RCMP: The Violation of the Conflict of Interest Act of Canada

As background, Mr. Nigel Wright had been employed by private equity firm Onex Corporation as a Managing Director in its Aerospace Manufacturing Division for fifteen years prior to his appointment as Chief of Staff by Stephen Harper on September 24, 2010. He returned to employment as a Managing Director at Onex Corporation in July 2014 after he resigned in May 2013 as Chief of Staff. He held no employment after his resignation as Chief of Staff of any kind in the interim. Instead, Mr. Wright chose to volunteer at the Ottawa Mission.

The relevant sections of the Conflict of Interest Act of Canada are s. 4 and s. 21. Section 21 states,

21 A public office holder shall recuse himself or herself from any discussion, decision, debate or vote on any matter in respect of which he or she would be in a conflict of interest.

This violation should help the RCMP focus on a series of financial crimes related to the Violation which appear to be part of the consideration for the money laundering payment scheme. The Criminal Code of Canada under s.380 (2) states,

• (2) Every one who, by deceit, falsehood or other fraudulent means, whether or not it is a false pretence within the meaning of this Act, with intent to defraud, affects the public market price of stocks, shares, merchandise or anything that is offered for sale to the public is guilty of an indictable offence and liable to imprisonment for a term not exceeding fourteen years.

In the investigator’s opinion, the evidence for this offense is clear and convincing but not yet above the standard of beyond a reasonable doubt (that’s your job).

The Air Canada Procurement Process

Central to the discussion of the legality of Mr. Wright’s conduct will be Air Canada’s mainline narrowbody fleet renewal plan conducted between August 2012 and December 2013. The procurement process was the largest of its kind in Air Canada’s history, entirely replacing the fleet of Airbus A320s the airline had flown since 1988.

It is exceedingly important for the reader to understand that in the airplane manufacturing industry, the sales and manufacturing processes are inextricably linked. Planes are ordered before they are built. Airplanes are not inventory sitting in a hangar somewhere. They are ordered, built, then delivered on schedules that stretch out over several years. This is because they are extremely expensive to produce with several major suppliers providing key components of the plane. The revenue from a procurement order to Boeing will in reality be split between several manufacturers. Boeing essentially acts as an identifiable brand name centralizing these interlinked manufacturers all relying on the same sales process. National airlines are also heavily regulated, leaving a great deal of room for shenanigans given the opaque process.

It had been expected by industry observers that Air Canada would fulfill its procurement needs by upgrading its existing fleet of A320s with the A320neo, the newer model of a320. Airlines suffer from high switching costs due to pilot retraining expenses and tend to favor incumbent providers.

Despite the cost incentives to select Airbus, Air Canada did not award the manufacturer the contract. To the surprise of industry experts, the airline instead selected Airbus’s competitor, Boeing and its 737-MAX, on December 11th, 2013. It was a major coup. The 737-MAX was awarded a $6.5 billion contract for up to 109 jets.

Air Canada’s switch from Airbus to Boeing was unexpected for several reasons beyond switching costs. The 737-MAX was a very new plane and had only been offered to customers in September 2012, a month after the procurement process was publicly announced by Air Canada. Given the A320neo’s proven performance, it also appears that Air Canada’s North American contemporaries were much more willing to switch from Boeing to Airbus than the other way around. Mexico’s low-cost airline, VivaAerobus, switched from the 737 to the Airbus A320neo during a bruising contest between Boeing and Airbus in August 2013. American Airlines also split a major jet order between the A320neo and the 737, breaking Boeing’s decades-long exclusive hold over the airline.

Nevertheless, the 737-MAX carried Air Canada’s day. “This is a generational decision. This is the plane that your grandchildren will be flying on,” exclaimed Chris Murray, an analyst at AltaCorp Capital. “It’s a strong vote of confidence in the 737 MAX.”

