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Canada’s business elite won’t soon forget Brian Hunter. And we’re not talking about the Calgary trader who lost billions speculating on natural gas in 2006, although he has launched an interesting comeback. We’re talking about Cowtown’s other notable Brian Hunter, the oil industry engineer who forced Bay Street to stop ignoring the average folks who collectively and unwittingly dumped hundreds of millions of dollars into the now frozen market for asset-backed commercial paper (ABCP).
These retail investors expected to make a decent rate of return on what were supposed to be safe, short-term investments. But after the market for non-bank ABCP turned to ice last August, they quickly learned to expect nothing, except perhaps to get royally screwed. Today, thanks to a revolt organized by Hunter, almost 100% of the little guys and gals — among them retirees, widows and orphans — exposed to this financial fiasco have a fairly decent shot at getting their money back, maybe even with interest.
To Toronto lawyer Henry Juroviesky, who signed on to represent these rebel investors, Hunter is a “man of determination and vision.” To his faithful followers, the 53-year-old is nothing less than a main street hero. But Hunter doesn’t see it that way. He has the confidence of a born leader. He looks likes an officer with the right stuff to command respect from the Calgary Highlanders deployed in Kandahar. But the potty-mouthed engineer is more Rambo than Patton. Hunter isn’t an activist or an organizer by nature, and he has little patience for folks with limited intellect. He’s a lone wolf more attracted to cross-country skiing and mountain climbing than social work or team building. “I’m not the kind of guy who ran for student council as a kid,” says the married father of three. “I am just a guy who saw people seriously fucking with his wallet. I’m more project manager than revolutionary.”
Hunter has a simple philosophy of life: have fun, make money — in that order. As a partner in Montane Resources, a five-man oil and gas engineering firm that does everything from land acquisition to drilling management, he works hard to play hard. But that’s not the only reason he was mad as hell when more than half-a-million-dollars’ worth of his life savings became potentially worthless last August. Feeling misled by his investment advisers at Canaccord Capital, he requested a refund. But the Vancouver brokerage responded with a nice letter explaining that it had no legal obligation to reimburse Hunter or anyone else. Nobody, insisted executive vice-president Bruce Maranda, could have foreseen the unexpected and widespread liquidity crisis that threatened Hunter’s financial security.
“Canaccord relied upon the DBRS credit rating given to ABCP,” Maranda wrote. “At the time of purchase, there was no indication that the R-1 (high) rating was inaccurate or that the market might experience a disruption that could impact upon the repayment of such highly rated ABCP.”
A few months later, Canaccord — the largest pusher of ABCP to retail investors in 2007, a year in which its CEO Paul Reynolds was paid $11.2 million — changed its tune. Defending itself against two investor lawsuits, the securities dealer alleged Scotia Capital had aggressively pushed ABCP on Canaccord after a controversial market update — selectively distributed by a major non-bank issuer of ABCP — generated fears over the exposure to sub prime U.S. mortgages. Scotiabank denied any wrongdoing, insisting the information it got was “incomplete.”
That was last December. And by then Hunter no longer cared what Street people had to say. He had no desire to trust that something called the Pan Canadian Investors Committee of Third-Party Structured Asset-Backed Commercial Paper would serve his interests. After all, despite being led by respected corporate lawyer Purdy Crawford, the market restructuring committee in question was put together to find a solution acceptable to institutional investors and the financial community, including the power brokers who built the ABCP house of cards in the first place.
Feeling like an insignificant pawn in a rigged game played with foreign rules, Hunter couldn’t take it anymore — much like the average folks in the 1976 movie Network who opened their windows and voiced their outrage after being fed a seemingly endless diet of BS. A fan of that consumer rebellion flick, Hunter decided to rip a page from its plot and issue a call to arms. But unlike Network’s crazed TV anchorman Howard Beale, he didn’t have a nightly newscast at his disposal. Then again, unlike Hunter, Beale didn’t have access to the Internet.
The retail investor’s initial attempts to organize a grassroots rebellion were relatively fruitless. “I was looking to make connections with other Canaccord clients stuck with ABCP for a number of months,” Hunter says. “I looked on Stockhouse.com, but nobody seemed interested. I tried a few other investing sites, made a few good connections, but nothing happened.” He even tried approaching the media with his tale of woe, but reporters just yawned. That attitude changed as soon as he started to use Facebook, the community-building website launched to serve Harvard students in 2004 that is now all the rage among today’s youth.
Introduced to social networking by his kids, Hunter found it useful for keeping in touch with family and friends. But when he decided to try to use Facebook to organize ABCP holders, the only other online network he had ever joined was a group supporting comedian Stephen Colbert for U.S. president. Hunter started small. He created in mid-February an ABCP Facebook page, posting a couple of newspaper articles and starting a few discussions. When he mentioned the Internet campaign the next time he approached reporters, he had limited expectations. “I was still crying and whining about my situation, but I also noted I was starting this Facebook thing and suggested that could be worth a mention.” The novelty of using social networking to fight Bay Street generated more than just a mention. English-Canadian newspaper hits generated French-language coverage; television and radio reporters got in the game. Hunter’s army started raising itself. In a matter of weeks, it was more than 100 strong.
But this story isn’t about social networking. It’s a cautionary tale for investors, albeit one that might just have a happy ending because of Hunter. For perhaps the first time in the history of major corporate restructurings, retail investors haven’t been rendered expendable for the greater corporate good. This time, Joe and Jane Average were not thrown overboard — they took over the ship.
The pin-striped crowd shouldn’t have been taken off guard by this particular investor uprising. After all, they put together a toxic product and sold it as a safe haven for short-term money. Canaccord and other dealers continued to compare ABCP to GICs even after the controversial July market update — the one that Scotiabank called inconclusive — led RBC Capital Markets to shun non-bank commercial paper. In some cases, ABCP was said to be even safer than GICs. For instance, on August 1 a Canaccord sales pitch described a block of AAA paper the firm had secured as a product offering better returns and better liquidity than GICs, which are “non-redeemable” and “only insured up to $100,000.” At least one commission-based Canaccord broker sold ABCP as a “no worries” product that was “fully secured.” And all of that cannot be blamed on credit ratings.
Dominion Bond Rating Service (DBRS), which Hunter thinks should go the way of Enron’s accounting firm, will probably always have a hard time justifying its rating of non-bank ABCP. But most of the underlying assets remain relatively solid and DBRS did outline the risks related to the product’s leveraged structure, which should have stopped any broker from comparing ABCP to GICs.
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