Fraud immunity threatens to derail deal

A requirement that would extinguish the right of noteholders to bring legal action against the sponsors of asset-backed commercial paper (ABCP) — even in the event of perceived fraud — does not sit well with the judge tasked with giving final approval to a restructuring deal on $32 billion of the frozen investments.

The restructuring plan, which was overwhelmingly approved by noteholders back in April, would prevent legal action against ABCP providers and their sponsor banks. There is no mention, however, of cases of fraud. On Friday, Ontario Superior Court Justice Colin Campbell adjourned the approval of the ABCP, citing an insufficient recourse for legitimate claims of fraud.

“Those who believe they have claims in fraud were not consulted before the plan was developed. Their voices may well be of a different kind and quality from the votes of other noteholders, who by their votes were willing to compromise claims of negligence in all its forms,” Justice Campbell wrote. “In my view there must be a mechanism for the court to determine in an expeditious fashion whether or not the plan can be approved with a way to take into account legitimate, specific and particularized claims of fraud if there are any.”

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Campbell is urging the Pan-Canadian Investors Committee, which crafted the restructuring plan, to go back to stakeholders and find a way to deal with fraud claims that work within the Companies’ Creditors Arrangement Act (CCAA) currently protecting the frozen ABCP notes. He has given a May 30 deadline for submissions.

“The plan as formulated for the most part represents a laudable business solution. If the parties can agree on a dispute resolution process within the ambit of the CCAA to deal with the serious claims of fraud, the plan can go forward immediately,” Justice Campbell wrote. “If the parties cannot agree on a claims dispute process, or one side or the other refuses to participate in a process within the CCAA, it may be that the plan is not approved and fails.”

If the plan fails, then more than 1,400 retail investors who have their savings frozen in ABCP will not have any guarantees that they will see their principal investment returned to them. These investors have been conditionally offered ABCP buyback deals from Canaccord Capital and Credential Securities, under the precondition that the restructuring deal is approved.

Brian Hunter, a Calgary-based retail investor with more than $650,000 of his retirement savings tied up in frozen ABCP, is nevertheless supportive of Campbell’s decision to postpone approval. He doesn’t want other investors short-changed.

“We’ve had to sort of hold our nose the whole way through this process. Even though it is our own money on the line, you would hate to see stuff happen in the future that is not reasonable. There are some out there, be they corporations or individual investors, that are still potentially going to be injured by [the ABCP liquidity crisis] and most likely unfairly so,” he says. “I was prepared to sue before they came up with the CCAA protection. I would still be prepared to do that. It wouldn’t be as happy an outcome, but I think I could live with it.”

Hunter says that’s the choice before many of the banks currently supporting the ABCP deal — whether to allow for dispute resolution to deal with fraud claims or whether to face a flood of lawsuits if it fails.

“Nobody has been able to show any real cause for fraud at this point, but who knows what’s out there,” Hunter says. “Justice Campbell has put it back to the banks and said either figure this out if you can work with [fraud claims] within the CCAA or you can go and deal with a whole bunch of lawsuits.”

Justice Campbell has also asked that banks and ABCP sponsors consider creating a hardship consideration process, presumably to set up some type of relief for investors in special circumstances, including “some elderly individuals and families holding through corporations their entire family savings.”

Purdy Crawford, chair of the investors committee, says it will work to meet Campbell’s conditions.

“We look forward to working with the monitor and other stakeholders to see if a process can be developed that meets the concerns raised by the court so that the plan may be sanctioned and implemented as soon as possible for the benefit of all noteholders,” Crawford said in a release responding to the adjournment decision.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(05/20/08)

Mark Noble