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Shareholders the lucky ones as Coventree winds up

Coventree Inc. , the company at the centre of the Canadian money market fiasco of 2007, is set to pay out tens of millions of dollars as it liquidates.

But the money won't be going to the investors who bought Coventree's asset-backed commercial paper (ABCP), and were forced to wait for more than a year to find out whether they'd get their savings back after the market for it froze. Nor will it go to regulators who pursued the company.

Instead, Coventree's cash will be given to its shareholders – and the two biggest are co-founders Geoffrey Cornish and Dean Tai, the same senior executives who were sanctioned by the Ontario Securities Commission in the wake of the crisis.

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The two men are in line for payments that will dwarf the $500,000 penalties they are facing from regulators. The specialty finance firm itself will distribute to shareholders many times the $1.25-million it was ordered to pay the OSC.

For those who held ABCP that seized up in 2007, the payouts to shareholders will be bitter news.

"That's just horrendous that they would get that," said Murray Candlish, a retired Alberta farmer whose $350,000 in savings were tied up by the crisis, calling the result "no penalty at all. No penalty."

Mr. Cornish, through a spokesman, declined to comment. Mr. Tai, through a lawyer, did the same.

As of Sept. 30, Coventree reported having $71-million in cash, or about $4.68 a share. That works out to $15.4-million for Mr. Tai, who owns about 22 per cent of the company, and approximately $17.6-million for Mr. Cornish, who owns almost 25 per cent.

It's likely that the final number will be lower, once claims are paid and outstanding legal matters are accounted for. The company can't say with any certainty what the distribution to shareholders will be. However, the market is betting it will be substantial. Coventree stock, which trades for the last time on public markets on Tuesday, closed Monday at $4.11. That suggests investors think there will be at least that much per share in payouts.

Coventree's paper made up a big chunk of the $32-billion of supposedly short-term ABCP that froze in the credit crisis of 2007. The market for the paper became illiquid, as global credit markets went into convulsions because of fear of contagion from the subprime mortgage crisis. ABCP owners, who thought they'd bought a very safe investment, were left fearing that the paper would be worthless.

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After 17 months of talks, the ABCP was restructured in early 2009 with a promise that investors would get their money back if they could just hold on until 2017. Smaller investors were bought out sooner at par, but bigger holders with more than $1-million would have to gut it out. Some couldn't wait, and sold at a loss. Others have watched their restructured notes languish in value.

Regulators went after Coventree, not for creating an investment that was vulnerable to freezing but for what staff of the Ontario Securities Commission alleged was a lack of proper disclosure to shareholders of the troubles the company was having in the days before the paper froze.

OSC staff asked for a fine of $5-million for each of Coventree, Mr. Cornish and Mr. Tai, plus $1.5-million in costs to be shared by the three parties.

The commission levied a much lower amount in a December decision. It cited mitigating factors – such as the finding that the disclosure shortfalls were not intentional and were not the most egregious the commission had seen. The regulator assessed an administrative penalty of $1-million against the company, as well as $250,000 of costs. Mr. Cornish and Mr. Tai were each ordered to pay $500,000. Both men are appealing.

How is so much cash available to Coventree's owners, when many who bought its paper are still facing potential losses?

Coventree has been in suspended animation since the crisis, paring back staff and costs to a bare minimum once it became clear that the ABCP freeze had dashed the company's future prospects. The goal was to preserve as much cash as possible for shareholders.

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During that time, the potential returns on Coventree stock have been substantial. The shares plunged from more than $16 prior to the ABCP freeze in mid-2007 to a low of 55 cents shortly thereafter. The stock then began steadily climbing as canny investors figured out how much money the company was still going to have.

Much of the restructured ABCP itself has been a good investment too, for those who bought it off desperate sellers. It has appreciated back toward par, giving hedge funds that scooped it up a nice gain.

But the paper isn't at par yet, meaning that ABCP investors who were handed restructured notes still can't sell without taking a hit. And holding to 2017 has its problems too. The interest on the notes themselves is minimal. After inflation, those who hold until maturity will in all likelihood lose money.

For ABCP holders, it won't be nearly as happy an ending to the tale as for Mr. Cornish, Mr. Tai and the other owners of Coventree.

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