Investors Scrutinizing the Regulators

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Change would let regulators take action

IDA Had Concerns

John Greenwood

Wednesday, May 14, 2008

Lawyers for a committee overseeing the restructuring of $32-billion of frozen asset-backed commercial paper have proposed a change to the plan that would allow action by securities regulators if the plan is allowed to go ahead.

Sources said the amendment was drafted after the Investment Dealers Association, the brokerage-industry watchdog, raised concerns that legal-immunity provisions contained in the plan are so broad they would prevent even regulators from taking action.

As reported in the Financial Post yesterday, the IDA has launched a compliance-and-enforcement sweep in the wake of the collapse of the ABCP market and has sent 26 letters to member firms involved in the controversial investments.

Under the proposed amendment, the powers of regulators such as the IDA would be mostly limited to investigations, something they wouldn't have the power to do under the agreement as is. For instance, they would not be permitted to impose any fines in the event of any wrongdoing.

Despite the damage caused by the ABCP collapse last August -- it is the biggest market failure ever to hit this country -- all the major securities regulators have sidestepped the issue, a matter that has raised serious concern among many observers. The IDA is the first one to launch an investigation.

An Ontario Superior Court judge yesterday wrapped up hearings into the fairness of the restructuring and is expected to issue a decision within a few days. The fairness hearings are one of the final steps in the approval process. If the judge gives the green light to the restructuring and there are no appeals, it could go ahead within the next few weeks.

The main objectors are corporate noteholders who say their legal rights are being removed by the legal release clause. About 1,800 individual investors will get all their money back under the plan while the major pension funds who hold the bulk of the paper are also expected to do well, but numerous companies that own the notes say they will end up shouldering the bulk of the losses without getting any benefit.

They worry that their best hope of recovering their losses may be through legal action against the financial institutions that created the stalled paper, but the plan would prevent that. Under the restructuring, all potential legal action, including fraud allegations, would be prevented.

Peter Howard, a lawyer for a group of banks that provided the assets underlying the stalled notes, said his clients would not take part in the restructuring without the promise of legal immunity.

"That's what noteholders knew when they chose the plan," Mr. Howard said, referring to a recent vote in which 96% of investors supported the plan.

Ken Rosenberg, a lawyer representing a group of companies including Redcorp Ventures and Ivanhoe Mines, said the court does not have the jurisdiction to grant immunity from fraud.

"If you don't have the jurisdiction, you can't give them what they want," Mr. Rosenberg said. "How far can you push the envelope? You can't push it beyond the court's jurisdiction."

Allan Sternberg, a lawyer for Montreal businessman Hy Bloom, questioned the validity of the noteholder vote. The largest block of notes is held by the group of institutions that engineered the workout and many of them have not fully disclosed how they will benefit, Mr. Sternberg said, noting that firms such as HSBC have not disclosed whether they hold any ABCP. Another major player is the Caisse de depot et placement du Quebec, holding more than 30% of the stalled ABCP. Not only did it invest in the market, it also owned a chunk of the one of the biggest creators of the paper through its holdings of Coventree Inc.

When that is taken into consideration, the result of the vote "simply doesn't bare scrutiny," Mr. Sternberg said. "When you look closely, the numbers are suspicious. Ben Zarnett, a lawyer for the investors committee spearheading the restructuring, dismissed such claims.

The court has the power to approve the restructuring, including the legal releases, he said. He said noteholders opted to give up their legal rights when they voted because they want a solution to the ABCP crisis. "It's a business judgment, not a moral judgment," he said.

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