Canada's biggest-ever insider trading investigation was blown open by the suspicious actions of a middle-class Montreal clothing industry executive who leveraged the equity in his home to make big stock bets, Quebec's securities watchdog says.
The executive is Earl Levett, the chief financial officer of Montreal apparel firm Point Zero. He is characterized by the regulator as a "small fish" in the investigation into Amaya Inc.'s $4.9-billion (U.S.) acquisition of PokerStars' parent Oldford Group Ltd. in 2014. In other words, someone who received rather than gave privileged information.
But it was his actions that fuelled the probe, according to the watchdog's investigators. Or at least a key aspect of it. The regulator is also casting a much wider net and looking at the trading done on Bay Street in Amaya ahead of the PokerStars deal in what is a sprawling international investigation.
"Most of the stuff that we were able to get from this whole operation was because of certain things that you did to trigger [suspicion]," investigator Annie Leblanc of the Autorité des marchés financiers (AMF) told Mr. Levett during an interview with him in the morning of March 23 of this year. "This was kind of like the drawer opened, and then we just started, you know, getting more and more information."
Mr. Levett has not been charged with any offence.
The interview took place at Mr. Levett's home in the on-island suburb of Dollard-des-Ormeaux as the AMF executed a search warrant on the premises, one of roughly a dozen such searches the regulator did that day on the case with the help of the RCMP. His family was home at the time and the experience visibly shook them, according to a transcript of the recorded interview filed to Quebec's Tribunal administratif des marchés financiers, an independent body overseeing securities regulation in Quebec.
At one point, Mr. Levett said: "This is a nightmare."
Just moments earlier, the AMF had issued a press release alleging that the businessman was part of a group of 13 individuals who collectively made about $1.5-million trading on stocks while in possession of privileged information about mergers and acquisitions transactions, including the PokerStars takeover and several other smaller deals. The AMF said some of the individuals leaked information to others in the group.
That same day, the AMF filed criminal charges against former Amaya chairman and chief executive officer David Baazov. He is alleged to have aided with trades while in possession of privileged information, influenced or attempted to influence the market price of the securities of Amaya and communicated privileged information. He has pleaded not guilty to the charges.
Certain bank and trading accounts belonging to the 13 individuals have been frozen while the AMF's investigation into this aspect of the alleged insider trading scheme continues.
The AMF alleges in the administrative case involving the 13, since whittled down to 12, that Mr. Baazov was the source for much of the information on which the people traded.
The regulator alleges that he passed on tips on some deals to Josh Baazov, his brother, and to Craig Levett, Josh's brother-in-law and a former consultant to Amaya. Josh passed the information onto Craig and to another man named Isam Mansour, who worked with both men at business consultancy Blackbelt, the regulator alleges. Craig passed information to several people in his entourage, including his brothers Earl and Sloan, it says. The tips made their way to other people as the web expanded, including two Montreal businessmen who run a network of popular pornography websites.
It was Earl Levett's trades that set off the alarm bells, according to the AMF investigators. It was his trades, based on information received from his brother, Craig Levett, that led them to the others, they said.
"Because of you, all this was looked at, all the transactions," investigator Hélène Guilbault, who also took part in the interview, told Earl Levett. Unlike the other individuals who were more careful about the way they were trading, he made big bets for short durations, she said.
An accountant by training, Earl Levett told the investigator that he doesn't "do that much trading" and that the majority of his investments probably consist of mutual funds. "If I make … 10 transactions a year, it's a lot."
According to evidence outlined by the AMF in its freeze-trade application, several phone calls were made the morning of Jan. 17, 2013, between Josh Baazov and Craig Levett as well as between Craig and Earl. The investigator told Earl that there were nine calls between him and his brother in the space of a few hours and that right after the calls, Earl placed a buy order worth $200,000 (U.S.) on shares of U.S. electronic gambling and amusement company WMS Industries Inc.
The orders were made through a trading account that was nearly empty and had been largely inactive for several years, according to the AMF. When he deposited a cheque in the account to cover the trade, he told his broker that the money came from an inheritance following the death of his mother, according to the AMF. But the regulator, which has accessed bank records, says that in fact Earl Levett borrowed $150,000 (Canadian) on his home equity line of credit to cover 75 per cent of the purchase.
Two weeks later on Jan. 30, Craig Levett sent an e-mail to Josh Baazov saying: "Josh, I can't reach your brother, any news on the stock, the news was supposed to come out," according to messages obtained by the AMF during other raids. The next day, Scientific Games announced a $1.5-billion takeover of WMS. Earl Levett made a $77,000 profit on the trade.
Asked to explain what WMS is, Earl Levett told the investigators that he could not recall exactly what the company does.
"So you're using a line of credit to pay off 75 per cent of the trade for a company that you cannot explain what really they're doing?" Ms. Leblanc asked him, according to the transcript. "To me, this does not make sense. And to a judge, this does not make any sense either, which is why we got the search warrant."
Another bet on May 8, 2014 – the purchase of 12,500 Amaya shares at $8 for a total of about $100,000 – roughly one month before the company announced it was taking over PokerStars, netted him a profit of $155,839, according to the AMF. Again, he tapped a home equity line of credit to help buy the stock, the regulator says.
The accountant used a portion of his profit to buy a $13,682 Rolex Daytona watch for another man, Allie Mansour, the brother of Isam, the AMF alleges. The watch was a kickback for information he received, the AMF says. He paid a separate kickback to his brother Craig after the WMS trade, the AMF alleges.
Earl Levett told the investigators that he first bought shares in Amaya "maybe five years ago," again three years ago and again in the previous six to nine months. He said his interest in the gaming and online commerce industry comes in part from the fact many of his friends work in the sector.
"I'm interested in gaming and I follow it very closely, I try to educate myself," he told the two AMF officials.
Asked why he invested such a significant sum in one stock at that time, Earl Levett said there was no specific reason. He told investigators: "There's nothing in particular other than that I did a lot of research on the company; I bought that stock before in the past." His adviser at Dundee told him that Amaya stock could go to $40, he said.
Earl Levett made two more trades based on privileged information, the AMF alleges.
In the first, the regulator says he bought shares in Britain-based poker and sports betting website Bwin.Party Digital Entertainment on Sept. 17, 2014, roughly two months before its share spiked on Nov. 12 when it confirmed early stage takeover talks with unnamed suitors. Earl Levett sold off his position the next day for an $11,132 profit, at the same time as several other Quebec investors including his brother. One of the suitors was Amaya.
The second came on Jan. 19, 2016, when he bought $7,660 worth of Amaya stock at $15.32 a share, 10 days before David Baazov announced his intention to make an offer to take the company private at $21. His paper profit on the purchase was $1,435, the AMF says.
Reached by phone this week, Earl Levett declined to comment on the substance of the allegations against him. He said he was frustrated by the media's portrayal of the case, which he said has been "completely skewed" and one-sided.
"It kills your reputation, believe it or not," he said of the way things have transpired.
Gary Martin, a Montreal defence lawyer representing Earl Levett, said there may be legitimate reasons explaining the timing of his client's trades, noting that there was a significant amount of industry chatter about the Amaya deal for PokerStars in particular well before it was publicly announced.
"It's a bit like Usain Bolt anticipating the gun," Mr. Martin said. "If rumour has it that something might happen, early buyers or people that are risky will take a chance and/or jump on it."
Mr. Martin said his client will present a defence in due course if and when he is charged.
"I'm a hard-working honest citizen trying to make a living," Earl Levett told the investigators. "I'm prudent, I'm a bright guy. I've made some good investments, some not so good investments."