Extrusion giant Royal Group Technologies Ltd. of Toronto is the subject of criminal, securities and tax investigations. The probes center around C$32 million (US$23.8 million) in transactions over five years between Royal and a St. Kitts resort development controlled by Royal's controlling shareholder Vic De Zen.
Royal Canadian Mounted Police, Ontario Securities Commission and Canada Customs Revenue Agency are conducting the probes.
Chief Executive Officer Douglas Dunsmuir shocked analysts when he announced a halt in trading of Royal shares the morning of Feb. 25 at the company's annual meeting in Toronto. De Zen was not present at the meeting. Company officials will not comment on De Zen's whereabouts or why he was not present at the meeting.
On the evening of Feb. 25, Royal issued a news release disclosing the investigations. OSC had first advised Royal to tell shareholders of the OSC probe in late December but the firm declined.
``The company has nothing further to add to the information in the press release,'' said Scott Bates, Royal's general counsel and corporate secretary. ``We have asked the OSC for detailed particulars of the matter and they have refused to provide them. If and when we are provided with any particulars, we will consider them and respond accordingly.''
Royal said it is cooperating with OSC and it established a special committee of its directors in late December to deal with the issue. The committee is comprised of independent directors who have retained independent legal counsel, which officials said is standard practice in such circumstances.
The St. Kitts development, called Marriott St. Kitts Royal Resort, has 648 rooms, six restaurants and a 35,000-square-foot casino, according to a Financial Post report. Although Marriott runs the complex, it is owned by Royal St. Kitts Beach Resort Ltd., of which De Zen and Dunsmuir are listed as directors.
RCMP spokeswoman Michele Paradis said she could not comment on the nature of the case. She said it is unusual for the federal police agency even to admit to an investigation because of privacy concerns, but she said OSC brought it into the public domain. RCMP's new Integrated Markets Enforcement Teams are conducting the investigation.
OSC spokeswoman Wendy Day said the commission handed off part of its probe to RCMP when it appeared to concern criminal law. OSC's investigation involves three areas: disclosure records, financial affairs and trading in Royal Group shares. OSC began its study many months ago and does not know how long it will take, she said.
Royal also is traded on the New York Stock Exchange. Securities and Exchange Commission spokesman John Heine had no comment on the investigations.
In Canada, fallout from the investigations is being felt by Ontario Finance Minister Greg Sorbara, a director at Royal from 1994 until last fall. Opposition members in Parliament have called for his resignation. As finance minister, he has jurisdiction over the OSC, although at his request that duty has been temporarily reassigned.
Royal's stock fell 20 percent to close at C$13.98 (US$10.42) on the Toronto Stock Exchange on Feb. 26, the day it resumed trading. For the previous 52 weeks its high and low stock prices were C$17.40 (US$12.96) and C$6.57 (US$4.89), respectively.
The investigations are a blow to investor confidence, said several analysts. Some said it could push Royal's board to sell the company quickly. Royal explored a possible sale last summer, but the four-month process resulted in no formal offer. It concluded the year by announcing the retirement of De Zen who took the title of nonexecutive chairman. De Zen retained his voting shares, of which he owns 80 percent.
``While there is no certainty that the OSC will find Royal guilty of any wrongdoing in connection with this matter, we believe investors may shoot first and ask questions later in light of the company's recent history,'' Cherilyn Radbourne, an analyst with RBC Capital Markets in Toronto, wrote in her Feb. 26 report.
``Investor confidence in Royal has been badly shaken over the last three years as a result of repeated earnings warnings and asset write-downs in the midst of a very strong housing and renovation market.''
RBC Capital tagged Royal as an above-average risk.
``We believe investors should avoid this stock pending more details concerning the OSC investigation,'' Radbourne wrote.
Industrial products analyst Jay McKinnell maintained a strong buy rating for the stock. McKinnell, with Raymond James Ltd. in Toronto, based his recommendation on the economic value of Royal's business.
``Our recommendation is likely to be controversial, but reflects our view that the economic value of Royal's business is unaffected and will eventually prevail,'' McKinnell wrote in his report.
It is unclear if the investigation is focused on individuals or the company, but from a company perspective, possible issues could include legal and accounting disclosure, and the financial fairness of the deals, according to McKinnell.
``Risks for shareholders include accounting restatements and various tip-of-the-iceberg/chain-reaction scenarios,'' McKinnell wrote. ``Conversely, we believe the news increases the odds that the company will be sold.''
Royal came under fire last year after it disclosed that it had given Dunsmuir and De Zen large bonuses in 2002.
Under pressure from shareholders, the company in July revised its salary structure and replaced the bonus program with one based on return on invested capital.