A comprehensive report from Mike Vermette of PricewaterhouseCoopers confirmed what many of League’s 4,280 investors had feared: They would be getting next to nothing as the company winds down operations.
Even Vermette admitted he was surprised at how little will be left for investors.
“I knew it would be very bad, but not this bad,” Vermette said in an interview Wednesday.
In the report, which noted League would be liquidating all assets and virtually cease to exist by the end of the first quarter of 2015, Vermette noted investors would receive an estimated $37 million.
That money is to be split between those who hold secured investor notes, unsecured investor notes and those who have equity investments. Those holding secured notes will split $19 million, a 63 per cent recovery of their investment; those with unsecured investor notes will split $3.7 million, which is a nine per cent recovery; and those with equity investments in League will split $14 million, a 90 per cent recovery.
But there is nothing available for others owed $279 million worth of equity investments.
“It has been a mess, yes, and this one has a unique flavour in that the people who will be short at the end of the day will be the individual investors,” he said.
Vermette said an erosion in property values, property assets being in worse shape than expected, a weak market over the last six months and more general creditor claims against League than expected have all contributed to investors getting a poor return.
Secured lenders for example will get back almost all of the $199 million loaned to League.
Many investors have told the Times Colonist they had already written off their money, while some had been holding out hope for the return of a portion.
All of them have blamed League founders Adam Gant and Emanuel Arruda for the financial mess, and a group of Ontario-based League investors have been exploring legal channels as a last resort.
Gant and Arruda, who started League in 2005, were singled out in Vermette’s report for their lack of experience and knowledge of the sector in which they worked.
“I don’t think it’s as simple as [they were in over their heads], but I do think that was a major component of this, absolutely,” he said, noting he had never before seen anything like the mess League had become. “You do have to make more than one mistake. You have to make a lot and not get any wins in the process.”
In response to questions from investors about the possibility Gant and Arruda may have feathered their own nests while League suffered, Vermette included a breakdown of their compensation in the report.
He pointed out there was little oversight of the founders, and their compensation model was never defined — the two took $5.5 million in salary between 2005 and 2013.
Gant’s average salary was $395,000 with the most he took in a year being $775,000 in 2011. Arruda’s average salary was $299,000 and his biggest year was also 2011 when he was paid $676,000.
“Stakeholders may find the quantum of compensation to be large given the challenged financial position of League. However, in the context of the scale of League [it is not surprising],” Vermette wrote. “This level of compensation was not a significant contributing factor to the insolvency of League.”
He stressed the Companies’ Creditors Arrangement Act process did not constitute a thorough investigation, but Vermette said he found no evidence there was money diverted to Gant or Arruda.
“I’m satisfied we’ve answered all the major questions,” he said.
One of the major sticking points with some investors was the perception that League took money invested in one of its offerings and funnelled it to another, in particular the Capital City Centre project in Colwood.
Vermette noted in his report that there was $183 million, $100 million of which constituted one loan to the Colwood project, deployed outside of the investment vehicle from which it was raised. The report noted many of the investment agreements provided that money could be loaned to other entities.
“It appears to us that it was wholly permitted,” he said, though he added: “You might be allowed to do something, but is it right, prudent or sensible to do it?”
When asked if the practice was legal or immoral, the B.C. Securities Commission said: “Lending money between related entities is permitted as long as, when raising money from the public, it is disclosed properly.”
The commission said it is reviewing the monitor’s report and all investor complaints, “and we will vigorously pursue any evidence of misconduct.”
League, which once had 170 entities under its banner, is selling off all assets.
Vermette expects everything to be wrapped up over the next six months and hopes to do a cash distribution to creditors in the first quarter of next year.
