BUSINESS

Picking up the pieces

Code gives Principal’s victims new hope

BARRY CAME July 31 1989
BUSINESS

Picking up the pieces

Code gives Principal’s victims new hope

BARRY CAME July 31 1989

Picking up the pieces

BUSINESS

Code gives Principal’s victims new hope

Throughout his 27-year career in the Canadian Armed Forces, Charles Mason never had any doubts about what he would do when he retired. “I always had the idea that I would buy a small trailer and travel around the country with my wife while our health lasted,” said the 59-year-old former air force technician. When he resigned in 1981, he invested his life savings—almost $140,000—in the Principal Group Ltd.’s subsidiary, First Investors Corp. That decision would eventually cost him both his retirement dream and his health. He vividly recalls the summer evening in 1987 when, sitting in the living room of his home in Bridgewater, N.S., he learned from a television news report of the impending collapse of Principal’s empire. “It was a shock,” he said last week. “It cut my income in half. It put a stop to my travelling plans.” According to Mason, it also worsened the hypertension-induced high blood pressure that had bothered him for years. Said his wife Isabel Mason: “It makes me so damn mad!” The reaction among the other Canadians snared in the collapse of two subsidiaries of the troubled Principal Group is much the same. There were 67,000 of them in all, residents of six provinces in Western and Atlantic Canada. Some were normally shrewd investors who miscalculated. But, for the most part, they

were people like the Masons of Nova Scotia— elderly, retired individuals seeking an element of security to cushion their later years. Collectively, they invested about $492 million in First Investors Corp. (FIC) and Associated Investors of Canada Ltd. (AIC), the two subsidiaries of the Edmonton-based conglomerate that were investigated by the Code inquiry. Frequently, depositors were not even aware which company in Donald Cormie’s complex empire held their funds. Many were shocked to find that they had lost thousands when the Alberta authorities suspended the licences of those two firms on June 30,1987, leading to the eventual bankruptcy of the entire group. So far, the 67,000 investors have been repaid about $220 million. And last week, with the publication of William Code’s damning report, many of these consumers were given new hope that they might eventually recover all of their money.

Ronald Thiel, 57, was one of them. The manager of a stamp and coin store in Victoria, Thiel was forced into early retirement in 1985

as a result of major heart surgery and other health problems. He was looking for a way to support himself on his limited resources, when he came across a newspaper advertisement for term deposits offered by Principal Savings and Trust Co. Pooling funds with his mother, Lilian, 80, and his wife, Barbara, 61, in April, 1986, he purchased $110,000 worth of what he assumed were Principal Savings and Trust term certificates. Without his knowledge, the money was diverted to FIC. The investment, which represented roughly half of the threesome’s life savings, provided a monthly income of about $900. Twelve months later, when Thiel and his wife and mother had managed to collect only $11,000 of their original investment, the Principal Group folded. Recalled Thiel: “During the first weeks after the news, I think we all went into a state of shock. But that shock gradually turned to anger and bitterness.”

That anger led outraged investors in British Columbia, Alberta, Saskatchewan, Nova Scotia, New Brunswick and Newfoundland to form associations. Many of them were victims of what Code called a “bait-and-switch” tactic allegedly used by Principal salesmen. Under that system, prospective clients approached Principal Savings and Trust, whose deposits were insured by the Canadian Deposit Insurance Corp. (page 34). They were then referred to salesmen who encouraged them to place their funds in higher-interest—but uninsured—investment contracts in one of the two subsidiaries. The salesmen received double commissions for selling the uninsured products.

Something similar happened to Lorraine Graves, 58. After her husband died in 1980, she sold the family home in New Minas, N.S., and moved back to her native Halifax. She intended to work part time in a clothing store and supplement her income by finding a safe haven for the $35,000 she had realized from the sale of her house. Acting on a friend’s advice, she approached the offices of Principal Savings and Trust in May, 1987. “I went and put $35,000 in Principal Trust, I thought,” she said. “Ten days later a certificate came in the mail from First Investors. I’d never heard tell of them.” Barely a month later, Alberta Treasurer Dick Johnston suspended First Investors’ licence. Said Graves:

“I felt like I’d bought a ticket on a dead horse. I couldn’t work. I had no money to pay the rent.” For some, the effect was even more serious. Gerhard Dieter, 62, of Calgary, says that he has suffered from profound depression ever since he discovered that he had lost his life savings as a result of the Principal collapse. “A person tries to forget it,” he told Maclean’s last week, with tears welling in his eyes, “but it stays with you and you keep thinking about it.” For his part, Ralph Candler, 72, also of Calgary, was a diabetic before he learned of the loss of his $80,000 investment but, according to his daughter, Cleo Bateman, the affair has accelerated her father’s ailment.

The fact that such a high percentage of Principal’s investors were older people has not helped. Many have died in the two years that have elapsed since the collapse of Cormie’s empire—200 in British Columbia alone and another 300 in the five other provinces. Of the 300 elderly Principal victims who originally registered with a financial advisory group that meets regularly in downtown Calgary’s Kerby Centre—a drop-in facility for senior citizens—12 are now dead.

“Their health was already precarious,” said Annette McCullough, director of social work at the centre, “but if you look at the financial loss they suffered as a severe source of stress, there is no question that it hastened their demise.” Not all of those who were dragged down by Principal were old, nor were they particularly unsophisticated. John Rodden, a 54-year-old union organizer in Calgary, started investing in the group in the mid-1970s. “They were a good strong company,” he recalled. “Everybody thought they were doing well, so the

attitude was, let’s keep the West strong.” Alberta’s Hutterites fall into a similar category. Said Peter Waldner, secretary of the Hutterites’ Kingslake colony near the town of Foremost: “We dealt with Principal for

25 to 30 years and never dreamed anything like this could happen.” His community invested $1.8 million in Principal Group promissory notes, not investment contracts, part of a total Hutterite investment approaching $30 million. One-third of the $87 million in promissory notes that became void when Principal went under is held by 22 Hutterite colonies.

In one sense, the Hutterites are in a far bleaker position than most of the other Principal victims. While the liquidators have so far returned 49 cents on the dollar to Associated Investors’ clients and 44 cents on the dollar to those involved with First Investors, Principal’s 750 noteholders have not received a penny yet. Even worse, they are not likely to do much better than 25 cents on the dollar once all of the group’s creditors are paid off. Alberta Premier Donald Getty promised to indemnify First Investors and Associated Investors investment-contract holders if William'Code found his Progressive Conservative government negligent in the companies’ collapse. But his government, which last week declined to respond to Code’s report, has not announced any plans to assist noteholders.

Still, nothing could dim the pleasure with which most of Cormie’s investors greeted the publication of Code’s findings. “We’re elated,” said Charles Mason in Nova Scotia. Morgan Hinchey in St. John’s, Nfld., declared, “It does sound like Code’s conclusions are I what we expected.” And Ronald Thiel g said that he sees a blessing in the £ whole affair. Said Thiel: “I really be“ lieve that when all of this is over, we will have achieved something in this country that is important for everybody. We have shown that little people just cannot be trampled on.” That may be a premature judgment as yet, but if it does eventually turn out to be accurate, William Code can take much of the credit.

HAL QUINN

MARY NEMETH

DEBORAH JONES

BARRY CAME with HAL QUINN in Victoria, MARY NEMETH in Calgary and DEBORAH JONES in Halifax