Hunter and the Hunted

Diogenes's picture

This article appeared online today. Because online articles have a habit of disappearing with time, I have reprinted it here for posterity. The images here are from my archive, the text from Canadian Business online.

There were many media stories that appeared over the last two months, but this is one of the most detailed and lengthy reviews.

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ABCP: Hunter and the hunted

by Thomas Watson
From the Summer 2008 issue of Canadian Business magazine

Canada’s business elite won’t soon forget Brian Hunter. And we’re not talking about the Calgary trader who lost billions speculating on natural gas in 2006, although he has launched an interesting comeback. We’re talking about Cowtown’s other notable Brian Hunter, the oil industry engineer who forced Bay Street to stop ignoring the average folks who collectively and unwittingly dumped hundreds of millions of dollars into the now frozen market for asset-backed commercial paper (ABCP).

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These retail investors expected to make a decent rate of return on what were supposed to be safe, short-term investments. But after the market for non-bank ABCP turned to ice last August, they quickly learned to expect nothing, except perhaps to get royally screwed. Today, thanks to a revolt organized by Hunter, almost 100% of the little guys and gals — among them retirees, widows and orphans — exposed to this financial fiasco have a fairly decent shot at getting their money back, maybe even with interest.

To Toronto lawyer Henry Juroviesky, who signed on to represent these rebel investors, Hunter is a “man of determination and vision.” To his faithful followers, the 53-year-old is nothing less than a main street hero. But Hunter doesn’t see it that way. He has the confidence of a born leader. He looks likes an officer with the right stuff to command respect from the Calgary Highlanders deployed in Kandahar. But the potty-mouthed engineer is more Rambo than Patton. Hunter isn’t an activist or an organizer by nature, and he has little patience for folks with limited intellect. He’s a lone wolf more attracted to cross-country skiing and mountain climbing than social work or team building. “I’m not the kind of guy who ran for student council as a kid,” says the married father of three. “I am just a guy who saw people seriously fucking with his wallet. I’m more project manager than revolutionary.”

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Hunter has a simple philosophy of life: have fun, make money — in that order. As a partner in Montane Resources, a five-man oil and gas engineering firm that does everything from land acquisition to drilling management, he works hard to play hard. But that’s not the only reason he was mad as hell when more than half-a-million-dollars’ worth of his life savings became potentially worthless last August. Feeling misled by his investment advisers at Canaccord Capital, he requested a refund. But the Vancouver brokerage responded with a nice letter explaining that it had no legal obligation to reimburse Hunter or anyone else. Nobody, insisted executive vice-president Bruce Maranda, could have foreseen the unexpected and widespread liquidity crisis that threatened Hunter’s financial security.

“Canaccord relied upon the DBRS credit rating given to ABCP,” Maranda wrote. “At the time of purchase, there was no indication that the R-1 (high) rating was inaccurate or that the market might experience a disruption that could impact upon the repayment of such highly rated ABCP.”

A few months later, Canaccord — the largest pusher of ABCP to retail investors in 2007, a year in which its CEO Paul Reynolds was paid $11.2 million — changed its tune. Defending itself against two investor lawsuits, the securities dealer alleged Scotia Capital had aggressively pushed ABCP on Canaccord after a controversial market update — selectively distributed by a major non-bank issuer of ABCP — generated fears over the exposure to sub prime U.S. mortgages. Scotiabank denied any wrongdoing, insisting the information it got was “incomplete.”

That was last December. And by then Hunter no longer cared what Street people had to say. He had no desire to trust that something called the Pan Canadian Investors Committee of Third-Party Structured Asset-Backed Commercial Paper would serve his interests. After all, despite being led by respected corporate lawyer Purdy Crawford, the market restructuring committee in question was put together to find a solution acceptable to institutional investors and the financial community, including the power brokers who built the ABCP house of cards in the first place.

