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Wednesday, July 27th, 2016

OSC says Coventree withheld looming ABCP crash from investors

JACQUIE MCNISH AND JEFF GRAY

After weeks of scrambling to resuscitate the ailing asset-backed commercial paper (ABCP) market in the summer of 2007, a senior executive with Coventree Inc. sent an ominous e-mail to company officers.

Warning that the Caisse de dépôt et placement du Québec would likely stop supporting the troubled market, Coventree’s head of capital markets David Allan wrote in an Aug. 12 e-mail: “I am not optimistic about our chances of dodging the bullet tomorrow. All hands should be on deck. … Helmets on; chin straps tightened.”

According to an Ontario Securities Commission ruling on Wednesday, the problem with the e-mail and dozens of other internal communications several days earlier, was that Coventree and two of its top two executives did not share their concerns with shareholders.

The OSC ruled that Coventree and two of its founders, Dean Tai and Geoffrey Cornish, breached securities laws by not alerting shareholders about a number of significant negative developments that threatened the health of their company and the ABCP market.

One day after Mr. Allan’s e-mail, on Aug. 13, 2007, Canada’s $32-billion ABCP market seized up amid fears that the notes had been dangerously infected by toxic subprime mortgages. It was the largest capital market failure in Canadian history, forcing some of the country’s biggest banks, funds and investors and financial companies to absorb hundreds of millions of dollars in writedowns on the notes.

Coventree shares were wiped out by the crisis and the company is in the process of winding itself up. The small Toronto investment bank created many of the financial structures that issued ABCP and it is the only entity that has been sanctioned by regulators for the breakdown. The OSC said it will issue a decision on the sanctions at a later date.

A handful of banks, including Canadian Imperial Bank of Commerce and National Bank of Canada, reached a $138-million settlement with securities regulators in 2009 over their role in the ABCP collapse.

In a 156-page ruling, a panel of three OSC commissioners found that “Coventree and a number of dealers” distributing its ABCP notes in the first 13 days of August, 2007, “had knowledge of liquidity-related events and developments in the ABCP market that were important to investors considering the purchase of ABCP.

“It is unlikely that any investor would have purchased Coventree-sponsored ABCP, or any other ABCP, if they had been aware of those market events and developments.”

Lawyers for Mr. Cornish and Mr. Tai said they were reviewing the OSC decision and both declined to comment.

The OSC’s decision included pages of private communications between Coventree executives and board members who knew since the beginning of August, 2007, that skittish investors were balking at buying ABCP. During those days, the Caisse, a Coventree investor and major ABCP holder, sought to calm the market by buying large volumes of the stranded notes.

Internal documents portray an increasingly distressed executive team that was growing agitated behind the scenes, while publicly calming the market. Mr. Tai was so relieved that the notes were still trading on Aug. 3 that he told Coventree directors in an e-mail that “we managed to roll our paper today.”

The OSC decision also faulted Coventree for not alerting its shareholders in the spring of 2007 that a Dominion Bond Rating Service move to tighten ratings on a riskier brand of ABCP securities, known as credit-arbitrage transactions, had a significant negative impact on its business.

In an April, 2007, presentation to investors, Coventree portrayed the effect of the DBRS decision in a graphic of a bicycle with a pole through its spokes.

The OSC decision said the rating change “constituted a change in Conventree’s business” that should have been disclosed to its shareholders.

 

 

 

 

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