Sergio De Zen had a problem. His wife had just bought him a Ferrari 348 Spyder for $169,000. But he already had a Ferrari Testarossa and the new car was another two-seater-impractical, given that the couple had two children.
Sergio told his father, Vic, about the car. The elder De Zen agreed that it just wouldn't do. De Zen grabbed a Ferrari brochure, pointed to a four-seat model that cost $325,000 and said, "This one. This one's nice." Then he pulled out his chequebook, told his son, "I'll put in the difference," and wrote out a cheque for $156,000. He handed the cheque to his son, who gave it to his wife and, in the words of Sergio, "That was it."
That kind of brash decision-making, displayed in 1995, has characterized Vic De Zen's life story ever since he arrived in Canada from Italy 43 years ago with $20 in his pocket. Driven by a relentless work ethic and an innovative flair, De Zen turned a one-machine operation in Woodbridge, Ont., into Royal Group Technologies Ltd., one of the largest plastic building-products companies in North America. Along the way, he made himself and those around him fabulously rich.
De Zen's dream was to retire to his own resort on the Caribbean island of St. Kitts and rest on his laurels, which include an Order of Canada. But these days, that quiet retirement seems very far off.
De Zen, 64, is at the centre of a criminal investigation that gets broader and murkier by the day. Documents filed in court by the RCMP direct allegations of fraud and theft against De Zen and several of his closest associates, and also assert that De Zen was involved in "suspect" money transfers. The investigation has produced a black eye not only for Royal Group but also for its banker, the Bank of Nova Scotia. To top it off, Royal Group's woes sparked a political scandal last fall when it emerged that Ontario Finance Minister Greg Sorbara, a former Royal Group director, was under investigation as well. None of the allegations has been proven, but Sorbara had to resign his cabinet position. He denied any wrongdoing and vowed to clear his name.
Through it all, De Zen has proclaimed his innocence, saying in a statement that he has always operated "in an honest and straightforward manner and with the highest standards."
Even those who have had their differences with De Zen acknowledge that his accomplishments are immense, and that he shouldn't be counted out yet. "He built an empire; you've got to give him credit for that," said Archie Zuliani, a former business partner who had a falling out with De Zen. "How he built it, that's another story."
On Nov. 2, 1962, Vittorio De Zen and his wife, Angelina, arrived in Toronto from Caerano di San Marco, a village north of Venice. Just 21, De Zen had followed his brothers Angelo and John to Canada with the help of an aunt who loaned him the money for the trip. De Zen soon landed a job with John, who ran a small plastic extrusion business called Mimico Extruders Ltd. De Zen had done some tool and die work, but he found extrusion wasn't easy to master. The process involves squishing hot plastic through a die cast in the shape of a finished product, such as pipes, siding or lining for window frames.
Still, De Zen improved his technique and it wasn't long before he was off to a larger company, Pillar Plastics Ltd. But when the owner wouldn't give his ambitious young employee an equity stake, De Zen struck out on his own. He recruited a couple of colleagues from Pillar-Domenic D'Amico and Lorenzo De Meneghi-and they cobbled together $58,000 to buy an extrusion machine. In 1970, they launched Royal Plastics from a two-storey building north of Toronto.
The going was tough at first. The trio worked around the clock to drum up business and churn out products. Sales in the first year were just $270,000, and money for the partners was scarce. And by this time, De Zen had two young sons to support, Sergio and James.
A number of factors soon combined to make Royal jell. For one, De Zen innovated constantly, taking out dozens of patents for extrusion techniques and die-making. (His proudest invention was not one of his most successful: a plastic house.)
De Zen also turned his hand to snapping up similar businesses across Canada and the United States. So many deals were done so quickly that De Zen sometimes used the back of an envelope or a napkin to jot down the terms. It was a good time to be in the housing business: The market was booming, especially in the suburbs around Toronto.
Royal also benefited from De Zen's hard-driving personality. As soon as he'd sped through one task, he'd tear into another. He was a natural salesman and a talented dealmaker, but he still rolled up his sleeves to tinker with machinery himself. He pushed suppliers hard and wasn't afraid to threaten legal action if he felt he was being taken advantage of. With this dynamo at its core, Royal saw its annual sales top $200 million by the early 1990s. The company was ready to go public.
But going public clashed with one of De Zen's fundamental traits: a need for control. From the day he started the company, De Zen managed every detail, demanding and receiving daily reports on everything from sales to collections and deliveries. Royal became famous for its near-vertical integration, doing everything from making its own machinery to delivering finished products in its own fleet of trucks.
"He had a finger in every single aspect of that business," says one industry observer who asked not to be identified. "He was a micromanager, hands on, every day....He's like a bear, he'll get right in there and get it done."
