Investors Scrutinizing the Regulators

Home Page


Securities Regulation In CanadA

Fox Guarding the Hen House




A Financial Nightmare
Canaccord clients’ money is frozen; they may eventually lose it

Vancouver Sun

Thursday, March 20, 2008
VANCOUVER - Investors in British Columbia who put their money - and faith - in a Vancouver brokerage house, are now caught up in a financial nightmare.

Canaccord Capital Inc. put about 1,400 clients, many of them from B.C., in ill-fated asset-backed commercial paper. Those investors, and their almost $270 million worth of savings, have been stuck in a legal limbo since the paper was frozen last August after investors shunned the short-term debt because of concerns of possible links to U.S. sub-prime mortgages.

And now with a proposal to resolve the ABCP freeze expected to be sent to note-holders next month, the investors are faced with a Catch-22.

CREDIT: Steve Bosch/Vancouver Sun

Yulan Wong of Vancouver is a Canaccord investor who has had her savings frozen.

Under the plan, reached March 17, the short-term paper would be converted into new notes maturing as late as 2017. Once trading resumes, the new notes will likely trade at 60 cents to 80 cents on the dollar, according to analysts. For that discount, investors may have to give up the right to sue the banks, rating agencies and investment dealers who got them into the mess in the first place.

Or they could hold what were supposed to be short-term investments for eight years and hope to regain the full amount of their investment at that time.

The alternative is to vote against the plan, see the value of the notes drop even further, yet retain the right to spend thousands of dollars in legal fees, and years in court, to try to get their money back.

It's a lose-lose situation for investors who thought they were in risk-free, conservative investments.

Angela Speller, 61, is a homemaker who lives with her retired husband in Victoria. Before they bought the ABCPs, the majority of their investments were guaranteed investment certificates and Canada Savings Bonds. The money was the couple's life savings, and so the investments needed to be guaranteed, Speller said. They also needed to be liquid, so that money could be easily withdrawn to supplement the couple's pension income and to help their two children finish their education.

"My broker knew that these were savings and that I would not purchase anything unless it was triple A, a sure investment," Spelling said.

But about a year before the ABCP freeze, her broker at Canaccord recommended the new notes, which he assured Speller were no different than GICs, except they provided a slightly better interest rate. And Speller believes the broker thought that was true. But that means little now that her and her husband's life savings are virtually frozen, and may eventually be lost.

Speller would not give the amount at risk, but said it took 41 years to accumulate.

"It was our life savings, it was a fair amount," Speller said.

Yulan Wong is a 60-year-old retired realtor in Vancouver who had cashed out her securities in anticipation of her retirement. She also invested money on behalf of her niece. Together, the two have about $300,000 frozen in their Canaccord accounts.

And like Speller, Wong wanted risk-free investments, that were easily accessible.
With her experience in the real estate market, and knowing assets like houses can go up and down, Wong said she would never have knowingly invested in ABCPs.

"I don't like risky stuff," Wong said.

Now she may have to sell her house just to get some cash. And her plan to go to Australia to look after her mother is on hold.

"I don't have an income but a few hundred dollars," she said. "That's why I'm in a very bad situation."

Wynne Miles, 55, has been lobbying to get a Parliamentary committee to determine what went wrong. But the wording of the current proposal before the House of Commons is forward-looking - how to prevent a recurrence - rather than how to help those currently affected.

The Victoria woman and her husband are both self-employed so their savings are their sole means of support when they retire. That's why they kept the bulk of their investments, which are with Canaccord, in government bonds and GICs until last July.

Miles hasn't made up her mind yet whether she will vote for or against the proposal, but she knows lots of people who are opposed. After all, the plan was developed by the pension funds, lenders and other institutional investors, and is not suitable for retail investors, she said.

"We don't think the solution they're proposing is appropriate because we don't have deep pockets," Miles said. "We can't wait five or eight years to get our money back. We need our savings back now with interest."

Nor does she like having to give up her right to sue.

"I don't like it when someone takes my money and won't give it back and then offers me an ultimatum," she said.

Miles complains that to date she hasn't had a say in how to solve the mess. But now Miles and the other retail investors have the power to nix the proposal because under the plan, and the related bankruptcy proceedings, 50 per cent of noteholders must vote in favour. So while the retail investors hold only a small portion of the total amount in jeopardy, they outnumber the approximately 100 institutional investors at least 15 to one.

If those institutional investors want to assure Miles doesn't vote against the plan, they'll have to buy the ABCPs she holds with interest.

"Then I would no longer be a noteholder and I would no longer have a vote," she said.

"So if they buy out the retail holders the larger institutions would be assured of a majority on the vote," Miles said. "So buy us out," she urged.

Calgary-based Canaccord customer Brian Hunter has set up a Facebook site for individuals holding ABCPs. He too urges the institutional investors to buy out the little guys.

Why would investors with $12 billion at stake risk having small investors vote against it, he asked.

And that's his dream, that he gets bought out and gets his money back.
"Faced with no other alternative I would vote against it and take my chances at suing," Hunter said.

But Canaccord says it can't afford to do that.

"We don't have the ability or the capital base to buy out [the paper] directly from our clients," Canaccord's chief operating officer Mark Maybank said in a telephone interview with Bloomberg.

"I have huge amount of empathy for them in what's been a structural collapse of part of the Canadian capital markets,'' he added. "We're doing everything we can to help."

Maybank said Canaccord was working on a "relief program" for its clients.
"I'm optimistic that we're going to be able to post a successful restructuring, identify market participants, potential buyers that we can work with to address the needs of our clients,'' he said.

Last week, Canaccord also hired an ABCP expert to advise its clients on the proposal.

But Canaccord's position contrasts with that of the National Bank of Canada, the country's sixth-biggest bank, which agreed last year to buy back about $2 billion of the commercial paper held by its consumer clients. Vancity and other financial institutions have also taken that step.

Credential Securities Inc., which offers its services to credit unions, also has an unknown number of retail clients holding ABCPs. Jane Mitchell, a spokeswoman for Credential in Vancouver, did not return a call from Bloomberg seeking comment.

Exact details of the restructuring plan have yet to be finalized, but investors are expected to be asked to vote on the proposal next month.
With files from Bloomberg

Click for more on ABCP