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Income Trusts and Seniors

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Postby Guest » Fri Dec 02, 2005 11:20 am

Appeared in National Post, Monday, November 28, 2005
Tories, NDP demand probe into alleged leaks to investors about tax policie
Jim Brown, Canadian Press
Published: Sunday, November 27, 2005
OTTAWA (CP) - As federal politicians prepare to hit the campaign trail, the Conservatives and NDP are calling for investigations of alleged insider trading arising from tax policy announcements by Finance Minister Ralph Goodale.
The Tories said Sunday they are writing to the Ontario Securities Commission to demand an inquiry, while the New Democrats want the matter turned over to the RCMP.
At issue are events last Wednesday, when there was a spike in trading in income trust units amid speculation that Goodale was going to change the tax rules that applied to them.
In fact, he left the trust rules unchanged. But he did announce new guidelines that will reduce personal income taxes on corporate dividends, a move intended to level the financial playing field between corporations and trusts.
Some commentators, including noted forensic accountant Al Rosen, have suggested the intensive trading in trust units that preceded Goodale's announcement may be an indication that advance word on the new policy leaked to some investors.
At a hastily called news conference on Sunday, Conservative MP Jason Kenney termed the trading "suspicious" and called on Goodale to explain who in his office had knowledge of the new policies and whether they spoke to anybody on Bay Street about them.
Kenney offered no hard evidence that information had leaked from Goodale's office, nor that any specific individuals or firms had engaged in insider trading.
But he insisted it's only "common sense" to conclude from the trading patter that word of Goodale's intentions must have been communicated to somebody.
"It's obvious that some people had inside information," said Kenney. "The question we need to answer is where did this information come from."
NDP finance critic Judy Wasylycia-Leis issued a statement demanding that the RCMP look into the affair.
"When huge amounts of money exchange hands just before a government announcement, it looks bad," she said. "If there was a leak, we need to know exactly when, why and how it happened."
When the issue first arose last week, Goodale adamantly denied any advance tips went to anybody about his announcement.
The trading on stock exchanges had "nothing to do whatsoever with any behaviour or conduct on the part of my office," he said.
"We are always very careful, very discreet, and there was no leak and there was no kind of advance information whatsoever."
© The Canadian Press 2005
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Postby Guest » Fri Dec 02, 2005 11:19 am

FINANCIAL POSTTime for OSC to get priorities in orderShould focus on trust issue not Rankin ruling
Barry Critchley
Financial Post
Friday, December 02, 2005
Trying to make sense of the priorities of the Ontario Securities Commission is an exercise that keeps even the experts guessing. Consider the events of the past week.Last Friday, the OSC announced it had filed a notice of appeal with Ontario's Superior Court of Justice regarding the sentence imposed on Andrew Rankin. The former RBC Capital Markets investment banker was sentenced to six months in jail for insider tipping.While every prosecutor likes to receive what it regards as the appropriate settlement, many have wondered what the point of the exercise is given that the chances of Rankin getting a job in the securities industry in the future are close to zero.It is not the first time the OSC has pursued this type of strategy. For instance, it went after Pier Donnini, the former head trader at Yorkton Securities, and managed to increase his suspension to 15 years from four.So the commission -- which was in a position to prosecute Rankin because of information provided by Daniel Duic, a former friend, who has kept much of the ill-gotten gains -- is on a mission to show it's tough.But is it a diversion from an investigation into who knew what and when, and who acted upon it, prior to the Nov. 23 announcement on tax reform?The OSC said it does not comment on what it may or may not be doing. But there are grounds on which it can disclose what it's doing. According to staff notice 15-703 -- known as Guidelines for Staff Disclosure of Investigations -- there is a general prohibition on disclosing such matters, with five exceptions.One exception reads: "The investigation relates to conduct or issues which are substantially in the public domain and there are credible allegations which engage the enforcement jurisdiction of the OSC. Confidence in the capital markets may be harmed by failure to confirm that the matter is under regulatory consideration."A perusal of newspapers -- from the comments from politicians in Ottawa and Toronto, from noting the RCMP has begun a review of trading in income trusts and dividend-paying stocks prior to Ottawa's announcement and from numerous comments from market participants, including some who indicated they received a e-mail indicating an announcement would be coming after the markets closed -- one thing is clear: The matter is in the public domain.Calls to OSC were not returned.- - -RETAIL BROKERS LAMENT The OSC might like to reflect on this e-mail from a retail broker as it mulls its response."I have a client base made up of average investors who expect those in a position of power to play by the same rules on disclosure as we all do who engage in market activity. Unfortunately, I wasn't made privy to the information that effectively shaved $2 of potential gain on sales of BCE the week of the announcement."Clearly the information was made to select individuals and due to the importance of the policy [on income trusts] my clients were turfed once by the suspension of trust reviews in October and again by the reversal in November.
"As an advisor who relies on the sanctity of the market's rules and regulations how can it be that in Canada, individuals are free to trade on inside information with impunity and clearly without consequence? This issue is merely the tip of the iceberg and illustrates that the market regulation system has failed us all again."
- - -
ROYAL BANK'S ROLE? Conspiracy theorists can have a field day with this combination.
September, 2005: Gordon Nixon, chief executive of Royal Bank of Canada, replies to a question about income trusts. "I'd be surprised to see a bank convert to an income trust ... but there are parts of our operations, that, depending on what happens with the rules in the future, it would make sense for us to look at."
A week later, Ottawa says it has stopped giving advance tax rulings on trust conversions. That left market participants wondering what the decision meant for the consultation process Ottawa announced earlier in the month.
November, 2005: Royal Bank sends a submission on Nov. 15 to the government outlining its views on tax and other issues related to publicly listed flow-through units. The bank has two main recommendations: Reduce the amount of tax paid on dividends declared by public corporations and refrain from imposing taxes or other limitations on investments in flow through entities.
Eight days later, it was posted on the bank's Web site. On the same day, after the markets closed, Ottawa announced there would be changes to the dividend tax credit but no tax changes for income trusts.
© National Post 2005
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Postby Guest » Thu Dec 01, 2005 10:29 pm

