Regulators are moving closer to a settlement with a group of major banks and brokerages that sold asset-backed commercial paper before it froze during the credit crisis, leaving panicked investors with no access to more than $30-billion of their money.
The final tally for the settlement is likely to be under $200-million, sources said, which would make it one of the largest such penalties in Canadian history but would be smaller than what regulators initially sought. Firms involved in the settlement talks include National Bank of Canada, Bank of Nova Scotia, Canaccord Financial and Credential Securities Inc., sources said.
While the talks are expected to result in a deal by year-end, they could still falter, forcing regulators to go to court to try to secure fines from firms that don't co-operate.
The Ontario Securities Commission is doing just that with Coventree Inc., the company that created most of the paper that froze, and two of its key executives, Dean Tai and Geoff Cornish. The OSC alleged Coventree made misleading statements about the amount of subprime mortgages underlying some of the paper, and said the firm and the two men “acted in a manner that is contrary to the public interest” and in breach of securities law.
A spokesman for Coventree said the firm had no comment. (To see the firm's statement, released later, click here.)
The charges against Coventree and the looming end of the settlement talks mark one of the final chapters of the ABCP saga, which began in August, 2007, when the market for the supposedly-safe paper seized because investors refused to buy it on fears that it was exposed to toxic subprime mortgages. That left existing holders stuck with paper that they couldn't sell or redeem.
A group of the biggest players in the market, including National Bank and the Caisse de dépôt et placement du Québec, led a year and half of negotiations that successfully restructured the paper in January.
Most smaller investors eventually got all their money back, though they had to endure the stress of months of warnings that their savings could be vaporized if the restructuring didn't work. Some larger investors who owned more than $1-million of the paper and therefore didn't qualify to be bought out are still stuck with restructured paper that can only be sold for a loss.
In the wake of the freeze, regulators demanded documents from 11 firms with ties to the ABCP as they investigated how the ABCP market failed in the summer of 2007 and whether the firms should have continued to sell the paper to investors even amid signs that the market was troubled.
The securities commissions in Ontario, British Columbia and Quebec, along with the securities industry's self-regulatory body, the Investment Industry Regulatory Organization of Canada, have jointly been pursuing a settlement with the banks, seeking to have them pay millions of dollars and admit their roles in the ABCP affair.
The negotiations have been going on for more than six months, and while regulators originally sought bigger payments that would break the previous record, a $205.6-million restitution payment wrung out of a group mutual fund companies and brokerages for market timing in 2004, the banks have fought back.
The settlement talks have been arduous as the banks have battled to bring down the size of the payments, and to avoid or minimize any admissions of wrongdoing, but negotiations are now said to be in the final stages.
“The goal is getting it [an agreement] out before Christmas,” said one person familiar with the negotiations.
Sources said that in recent days talks have advanced significantly as regulators have become much more aggressive, losing patience with recalcitrant banks and threatening to take the issue to public hearings. That has helped to move negotiations along.
“They got tough,” said a source.
This story has changed from an earlier version.
