The Ontario Securities Commission has brought the first enforcement case concerning the collapse of the non-bank sponsored segment of the Canadian asset-backed commercial paper market in 2007.

The OSC issued a notice of hearing on Monday that unveiled allegations against ABCP manufacturer Coventree Inc., and two of its senior executives, president Geoffrey Cornish and CEO Dean Tai. None of the allegations have been proven.

Earlier this year, the firm disclosed the existence of the OSC’s investigation, and it established a special committee to oversee its’ response to that investigation. The committee is comprised of twoindependent directors, Peter Dey and Wes Voorheis.

In a joint statement responding to the allegations, they said, “We are extremely disappointed with OSC staff’s decision to commence these proceedings. Led by the special committee, Coventree cooperated fully and completely with OSC staff and took significant steps — at a substantial cost to the company — to cooperate with their investigation.”

“Most significantly, the special committee engaged independent legal counsel and other experts and undertook its own investigation into the issues identified by OSC staff. Based on our investigation, we believe the company and the individuals complied with their obligations under Ontario securities laws and that these allegations are unwarranted and unfair in the circumstances,” they added.

The commission outlined four primary allegations against Coventree, all of which involve alleged shortcomings in the firm’s disclosure.

Specifically, the OSC alleges that Coventree

• failed to disclose, in its prospectus, the fact that credit rating agency DBRS had adopted more restrictive credit rating criteria for ABCP
in November 2006;

• failed to meet its continuous disclosure obligations by failing to report that DBRS’s decision in January 2007 to change its credit rating methodology resulted in a material change to Coventree’s business;

• made misleading statements in April 2007 by telling the market that the total U.S. subprime exposure in its sponsored conduits was 7.4%, but failing to provide a breakdown of that exposure (which was higher than
15% in three conduits, and higher than 40% in one note series); and

• failed to meet its continuous disclosure obligations by failing to disclose liquidity and liquidity-related events and the risk of a market disruption in the days leading up to the market disruption on August 13,
2007.

It was in August 2007 that certain third-party ABCP conduits became unable to sell new ABCP to fund the repayment of maturing ABCP, and many of the conduits’ liquidity providers refused to provide liquidity to the affected conduits. At the time, the OSC reports, the Canadian third-party ABCP market totalled approximately $35 billion, with ABCP issued by Coventree and Nereus conduits representing approximately 46% of the market.

Ultimately, that market was restructured under a deal
agreed by a consortium of banks, asset providers and major ABCP holders, which was implemented on Jan. 21, 2009.

The commission set Jan. 14, 2010, as the first day to begin hearing the case. Coventree said that it will review the OSC staff’s allegations and, following that review, that it will provide further information on the implications for its previously announced plans to wind up the company and distribute its remaining assets to shareholders.

IE