National Post
Tuesday, November 29, 2005
After markets closed last Wednesday, Ralph Goodale did an about-face on income trusts. The week before, the Finance Minister had insisted that the review Ottawa launched into income trusts in September -- investigating whether to (1) tax them; (2) leave them alone; or (3) reduce their comparative tax advantage by decreasing the tax on dividends paid by corporations -- would not produce answers till January. But at 6 p.m. on Wednesday, Mr. Goodale announced the government would pick the third option.

As we argued in this space on Friday, that was the right decision. But since then, questions have been raised about the extraordinary increase in the volume of income trusts traded on the S&P/TSX Capped Trust Index and high-quality dividend-paying stocks before the markets closed on Wednesday afternoon.

As the accompanying chart demonstrates, there was heavy buying of income trusts beginning Tuesday. That trend gained momentum the next day. By the close of markets Wednesday, the income trust index was up 3.6% for the week. What makes this suspicious is that it preceded the massive spike that took place on Thursday morning, when traders legitimately acted on Mr. Goodale's public announcement.

During trading on Tuesday and Wednesday, there was no obvious public news to explain why investors should sink new money into income trusts that Ottawa was considering taxing.

As income trusts were on the rise, so were high-paying dividend stocks, such as BCE. On Wednesday, its share price enjoyed its largest one day increase -- 4.9% -- in four years, and again this was before Mr. Goodale made his announcement.

In his Friday column, Financial Post columnist Barry Critchley raised the spectre of "tipping" -- giving market participants inside information. Mr. Critchley quoted an investment banker who told him: "I was talking to some prominent lawyers and bankers and they were up there in Ottawa earlier this week and they were basically told this was going to happen."

Opposition politicians have picked up on these allegations and demanded an investigation by the Ontario Securities Commission and the RCMP. Mr. Goodale has responded by suggesting the opposition is engaged in pre-election mud-slinging and that no information was leaked. That may be so. But if so, we have a challenge for Mr. Goodale: Explain the shape of the graph that appears on this page.

This is not about politics. The Finance Department is now operating under a cloak of suspicion, and some investors may have profited from inside information. For the sake of maintaining market integrity, the OSC and the RCMP should investigate the allegations of tipping.

© National Post 2005
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one of the dirty secrets of the retail investment business

Postby urquhart » Mon Nov 28, 2005 7:56 am

Monday, November 28, 2005 See today's electronic edition

FINANCIAL POST

Investment business has dirty little secret
Hugh Anderson, Financial Post

Monday, November 28, 2005

The already bruised reputation of investment advisors working for the big bank-owned investment firms has suffered another black eye in the breakneck collapse of FMF Capital units.

Sold to Canadian investors in March at $10 apiece by a six-firm underwriting group lead by BMO Nesbitt Burns, they were trading late last week at penny-stock prices around 80 cents. Hapless holders are getting no monthly distribution for November and possibly forever.

In hindsight, it may seem hard to understand how investors were persuaded to pay close to $200-million for this product.

After all, it says right there on Page 2 of the prospectus that "a return on your investment in the issuer is not comparable to the return on an investment in a fixed-income security." A few lines later, in a masterly understatement, the document warns that the "market value ... may decline if the issuer is unable to meet its cash distribution targets ... and that decline may be significant."

