BUSINESS

SNC-Lavalin's 100th year tarnished by CEO resignation over US$56 million payouts

03/26/2012 06:35 EDT | Updated 05/26/2012 05:12 EDT
MONTREAL - Engineering giant SNC-Lavalin plans to inform police and other authorities about the results of an internal investigation that failed to determine the use of US$56 million of payments that resulted in the resignation of its CEO.

Pierre Duhaime stepped aside Monday after a probe revealed he signed off on payments to undisclosed agents, breaching the company's code of ethics.

"The company is in the process of contacting and will be passing on any information we have with regards to the payments — basically the inconclusive results of our investigation — to the relevant authorities," board chairman Gwyn Morgan told a conference call.

The company said Ian Bourne will assume the role of vice-chairman and interim CEO until a new chief executive is hired. A former chief financial officer at TransAlta, Bourne has been an SNC director since 2009.

SNC-Lavalin (TSX:SNC) was unwilling Monday to indicate where the agents were paid for two large projects, or rule out if they involved construction projects in Canada.

The company simply said the payments were made to "Projects A and B" — though it did say that it doesn't believe the payments in question were related to its operations in Libya.

The company said Duhaime co-operated with the investigation, but couldn't provide details of the payments that investigators believe are known by two former senior employees, including one who has since left the country.

Morgan acknowledged that the incident tarnishes the reputation of the company and perhaps the construction industry as a whole, but he urged perspective given the overall size of the company, which had more than US$7 billion in revenue last year.

Hoping that the worst was behind the company, investors boosted shares by nearly five per cent, gaining $1.93, at C$41.20 in trading on the Toronto Stock Exchange.

Based on the results of the investigation, Morgan said the board doesn't believe the money was used for bribes or wound up in Libya. But, he acknowledged it wasn't "able to really determine the use of those payments."

"We did our best to find out everything we could about the course of those payments and haven't been able to do so at this point there is no further action we can take."

SNC said the company's CFO and the chairman of its international subsidiary refused to approve the payments, but Duhaime stepped in to allow the payments to be made, which was a breach of its ethics code.

Using agents is a normal part of doing business by construction firms, especially in foreign countries. They are contracted to arrange permits and help execute projects.

But, Morgan said the size of these payments was unusual. He said the three-year average payments to agents was around $700,000.

The two large payments in this case were charged to contracts that didn't exist. He added the board should have been made aware of the large payments.

The company declined to disclose if Duhaime will receive a severance payment. He earned nearly $5 million last year, including a base salary of $800,000.

Last month, the company's board launched an investigation over the circumstances surrounding roughly $35 million in payments.

Around that time it also parted ways with executive vice-president of construction, Riadh Ben Aissa and vice-president finance Stephane Roy, saying that the conduct of its employees had recently been questioned.

In February, the investigation into the first set of payments, worth some US$33.5 million, was widened to include another set of payments worth some US$22.5 million that were also improperly attributed to construction projects to which they did not appear to relate, the company said.

Maxim Sytchev of Alta Corp Capital said the board acted decisively to deal with any overhang of issues plaguing the company.

"It's a bit of a surprise to see that it's the top guy leaving, but that really speaks volumes to how the board wanted to position itself in the market and that's the right signal that they're sending out right now," he said in an interview.

Duhaime helped to build up SNC's mining business during his 23 years with the company.

"It's always a big blow when you have a very senior executive leaving ... but at the same time SNC has 28,000 employees and a lot of depth on the board and within the company so it's a blow but nobody's irreplaceable."

In a statement Monday, the company said Aissa — who is apparently not co-operating with the investigation — authorized the signing of agreements for the projects, which were improperly documented.

It said Aissa "is believed to have significant knowledge about most of the investigated transactions, but has not been met despite a request to his counsel." He is believed to have left Canada, possibly for Tunisia.

It added that Roy may also have knowledge, but he has not been interviewed since prior to his dismissal in February.

SNC also reported Monday that it earned a profit attributable to shareholders of $76 million in the fourth quarter, or 50 cents a share, down from $158.7 million, or $1.04 cents per share, in the same period a year earlier. Revenue for the quarter increased to $2.12 billion, up from $1.83 billion.

In February, the company announced its 2011 outlook would be reduced by some 18 per cent or $80 million, in part because of the improperly recorded payments which would need to be recorded as period expenses in the fourth quarter.

SNC-Lavalin also said the quarterly cash dividend would be increased by 4.8 per cent to 22 cents per share for the fourth quarter of 2011.

Bourne said there was no evidence that this incident has had any impact on customers as it recorded about $800 million in new contracts in March.

SNC said its outlook for 2012 will be similar to last year, which would be below analyst expectations.

SNC-Lavalin is one of the top engineering and construction groups in the world and is currently working in some 100 countries.

Earlier this month, a class-action lawsuit was filed on behalf of shareholders who acquired its securities between March 2009 and February 2012.

The suit is seeking $250 million in damages from the company in relation to the millions in mysterious payments.

SNC denies all liability in respect of the claims alleged in the proposed class-action.

Note to readers: This is a corrected story. A previous version said the chairman objected to the payments, though he has since said he and the board were unaware of the payments.