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ABCP buyback too big for broker

March 31, 2008 at 4:17 AM EDT

Canaccord Capital Inc.'s capital position would be severely affected if it were to buy back the $269-million in frozen commercial paper its clients hold, but the company is working on a plan that would see clients receive a portion of their money back, according to an internal e-mail.

"By any measure, we are more than adequately financed to conduct and grow our business," says the e-mail, signed by chairman Peter Brown and chief executive officer Paul Reynolds.

"However, if we were to purchase from our clients $260-million of non-marginable ABCP, this would severely impact the regulatory capital required to do our business."

A copy of the e-mail, sent Friday, was obtained by The Globe and Mail. A company spokesperson confirmed its authenticity.

"Clearly, we are not in a position to buy our clients out," the e-mail says.

But it adds that Vancouver-based Canaccord is in a position to help clients who might experience losses when the asset-backed commercial paper sector is unfrozen.

About 1,400 Canaccord clients collectively hold about $269-million of third-party ABCP.

The $32-billion sector was swept up in the turmoil that struck global financial markets in August, when investors balked at any investment with exposure to the U.S. subprime mortgage market, and liquidity dried up. Fearing that the commercial paper's value would freefall, a group of major players in the third-party ABCP sector, led by the Caisse de dépôt et placement du Québec, decided to effectively bring the sector to a standstill, freezing the paper and barring investors from getting their money out while a restructuring plan was being hammered out.

"We are actively working on a plan that will try to close the gap between the par value of these notes and their market price," it said. "In addition, Canaccord is continuing to negotiate with others who we believe have some civil or moral obligation or greater financial interest in the success of the Crawford committee reorganization."

The committee led by Toronto-based lawyer Purdy Crawford will hit the road today, beginning in Toronto and Montreal, to hold information sessions for ABCP investors across the country. It has less than one month to convince about 1,800 individual investors that it has come up with the best solution to fix the sector, which has been at a standstill since August. A vote will be held April 25 and the majority of those who vote must be in favour of the plan in order for it to proceed.

By voting yes, investors effectively sign away any right to sue any company - from rating agencies to banks and brokers - that has been involved in the ABCP sector. And it's not clear how much of their money investors will recoup from the plan, which will transform the commercial paper into longer-term notes. Those investors who can hold the notes until they mature, which is up to nine years, should be able to obtain most of their value back, the committee says. Those who need to sell the paper sooner will likely take a significant hit.

However, the committee says that if the plan is voted down, the ABCP sector will immediately begin to disintegrate and the paper could lose most or even all of its value.

The people who must be convinced are investors such as Murray Candlish, a retired farmer in Daysland, Alta., who said in an e-mail yesterday that he and his wife Cindy hold $350,000 of frozen ABCP, "which represents our life savings." They made the investment through Credential Securities Inc., an investment dealer for credit unions.

Another investor, Yulan Wong, a 60-year-old Vancouver resident, says she is now selling her house as a result of her ABCP nightmare.

Ms. Wong, who recently retired, has $160,000 stuck in ABCP that she hasn't been able to access for seven months. Her niece, who is now in her early 20s, has $140,000 in ABCP. When the niece was orphaned a couple of years ago, Ms. Wong became her guardian and took her to visit her own investment adviser at Canaccord. "I introduced her to my adviser, and on her form [it] said her capital has to be preserved," Ms. Wong said.

"Now I'm selling my house because [the niece's] uncle said 'Why don't you just sue your aunt, that's the only way you can get the money back.' Not out of spite. So, I said, okay, to keep the family from conflict I'll sell the house and give her the money back."

Some ABCP investors are expected to hand out leaflets at the investor meetings this week, as they push their brokers to buy back their paper or take other actions to help them. The investors are using their power to vote against the plan as a bargaining chip.

The internal Canaccord e-mail notes that a lot of attention has been paid to the number of retail holders of ABCP who were put into the investment by Canaccord and Credential Securities. "This is a bit of a canard in that many larger banks sold this product in their retail systems and simply repurchased it from small note holders," it said. "In addition, the largest concentration of notes is currently held by major pension funds like the Caisse de dépôt, the PSP and the Canada Post pension plan. Those funds are comprised exclusively of small investors and pensioners who depend on those smart money managers to make good investment decisions. Clearly, those large institutions felt this ABCP was both a wise investment and a safe bet."

The e-mail adds that Canaccord's policy has always been to permit clients to buy short-term notes rated double-A or triple-A. Most of the third-party ABCP in Canaccord's system was from a conduit called SIT III, which was underwritten and sponsored by the Bank of Nova Scotia and "has proved to be one of the better conduits," the e-mail notes.

"In most cases, the client was not charged a commission but provided with a service," it said. "Our best legal advice suggests that, with the triple-A rating and its track record in the Canadian marketplace, we do not have a specific civil liability," the chairman and CEO wrote of Canaccord. "We do, however, feel a moral obligation and duty to help our retail clients and our [investment advisers] both of whom have experienced extreme anxiety and stress. We are working hard to arrive at an offer that our retail clients will believe to be fair and as close to par as we can negotiate."

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