Many former managers praise De Zen's drive and say they've never regretted putting everything they had into the company, even though it often meant working seven days a week. Others found him charming in an "old-school" kind of way, the type of executive who wasn't afraid to speak his mind or offer a visiting reporter a drink.
Both of De Zen's sons worked at Royal from the time they were young men, starting on the tool and die floor. Sergio left school in Grade 11 and took a full-time job at the company. Before long he was his father's right-hand man, frequently filling in for him and making crucial decisions. There were other family connections as well. De Zen's brother-in-law Fortunato Bordin joined as a manager in the tool and die shop. With Sergio's father-in-law and other investors, De Zen owned Baron Metals, which was ultimately acquired by Royal.
So, when Royal began life as a public company at $11.25 a share on Nov. 30, 1994, it had not shed the tight control and family connections that are typical of private companies. Indeed, Royal had two classes of shares: multiple voting shares, all owned by De Zen; and non-voting shares, owned by everyone else. Through the dual-class structure, De Zen could own only a fraction of the trading shares but still control more than 80% of the votes, giving him virtually complete control.
Still, that didn't define the extent of insider power at the company. De Zen and Sergio held the two top positions in the company-chief executive officer and chief operating officer, respectively. And De Zen's old partners, D'Amico and De Meneghi, were the largest holders of the non-voting stock, controlling almost 30% of those shares.
Going public did force the company to create a new board of directors, but here, too, De Zen turned to his colleagues. The 10-member board included De Zen, Sergio and four other Royal executives. But there was one notable outsider on the board: Greg Sorbara.
The Sorbaras and De Zens were a natural fit. They were in complementary lines of business, had similar backgrounds and gravitated to the same area-Woodbridge, the thriving Italian-Canadian community north of Toronto that is now part of the city of Vaughan.
Sorbara's father, Sam, immigrated to Canada from Italy in the 1920s and started a property development business not far from where De Zen later built Royal Plastics. Throughout the 1960s, '70s and '80s, the Sorbara Group built housing around Woodbridge, where the suburban open spaces were a magnet to thousands of second- and third-generation Italians whose parents had originally settled in Toronto. As the Sorbara Group's building projects grew, it became a loyal customer of Royal.
First elected to the provincial legislature in 1985, in York North riding, Greg Sorbara had been a cabinet minister under Liberal Premier David Peterson, but lost his seat in 1990 when the government was defeated. After an unsuccessful run for the leadership of the party in 1992, Sorbara decided to leave politics and join the family business, which he co-owned with his father and two brothers. By this time, the Sorbara Group had become one of the province's largest private development companies, with interests in millions of square feet of office, industrial and commercial space, as well as a number of apartment buildings.
Sorbara joined Royal's new board on Sept. 26, 1994, and became chairman of the audit committee, responsible for overseeing the company's books. He kept that job even after he returned to provincial politics in 2001 by winning a by-election.
In Royal's first years as a public company, few investors cared about the ownership structure or De Zen's personal control because the company continued its remarkable growth. Within four years, sales had doubled to $1 billion and profit had tripled to $120 million. It changed its name from Royal Plastics Group to the grander Royal Group Technologies Ltd.; its share price soared as high as $48.
The company was a true global player, with more than 5,000 employees scattered around the world, from Canada to China, Argentina, Colombia, the Netherlands, Italy and Poland. It also continued buying up companies and operated 75 subsidiaries, one of which was none other than De Zen's old employer, Pillar Plastics.
"Plastic gives us life," De Zen boasted to his employees in a company newsletter. Indeed, it seemed De Zen could do no wrong. He was showered with awards, including Canadian Entrepreneur of the Year in 1995 and the Order of Canada in 2002. The latter was bestowed in part for his charitable contributions, including involvement with the Meta Centre for the Developmentally Disabled in Toronto.
The company's growth also meant there was wealth to share with family and friends. Since he had almost complete control, De Zen was free to dole out bonuses as he saw fit. His own annual bonus rose steadily from about $1 million in 1995 to $4 million in 1999. It peaked at $5.6 million in 2002 (in addition to a base salary of $500,000).
Sergio benefited as well. Although Sergio's annual bonuses were much more modest-about $200,000-De Zen helped cover the shortfalls. He showered his son with gifts, including $1 million in cash in 1994, and made sure he had plenty of stock options. In 1997, Sergio earned more than $7 million between options, salary and bonus. But still there was more. De Zen bought Sergio and Sandra a house worth more than $1 million. He gave them jewellery, sometimes paid Sergio's credit card bills and took them on expensive vacations. During one brief trip to Las Vegas, one of De Zen's favourite vacation spots, he bought Sergio $8,000 worth of clothes.
