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Income Trusts and Seniors

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Postby admin » Mon Feb 27, 2006 10:36 pm

Pyramid income trust
Al Rosen
From the February 13-26, 2006 Issue of Canadian Business Magazine
I'm offering you a guaranteed opportunity to make a fortune. You can get in on the ground floor of an investment idea that has been so thoroughly researched I'm tempted to use the words "sure thing." I need you to give me money so that I can buy a business. The type of company is irrelevant; I'll just grab the first thing that comes along. Profitable or unprofitable, it just doesn't matter. I'm going to cook the books anyway. We're just in for a quick flip. With a little magic, we can sell it for three times what we paid.

Once we buy the business, I'll make a call to my investment banker's dedicated hotline, and with the utterance of a single phrase, I'll set in motion a spectacle not seen since, well, since the last deal they did. "Hello, yes, I've just purchased a business, and I'm thinking of turning it into an income trust."

Before the words are fully past my lips, the limo will be on its way to pick me up, with stops at the lawyers' for a thick prospectus, and then on to the PR firm to hammer out the details of the road show. We'll talk a few more specifics along the way: "No, it's not profitable. No, we don't want to retain any interest in the company. No, we won't subordinate our distributions."

The story continues below...


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Now, you might think that there's some sort of risk attached to the whole cooking-the-books part of the plan. So let me put your mind at ease. Nobody's going to jail. This is Canada, after all. We have a grey zone of regulation that rivals our Arctic tundra in both size and activity.

You see, we're going to hide our losses in plain sight. As long as they are buried on page 87 of the prospectus, everything's legal. Our friends at the investment bank will make sure the research reports on our company never mention net losses. We will focus on distributable cash, which can be any money we can get our hands on in the short term. It all counts, no matter how we borrow, beg or steal it. Oh, did I mention the bank would be giving us a bridge loan in addition to underwriting us?

Actually, forget distributable cash--it's so 2005. They've come up with an even better one recently called "free use of cash." It sounds like "free cash flow," but the best part is you don't have to actually earn it. Sure, it's a liability that has to be earned or repaid at some point, but by the time anyone figures that out we'll be sunning ourselves on a beach somewhere.

I know it sounds too good to be true, but let me run you through it. The whole premise is based on the greater fool theory. We can get future investors to ignore the fundamentals by comparing ourselves to other overvalued trusts.

The key is turning our net losses into something positive. Simply put, we will inflate our free cash flow estimates by stopping what we spend on maintaining our capital assets. Sure, this would ruin the company if we kept it up over the long term, but we only need to keep it going long enough for us to cash out.

Look, the attached table shows it all. While the moratorium on capital maintenance slowly erodes the company's assets and its earnings power, we simply give people extra cash to make up for it. OK, I admit that the extra cash wasn't earned by the company; we just borrowed it from the bank. But look at that 12% yield!

So, don't delay a moment longer. Send your confirmations of interest to the e-mail address below. And don't be afraid to just send envelopes of cash as well. If this issue fills up, I will have another one for you to invest in soon enough.
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Income Trust Leader Does Not Want GAAP Reporting

Postby urquhart » Tue Feb 21, 2006 8:08 am

We have gotten the attention of the Canadian Income Trust Association, who is now working feverishly to adopt its own voluntary standards on distributable cash for income trusts. Marc Tellier, CEO of Yellow Pages Income Fund, does not try to hide his view that income trusts should not have to follow GAAP rules imposed by accountants. Here are his comments in the attached Toronto Star article.

"He said the rules do not have to be imposed by accountants, such as the GAAP (Generally Accepted Accounting Principles) conventions that govern share-based companies, rules that he said can cause distortions. Instead, the rules can be drawn up by industry associations,"


""We need to have a common terminology and framework for distributable cash. We don't feel that GAAP is necessarily the way to go; there are other ways to do it," Tellier said following a speech to the Canadian Club in Montreal. "



So, the income trust industry wants to set its own financial reporting standards, that do not need to comply with Canadian GAAP and that do not need to be subject to even the semblance of independent oversight. And, this asset class is targeted to the least sophisticated, most trusting and most financially vulnerable group, seniors and income seeking investors. There has still been no enquiries on the financial reporting and marketing abuses of income trusts from any of the Provincial Ministers, Commission chairpeople or Auditor Generals across Canada. The prospective $25 billion investment damages from torpedo income trusts are inevitable at some unknown time in the future (likely triggered by the next recession or a U.S. securities enforcement action). Its clear that the cash distribution and cash yield deceptions of income trusts will continue to occur unless strong political lobbying takes place from the seniors associations.







Fix income trust rules, says Yellow Pages
Accountants needn't dictate

Industry groups could call shots
Feb. 21, 2006. 07:52 AM
ALLAN SWIFT
CANADIAN PRESS

