Civil or Criminal Actions against companies or regulators

[Guest]

Scotia Capital Markets underwrote $175 million of T. Eaton Company, which was distributed primarily to retail clients within one year before the company became insolvent. Read this public letter from Thomas Caldwell, President of Caldwell Securities to the Ontario Securities Commission:


April 23, 2004

John Stevenson, Secretary Ontario Securities Commission
20 Queen Street West 19th Floor
Toronto, ON M5H 3S8

Proposed NI 81-107

Over the years securities regulators have tolerated and encouraged massive concentration within the Canadian Securities industry, with approximately eighty percent of the securities business now controlled by the five major banks. It is apparent these entities are trying to serve too many masters. Conflicts are the natural by-product of this situation. We continue to make more rules, which drive up compliance costs for independent organizations and thus reinforce the consolidation trend. The mutual fund industry is a clear case in point.

We have also forgotten or disregarded history in the creation of the current industry structure. In the U.S., the Glass-Steagall Act, which separated commercial and investment banking functions, was put in place to deal with the abuse of banks using their equity placement (or investment management) capabilities to underpin problem loans with equity issues. Clearly, we cannot expect memories to extend back to the Act’s enactment in 1933 but we should be able to depend upon regulators’ having recall extending to 5 or 10 years.

For example, the T. Eaton Company issued its only IPO in 150 years only to be declared insolvent one year later. Whatever losses its bankers suffered were reduced by the size of the $175 million underwriting. It is ironic to note that financial projections used by the bank-controlled underwriter at the time of the financing were declared to be incorrect within three months of the deal’s closing. Part of the bankruptcy agreement included the provision that the underwriter could not be sued.

Laidlaw Inc., one of Canada’s most widely held companies, was declared insolvent when a bank initiated and advised acquisition (Safety-Kleen) declared its bookkeeping to be fictitious. Many of the shares held were owned through bank-controlled mutual funds. The banks aggressively sought recoupment of their loans to Laidlaw and not one spoke up on behalf of the direct or indirect common shareholders, many of whom held shares through their mutual funds.

Clearly, in a crunch, the banks’ priorities were on the side of getting their loans back at all costs. Canadian bankruptcy laws, unlike those in the U.S., clearly favor creditors in restructuring rather than also allowing equity holders some means of partial recoupment. This fact, when coupled with removing conflict of interest provisions, reinforces this form of common shareholder abuse. The intent and results in these two relatively recent issues appear to be lost in the Canadian Securities Administrator’s submission. That is no surprise. For 40 years in the Canadian Securities industry, I have watched our major banks always get what they sought from the securities regulators. This, despite conflicts, trading abuses, the destruction of agency stock trading, aggressive tied selling (yes, it still exists) and the negative economic impact for small to mid-sized firms trying to raise capital.

One provision that should be specifically allowed in, however, is the ability of an investment manager to trade on a principal basis with an affiliate in the fixed income sector. All bond trading is conducted on a principal basis. It would be chaotic to reinvent this when one understands that all world-wide trades are conducted in this manner. In regards to equity trading, principal transactions are becoming the norm on an institutional basis. In this instance real costs are often hidden from investors and capital is used to buy business and further consolidate our industry.

Approximately 20 years ago, as banks took over investment firms, I asked the Ontario Securities Commission: “How powerful do you want the banks to be?” The question still stands.

Yours truly, Thomas S. Caldwell,
C.M. Chairman

Cc: The Right Honourable Prime Minister Paul Martin
Premier Dalton McGuinty
Honourable Greg Sorbara, Minister of Finance

[Guest]

does anyone have experience with Assante rumors of stock options and other incentive to advisors who switch third party funds to assante proprietary products?

According to OSC fair dealing model, Appendix F (i think) pages 10 or 11, this kind of "churning" increases compensation to the advisor and the firm by many many times over and above third party funds. If clients ever had to pay a DSC redemption charge, as RBC has allowed..........on top of this, then a good case can be made for double dipping by the advisor

class action lawyers should be eating this up. I would say one in five Canadians just might have suffered something like this. Ask around.

[admin]

thanks for the reply. I will post a note in the class action area of this forum on it. The underwriters of this (if they were also the bankers to Eatons) would have been aware and had a tremendous conflict of interest IF it is true that they floated a dead horse issue on the public just to bail out their own bad loans.

Cheers
the advocate

(from the "cover-ups, anyone" forum, discussion whether the underwriters of the EATONS share issue were the same people (or related) to the bankers to the Eatons corp, and whether the offering Eatons shares to an unsuspecting public just months prior to their bankruptcy would be considered self dealing worthy of class action)

[admin]

check out the cases of "unsuitable" investment advice on the NASD web site. (national Association of Securites Dealers in the US)

also check out mutual funds alerts, and investor alerts and warnings section

you will discover numerous cases and examples of mutual fund overcharging, and advisor misrepresenting him or herself as trusted advisor whilst taking advantage of the client as a commission salesperson might..........all of which are being exposed and disinfected in the United States.

None of which are even raising an eyebrow in Canada. Firms cannot touch them because they need the billion dollar problem to go away more than anything in the world.

Regulators cannot touch them because to do so would be like admitting that the regulator was asleep at the switch, or worse, an accesory to the crime.

Lawyers, or public inquiry is the only method I can now image that will have the resolve to unearth these items.

Lets shine the light of day on our investment industry, shall we?

[admin]

why does ASC fear audit? what are they hiding? Certainly not what they
say...........confidentiality of clients. This would be much to easy to
solve.
Appears to be hiding a failure to do the job..........from my perspective

Here's what could be happening in my scenario

1. assume that the ASC receives dozens, hundreds, perhaps thousands of
customer complaints each year, choose any number you wish until an audit
fills in the exact number.
2. Assume that some of these complaints pertain to bank owned (under IDA
membership) firms.
3. I predict that close to 100% of these complaints (about IDA members)
have been referred to the IDA itself.
(with or without legislative authority to do so) (with or without follow up
on the compalints)
4. I predict that the vast majority of those complaints that are about IDA
members, that are handed to the IDA to investigate......get dismissed or
deflected without fanfare by informing the client they have no case. An
audit would tell us this.
(referring abused clients to the IDA is like sending abused young boys
to complain to the north american M/B/L association)

I look forward to public audit or freedom of information requests that will
answer a few of the outstanding assumptions made in this scenario.

Imagine, if this scenario were in any way accurate, how many members of the
investing public, have been misled, misinformed, and left to fend for
themselves while the government funded agency responsible for protecting
them abandoned their role.

Every complainant if this were the case would be able to participate in a
class action against the ASC to recover losses and double and triple
commission charges in the billions.

Abused clients should file suit against the ASC, or alternately, investigate under the access to information act to obtain answers to some questions.

Such as how many complaints, IDA firm complaints, how were they handled? What authority powers the IDA to enforce the act, they feel they do not have such authority etc., etc.

[admin]

once again, private forum to allow advocates to move forward ideas of mutual interest. Speak your mind.

Larry feels that class action suits are the only way to generate some results. Failure to perform duties, placing firm interests ahead of client interest against industry policy and promise etc., failure of regulators to follow securities law.

you name it, it is being used successfully in the US. Why are the same indiscretions in Canada considered "standard Industry practice?"