ABCP judge stands firm
Refusal to OK fraud release blow to
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
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
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
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
"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
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
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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