MONTREAL—The chief executive of Yellow Pages Group is calling for a standard set of rules governing income trusts.
Marc Tellier said yesterday there are several ways to compute the surplus cash that income trusts distribute to their investors or unit-holders.
He said the rules do not have to be imposed by accountants, such as the GAAP (Generally Accepted Accounting Principles) conventions that govern share-based companies, rules that he said can cause distortions.
Instead, the rules can be drawn up by industry associations, the way they were for real estate investment trusts, which have been around for a much longer time than the newer so-called business trusts such as Yellow Pages Group.
"We need to have a common terminology and framework for distributable cash. We don't feel that GAAP is necessarily the way to go; there are other ways to do it," Tellier said following a speech to the Canadian Club in Montreal.
He said Yellow Pages Group supports an initiative by the Canadian Association of Income Funds to establish a framework for reporting distributable cash and providing supplemental disclosure.
The income trust formula has been very popular among investors looking for a steady income, but was called into question last fall by then-federal finance minister Ralph Goodale over concerns it helps companies avoid corporate taxes.
Units plunged in value after Goodale mused that their income tax status could change.
There were estimates units lost $15 billion to $16 billion in value, mostly recovered after the Liberal government announced just before it called the election last fall that the status of income trusts would not change.
Tellier also said the federal government can play a role in defining the rules of cash distribution as well as governance regimes for income trusts to protect unit-holders the way share-holders are protected.
"Everyone would benefit if we could put an end to such uncertainties in the market," Tellier added
"The time has come to raise the bar and establish best practices for plain full disclosure on distributable cash across the income trust sector," he said at the Hilton Montreal Bonaventure Hotel.
Tellier said there could be different rules for different types of trusts. The reporting model used by Yelow Pages, the second-largest income trust in Canada after Canadian Oil Sands Trust, may not be suitable for others.
For example, oil and gas income trusts have large capital expenditure requirements that YPG does not.
"It would be myopic and naive to believe there is only one solution to this," Tellier said.
He added he welcomes a debate on the question, but he urged caution on the part of the new Conservative government which just took command in Ottawa.
"We want to see people addressing the issue of tax leakage and being responsible about it, not speculating out loud in terms of `Should we or should we not do this or that?'" Tellier said. "We need to have a dialogue so we can improve disclosure and demystify the income-trust asset class."
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Income Trusts Described as Pyramid Schemes

Postby urquhart » Mon Feb 20, 2006 1:43 pm

Pyramid income trust

Al Rosen

From the February 13-26, 2006 Issue of Canadian Business Magazine

I'm offering you a guaranteed opportunity to make a fortune. You can get in on the ground floor of an investment idea that has been so thoroughly researched I'm tempted to use the words "sure thing." I need you to give me money so that I can buy a business. The type of company is irrelevant; I'll just grab the first thing that comes along. Profitable or unprofitable, it just doesn't matter. I'm going to cook the books anyway. We're just in for a quick flip. With a little magic, we can sell it for three times what we paid.
Once we buy the business, I'll make a call to my investment banker's dedicated hotline, and with the utterance of a single phrase, I'll set in motion a spectacle not seen since, well, since the last deal they did. "Hello, yes, I've just purchased a business, and I'm thinking of turning it into an income trust."
Before the words are fully past my lips, the limo will be on its way to pick me up, with stops at the lawyers' for a thick prospectus, and then on to the PR firm to hammer out the details of the road show. We'll talk a few more specifics along the way: "No, it's not profitable. No, we don't want to retain any interest in the company. No, we won't subordinate our distributions."
Now, you might think that there's some sort of risk attached to the whole cooking-the-books part of the plan. So let me put your mind at ease. Nobody's going to jail. This is Canada, after all. We have a grey zone of regulation that rivals our Arctic tundra in both size and activity.
You see, we're going to hide our losses in plain sight. As long as they are buried on page 87 of the prospectus, everything's legal. Our friends at the investment bank will make sure the research reports on our company never mention net losses. We will focus on distributable cash, which can be any money we can get our hands on in the short term. It all counts, no matter how we borrow, beg or steal it. Oh, did I mention the bank would be giving us a bridge loan in addition to underwriting us?
Actually, forget distributable cash--it's so 2005. They've come up with an even better one recently called "free use of cash." It sounds like "free cash flow," but the best part is you don't have to actually earn it. Sure, it's a liability that has to be earned or repaid at some point, but by the time anyone figures that out we'll be sunning ourselves on a beach somewhere.
I know it sounds too good to be true, but let me run you through it. The whole premise is based on the greater fool theory. We can get future investors to ignore the fundamentals by comparing ourselves to other overvalued trusts.
The key is turning our net losses into something positive. Simply put, we will inflate our free cash flow estimates by stopping what we spend on maintaining our capital assets. Sure, this would ruin the company if we kept it up over the long term, but we only need to keep it going long enough for us to cash out.
Look, the attached table shows it all. While the moratorium on capital maintenance slowly erodes the company's assets and its earnings power, we simply give people extra cash to make up for it. OK, I admit that the extra cash wasn't earned by the company; we just borrowed it from the bank. But look at that 12% yield!
So, don't delay a moment longer. Send your confirmations of interest to the e-mail address below. And don't be afraid to just send envelopes of cash as well. If this issue fills up, I will have another one for you to invest in soon enough.
urquhart
 
Posts: 125
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Location: Mississauga

"half the business trusts will end up as fallen angels.

Postby urquhart » Thu Feb 09, 2006 9:29 am

• Thursday » February 9 » 2006

Alarm bells sound over income trusts Experts point to trouble with accounting methods being used
Ray Turchansky
Freelance
Saturday, February 04, 2006

A forum on income trust investing put on by Blackmont Capital this week was as bizarre as they come.

What figured to be a discussion on such issues as government handling of the loss of income tax revenue instead was dominated by concerns about how trust yields and distributable cash are calculated.

