It is May 17, Day 104 of the inquiry into the collapse of the Principal Group Ltd., and supersalesman Ken Marlin attends with his lawyer. The hearing room in an Edmonton highrise is littered with transcripts, lawbooks and microphones. For eight months the media and police have attended the hearings, under the chairmanship of lawyer William Code, and proceedings are telecast daily. Marlin is nearly bankrupt now, after being the Principal Group’s senior vice-president of sales and a 10.5-per-cent partner with Principal chairman Don Cormie in Collective Securities Ltd., the holding company that perched atop their $1.2-billion empire.
It all fell apart in June, 1987, when the Alberta government cancelled the operating licences of Principal’s two mortgage investment funds, First Investors Corp. Ltd. and Associated Investors of Canada Ltd., leaving about 35,000 investors in three Atlantic and four western provinces with $150 million in losses. That triggered the bankruptcy in August, 1987, of Principal Group, costing 600 holders of promissory notes about $60 million. The failure was due to poor mortgage investments, but millions more are unaccounted for.
Of all the testimony so far, most damning has been that of Cormie’s executive assistant, Diane Stefanski, a 37year-old university graduate from Ontario. At the inquiry, she explained Department Eight, Cormie’s codename for the business manoeuvrings between Principal Group companies and various Cormie family companies. Department Eight could have been named after Cormie’s eight children who, along with other family companies, drained as much as $66.6 million worth of sweetheart loans out of the empire via Cormie and Marlin’s Collective Securities.
In an interview with Maclean's, Stefanski repeated what she had told the inquiry: that Department Eight’s operations were purposely hidden from Marlin. “I was told not to give Ken [Marlin] financial information for Collective Securities even though he owned 10.5 per cent,” she said. “I was told that if Ken ever asked for information, I was to give it to Don Cormie and Cormie would give it to him because Ken did not need to see it. Ken didn’t bug anybody because he was travelling almost constantly.” Marlin told Maclean's that he was “shocked” when he learned that he made less than some of Cormie’s children. For instance, Marlin’s salary was $134,000 in 1987, but Cormie’s testimony before the inquiry has revealed that between 1985 and 1987, Principal Group Ltd. paid Cormie’s daughter Allison, $288,000 to research climatic and economic cycles while she was attending McMaster University. Allison’s work involved archeological study of cold/wet and cold/dry climatic cycles over the past 1,000 years, Cormie testified.
At the same time, Estate Loan and Finance Ltd., the company run by Cormie’s wife, Eivor, was paid between $28,000 and $30,000 a month in management service fees from 1984 to 1987 to set up Principal’s sales force—while Marlin was already getting a salary for operating an existing sales team full time. In addition, Cormie’s wife was paid a salary and fees of $275,000 to attend social functions such as “dances
For eight months the media and the police have attended the hearings in Edmonton, and the inquirg grinds on
and parties” in the 13 months before Principal declared bankruptcy. Millions more were lent interest-free by Cormie and Marlin’s personal holding company, Collective Securities Ltd., to Cormie and his children—while Marlin borrowed money from the company to buy his home at rates as high as 20.5 per cent.
Marlin, a former railroad dispatcher who joined forces with Cormie 30 years ago, says that he has been most upset about what happened to money he personally coaxed out of Alberta’s religious Hutterites, who bought promissory notes from Principal Group. The notes were to be deployed by Principal Group for general corporate purposes, but, according to testimony at the inquiry, often ended up being lent to the registered retirement savings plans of Cormie children or to Cormie’s personal companies or ranch, to pay taxes or complete renovations. Stefanski, for one, told the inquiry about one particular transaction that concerned $215,000 lent on April 27, 1984, by the Hutterites to Principal Group Ltd. in return for a guaranteed interest rate of 10.2 per cent.
Principal Group then lent that money at 10.375 per cent interest to Collective Securities, which in turn lent $50,000 of it to the Cormie family holding company, County Investments Ltd., to pay taxes owed. Some $164,000 was lent to the Cormie ranching corporation at 10.5 per cent interest, another $120,000 went to Merrill Lynch to pay for stocks, and $13,724 was paid to a construction company. There were dozens more transactions like that.
In fact, at the time of the collapse, Cormie family members owed about $6 million to County Investments. Apart from the question of morality, such manoeuvres also raise serious tax questions. In Canada, individuals who receive loans lasting one year or more from a non-arm’s-length corporation must declare them as income for tax purposes. But Cormie has argued before the inquiry that because County Investments did not have a member of his family in an official position, it was in fact an arm’s-length company.
Marlin, once worth $14 million on paper for his 10.5-per-cent stake, now totters on the brink of financial ruin. “My creditors have my house, and I have lost everything,” he said. “I may declare personal bankruptcy.” When bankruptcy trustees moved in last fall, Marlin and Cormie signed away their ownership in return for settlements that gave Cormie $5 million in assets and millions more in loan forgiveness terms. Marlin got $50,000 cash up front and another $130,000 spread over 26 months. That was done before Marlin discovered the truth about Department Eight.
Marlin says that he plans to sue Cormie for shareholder “oppression”—an offence under the Alberta Business Corporation Act. The RCMP are closely following the inquiry, which grinds on with Code hoping to submit his written conclusions this fall. Cormie, for his part, agreed last fall to a public airing (he could have fought for a private hearing), but now fights in court against Code publishing any conclusions on the grounds that the inquiry is not a court of law.
Meanwhile, although Ken Marlin has been destroyed financially, he retains a salesman’s sense of humor. “I learned one thing. There are three kinds of shareholders in this world: majority, minority and ignored. I was one of the ignored.” And in my opinion, Principal will rank as one of Canada’s biggest scams, with Ken Marlin and others unwitting victims of Donald Cormie’s fancy, and disgraceful, financial footwork.
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