Air Canada’s decision, given its size and importance to the airline, provided the assurance the airline industry needed in the 737-MAX. Subsequent purchase orders by airlines around the world reflected back the confidence in the plane bestowed by the seemingly uncorrupted Air Canada procurement process. Boeing turned the tide and largely won its market share war with Airbus. Referencing the agreement, leading German broadcaster Deutsche Welle exclaimed, “Air Canada’s flirt with Boeing deals big blow to Airbus” in their market share fight with Boeing.

It has not, in light of recent facts, turned out to be a wise decision. The Boeing 737-MAX is not a safe airplane. The Boeing 737-MAX is the faulty aircraft responsible for two major crashes in 2019 and hundreds of fatalities. Today every 737-MAX around the globe is grounded, unable to fly until serious structural issues are resolved.

The industry has picked apart why Air Canada would possibly select the 737-MAX over the A320neo. Rationales run the gamut from pricing to maintenance costs. Yet one factor that has never been considered is the private interests of one very controversial Chief of Staff to the PMO while the procurement process was ongoing. Nigel Wright.

Wright was sitting on the board of directors at Spirit AeroSystems when he was named Chief of Staff to Stephen Harper on September 24th, 2010. On that day Nigel also personally owned 66,888 shares in the aerospace manufacturer, worth over $1.4 million at the time he was named Chief of Staff. His shares were placed into a blind trust created specifically to avoid any conflict of interest while he acted as Chief of Staff to the Prime Minister’s Office.

Spirit AeroSystems is the former unit of Boeing Corporation Nigel Wright helped acquire and subsequently manage for Onex Corporation, Canada’s largest private equity company. Spirit AeroSystem’s primary business line is building the fuselages for the 737 and 737-MAX. In 2010, when Wright joined the PMO, 737 fuselage and parts manufacturing represented 54% of all revenue for this company.

This matters. A lot. Because on December 12th, 2013, just one day after Air Canada’s procurement decision was publicly announced, the Harper government quietly issued an Order In Council. It was not covered in the media. Little known by the Canadian public, an Orders In Council allows the Prime Minister’s Office to unilaterally pass legislation without Parliament almost instantly.

The Order In Council made an annex to the Pension Benefits Standards Act, 1985. The relevant annex passed into Canadian law nearly $4 billion in pension deferments that Air Canada had lobbied the Harper government for between August 2012 and March 2013, when the Harper government largely granted those deferments.

There were over 900 Orders In Council passed between March 2013, when the Harper government agreed to Air Canada’s request, and the announcement of Air Canada’s procurement contract award. There were 80 more passed between December 12th, 2013 and the end of the calendar year.

The Order In Council was submitted and passed just after the board of directors at Air Canada met to select the winner of the procurement contract.

Fire Sale

Less than three months after Air Canada’s announcement of the purchase of the 737-MAX Onex Partner’s fire sale of their interest in Spirit AeroSystems quietly began. The timing is a little bit more than suspicious. Onex Partners, Onex Corporation’s dedicated private equity wing, had not made a single share trade diluting its controlling interest in Spirit AeroSystems in over three years.

The first shoe dropped on March 10th, 2014 when Onex Partners and related entities sold 6,000,000 shares in Spirit AeroSystems at a price of $28.52, recouping over $171,000,000. Then they struck again, selling 8,000,000 shares on June 10th at $32.31, taking back a remarkable $258,480,000. Following that, a secondary share sale sold off Onex Partners and related entities’ remaining 8,557,155 shares at a price of $35.90, bringing in $307,201,864. With that, Onex Partners ended an over nine-year run controlling the former unit of Boeing Corporation.

The press release announcing Onex Partner’s divestment came on August 7th, 2014. There was no mention in the release of the earlier share sales beyond the final offering in August. However, Onex Partner Senior Managing Director Seth Mersky did provide a warm goodbye: “Onex’ relationship with Spirit dates back nearly a decade, beginning with its carve-out from Boeing in 2005, its establishment as one of the world’s largest non-OEM designers and manufacturers of aerostructures, and its continued growth as an independent and publicly listed company. Spirit’s leadership, employees, and Board of Directors have been wonderful partners and friends. Without their efforts and support, Spirit would not have become the thriving business it is today.”

