Investors Scrutinizing the Regulators

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Immunity at issue, ABCP judge warns
Broad protection could hide fraud, Campbell says

John Greenwood


Tuesday, May 13, 2008

On the first day of hearings into the fairness of a proposed restructuring of $32-billion of asset-backed commercial paper, an Ontario Superior Court judge warned he is uncomfortable with the blanket legal immunity that would be provided to market participants under the workout.

Justice Colin Campbell said he is worried that they may be used to protect against serious wrongdoing, such as fraud.

"I have a problem with that," he said, adding he is not aware of any similar situations in which players were given such broad protection.

"Can you show me a case where there have been allegations of fraud where there has been release?" he said.

The fairness hearing is the final step before the workout can go ahead.

The plan has been given the green light by about 96% of noteholders, but the judge said that by sanctioning it he would be imposing a deal on the remaining investors that would require them to give up their legal rights.

The ABCP market froze up in August after issuers were unable to roll over maturing notes and banks that had agreed to provide emergency liquidity declined to step in.

Even with a successful workout, investors are expected to face significant losses. But at least they will get some of their money back, which is more than they would end up with if the deal falls apart, according to the judge.

Despite the high level of support for the restructuring, there is a lot of anger on the part of investors, some of it directed at the institutions that created the assets underlying the frozen ABCP.

Peter Howard, a lawyer for the asset providers, told the court that his clients would back out of the restructuring unless the legal releases extended to fraud.

"If we don't get that, then we don't get the benefit of the plan," Mr. Howard said.

The 4% of noteholders opposed to the plan are mostly companies. Many are worried the right to sue, which they are being asked to give up, may be worth more than the new notes they will receive if the restructuring goes ahead.

Jeff Carhart, a lawyer representing corporate investors with nearly $2-billion of stalled notes, has argued forcefully that the releases are too broad and should not include fraud. According to Mr. Carhart, much of the world is watching the restructuring and it would prove a major embarrassment to Canada if it the plan goes ahead and it is subsequently learned that there was serious wrongdoing in the market.

The hearings continue today.


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