WILLIAM CODE'S BLUNT REPORT ON PRINCIPAL CALMED INVESTORS BUT SHOOK ALBERTA'S GOVERNMENT
The motorist leaned out of the pickup truck window and shouted, “Go get ’em, Bill” at the husky, grey-haired man with the battered cowhide briefcase as he walked down an Edmonton street last week. Lawyer William Code waved a greeting. Then he resumed the four-block stroll from his office to the green-carpeted chambers of Alberta Court of Queen’s Bench Justice Ronald Berger. Code has become an Alberta celebrity after leading a televised, 14-month investigation into the 1987 failure of Principal Group Ltd., the Edmonton-based financial conglomerate. But on Tuesday, July 18, at 8:56 a.m., the lawyer’s role as inquisitor officially ended when he handed Berger a long-awaited, 619-page report into the death of Principal. After a short chat with the judge, a smiling Code emerged ready to begin a long vacation. “I’m going to be thinking about my golf game and the horses,” he told reporters, “anything but the inquiry.” But last week, the fallout from Code’s scathing report was just beginning.
For two years, the Principal affair was the most-watched show on cable television in Calgary and Edmonton. And during 205 days of exhausting—and often rivetting—testimony, Code sat, Buddha-like, at the head of the Edmonton courtroom piecing together the story of why the $1.2-billion Principal empire collapsed, leaving the savings of 67,000 investors in limbo. When the doors closed, Principal owed $492 million to holders of investment contracts issued by subsidiaries First Investors Corp. (FIC) and Associated Investors of Canada Ltd. (AIC) and another $87 million to promissory noteholders. His conclusions were blunt. Code laid the blame firmly at the feet of Principal founder Donald Cormie—a 67-year-old Harvard-trained lawyer who had once taught Code at the University of Alberta law school. Code said that evidence indicated that his old instructor had acted fraudulently and dishonestly. But the report also included a stern condemnation of the provincial government ministers and officials who had allowed the company to continue operating despite danger signals that had been flashing for years.
The day after Code handed over his report, the federal department of consumer and corporate affairs charged Cormie, his son John, Principal senior vice-president Kenneth Marlin and Christa Petracca—a Principal vice-president and close friend of Cormie’s—with using misleading advertising and misrepresenting their financial services and products to investors. At the same time, political opponents and newspaper editorials called for the resignation of Career Development Minister Constance (Connie) Osterman, who was the consumer and corporate affairs minister in 1984 in the government of Premier Peter Lougheed. Code said that she was “neglectful and misguided” in allowing the public to invest in FIC and AIC, even though she knew the companies were in financial trouble. The report said that Osterman ignored the advice of subordinates who had urged her to close down FIC and AIC.
Questioned in the legislature last week about the province’s role in the affair, Premier Donald Getty refused to respond, saying that he needed time to examine the report. But Getty was also under fire from the 67,000 Principal investors—many of them elderly, rural, retired people in Western Canada and the Atlantic provinces—who demanded that he live up to his earlier promise to compensate them if the Code inquiry found the government to be negligent (page 33). Said Ronald Thiel of Victoria, who invested $110,000 with FIC: “If the Alberta government wants to regain any credibility as a place to invest money, it should be prepared to pay.”
In fact, the provincial government—clearly anticipating the worst from Code’s report—had already acted to shore up investor confidence. On June 29, it tabled a white paper that will give Alberta some of the toughest consumer protection laws in the country. But it may take more than that for investors to forget the Principal affair—and the long string of western financial institutions that also failed during the 1980s, including the Northland Bank and the Canadian Commercial Bank.
Despite the condemnations, Principal founder Cormie continues to maintain he is being unfairly blamed. On June 29, he even filed a $21-million lawsuit against Osterman, her predecessor, Elaine McCoy, and Alberta Treasurer Dick Johnston, faulting them for the collapse of Principal. Family spokesman Neil Cormie told Maclean’s that his father was not surprised to be shouldering most of the blame for Principal’s collapse. One of eight Cormie children, he added: “It is evident that the government is trying to make him the scapegoat. It doesn’t matter what the Code report says. We’ve already been tried in the press.”
But, in fact, the family’s problems may be just beginning. The federal charges under the Competition Act, carry maximum penalties of up to five years in prison and unlimited fines. The Royal Canadian Mounted Police, which closely monitored the Code inquiry, is also considering laying criminal charges. Still outstanding is a $200-million civil action filed against Cormie last March on behalf of the 67,000 Fie and AIC investors. And Conrad LeClerc, a member of the Investment Contract Holders Committee, representing the investors, told Maclean’s last week that his group may try to recover more money through a separate civil action.
Neil Cormie said that his family has already lost most of its assets. Donald Cormie has already paid out approximately $40 million worth of assets under the terms of the September, 1987, settlement he reached with a bankruptcy trustee, Calgary-based Collins Barrow Ltd. But the family still owns two elegant waterfront homes in Victoria—one of which served as the backdrop for the 1970 Jack Nicholson movie Five Easy Pieces—as well as a 42-foot yacht. Neil Cormie said that his father sold a house in Edmonton for about $300,000 last year. And the family’s sprawling 14,000-acre ranch 90 km west of Edmonton was listed by Canada Trust in March for $5 million. Cormie also owns a split-level, Spanish-style stucco winter home in an affluent residential community known as Paradise Valley, near Phoenix, Ariz., where house prices start at more than $1 million.
