BUSINESS/ECONOMY

The Principal saga

PATRICIA BEST February 22 1988
BUSINESS/ECONOMY

The Principal saga

PATRICIA BEST February 22 1988

The Principal saga

When Christa Petracca took the stand at the investigation that prominent Calgary lawyer William Code is conducting into the collapse of companies associated with the $1.2-billion Edmonton-based Principal Group Ltd., lawyers expected that, because of her intimate knowledge of the workings of the fallen corporate empire, her testimony would produce revelations. But work at the five-month inquiry is creeping forward with agonizing slowness. And last week the testimony of Petracca, a German-born, 40-year-old blonde nicknamed Cupcake who served as personal troubleshooter for the company’s chairman, Donald Cormie, offered little more than further allegations of special deals for company insiders.

The Alberta Court of Queen’s Bench ordered the inquiry, which began hearings last October, to look into the collapse last June of two investment contract companies, First Investors Corp. and Associated Investors of Canada Ltd., both owned by the financial services conglomerate Principal Group. Investors in those companies lost $150 million. In August the parent company and other affiliates, which included mutual funds companies and a trust company, went into receivership and promissory noteholders lost about $60 million. Testimony from more than 100 witnesses has established a scene of autocratic, secretive management by Principal’s majority owner and chairman, Donald Cormie, repeated clashes with government regulators and irregular business practices.

Now, as the time approaches for Cormie himself to take the stand, feuding between lawyers attached to the inquiry has intensified. Last week Cormie’s lawyer, Robert Duke, protested against the very scope of the inquiry, which is obligated to find out whether there was evidence of fraud in the collapsed companies. Duke threatened to seek a court ruling as early as this week on Code’s powers. Countered Code: “If they carried out their business in what we consider to be an illegal way, I’m going to make those findings.”

Until that outburst late last week, attention had been focused on the testimony of Petracca and an Edmonton

real estate developer, James Hunter, who said that he had made $980,000 in a property flip which he had negotiated with Principal Savings & Trust Co. However, in another deal, two Principal Group companies lost $4.8 million when Hunter used money loaned by the companies to buy—and then sell

back—shares for $1.05 each that now trade in the 30-cent range. The upshot of the relationship between Principal and Hunter remains unclear, although the two deals and others described in testimony appear to be unusual.

In earlier testimony last month witnesses said that within the privately held Principal Group and certain private holding companies that the Cormie family used to control the empire, there existed a mysterious “Department 8.” Former Principal vice-president of finance William Johnson told the inquiry that Department 8 was an “upstairs fund” that acted as a conduit for money flowing from various parts of Principal to a company called Collective Securities Ltd., which the Cormie family owned outright. Johnson also said that loans amounting to $36.5 mil-

lion moved out of Principal Group and its holding company, Collective Securities Inc., and to the mysterious Collective Securities Ltd. Johnson said that Donald Cormie managed that money personally.

Meanwhile, documents filed with testimony.by Christa Petracca showed that in the eleventh hour, before the Alberta government lifted the operating licences of First Investors and Associated Investors last June, Cormie agreed to pay Petracca a special bonus for securing government grants to bail out a financially troubled hotel property that Principal owned in Banff. The bonus was never paid in full because the two investment contract companies, which actually held title to the property, were closed down.

Petracca joined Principal Group in 1978 as Cormie’s executive assistant. Within two years she rose to become vice-president of corporate development and in 1983 assumed responsibility for real estate and mortgages in one of the investment contract companies, First Investors. Then, in 1985 she took over management of investment properties worth more than $1 million, which First Investors and Associated owned. Since the collapse of Principal Group in August she has served as vice-president and chief operating officer of several Cormie-owned U.S. mutual-fund companies.

Still, Petracca, who earned a salary of $201,500 in the 13 months between Aug. 1., 1986, and Aug. 31, 1987, did receive some additional reward for her work with Cormie. In a memo dated July 22, three weeks before Principal Group went bankrupt, Cormie told Petracca that the company would discharge a loan against her condominium. Now, investors in First and Associated Investors—along with creditors of Principal Group—are wondering whether more could not have been done to prevent the collapse. The task of determining has become increasing-

_ ly complex with the

passing weeks of hearings, and last week Court of Queen’s Bench Justice Ronald Berger granted Code a fourmonth extension in his investigation. Now, a report, which investors hope will include some answers to their questions, is expected on June 13. Until then, the financial horror story of Principal Group will continue to haunt them.

PATRICIA BEST

DAVID HOWELL

DAVID QUIGLEY