Financial Post: Canada lacks investor protection

EXTRACT: Meanwhile, in the United States, ERISA resulted in a successful class-action settlement in the U.S. involving Royal Dutch Shell and its reduced reserves controversy. The oil giant paid out US$90-million. So did Global Crossing (US$79-million) and AT&T (US$29-million) for transgressions.

THE ARTICLE

Canadian companies are getting picked off piecemeal due to one principal problem: the lack of investor protection in Canada, which discounts the cost of buying assets.

The impending buyout of BCE Inc. is a case in point.

Leveraged buyout artists circling around this underperformer plan to pick up its assets more cheaply by subordinating its bonds to the huge loans they will incur to buy companies.

In the case of BCE, which has yet to be taken over, the value of the Canadian BCE bonds has already fallen by 10% to 18% whereas BCE’s U.S bonds have dropped by only 2%.

Why the difference? Because American bondholders have investor protection that the Canadian bondholders do not. It’s called ERISA, or the Employee Retirement Income Security Act of 1974. This legislation requires money managers (running pension or mutual funds) to undertake class-action lawsuits to protect investors hurt by attacks on bonds or equities.

It also makes responsible for such drops in value, the officers and directors of BCE or other bond-issuers.

This legislation does not exist in Canada even though it has transformed investment management south of the border. To not have reciprocity, in the form of such protection, means that Canada’s legal stupidity is helping finance the American takeover of our economy.

This ERISA legislation not only forces money managers to do their jobs, but stops the sort of soft-dollar nonsense that coopts money managers into blessing bond attacks, as in BCE’s case, in return for some collateral arrangement. Which brings me to BIMCOR, Bell’s internal pension fund management operation with $12-billion under its stewardship. Most other companies farm out their pension investment responsibilities but not Bell.

So here’s the problem: Whoever takes over Bell can co-opt money management outfits that otherwise might squawk over the bond theft with the promise that the new owner will privatize BIMCOR and they can manage some, or all, of the funds.

In Canada, there is no law against this.

These days, money managers slaver over such a huge slice of business, or even part of it. Typical fees amount to 0.5% of $12- billion, which is a nice chunk of change in a slow-growing money management sector.

So Canada’s investors are sitting ducks for international and local marauders.

Even worse, individual bondholders and shareholders have no recourse in Canadian courts or with toothless securities commissions. Brokers, owned by banks, are co-opted because they don’t want to alienate corporate managements or buyout artists.

And the justice system is nonexistent for individuals. Lawyers rarely do contingency fee cases for fear of running into conflicts of interest with the same buyout artists they represent. Even the Supreme Court of Canada recently defanged the Ontario Securities Commission by saying it had no jurisdiction over Asbestos Corporation’s buyer, the Province of Quebec, which shortchanged minority shareholders in contravention of securities laws and Toronto’s stock exchange rules.

The ERISA laws in the United States have made a big difference, which is why the BCE ”yankee bonds” are hardly affected. The failure to have ERISA laws here is why Sears was able to finance its privatization in Canada, partially off the backs of Canadian bondholders, with impunity.

Meanwhile, in the United States, ERISA resulted in a successful class-action settlement in the U.S. involving Royal Dutch Shell and its reduced reserves controversy. The oil giant paid out US$90-million. So did Global Crossing (US$79-million) and AT&T (US$29-million) for transgressions.

ERISA imposes responsibilities on people who handle other people’s money but also extends this to the directors and officers of the companies whose bonds or stocks have dropped because they have not done all they could to defend values.

Companies whose securities drop as calamitously as Bell’s bonds would be automatically subject to charges under ERISA class action.

Meanwhile, here in Canada there is no protection and this failure leads to the co-opting of the pools of capital, which should be deputized to be watchdogs over the capital markets.

On top of all this, there is little, if any, recognition of problems among the politicians in charge of Canada’s fragmented, ineffective securities and financial system.

Lastly, other countervails are non-existent. There’s Bay Street (enough said) and the business media, which mostly have a conflict of interest because two of the biggest outlets are owned by BCE itself.

“Corporate bonds and prefs are getting hit hard by these LBO guys, and it’s destroying an important market. They are using these guys as cheap money they don’t have to repay,” said Stephen Jarislowsky of Jarislowsky, Fraser & Co. in a recent interview. “It’s a crime or should be.”

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Published: May 19, 2007

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