BMO faces sanc­tions over FMF de­ba­cle

National Post (Latest Edition) - - FINANCIAL POST - BY BAR­BARA SHECTER

The On­tario Se­cu­ri­ties Com­mis­sion has made al­le­ga­tions against in­vest­ment bank­ing gi­ant BMO Nesbitt Burns Inc. in a long-sim­mer­ing case in­volv­ing the un­der­writ­ing of a Michi­gan-based sub-prime mort­gage firm.

Of­fi­cials from BMO are to ap­pear be­fore the OSC in Toronto to­mor­row so a panel of reg­u­la­tors can con­sider a pro­posed set­tle­ment con­cern­ing al­le­ga­tions the in­vest­ment bank en­gaged in con­duct “con­trary to the pub­lic in­ter­est.”

The al­le­ga­tions date back to a 2005 un­der­writ­ing of FMF Cap­i­tal Group Ltd. by prospec­tus.

A brief state­ment from Canada’s largest stock mar­ket reg­u­la­tor yes­ter­day al­leged that BMO Nesbitt Burns con­ducted due dili­gence “in a man­ner that did not com­ply with rea­son­able un­der­writ­ing prac­tices.”

In March 2005, FMF Cap­i­tal was taken pub­lic in Canada with BMO as the lead un­der­writer.

The shares, is­sued at $10, fell to less than $1 within eight months when the com­pany sud­denly sus­pended pay­ments.

While there were rum­blings that reg­u­la­tors were col­lect­ing in­for­ma­tion, no pub­lic ac­tion was taken at the time de­spite calls by some in­vestor ad­vo­cates who claimed in­ac­tion fos­tered Canada’s rep­u­ta­tion as a lax en­forcer.

A class-ac­tion law­suit was launched that in­cluded al­le­ga­tions against BMO and a raft of oth­ers in­volved with the strug­gling com­pany. It was set­tled in 2006 for $29-mil­lion, and ap­proved the fol­low­ing year.

Dim­itri Las­caris, a lawyer with the London, Ont-based Siskinds law firm that brought the class ac­tion, called the OSC ac­tion against BMO yes­ter­day “a post-script” to the saga. He said he is in­ter­ested in see­ing the terms of the pro­posed set­tle­ment, which won’t be re­leased un­less it is ac­cepted by the OSC panel that will con­vene to­mor­row af­ter­noon.

The con­tro­versy over FMF Cap­i­tal un­folded be­fore sub-prime mort­gages were re­vealed to be a dan­ger­ous cat­a­lyst for the global fi­nan­cial cri­sis.

NERA Eco­nomic Con­sult­ing, a U.S. firm that as­sisted the court in as­sess­ing dam­ages in the class-ac­tion case, called

No one ad­mit­ted li­a­bil­ity

FMF Cap­i­tal “the prover­bial ca­nary in the coal mine” for the credit cri­sis.

Shortly af­ter FMF was taken pub­lic, the firm re­vealed losses amid shrink­ing de­mand for mort­gages and dif­fi­culty in se­cu­ri­tiz­ing them, or sell­ing them to other in­sti­tu­tions. Higher in­ter­est rates were blamed.

The com­pany’s busi­ness was also struc­tured in a man­ner that al­lowed in­sti­tu­tions that bought mort­gages to re­turn them in cer­tain cases, in­clud­ing if the home buyer who took out a mort­gage had made mis­rep­re­sen­ta­tions.

The class-ac­tion law­suit, which drew on in­for­ma­tion from for­mer FMF em­ploy­ees, claimed the firm it­self had made im­proper dis­clo­sure and neg­li­gent mis­rep­re­sen­ta­tions.

Six un­der­writ­ers, in­clud­ing BMO Nesbitt Burns, paid $3.75-mil­lion of the set­tle­ment amount. No one ad­mit­ted li­a­bil­ity.

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