TORONTO – The Ontario Securities Commission ruled Wednesday that Coventree Inc. and two of its senior executives failed to warn investors about the impending meltdown of billions in supposedly secure short-term investments in 2007.
Coventree had been a major player in a type of security known as non-bank asset-backed commercial paper until investors stopped buying new notes or redeeming old ones in August 2007 – resulting in a collapse of the market.
The $32-billion ABCP market in Canada collapsed over concerns that some of the notes were backed by U.S. subprime mortgages, which were also linked to the 2008 Wall Street financial crisis that froze credit markets around the world.
At the time, many ABCP holders could not get their money back, which produced operational and financial problems for pension funds, companies and ordinary Canadians who parked their money in the short-term investments which paid higher returns than other investments such as government treasury bills.
Several major pension plans, particularly the Caisse de depot et placement du Quebec, had to writedown the value of their assets although they expected to recoup some of their losses over time.
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In the ruling Wednesday, an OSC tribunal said Coventree broke two subsections of the Ontario Securities Act by failing to issue a news release or file a material change report with regulators on two occasions in 2007.
It also found Coventree co-founders Geoffrey Cornish and Dean Tai authorized or permitted Coventree’s non-compliance, contrary to the public interest.
However, the three-member panel dismissed some of the allegations levelled at Coventree by the OSC enforcement staff.
While the panel said Coventree failed to announce material changes in January and August 2007, it disagreed that the defendants violated the act on a daily basis until they made disclosures.
It said Coventree should have issued a statement in January after DBRS announced a more restrictive rating methodology, a move that prevented Coventree from carrying out certain transactions that were the source of more than half of its revenue. The panel also said Coventree failed to issue a press release promptly after an Aug. 1 board meeting discussed the rapidly deteriorating market conditions.
It also agreed with the staff’s allegation that information provided by Coventree at an investor day in April 2007 was misleading because it wasn’t detailed enough, but ruled the lapse wasn’t sufficient to violate the act because the correct information probably wouldn’t have had much impact on the securities prices at that time anyway.
The panel also said there was no evidence that Coventree ever withheld the more detailed information or that the information had been sought out by its investors.
Coventree, which is in the process of winding down its operations, issued a statement Wednesday that said the regulator found no evidence that led it to conclude that either Cornish or Tai intentionally misled investors.
“Coventree is continuing to review the Commission’s decision with counsel and is considering its options. Coventree will update its shareholders in due course,” the firm said.
The 154-page ruling was compiled after more than 40 days of hearings last year.
The OSC panel will hold further hearings before determining what penalties to impose.
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