First Greg Guichon, managing director of Rockwater Asset Management, outlined the pros and cons of energy, real estate, infrastructure and business trusts.
Mike Lough, vice-president of TD Mutual Funds, extolled the virtues of a new income trust fund that will pay out in capital gains.

Barbara Gray, income trust analyst with Blackmont, talked about the perils of business trusts, particularly "fallen angels" that have reduced or suspended distributions.
And then came Al Rosen, who has nine designations behind his name, ranging from PhD to CFE (Certified Fraud Examiner).

Rosen, a forensic accountant with Toronto-based Rosen & Associations Limited, said many income trusts, including most business trusts, use accounting methods similar to those that caused the run-up and eventual freefall of share prices in Nortel Networks.
"My own prediction is many of the business trusts are another Nortel, about to wipe you out," Rosen told a crowd heavily populated with seniors.
"We're not as negative on oil and gas by any stretch, as we are on the business trusts and some of the REITs. Some of the REITs are greatly overpriced."

Gray was the first to raise eyebrows during the evening. She noted that the proliferation of income trusts to 243 in number and $180 billion in market capitalization was due in large part to declining Canadian interest rates during the past five years. She then predicted that "2006 will mark the end of investors' love affair with business trusts, but not income trusts in general."

During the past year, 27 of 128 business trusts cut or suspended distributions, while 60 per cent of them suffered a drop in their unit values.

Looking forward, she expects "half the business trusts will end up as fallen angels." Rosen has warned about trusts for a few years, and took some comfort that three weeks ago Standard & Poor's also cautioned about obscure and inconsistent financial reports in the sector.

"Even the initial starting point to the distributable-cash calculation is plagued with distortion and information risks that, if left unattended, will undoubtedly result in misinformed investor decisions," said S&P analysts Kevin Hibbert and Ronald Charbon.
They said a sample of 40 income trusts on the Toronto Stock Exchange had 19 different methods of generating and making cash available for distribution to unitholders.

Rosen attacked trusts on two major fronts - their published yields and balance sheets.
Seniors in particular are attracted to income trusts as an income stream because of their high distribution yields, often unaware that an income trust yield usually includes a return of capital.
"If you give me 100 bucks, and I give you back $15, it's not a yield," said Rosen. "Not every trust is doing this, there are some good ones. But at least get clear in your head what is being earned by a company, as opposed to the cash that is coming back, of which a big chunk is your own (capital)."

Of 50 trusts he studied, 18 claimed to have cash yields of more than 10 per cent, but in fact only three had income yields greater than 10 per cent.

Rosen's next major attack on trusts concerned how they calculate distributable cash. He showed how one trust includes "recovery of income taxes" -- namely the supposed tax savings that unitholders get -- as part of "net earnings."

Such accounting is allowed, after the Supreme Court of Canada in 1997 upheld a Manitoba court decision and said that "financial statements are not to be used for investing decisions if they are annual audits."

"If you have good money managers who can clue in, that's fantastic," said Rosen. "But make sure you have good money managers."

He also discussed a trust that was spun off from a company that was under creditor protection.
"What would you think of a deal where you and your spouse separate, you keep the house and your spouse gets the mortgage?"
Rosen says the accounting methods used by trusts is a much more serious issue than tax leakage, and hopes the new federal government agrees.

Ray Turchansky is a freelance writer and income tax preparer. He may be contacted at turchan@telusplanet.net
© The Edmonton Journal 2006
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Another National Post Article On Abuses in Income Trusts