If Sergio and Sandra "didn't have enough money, whether for a larger Ferrari, some additional vehicle or a house, [Sergio]went to his parents and was usually given the money to acquire what he desired," said the judge overseeing the couple's divorce.
Sergio was well respected within the company. Like his father, however, he suffered from chronic back problems; in Sergio's case, the pain cut short his career at Royal Group. Both men have had surgery to remove discs from their spines, and Sergio has been bedridden for months at a time. In 1999, despite having been unable to get out of bed for nine months, Sergio was paid close to $1 million by Royal Group. He resigned from the company in 2000.
De Zen's younger son, James, also benefited from his father's largesse. James worked at Royal as an executive for a short time, but court filings reveal that at least one executive thought he was not as popular as his brother. James "was not well liked and told people what to do," Mike Romano, a Royal Group vice-president, told police. "He had no respect within the company."
According to court filings by police, a Royal Group subsidiary built James's house in Schomberg, Ont. The 24,000-square-foot mansion cost nearly $10 million to build and included 13 bathrooms, an indoor gym, a tropical greenhouse and a waterfall. (It's not clear who paid for the home, but in court filings the RCMP concluded that most, if not all, of the building costs "did not come at the expense of Royal Group Technologies and its shareholders." However, police allege that a Royal Group subsidiary waived its construction management fee, which was worth about $162,000.)
Other people, including De Zen's doctor and his brother-in-law Bordin, had their homes built by a subsidiary of Royal Group, according to court filings. Police also inquired about "the manager at the branch of the Bank of Nova Scotia in Woodbridge, who had a cottage built for him."
De Zen's own indulgence was gambling. Trips to Las Vegas, Atlantic City and anywhere else that had a casino were always his preferred way to unwind. Friends say his gambling was never excessive, just something he enjoyed with a passion. It wasn't uncommon for him to break out the cards during a sales trip and haul together a group for a quick game of gin rummy.
That recreation notwithstanding, nothing excited De Zen like business. Even as Royal Group's sales topped $1 billion in the '90s, it wasn't enough to fully occupy him-he launched numerous personal ventures, often teaming up with close colleagues. At first, these outside activities largely revolved around real estate, but soon De Zen and some of his circle-most often Sergio and D'Amico-were involved in a wide variety of businesses, including mining projects, financing and a casino.
At times, the line between Royal Group business and De Zen's personal business blurred. According to a report by forensic accountants Kroll Lindquist Avey, commissioned by Royal Group's board last year, De Zen and other company insiders were involved in 20 related-party transactions with Royal Group dating back to 1996. Such deals should be fully disclosed to the shareholders of a public company; but, as the Kroll report found, few of Royal's were.
The report discovered that between 1995 and 1999, Royal Group bought six companies, each partly owned by De Zen, for a total of $16 million. There were also a dozen real estate deals and nine joint-venture land-service agreements involving Royal Group, De Zen and his family.
One of the most controversial land deals detailed by the Kroll report occurred in March, 1998. De Zen and a group of investors formed a company that bought 185 acres of land near Royal Group's head office. They paid $20.5 million. Less than a week later, they sold their company to Royal Group for $27.1 million.
But there was one deal that topped them all. The seed of the idea was planted in 1995, when Archie Zuliani told De Zen about St. Kitts.
Zuliani, who was originally from Toronto, had been working on the island for years and was developing a small resort with a few condominiums. During a golf game with his buddy Mike Di Gianni, an executive at Royal Group, Zuliani mentioned that he needed to find building supplies for the project. Di Gianni set up a meeting with De Zen.
The two hit it off. "He seemed like a hell of a nice guy," Zuliani recalled. "He puts on a hell of a good show, let's put it that way."
De Zen was intrigued with the project but wanted to see it for himself. He'd been to the nearby island of St. Martin before, but wasn't familiar with St. Kitts. "Before you know it, we got on the plane, we went over there and started drawing [plans]and he loved the whole idea," said Di Gianni. De Zen fell in love with the island too. Now the project took on a whole new meaning. The resort could be a showcase for Royal Group's products and a retirement villa for De Zen and his family as well.
De Zen took the project on full bore. He worked out a joint-venture agreement with Zuliani. De Zen had visions of a hotel, conference centre, golf course and casino, accompanied by an on-line gambling operation. He saw it being built with Royal Group products and owned by himself, his family and Zuliani.
De Zen considered going to a bank for financing but balked at the interest costs and fees. Instead, he turned to his friends to see who was interested. Within a short time, he had a collection of investors, including D'Amico and Bordin. Another person attracted to the project was Doug Dunsmuir.