Looking for a new beginning, Cormie chose Arizona to stage a financial comeback after Principal’s collapse. He is registered there as a securities dealer through Sea Investors Corp., a mutual-fund company located in a modest three-storey commercial building in the Phoenix suburb of Scottsdale. The company currently has no active sales force, but state regulators said last week that they are monitoring the company’s activities.
Cormie’s remaining assets are just a fraction of what the self-made millionaire once owned. After graduating from Harvard, Cormie, born into a well-to-do Edmonton family, became rich and famous by creating one of North America’s most sophisticated financial networks in a region normally known for oil and cattle. Starting with just $10,000 in 1954, he built Principal by preaching a simple business gospel: save 10 per cent of all you earn and respect long-term business cycles.
Cormie soon won renown as an investment genius—predicting the peak of the Alberta real estate market in 1978 and the 1984 slump in crude oil prices. Concluded Paul Grescoe and David Cruise in their 1985 book The Money Rustlers: “He’s the kind of man you’d want in charge during a crisis . . . the banker protecting your life-savings during the recession.” But even before that book appeared, Cormie’s empire was starting to crumble. An unsuspecting public learned of the internal ferment on June 30, 1987, when the Alberta government suspended the licences of FIC and AIC. Six weeks later, Principal declared bankruptcy.
From the beginning, Cormie has blamed the Alberta real estate crash and a vindictive provincial government for his woes. But after listening to the 205 days of testimony, Code concluded that Cormie and Principal senior vice-president Marlin, a former railroad conductor and vacuum-cleaner salesman, were chiefly to blame for the empire’s collapse. Code’s report concluded that depressed real estate values may have badly hampered Principal. But, in the end, the evidence indicated that Principal was an enterprise built on fraud and deception, which was designed to benefit the owners at the expense of investors.
Code’s report is a relentless chronicle of Cormie’s and Marlin’s “grand plan” to paper over the conglomerate’s real estate and mortgage crisis. To begin with, Principal management used a series of convoluted internal transactions to shift troubled assets from one part of the group to another. The procedures painted a misleading portrait of Principal’s health and were designed, Code said, to “cover up” the problems of FIC and AIC. Evidence during the inquiry also suggested that Cormie misled investors with some of Principal’s financial statements—in some cases, reporting profits when the company was in fact losing money.
But it was Principal’s sales and marketing practices that came under some of the harshest criticism. Code pointed out how Marlin and Cormie let the company’s sales personnel continue to promote Principal products even though FIC and AIC were almost insolvent. At the same time, declared Code, Principal’s aggressive sales force was misrepresenting their products. Among other tactics, according to the report, salesmen told customers that their investment was 100-per-cent backed by deposits with Principal’s own bankers. More damning was Code’s conclusion that Cormie was shifting assets out of Principal as the group’s situation worsened. And Code called Cormie’s payment of huge fees and loans to his family—including Cormie’s wife, Eivor, and his daughter Allison—and to close friend Petracca “fraudulent and dishonest.”
The lawyer’s report also sent tremors through the Alberta government, which Code scolded for negligence and inaction over an extended period of time. The Cormie company’s problems were first identified as far back as 1973, when Alberta Securities Commission chairman Harold Rose wrote to the Alberta government recommending that AIC be put under the supervision of a receiver-manager because the Principal Group companies were operating “close to the borderline.”
By the mid-1980s, high-level provincial officials were regularly monitoring the activities of FIC and AIC. Between 1984 and 1986, a special cabinet task force on financial institutions included some of Alberta’s most powerful cabinet ministers—among them, Osterman, Lougheed’s right-hand man, then-Treasurer Louis Hyndman, Attorney General Neil Crawford and Municipal Affairs Minister Julian Koziak. Code reported that they all had ample warning about Principal’s problems. Osterman’s assistant deputy minister, James Darwish, told her in 1984 that FIC should be closed immediately. But, rather than following his advice, she suggested that he take early retirement. A few months later, he did.
Appearing before Code last May, an evidently unrepentant Osterman said that, at the time, she was preoccupied with trying to save Alberta’s troubled credit unions. She also said that she was swayed by Principal officials, who strongly disagreed with regulators about the state of the companies. When asked if the government’s approach to Principal was based on “hope and prayers,” a defiant Osterman replied, “Life’s a gamble.” And, in what she said was a coincidence of timing, bureaucrats inadvertently destroyed her private documents relating to Principal a few days before Johnston withdrew the FIC and AIC licences. Code wrote that Osterman had been “naïve and misguided” for not taking her subordinate’s advice. Added Code: “In the end, it was the investors who bore the risks of her decision and her policy and her hope that economic conditions would improve.”
So far, at least, the Principal affair has stopped short of the premier’s office. Getty and his popular predecessor, Lougheed, now an Edmonton lawyer, met privately with Code’s lawyers during the inquiry and apparently convinced them that they could not assist him in his investigation by shedding any light on the Principal situation. Indeed, Getty signed a sworn statement that he “had no knowledge of any financial difficulties” in the Principal Group until four months before the Edmonton-based financial conglomerate failed. But with investors demanding compensation—and the opposition calling for Osterman’s resignation—the Alberta premier now undoubtedly knows more of Principal than he would like.
As for Code, he plans to try to improve his 10-handicap golf game and to spend some time visiting race tracks and watching the seven thoroughbred horses that he and his partners own. But, clearly, he too will be watching closely as his findings reverberate through Alberta’s business and political circles.
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