The answer is . New issues are not really sold on the prospectus, a long and detailed document that few individual clients or even advisors actually read. They are sold on the basis of an unofficial brochure known as the green sheet, named for the colour of the paper on which it may be printed.

This brochure, written by the lead underwriter, is a sort of crib sheet used by advisors in pitching their clients on the issue. It's a marketing document, period. As such, it accentuates the positive and maintains a discreet silence on risks that may be spelled out clearly in the prospectus.

FMF Capital's distributions depend on the ups and downs of the fiercely competitive U.S. mortgage-origination business. Its niche is mostly non-prime loans, the polite term for money lent to borrowers that many other financial institutions won't touch. Its business is vulnerable to higher interest rates and to early defaults, factors cited by the company when it suspended distributions.

Whether this new issue was marketed in such a way as to be misleading may yet be considered in a court of law or before the Ontario Securities Commission.

There's another dirty secret of the retail investment business that may be relevant to the FMF Capital fiasco. At most firms, advisors are free to decide not to pitch a new issue they are uncomfortable about.

But rookie brokers learn quickly that if you want a piece of the hot new issues for eager clients, you have to show yourself willing to take on and pitch the dogs as well.

BMO Nesbitt Burns had five partners in the FMF underwriting: National Bank Financial, TD Securities, Canaccord Capital, First Associates Investments and Sprott Securities.

They shared $11.3-million in underwriting fees, 5.7% of the issue. The buyers didn't do as well. The securities never traded at or above the issue price.

© National Post 2005
urquhart
 
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Location: Mississauga

Postby Guest » Thu Nov 24, 2005 9:43 am

Despite the recent bloodbath in Canadian income trusts, the sector may still be overvalued by 28 per cent or a total of $20-billion, according to a new study that blames "abuses" in trust accounting and salesmanship. The $20-billion potential loss is in addition to the $10-billion stock market decline in the sector since the federal government announced its tax review of income trusts in September, Accountability Research Corp., an affiliate of Rosen and Associates forensic accountants, said in the study released yesterday. "Much of the overvaluation stems from abuses in the financial reporting, valuation and marketing of business trusts," the study said, adding that the tax advantage of the trust structure has been overstated as the motivation for the mass conversion into trusts of corporations outside the energy and real estate sectors. "Rather, it has been the opportunity for selling owners to receive inflated prices well above what strategic industry buyers and professional investors alone would be willing to pay," the report said. CP
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Postby Guest » Thu Nov 24, 2005 8:09 am

The "trust" pop today on the TSE shows how unsophisticated investors have really become the target for rogue bankers.
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Postby Guest » Thu Nov 24, 2005 8:06 am

The fundamentals haven't changed as Al Rosen pointed out. The primary reason income trusts are brought to market is to sell overvalued assets to unsophisticated investors. In some cases wealthy offshore investors can evade tax, but the objective is to promote high-risk returns as being conservative. This wouldn't happen as often if the OSC did its job by reviewing all prospectuses or outsourcing the job to a forensic accountant.
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Postby Guest » Wed Nov 23, 2005 8:44 pm

It appears YLO had inside information but that's almost legal in Canada.

"Yellow Pages Group Welcomes Ottawa's Decision on Income Trusts
CNW, November 23, 2005 06:33 PM"
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Postby Guest » Wed Nov 23, 2005 7:39 pm

I could be very wrong (and I hope I am for Canada's sake), but I somehow get the impression that the amount of budget money and talent alloted to IMET (Commercial Crime etc) is about enough to afford a used motorhome and a few staff.
I am not aware of anything but "cosmetic" approaches to white collar crime in Canada.
In one of Jon Chevereau's Post articles he quotes the head of the RCMP as saying they can only afford to look at about 5% of the commercial crime cases reported to them.

We got nothin.
White collar criminals know this.
They win.
Canada loses.

(see posting on CIBC topic where top CIBC man avoids criminal charges when CIBC agrees to pay $125 mil fine to US authorities)
(two items to note here: one, criminal charges can be "solved" with money, two, Canadian authorites are nowhere to be seen on anything of consequence.) Canadian regulators are so far behind in this game that attempts by them to play catch up look rather futile to this observer.
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Postby Guest » Wed Nov 23, 2005 7:38 pm

What a surprise, the Goodale Trust announcement was leaked to friends on Bay.
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Postby Guest » Wed Nov 23, 2005 2:30 pm

Business income trusts overvalued by $20B amid accounting 'abuses': report
12:31:10 EST Nov 23, 2005
TORONTO (CP) - Despite the recent bloodbath in Canadian income trusts the sector may still be overvalued by 28 per cent or a total of $20 billion, says a new study that blames "abuses" in trust accounting and salesmanship.

