KEVIN CROWLEY

The deal that sounded too good to be true

Trust your instincts. Be persistent. And don’t accept vague answers. Those are the main lessons I learned, or perhaps re-learned, during the course of investigating the MFP Financial Services scandal.

Such advice may sound trite. But it was these basic journalistic principles,more than any accounting know-how, that helped expose a series of questionable financing deals that were costing taxpayers hundreds of millions of dollars .Simply put, these deals were too good to be true — and it was this more than anything else that first struck my editors.

I began looking into the MFP story in April 2001. The City of Waterloo was building a large sports complex called RIM Park — a 200-hectare facility that included four indoor rinks, an indoor soccer pitch, 12 outdoor playing fields and an 18-hole golf course.To finance construction, city officials arranged a $49-million lease-style loan with MFP Financial Services Ltd. of Mississauga.

The unusual deal was supposed to be a creative alternative to traditional debenture financing. City bureaucrats said the lease approach gave them a flexible payment structure that tied annual debt charges to park revenue. What’s more, they said the city was repaying the loan over 30 years at a remarkably lowinterest rate of 4.73 per cent.

The Record’s editor-in-chief, Lynn Haddrall, wanted a detailed explanation of how the deal worked. At the time, I was covering Waterloo’s high-tech industry. But I knew my way around financial statements, having completed the Canadian Securities Course and having written a regular column on publicly traded companies. So Haddrall assigned me to look into the RIM Park financing.

I set up an interview with the two Waterloo bureaucrats who negotiated the deal: city treasurer John Ford and chief administrator Tom Stockie. My intention was to write a story that simply explained the complex financingin plain English. But I came away from my first interview astonished by the bureaucrats’ inability to provide hard facts and firm answers.

For instance, Ford seemed unsure of the cost of the financing, saying he didn’t have it “totaled up. But it’s around $103, $104 million.”(The actual cost proved to be $227.7 million). Asked how MFP could afford such a low interest rate, Ford and Stockie said it involved corporate tax breaks called capital cost allowances — but I’d have to call MFP for a detailed explanation.

I left the interview with the uneasy feeling that city officials had committed generations of taxpayers to a deal they didn’t understand. Within a few days, I obtained a copy of the financing contract from Ford. Several aspects of the complex deal appeared to conflict with what I’d been told in the interview.

But the most striking clause involved the loan-repayment language. Instead of a list of monthly or annual payments over 30 years, the contract set out specific amounts for the first six years only. After that, payments were based on a mathematical formula. I took out a pencil and a calculator and worked my way through the formula. I came up with annual payments for the first few years and extrapolated from these that the total cost was about $200 million.

I confronted Ford with my findings. He said he and his staff had come up with a similar total when they first did the calculation. But it turned out they had done it incorrectly, he said. The accurate total, Ford now said, was $112.9 million. So, who showed you the right way to do the calculation? I asked. MFP vice-president Dave Robson, the salesman who arranged the lease-style loan, Ford replied. I called Robson but he refused to comment, saying MFP had a policy of not discussing its transactions publicly for competitive reasons.

From here, I tried to find a leasing expert to review the contract and give me an objective opinion. But I discovered that there are few lease-financing experts in Canada, and most are reluctant to be quoted in the media for fear of offending their clients.

It was at this point that I foolishly ignored my instincts.I set aside my questions about the repayment calculation, concluding — naively — that the city could not have screwed up that badly. Instead, I focused on what seemed to be a more tangible angle — that the tax breaks at the heart of the deal conflicted with federal tax laws. I also re-interviewed Ford and Stockie several times to clarify aspects of the deal that still seemed remarkably vague.

A month after doing my first interview, I wrote a package of stories that focused on the inconsistencies and gaps in the city’s explanation of the deal. The stories included examples of the city’s reliance on MFP, including the fact that bureaucrats had accepted MFP’s interpretation of the repayment calculation without getting an independent financial opinion. One story also explained another wrinkle that added to the complexity of the deal: MFP acted as a broker that arranged the deal and then sold the right to collect the debt to Clarica Life Insurance Co.

A few days after the stories ran, I received an anonymous call from someone who knew the deal intimately. The person said the purported interest rate of 4.73 per cent, as well as Ford’s table of payments, was wrong. But the anonymous source refused to be more specific.

I took Ford’s repayment table to The Record’s own internal accountant and to Alan Macnaughton, a University of Waterloo accounting professor who had shown interest in my first stories. Both concluded that the interest rate, based on Ford’s repayment table,was about 5.8 per cent — more than one per cent higher than Ford had said. Unfortunately, I had to leave the story on hold while my family and I went on a previously booked vacation.

While I was away, my colleague Terry Pender took a call from a source who obtained a copy of the financing contract. He, too, had concerns with the repayment formula. Pender sent the calculation to the University of Waterloo’s Alan Macnaughton and Peter Bell of the Richard Ivey School of Business at the University of Western Ontario. Independent of one another, the two academics came up with the same total: $227.7 million and an interest rate of about nine per cent — more than twice what the city had been telling us.

Pender broke the news in a front-page story,but city officials still refused to confirm it. When I returned from vacation, I wrote a story in which Clarica confirmed that the deal it bought from MFP required the city to pay $227.7 million over 30 years.

On June 28, five weeks after our first stories ran, Waterloo announced that it was suing MFP and salesman Dave Robson, alleging “fraud,deceit and fraudulent misrepresentation.” The lawsuit also named Clarica, which had provided the actual loan. MFP and Clarica denied the allegations and vowed to defend themselves. In its statement of claim, the city shed some light on how the deal came together.

The claim alleged that MFP’s Robson didn’t give Ford the repayment language until an hour or so before city council was to approve the deal. Given the late arrival, the city said Ford didn’t check the math. Instead, he accepted Robson’s word that it worked out to the terms previously discussed. Such trust seems astonishing, given that Ford was asking council to approve a multimillion-dollar deal.

But the trust was built up over the previous year while MFP treated him and other city officials to golf games, charity balls and other events. In its statement of defence, MFP denied that it intentionally delayed the final version of the repayment language. It also alleged that the city was fully aware of the repayment terms. Meanwhile, I continued to investigate MFP contracts with some of the company’s other public sector clients.

A year later, here’s where things stand:

• The City of Waterloo has reached an out-of-court settlement that will save taxpayers $82 million.
• Brock University has reached a settlement with MFP that the university says will save it millions of dollars.
• Four other clients are suing MFP, including Windsor and Essex County, Toronto, Hamilton, and the Union Water System near Leamington.
• The Ontario government is writing new regulations to protect taxpayers from similar deals in the future.
• John Ford has resigned as city treasurer in Waterloo. Other casualties include two finance officials at the City of Windsor, and a technology manager at the City of Toronto.

I’m still waiting for the results of Freedom of Information appeals involving several provincial ministries and their MFP computer leases. As I write this, a number of issues remain unclear, especially the question of how municipal staff came to recommend deals that were so clearly flawed.

It’s hoped that these issues will be further explored in the coming year when Waterloo and Toronto hold separate public inquiries into their MFP deals.

Kevin Crowley is a business reporter with The Record in Kitchener-Waterloo.A complete archive of The Record’s investigation can be found at the bottomof the newspaper’s Web site at http://www.therecord.com/news/special/rim_park/index.html