Neiman Marcus creditor questions whether MyTheresa shuffle triggered default

A creditor of Neiman Marcus Group Ltd. is questioning whether the struggling retailer defaulted on its debt by shuffling one of its most promising units beyond the reach of creditors.

Marble Ridge Capital LP said Friday in a statement that Neiman Marcus’ recent transfer of its MyTheresa unit was improper, and may have violated terms of company debt that the New York-based fund holds. Marble Ridge said it sent a Sept. 18 letter to the board demanding the rationale behind the transfer of MyTheresa, the German online luxury retailer, to Neiman Marcus’s corporate parent, a change that could block creditors from making any claims on the unit.

The switch lets Neiman Marcus’s owners, Ares Management LP and Canada Pension Plan Investment Board, “usurp this massive benefit” for no consideration to the company, Marble Ridge said. What’s more, Neiman Marcus was either insolvent at the time of the transfer or was made insolvent by the deal, said the fund, a distressed-debt investor that says it owns 8.75 per cent senior notes and term loans.

“MyTheresa was already an unrestricted, non-guarantor subsidiary not part of our lenders’ collateral and it will remain outside of the collateral,” a representative from Neiman said in a statement to Bloomberg. “This reorganization was expressly permitted by the company’s credit documents.” Representatives for Ares and CPPIB didn’t have an immediate comment on the letter.

Asset Disputes

Neiman Marcus is the latest retailer to ignite controversy over whether such transfers unfairly deprive creditors of claims on assets if a borrower needs to restructure. The dispute could presage a lawsuit over so-called fraudulent conveyance, in which a troubled company purposely moves healthy units beyond the reach of lenders ahead of a reorganization.

Neiman Marcus’ US$4.7 billion in debt gives it a 10 times leverage multiple, far in excess of its peers, Marble Ridge said in its letter. Much of it sells for 70 cents on the dollar or less.

The allegations echo complaints against retailers including PetSmart Inc. and J. Crew Group Inc., who made changes to their capital structures in a way that complicated restructuring talks.

“These recent actions threaten the viability of a storied franchise that includes marquee brands such as Neiman Marcus and Bergdorf Goodman,” Dan Kamensky, managing partner of Marble Ridge, said in the statement.

CIBC faces proposed class action lawsuit over trailing commissions

TORONTO — A class action lawsuit regarding trailing commissions paid to discount brokers on CIBC mutual funds has been proposed against the Canadian Imperial Bank of Commerce and CIBC Trust Corp.

The lawsuit alleges investors who hold the mutual funds in discount brokerages receive no value for the trailing commissions paid.

The allegations have not been proven in court.

The case filed by Siskinds LLP and Bates Barristers PC seeks compensation for those investors.

Siskinds and Bates Barristers have filed two other similar cases related to trailing commissions on mutual funds sold through the discount brokerage channel.

The firms have proposed a class action case against Scotiabank’s 1832 Asset Management LP as well as another against TD Asset Management Inc., the trustee and manager of TD mutual funds.


Danske Bank boss resigns after probe into $234 billion in ’suspicious’ transactions through its Estonian branch

COPENHAGEN — Danske Bank’s chief executive Thomas Borgen quit on Wednesday following an investigation into payments totalling some 200 billion euros (US$234 billion) through its Estonian branch, many of which the Danish bank said were suspicious.

“It is clear that Danske Bank has failed to live up to its responsibility in the case of possible money laundering in Estonia. I deeply regret this,” Borgen said in a statement which detailed failings in compliance, communication and controls.

Thomas Borgen, chief executive officer of Danske Bank

Regulators and the financial community will scrutinize the Danske Bank report, which follows calls by Brussels for a new European Union watchdog to crack down on financial crime following a series of major money laundering scandals.

Danske Bank said its investigation had concluded that Borgen, Chairman Ole Andersen and the board of directors “did not breach their legal obligations towards Danske Bank,” adding that it had taken action against some staff.

“We have taken a number of measures against current and former employees … in the form, among other things, of warnings, dismissals, loss of bonus payments and reporting to the authorities,” it added.

Danske Bank’s report, which covered around 15,000 customers and 9.5 million payments for the period 2007-2015, said that some 6,200 customers had been examined.

“Overall, we expect a significant part of the payments to be suspicious,” Danske said in a statement.