Postby urquhart » Wed Feb 08, 2006 1:44 pm

It's nice to have company S&P seems to agree with me on trusts' distributable cash
Al Rosen
Financial Post
Wednesday, February 08, 2006
Someone asked me the other day how long I've been warning about the downsides of income trusts. The earliest reference I found was back in 2003 when I said that the problems with Atlas Cold Storage were just the tip of the iceberg. Since that time, dozens of income trusts have also cut their distributions because they misjudged their own distributable cash stability.
So it's nice to finally have a little company when it comes to my public views on the manipulative nature in which many incomes trusts are marketed. The only thing more surprising, perhaps, is the source of the apparent camaraderie.
On the one hand, there was Standard & Poor's recently echoing some of the issues I have been hammering away at for years. The report S&P issued essentially stated that distributable cash was easily manipulated because no financial reporting standards exist for its calculation. The obvious problem with this is that distributable cash forms the basis of valuation for many trusts.
The report from S&P seemed a little ironic given the fact that they are also the entity responsible for hoisting a perception of added credibility on to the trusts by recently including them in the S&P/TSX composite index at half their market weight (with full inclusion to follow this March).
S&P promises a sequel to its report, so I hope they address the issue of how they will adjust the reported dividend yield of the index to exclude the portion of trust distributions that represent a return of capital to investors. By my calculation, roughly one-third of cash distributions among the largest business trusts is simply a return of people's original investment principal. An inflated yield calculation for the country's flagship equity index is sure to draw the ire of international regulators -- that is, if their concerns over Canadian trusts haven't already been piqued.
The other recent warning about trusts has come rather surprisingly from the Accounting Standards Board of Canada. Just last month, they warned that investors were likely unaware of the dangers inherent in trusts whose
file:///C|/Documents%20and%20Settings/All%20Users/Do...th%20Me%20%20on%20Trusts'%20Distributable%20Cash.htm (1 of 3)2/8/2006 9:34:33 AM Print Story - canada.com network
"distributions routinely and substantially exceed reported earnings."
Incidentally, this includes a majority of the largest business trusts.
The Board went on to note that distributable cash was the "culprit" of overvaluation in the business trust market, and that GAAP reporting need not be changed (or presumably expanded to regulate distributable cash). This is where they lost me.
Indeed, it has been a bizarre twist of GAAP that has actually accelerated and promoted the adoption of distributable cash. Back in 2000, long before the trust mania could have been predicted by anyone, a consensus opinion was issued by the Emerging Issues Committee (EIC) of the standards board. Incidentally, the shortcomings of the composition and workings of the EIC were addressed in my articles from March 10 and 28 of last year.
Nevertheless, the standard they passed (called EIC-107) allowed trusts to create some very questionable future income tax liabilities, and then amortize them into income by reducing reported tax expenses.
Of course, the supposed reason for creating trusts in the first place is to avoid tax expenses. Therefore, reducing tax expenses actually produces a net tax credit in many cases.
In other words: it is not unusual to see a trust reporting pre-tax income of, say, $100-million, tax expense of negative $20-million, and net income of $120million. As such, it is not surprising that investors have openly questioned the utility of GAAP reporting for trusts, with the unfortunate result of turning blindly towards distributable cash reporting.
There's no indication yet that the rule is being considered for an update, even in light of the explosion of interest in the trusts over the past six years. This is despite the fact that a provincial accounting standards task force noted in 2004 that the application of EIC-107 simply "makes no sense."
I've explained the problem in more detail, and how to work around it, in a recent report to clients using Yellow Pages Income Fund as an example. In short, the depreciation expenses that many investors seem to be ignoring at Yellow Pages definitely deserve a second look.
Distributable cash at the company was 161% of reported net income for the first nine months of 2005. By contrast, distributable cash as a percentage of pre-tax income was actually 191% for the same period. This is very strange indeed, as you would more likely expect to see the opposite.
The basic caveat here is that although GAAP has a few problems when it comes to the accounting for trusts, a standardized approach is still miles ahead of the present distributable cash alternative.
Unfortunately some investors have chosen to ignore the income statements of the trusts, in favour of a pick-and-choose approach that mixes some GAAP figures with management's short-term cash budgeting estimates.
Everyone has been in a situation where they've had to tighten their belt for a while, and they also know that they could not have done it forever. In other words, short-term cash budgets have nothing to do with long-term earnings power, the latter of which has traditionally formed the basis for valuing investments.
© National Post 2006
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Income Trusts - Flaky Audited Canadian GAAP Tax Credits

Postby urquhart » Wed Feb 08, 2006 1:40 pm

Al and Mark Rosen have discovered another significant accounting problem in Yellow Pages Income Fund and many other income trusts. Yellow Pages is booking for the nine months ending September 31, 2005, an audited GAAP pre-tax earnings of $52 million, a tax credit of $21 million and after-tax earnings of $72 million. As you know, income trusts are not taxable, so the booking of a tax liability on the balance sheet and the amortization of this tax liability as a tax credit inflating net income is so flaky, we must conclude it is purposely deceitful. The tax liability is booked at the time the income trust conversion takes place. The assets acquired from the previous corporate structure are written up to current market value in order to better reflect their current replacement cost. The assets are written up for the balance sheet purpose, but the tax costs are left unchanged. The Canadian Accounting Standards Board and its Emerging Issues Committee have permitted income trusts to book a tax liability equal to the hypothetical tax that would be paid if the written up asset were sold at the recorded accounting value. But, income trusts do not pay tax, so the CASB's permission of a tax liability is so flaky, that it looks purposely deceitful.

When we said in our November 16, 2005 AR Report that cash distributions were on average 158% of the reported net income, we now know the net income in the denominator of this calculation has been inflated by the tax credits of Yellow Pages and other income trusts. Al Rosen and Mark Rosen have not yet released to the public their latest Accountability Research on Yellow Pages Income Fund and this Canadian GAAP tax fiasco. In the following National Post article, he gives a preview of what the AR Report concludes on Yellow Pages Income Fund:
"Distributable cash at the company was 161% of reported net income for the first nine months of 2005. By contrast, distributable cash as a percentage of pre-tax income was actually 191% for the same period."

Put another way, Yellow Pages Income Fund has a marketed cash yield of 6.1%. Its reported net income yield is about 3.8% and its actual income yield is closer to 3.2%. The deception in income trusts has now gone beyond the communication of non GAAP management statistics to improper Canadian GAAP accounting of net income. This is appalling conduct by our Canadian Accounting Standards Board and shows a breach of trust by our securities regulators in not providing oversight and enforcement on the accounting and honest marketing of yields to seniors and other income seeking investors!
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"SEC Yield" Definition Should Apply to Cdn Income

Postby urquhart » Sun Jan 22, 2006 8:18 am

The OSC and CSA's regulation of income trusts is on the wrong track. These securities regulators have published guidelines for making public disclosure on the disrepancies between audited cash flow and distributable cash. The acknowledgement of distributable cash as a relevant measure for income trusts is wrong, for the simple reason that this is not an audited Canadian GAAP financial measure.

