June 15, 2017

On Thursday, the S&P 500 was down 0.2% while Toronto was down 0.1%.

TFI International (TransForce) was down 2.6% and I added to my position in this company today.

In the next day or so I will add Fortis Inc. to the list and it will likely be rated “Buy” or possibly (lower) Buy.

Home Capital (not on our list but much in the news) was up 12.7% to $13.67 after it announced a settlement with the regulator. A settlement that included relatively minor punishment for three executives and fines/payments for the company itself

An ironic thing in the Home Trust situation is that the company and the executives were not pursued by the Ontario Securities Commission because the company discovered that certain of its brokers were falsifying mortgage applications. The crime the company and the executives was charged with was failing to DISCLOSE¬†this in a timely manner. By failing to disclose this Home’s share price was artificially higher than it should have been for a some months. When the news was disclosed Home’s shares fell about 35% shortly after the problem was disclosed. Had they disclosed it earlier the share price presumably would have declined earlier. And there seems to be no doubt that it should have been disclosed earlier and that the lack of disclosure caused some people to pay too much for the shares (while others benefited by selling at an artificially high price). Clearly the executives deserved to be sanctioned/fined for this. (I am not so sure the company itself ¬†should be fined since that just punishes innocent shareholders).

What I find ironic is that when the regulator came after the executives and the company it caused a situation whereby investors had no idea how to value the company. Since then the shares have traded as low as $5.06 and as high as $14.47. The regulator apparently caused a run on the bank that threatened its existence. The turmoil and confusion and the extreme difficulty of figuring out a fair price for the shares caused by the regulator’s actions seems to have FAR exceeded the damage the original crime caused. Home many share owners have now been harmed by selling out in a panic at the low prices? Should the regulator’s actions also be considered a case of poor disclosure? The market was left with no idea how seriously the company would be hurt by the charges.

Perhaps if the regulator had demanded the executives be removed from the company and gone after only the executives and not the company, the run on the bank could have been avoided. The company itself bungled the situation by trying to fight the regulator instead of tossing the guilty executives overboard. (But it would be difficult for a Board of directors to toss out some of its own members) The notion that corporations are “persons” is a legal fiction. In reality a corporation is an inanimate construct that does not itself commit crimes. It is the management of corporations that commit crimes not the company (in my opinion) and surely not the external share owners. Yet the shareholders often bear the biggest costs of any crimes by far. Executives usually get away very lightly.