Dutch bank ING this month admitted criminals had been able to launder money through its accounts and agreed to pay 775 million euros (US$900 million) to settle the case.

A third of Danske Bank’s stock market value has been wiped out in the last six months, driven by concerns over a possible inquiry by U.S. authorities and the penalties this could entail.

“Crucially, Danske say there have been ‘no findings of sanctions violations, which is a relief given concerns of an investigation by the U.S. Office of Foreign Assets Control (OFAC),” analysts at brokerage Jefferies said in a note.

U.S. authorities earlier this year accused Latvia’s ABLV of covering up money laundering and the bank was promptly denied U.S. dollar funding, leading to its collapse.

While Danske does not have a banking licence in the United States, banning U.S. correspondent banks from dealing with it would amount to shutting it out of the global financial network.

Whistleblower Ignored

While Danske said it was not able to provide an accurate estimate of the suspicious transactions through its Estonian branch, it said the non-resident portfolio included customers from Russia, Azerbeijan, Ukraine and other ex-Soviet states.

The report found that the bank failed to take proper action in 2007 when it was criticized by the Estonian regulator and received information from its Danish counterpart that pointed to “criminal activity in its pure form, including money laundering” estimated at “billions of roubles monthly.”

When a whistleblower raised problems at the Estonian branch in early 2014 the allegations were not properly investigated and were not shared with the board, Danske said.

And while it took measures to get its Estonian business under control in 2014, these were insufficient.

Danske Bank also said it had decided not to migrate its Baltic banking activities onto its IT platform, because it would have been too expensive. As a result the Estonian branch did not employ Danske’s anti-money laundering procedures.

The bank, whose shares fell by early 8 per cent following the release of the report, also lowered its expectations for annual net profit to 16-17 billion Danish crowns, from a previous range of 18-20 billion.

© Thomson Reuters 2018

10 things people still get wrong about the Financial Crisis

One of the most intriguing aspects of the 2007-09 financial crisis is how little understanding there is of what actually occurred. Some of this has to do with the complexities of the event, as well as how hard it is to identify forces lurking below the surface that had built up over the years.

Even a decade later, many people still cling to false ideas about the underlying causes (there wasn’t just one, folks!) of the crisis. What follows are my 10 favorite flawed memes, misunderstandings and just outright falsehoods about the financial crisis and its aftermath:


A financial news update in Canary Wharf on September 15, 2008 in London, England.

No. 1. Lehman’s collapse caused the crisis: “If only we had saved Lehman Brothers, we could have avoided the crisis,” goes a popular lament. This reflects a fundamental misunderstanding of the scale of the dislocations. To accept this premise — former Lehman employees are some of the loudest apostles of this theory — then one has to pretend an entire universe of other issues didn’t exist.

Lehman, like Bear Stearns before it, suffered from many of the same issues that afflicted most of the U.S.’s other big banks and brokers: too much junk paper, too much leverage, too little capital and deficient risk controls. Lehman was simply among the most overleveraged and undercapitalized of the lot.

No. 2. If not for X, we would have been OK: Take your pick of things to insert here, but it’s important to understand that this was not a single event, but rather the result of many factors that came together over time. These include: the Federal Reserve’s ultralow interest rates, a fundamentally weak recovery from the dot-com collapse, the housing boom and bust, huge amounts of financial leverage, securitization of mortgages, the embrace of derivatives and reckless deregulation of the financial industry that enabled much of the above, and more.
No. 3. Repeal of Glass-Steagall: The argument is that in the decades after Glass-Steagall was enacted during the Great Depression, Wall Street crises were confined to Wall Street and didn’t spill onto Main Street. See as examples the 1987 stock-market crash or the Mexican peso crisis of 1994. But the causative issue we run into to is the but-for test. Would we have had a crisis if Glass-Steagall were still in place? I don’t see how we can make that claim. Perhaps had Glass-Steagall not been repealed, the crisis might have been smaller, but it is very hard to say it wouldn’t have occurred anyway.

People rally in the financial district against the proposed government buyout of financial firms September 25, 2008 in New York City.

No. 4. Bailouts were the only option: There were many other options, but they would have been very painful and required considerable foresight. I believed then (and still believe) that the best course of action would have been prepackaged bankruptcies for all the insolvent institutions instead of bailouts. I would have had the federal government provide debtor-in-possession financing, allowed qualified private institutional investors to bid on the assets thereby letting markets set the valuations, with the government picking up the rest. It would have been more difficult in the short term, but the economy would have rebounded much sooner.