Dunsmuir's connections to De Zen date back to the early 1980s, when he did legal work for Royal Group as a partner at Toronto law firm Catzman, Wahl. He joined the company in 1986 and soon became one of De Zen's most trusted advisers, eventually being named executive vice-president and legal counsel. Court filings show that Dunsmuir handled the paperwork on dozens of Royal Group transactions and also became involved in several personal ventures with De Zen, including the deal for the land that neighboured Royal's head office. He also served as a trustee for a De Zen family trust.
Di Gianni signed on as well. The resort was projected to cost $50 million at most-within the investors' grasp, Di Gianni felt. But before a year was out, the costs had climbed to $120 million. Di Gianni told De Zen he wanted out. "I said, 'Where am I going to get the money?'" Others had to drop out as well, and eventually only De Zen, Dunsmuir, D'Amico, Bordin and two other company officials remained, with De Zen controlling 59.9% of the venture.
Within a year or so, Zuliani, who had in mind a more modest project, also became uncomfortable with De Zen's ambitions. "He wanted more and more and more," Zuliani says. "Vic just put people in places he could control. If he couldn't control you, he got rid of you," he added in court filings. De Zen was reluctant to put things down on paper and was in the habit of squeezing "the trades," Zuliani told police in filings. "For example, he owes $1.5 million, pays $800,000 and says, 'Sue me for the rest!'"
In 1998, De Zen bought out Zuliani for $4 million (U.S.). Zuliani chalked it up "to bad experience and left it at that," he said in an interview.
With Zuliani no longer involved, De Zen took the project to new heights. His brother Angelo was dispatched to head up construction, using workers from Jovien Associates Ltd., a company partly owned by Royal Group. One of those sent from Jovien was the company's co-founder and co-owner, Joseph Cecchini.
Cecchini and De Zen had been doing business for years. (Cecchini had a troubled past. In 1983, he was charged with first-degree murder of his 26-year-old wife, Alexandria. She was eight months pregnant at the time of her death. Cecchini's first trial ended in a hung jury. He was tried again and acquitted.)
Once in St. Kitts, Cecchini not only helped oversee construction of the resort but he also became an investor. With Cecchini and Angelo on the ground in St. Kitts, De Zen gave orders from Toronto, demanding daily status reports. De Zen "knew everything that was going on," Cecchini told police in a court filing. "A decision would never be made on this project without Vic being involved."
Claudio Rabaglino, a Toronto architect, told police he flew to St. Kitts on Royal Group's Challenger jet more than 25 times to work on the project. He said De Zen was involved in design changes and gave orders on what materials to use. The Royal Group chief also arranged the purchase of casino equipment, worked out details for a golf course and co-ordinated plans for swimming pools and the spa.
The resort became so important to De Zen that he turned over one of Royal Group's boardrooms-dubbed the "war room" by some-to the project. As construction progressed, 16 contractors were involved and about 3,000 shipments of products were made from Toronto. By 1999, roughly 700 workers were on site, some of them connected to Royal Group.
Despite the massive scale of the project, few Royal Group shareholders knew much about it. One of the few hints that Royal Group had set foot on the island was buried in a 1997 press release about new orders for the company's products. Near the bottom was this sentence: "These orders include a 2,160-home project in the Philippines, a 400-home project in Argentina, an 86-home project in Poland and a resort complex on the island of St. Kitts."
Anthony Scilipoti, an analyst at Veritas Investment Research in Toronto, had been following Royal Group for a few years as of 2001, and was concerned about some of the company's accounting and disclosure practices. Then he heard a rumour about the company building a resort in the Caribbean. Intrigued, he did an internet search and came across a couple of stories in a St. Kitts newspaper.
One article, dated Nov. 3, 2000, was about a signing ceremony involving St. Kitts Prime Minister Denzil Douglas and the developers of a new resort, lavishly endowed and complete with a casino and conference centre. It was scheduled for completion in 2002, and was to be managed by Marriott International Inc.
According to the story, the project was being built by Technologies Limited of Canada, and there was a quote from that company's vice-president, Douglas Dunsmuir. "We are very pleased to come down from Canada to be involved in and complete these intense negotiations and concluding successfully these arrangements that will allow us to take our project including the condominium project to a world-class resort," Dunsmuir said. The story was accompanied by a photo with a caption that read: "Signing the documents were Prime Minister Douglas, Mr. Donsmuir [sic] developer Mr. Vic Dezen [sic]and Mr. Vincent Morton, Chairman of the Frigate Bay Development Corporation."
Scilipoti was stunned. Royal Group had never disclosed the extent of the project, nor revealed De Zen's involvement. Not long after Scilipoti read the article, Dow Jones news service got wind of the project and reported that De Zen was among the investors.
