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ABCP judge stands firm

Refusal to OK fraud release blow to sponsors

Jim Middlemiss

Saturday, May 17, 2008

There's brave and then there's Ontario Superior Court Justice Colin Campbell, who's riding shotgun over the $32-billion Companies Creditors Arrangement Act hearing into the non-bank asset-backed commercial-paper restructuring.

Canadian and foreign banks involved in ABCP backed Judge Campbell into a corner this month, saying the deal could fly only if it included releases absolving them of legal claims, including fraud. At this stage, there is no evidence of fraud.

Yesterday, Judge Campbell declined to play lapdog to Bay Street. Instead, he stared down that 32-calibre gun put to his head, reached into his own litigation holster and fired a volley. He refused--for now -- to sanction the plan of arrangement as long as fraud releases are included.

It's a blow to the investors' committee that worked diligently -- albeit with little transparency -- to find a deal and a rebuke to the banks, brokers, asset providers and sponsors that created this failed market.

The $32-billion ball is now in their court. They, not the judge, will decide whether to shoot the ABCP horse, and that's how it should be. They, not the judge, created and sold a flawed product, and they should be accountable if the restructuring fails.

"I am not satisfied that the release proposed as part of the [restructuring] plan, which is broad enough to encompass release from fraud, is in the circumstances of this case at this time properly authorized by the CCAA, or is necessarily fair and reasonable," Judge Campbell said.

Those are incredibly courageous words, given what is at stake. Had he backed the plan with the fraud releases, he risked creating a situation where a possible police or regulatory investigation could unearth criminal wrongdoing and investors would have been precluded from suing perpetrators. Optically, it would have left the justice system -- which takes enough hard knocks -- looking silly and beholden to Bay Street, and would make fraud releases de rigueur going forward in other restructurings.

He took the high road, opting to back judicial principle over Bay Street bucks. No doubt, some investors are riled. But they should be mad at the banks that sold them the paper, not the judge.

Judge Campbell is prepared to back a plan that includes releases for other civil-type wrongdoings, noting, "It may well be appropriate to approve releases that would circumscribe claims for negligence," but not fraud.

Interestingly, he takes the investors' committee to task for its handling of that aspect of the restructuring, noting there was no court monitor or process in place for investors to raise fraud claims early in the restructuring. Rather, the plan was sprung on them at the courthouse steps almost eight months after the ABCP market froze. "Those who believe they have claims in fraud were not consulted before the plan was developed."

However, he was also quick to praise the work done to date, noting that it has been done with "care and diligence."

It is now up to the banks, especially the foreign banks, which must think long and hard before walking away from the deal on the table. Judge Campbell has offered them a tremendous olive branch -- avoid litigation for the cases that are easier to make, such as negligence or breach of contract, in exchange for a process to deal with possible fraud claims.

It's a good deal. The banks should take it. If they don't, they look more foolish than they already do. To take the public position in the first place that they should be absolved of fraud is troubling. These are publicly traded institutions that deal with trillions of dollars of investors' money. It sends the public the wrong message when financial institutions seek to shield themselves from possible fraudulent conduct affecting their own clients.

From a corporate-governance standpoint, the boards of directors of these companies need to rethink their negotiating and litigation strategy. Are the chief executives and directors really aligning themselves with the argument that their institutions should not be held financially liable for possible criminal deeds that took place on their watch? It's an offensive position to take for those charged with oversight of public and private institutions, especially in an age of corporate social responsibility.

If the banks don't take the deal, the downside is they will face negligence and breach-of-contract lawsuits that stand to expose their handling of the ABCP market more than any fraud case ever could.

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