Inside the downfall of a deal-making duo (Subscribers) by jembradshaw
, invoking a rarely used power reserved for stabilizing firms in serious financial or operational distress. In December, the regulator fired Larry and Phillip Smith without severance.
The Smiths are no strangers to deal-making. Larry Smith built PACE over three decades through acquisitions and mergers with smaller credit unions, and it now has more than $1-billion in assets and 16 branches across Southern Ontario. Phillip had served as chief financial officer before he succeeded his father as CEO, but Larry stayed deeply involved.The allegations in the court filings raise questions about apparently lax oversight and regulation of credit unions.
A lawyer for Larry Smith, Alistair Crawley, said in a written statement to The Globe and Mail that “The administration order was made without notice to Mr. Smith or PACE’s management, and neither the board of directors nor management was provided any opportunity to respond." He added:"Mr. Smith strongly disagrees with DICO’s characterization of the [currency-exchange] transaction and intends to defend the proceeding commenced by DICO should it move forward.
The deal that would lead to Mr. Smith’s downfall took shape in late 2016. He wanted PACE to buy a stake in Continental Currency Exchange Canada Ltd. , a family-run currency-exchange business with 19 branches across Ontario. The regulator alleges that 2340 was created specifically for this purpose. The poultry business, Trayco Processing Inc., was struggling, and one of Trayco’s shareholders was another numbered company owned by Alison Golanski, Larry Smith’s common-law partner. Late in 2012, when Trayco defaulted on $3.5-million in loans from PACE, the credit union “conveyed" Trayco’s assets to 2340 through a sale, DICO alleges.
To finance 2340’s purchase of its stake, Larry Smith “caused PACE” to provide 2340 with a $14.5-million interest-only loan, and a $500,000 line of credit purportedly for “working capital purposes.” It’s also unclear whether PACE’s board knew of the loan, according to the regulator. In an e-mail to The Globe, Ms. Whitfield said, “if this matter proceeds, I plan to vigorously defend myself. As always, there is another side to the story."
In October, 2017, BMO’s banker asked more pointed questions about the close relationship between PACE and 2340, surmising that it provided PACE with"the ‘comfort’ of indirect control” of CCE. DICO alleges Larry Smith received $50,000 from 2340 after the deal closed, while Phillip Smith received $50,000 in cheques made payable to his son.
DICO alleges Larry Smith received $50,000 from 2340 after the deal closed, while Phillip Smith received $50,000 in cheques made payable to his son.One exhibit includes 2340′s bank account statements, showing $141,000 in payments to Ms. Whitfield between February, 2017, and October, 2018. PACE’s audited financial statements for 2017 reported that Larry Smith was paid $636,010 and Phillip Smith earned $511,750. But in an affidavit, DICO says the duo received far more.
In an e-mail, Mr. Klees said “the Smith family are long time friends,” and that PACE has been a client of his consulting company “for a number of years," but that all fees “have been transparent and fully disclosed by my company and by Mr. Smith on behalf of Pace Credit Union.” As for why the court order names him as a defendant, “I myself am at a loss to understand,” Mr. Klees said, referring questions to his lawyer, Michael Cohen, who did not respond to requests for comment.
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