Feeling like an insignificant pawn in a rigged game played with foreign rules, Hunter couldn’t take it anymore — much like the average folks in the 1976 movie Network who opened their windows and voiced their outrage after being fed a seemingly endless diet of BS. A fan of that consumer rebellion flick, Hunter decided to rip a page from its plot and issue a call to arms. But unlike Network’s crazed TV anchorman Howard Beale, he didn’t have a nightly newscast at his disposal. Then again, unlike Hunter, Beale didn’t have access to the Internet.

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The retail investor’s initial attempts to organize a grassroots rebellion were relatively fruitless. “I was looking to make connections with other Canaccord clients stuck with ABCP for a number of months,” Hunter says. “I looked on, but nobody seemed interested. I tried a few other investing sites, made a few good connections, but nothing happened.” He even tried approaching the media with his tale of woe, but reporters just yawned. That attitude changed as soon as he started to use Facebook, the community-building website launched to serve Harvard students in 2004 that is now all the rage among today’s youth.

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Introduced to social networking by his kids, Hunter found it useful for keeping in touch with family and friends. But when he decided to try to use Facebook to organize ABCP holders, the only other online network he had ever joined was a group supporting comedian Stephen Colbert for U.S. president. Hunter started small. He created in mid-February an ABCP Facebook page, posting a couple of newspaper articles and starting a few discussions. When he mentioned the Internet campaign the next time he approached reporters, he had limited expectations. “I was still crying and whining about my situation, but I also noted I was starting this Facebook thing and suggested that could be worth a mention.” The novelty of using social networking to fight Bay Street generated more than just a mention. English-Canadian newspaper hits generated French-language coverage; television and radio reporters got in the game. Hunter’s army started raising itself. In a matter of weeks, it was more than 100 strong.

But this story isn’t about social networking. It’s a cautionary tale for investors, albeit one that might just have a happy ending because of Hunter. For perhaps the first time in the history of major corporate restructurings, retail investors haven’t been rendered expendable for the greater corporate good. This time, Joe and Jane Average were not thrown overboard — they took over the ship.

The pin-striped crowd shouldn’t have been taken off guard by this particular investor uprising. After all, they put together a toxic product and sold it as a safe haven for short-term money. Canaccord and other dealers continued to compare ABCP to GICs even after the controversial July market update — the one that Scotiabank called inconclusive — led RBC Capital Markets to shun non-bank commercial paper. In some cases, ABCP was said to be even safer than GICs. For instance, on August 1 a Canaccord sales pitch described a block of AAA paper the firm had secured as a product offering better returns and better liquidity than GICs, which are “non-redeemable” and “only insured up to $100,000.” At least one commission-based Canaccord broker sold ABCP as a “no worries” product that was “fully secured.” And all of that cannot be blamed on credit ratings.

Dominion Bond Rating Service (DBRS), which Hunter thinks should go the way of Enron’s accounting firm, will probably always have a hard time justifying its rating of non-bank ABCP. But most of the underlying assets remain relatively solid and DBRS did outline the risks related to the product’s leveraged structure, which should have stopped any broker from comparing ABCP to GICs.

Retail investors were never told that the commercial paper market was a complex game of financial engineering. Income from a wide range of debt (car loans, credit cards, mortgages, etc.) was packaged together in a banker’s version of musical chairs. Whenever any ABCP matured, an equal amount had to be sold to pay back the last crop of investors. To keep the music playing, liquidity pacts with major banks were struck to keep the money rolling during market failures.

As DBRS pointed out, the liquidity agreements were not up to global standards. According to other credit agencies, loose wording made them potentially worthless. This loose wording, of course, is what allowed some bank executives to claim with a straight face that a $32-billion crisis wasn’t big enough to force a bailout. And since a few financial institutions played multiple roles in the market, some of the banks that were paid to back ABCP now stand to actually make money from its failure.

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As far as Hunter is concerned, insult after insult was added to his initial injury. The most vulnerable holders of frozen ABCP were not at the table when well-heeled institutional investors gathered behind closed doors to discuss ways of limiting the damage to their balance sheets. Nobody sought input from retail investors when the Crawford committee was set up. And nobody asked them what they thought in March when ABCP trusts were transformed into corporations in order to restructure the market under the Companies’ Creditors Arrangement Act (CCAA).

