To get to the bottom of the Watergate scandal Deep Throat advised investigative journalists Bob Woodward and Carl Bernstein to “follow the money”. Anyone trying to understand the scandal around the privatization of lands deleted from Western Forest Products (WFP) Tree Farm Licence (TFL) should do the same.
The Auditor General’s report slammed the B.C. government for giving an estimated $150 million sweetheart deal to WFP. The Auditor General concluded the government lacked “due regard for the public interest” when then Forest Minister Rich Coleman approved the deletion of over 27,000 ha of forest land from WFP’s TFLs on southern Vancouver Island near Jordan River, in Haida Gwaii and in the Great Bear Rainforest.
John Doyle presented his 73 page report at a press conference, not in the shadows as Jason Robards memorialized in the famous parking garage scene in his film on the Watergate scandal, ‘All the Presidents Men’. But while the majority of the AG report documents show how the privatization was made without sufficient information or consultation and without enough attention paid to the public interest, the financial aspects of the scandal, while referenced, remain in the shadows.
The media has yet to follow Deep Throat’s shadowy whispered advice and emulated Woodward and Bernstein in following the money.
Unusual trading patterns
Trading volumes of WFP stock in the days before Minister Coleman announced the TFL deal were nearly 6.5 times greater than the 2006 monthly average.
It was these unusual trading patterns the prompted Dogwood Initiative to file a complaint with the B.C. Securities Commission (BCSC). Our complaint documented suspicious WFP stock trades beginning two weeks prior to the January 25 announcement. Spikes in trading of WFP shares occurred on January 11, 12, 23, 29 and 30. The largest of these was a massive purchase of 1.6 million WFP shares by Harbert Management Corporation on January 12.
Harbert Management Corporation, an Alabama-based real estate investment company that specializes in distressed companies, was WFP’s second largest shareholder and a corporate ‘insider’, owning about 10 per cent of WFP immediately prior to the January 12 transaction. After the transaction, Harbert Management Corporation (Harbert), owned about 20 per cent of the company.
The sheer volume of purchased shares just before the deletion was announced, the fact that at least one of the major stock purchaser was a WFP insider, and the fact that the shares were acquired so near to the announcement of the deletion suggests that Harbert and others were potentially acting on insider knowledge. The difficulty is proving it.
The BC securities commission has terminated its investigation of the WFP deal without laying charges of insider trading but the “unusual stock trading patterns” referred to in the Auditor General’s report remains.
When the two BCSC investigators visited our office to gather information they acknowledged that the large trading volumes in the lead up to the announcement were “suspicious”, but they warned us that insider trading was difficult to prove. They said prosecutions virtually never proceeded unless there was an inside whistleblower. Obviously in this case there was no whistleblower to be found.
Donations to the Liberal party
The money trail does not begin and end with suspicious share trading. The “pattern of donations to the Liberal Party” referred to in the Auditor General’s report suggests that big money influences policy more than the public interest.
In B.C. we don’t need to look for paper bags full of undisclosed cash to find that money dirties politics. With the country’s least restrictive campaign finance rules, money talks in B.C. politics. Nowhere is that trend clearer than in relation to decisions to delete lands from TFLs.
WFP donated $60,470 to the Liberals between 2005 and 2007 while Brookfield Asset Management Inc.(WFP’s major shareholder) donated $50,000 in 2007.
These donations to the Liberal Party were entirely legal but it is easy to speculate on a link between Liberal Party donations and benefactors from TFL deletions.
There are 33 TFLs in BC, held by 19 separate companies. However, only 6 companies have gotten the windfall gift of having lands deleted from their TFL. Only one of these was not a major donor to the Liberal Party.
The largest TFL deletion, 88,000 ha, was granted to Weyerhaeuser, the Liberal Party’s second largest donor. Other beneficiaries include West Fraser (third largest donor) and Timber West (eleventh), and of course Western Forest Products. WFP/Brookfield’s donations from 2005 to 2007 made them the fifteenth largest donors in the years surrounding their deletions.
As the Auditor General noted, though not in the public interest, the decision to grant WFP its TFL deletion “was based largely on a belief that the removal of private land was consistent with government’s direction…” it is reasonable to ask to what degree government direction is based on the influence of its large donors. The facts show that the congruence between big donations and beneficiaries of windfall TFL deletions is certainly a strange coincidence at best and worthy of at least a mention, if not further investigation.
The debt of Western Forest Products is not as it seems
The Auditor General criticized the Minister for not investigating WFP’s true financial status. He concluded the Ministry of Forests “put greater weight on assisting the licensee’s financial restructuring than on other public interests…” and relied on “unsupported statements about the licensee’s financial health.”
WFP CEO Reynold Hert told the Victoria Times Colonist at the time of the deletion that “the prime driver and the prime reason why we’ve been looking at doing this is the company has a high debt level and we still have a very high interest rate on that debt.”
But if government had investigated it would have determined that WFP wasn’t as financially crippled as they claimed.
Even a cursory review of WFP’s financing and ownership structure would have revealed that all of WFP’s long-term debt was owed to Brookfield Asset Management (Brookfield), which by holding ~70% of the WFP’s stock was majority shareholder through its wholly-owned subsidiary Tricap Asset Management (Tricap). Thus, Brookfield through WFP was paying back interest and principal to itself.
Now one would think that Brookfield, through one of its subsidiaries (Tricap), would give its other subsidiary (WFP) good terms on its loans. Think again.
A series of deals from 2004-2006 saw WFP making large purchases of forest tenures and companies and further in debting itself to Brookfield subsidiary Tricap. In 2004 WFP paid $45 million to acquire Canfor’s Englewood tenure. In 2005 it paid $1.2 billion for Cascadia Forest Products. Each of these deals were financed by Tricap and WFP paid above market rates for the loans. This included $221 million in 15 per cent bonds (due in 2009) to Tricap; near credit card level interest.
When WFP received its $109 million softwood tariff rebate in 2006 it chose not to pay down its credit card-like debt. Could the fact that these non-market rate loans were being paid to its parent company have anything to do with it?
This is how the rich get richer, using complicated corporate and financial structures to justify millions if not billions in government giveaways.
Value of Windfall to WFP
The completely one-sided nature of the deal has fuelled public outrage. The Ministry of Forests estimated that the deletion decision was worth $150 million. The Auditor General and most media have accepted this estimate. But is it accurate?
In its press release WFP estimated that its ‘non-core assets’, including large portions of private land (real estate) released from its TFLs, are worth $150-180 million. But recent events indicate that number is too low. Reports indicate Ender Ilkay will pay ~$50 million for just 2,000 ha near Jordan River. At the time parcels in the area were selling for an average $289,000 per ha meaning that the 12,000 ha near Jordan River could be worth as much as $3.47 billion in real estate alone. And that doesn’t include the increased profits WFP can make exporting raw logs and logging the area under weaker environmental laws.
So we estimate the government provided a windfall of between $3-5 billion with Minister Coleman’s stroke of a pen. And the public got nothing except fewer forestry jobs, more urban sprawl, fewer recreational opportunities, less environmental protection and limited opportunity for input.
Like Nixon, the government isn’t going down without a fight.”Unprofessional, unfair, biased and inappropriate.” Are how Minister Bell characterizes the Auditor General’s report. It’s how I would characterize the Coleman’s TFL deletion decision.