---

"I bought shares in Stelco Ste.b -- not thousands of dollars worth. I thought that once a company's shares are declared worthless and they are reconstructing, then new shares had to be issued when the new company is formed. (But) this is cheating -- a crime -- if they actually can just write off shareholders while still going about their business. I decided on steel for my first investment because with a building economy it figures Stelco would turn around and be a profitable company. Which it will."

---

There are some legal issues here.

When, for example, a penny natural resources company needs to re-organize it's stock (as they often do), which is an arrangement under securities law, there is a roll-back of shares. In that case, the original shares are given some value in order to provide corporate continuity. Then new equity is issued for cash, debt or quantifiable consideration acceptable to the regulators, which expands the number of new shares, which together with the fewer old shares makes up the company's new capitalization.

That didn't happen in the case of Stelco for a reason (albeit not a good reason).

The new shareholders did not invest any equity. They provided a promised service, which is to re-arrange the Asset-Backed Loans of Stelco. But, under securities law, a corporation cannot issue equity shares without equity being invested. Then, not later.

Moreover, because, unlike themselves, some of the debenture holders actually paid full price (not 20 cents on the dollar), and would have rejected the Plan of Arrangement that intended to pay them 50 cents on the dollar, the "new" shareholders had to offer them some of their "new" shares in order to get the independent debenture holders to agree to the Plan.

That was another phony transaction " or at least it would be under securities law. You simply cannot have a transaction today based on something that might happen tomorrow. That's because there are other stakeholders today who have an interest in what might happen tomorrow. Like the "old" shareholders, for instance.

But under Judge Farley's law, I guess anything goes.

I have seen a lot of chicanery in 40 years in capital markets, but I have never seen anything like this. I've been in quite a few courtrooms too, but again I have never seen anything like this.

It is a fact that two years ago, Farley listened to the story of a CEO (and one that had never been presented for approval to Stelco shareholders who were paying the CEO's salary) that (i) Stelco might run into financial troubles (I say might because it wasn't in trouble at the point it went into CCAA), and (ii) it might not be able to meet an under-funded pension fund obligation, and (iii) steel prices might dip, which could possibly mean that (iv) Stelco might have trouble getting new debentures issues and credit lines established.

So a solitary judge presumed himself to be as great as God Himself, and deemed that these would be acceptable facts in his (His?) court, and granted a bankruptcy motion by a management that eventually was found motivated to swing the control of Stelco to their former employer.

Ironically, in fact, (i) the market conditions improved for the steel industry, (ii) the price of steel went up, (iii) the corporate profits of Stelco zoomed to record high levels, (iv) there was evidence that other Canadian companies had a worse under-funded pension fund issue, and so forth.

But did these market facts impress this judge? Hardly. He was too involved in proving the notion that pigs might be able to fly. It's amazing what you can do when your mind is set on it.

The other issue is that Stelco could not stop its operations. The blast furnaces could not be stopped and let go cold. It would take months to re-start those furnaces, and in the meantime the customers would go elsewhere. That would be a loss of goodwill, which the corporate raiders were depending on stealing.

So they went to a friendly judge who agreed to keep those furnaces going, but to also agree there was no goodwill. The judge had to agree to that notion because otherwise the shares would have value, and he intended to rule the shares had no value. That's called having your cake and eating it too, which, being greater than God Himself, this judge found to be a reasonable proposition.

He also decided that it would be fitting and proper to have this rogue Board of Directors and management stay in control, with no legal opportunity to the then-controlling shareholders to boot them out when it started to become clear to all that these rascals had some motive other than meeting the fiduciary obligations they took on when accepting those directorships and executive officers' positions.

So we have a problem. The issue is will the public stand for capital markets to be taken hostage by a solitary judge and a gang of "rascals" or are they going to stop it and make it right?

If Stelco goes down, then I venture to say that GM and Ford and hundreds of other companies worthy of stealing are next. And traders might as well go to Las Vegas or try lottery tickets where the odds are better.

It really is an issue that concerns me because I have to decide if it is worth my time talking about capital markets that are supposed to work on the principle of integrity. Now, I know you know I'm going to get back to following the market, but you also have to know by now that I have been very much disturbed by this situation by Stelco and the fact the securities regulators, police, and politicians are not taking a stand.

They have so much to lose.

They already have. They just don't know it because they are dead from the ankles up.