Nicknamed “Project Wind”, Mersky and Wright spearheaded the acquisition of Boeing’s Wichita, Kansas based fuselage and airplane parts manufacturing plant in 2005. Nigel Wright then joined the board of directors of the former Boeing unit and spun it off quickly as a publicly-traded company named Spirit AeroSystems at an initial offering of $26. The IPO would seem to have made the acquisition a quick success.

But Onex Corporation didn’t divest from Spirit. The private equity company did sell into the IPO, and then completed an additional share sale in 2007, but maintained a significant controlling stake in the manufacturer right up until Mersky’s 2014 press release. The size of the holding was material to Onex Corporation, representing over 30 million shares worth over $1.2 billion in late 2007.

Part of Mersky and Wright‘s plan for Spirit was to attract Airbus as a client for Boeing’s former unit. Unfortunately, the bright future didn’t materialize. Spirit AeroSystems was instead devastated by the Great Recession. According to its annual reports, cash flow from operations declined from $273.6 million in 2006 to just $125 million by 2010. Shares which were trading for $40 in July 2007 declined to a low of $7 before rebounding to just $19 by September 2010, the same month Nigel Wright was named Chief of Staff to Stephen Harper. The value of the holding had dropped to approximately $570 million, less than half the trading price in 2007, three years earlier. At the time of Wright’s appointment, Airbus represented just 10% of Spirit AeroSystems revenue. Orders for airplane parts from Boeing remained the company’s dominant business driver, representing 85% of all earnings, with 54% of all company revenue earned by manufacturing fuselages and parts for the 737.

The management at Spirit AeroSystems was so concerned over the company’s reliance on Boeing they listed both “Our largest customer, Boeing, operates in a very competitive business environment” and “Our revenue largely derives from the B737” as risk factors to the value of the business on every single annual report available from Spirit AeroSystems.

Spirit AeroSystems was also heavily in debt. Company debt had skyrocketed from $595 million in 2007 to $1.2 billion in 2010. According to Spirit AeroSystems 2010 Annual Report, “Our existing senior secured revolving credit facility, which matures on September 30, 2014, is a significant source of liquidity for our business. The failure to extend or renew this agreement could have a significant effect on our ability to invest sufficiently in our programs, fund day to day operations, or pursue strategic opportunities.”

During Nigel Wright’s tenure as Chief of Staff, Spirit’s stock price never exceeded Spirit’s 2006 IPO offering price of $26 and reached a low of $15.19 on November 12th, 2012. In late 2012, Onex Corporation’s investment had effectively cratered and Nigel had led the private equity firm into a disaster. Onex Partner’s remaining investment consistently traded below its IPO price, was heavily indebted, with declining cash flows and reliant on manufacturing fuselages for just one plane — the B737 — losing a market share battle with Airbus and its A320neo.

Yet, Spirit AeroSystem’s stock price recovered just in time for Onex Corporation’s divestment in the spring and summer of 2014. One potential explanation not yet explored for why the stock price recovered so quickly is the aforementioned Air Canada procurement process. How? We’ll be getting into that shortly. First, a brief overview of the Harper Government’s very curious treatment of Air Canada under Nigel Wright’s tenure as Chief of Staff is required.

Harper and Air Canada

The Harper Government was consistently in contact with Air Canada leading into the procurement process over a spat of serious labor issues the airline was facing. In 2011, Air Canada was renegotiating its union contracts with all four of its major unions. The negotiations had long been expected to be contentious, given that the unions had made numerous concessions to Air Canada in 2003 to assist the airline in exiting from bankruptcy. The unions were looking to recoup some of these losses.