The OSC should be banning the use of the name income trust, when cash distributions are greater than net income. The OSC should not be setting public disclosure standards for the discrepancies between distributable cash and Canadian GAAP net income and cash flow, since the OSC should be banning exclusive provision of non-Canadian GAAP disclosures. The OSC should be taking enforcement actions on the Green Sheets and Equity Research that provide cash yields, that are a combination of income yield and getting your own capital back, without any specification of this or any clearly visible earnings per unit for the buyer to make his own adjustments. The OSC should be mandating that the income mutual funds provide a Canadian GAAP-based measure of income yield for the fund as a whole. Also, the S & P/TSX Index yield should be based on a Canadian GAAP-based measure of income yield for the pool of income trusts and common shares in the index.

The U.S. "SEC Yield" may be a prototype for how income trust yields must be regulated in Canada. Income trust marketing of cash yields in the U.S. violates the principle of yield set out in the "SEC Yield" definition in the U.S. If U.S.-registered mutual funds are not adopting the "SEC Yield" definition for recording the income of Canadian income trusts and income deposit securities, this would be a U.S. securities violation.

Susan Brown in the US SEC Investment Management Division says the SEC Yield Guidelines are found in Registration Form N-1A for Investment Management Firms, Item 21 Section (4) and (5). These guidelines govern how US registered mutual funds must report yields (Canadian income trusts are mutual fund trusts in Canadian law). These SEC yield guidelines use the terms "dividends and interest earned during the period" and "undeclared earned income, calculated in accordance with generally accepted accounting principles". The Canadian income trust units are neither debt nor equity, and so the terms of interest and dividends do not apply here. However, the concept of "earned income, calculated in accordance with generally accepted accounting principles" would apply to Canadian income trusts and income-oriented mutual funds.

I would be encouraging the Canadian accounting and securities oversight agencies to be adopting at a minimum a CSA Yield Calculation Guideline with Mandatory Public Disclosure of this CSA Yield in public disclosures containing a yield statistic from income trust issuers and income-oriented mutual funds and in all related marketing materials issued by investment banks and mutual fund distributors. The CSA Yield Calculation should be a conservative measure reflecting the net income per unit according to Canadian GAAP, for each income trust as an individual entity and for income trusts owned in a fund when calculating the CSA yield of the fund.

Given Canadians' choice between income trust yields and corporation yields, it probably makes sense for the suppliers of yield information to have explicit guidelines for the reporting of after-tax yields, as well. Such after-tax yield guidelines would not permit the return of capital to be defined as tax deferred income, rather it is a component of cash distribution that is not to be included in the CSA yield calculation in the first place. A return of capital should be shown as tax exempt, with instructions for the return of capital to be deducted from the income trust unit cost base. The US SEC after-tax return guidelines are at the following SEC webpage.

http://www.sec.gov/rules/final/33-7941.htm

Examples of US Mutual Funds' Use of SEC Yield Calculations:

http://www.cohenandsteers.com/navs.asp

"†† SEC yield reflects the rate at which a fund is earning income on its current portfolio of securities. Since certain distributions received by the funds from real estate investment trusts (REITs) may consist of dividend income, return of capital and capital gains and the character of these distributions cannot be determined until after the end of the year, the SEC yield has been adjusted for the funds that invest significantly in REITs based on estimates of return of capital and capital gains."

https://wwws.tiff.org/TAS/caq/TIFF_Fund_Yields.html

"SEC Yield
To inhibit misleading advertising by mutual fund vendors pitching their wares to yield-hungry investors, the SEC has promulgated detailed guidelines that mutual fund sponsors must follow when computing and reporting their funds’ "yields." Not surprisingly, these guidelines produce yield figures that are quite conservative, which is entirely appropriate given the sad history of investors flocking to funds generating artificially inflated or unsustainably high yields. Importantly, a mutual fund’s "SEC yield" excludes all capital gains distributions, but includes (i.e., is stated net of) Fund expenses."

http://www.vankampen.com/vksite/product ... 000045.asp

"SEC yield is a calculation for determining the amount of portfolio income, excluding non-income items as prescribed by the SEC."


http://www.nuveen.com/MF/products/Overv ... dcode=NHYF

"The SEC yield is a standardized measure of the current market yield on the fund's portfolio. The Distribution Yield differs from the SEC Yield because a fund may be paying out more or less than it is earning and it may not include the effect of amortization of bonds."
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Postby admin » Sat Jan 14, 2006 2:08 am

COMMENT Off The Record


FMF mess about to get even messier



Investor complaint lobbed into lap of RCMP




BA R RY C R I T C H L E Y
Financial Post




The FMF Capital Group mess, in which distributions are suspended on a supposedly safe and conservative investment less than eight months after the issuer goes public, may be about to get a whole lot messier.


A reader — a professor from Montreal — advised yesterday he has lodged a complaint with the RCMP’s RECOL (Reporting Crime OnLine) program.


“I don’t know what will happen with my complaint but at least I did something,” said the professor, who now has about $500 to show for his original $10,000 investment. For those wishing to follow suit, the academic advised it took “many, many hours” to complete the required forms.


The academic lodged a complaint because of the way his investment has worked out. “We are talking about income trusts — stable and conservative. I was looking for an income stream. I am in my sixties. I am not looking for high-risk investments. It was presented to me as a safe and conservative investment,” he said, noting that because FMF operates entirely in the United States, BMO Nesbitt Burns should have been “extra careful.”


He has received the standard reply. “Thank you for sharing your complaint information. In accordance with your instructions your complaint information was sent to the following agency(s) for intelligence purposes: Royal Canadian Mounted Police; Internet Crime Complaint Center (United States); RCMP (Quebec) and the Integrated Market Enforcement Team.”


