DICO placed Pace Credit Union under Administration due to governance issues | Page 3 | General financial discussion | Discussion forum

Anyone have an update? It's been about 4 months since DICO made their governance concerns public.

https://www.theglobeandmail.com/business/article-downfall-of-a-deal-making-duo/

Can someone explain the gist of the article? Doug's link not working well for me.

Koogie said
I certainly hope Peter has rules against cutting and pasting whole articles in the forum.

It violates copyright law and isn't a clever idea to allow posters to do it.  

Actually, under Canada's fair dealing rules, since this article represents less than 10% of that issue of the Globe's print newspaper, in which it originally appeared, I can share the article for educational purposes.

Nevertheless, the article itself is not being hosted on this site, so there's no issue for the site itself. And, that PDF hosting service is a free service so the article will expire within 30 days (should be more than enough time for those interested to read it). After which, it will be automatically deleted. 🙂

Cheers,
Doug

Loonie said
Can someone explain the gist of the article? Doug's link not working well for me.  

The story is long and complex, so I'm not sure I can do a sufficiently good job to summarize it, but what I can say is that all of our thoughts and suspicions, when DICO placed PACE Credit Union "under Administration" late last year, was that it was related to capital adequacy or with mismanagement in amalgamating with so many credit unions in a short period were incorrect. Essentially, it has to do with mismanagement and, possibly, illegal, non-arms length business transactions, and either inadequate internal controls over PACE's credit approval processes or the process by which the President and its CEO (two different positions, at the time) were able to override those otherwise sound credit approval processes.

It involves Larry Smith, who had been the long-time CEO of PACE Credit Union (or one of its predecessors) for more than 28 years but remained its President following his stepping down as CEO, and Phillip Smith, who was PACE's current CEO until DICO removed the pair late last year - with cause and without severance. Phillip is also Larry's son.

In 2016, the pair wanted PACE to buy Continental Currency Exchange Canada, Ltd., an Ontario-based concern with 19 branch office locations in shopping malls and retail centres in Ontario that offers currency and money exchange services, so that PACE could use that geographic footprint to expand its services. The only problem, though, was that DICO approval is required for a credit union to either (a) incorporate a new subsidiary or (b) buy more than 30% of the shares of another company. (As an interesting aside, Continental Currency Exchange Canada, you may remember, sought & won approval for a Schedule I banking license as Continental Bank of Canada, which it subsequently surrendered only a couple years later and continued again as a regular corporation, so I'm wondering now how that fits into this whole story.)

So, through a series of complicated corporate arrangements, a numbered company known as 2340938 Ontario Ltd. proposed acquiring the 45% that PACE Credit Union wasn't permitted to acquire without DICO approval, since they're limited to owning 30%. 2340938 Ontario Ltd. was originally incorporated in 2012, but had just purchased the assets of an insolvent chicken processing and rendering company known as Trayco Processing, Inc. One of the controlling shareholders of Trayco was a woman by the name of Alison Golanski, who was Larry Smith's common-law partner. (Larry Smith was, also until his ouster from PACE by DICO late last year, President of PACE Credit Union.) In 2012, the year 2340938 Ontario Ltd. was incorporated, Trayco had defaulted on a $3.5 million commercial loan payable to PACE Credit Union. According to DICO's allegations, 2340938 Ontario Ltd. won the sale process, initiated by PACE Credit Union, for Trayco's assets. However, the problem is what was the source of 2340938 Ontario Ltd's funds to buy Trayco's assets? In the court filings that the article refers to, PACE Credit Union loaned 2340938 Ontario Ltd. $3.3 million and provided a $300,000 line of credit on the rationale that the profits that 2340938 Ontario Ltd. would generate from the business would fully repay PACE Credit Union's earlier, now in default, loans to Trayco and the lending to 2340938 Ontario Ltd. In sum, DICO alleges PACE Credit Union, at the direction of its President and CEO (who are father and son), engaged in "circuitous lending."

There's a whole other side story that's related, but not essential to summarizing the key parts of the story. It involves 2340938 Ontario Ltd's sole director and officer, Joanna Whitfield, who is a real estate agent and, as the article states, exchanged flirtatious messages with Larry Smith.

After the deal to acquire the 75% interest in Continental Currency Exchange Canada, Ltd., had closed, as part of prudent KYC due diligence, a commercial relationship manager with 2340938 Ontario Ltd's other banker, Bank of Montreal, began asking questions in order to ascertain "beneficial ownership." Due to PACE's lending to 2340938 Ontario Ltd. and its minority interest in CCE (30%), the relationship manager determined effectively beneficially controlled CCE. However, Scott Penfound, CCE's CEO, and Phillip Smith, Larry's son and PACE's then CEO, tried to get the relationship manager from BMO to "soften" his language of effective beneficial control by PACE Credit Union because that would indeed illustrate to DICO that PACE had circumvented DICO's rules by acquiring more than 30% of another company without its approval.

After the CCE deal had closed, there is evidence of dividend payments to a party identified as 'JW', which DICO believes is Joanna Whitfield, that total $1.35 million. However, PACE held the same class of shares in CCE as 'JW' yet received no such dividend payments. So, DICO wants to know why not.

As DICO alleges the President and CEO father-and-son duo received improper payments, an Ontario court has now frozen the assets, which include properties in Florida, an Aston Martin, a high-end art collection, and personal watercraft and boats, of the Smiths and the court order doing so lists Frank Klees, an Ontario PC Party cabinet minister in Ernie Eves' government (remember him?) who was on PACE's board and who previously ran for the leadership alongside Ernie Eves and the late Jim Flaherty, as a co-defendant along with PACE's then-president of commercial lending, Art Hogan, and Alison Golanski (PACE's then-president's common-law partner who owned the bankrupt Trayco Processing company) as co-defendants. In its order placing PACE under Administration, DICO also removed the entire board of PACE Credit Union.

I should also add that the article notes that the Smiths and Joanna Whitfield deny the allegations, CCE's Scott Penfound declined comment or referred the matter to his lawyer, and plan to "vigorously defend themselves" should this proceed to a full legal proceeding.

Cheers,
Doug

Note: The above is a partial summary, written by me, based on the following:

Bradshaw, James. "Downfall of a deal-making duo." The Globe and Mail, 26 April 2019, https://www.theglobeandmail.com/business/article-downfall-of-a-deal-making-duo/. Accessed 27 April 2019.

Doug said

Actually, under Canada's fair dealing rules, since this article represents less than 10% of that issue of the Globe's print newspaper, in which it originally appeared, I can share the article for educational purposes.
…

That's not correct. It's up to 10% of a copyrighted work. Not 10% of the copyrighted works in a copyrighted collection of works.

An article or poem appearing in a collection of 100 articles or 100 poems does not give anyone the right to upload one of the full articles or poems to a public website.

Articles like that are worth funding. Buy a copy of the paper or pay for a month of online access. The Globe & Mail online site currently has a special $1.99/week rate (minimum four weeks). I paid for a month of online access.