Most people accept that there are no guarantees in life. Still, when it comes to financial markets, that is exactly what investors seem to want. In the United States—and more recently in Canada—investors have been turning to the courts for compensation when they lose money. And that raises a number of fundamental questions about who is responsible when bad judgment collides with a volatile market.
In recent years, corporate directors have been forced to take more of the rap when things go wrong. For one thing, the heightened emphasis on shareholder rights has intensified the public scrutiny of directors and their performance. Last week, Institutional Shareholder Services of Maryland, which represents 500 major U.S. pension funds and other institutional investors, announced that it will try to oust several directors of the beleagured Hamilton-based waste management firm Philip Services Corp. at its annual meeting this week.
In addition to such outside pressure, directors of Canadian companies can be held personally liable for some of a faltering company’s financial obligations.
Investors are also trying to widen the circle of blame by taking aim at brokers, engineering firms, credit rating agencies and even regulators. The concept of “buyer beware” now seems a thing of the past. Last month, in one of the most high-profile examples of this trend, Wall Street giant Merrill Lynch agreed to a $585-million out-of-court settlement with Orange County, Calif. The county declared bankruptcy in June, 1994, after its treasurer lost $2.2 billion with an aggressive derivativetrading strategy. It promptly sued Merrill Lynch, claiming the firm knew that derivatives were an inappropriate investment for the county and should have refused to sell them. Local officials also sued the county’s auditor, KPMG, and a credit rater, Standard & Poors, for rating its bonds too highly.
Although Americans have a more established tradition of using litigation to resolve disputes, Canadians are quickly catching up. In an echo of the Orange County suit, three credit unions from Thunder Bay, Ont., sued brokerage firm Nesbitt Burns for losses
On the financial markets, the concept of ‘buyer beware’ now seems a thing of the past
resulting from derivative trades in 1994. Great Lakes Community Credit Union, West Fort William Community Credit Union and Ukrainian (Fort William) Credit Union each claimed that Nesbitt wrongly steered them into a speculative investment and misrepresented the degree of risk involved in trading government of Canada bond options.
Probably the best-known investor grievances in Canada are the Bre-X Minerals class action suits, one of which got under way in an Ontario court last week. The plaintiffs are seeking compensation for the losses they suffered when Bre-X’s Busang gold discovery in Indonesia was revealed as a fraud. They have taken aim at company executives and directors, stockbrokers, the Montrealbased engineering firm SNC-Lavalin, and even Barrick Gold Corp. of Toronto. The case against Barrick, which made a failed bid to acquire the Busang site, alleges that it knew the site contained little or no gold, and had an obligation to make that information public.
Bre-X investors have also loudly criticized Canadian stock market regulators and the Toronto Stock Exchange, which allowed the company’s stock to trade publicly until the bitter end. The TSE has also come under fire recently over the collapse of another listed stock, YBM Magnex, one of whose founding shareholders is said by U.S. authorities to be a Russian mobster.
Another Toronto brokerage firm, Midland Walwyn, is currently under the gun from investors because its research analyst assigned a positive rating to Philip Services, despite its mounting problems.
The common denominator in each case is the assumption by investors that they are not responsible for the bad decisions they made, the risks they freely took, the losses they consequently incurred. Granted, financial markets have become more complex in recent years. But at the same time, the volume of detailed information available to investors has never been greater, thanks in part to the Internet and increasing media coverage of business. Even when dealing with the most persuasive of brokers, investors must know that the decision to buy and—the responsibility for any losses—is ultimately their own.
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