The professor made his investment after his broker attended a road show last March in Montreal. “BMO Nesbitt Burns [the lead underwriter] presented this deal and everybody was gung-ho,” he said, a view that was endorsed a few months later when the firm’s analyst upgraded the issue to “outperform,” he said.


While the academic awaits the outcome of his complaint, he is left to wonder about the quality of the due diligence done by BMO Nesbitt. “How can there be due diligence when [five months after the units were issued] in August everything was OK and then in November it tanked?”


This FMF investor, like others, is perplexed why there has been no formal response from BMO. “They should do something. The fiasco needs to be resolved. Someone needs to take a leadership role,” he said.


Meanwhile, the professor — a customer of Bank of Montreal for 25 years — said he has made one decision. “I will never, never in the rest of my life buy something that is recommended by BMO Nesbitt. I would trust other bankers or firms, but not them.”


A while ago, this column contrasted the dramatically different response by two large financial institutions — Manulife Financial Corp. and Bank of Montreal — to situations where clients lost a pile of dough.


Manulife responded quickly to the mess at Portus — and agreed to make its clients whole by, in effect, purchasing the forward contract — while BMO has been dead silent on what it hasn’t been doing with regard to FMF Capital, a company it took public at $10 a unit — 20 times its current price. While the bank said it did “very thorough” due diligence, FMF did collapse. BMO and a number of other parties have been named in a class-action lawsuit.


One reader, who did not want to disclose his name, commented on the contrast, particularly as it related to Manulife’s many roles. This reader, who seemed to be a dealer in Portus products, said Manulife was in a different situation because it is both a manufacturer of investments and a dealer of investments.


“Manufacturing products is much more lucrative than just operating as a dealer,” said the letter, in which the writer noted that by agreeing to make its clients whole, Manulife also garnered about $200-million in “new” assets.


The letter said the dealers don’t have such an option because “they are only dealers. At the same time, the dealer participants have been shown in less-than-positive light in the media.”


The letter-writer concluded that “Manulife did the right thing for the investors and every good businessman would have done the same in the same situation. Numbers talk and it was a business decision,” it said.


The letter-writer did not directly address the lack of action from BMO, which sourced the FMF transaction and which was the lead underwriter on the March, 2005, $197.5-million offering. (FMF is a U.S. company that Canadianized its structure to raise capital in this market. It sold income-participating securities, a product that has been trademarked by BMO.)


Many BMO shareholders argue that given FMF’s high-profile meltdown and given the class-action lawsuit, the bank should say what it intends to do. The bank’s owners would like to know whether it intends to “vigorously defend” the suit or just defend it or try to reach a settlement.


A call made to BMO yesterday seeking a comment was not returned. In the past, BMO said that “it doesn’t comment on client matters.” When the class-action law suit was filed, BMO said that it “wouldn’t comment because the matter is before the courts.”


bcritchley@nationalpost.com
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Postby admin » Sat Jan 14, 2006 12:12 am

Gerry Phillips the minister who oversees the OSC for the corrupt government of Ontario appointed OSC chair David Wilson, formerly head of a firm the regulator is supposed to regulate. Now it appears he is trying to help Bay Street cover up the Trust insider trading scam.

Progressive Conservative MPP Tim Hudak demanded during Question Period that the government take the unprecedented step of telling the province's securities regulator to investigate whether details of the dividend credit leaked from Finance Minister Ralph Goodale's office and fuelled illegal insider trading. Gerry Phillips, the minister responsible for overseeing the Ontario Securities Commission, rejected such a move, saying it would be tantamount to political interference. (G&M)
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Postby admin » Tue Jan 10, 2006 9:28 am

Conservative finance critic and MP Monte Solberg has formally asked the federal ethics commissioner to investigate the income-trust affair.

Tories ask ethics czar to probe income-trust case
Updated Sun. Jan. 8 2006 11:36 PM ET

CTV.ca News Staff

Conservative finance critic and MP Monte Solberg has formally asked the federal ethics commissioner to investigate whether Liberal cabinet members or their staff violated their obligations in the alleged income-trust leak.

"Seniors and other investors, many with only a few thousands dollars invested, have been hurt while well-connected insiders take advantage of connections to the Liberal government," Solberg said at a media briefing on Sunday.

"That's unfair. That's not right. That's an injustice that today I have asked the federal ethics commissioner, Dr. Bernard Shapiro, to investigate."

Solberg has formally asked the Shapiro to determine whether the conflict of interest code for members of the House of Commons or the conflict of interest and post-employment code for public office holders have been violated.

The Tory finance critic demanded action to protect individual investors who may have been hurt by insider trading.


"We don't know who leaked the information. We don't know who profited. What we do know is that there were clear and unmistakable spikes in trading before the markets closed on Nov. 23 -- spikes in the volume of trading that show that some investors benefited from Ralph Goodale's announcement," Solberg said.

"I call on the prime minister and I call on the government to explain this spike. Explain it to Canadians."

Solberg referred to comments made by Sandy McIntyre, a fund manager at Sentry Select Capital Corp. to the Toronto Star.

"You had large investors enjoying a substantial windfall in profits and once again the small investor got screwed," McIntyre was reported as saying. "It's pretty clear somebody leaked this thing and they should be held responsible."

The U.S. Securities and Exchange Commission (SEC) is reviewing last November's alleged income trust leak and may launch an investigation, the regulator revealed in an e-mail sent to NDP Finance Critic Judy Wasylycia-Leis last week.