The Harper Government intervened in virtually every labor dispute that occurred between the unions and Air Canada, and universally against the union’s and in the airline’s favor. This included introducing back-to-work legislation into Parliament and submitting numerous referrals to the Canadian Industrial Relations Board (CIRB).

The CIRB referrals were apparently of arguable merit. One particular claim, that Air Canada employees represented “essential services” was especially contentious. “There’s not a serious individual involved in industrial relations, either on the management or the union side, that would suggest that Air Canada falls into essential services,” Labour Expert Dan Oldfield explained to publication Tyee. “We’re talking about flight attendants. The only issue of public concern would be who was going to fill the glasses of wine. And it’s not like you can’t travel even if Air Canada isn’t flying. There are numerous options.”

It was during the labor dispute that the first lobbying meetings relating to the discussion here occurred between Wright and the airline. An additional figure who will later become important to the document review, former Minister of Foreign Affairs John Baird, also met with Air Canada at this time. Wright’s meeting occurred in October 2011. Baird’s meeting occurred in February 2012.

As the labor disputes began subsiding, Air Canada then made a very questionable appointment from the Harper Prime Minister’s Office. Derek Vanstone, the Deputy Chief of Staff and Nigel Wright’s number two in the PMO, was named as Vice-President of Government Relations and Corporate Strategy for the airline. The appointment was announced on July 21st, 2012, less than a month before the airline’s first public disclosures of the Narrow-Body Fleet Procurement Process.

This appointment appeared to violate the Conflict of Interest Act of Canada given the required “cooling off” period between a private company appointing a former government official it has had previous dealings with. Kate O’Malley from CBC News attempted to contact the Harper Government for information regarding why Vanstone’s appointment was allowed. Though the Harper Government did state that Vanstone’s appointment had been approved by Ethics Commissioner Mary Dawson after “lengthy discussions”, O’Malley appeared frustrated by the seeming evasiveness by the Prime Minister’s Office given her writing style in her blog post on the subject.

The Air Canada unions, troubled by the Harper government’s interventions into their labour dispute with airline management, reacted with opprobrium to the announcement. Chuck Atkinson, the IAM 140 District Lodge President, exclaimed, “With the hiring of Derek Vanstone, Prime Minister Harper’s Deputy Chief of Staff, Air Canada has made it quite clear that they no longer need to hide the cozy relationship between the corporation and the government.”

“The cronyism and corruption continue and it appears neither side cares how it looks to the public.”

Vanstone was in place and the Harper Government had controversially intervened in numerous contentious labor disputes, and the procurement process was about to begin. Baird and Wright had both had meetings with Air Canada lobbyists in the year prior to Vanstone’s appointment. The main issue can now be addressed.

The Procurement Process

Air Canada’s Narrowbody Fleet Renewal procurement process was publicly disclosed in early August 2012. Running concurrent to the procurement process was another major lobbying effort undertaken by senior executives at Air Canada: pension relief. Beginning in August 2012 and into the winter of 2013, Air Canada CEO Calvin Rovinescu led a major lobbying effort in Ottawa, Ontario with top Harper Government officials for relief from the airline’s massive pension deficit. According to the Globe and Mail, “Without an agreement to gain breathing room to whittle down its $4.2 billion pension deficit, the airline would have faced a financial crisis, with the company’s long-term solvency in doubt.”

The airline requested a $150 million cap on its annual solvency deficit payments beginning in 2014. It would result in $700 million in relief in each of the first five years.

There were 12 total meetings with officials from the Harper Government with Air Canada over the pension issue. Among the government officials participating was Foreign Affairs Minister John Baird on January 7th, 2013.

Nigel Wright met with Air Canada on December 4th, 2012. The Globe and Mail noticed that Mr. Wright’s name had been entered into the federal lobbying registry, and inquired with the Harper government whether there was any conflict of interest due to Gerald Schwartz’ previous attempt at acquiring Air Canada in 1999 for Onex Corporation. The Harper government replied that there was “no conflict of interest” in Nigel Wright’s meeting.

