Shareholders to get a fraction of losses
Feb. 9, 2006. 01:00 AM
DANA FLAVELLE AND MADHAVI ACHARYA-TOM YEW
BUSINESS REPORTERS
At first, James Markis was ecstatic when he heard yesterday that Nortel Networks Corp. had agreed to settle two class-action lawsuits for $2.4 billion (U.S.). But on closer inspection, no one knows just how much money the Bolton computer consultant and thousands of other Nortel shareholders will recover on their soured investments.
Indeed, some observers say they'll be lucky to get back a fraction of what they lost.
Markis, 51, says he lost $104,000 (Canadian) that was left to him by his grandfather, and he spent many sleepless nights worrying about holding onto his home and inheritance. Despite the settlement, Markis won't be getting anywhere near what he'd hoped for.
"It's not fair when so much damage was done on such a massive scale," he said yesterday after Nortel announced the landmark settlement, one of the biggest in North American corporate history.
Shareholders like Markis were wondering yesterday just how much they'll see.
Once legal fees are subtracted, many investors will be lucky to get 10 to 15 cents on the dollar, according to Stan Buell, head of the Small Investor Protection Fund in Markham.
Markis is just one of thousands of Canadians who owned Nortel stock either directly, or indirectly through mutual funds, or who were exposed through their workplace pension plan's investment portfolio.
The tentative agreement announced yesterday — Nortel admitted no wrongdoing — was negotiated in New York by law firms representing two major Canadian pension funds.
But it could end up covering all U.S. and Canadian investors who held Nortel shares during the relevant time period, if the deal is extended to cover all other claimants, as expected.
The proposed settlement consists of $575 million (U.S.) in cash and the rest in Nortel stock. It settles two separate class-action suits launched on behalf of the Ontario Teachers' Pension Plan Board and Ontario Public Service Employees Union, covering two distinct time periods.
"What's significant is you've got a large Canadian institutional shareholder that is showing leadership in regards to shareholder rights and holding companies accountable for their conduct," said Murray Gold, a lawyer with Koskie Minsky, which represented OPSEU.
That's small comfort to average investors like Markis, who watched their shares tank as some executives took home fat paycheques. It could be months before investors see any payback and the final amounts could be insignificant compared to their losses, experts say.
Nortel shares, which hit more than $120 (Canadian) during the dotcom bubble in 2000 and at one point represented 35 per cent of the Toronto Stock Exchange's composite index, now trade for less than $4 apiece.
No one could say for sure yesterday how much investors will get from the proposed settlement. Legal fees could eat up much of the cash portion, said forensic accountant Al Rosen of Rosen & Associates Ltd. in Toronto.
The amounts available for distribution will also depend on how much Nortel recovers from its insurers and whether it is successful in litigation against former executives, the company said in a statement.
History shows investors usually see very little, Rosen said. "It will be less than the shell of one peanut."
A scandal involving allegations of market timing by certain Canadian mutual funds resulted in a $205.6 million settlement. The average payout to an investor was $25.
Some major institutional investors were questioning the wisdom of launching such lawsuits, especially when the company issues new shares as part of the payout. Under the Nortel deal, the more than 628 million shares to be issued will represent 14.5 per cent of the company's stock, potentially depressing its price.
"I think these class-action lawsuits, where shareholders are suing themselves, are a great fraud against investors and benefit nobody but lawyers," said Bill Holland, chief executive officer of CI Financial Inc. "Who's paying it? It's not the management. The absurdity of it is truly mind-boggling."
The impact on mutual funds that held Nortel shares is likely to be minimal, Holland added. "It's certainly not going to have any meaningful impact on mutual fund values."
OPSEU lawyer Gold said it was too early to say how much money the investors would recover, adding the impact would not be "material." The pension fund lost $30 million on Nortel but had $10 billion (U.S.) in total investments. "The loss was not a material loss for them. It does not affect the security of people's benefits at all."
Canadian lawyer Joel Rochon, whose clients include Markis, said the deal is the best that investors could hope to get given Nortel's relatively fragile financial state. The deal is conditional on being accepted by all who are suing the company.
"While I sympathize with Mr. Markis's disappointment, if the case had gone to trial and the full value been realized, it would have bankrupt Nortel," said Rochon, of the law firm Rochon Genova LLP. "I think a fine balance was sought to extract a settlement that was fair to shareholders without crippling Nortel."
The settlement also removes a cloud over Nortel that could help boost the stock, Rochon added.
The fact the two Canadian pension funds are willing to accept Nortel shares as part of the settlement is a vote of confidence in the company, added Richard Powers, business law professor at the University of Toronto's Rotman School of Management.
"I think it's going to send a very positive message to the investment community," Powers said.
But investors like Markis were hoping for more. The class-action lawsuit he joined was aiming for 100 per cent recovery plus 30 per cent in punitive damages, Markis said.
That seemed only fair to Markis given that he had bought all of his shares based on financial statements that were later restated.
"The fundamentals and outlook for the company were phenomenal. I invested it all. Much to my horror they had to restate their financials. I was devastated," said Markis.
The proposed settlement applies to investors who held Nortel shares between Oct. 24, 2000, and Feb. 15, 2001, and between April 24, 2003, and April 27, 2004.
If approved by the court, the $2.4 billion in cash and stock would be shared among all investors who register to be included in the deal. Shareholders who don't like the settlement deal can opt out to pursue their legal claims on their own.
Investors may be placed in different classes depending on when they purchased their shares or how long they held on to them.
It's difficult to say how mutual funds will be handled, said Ralf Hensel, lawyer for the Investment Funds Institute of Canada.
Fund companies would likely add their portion of the settlement to the overall fund rather than try to compensate individual unit holders, he said.
"It would become very complicated because people come and go in the fund," Hensel said. |