Wasylycia-Leis has asked various officials to investigate a rise in income trust unit trading, that occurred just hours before a Nov. 23 tax policy announcement by Finance Minister Ralph Goodale.

Meanwhile, the RCMP has launched a criminal investigation into the alleged leak. While officials say they would normally keep such a probe confidential, Wasylycia-Leis made the RCMP's activities public.

Like the SEC, the Ontario Securities Commission is also reviewing the possible leak, but will not confirm whether it has launched an actual investigation.

Goodale has consistently denied that anyone in his office leaked information about his tax announcement before it was made.
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2006 Election Debate on Alleged Illegal Income Trust Trading

Postby urquhart » Tue Jan 10, 2006 8:03 am

Election 2006 - Debate transcripts
Tuesday, January 10, 2006 Posted at 8:34 AM EST
From Canadian Press

Excerpt on Alleged Illegal Income Trust Trading

Moderator: Thank you, Mr. Layton. Those are the opening statements. Gentlemen, as you know, we have sort of divided tonight in to four overarching themes and we're going to start with the first theme tonight which is government and ethics, and Mr. Layton, you get the first question. One of the major stories brewing over the week is the RCMP investigation into whether there was an improper leak from the government on how it would handle the issue of income trusts. You have demanded the resignation of the finance minister, Ralph Goodale. What evidence do you have, if any, that there was, in fact a leak of information?

Jack Layton: First of all, let me say that we're in a very sad time in Canadian politics because of the ethical standards that have not been set properly by the government. First we had the Gomery Commission, and now we have the income trust issue, and most recently the Options Canada story. It's time that we had a real focus on change, and that's why we have emphasized the need for new legislation and new electoral reforms so that we can sweep the Parliament clean of this ethics strategy. Now, it's not for us to show whether there's a particular scandal that the RCMP has begun to investigate. We simply noticed what happened to people's savings, and some people benefitted. We drew it to the attention of the RCMP. You know, actually, the finance minister should have done this or the prime minister, and it's sad that they chose not to do so. It shows they don't understand the concept of ministerial responsibility in parliamentary democracy. The RCMP says there's something worth looking into. We'll respect their decision.

Moderator: Mr. Harper, you've also called for the resignation of the finance minister. Do you have any evidence there was a leak?

Stephen Harper: Well, it's the RCMP that's investigating the evidence that's available, and we know what that evidence is. It's high trading on stocks, often stocks closely connected with this government in the days preceding the reversal of what was in the first place a very bad decision. This was a decision, let's forget about whether it was even a scandal, this was a decision that cost millions of ordinary people literally billions of dollars in their portfolios. It was a terrible decision. It should never have been made in the first place. And the fact was that this prime minister and this finance minister were asked repeatedly questions about the trading in the House of Commons, and they denied there was any problem and swept it under the rug. It's now the RCMP investigating, and that's the problem. It always has to get to the point of an RCMP investigation or some kind of an investigation before we get any answers. We've learned in this campaign about the RCMP investigation into the income trusts. We're hearing about investigation in Options Canada. We've got the Toronto waterfront. Mr. Martin should tell us tonight; will you tell us, Mr. Martin, how many criminal investigations are going on in your government?

Moderator: In fact, Mr. Martin, it's your turn to respond.

Paul Martin: My view of ethics in government is straightforward. It's honesty, it's integrity, but it's also telling the truth when you're, in fact, making a challenge. The income trust is an opposition allegation. That's all it is. In fact, the RCMP have said there is not a shred of proof that supports it. Obviously they're going to respond because, in fact, when they're asked to do so by a member of Parliament, they will do that. But to impugn the reputation of the minister of finance, who is one of the most honest people I know, because there has been trading which goes on all the time, I just think is fundamentally wrong. And I must say, and we may talk about this, but Mr. Harper, I can't believe it, you raise the issue of Options Canada? Options Canada was, in fact, an organization with all the federalists in Quebec, leading Conservatives were part of it it as well as Liberals and may well be NDPers. For you to raise the issue either shows you don't understand what was going on. I can tell you one thing, it was not an attack on Confederation. What it really was was meeting the PQ on their ground.

Moderator: Mr. Duceppe, can I get your response on that?

Gilles Duceppe: The least we can say was it was not very prudent or wise for Mr. Goodale to meet with investors on the morning he was to announce an important decision. The announcement of that decision and that meeting that occurred the same morning, we know what happened at the Toronto Stock Exchange. When you're in office, the question is not to be only in conflict of interest, but also that there's no appearance of conflict of interest, and in that case, obviously at least what we can say is that there's an appearance of conflict of interest. In the past, the Liberals have asked Mr. Wilson to resign because of something like that and less important that than what happened with Mr. Goodale. I think this is what Mr. Goodale has to do to respect not only his function internally but also internationally.

Moderator: OK, thanks, Mr. Duceppe. The rules now provide for a 30-second rebuttal for you, Mr. Layton, since you got the first question on this, to anything you've heard so far.

