BUSINESS

A widening scandal

The Principal failure raises troubling issues

JOHN HOWSE September 26 1988
BUSINESS

A widening scandal

The Principal failure raises troubling issues

JOHN HOWSE September 26 1988

A widening scandal

BUSINESS

The Principal failure raises troubling issues

After 12 months of sometimes rancorous court hearings, disturbing issues are emerging about the Alberta government’s role in the 1987 collapse of Principal Group Ltd., which cost 67,000 investors about $150 million. Last week, court-appointed investigator William Code heard some of the most explosive testimony so far. A former senior Alberta government official said that a special provincial cabinet committee, set up by Peter Lougheed when he was premier, exerted influence to allow two Principal subsidiaries to stay in business until 1987, even though committee members knew about their financial difficulties. And this week, the inquiry enters a critical new stage that could provide further insight into the Alberta government’s involvement in the Principal affair.

Last week’s testimony was the strongest evidence so far linking the provincial government with Principal.

But new light may be shed on the government’s role as former Alberta consumer and corporate affairs minister Connie Osterman becomes the first politician to

testify before the Code inquiry. Inquiry lawyers have said that they are considering calling other former and current cabinet ministers and may even ask Lougheed to testify. And other revelations may now follow because the current provincial government of Premier Donald Getty has given the investigators access to 12 years of cabinet minutes concerning the Principal affair.

Last week, Osterman’s former deputy min-

ister, Barry Martin, testified that Lougheed, who was succeeded by Getty in 1985, instituted a special inner-cabinet task force that met weekly over what he called “soup-andsandwich” lunches to deliberate the future of Edmonton financier Donald Cormie’s two Principal Group subsidiaries—Associated Investors of Canada Ltd. and First Investors Corp. The high-powered committee, disbanded in 1986, included Osterman; her predecessor in the Lougheed cabinet, Julian Koziak; the Alberta treasurer at the time, Louis Hyndman; then-Attorney General Neil Crawford; and several key senior civil servants, including Martin. Between 1984 and 1987, financial regulators had regularly pressed Osterman to take action against Cormie’s subsidiaries. But the task force—which advised Osterman until Lougheed stepped down as premier in 1985—urged her not to take any steps against the companies, even though they violated the province’s Investment Contracts Act, because they had insufficient capital and reserves. Said Martin: “We did not want Alberta’s image blackened as an area of failed financial institutions.”

Martin, 57, a lawyer who was handpicked by Lougheed as deputy minister to oversee financial regulatory agencies, took early retirement in 1986. He is one of several witnesses to link the provincial government with Principal. On Sept. 8, the Code inquiry heard evidence that as early as mid-1985, the entire Alber2 ta cabinet knew about the financial 5 troubles facing Principal subsidiary First Investors Corp. An internal document from the Alberta Securities Commission revealed that the commission planned to recommend that the company’s status as an approved corporation under the provincial Trustee Act be revoked because of its poor financial condition. According to a memo written by Marguerite Childs, the commission’s deputy director of franchises, Associated Investors chairman William Pidruchny discussed the matter with government regulators, who said that there was no need to advise cabinet of the financial standing of the company “since they are fully aware.”

Last week, Martin said that the Lougheed task force declined to call for special studies of the two faltering companies. Instead, he said, there was “a hell of a lot of hope and prayers” that the Alberta real estate market and the general provincial economy would improve enough to save the firms. Martin added that the task force was especially reluctant to recommend any regulatory action because it might cause a “domino effect” in the Alberta financial community. The province was already reeling from the collapse of Calgary-based Northland Bank and the Canadian Commercial Bank of Edmonton.

As well, the cabinet was then involved in shoring up the provincewide network of co-operative credit unions that had weakened because of falling real estate values after the oil boom ended in the early 1980s. Declared Martin: “I did not see a government policy emerging. All understood that the companies were offside and nothing would be done, that we would wait.”

In fact, Treasurer Dick Johnston did not withdraw the licences of the companies until June 30, 1987—the companies declared insolvency on Aug. 10— which finally prevented Principal employees from selling investment certificates to investors.

But the licence suspensions took place too late for many people.

According to Principal’s financial records, $95 million was deposited between 1984 and 1987 while the government allegedly knew about the company’s financial problems.

Last week, the provincial government was also rocked when Martin confirmed that his former assistant deputy minister, James Darwish, was urged to take early retirement after he criticized the companies in a scathing memo to Osterman in April, 1984. Darwish claimed that the companies were guilty “of the most flagrant abuse I had ever seen perpetrated.” Martin said that he and six other

people were present when an angry Osterman suggested a career change for Darwish. Said Martin: “She was rational, she was determined. She knew exactly what she wanted to say.”

Earlier, Darwish had provided the inquiry with notes that he made after Osterman’s call. Added Darwish: “She told me I did not understand my job description. She said I was on the outside looking in and that I knew nothing about the other side—that I am up

for retirement in the fall and to keep her comments in mind.” His memo reflected concerns about the companies that were similar to those held by officials with the Canada Deposit Insurance Corp. They had already called for a joint federal-provincial investigation into the companies, but members of Lougheed’s government rejected the proposal as “premature.”

Earlier, investigation officials said that they were surprised by Osterman’s admission that her personal files on the two Principal Group companies had been destroyed “in a

vault cleanout of all cabinet ministers’ papers” just before the companies’ collapse. But last week, inquiry lawyer Neil Wittmann assured reporters that “no typewritten memos had been destroyed that had not been duplicated elsewhere—only her copies of documents that she may have written on may have been destroyed.” And Getty denied any intentional destruction of ministerial files.

Last week’s revelations were the latest in a litany of complaints and finger-pointing that has continued since the fall of 1987. The initial anger was voiced by investors who still face losses despite three staggered payouts from receivership sales of Principal assets. But the inquiry has also heard months of evidence from Principal Group officials, including senior salesman Donald Slater, who described investors as “interest-rate junkies,” to Principal Group founder and chairman Cormie. During his testimony, Cormie, a prominent and longtime Alberta Tory, angrily rejected charges that he actually hastened the companies’ demise by selling overvalued real estate to investors in return for badly needed cash for other Principal Group companies.

Although the public gallery is almost empty now, many Edmonton and Calgary investors continue to monitor the hearings on their community TV channels. One concerned investor is Suzanne Mah, an Edmonton lawyer who placed $5,000 in term deposits with each of the two companies and has recovered about 35 per cent of her original investment (she may receive another 30 per cent in about two years). Said Mah: “The inquiry has uncovered much more than anyone dreamed it would.” She added that to recover all of her investment, “you need all the ammo you can get, and the Code inquiry is providing it.”

The politicians’ testimony, cross-checked against the computer-logged versions of earlier witnesses, should help investors trying to recover their money. If the inquiry ultimately finds evidence that regulatory negligence played a major role in the companies’ demise, the provincial government may be responsible for repaying the balance of investors’ funds. If that occurs, the price paid by the Alberta government for its unwavering support of the provincial institutions under its wardship will be high indeed. And the costs could be measured in terms of political popularity, as well as millions of dollars.

JOHN HOWSE in Edmonton