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ABCP plan backers propose tight limits

Fraud Claims

John Greenwood with files from Jim Middlemiss

Thursday, May 29, 2008

Backers of a restructuring of $32-billion of frozen asset-backed commercial paper yesterday proposed a way to deal with fraud claims by putting tight limits on who can be charged and what damages can be claimed.

Under earlier wording of the restructuring plan, participants in the ABCP market would be provided blanket immunity from legal action. But earlier this month an Ontario Superior Court judge warned that he could not approve a restructuring that protected players from fraud, and he asked the proponents to figure out a way to deal with such claims.

Still, the solution they came back with could anger noteholders, many of whom have been hit with significant losses.

Under the amendment, only investment dealers that sold the stalled notes could be subject to fraud allegations. The numerous players involved in the creation of the notes such as the foreign banks that provided the assets and agreed to provide emergency liquidity would be immune from prosecution.

The biggest holders of stricken notes, the members of the investors committee that spearheaded the restructuring, would not be permitted to submit claims.

On top of that, potential claimants would have a window of six weeks to file claims; after that no claims can be filed.

"It doesn't do a lot for noteholders in terms of exacting a better deal," said Colin Kilgour, an industry expert representing corporate investors.

"It opens the lid a little, but not much," Mr. Kilgour said.

Corporate holders of frozen ABCP are a cross section of Canadian business, including Redcorp Ventures, Baffinland Iron Mines, Ivanhoe Mines, Magna International Inc. and tour operator Transat AT. Many of them are among the biggest critics of the restructuring, claiming that they are being required to shoulder the bulk of the losses while other investors, such as big financial institutions and retail investors, get a better deal.

"Any system that doesn't give you your basic right [to sue] to me is window dressing," said Allan Sternberg, a lawyer for Montreal businessmanHy Bloom.

The corporate noteholders say they were not consulted in putting together the amendment. In court hearings this month, Mr. Sternberg argued that it would be illegal for a court to approve a restructuring plan that provides immunity from fraud claims.

Under the amendment, players in the ABCP market would be protected from all but claims of fraud. Those allegations would be dealt with in an arbitration process that tightens the definition of fraud. It also limits any damages that might be awarded to the amount lost on the investment.

If Ontario Superior Court Justice Colin Campbell approves the amendment, the restructuring could be completed as early as mid-July, observers say.

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