FSCO erred in law, thereby granting Ontario Teachers’ with zebra mussel status

Anyone who resides around the Great Lakes will know the major pest that zebra mussels represent to this freshwater marine ecosystem.

Zebra mussels were introduced by humans to the Great Lakes through the bilge water effluent of cargo ships and soon took over the entire ecosystem by consuming virtually all the available nutrients, thereby vastly reducing its biodiversity and threatening its very existence.

Evidently the Ontario pension regulatory body known as FSCO thinks this is a desirable outcome in the context of the pension plans it regulates, such as Ontario Teacher’s Pension Plan.

In its bid to acquire 51.6% of BCE, Ontario Teachers’ came up with a novel structure involving Morgan McCague whose sole purpose and crude contrivance is to circumvent the following rule:

“the administration of a plan shall not, directly or indirectly, invest the moneys of the plan in the securities of a corporation to which are attached more than 30% of the votes that may be cast to elect the directors of the corporation”.

Wisely the CRTC would have no part of such a deliberate attempt to circumvent, directly or indirectly, the rules that govern Ontario Teachers which are diametrically opposed to the requirement that BCE be Canadian controlled, given all of Teachers’ partners in this proposed deal are non-Canadian. As such Konrad von Finckenstein suspended the public hearings on February 26, 2008 and reconvened them for March 11, 2008 and asked Teachers’ to bring proof in the form of a letter from FSCO, that Teachers’ had not violated its own regulations.

Even though he had been in possession of the letter on March 10, 2008, this was the reaction of the CRTC Chairman at the public hearings on March 11, 2008 upon informing that audience that FSCO had ruled in Teachers’ favour:

“I must say I am astounded. The interpretation that FSCO puts on these things is not the one that either I as a lawyer or former judge would put on that legislation and regulation.”

I think this is the reaction and conclusion that 100 people of 100 would ascribe to such a ruling. Teachers’ then went on attempting to plead confidentiality for this FSCO letter and asked that it not be made part of the public record. The reasons for this are obvious upon reading the letter. The CRTC Chairman wisely rebuffed that attempt at subterfuge.

Highlights of the letter include the following qualifications in the conclusions:

"In providing the comfort that this letter may give you, I point out the following:

No judicial or tribunal decisions interpreting the meaning of section 11(1) of Schedule III of the Pension Investment Regulations have been brought to my attention. The conclusion I have reached is based on the plain meaning of the words in section 11(1) of Schedule III of the Pension Investment Regulations, without the benefit of judicial interpretation.

The extent of the inquiries made into and analysis of this complex deal are necessarily limited by the time limits I was asked to abide by.

FSCO does not have authority to, and does not issue advance rulings; this letter is not a decision, consent, order or approval made under the Pension Benefits Act."

So what does nay of this mean? How is it plausible that federal pension regulations that make it abundantly clear that Ontario Teachers is not meant to be the zebra mussel equivalent in the capital markets and is to own no greater that 30% of a given corporation, and then FSCO renders its judgment of acquiescence that permits it to own 51.6%?

To make the zebra mussel analogy even more applicable, Teachers’ is going about this exercise by way of a leverage buyout. It and its US partners are acquiring all of BCE for $8 billion. They are vacuuming up $32 billion of equity investment by long standing “widows and orphans” type investors with a mere $8 billion in capital. They have puffed themselves up by a factor of 400% in order to displace average investors in what was previously Canada’s most widely held public company.

They achieve this through a means that is also analogous to the zebra mussel and that is by getting BCE to devalue itself so that it’s only worth $8 billion by taking on $32 billion in new debt, on top of the $12 billion of existing debt, thereby desytoying the credit worthiness of the company and the paper held by existing bondholders. Meanwhile the company itself is burdened with this massive debt load, which will only render it less competitive and the costs of its essential services will rise. The Canadian government will forego $800 million to $1 billion in annual taxes, enough to fully fund the RESP program.

It’s impossible to find something in this deal to like. Meanwhile FSCO’s ruling thingy has opened the floodgates of pension plan zebra mussels into the Canadian Capital Markets. Only 25% of Canadians belong to pensions. So why should pensions be able to blow through this 30% rule imposed by federal regulation? Pension plans administrators are meant to be participants in the capital markets, not the controlling elements of capital markets.

Even Teachers’ themselves acknowledged that they aren’t equipped to play such a role, upon stating:

“Teachers’ is not the expert when it comes to operations, and our two US partners have appropriate experience as savvy telecom investors” Teachers’ former President and CEO, Claude Lamoureaux

“We bring the money, but our partners, Providence and Madison Dearborn are experts in this field” Teachers’ current President and CEO, Jim Leech

Enough already, play by the rules, The FSCO letter is technically offensive and in no way complies with the intent of the legislation. Why the CRTC found it acceptable (or have they?) is beyond me, since as a non lawyer and non judge:

“I too am astounded”.