But De Zen denied any involvement in the construction and said he was focused on Royal Group's operations. "You come every Saturday, I'm here [at Royal Group's headquarters] I'm here every night," he told Dow Jones. He added that the complex was being built by his brother, but that Royal Group was supplying materials.
While De Zen played down the project, his crew in St. Kitts was completing condominiums that were soon owned by himself, his sons, his brother and two nephews, as well as Dunsmuir, D'Amico and Bordin, according to court filings. Marriott had been brought in to manage the resort once it opened.
By the latter half of 2001, there were signs of discord within Royal Group. In August, it announced the retirement of chief financial officer Gary Brown, who had been with the company since 1985. In a press release, Brown said his decision to retire was "well planned." But according to court filings, Cecchini told police that "he believes that the reason Gary Brown left was that he was getting tired and wanted nothing to do with this St. Kitts project."
Brown didn't leave empty-handed. He received a $1.2-million payment as a "consulting fee" and, according to an analyst's report, cashed in about $18 million worth of options.
By the time Brown departed, Royal Group was facing other challenges besides the St. Kitts project. The company was no longer generating a steady rise in sales and profits. In fact, it issued a series of profit warnings in late 2000 and early 2001, blaming rising costs for raw materials, notably the resin that is used to make plastic. Although sales in 2001 increased 8% to $1.67 billion, profit fell 30% to $117.4 million. Despite a slight rebound in 2002, analysts and investors were not impressed.
In a report titled "A Royal Farewell," Scilipoti pointed to several troubling issues, including accounting practices, De Zen's generous compensation and stock sales by D'Amico that had totalled more than $41 million that year. "In short," Scilipoti wrote, "outside investors should treat Royal like the private company that it seems to believe it is." Other analysts were also losing faith. In early 2003, of the six analysts who followed the company, four had "sell" ratings.
By February, 2003, Royal's share price had fallen by approximately 60% in six months, to around $10.50. Compounding investor concerns, Royal Group disclosed that De Zen and Dunsmuir, now the company's president, had taken home nearly $9 million in bonuses. That was more than twice the bonus they'd received the previous year.
"We have a big problem with this company," said Robert Bertram, executive vice-president of the Ontario Teachers' Pension Plan, which owned the stock. "The compensation levels are totally out of line with its performance and have no bearing on corporate reality."
When shareholders gathered in Toronto for the company's annual meeting on Feb. 20, many were out for blood. One shareholder called the bonuses a "disgrace," while another said the board had been negligent. Flanked by private security guards, De Zen tried to quell the unrest. At a press conference afterward, he bowed his head and blurted, "For God's sake, give me a break."
De Zen was also peppered with questions about the St. Kitts project. He told the crowd that his brother's company was handling construction, and he averred that while Royal Group had sold more than $60 million of equipment to the project, "there was no discount."
Two days after De Zen was roasted by shareholders in Toronto, the resort received its first guest. Officials from Marriott touted it at a press conference in St. Kitts as "exciting times for Marriott and especially for the island and people of St. Kitts." The St. Kitts Marriott Royal Beach Resort & Spa was a still-in-progress complex that, when completed, would include more than 460 rooms, six restaurants, two lounges, three swimming pools, a golf course, a 15,000-square-foot recreation centre, 38,000 square feet of meeting space and one of the largest casinos in the Caribbean. The estimated cost had climbed to a minimum of $400 million (U.S.), and the resort was one of the largest employers on the island.
Over the next few months, Royal Group made changes to assuage investor concerns. The company revised its executive compensation and told De Zen and Dunsmuir to reimburse a portion of their bonuses (although both received a pay raise to cushion the blow). It also brought in a couple of independent directors. Meanwhile, unbeknownst to investors, De Zen quietly put the company up for sale. When he received no attractive offers, he dropped the idea.
Back in St. Kitts, the resort was in full operation and even boasted its first celebrity guest, former U.S. president Bill Clinton. But the casino was running into some problems, court filings by police show. First it got stuck with $1.4 million worth of bank drafts that had been stolen from a CIBC branch. Then, in August, 2003, a series of what police termed "suspect" cheques, drawn from a Scotiabank account of the resort's in Puerto Rico, found their way into an account belonging to Roycon Ltd., a St. Kitts entity connected to De Zen.
The cheques had several common characteristics that "make the cheques, and perhaps the account, suspect," police alleged in court filings. "The fact that these cheques [were]issued in the manner described...and ultimately endorsed in a manner that could not benefit the payees would suggest that the account is being used for another purpose."
