By Tom Bradley
The investment banking league tables came out this week and they showed that Scotia Capital was at the top of the equity list. BNS was lead underwriter on $2.4 billion worth of deals in the first quarter. What pushed them to the top was a $1.66 billion stock issue by their employer, Scotiabank.
That’s right. The bank was the lead underwriter on its own issue. Yes, this is a huge conflict of interest. The seller of shares (BNS) was seeking the best price it could get and the investment banker (BNS) was charged with doing independent due diligence on behalf of the buyers. How does that work?
The fact that the regulators (and buyers) allow this practice to go on is beyond me. Why risk the perception of a conflict ... ever. What leg would the bank and regulators have to stand on if one time there were improprieties?
Canadian banks are well run, but they do make missteps from time to time. Indeed, I write this on a day when Canada’s banking leader, RBC, is facing allegations of improper trading in the U.S. and JP Morgan is being fined $20 million for improper conduct with respect to Lehman Brothers. Going back a few years, BNS was caught with their hands in the till on the ABCP debacle (pursuing its own interests over that of its clients).
I get particularly steamed about this because investment banking appears to be the ‘wild west’ compared to how tightly the asset management and mutual fund industries are regulated with regard to conflict of interest.
(Note: I disclose that I am a shareholder of BNS through my ownership in the Steadyhand Income Fund. Also, I have a friend in their equity research department, Lori and I ski with a branch manager on occasion and we recently went to a movie at the Scotiabank Theatre downtown.)