VZCZCXRO3915
PP RUEHGA RUEHHA RUEHQU RUEHVC
DE RUEHON #0164/01 1481335
ZNR UUUUU ZZH
P 271335Z MAY 08
FM AMCONSUL TORONTO
TO RUEHC/SECSTATE WASHDC PRIORITY 2504
INFO RUCNCAN/ALCAN COLLECTIVE
RUEHLO/AMEMBASSY LONDON 0058
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 02 TORONTO 000164 
 
SIPDIS 
SENSITIVE 
 
STATE FOR WHA/CAN (RIOS) AND EEB (SIROTIC) 
DEPT PASS USTR FOR MELLE, MENDENHALL, SULLIVAN 
TREASURY FOR INTERNATIONAL AFFAIRS (TRAN) 
COMMERCE FOR 4320/ITA/MAC/WH/ONIA (WORD) 
 
E.O. 12958: N/A 
TAGS: EFIN EINV ETRD PGOV CA
SUBJECT: Another Hurdle for ABCP Market Restructuring 
 
REF: (A) Toronto 115 (B) Toronto 87 (C) Toronto 81 
 
 (D) Toronto 66  (E) 07 Toronto 430 
 
Sensitive But Unclassified - Please protect accordingly. 
 
¶1. (U) Summary:  Ontario Superior Court Justice Colin Campbell, who 
is presiding over restructuring of the C$32 billion third-party 
asset-backed commercial paper (ABCP) market is considering how to 
resolve potential fraud claims.  Foreign banks, whose support is 
crucial for the restructuring, initially said they would not support 
a deal that did not release them from future liability but have 
recently indicated they could support a deal that includes 
provisions for lawsuits based only on fraud.  Some corporate 
investors have initiated or plan to initiate lawsuits against the 
retailers who sold them the ABCP.  Barrick Gold reportedly settled a 
similar dispute with big-five Canadian bank CIBC on May 8. 
Regulatory bodies are beginning to investigate the behavior of ABCP 
retailers but have not yet publicly issued formal conclusions.  End 
Summary. 
 
--------------------- 
No Release from Fraud 
--------------------- 
 
¶2. (U) On April 25, 96% of the 2,000 ABCP note holders who cast 
ballots, mostly retail investors, voted in favor of the 
restructuring plan that will convert the frozen C$32 billion 
non-bank (third party) ABCP into new notes maturing within nine 
years (ref (D)).  Many of the 200 corporate investors (ref (A)), 
however, withheld their support for the plan because they will not 
get as much of their investment back as small investors (who will 
receive 100 cents on the dollar through buyout programs for retail 
investors arranged by Canaccord Capital Inc. in exchange for giving 
up their right to sue for losses).  Toronto's Hollinger Canadian 
Publishing Holdings, and Quebec-based Jean Coutu Group have 
reportedly said they will sue the ABCP-issuing institutions to 
recover their losses rather than settle for the limited compensation 
available to them under the restructuring plan.  Vancouver-based 
First Quantum Minerals has launched a suit against HSBC Bank Canada 
for selling the paper. 
 
¶3. (U) On May 16, following two days of hearings with over 20 mostly 
corporate investors groups, Ontario Superior Court Justice Colin 
Campbell announced he would not finalize his approval of the ABCP 
market restructuring before May 30.  Before that date, Campbell is 
considering how to treat potential fraud claims under the ABCP 
market restructuring plan.  He has already said the issuers and 
retailers of non-bank ABCP should not be completely released from 
civil liability under the Companies' Creditors Arrangement Act 
(CCAA) (ref (C)).  Purdy Crawford, chair of the restructuring 
committee, told investors in April that alleged fraud cases might be 
allowed to proceed even if the restructuring wins court approval 
(ref (A)).  Foreign banks such as Deutsche Bank, whose support is 
crucial for the restructuring, initially said they would not support 
a deal that did not release them from future liability.  In the past 
few days, however, they reportedly indicated that they could support 
a deal that includes provisions for lawsuits based on fraud.  They 
have made clear that their support hinges on the precise definition 
of "fraud." 
 
------------------------------ 
CIBC Settles with Barrick Gold 
------------------------------ 
 
¶4. (U) On May 8, Toronto-based Barrick Gold and Canadian Imperial 
Bank of Commerce (CIBC), Canada's fifth largest bank, settled a 
dispute over C$66 million worth of Ironstone Trust-issued ABCP, 
which CIBC sold to Barrick.  Barrick had demanded full repayment of 
C$66 million from CIBC, and was fighting in court for the right to 
sue CIBC for selling Barrick the now almost worthless paper.  The 
terms of the deal remain confidential.  A majority of the investors 
holding Ironstone-issued ABCP voted against the restructuring plan. 
Ironstone-issued ABCP, unlike that of the other 20 ABCP-issuing 
trusts, is backed by many subprime assets which make its notes worth 
between 5 and 12 cents on the dollar.  Sources said a similar deal 
between CIBC and Chicago-based Sun-Times Media Group is also nearing 
completion.  According to industry sources, some of CIBC's 
competitors quietly bought back bad notes from their valued 
corporate clients after the August 2007 meltdown. 
 
------------------- 
Regulatory Response 
------------------- 
 
 
TORONTO 00000164  002 OF 002 
 
 
¶5. (U) In response to complaints from retail investors, the 
Investment Dealers Association of Canada (IDA), the self-regulator 
for the securities industry, in April began a "compliance sweep" 
focusing on firms that sold non-bank ABCP.  The IDA is investigating 
whether ABCP retailers met know-your client and suitability 
requirements.  While the IDA can sanction brokers for inappropriate 
behavior, it does not have the power to recover lost funds.  The 
Ontario Securities Commission (OSC), which has market oversight 
responsibility, is reviewing the compliance of issuers with 
accounting standards and disclosure requirements (required to 
provide investors with the level of transparency needed to make 
informed investment decisions).  The OSC is also considering whether 
to mandate relief for the financial institutions and other retailers 
that have bought back ABCP from retail investors. 
 
¶6. (SBU) Comment:  Judge Campbell is apparently looking for a 
solution that will give the restructuring plan sponsors some comfort 
that they will not be significantly affected by fraud claims, while 
at the same time not shutting down fraud claims altogether, which 
would be unacceptable to a higher court.  Some market watchers view 
the IDA's investigation as a public relations campaign with no 
teeth.  We expect the non-bank ABCP liquidity crisis will prompt 
financial sector regulatory reform once the restructuring plan is 
finally complete, and the market again operating, sometime this 
summer.  End Comment. 
 
NAY