On Nov. 17, 2003, with earnings continuing to sag and Royal Group's share price dropping below $10, De Zen announced he would step down as CEO the following month. In a press release, De Zen said he would remain company chairman but that he was "looking forward to spending more time with his family and friends." He had no plans to give up control of his multiple voting shares, however. His old friend Dunsmuir, who had been acting as co-CEO, would take over fully as chief executive. A few days later, Royal Group announced it had lost $78 million in the fourth quarter ended Sept. 30, compared with a profit of $22 million in 2002. Sales had fallen nearly 4%.
The press release notwithstanding, De Zen didn't go off into quiet retirement. He'd already incorporated Zzen Group of Companies with his sons and moved into an office not far from Royal Group's headquarters. (According to court filings, D'Amico and Bordin are also partners in Zzen Group.) By the time De Zen left Royal Group as CEO, his new operation already had two subsidiaries up and running-Zzen Design and Build Ltd. and Zzen Development Ltd. It also owned Jovien, which De Zen acquired from Royal Group, and one of Royal Group's jets, a purchase De Zen also arranged.
Not long after De Zen left as CEO, Royal group was hit with a bombshell. On Friday, Dec. 19, the company's lawyers received a call from officials at the Ontario Securities Commission. The company was under investigation, the OSC said, and a letter to that effect would be arriving shortly.
The letter came Monday morning: Michael Watson, the OSC's director of enforcement, spelled out the regulator's suspicions that Royal insiders were "engaging or may intend to engage in selling securities with knowledge of a material fact that has not been generally disclosed." The letter was copied to Market Regulation Services Inc. (RS), which polices trading on Canada's stock exchanges.
De Zen and other executives, taken aback, quickly met to weigh their response. Company lawyer Scott Bates asked the OSC for more information, but details were scarce: The OSC was acting on an anonymous tip and didn't have much to go on. Nonetheless, officials at RS wanted the company to issue a press release to disclose the investigation, in keeping with the securities-law requirement that companies report anything "material" to the market.
Meanwhile, then-OSC chairman David Brown quietly put in a call to the office of Greg Sorbara. By now, Sorbara had added to his reputation credit for the Liberal Party's resurgence in the province, in part by winning the Vaughan-King-Aurora seat in a 2001 by-election, proving that the Conservatives' 905 belt was not impregnable. Since the Liberals' 2003 election victory, he'd been Minister of Finance and a trusted adviser to Premier Dalton McGuinty, whom he'd backed in a hotly contested leadership race. Brown was keenly aware that Sorbara had been a long-time director of Royal Group, even after his return to the legislature-although, in keeping with cabinet rules, he'd resigned from the board when he became Finance Minister and put all his holdings in a blind trust. Likewise Brown knew that Sorbara's riding included Vaughan, home to Royal Group. The final element in this delicate matter was that Sorbara, as Finance Minister, technically oversaw the OSC.
Brown's call, taken by one of Sorbara's aides, aimed to give the minister a "heads up" that Royal Group was about to announce it was under investigation. But Royal Group didn't announce anything. During a meeting on Christmas Eve with officials from RS and the Toronto Stock Exchange, the company argued that there wasn't enough information in the OSC letter to justify a press release, and that it would be damaging to disclose what information there was. The regulators were persuaded and conceded that Royal Group could keep the information confidential "until they could get more information to make a press release more relevant," said RS president Tom Atkinson.
Since the OSC didn't force the company's hand, the issue of disclosure went into limbo for the next two months. News of the investigation was kept under wraps. Behind the scenes, Royal Group set up a special committee of its board, which hired forensic accountants Kroll Lindquist Avey. The OSC called in the RCMP, which turned the file over to one of its new white-collar crime units, dubbed integrated market enforcement teams (IMET). An IMET moved into action and started sifting through the anonymous material sent to the OSC. It also used a helicopter to fly over Royal Group's head office and snap pictures.
At 6 p.m. on Feb. 24, 2004, the evening before Royal Group's annual general meeting, the OSC told company lawyers that unless they issued a press release by 1 p.m. the next day, the commission would make its own statement. The next morning, Royal Group halted trading in its shares. Dunsmuir told shareholders at the AGM that the company was evaluating "certain information." Later that day, the company finally announced the investigation and said it related to the St. Kitts resort.
The next day, Royal Group's share price dropped 20%, and Sorbara found himself in the middle of a political storm.
The Opposition parties called for Sorbara's resignation, but McGuinty stood by his Finance Minister. The controversy died down after Sorbara was cleared by a provincial ethics commissioner. But an even larger storm was just gathering.
While Royal Group struggled to explain to investors what was going on, the RCMP quietly went about its work and soon honed in on the Bank of Nova Scotia. The bank had long been associated with De Zen and Royal Group. It had been De Zen's personal banker and had played a part in many of Royal's financial dealings, including underwriting its initial public offering. It was also involved in some of De Zen's personal ventures, including the St. Kitts resort. And it had accounts for the personal businesses of Royal group executives Dunsmuir, D'Amico and Bordin.