Simply put, retail investors were left out in the cold with their frozen assets, where they spent this past winter riding a financial and emotional roller coaster. Belts were tightened. Vacations cancelled. Planning for the future became impossible. Daily life became a living hell. The restructuring experts, meanwhile, started racking up what is expected to be a $100-million-plus legal tab for developing a solution.

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In April, the Crawford committee released details of a plan to convert the frozen short-term notes into long-term bonds, some with maturity dates almost a decade away. The proposal required all concerned to sign away their rights to sue, protecting ABCP bankers and dealers from having to answer charges of ethical misconduct, not to mention criminal wrongdoing.

Retail investors were stunned. Unlike the Caisse de dépôt et placement du Québec, the largest holder of frozen ABCP, they didn’t help create the dysfunctional Canadian ABCP market. They saw no need to offer immunity to anyone. They also didn’t like the idea of being paid back with long-term bonds. Retirees, widows and orphans have short-term needs, and they believed that unloading restructured ABCP on the secondary market before maturity would be a sucker’s bet.

In stressed-out homes across the country, fear quickly turned to outrage.

Hunter’s mad-as-hell army grew stronger. You couldn’t hear his followers shouting from open windows. But their collective screaming eventually scared the daylights out of the Street, which suddenly realized that CCAA voting rules gave each and every one of the estimated 2,000 average Canadians caught up in this mess as much say in approving any restructuring as any institutional investor with billions of dollars at stake. Acting as one, the Facebook camp also suddenly had the power to veto the immunity to lawsuits that Canada’s financial community so desperately wants.

Not everybody sees Hunter as a hero. Critics insist anybody who invested in something as complex as ABCP, even if a professional broker said it was safe, got exactly what they corcoran (4K) deserved. According to National Post business editor Terence Corcoran, Hunter’s rebellion has made a mockery of restructuring laws, using the power of the Internet, combined with threats of class-action lawsuits, a little “steamy rhetoric” and the good ol’ “cat food claim” to turn CCAA into a “form of deposit insurance for investors.”

Hunter finds such haughty statements funny. “Maybe,” he says, “some people are upset that things are going our way because the small investor is supposed to get screwed all the time, especially in CCAA.” But he points out CCAA laws were not put in place to provide a blanket of immunity to professionals who cross the line. “We’re not greedy bastards,” he adds. “We are conservative investors who were sold a savings vehicle. Most of us have never bought anything but a GIC before in our lives.”

ABCP wasn’t paying an interest rate that raised any suspicion, says Hunter, and retail investors had to trust professional advice because the paper was allowed to be issued without a prospectus. “We didn’t miss the small print,” the engineer says. “It is not like buying Talisman instead of Imperial Oil because you can compare the assets. You could not know what this shit was.”

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Still, Hunter admits he was keenly aware of the power at his disposal as soon as the ABCP trusts applied for court protection. “I’m no lawyer,” he says. “And I’ve never been involved in a CCAA as an investor or bondholder. But when they went that route, I immediately realized the power available to retail investors speaking as one camp.” And by this time, he adds, “we had some strength in numbers; outspoken, intelligent and interesting characters from all walks of life.” The retail camp wanted nothing less than a full refund, so they threatened to veto the Crawford plan when it was put on an investor road show. They confronted ABCP dealers at their head offices and demanded answers from banking executives at annual meetings. And they bombarded politicians and market watchdogs with complaints.

To let Bay Street know it had a real fight on its hands, Hunter personally sent Scotiabank CEO Rick Waugh a YouTube clip of consumers screaming in Network. To increase pressure on institutional players, he started talking to hedge funds interested in buying the retail camp’s votes in order to hijack the CCAA process and shake a profitable deal out of large creditors.

