The not-so-sneaky business of policing Calgary’s towers
Meet the investigative geologist keeping tabs on Alberta's energy sector
Rock Star: Paul Kavanagh, an investigative geologist with the ASC
Photography by Ewan Nicholson
Don’t call Paul Kavanagh a gumshoe. The veteran earth sciences specialist works as an investigative geologist for the Alberta Securities Commission (ASC), the agency responsible for sniffing out corporate misbehavior in Canada’s second-largest public capital market behind Ontario. But he stops short of identifying with fictional detectives or even Klondike claims inspectors. “That’s probably a little too colorful,” he says. “I don’t use my rock hammer that much, but you do get information from a variety of sources and you do try to piece together a puzzle.”
The talent for problem-solving showed in 2008 enforcement proceedings against High Plains Energy Inc. A series of news releases issued by the now-defunct Calgary firm between July 2005 and January 2006 exaggerated the company’s oil and gas production rates ahead of a private placement of securities – sales of stock that don’t require as much disclosure as an initial public offering – that raised roughly $8.6 million.
Kavanagh was among the ASC staff working the case. At the time, High Plains had operations in Alberta, Saskatchewan and Montana, and its shares were listed for trading on the TSX Venture Exchange. In one release dated Nov. 28, 2005, company executives claimed net production volumes were on track to eclipse the equivalent of 800 barrels of oil per day. In fact, lease operating reports from the previous month showed production had declined to 216 barrels of oil equivalent per day. Five directors and two executives were ultimately fined a total of $230,000 for misleading the market.
Testifying on his own behalf at a February 2009 hearing, former company president and chief operating officer Benhard Andrew Anderson said the executive team had been “careless,” but he argued the firm “had a dynamic situation in an emerging company that was looking to be aggressive in terms of its results.”
ASC staff called Anderson “cavalier,” arguing the industry veteran “failed to demonstrate the soundness of judgment, care and skill required and expected of a senior officer and leader of a reporting issuer.” For his role in misleading the market, Anderson was fined $100,000 plus ordered to pay $20,000 to cover the costs of the ASC investigation. He was also banned from serving as a director or senior officer of a company for a total of seven years.
Kavanagh says companies frequently hesitate to disclose negative information. “If there’s a bunch of wells watering out or if their production is tapering off for whatever reason, they will hesitate and spend months, sometimes longer, to disclose that information, even though it’s material to the company.”
Shining a light on dubious claims or suspect information companies would otherwise prefer remain hidden is key to the ASC mandate to protect investors and shareholders.
The agency’s enforcement team includes investigative lawyers, accountants and ex-cops with years of police and investment industry experience. “It’s a really diverse set of skills,” the geologist says. His own job involves unearthing clues on corporate news releases and websites, financial statements, reserve and flow-test reports, plus well logs and other disclosure documents. “There’s always something going on. There are always disclosure concerns and there’s always insider trading cases.”
The ASC received 984 complaints in the financial year ending March 31, 2010, up from 799 the previous year. In that time, the agency also concluded 456 investigations and issued eight interim cease-trade orders, plus levied $1.1 million in administrative fines compared to $1.9 million for 2009.
Penalties levied in 2008-09 – when oil prices reached a mid-summer crescendo of US$147 a barrel – were $3.2 million. The price spike meant markets were “primed for scammers,” Kavanagh says, although he stops short of drawing a direct link between oil prices and the prevalence of insider trading swindles.
There are just over 26,000 registered individuals and 584 registered firms in Alberta, representing 27 per cent of the Canadian capital market. Alberta-based companies have an average market capitalization of $753 million – Canada’s highest when compared to firms in Ontario, Quebec and British Columbia.
Fully 38 per cent of the energy province’s capital market is comprised of oil and gas firms. That compares with 14 per cent for mining and four per cent for financial services. The large number of reporting oil and gas firms makes employing staff familiar with the sector’s nuances especially important. The ASC draws on the expertise of a Petroleum Advisory Committee for advice on changes to current and proposed securities laws and petroleum-specific regulatory policies.
The watchdog’s Corporate Finance division is active in developing legislative amendments and regulatory instruments used to regulate the province’s capital markets, with a particular emphasis on the oil and gas sector. For his part, Kavanagh describes himself as an oil and gas “generalist.” From reserves to well logs, “I dabble in almost everything,” he says.
He landed at the ASC after starting in the sector with a service-supply firm. His first crack at sleuthing was working for the investigative arm of an insurance company. From there he wound up at what is now the TSX Venture Exchange, working in the organization’s surveillance department as an oil and gas geologist. “It’s not really a well-defined career path,” he says. But “that’s how I got my position here. I understood oil and gas geology, and I understood securities.”
The job is a far cry from the secret dossiers and manila envelopes that color popular depictions of corporate skullduggery. “People always get fascinated by the title,” Kavanagh says, reflecting on the investigative nature of the work. He jokes, “We should get more guys working on the street.”
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