Jack Layton: Well, I'm hoping that we will hear a response from Mr. Martin because I do believe that you need to tell us whether you believe in the concept of ministerial responsibility. It's an important parliamentary concept fundamental to our democracy, and I hope that during the discussion this evening, we'll be able to hear whether (a), you believe in the concept, and (b), if you do, why you wouldn't ask a minister to step aside while an investigation is under way. Because the fact is the buck has to stop somewhere, and the question is do you understand that it needs to stop with you?
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Leaders Debate Had Whole Section on Income Trust Leak

Postby urquhart » Tue Jan 10, 2006 7:41 am

For anyone who missed the Leaders debate last night, the Globe and Mail has an audio of them. Note that Income Trust Leak was the first of six sections of the debate. I suspect that this is the first time ever that investor protection got such a high political profile. in this country.


http://www.theglobeandmail.com/

Interactive: Audio and report card
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Postby admin » Mon Jan 09, 2006 3:37 pm

Google machine Translation :-)

Jim

Official statement 88

For immediate diffusion

The business of trusts of income

"PAUL MARTIN MUST EXPLAIN IN Light of INCREASINGLY SERIOUS ALLEGATIONS WHICH ACCUMULATE EACH DAY" - Yvan Loubier Montreal,

Thursday January 5, 2006 - In front of the most recent revelations wanting that several ministers, their personnel as well as a certain number of financial brokers were informed of the plans of the Minister for Finance relating to trusts of income, the spokesman of the Québécois Block as regards Finances and candidate in Saint-Hyacinthe -- Bagot, Yvan Loubier, support that the Prime Minister Paul Martin does not have any more the choice.

Paul Martin must reveal the names of the brokers as well as ministers who had access to this privileged information. Yvan Loubier deplores that, as it is its practice, the Prime Minister chose to be ravelled up to now vis-a-vis its responsibility returning accounts to the population vis-a-vis its management of the public funds

"Paul Martin takes refuge behind the investigation of the GRC to withdraw itself from its duty to say to us which are the people within the PLC which knew about the plans of the Goodale minister.

Once again, it us rejoue the cassette of the plot to tarnish the federal government, whereas serious allegations plane on the PLC. One re-examines the same old man film in whom the liberals say to us that all is correct, that there is not to be done some, that the liberal government does not have anything to be reproached ", declared the spokesman of the Québécois Block today.

"The cat however starts already to leave the bag and, in the light of what one could learn until now, we can already note that that does not smell very good. One starts to hear names associated with this history. One speaks to us already about the Minister for the Income, John McCallum, as well as leader of the government to the Tony Valeri, House of Commons ", underlines the candidate of the Québécois Block. "It is now also known that, among the brokers met by Ralph Goodale the morning of its advertisement, there were in addition a certain Donald Black, a contributor recognized with the electoral case of Mr. Goodale and a personal friend. It is besides this same Donald Black who had been named with the head of the Company of the agricultural credit whereas Ralph Goodale was a Minister for Agriculture, in 1995 ", specifies Yvan Loubier.

"Far from me the intention at this stage to launch charges. It becomes however increasingly obvious that explanations are necessary. We have the right to know how much friends of the PLC could profit from privileged information. Paul Martin must reveal the names of the people who held this information within her organization.

Especially, it must make public the names of the brokers financial that its Minister for Finance would have met before revealing his decision on trusts of income. The Prime Minister must finally raise Ralph Goodale of his functions until the light supplements is made on this history ", Yvan Loubier concluded.

- 30 -

Source: Service presses Block Québécois Tel.: (514) 376-1887 www.blocquebecois.org Information: Person in charge for the communications for the district Jean-François Pear tree Tel.: (450) 778-4169 3730, boul. Crémazie Is, 4th stage, Montreal (Quebec) HÀ 1B4 - telephone: (514) 376-1887 - telecopier: (514) 376-5534 Authorized by the principal agente of the Québécois Block
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Agree With Donald's Suggestions Plus Some Other Ideas

Postby urquhart » Mon Jan 09, 2006 1:39 pm

I agree with your suggestions Donald and I am already on the public record asking for both elimination of self-regulation and David Wilson's resignation.


I have some other concrete suggestions that aim to make the current RCMP and National Securities Commission proposal effective in completing their mandates to protect investors. These are:

RCMP

1. Merge RCMP IMET Unit with Commercial Crime Unit

2. Raise Budget for Commercial Crime Unit

3. Allow RCMP to lay criminal charges directly without need for approval from federal or provincial crown prosecutors

Provincial Securities Commissions


1. Create a National Securities Commission, with likely separate Quebec AFM

2. Adopt separate Adjudication Tribunal from the National Securities Commission and adopt the same separation of adjudication and policing in each Province in the meantime

3. Raise budget for National Securities Commission enforcement of securities offences and other improprieties in the public interest compared to the combined provincial securities commissions' enforcement budgets

4. Adopt new legislative provisions and simplified procedures for obtaining restitution for investor losses caused by quasi-criminal and securities offences.

5. The new National Securities Commission must have accountability to the public through:

(a) its reporting to the Finance Committee of the Federal Parliament;

(b) its reporting to a new Commission for Public Complaints on White Collar Crime Enforcement Services by the National Securities Commission and the RCMP Commercial Crime Unit.

(c) it being subject to a regular enforcement audit by the Auditor General


Self-Regulators


1. Eliminate government reliance on self-regulation and enforcement in the financial services industry.
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Postby Donald » Sun Jan 08, 2006 11:02 pm

Rather than dreaming about an investor protection agency or complaining to Joe Oliver why not focus on taking back the public regulator from the industry. Force the resignation of David Wilson and have him replaced by someone who truly represents the public, someone cut from the same cloth as Al Rosen.
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