On April 9, the financial community blinked. With financial backing from secret sources — who are not interested in taking credit for bailing out retail investors — Canaccord decided to do what it previously claimed it wouldn’t, couldn’t and had no obligation to do. It announced a $138-million relief program to buy back ABCP at 100% on the dollar (plus interest) from clients who have $1 million or less invested in the toxic paper. The program has since been matched by Credential Securities Inc., the second-largest seller of ABCP to the general public and, with support from the Facebook gang, Crawford’s CCAA plan won support from a majority of affected creditors on April 25.

The sudden move to appease retail investors has angered corporate ABCP holders that still stand to take a significant loss if they try to unload any restructured ABCP in the short term. This group ranges from Transat A.T. Inc. and The Jean Coutu Group (PJC) Inc. to Peter Munk’s business empire (which apparently didn’t stop making doomed investments after the Clairtone stereo misadventure). At press time, the corporate players were still fighting to have the courts declare them a separate class of investors, which would empower them to kill the CCAA proposal along with the retail investor relief program. Hunter has sympathy for corporate investors who were also duped into investing in ABCP, but says he approached this camp and offered to sell them the retail camp’s votes. They declined the offer.

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Ironically, Purdy Crawford — whose face greeted visitors to Hunter’s Facebook site — thinks the corporate investors were outplayed because they had sophisticated and expensive lawyers like himself. “They’re good,” he says, but slow moving and they don’t network over the Internet. That said, Crawford insists he created the best workable solution he could get with the cards he had, which were dealt by other players at the table. What the Hunter campaign did, he adds, was make the game more fair. “I’ve come to know and trust Brian Hunter. He was helpful to the outcome. To what extent Canaccord might have acted without pressure from the Facebook group and my committee, I wouldn’t want to say.”

The Bay Street lawyer freely admits he left a big gun on the table for retail investors to pick up. “I was quite conscious that we were giving clout to retail investors by going into CCAA. I was not entirely conscious of the numbers.” Believe it or not, Crawford says he “had no idea until late in the game” that Canaccord and Credential had sold ABCP to so many average Canadians. After meeting the retail investors face to face, and hearing their stories during the CCAA road show, he concluded many of these people were clearly distraught. “Gosh, you’d have to be cruel not to want to help them.”

According to Crawford, running a CCAA restructuring is a lot like playing a game of chicken while in a Mexican standoff. And, he says, Hunter and his army of retail investors did nothing that hasn’t been repeatedly done by investment bankers, bondholders and hedge funds during other CCAAs, such as the restructuring of Hamilton steelmaker Stelco, where self-serving parties threatened the future of thousands of workers in order to turn a profit after buying voting power from scared creditors.

The ABCP fiasco will not be over until the big-city fat cats sing. But Crawford thinks his CCAA plan, with most of its current warts and wrinkles, will eventually get court approval, paving the way for the Facebook gang to get their money back. After that, he’s not sure if he’ll return to his last thankless high-profile assignment, trying to organize support for a national securities regulator. If he does, it might be a good idea to give Hunter a call.

The Calgary engineer may not consider himself a leader, but he has proven to be one heck of a project manager who knows how to focus his troops until the job is done. “We are at or very near the summit of a climb,” he recently told his Facebook followers. “We have worked hard and are exhilarated by apparent success, yet we are tired from the effort.” Descents, he warned, are generally more difficult and sketchy. “There may be a rockfall and a rappel or two that lie between us and the cold beer and high fives in the tavern. Patience and steady hands are mandatory in this part of the journey.”

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But whatever the future holds for Hunter, he has learned a lesson. “Don’t let anyone else perform your due diligence on any business transaction,” he says, and if you can’t properly perform it, then “run.” Even with a prospectus, however, you can bet Hunter won’t be holding any more ABCP, which he now unaffectionately calls “asshole-backed commercial paper.”

What about Crawford? Did he add any commercial paper to his portfolio this past RRSP season. “Oh God, no,” he says.

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Jill O’Hara sent an e-mail to Canaccord Capital on June 12, 2007. The paralegal was selling her Victoria condo about six weeks before buying a small house, where she planned to garden while recovering from a failed marriage. She wanted a safe, short-term place to park some cash.

