. Jennings.
Jennings: Yes, thank you, your honour. Again, I thank you for your indulgence from yesterday and I’m now in a position to update you on, it’s the end results of the new information that came forward.
And, as your honour’s aware, on Friday, Feb. 2, 2007, the accounting firm of Ernst & Young disclosed for the first time to the defence and to the prosecution various materials that should have been provided a number of years ago pursuant to your honour’s third-party-records order of June 24, 2005.
And, as was reported to the court on Tuesday, Feb. 6, 2007, after a preliminary review of the materials, it was determined that 14 interviews of various Ernst & Young personnel had never been provided to the prosecution or the defence.
After reviewing those 14 statements of the Ernst & Young personnel, it was determined that there was an obligation on behalf of the prosecution to conduct further interviews of those individuals, and that process commenced on Feb. l2, 2007 and was completed on Feb. 22, 2007, in which time 13 separate interviews were conducted and transcripts of those interviews were provided to the defense as they became available.
The only Ernst & Young employee not interviewed, as I stated yesterday, was unavailable and is currently residing in Australia.
Some of the information in the materials provided by Ernst & Young on Feb. 2, 2007 was new information, and the focus of the recent interviews conducted by the Ontario Securities Commission investigators was to clarify and elaborate on that new information.
The prosecution is, of course, obliged to review the reasonable prospect of conviction on an ongoing basis. Now the prosecution has had to consider the new information that came from both the Ernst & Young interviews disclosed on Feb. 2, 2007 and the interviews subsequently conducted by the Ontario Securities Commission investigators, and do so in the context of the entirety of the prosecution materials. We’ve also had an opportunity to consider the evidence heard to date in this trial in the context of the new information.
Of course, the prosecution is obliged to prove the charges as drafted beyond a reasonable doubt. That burden of proof remains with the prosecution throughout and never shifts. Given the new information that has come to our attention over the last several weeks and the comprehensive review that we have conducted in light of it, we have determined that the prosecution no longer has a reasonable prospect of conviction.
We, therefore, do not intend to call any further evidence, and we would ask your honour to dismiss all of the charges before the court in relation to Mr. Gouveia. Shamai Thank you, Mr. Jennings. Mr. Fenton. Fenton Thank you, your honour. Just a couple of brief remarks. On behalf of Mr. Gouveia and Mr. Leon and Ms. Pratt, we wish to commend the Ontario Securities Commission, its enforcement personnel and my learned colleagues to my right for reviewing this case at this time and for coming to the correct, the, frankly, only just conclusion that on all of the information available there is no reasonable prospect of conviction and that these charges should be dismissed.
Mr. Gouveia has steadfastly maintained that he is innocent of any wrongdoing and, in particular, in relation to the financial statements of Atlas he has always maintained that he strove to ensure that the highest standards of corporate governance, including financial reporting standards, were followed for the benefit of all unitholders within the trust.
This has been a long and difficult and costly ordeal for Mr. Gouveia, and we are all, as his counsel, pleased to see that he’s vindicated in terms of his innocence here today. Thank you for your attention to the evidence in this case. It has been a long case for your honour as well. It has been a pleasure to litigate this matter in front of you, and we are very pleased to have it come to the correct conclusion.
Shamai: Well, thank you, sir. I will, of course, take my leave from what counsel proposes in this matter. I am troubled by the non-compliance with the order that I made in June of 2005. I have very experienced and knowledgeable counsel before me. I see that counsel for Ernst & Young is in the body of the court as well.
I appreciate Mr. Fenton’s comments on behalf of his client, and, although I am hesitating in this matter, I am not going to propose anything further in relation to the non-compliance with the order, as it is my guess that if counsel felt that it was appropriate to seek anything further from this court in relation to that non-compliance, counsel would, as I have grown to know them, not hesitate to seek a further remedy.
And so, sir, I am dismissing the charges before this court. The reasons on behalf of the securities commission have been, I think, courageously and plainly stated, and I would like to thank counsel for your tremendous courtesy throughout this rather difficult matter.
Fenton: Thank you, your honour.
Jennings: I would like to thank your honour as well.
Leon: Thank you, your honour.
Hunt: Thank you, your honour.
What the OSC said in a news release on February 27th, 2007
OSC Discontinues Proceedings in Respect of Patrick Gouveia
Tuesday February 27, 6:25 pm ET
TORONTO, Feb. 27 /CNW/ – The Ontario Securities Commission (OSC) today discontinued its proceedings in the matter of R. v. Gouveia.
New evidence was produced to the OSC and to the defence on February 2, 2007 by a key witness. This evidence should have been produced to the OSC and to the defence in 2005 pursuant to an Order of Justice Shamai dated June 24, 2005. The late production of this new evidence has impaired the ability of this key witness to provide useful testimony at the trial.
After a comprehensive review of the new evidence, the OSC has determined that there is no longer a reasonable prospect of conviction because evidence of the key witness was tainted by the late disclosure.
Counsel for the OSC announced today it will not call any further evidence in relation to the prosecution of Mr. Patrick Gouveia, and requested that Justice Shamai dismiss all of the charges.
What the OSC said in a corrected news release on March 02, 2007
Correction in Respect of Discontinued Proceedings Regarding Patrick Gouveia: Transcript of Proceedings Attached
TORONTO – On February 27, 2007, in the matter of R.v. Gouveia before the Ontario Court of Justice, counsel for the Ontario Securities Commission (OSC) asked Justice Shamai to dismiss the charges before the Court.
At the conclusion of his remarks, counsel for the OSC stated “Given the new information that has come to our attention over the last several weeks, and the comprehensive review that we have conducted in light of it, we have determined that the prosecution no longer has a reasonable prospect of conviction”. As a result, the charges were dismissed by Justice Shamai.
The OSC issued a press release later that day in respect of the dismissal of charges. The OSC has been asked to replace the February 27, 2007 press release with a press release containing the full text of the statement made by OSC counsel to the Court. Counsel’s statement is contained in its entirety in the Court transcript of proceedings that is available at www.osc.gov.on.ca.
The February 27, 2007 press release has been removed from the OSC website. The OSC is committed to transparency in respect of Court proceedings and regrets any harm or confusion that may have resulted from its earlier press release.