No. 5. Taxpayers were repaid in full and even made a profit: There are two major issues with this claim: The first is that the Troubled Asset Relief Program and most other loans and bailouts were all (or almost all) repaid. But to make that happen, the federal government in a move questioned by tax experts allowed failed American International Group to carry forward the net operating losses for use to offset future earnings; this was a stealth bailout worth tens of billions of dollars that didn’t appear to “cost” anything. Meanwhile the Federal Reserve kept rates at zero for almost a decade. This resulted in a huge transfer from savers to bailed-out lenders.

The federal government also took a huge amount of risk during a period when financial markets tripled. And that is before we account for all of the collateral losses and moral hazards we created.

No. 6. No one went to jail because stupidity isn’t a crime: This one is laugher, from the behavior of the executives at Lehman Brothers to all of the foreclosure fraud that took place. Jesse Eisinger, author of “The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives,” explained how the white-collar defence bar successfully lobbied and undercut the Department of Justice during the years before the crisis. You can’t convict a criminal if you don’t have the personnel, intellectual firepower or stomach to prosecute in the first place.

An abandoned home stands behind a padlocked gate April 29, 2008 in Stockton, California.

No. 7. Borrowers were as blameworthy as lenders: First, we know that for huge swaths of the banking industry, the basis for lending changed in the run-up to the crisis. For most of financial history, credit was granted based on the borrower’s ability to repay. In the years before the crisis, the incentive to lend shifted: It was based not on the likelihood of repayment but on whether a loan could be sold to someone else, often a securities firm, which would repackage the loan with other loans to create a mortgage-backed security. Selling 30-year mortgages with a 90-day warranty changes the calculus for who qualifies: just find a warm body that will make the first three payments; after that it’s someone else’s problem.

Second, we know that if you offer people free money, they will take it. This is among the reasons we have banking regulations in the first place. We expect the banking professionals to understand risk better than the unwashed masses.

No. 8. Poor people caused the crisis: This is another intellectually dishonest claim. If any U.S. legislation such as the Community Reinvestment Act was the actual cause of the crisis, then the boom and bust wouldn’t have been global. Second, if poor people and these policies were the cause, then the crisis would have been centered in South Philadelphia; Harlem, New York; Oakland, California; and Atlanta instead of the burgeoning suburbs of Las Vegas, Southern California, Florida and Arizona. The folks making this argument seem to have questionable motivations.

No. 9. The Fed made a mistake by stepping in when Congress refused: Congress is the governmental entity that should have done more in response to the crisis. But it didn’t, and all of those members who opposed efforts to repair the economy and financial system should have been thrown out of office. The Fed gave cover to Congress, creating congressional moral hazard and allowing it to shirk its responsibilities. We don’t know how the world would have looked if that hadn’t happened, but I imagine it would be significantly different than it does today — and not necessarily better.

No. 10. Lehman could have been saved: This is perhaps the most delusional of all the claims. Lehman was insolvent. We know this from an accounting sleight-of-hand it performed called Repo 105, in which it which “sold” US$50 billion in holdings to an entity it owned, booked a profit just before quarterly earnings, then repurchased the holdings. The sleuthing done by hedge-fund manager David Einhorn reached the same conclusion about Lehman’s solvency long before the collapse; the Fed itself also made clear that it couldn’t take on Lehman’s losses.

When people stubbornly refuse to acknowledge facts, when they insist on staying married to their own faulty belief system, it becomes very challenging to respond with sound policies. As a society, the sooner we reckon with reality, the sooner we can begin to avoid disasters like the financial crisis.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Barry Ritholtz is a Bloomberg Opinion columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He is the author of “Bailout Nation.”

What the financial crisis should have taught us: A look at the collapse that changed the world

Ten years ago, on Sept.15, 2008, Lehman Brothers declared bankruptcy. At the time, it was the fourth-largest investment bank in the United States. That made its bankruptcy by far the largest in history, and its demise sent shock waves not only through the global financial industry, but the real global economy as well.