“Any idea what sort of rate I could get?” she asked her Canaccord adviser. O’Hara’s broker wrote back, offering well wishes and professional advice: “We have notes (like Term Deposits) that range from several days to just short a year. Depending on inventory they range in yield from 4 to 4.35%, fully secured. So no worries on making a little while waiting.”

There were no other discussions. And since the offered interest rate — which would have generated just a few hundred bucks — didn’t raise any alarm bells, O’Hara wired about $255,000 to Canaccord, where she assumed her money was going into a term deposit equivalent.

What she got was asset-backed commercial paper that she couldn’t sell when it was time to finance her fresh start. This retail investor, for one, expects the ABCP fiasco to spike mattress sales. After all, even if O’Hara gets her money back and manages to keep her new home (which she had to finance on terms she can’t afford), she will have “a lingering fear over the security of any investment or savings products.”

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Yulan Wong is eating more peanut butter sandwiches than anyone should expect to consume after 30 years of hard work. But these days everything seems tough to the B.C. real estate consultant.

She has started taking antidepressants after her life savings were frozen last year. And, well, the broken arm isn’t making things any easier. “I’m lucky ABCP didn’t kill me,” the 62-year-old says. “I’ve had several close calls while driving since my lifestyle changed so much.”

But if you look at the glass as half full, having her future jeopardized has also been a valuable experience for Wong, since it has freed her from any attachment to material things. That’s not because of some religious epiphany. Indeed, if retail investors end up taking a bath on ABCP, Wong feels she should sell her remaining assets to replace the funds lost by other family members.

On her advice, one of her orphaned nieces — with about $140,000 to invest — met with a Canaccord financial adviser. The broker recommended ABCP, despite being told that principal protection was a must. He was asked about a prospectus, but told his clients not to worry. “My broker is a Canaccord vice-president and director,” Wong says, “He is experienced. He said, ‘The money is safe. Trust me.’”

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Ryan Laudien is committed to being a retail client of Canaccord Capital, but not out of loyalty. A year before the 2007 credit crash, his RRSP account wasn’t even with the Vancouver investment firm.

But when Laudien’s broker took a job with Canaccord in 2006, he saw no reason not to follow his investment adviser (a term he now only uses loosely). At the time, Laudien’s savings were invested in money market funds, which matured, and then, without his knowledge or consent, reinvested in riskier ABCP. When concerns over exposure to U.S. sub- prime mortgages caused the market for these complex investments to collapse last summer, the 60-year-old chemical industry manager was not even notified anything was amiss.

In September, he did get a Canaccord letter advising him that he held ABCP. But that “meant absolutely nothing to me, and I was not unduly alarmed as I thought my broker would call me if there were any problems.”

In October, after deciding that he’d be better off with a self-administered RRSP, Laudien had his holdings transferred to another company — which immediately explained his ABCP was potentially worthless. “I had the frozen ABCP transferred back to Canaccord,” he says. “Canaccord got me into this mess and Canaccord was going to get me out of this mess.”

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Reid Moseley started a small collectibles business in Calgary after retiring three years ago. It was supposed to be fun, not his primary source of income. The Moseley clan had a nest egg, which was sitting in a bank last year, not doing much of anything, after growing, albeit not by leaps and bounds, in a 19-month GIC. The former teacher needed the money to finance a home in the country, but he started joking that his life savings “were only earning $13 interest a month.”

One of his friends, a Canaccord broker, didn’t think that was funny. Moseley was told he could invest his nest egg in a short-term AAA-rated product that was just as secure as the GIC he just cashed out. The money would be “just like in the bank,” but it would be making better interest. That sounded good, which is why Moseley went ahead and bought ABCP. He then bought a home he couldn’t afford, although he didn’t know that at the time.

Now, the family can barely afford life’s essentials. Trips are out of the question. Moseley, who still has a daughter in high school, has been forced to take early Canada Pension. Money set aside for his business venture has been cannibalized. “We literally have to budget to go to a movie,” he says, “and my wife now shops at the Sally Ann. Not at all what I had planned for my retirement.”