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Coventree misled investors on ABCP: OSC

A panel of the Ontario Securities Commission found that Coventree Inc. and two of its senior executives breached securities laws by misleading investors in 2007 about underlying weaknesses in the asset-backed commercial paper (ABCP) market.

Coventree was a publicly traded Toronto investment bank company that designed many of the complex structures which issued ABCP, short term notes that were backed by mortgages and other assets. The two senior executives cited by the OSC are Geoffrey Cornish, a founder and president from 2006 to 2007, and Dean Tai, founder and chief executive officer from 2006 to 2007.

The OSC issued a 153-page decision on Wednesday, which followed weeks of hearing late last year. The decision detailed extensive private communications between senior executives and other ABCP players about the increasing frail market for ABCP. Concerns about toxic subprime mortgages in the U.S. had infected the market in the summer of 2007 and a number of big ABCP investors were balking at buying the notes.

In August 2007, the market for non-bank issued ABCP froze and thousands of Canadian investors were left holding $32 billion of notes that could no longer be traded or redeemed.

“It is clear to us having considered and reviewed the extensive evidence submitted to us over 45 hearing days, that Coventree and a number of the dealers distributing Coventree sponsored ABCP from August 1, 2007 to August 13, 2007, had knowledge of liquidity related events and developments in the ABCP market that were important to investors considering the purchase of ABCP. It is unlikely that any investor would have purchased Coventree sponsored ABCP, or any other ABCP, if they had been aware of those market events and developments,” the OSC said in its decision.

The OSC's decision included pages of private e-mails between Coventree executives and board members that show the company had learned as early as Aug. 2 that skittish investors were balking at buying ABCP.

Internal documents portray an increasingly distressed executive team that was worried behind the scenes, but in public pursued a strategy of calming clients. Tai was so relieved that the notes were still trading on Aug. 3 that he told Coventree directors in an e-mail that “we managed to roll our paper today.”

Ten days later, investor fears brought the ABCP market to a halt. A national committee of bankers and investors spent the next two years restructuring the tainted notes. Although most individual investors recovered their investments, many pension funds and other big investors were forced to absorb hundreds of millions of dollars in writedowns on the tainted notes.

Coventree is in the process of winding down its business. The company reported a loss of $4 million in June and shareholders agreed that month to dissolve the company. The decision was stayed until the OSC released its decision.

Spokespersons for Coventree, Cornish and Tai could not be reached immediately.

The OSC has asked Coventree and the two executives to schedule a sanctions hearing within the next 30 days.
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