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CIBC Ordered to Pay Millions in Bond Deal Deception Case

Money management firms say investment bank hid information. CIBC plans to appeal.

September 09, 2003|Kathy M. Kristof | Times Staff Writer

A Los Angeles jury ordered CIBC World Markets Corp. on Monday to pay almost $52 million to three money management firms that had accused the investment bank of deceiving them in a 1997 deal.

The money management firms, Oaktree Capital Management and TCW Group Inc., both of Los Angeles, and Pacholder Associates Inc., a mutual fund company based in Ohio, charged that CIBC hid damaging information when selling $200 million in bonds issued by now-defunct Renaissance Cosmetics.

The verdict, handed down by a Los Angeles County Superior Court jury, was for the exact amount that the money managers, which operated funds that invested in high-yield bonds, said they had lost when Stamford, Conn.-based Renaissance filed for bankruptcy protection in 1999.

"I think the award shows that juries have become a lot more hostile to anybody who they believe has played fast and loose with the facts," said Alan Bromberg, a law professor at Southern Methodist University in Dallas.

The accounting and securities scandals of the last three years weigh heavily on the minds of the people sitting in the jury box, who probably are smarting from losses in their own portfolios that they partially attribute to crooked dealing, Bromberg added. "If they agree with the plaintiffs," he said, "I think they're going to hit pretty hard."

Attorneys for the money management firms, which invest the assets of charities and of public pension funds for teachers and firefighters, said the award would restore at least a portion of these investors' losses. Although the award was for the full amount of principal that the funds said they had lost, it did not provide for punitive damages, interest or attorneys' fees.

CIBC, a subsidiary of Toronto-based Canadian Imperial Bank of Commerce, said it planned to appeal.

"We are disappointed with the jury verdict," said Rob McCleod, spokesman for CIBC. "CIBC believes there are substantial questions for appeal both as to liability and the award of damages and intends to vigorously prosecute that appeal."

At the heart of the case was a February 1997 debt offering by Renaissance Cosmetics, a firm founded by a former Harvard professor who had aspirations of turning Renaissance into a $1-billion beauty empire. CIBC had provided Renaissance with its start-up financing, according to the suit, and had been privy to internal discussions about the company's finances.

The investors charged that CIBC hid damaging financial information from prospective investors to ensure that the offering was a success. Proceeds from the offering went to pay off CIBC's loans to Renaissance, an inherent conflict that the investment bank failed to disclose, the suit alleged.

The facts of a case are generally pivotal in this type of litigation, said Jonathan Macey, professor at Cornell Law School. However, in this instance, CIBC also may have been dealt a blow by a newsletter, written by Renaissance's now deceased chief executive, called "Weasel Parade News."

"Weasel Parade," a spoof of the road show process used by Wall Street to peddle securities to investors, was entered into evidence in the case. It dubbed CIBC's pro forma financial statements for Renaissance "a fiction of a fiction ... so that people with fictional fiduciary powers over real people's money can spend it like water on us." The newsletter also lamented the worker "at Ford Motors who put his pension money in their mutual fund" and who would get back "less than he started with."

While not commenting directly on "Weasel Parade," CIBC's McCleod said, "CIBC did nothing wrong. We believe subsequent proceedings will confirm that conclusion."

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