BMO faces sanctions over FMF debacle
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.