News of the investigation had prompted the bank to begin its own internal review. On March 30, several senior managers, including the director of anti-money laundering investigations and the director of investigations, met to discuss the St. Kitts accounts, according to documents filed in court.
Over the summer, the RCMP closed in and served the bank with a search warrant that demanded access to hundreds of records. Scotiabank officials said they needed more time to gather the material, and they contacted Ontario's deputy attorney general for guidance on their obligations.
The police backed off, but a few months later they returned and served "production orders" on the bank and the company, seeking thousands of pages of records, mainly relating to the St. Kitts project. The orders were a relatively new legal tool for police to use with companies or individuals who are not under investigation but who possess records and documents relevant to a probe. The orders were also public documents containing information about who was being targeted-not something Royal Group was keen to see in the papers.
Royal was furious and sent its lawyers to court in a bid to block publication of the contents of the order. It was easy to see why. The order outlined that De Zen, Dunsmuir and Brown were targets of the investigation over allegations of filing false information with regulators and of fraud dating back to 1996.
At a hastily organized court hearing, James Riley, a lawyer for the company, argued that disclosure of the order would damage the company's financial position, especially since the document did not contain specific information, only allegations. But the judge refused, and news of the allegations was out.
In response, De Zen issued a statement saying he was "outraged" by the "completely wrong" allegations. "I have never defrauded anyone in my life and pride myself on conducting my business affairs honestly," he said. The company stood by De Zen and Dunsmuir, saying in a press statement, "These are allegations only."
Royal Group summoned company director James Sardo to respond publicly. Sardo duly said there was no reason for the men to step down.
But Sardo was already in a tight spot. He'd been a director for less than a year, having been appointed as part of the company's reform efforts in the wake of the compensation turmoil. Sardo had had a distinguished career, serving as president of the Canadian arm of Moore Corp. Ltd. and CEO of SMK Speedy International. But none of that likely prepared him for what was in store at Royal. Within weeks of joining Royal's board, he'd been named to a special committee struck to review the allegations raised by the OSC.
By the end of October, the RCMP served one more production order on the bank and informed Royal Group that it was formally under investigation. The new orders added allegations of theft and added D'Amico and Bordin, as well as new CFO Ron Goegan, to the list of those under investigation.
A month later, Sardo received some disturbing information from the accountants at Kroll who'd been hired to conduct Royal's internal review. They'd been going over years of related-party deals and uncovered the transaction for the land near Royal's head office that netted De Zen and the others a $6.5-million profit. Sardo was shocked.
He called a meeting of the special board committee on Friday, Nov. 26, in a downtown law office. The directors agreed that all five executives who participated in the land deal, now all under investigation by the RCMP, had to go. That afternoon, Sardo drove up to the Royal Group head office in Woodbridge, and met individually with Dunsmuir and Goegan. He told them they were fired and gave them time to clear out their desks.
Then he tried to call De Zen, who was in St. Kitts. When he couldn't get through on the phone, he told De Zen's lawyer that the company was dismissing De Zen as chairman. The next day, he met D'Amico and Bordin in the tool and die shop, and fired them as well.
On Monday, Nov. 29, the full board met to approve the dismissals, which were announced in a press release later in the day. Sardo, the company said, would take over as CEO until a replacement could be found. News of the firings sparked a frenzy of trading in Royal shares and a volley of lawsuits from shareholders.
While the company dealt with the fallout from the dismissals, officials at Scotiabank were scrambling to satisfy the production orders. They were growing bitter about the cost involved. In late November, the bank took the unprecedented move of going to court to see if the RCMP could be required to cover some of the expense, which Scotiabank estimated to be about $177,000.
"This is a brand-new law and the bank is spending a heck of a lot in person power and money," said a source at the bank who was familiar with the application. "We want to just get some direction from the court. What about costs? What about compensation?"
The manoeuvre infuriated the police, who withdrew the production order to avoid the litigation. "The courts have said a criminal offence is being investigated and the bank is trying to turn it into a revenue stream," one police source said.
The police didn't wait long to respond. Early on the morning of Tuesday, Feb. 1, 2005, a stream of RCMP cars, along with a white van emblazoned with the force's coat of arms, pulled up in front of the bank's head office at King and Bay in downtown Toronto. Two dozen officers went up to the executive offices and handed a search warrant to surprised staff.
