The Mystery Behind SNC-Lavalin's CEO Resignation
Zut alors! Triple zut! The recent crisis surrounding Montreal-based engineering firm SNC-Lavalin has caused shareholders, employees and managers alike to curse les cieux and see rouge. It's also caused the company's chief executive officer to look for work elsewhere. While he waits for that next job offer, one line is that he's - and you never, ever want this phrase following your name - "cooperating with authorities."

SEE: Playing The Sleuth In A Scandal Stock

Deciphering the Issue
The outgoing CEO, Pierre Duhaime, abruptly resigned from his position and the board of directors on March 26. The catalyst? $56 million in payments that no one can seem to account for. This puts SNC-Lavalin in the position of having to assuage its remaining shareholders, while not saying anything that can be used against the firm in a court of law. Which means you have to burrow through tons of legalese to get an idea of what the problem was. Here are samples of it from SNC-Lavalin's public relations department:


"… recommendations are directed primarily at reinforcing standards of conduct, strengthening and improving internal controls and processes, and reviewing the compliance environment." Also, SNC-Lavalin had "identified material weaknesses in its internal control over financial reporting as at Dec. 31, 2011, relating to management override, non-compliance with and ineffective controls over compliance with the company's policy on commercial agents and its code of ethics. As a result, the company has concluded that its disclosure controls and procedures and its internal control over financial reporting were not effective."

SNC-Lavalin conducts business mostly in French, followed by whatever the above language is. If you're keeping score, that passage includes four uses of the passive voice, eight qualifying adjectives, and nothing attributed to any particular person, or even to any department. Duhaime's guilt or lack thereof notwithstanding, no one disputes that he was in charge when $56 million officially went missing.

SNC-Lavalin's major projects include hydroelectric stations throughout its home province of Quebec; bridges, highways and light rail lines across Canada; a Malagasy nickel mine; and several projects in Libya and Tunisia, which if you have been paying attention to the news for the past two years would unsurprisingly raise a couple eyebrows. Ordinary citizens who live under the thumbs of dictators need roads and tunnels just like the rest of us do, and better for everyone that they benefit from good old-fashioned Canadian know-how. Operating in Libya doesn't mean condoning the regime of the recently assassinated Col. Muammar Gaddafi, does it?

Unfortunately, that's not how the developing world works. While SNC-Lavalin can operate in Canada without doing any personal favors for Prime Minister Stephen Harper, your average despot expects something in return for letting you enter his country to improve the lives of his people. When that despot knows that his 42-year reign is about to end, he starts planning an exit strategy.

Controversy
Saadi Gaddafi was the son of the curiously coiffed late dictator. Gaddafi fils was also referred to as the family "black sheep," leading one to wonder what the ovine standards are for the Gaddafi family. Through his family's political and financial influence, Saadi made a brief career for himself on an Italian Series A soccer team, then got suspended for drugs. (Imagine the Boston Celtics making Vladimir Putin's son their starting point guard.) Rather than suffer the grisly fate his father would eventually undergo, in 2011 Saadi Gaddafi made plans to split town and find somewhere a little more pleasant to live out his decades. The Mexican Riviera, for instance.

What does smuggling dictators' family members have to do with a humble engineering firm headquartered on the other side of the world? At least a little, it seems. SNC-Lavalin contracted consultant Cynthia Vanier who attempted to fly to Libya last year, or at least as close to Libyan airspace as she could get, which would be adjacent Tunisia where NATO doesn't control the skies. No one disputes that SNC-Lavalin paid Vanier $100,000, nor that she hired a Mexican plane to fly across the Atlantic, pick up a certain scion of a notable Libyan family, and return with him.

Today, Vanier sits in a Mexican jail cell. She insists that SNC-Lavalin owes her another $300,000, a payment that it's safe to assume the firm won't be making anytime soon. As for Gaddafi Jr., he got dropped off in Niger, a nation whose government has no plans to extradite him or comply with international police orders to give him up.

This would make for a fantastic Tom Clancy novel, but not a very good annual report. SNC-Lavalin trades on the Toronto Stock Exchange (TSX), where its stock price has taken some historic falls in recent weeks. On February 27, shares traded at $48.37. A day later, you could buy SNC for $38.43. The company's stock hadn't dropped that much, that quickly, in more than 20 years.

Within a week of the stock drop, SNC-Lavalin fired Riadh Ben Aissa, the senior vice president in charge of Libyan operations. He claims no knowledge of the missing money, and while speculation is best left to speculators, it's hard to envision a scenario in which a company that's already on the ropes would exacerbate the situation by firing a wholly innocent employee who could be expected to retaliate. Ben Aissa has since threatened to sue.

The Bottom Line
The recent examples of Enron, Fannie Mae, Freddie Mac, Global Crossing, WorldCom, Phar-Mor, Adelphia and dozens of others seem to have taught some executives less than nothing. If highway speeding is the crime with the highest likelihood of success, corporate fraud has got to be somewhere near the bottom. Find an instance in which the perpetrators didn't get caught.

SNC-Lavalin continues to go to great lengths to espouse its Code of Ethics and make said statement available via PDF on its website. The company has hired an interim CEO whose background contains not a hint of impropriety, is continuing an internal investigation into the payments made in 2011, and the stock has shown some signs of recovery. SNC-Lavalin shareholders are optimistically hoping that any further developments won't affect the company's long-term stability.




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