Friday, January 20, 2006

BMO's Position on FMF Fiasco

Financial Post, Barry Critchley, 20 January 2006

Officially the Bank of Montreal has made no comment on the FMF Capital Group debacle, a U.S. sub-prime mortgage lender that came to Canada, raised $197.5-million from retail investors and less than eight months later suspended distributions.

The units -- which cost $10 when issued in the initial public offering via a deal led by BMO Nesbitt Burns and which never traded at issue price -- now change hands at around 60 cents.

The bank has decided that saying nothing is the best approach. It adopted "my lips are sealed" approach when FMF suspended distributions -- "we don't talk about our clients" and followed a similar line when a class-action lawsuit was filed a few weeks later. Then it said that "we can't comment given that the matter is before the courts."

But the bank -- clearly a takeover target if the new government allows bank mergers -- does take an interest in what's going on -- and what's written. A while back, a spokesperson asked this columnist whether he owned any FMF units. Given that this is a family newspaper, we skip the full reply. (For the record, journalists do have a code of investing conduct.)

But the question seems to be part of a BMO trend: Try and deflect the blame for what appears to be a monstrous lack of due diligence on its part. (The analogy isn't perfect but if a new car performed as badly as FMF, then the manufacturer's warranty would kick in.)

The bank has adopted "don't blame us'' approach in its correspondence with brokers who have written seeking answers.

In recent correspondence it said the following: "It is the responsibility of each investment advisor to review the risks of an investment and determine whether it is suitable for his or her clients."

That approach didn't sit too well with some brokers, including a former BMO Nesbitt broker.

"I find it of interest that the firm seems to be holding the brokers [its IAs] totally responsible for recommending this to clients," he said.

"How can an IA no matter how bright and experienced, be able to critically analyze each new issue over a couple of days when the corporate finance group comprising an army of specialists has been working with the corporate client for weeks and months and then promotes this to the IAs in its roadshows?" There seems to be a huge imbalance here, noted the broker.

Of course the bank has a ready answer: "BMO Nesbitt Burns and its employees conducted themselves appropriately and in accordance with applicable professional standards."

While BMO has made no public comment on the class action lawsuit, a lot has happened.

- The firm has hired Winston & Strawn, an international law firm that's home to 875 lawyers. That firm wasn't chosen at random. It acted for BMO in its successful defence of a Bre-X class action lawsuit filed in the U.S. In turn, W&S has hired a Michigan litigation firm of Young & Susser.

- The six underwriters on the FMF issue are divided into two camps. Four firms have opted to use Winston & Strawn while two -- Canaccord Capital and Blackmont Capital -- have retained Foley & Lardner.

- BDO Seidman, FMF's auditor, has hired Dickinson Wright, a Detroit-based law firm. BMOs approach of late stands in contrast to what it said when FMF closed its deal.

Back then it said the following: "Ultimately investors were attracted to FMF Capital's strong and predictable revenue and cash flow, a compelling strategy for future growth and a dynamic and committed management team with a proven track record of success."

And for good measure the bank added that "we were delighted to lead this successful offering for FMF Capital, the first financial services company to go public through a cross-border income-participating securities transaction."

BMO and Manulife BMO's approach is in contrast to what Manulife did last year when it faced a situation with some of its clients who bought Portus hedge funds. With chief executive Dominic D'Allesandro calling the shots, the insurer decided to make its clients whole. The result: The matter has been settled.

Manulife's action and BMO's non-actions came up in a recent conversation with a senior Manulife executive. This executive opined that if a lawyer gave D'Alessandro the same view that is being given to Comper, "he wouldn't be working here anymore. Dominic would have told him that he was fired."