Outside on the street, traffic ground to a halt and a crowd gathered. The media soon began reporting that the bank had been raided. "I don't think it's lost on anybody that a byproduct of Scotiabank not being co-operative with us is, we aren't going to be intimidated," said a police source that morning. The bank stressed that it would indeed co-operate and that it never intended to prevent police from doing their job. But the publicity damage was done. The police made it clear they planned to be at the bank for the full two-month term of the warrant.
As the police probe broadened, Royal Group quietly negotiated a deal with De Zen. He agreed to step down as a director and give up his control by allowing the company to convert the multiple voting shares into common stock. By converting the stock without a premium, De Zen effectively paid back the company for all the profits and interest that had been made on the head-office land flip. He also agreed to pay back $1.1 million in bonuses in a settlement with the company. For its part, the company dropped all legal claims regarding that deal and said it would not pay De Zen any severance or pension.
But De Zen was not admitting any wrongdoing. "I have stated and reconfirm today that throughout my career I have always acted honourably and have prided myself on conducting my business affairs openly and honestly," he said.
For his part, Dunsmuir "has never been engaged in anything but honest and lawful conduct," says his lawyer, Brian Greenspan. The executive "stands by every act that was done being a proper business transaction that was always in the best interests of Royal. There's nothing that he has ever engaged in that wasn't to advance the best interests of the company."
Sardo said the settlement with De Zen offered the company a fresh start, and he promised that a new executive team would be in place soon. Within weeks, the company found its man: Larry Blanford, a former executive at Philips Consumer Electronics.
But within days of the announcement of Blanford's appointment, the company was jolted once again. A New York-based investment fund, Cerberus Capital Management LP, announced a surprise $1.31-billion takeover proposal. It was a crafty move by Cerberus, a specialist in picking up distressed companies that has an estimated $10 billion (U.S.) under management and is best known in Canada for its investment in the post-bankruptcy Air Canada.
Cerberus said it wanted to begin due diligence in preparation for a possible offer worth $14 a share. And it said it had lined up the support of De Zen and D'Amico. The announcement derailed the reorganization the company had begun; instead, it immediately put itself up for sale.
More bad news came in July, when the Securities and Exchange Commission announced it was looking into Royal Group's accounting (the company's shares had been listed on the New York Stock Exchange since 1996). Meanwhile, profits continued to fall and sales worsen. In August, Royal Group's second-quarter profit slid to $18.6 million, compared with $35.5 million a year earlier. It began selling off operations. As the summer wore on, investors and analysts lost interest in the company. The sale process dragged on and Royal Group's earnings remained unattractive. The lull lasted until the front-page news of Oct. 11.
Early in the day, rumours began circulatiing that the RCMP had served search warrants on the Sorbara Group. By late afternoon, the reports were confirmed and the search warrants had been filed in court. The warrants contained new allegations and a stunning revelation: Greg Sorbara had been named in two allegations relating to the fraud investigation. The warrant mentioned a $2.5-million land deal between the Sorbara Group and Royal Group in 1996, but made no allegations of impropriety in the transaction. However, court filings noted Sorbara's former role as chair of Royal Group's audit committee, which is charged with monitoring accounting issues such as deals with related parties.
Sorbara had received a phone message that morning telling him that the RCMP had shown up at the Sorbara Group offices armed with a search warrant. His first reaction seemed to be that of a man in denial: He didn't pay the matter any attention or ask for a copy of the warrant. By late afternoon, reporters began asking him about the search and the allegations in the warrant. At first Sorbara shook off the allegations. But by early evening, he finally reached his brother Joseph, and asked him to read the warrant over the phone and then fax it to him. At that point, he knew he had no choice. Around 9 p.m., he told McGuinty that he had to resign.
"I'm feeling dumbfounded," Sorbara told reporters. "I have no idea where these allegations come from. I'm somewhat devastated by this whole thing."
Sorbara immediately hired a lawyer, Frank Marrocco, who demanded access to the relevant RCMP files. After a brief hearing, the police agreed to unseal some of the material they had in court to obtain the warrants.
Marrocco wasn't impressed. None of the unsealed documents provided any clues about the land deal or any other allegations. He promised to keep pressing the police for more. "We're not going away, anywhere," he said. In the meantime, Sorbara's life "was turned upside down."
The police have remained silent about the case, offering no explanation for Sorbara's inclusion in the allegations or any indication of when their probe might end. Indeed, it could go on for months or even years. An RCMP investigation into allegations of fraud at Philip Services Corp. went on for five years before charges were laid. A similar probe involving Livent Inc. dragged on for four years.
For people like Di Gianni, who worked at Royal Group for 20 years, the investigation is a melancholy end to the work of a seemingly unstoppable entrepreneur. "We had such a beautiful company. I mean, the whole of Canada was talking about it. Vic, he was the king of Woodbridge."