Canadian ABCP investors bullied

March 27, 2008, 6:00 PM

Diane Francis

Greed, Canadian Politics, Litigation

An estimated 1,500 individual and corporate retail investors have been left holding the bag on more than $900 million worth of junk credit they should never have been allowed to buy in the first place if Canada’s regulators, laws and intermediaries had done a proper job.

In total, $32-billion worth of this stuff was exported by Wall Street to Canadian individuals and institutions, but the big banks and brokers recently cut a deal and threw the non-bank investors under the bus.

Purdy Crawford and the Bank of Canada put together a package among the banks, brokers and pension plans then wrapped it in a ribbon by getting bankruptcy protection. The smaller players were denied a seat at the table or opportunity to organize or sue even though the deal benefits big players but is ruinous for small ones. (Crawford extended an olive branch to small investors this week but without details or helping them organize.)

“The CCAA [bankruptcy protection] does not allow class action lawsuits against the parties so the only way we can get to a class action is to defeat the proposal,” said investor, Brian Hunter, a Calgary oil man whose broker, Canaccord Capital Inc., wiped out his $658,000 RRSP by replacing legitimate corporate bonds with worthless junk.

(Canaccord is protected under the Crawford arrangement because it lost money and is a signator but it stranded its clients.)


Ottawa is a culprit

The big chartered banks, to their credit, looked after their clients by taking back the junk, but Canaccord and some credit unions refuse to do so.

The only “good” news is that the deal can be defeated if 50% of these small investors vote against it on April 25. The bad news is they have been denied a list of investors which makes organizing and getting legal advice impossible.

Frankly, Ottawa is also to blame.

The fed’s bank regulator, the Office of the Superintendent of Financial Institutions, waived prospectus requirements on the junk credits because a third-rate credit rating agency rated them as top quality. By contrast, American and British regulators required prospectuses.

“My broker told me it was GIC compatible,” said Hunter. “You couldn’t have known there were high-risk derivatives behind this without a prospectus.”

These investors have been orphaned by the government which should force all regulated intermediaries to take back this junk, as did the others. Canaccord and the credit unions should be stripped of their protection under the deal.

The big boys’ arrangement ruins small investors but not big ones: the Caisse or banks can protect their balance sheets and recoup some of the losses because losses will shelter profits from taxation.

“They claim there will be a gray market and somebody will buy it so they can put it on their balance sheet at 80 cents on the dollar which nobody will notice,” said Hunter.

Frankly, Crawford, the courts and auditor should have looked after all investors, not just the ones who could pay the big legal fees.

The little guys weren’t even allowed inside the tent. The big boys could afford advice and got access to the Ernst & Young distribution list so that they could organize and lobby. The little guys were not only denied access but even their day in court.

(Brian Hunter is trying organize victims and his phone number is 403 650 4960 and email is hunter@windyfield.com )