The $20-billion potential loss is in addition to the sector's $10-billion stock-market decline since the federal Department of Finance announced its tax review of income trusts in September, says the report from Accountability Research Corp., an affiliate of Rosen and Associates forensic accountants.

"Much of the overvaluation stems from abuses in the financial reporting, valuation and marketing of business trusts," the study made public Wednesday declares.

It says the tax advantage of the trust structure has been overstated as the motivation for the mass conversion into trusts of corporations outside the energy and real estate sectors.

"Rather, it has been the opportunity for selling owners to receive inflated prices well above what strategic industry buyers and professional investors alone would be willing to pay," it states.

"Investment bankers have been motivated by the $1.4 billion of inflated underwriting fees that they have received since Jan. 1, 2001. Many have taken advantage of ill-informed investors seeking higher cash yielding investments."

Accountability Research said its examination of the 50 biggest income trusts outside the energy and real estate industries found that on average less than two-thirds of their cash distributions are actual income. The rest is a return of the investors' own capital.

The report also fingers abuses in calculation of distributable cash - a term that has no meaning under established accounting standards.

"Much of the manipulation relates to the understatement of future capital spending required to maintain the capital assets of the business," the study finds.

"Even more overvaluation results from the flawed methodologies being pushed by the investment banks."

The report notes that "the prospects for serious declines in business trusts are already evident," with the unit prices of 22 trusts down by 30 per cent or more from their offering prices.

And the title of the report is ominous: The Worst is Yet to Come.

The Accountability Research findings are not overdrawn, said Ross Healy, CEO of Strategic Analysis Corp., who was a lonely prophet of doom during the tech bubble and has been a longtime critic of income trusts.

"The only way they could be sold at the price levels that they were, and are, is if they're sold to unitholders of income trusts who believe, I think, that the word 'trust' means something," Healy said in an interview.

"The term trust, as in income trust, carries a very unfortunate connotation that many buyers will live to regret."
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Postby Guest » Wed Nov 23, 2005 1:38 pm

The Street operates similarly to other organized crime groups except the social decay they cause happens as a result rather than directly. If Al Rosen says up to 75% of Trusts are scams then it's fair to say as many as 50% of public cos. operate like Hollinger and Royal Grp.
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Postby Guest » Wed Nov 23, 2005 1:24 am

I just got a look at a very comprehensive report on income trusts. It is being put forth by Accountability Research Corporation.
www.accountability.com

It correctly identifies some of the key flaws with some of the income trust investments that have caught the eye of firms, advisors, and income investors.

Flaws like trusts that pay out investors own capital and in doing so, act more like a Ponzi scheme than an investment.

Flaws like underwriting fees of billions earned by investment firms representing both sides of a conflict. Trusting clients on one hand (those with the money) and business owners (those who need the money) wishing to sell out to these trusting clients on the other side.

Flaws like cosmetic regulatory agencies who give a false pretense of protection and regulation to the investing public.

Flaws like allowing names like "income trust", "yield", and "payout ratio", to misrepresent the fact that some trusts are paying out more than they earn. (like burning the furniture to heat ones home)

Flaws like failing to represent to clients just how much of their "yield" is in fact a return of thier own capital.

The list goes on, and I hope you are able to see copies of this report made public when the writers desire. It may cause you to second guess the motivations of trust, integrity, and service assumed or assured by investment firms pushing these products.
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Postby Guest » Mon Nov 07, 2005 5:40 pm

The Hon Goodale's comments have finally made income trusts an issue. There are other products (principal protected notes & other structured products) as well as mutual funds that can present problems for investors. A copy of SIPA's letter to Goodale dated October 12th is appended.

The problem seems to be that many investors are not aware of the risks inherent with these products, and trust their advisors (many of which are simply salesmen pushing product) to look after their investments. There are some good advisors and not all investors lose their savings. Unfortunately many seniors and widows have lost due to inappropriate investments or investment strategies.

SIPA will be making a formal submission regarding income trusts to the Finance Department Canada and invites members to send their comment for possible inclusion in our submission.

Regards,

Stan I. Buell
Small Investor Protection Association
P.O.Box 325, Markham, ON, L3P 3J8
Tel: 905-471-2911
e-mail: stanbuell@sipa.to
website: www.sipa.to


INVESTOR ALERT - Limitation Periods reduced from 6 years to 2 in AB, ON, SK & NL. Investors with a complaint should first consult legal counsel regarding limitation periods.
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Postby Guest » Sat Nov 05, 2005 10:32 am

I have also written the minister a short note supporting his decision to crack-down on Trusts, many of which are shams underwritten by dubious dealers.
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