Investors Scrutinizing the Regulators

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Retail ABCP holders ask regulators to intervene

August 12, 2008 | Mark Noble


Retail investors who had their savings in asset-backed commercial paper frozen with Canaccord Capital and Credential Securities are now urging regulators to step in and get their money back, despite a deal being struck in April to do just that.

Clients of Canaccord and Credential, who represent the bulk of retail investors with their money frozen in ABCP, have been promised all of the principal back within 21 days of the ABCP restructuring deal getting final court approval.

But due to ongoing appeals from small to medium-sized institutional investors, that approval has yet to be received, and it's likely that a court fight is going all the way to the Supreme Court of Canada. Investors likely won't see their money until late in the fall.

That's an unacceptable development for some retail ABCP investors who say they want their money now and are demanding regulators step in to force dealers to pay up. Such a move is not without precedent, as the state regulators and the U.S. Securities Exchange Commission have forced financial institutions in the United States to make restitution for investors who bought now illiquid auction rate securities (ARS).

Auction rate securities are income-yielding notes with a long-term maturity, but were sold to some investors as short-term investments under the false claim they were as safe as cash. In truth, their short-term value was determined by liquidity. When worries about the credit markets started to spread, there were no short-term buyers for ARS, and investors had their money effectively frozen. The situation is somewhat similar to what happened to non-bank ABCP investors, who faced an illiquid market for their securities.

Diane Urquhart, an independent analyst and investor advocate, says the ability of U.S. regulators to force banks in the U.S. to make investors whole could serve as a template for how investors here can get their money back. According to Urquhart, U.S. regulators have so far been able to get U.S. securities dealers to pay more than $40 billion in restitution. In Canada, the figure to make Canadian retail investors whole is estimated at around $240 million.

"I think, in essence, we are saying to the government and IIROC, 'It was the Canadian securities industry that brought this to the Canadian market. Surely you can assemble the money from your industry to repay investors.' From the victim's perspective, they don't care who pays," she says. "Both federal and state authorities have done so for American investors. They've stepped up to the plate and done so in the trading of a security that I personally think has been subject to less unlawful activity than what we see here."

But investors here have virtually no leverage, having voted en masse in favour for the Pan-Canadian Investors Committee Restructuring deal. It was necessary for the deal to pass in order for them to get their money back.

Now with the legal deal in limbo, there's little reason for dealers to return their capital, even though other buyback deals have been struck in the Canadian marketplace that didn't require the passing of the ABCP plan.

Urquhart estimates that investors have received more than $4.8 billion in buyback deals at other firms, the largest of which was a $2 billion dollar deal announced by National Bank at the outset of the ABCP liquidity crisis.

"The National Bank did a $2.1 billion deal right off the bat. That was a purchase from retail and small corporations. They decided right out of the gate to make a voluntary settlement," she says.

Urquhart says investors would like to see the unnamed parties that have committed roughly 60 cents on the dollar to fund the Canaccord and Credential buybacks to offer the same deal without the requirement of the ABCP deal pass.

"Basically, this is a message to the unnamed parties covering the 60 cents. If they don't want to pay for whatever reason, we are saying somebody else step up to the plate and make the difference," she says. "The retail investors are not trying in any way to interfere with the court decision. They are seeking remedy for their losses in the same manner as what has been done in the U.S."

Murray Candlish, a farmer from Daysland, Alberta, with more than $350,000 frozen in ABCP, is waging a PR campaign to get a buyer to come forward.

"It is highly suspected, if the Ontario court turns it down, it will definitely go to the Supreme Court. They are on holidays on recess right now. At the very earliest, they probably wouldn't be able to hear the case until October. It's been a year tomorrow that my money has been frozen," he says. "American banks were able to pay $44 billion in two days for selling the auction rate securities. I'm going to be on BNN tomorrow trying to put pressure on the Canadian banks to do the same."

Filed by Mark Noble,,



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