There was. Spirit AeroSystems. At the time of Nigel Wright’s meeting with Air Canada, the 737-MAX fuselage manufacturer had a deeply depressed stock price, hovering around $15. Mr. Wright had every motive to press Air Canada on the procurement process. Certainly, it is reasonable to believe he was well aware of the process considering his deep knowledge of the Aerospace industry, his deputy had been recently hired by Air Canada, the Harper Government’s continuous contact with Air Canada, and his former role as a director at Spirit AeroSystems.

It is very clear that the Conflict of Interest Act of Canada was violated. Specifically, Section 4 of the Act states,

For the purposes of this Act, a public office holder is in a conflict of interest when he or she exercises an official power, duty or function that provides an opportunity to further his or her private interests or those of his or her relatives or friends or to improperly further another person’s private interests.

The operative word in the above passage from the Act is an opportunity. It is not necessary to positively show that the public servant acted to further their interests. Public servants are legally obligated to recuse themselves from any activity where an opportunity exists for a conflict of interest while completing their official duties.

The airline’s competitors were not pleased with Air Canada’s pension relief lobbying effort. “Rather than dealing with the problem with Air Canada’s pension funds, deal with Canadian pension funds as a rule because if they (politicians) create this precedent, I can think of all the other industries that are going to line up at the PM’s door and say: ‘Me too,’” Air Transport Association of Canada president John McKay exclaimed.

In February 2013, McKay sent a letter directly to the Prime Minister’s Office complaining that targeted relief for an airline that had already received “immense support” not enjoyed by competitors would seriously hamper the level of competitiveness in the airline industry.

Despite the controversy, on March 11th, 2013, the Harper Government largely granted the airline’s request. It bestowed a floor on annual pension deficit payments of $150 million per year and an average of $200 million per year, for a total of $1.4 billion over seven years. Caps on executive compensation were included in the deal.

In a written statement, WestJet CEO Greg Saretsky wrote of the pension deferment award, “While we recognize this has been a difficult decision for the government, we are disappointed with this announcement. We are supportive of a strong and competitive aviation industry in Canada. To that end, we trust this marks the end of special treatment for Air Canada as such treatment at the expense of other industry players has become too common.”

On December 2nd, 2013, airline insider FlightGlobal reported that Air Canada had selected the A320neo, Boeing’s competitor and the expected winner of the procurement process, for the contract. With one caveat — the decision was subject to approval by the airline’s board of directors.

The board of directors approves all strategic procurements. According to Air Canada’s policies, the board is also responsible for overseeing and managing Air Canada’s pension system. Calvin Rovinescu, who personally led the lobbying effort for pension relief in 2012 and early 2013, sat on Air Canada’s board of directors in December 2013 to approve that purchase order.

Boeing won instead. The Order In Council used by the Harper Government to make legal the pension deferments awarded Air Canada in March 2013 was actually passed on December 12th, 2013, just after the board of directors at Air Canada made the switch. All without Parliament or the Canadian media noticing. That was the leverage to twist the board’s arm.

The circumstantial evidence is overwhelming. I did some back of the envelope calculations based on the 2017 10-K filed by Spirit AeroSystems with the SEC. Just an estimate of how much revenue per 737-MAX Spirit AeroSystems earns. It came out to about $6.3 million. It’s just a ballpark figure, but with 109 planes ordered, it means about $700 million for Spirit AeroSystems was in that Air Canada contract.

Imagine the temptation on December 4th, 2012 when Nigel Wright met with Air Canada executives. For both sides. On one side of the table were high-level executives and board members from an airline desperately seeking pension relief just to survive. On the other side of the table was a Chief of Staff to the Prime Minister’s Office holding tens of thousands of shares in a struggling aerospace manufacturer supplying one plane fighting for a giant contract from that very same airline. On the table was $700 million.