Before Lehman brothers, it seemed reasonable to think that recessionary forces could be contained. Lehman’s collapse made it painfully clear that was not true. Financial Post columnist Joe Chidley looks back at the source and fallout of the biggest financial crisis of our generation.

Possible expansion of OBSI’s role in investigating complaints set off alarm bells in financial industry: filing

Bank of Nova Scotia’s announcement this week that it will stop using a not-for-profit watchdog to investigate the most stubborn of customer complaints came after the watchdog prompted concern in the financial industry by proposing changes to the document outlining its purpose and powers that some felt could give it more teeth, public consultation documents show.

The decision by Scotiabank to move on from the Ombudsman for Banking Services and Investments’ oversight will leave OBSI with just two of Canada’s Big Five lenders under its purview for banking–related complaints, underscoring a situation that the watchdog claims is unfair for consumers.

The move comes after OBSI published a proposed update this spring to its terms of reference, which lay out matters such as how the ombudsman is governed, in addition to describing how the organization receives and investigates complaints.

But a few of those changes floated by OBSI set off alarm bells for some in the financial industry.

One comment on the document came from the Investment Industry Association of Canada, which represents 120 investment dealers, including those of the big banks.

Among the reservations voiced by the IIAC in its May 31 submission was an amendment proposed for the definition of “complaint,” which would see it include “issues identified by OBSI in the course of its investigation whether such issues are raised by the Complainant or not.”

The IIAC recommended the phrase “whether such issues are raised by the Complainant or not” should be removed from the document.

“We believe this expands the role of OBSI to becoming an investor advocate rather than an impartial complaint resolution body,” the IIAC said in its public submission. “It also creates procedural unfairness, as it introduces a new complaint into the process that the firm would not have had an opportunity to deal with internally.”

Ian Russell, president and CEO of The Investment Industry Association of Canada.

According to the Bank Act, lenders must have an external ombudsman to handle customer complaints that have not been resolved to the consumer’s satisfaction by the banks’ internal systems. It does not, however, specify which external ombudsman should be used.

A spokesperson for the IIAC noted its members are required to use OBSI as part of their dispute resolution process.

Another submission, made by an executive of a Sun Life Financial Inc. subsidiary, took issue with the word “exclusively” in a section stating, “All questions of whether a Complaint falls within OBSI’s mandate will be determined exclusively by OBSI.”

“It would appear that this change creates broad discretion,” the Sun Life letter said.

Scotiabank said its move away from OBSI followed a review of the bank’s dispute resolution process, and added that the changeover would take place at the end of its current contract period. The lender will also continue using OBSI for investment-related complaints.

“While this decision was not made lightly, we believe that our customers will benefit from a more streamlined resolution process, including faster response times,” the bank’s statement said.

Scotiabank said its move away from OBSI followed a review of the bank’s dispute resolution process.

Asked if Scotiabank’s decision to stop using OBSI for banking-related complaints had anything to do with the proposed changes to the group’s terms of reference, a spokesperson for the bank said Wednesday that they had nothing further to add to their initial statement.

OBSI, meanwhile, says it is still reviewing feedback it received on the proposed changes to its guidelines.

Even so, an OBSI spokesperson did say the proposed definition of “complaint” was in line with the group’s “longstanding practice,” which it claims is consistent with what other such bodies do around the world. The spokesperson also noted consumers often have trouble nailing down the facts and issues tied to a complaint.

OBSI “infrequently” uncovers issues that were not previously identified, the spokesperson said, but when it does, it investigates. The firm involved is then given a chance to respond to an issue and may also be given an opportunity to investigate as well.

“If a Participating Firm came across a previously unidentified potential issue in a complainant’s accounts, we assume the Participating Firm would take steps to investigate and, if a problem is found, rectify it,” said OBSI spokesperson Mark Wright in an email. “Similarly, it would not be right for OBSI to identify a potential problem during its investigation and ignore it.”

Scotiabank is now the third of Canada’s Big Five banks to stop using OBSI for banking-related complaints, such as issues around credit cards and mortgages.

RBC and TD opted out in 2008 and 2011, respectively. The two banks chose instead, as Scotiabank is doing, to use ADR Chambers Banking Ombuds Office, a private company.

“We look forward to serving as the external complaints body for the customers of Scotiabank,” said Britt Parsons, banking ombudsman for the ADR Chambers Banking Ombuds Office, in an email. “ADRBO operates independently from the participating banks and is guided by principles of Accessibility, Impartiality, Independence, Integrity, and Accountability. The services of ADRBO are free of charge to those making a complaint.”

