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Market watcher doubts ITscam will shake investors' confidence in Canada

[PoliticsWatch Updated 3:30 p.m. January 3, 2006]

Finance Minister Ralph Goodale. 

OTTAWA  — A U.S. financial observer says he doubts the RCMP investigation of potential leak from the federal government on income trusts will shake international confidence in Canada's stock markets. 
 

"As big as this is to the election in Canada, it's not going to turn off American investors to Canadian securities," David Callaway, editor-in-chief of  MarketWatch.com, said in an interview Tuesday with PoliticsWatch. 

"To be honest, these types of trading scandals happen a lot. We often see moves in stock before significant announcements and that's why the SEC has its enforcement division."

While trading may be commonplace, the political dimension and timing is unique.

Callaway said he is unaware of any type of similar scandal happening so  close to an election day in the U.S. 

Last week, Canada's election campaign was jolted by the unprecedented revelation that the RCMP was conducting a criminal investigation regarding "a possible breach of security or illegal transfer of information" before the income trust announcement was made in November. 

Since the RCMP investigation was announced, the Conservatives have risen in the polls and are either tied with or ahead of the governing Liberals in most polls for the first time in the campaign.

Finance Minister Ralph Goodale's November announcement to lower the tax on dividend yielding stocks and keep in place the tax free status of income trusts has been the subject of allegations of insider trading by opposition parties and some Bay Street watchers.

On the day Goodale announced the changes there was a notable spike in the volume of a number of dividend-paying stocks and income trusts before the decision was made public when the market was closed. 

Even though there was a weekend New York Times story on the controversy, the scandal is not making a lot headlines in the U.S. 

But there could be a U.S. dimension to the controversy.

NDP finance critic Judy Wasylycia-Leis has asked the U.S. Security Exchange Commission to investigate the matter because at least one of the stocks that spiked in volume before Goodale made the announcement is cross-listed on the New York Stock Exchange. 

Unlike the RCMP, however, the SEC is much more tight-lipped about disclosing its investigations. 

A spokesman for the SEC contacted by PoliticsWatch would not confirm receipt of the Wasylycia-Leis's complaint, even though her letter is publicly available on the NDP Web site. 

The SEC says it does not comment on investigations and only discusses "cases we file in court."

Opposition parties have asked Goodale to resign, but the finance minister has vehemently denied that there was a leak of information from his office and some on Bay Street suggest that Goodale had offered a sufficient number of hints that an announcement on income trusts was coming. 

But MarketWatch's Callaway agrees with most Canadian observers who have spoken with the media and said the trading activity that occurred is suspicious. 

"From the trading patterns produced and the spike in volume, it certainly looks like this information did get out ahead of time," he said. "Who got the information out seems to remain a mystery. But if all this information is correct, it's certainly clear that it did get out."

The controversy is also raising questions about how air-tight things are in Ottawa. 

When Prime Minister Paul Martin was finance minister, he said he "wasn't thrilled" with the Bank of Montreal and Royal Bank merger plan that he eventually killed because his office was not informed about it until an hour before the two banks went public.

The banks kept the information under secrecy because of its market sensitivity. 

Currently Goodale has been delaying the release of new guidelines for future bank mergers for nearly two years. But when those guidelines are released a number of banks could potentially merge.

Callaway said some bank CEOs worried about information getting out may be reluctant to share information with the finance department in light of the alleged income trust debacle. 

However, he said he believed the banks have no choice but to provide finance with any merger announcement before it was made public. 

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