Just imagine the kind of man who could resist it.

Nigel Wright’s Character

If Nigel Wright’s name doesn’t ring a bell, it should. He was a Chief of Staff so influential one government official dubbed his role “almost like a deputy Prime Minister”. There was also controversy over his employment at Onex Corporation and concern over potential conflicts of interest that may result. A so-called “ethical wall” was thus constructed by Nigel Wright in consultation with Ethics Commissioner Mary Dawson to separate him from decision-making on any portfolio involving Onex Corporation business interests, especially Aerospace where he led investments for the private equity company.

Despite a sterling reputation amply communicated by the press upon Nigel’s appointment, his tenure turned out to be a bit worse than controversial. It was a disaster. After multiple ethics investigations by Ethics Commissioner Mary Dawson Nigel resigned in disgrace from the Harper Government in May 2013 when his critical role in the Canadian Senator Mike Duffy improper payments scandal was revealed.

Wright had personally paid Duffy $90,000 so the Canadian Senator could quietly repay disputed living expenses he had previously claimed government reimbursement for. Later disclosures found Wright intended to snuff out a nascent political scandal over a Conservative Senator comping personal expenses on a government tab. Accusations of bribery swirled on social media when it was discovered. It was the major scandal of Harper’s government.

The RCMP controversially chose to forgo charging Nigel Wright for making the payment despite admitting they had sufficient evidence to charge him. Instead, they charged Mike Duffy with 31 counts relating to political corruption for accepting Nigel’s payments and planned to use Wright as a witness at trial.

The decision didn’t sit well with many. The Political Observer asked, “Why did those (or other) charges against Wright never materialize? Something went seriously wrong at the charging stage and the smell won’t wash out”.

Duffy’s show trial was a disgrace. Justice Charles Vallaincourt dismissed all charges against him while excoriating Nigel Wright in his judgment,

Was Nigel Wright actually ordering senior members of the Senate around as if they were mere pawns on a chessboard? Were those same senior members of the Senate meekly acquiescing to Mr. Wright’s orders? Were those same senior members of the Senate robotically marching forth to recite their provided scripted lines?… The answers to the aforementioned questions are: YES; YES; YES; YES; YES; and YES!!!!

According to CBC News, “Questions have long persisted about how Duffy could have been charged with accepting a bribe when Wright was not charged with offering one”.

Does this sound like a man who could resist a cool $700 million?

It doesn’t even appear to be all Nigel Wright got up to. On December 19th, 2012 Nigel Wright met with General Motors of Canada. It’s entered into the lobbying registry and anyone can look. It was the only car company that Wright ever met during his tenure as Chief of Staff. Ford, Toyota, Mazda were all forsaken.

Onex Corporation, Nigel Wright’s employer, carved out another unit from another manufacturer. It made transmissions for an automaker called Allison Transmission. Onex Corporation, of course, purchased it from General Motors.

Onex Corporation was liquidating another long-term investment at the exact same time that Spirit AeroSystems was divested. It was very similar to its sister share sale going on at the same time. Just like Spirit AeroSystems, the prices for the initial sales made in August 2013 were far less than the later prices received in 2014. The price of the stock was just skyrocketing after Nigel Wright left the government. In the first identified transaction, Onex Partners and related entities only received $21 for their divestment of 11.9 million shares. When Onex sold 17.5 million shares on June 9th, 2014, just four days after a major Spirit AeroSystems divestment, they received $30.

Allison Transmission was all gone by September 9th, 2014.

On July 28th, 2014, while Onex Corporation’s stock sales of Spirit AeroSystems were still ongoing, Nigel Wright returned to work at Onex Corporation. Onex chair and founder Gerry Schwartz stated in a press release: “We missed Nigel during his leave of absence and are excited to have him back.

I’m sure Gerry was overjoyed.