Like Scotiabank, however, RBC and TD continue to use OBSI for investment-related issues.

The chief executive of CIBC said Tuesday that he was not planning any changes when it comes to OBSI.

Asked if it was a problem that banks can opt for a different ombudsman, CIBC CEO Victor Dodig told reporters that “the more commonality you have in a system, the better, on some of these factors.”

“I can’t really comment on others’ decisions,” Dodig said. “I know where we are, and we’re fine.”

Bank of Montreal, the other remaining major bank under OBSI’s umbrella, declined to comment.

OBSI ombudsman and chief executive Sarah Bradley.

The head of OBSI said in an interview with the Financial Post this week that the current moment marks “a bit of a tipping point.”

“We’re facing a real problem for consumer protection in the banking sector,” said Sarah Bradley, the ombudsman and chief executive of OBSI. “By this fall, around 70 per cent of Canadians are not going to have access to a non-profit, public-service-oriented ombudsman to help if they’ve got a problem with the banks that they can’t solve for themselves.”

Bradley said the current system “creates an inherent conflict of interest, by letting banks choose their own investigator and forcing the dispute resolution services to compete for banks’ businesses.”

“It’s not fair for Canadian consumers and it’s not in their interest,” she said.

CARP, the former Canadian Association for Retired Persons, also called for a single banking ombudsman.

That there is one ombudsman for investment services (OBSI) and two for banking services “makes no sense,” said Wanda Morris, CARP’s chief advocacy and engagement officer, in a release.

Both Bradley and CARP suggested that Ottawa needs to take action.

A spokesperson for the Department of Finance Canada said in an email that the federal government “takes the protection of financial consumers very seriously.”

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Canada’s market watchdogs propose ban on some embedded commissions

TORONTO — The Canadian Securities Administrators has proposed changes that would prohibit certain embedded commissions paid to dealers in a bid to address investor protection concerns.

The umbrella organization of the country’s provincial securities regulators has published a notice with its proposal, which includes banning investment fund managers from paying up-front sales commissions to dealers.

The CSA has also proposed a ban on trailing commissions to certain dealers who do not make a suitability determination, such as those that only offer trade execution.

The umbrella organization says the changes will eliminate a compensation conflict inherent in the deferred sales charge option — a fee to be paid by the investor if the investment is redeemed prior to a set amount of time — which has been criticized.

The CSA says prohibiting the upfront sales commission payments will eliminate the need for charging these redemption fees.

The notice with the proposed amendments will be open for public consultations until Dec. 13.

CIBC’s $1-billion gender bond paves the way for more socially responsible debt

Canadian Imperial Bank of Commerce broke ground with that nation’s first bond sale that will advance gender diversity in the corporate world.

The bank on Wednesday sold $1 billion (US$769 million) of three-year deposit notes, which will support lending to companies committed to promoting women to executive positions.

“The framework we have created could work for any issuer, any bank, and by no means will we keep that quiet,” Susan Rimmer, a managing director and head of global corporate banking for CIBC Capital Markets, said in an interview.

Bond issuers in Canada have become prominent in financing socially or environmentally friendly causes since 2016. The City of Vancouver is the latest entrant to the market, selling $85 million of green bonds this week. Canada Pension Plan Investment Board in June become the world’s first pension fund to sell a green bond.

“We expect more large Canadian institutions will develop ESG-friendly bond frameworks to offer alongside traditional bonds,” Kris Somers, a credit analyst at BMO Capital Markets, wrote in a note, in reference to investments that comply with environmental, social and governance criteria. “Recognition of such programs also telegraphs that a company is serious about these issues.”

CIBC’s bonds will support the bank’s corporate lending to companies where women make up at least 30 per cent of top executives or board members, or who are signatories of the Catalyst Accord 2022, a movement that aims to advance women in business.

The notes attracted 79 buyers, which is a number “towards the higher end of the range” in a typical sale of deposit notes by CIBC, according to Amber Choudhry, a managing director for debt capital markets at the bank. The yield of 72 basis points above similar-maturity federal government bonds, which was the tight end of initial guidance, was in line with where CIBC would price a plain vanilla deposit note, she said.