Accounting in the West

D’ARCY JENISH July 27 1987

Accounting in the West

D’ARCY JENISH July 27 1987

Accounting in the West


For the past two weeks 72-year-old Hildegard Baron has had trouble sleeping. As a result, she watches TV—or occasionally takes a sleeping pill. When she becomes really despondent, the Calgary widow quietly sobs and says that she worries about paying the August rent. The reason: Baron had invested her life savings of $95,000 in First Investors Corp. (FIC), one of two now-insolvent subsidiaries of Edmontonbased Principal Group Ltd. On June 30 the Alberta Court of Queen’s Bench placed both companies under the control of a courtappointed managership—in order to sell off any assets—at the same time the provincial government suspended their operating licences. Since then,

Baron and hundreds of other elderly Calgarians who invested in the Principal subsidiaries have turned to a senior citizens’ advocacy group for help. And thousands of other angry investors turned up at packed meetings in Edmonton and Calgary demanding a provincial government inquiry. Finally, last Thursday, July 16, provincial Treasurer Dick Johnston relented and announced that an investigation would be held.

At the same time, Johnston attempted to address most of the issues raised over the past two weeks by outraged investors. “The investigation,” he said, “will concentrate on possible misleading representations by the companies.” Transactions among the various Principal Group companies will be completely examined, he added. The objective, Johnston said, will be to determine whether “misrepresentation, fraud or dishonesty has existed in the companies’ activities.” Meanwhile, two disgruntled Edmonton investors launched legal proceedings last week to have the firms placed in bankrupt-

cy, which would also allow for a thorough examination of their operation. In response to the public furore, Principal Group ran two-page newspaper advertisements in several large newspapers across Canada with a message from president Donald Cormie assuring the public that the overall company remains solid.

Although two banks, two trust companies, six mortgage companies and

over a dozen credit unions have collapsed in Alberta over the past five years, the failure of the Principal subsidiaries unleashed an unprecedented uproar. For one thing, neither of the two companies, FIC and Associated Investors of Canada Ltd. (AIC), were members of the Canadian Deposit Insurance Corp. As a result, the interestbearing investment certificates they issued are not insured. Currently the companies owe some 67,000 individuals, primarily from Alberta, British Columbia and Saskatchewan, an estimated $467 million. Investors in Saskatchewan and British Columbia have also demanded help from their governments. The B.C. government responded last week by appointing an

investigator under the Trade Practices Act, but Saskatchewan Premier Grant Devine has resisted calls for an inquiry despite public pressure from approximately 7,500 investors in his province.

Principal Group is a $1.3-billion financial services empire which offers consumers in six Atlantic and western provinces the equivalent of one-stop financial shopping. Its various subsid-

iaries, including Principal Savings and Trust, sell term deposits, guaranteed income certificates, registered retirement savings plans and shares in eight mutual funds, as well as providing basic services such as savings and chequing accounts. Alberta native Cormie, 64, helped found the company in 1954 and, along with two sons, retains a 90-per-cent controlling interest. They run the organization from palatial headquarters atop the 30-storey, $38-million Principal Plaza on Edmonton’s main thoroughfare, Jasper Avenue. In fact, the executive suite is a two-floor unit linked by a massive mahogany staircase.

Much of the investor outrage was directed at the company’s financial Consultants and the way in which they sold Principal’s now-suspect products. Calgarian Connie Lawson, who purchased FIC/AIC certificates, said that a consultant assured her that the two companies were required by law to maintain assets on deposit with a chartered bank equivalent to the value of the investment contracts outstanding. Lawson added that after seeking further assurances, the consultant told her that “I would have the total assets of the Principal Group behind me.” Calgary Conservative MLA Gordon Shrake said that numerous constituents have complained to him that financial consultants advised them to move money from Principal Trust, whose deposits are insured, into uninsured FIC/AIC certificates. Said Shrake: “Something is really wrong here.”

A former Principal vice-president, Wayne Holmgren, added that consultants received double commissions if they persuaded a client to purchase an Fie or Aie certificate rather than depositing money in a Principal Trust account.

“It’s one reason why so much money was put on deposit,” said Holmgren.

But Principal Trust president John Cormie, one of Donald’s two sons, said that double commissions existed only because the investment certificates were not covered by federal insurance, which made them more difficult to sell.

The first indication that the two companies were in trouble appeared in a First Investors prospectus filed with the Alberta Securities Commission (ASC) in early 1985. FIC acknowledged that 63 per cent of its mortgages were in arrears for 90 days or more. As a result, the ASC asked the company to withdraw a proposed issue of common shares. Despite the warning, neither the ASC nor the Alberta government took any action until mid-1986, when the Alberta treasury department conducted a preliminary review. But provincial Treasurer Johnston did not order a thorough examination until last January, after a year-end audit revealed that the real estate assets of the two companies had fallen well below what Principal claimed they were worth. And a quarterly report filed with the government in April uncovered further deterioration in the value of the real estate assets of the two companies. Johnston and Donald Cormie held a series of meetings but were unable to devise a solution before the government lifted the operating licences of the companies.

Meanwhile, the Principal Group took action to avoid bankruptcy proceedings, which would have resulted in a detailed examination of the subsidiaries and their relationship to the parent company. Each subsidiary sold a single $50 bond to Edmonton

resident Scott Gyles. Having sold the bonds, the firms were legally able to apply for protection under the Companies Creditors Arrangement Act. Normally, companies use the act to protect themselves from bankruptcy proceedings and lawsuits while trying to devise a survival plan or financial restructuring. But in a sworn affidavit, Kenneth Marlin, president of the two troubled companies, acknowledged that both were insolvent and unable to pay investors as certificates came due. As a result, the court appointed the chartered accounting firm Coopers & Lybrand as receiver-manager for the purpose of selling off the assets and reimbursing the investors.

Opposition politicians, bankruptcy experts and investors all condemned Principal’s move to protect itself. “This was the ritual issuing of a nominal bond,” said Edmonton New Democratic MLA Gordon Wright. “It was an entirely specious contrivance.” And Cameron Murray, president of the Alberta Insolvency Association, said that a trustee in bankruptcy would have had far greater powers of investigation than a receiver-manager and could have overturned transactions among Principal Group subsidiaries. He added: “It’s obvious [Principal Group] have thought this out.”

By last week two Edmonton investors, Suzanne Mah and Donald Logan, initiated legal proceedings aimed at having the companies declared insolvent under the Bankruptcy Act rather than the Companies Creditors Arrangement Act. Mr. Justice Allan Wachowich, who issued the initial stay order, put off a decision until at least July 30. But he made an important concession to the investors by stipulating that Coopers & Lybrand report to the court rather than just to the government committee that Treasurer Johnston set up last week. Wachowich also ruled that FIC/AIC president Marlin can be cross-examined by lawyers for the two investors.

Although the legal sniping will no doubt continue in the weeks to come, and the provincial inquiry may eventually get to the bottom of the affair, many investors are faced with immediate financial problems. For her part, Calgary widow Baron, who ran a farm in Saskatchewan with her husband for 18 years before moving to Calgary, has her rent and property taxes of $455 a month to worry about. “My pension cheque doesn’t cover that and I must eat and pay utility bills,” she said. “I never cried before because I always had hope. But these last few days, I cry a lot.”