Investors Scrutinizing the Regulators

Home Page


Securities Regulation In CanadA

Fox Guarding the Hen House


Legal pains for MFDA

Barry Critchley

Wednesday, January 24, 2007

Canadian retail investors can enjoy their breakfast a little better this morning knowing that securities regulators are acting in their best interests.

And that's a lot of breakfast delights given the slew of regulators involved: Each province has its own, there is a national umbrella body, there are industry bodies and, just like the real world, there are spin-offs and mergers. By one estimate, securities regulation is a $600-million business.

The Mutual Fund Dealers Association of Canada is a relative newcomer to the world of regulation. It was formed in June, 1998, and regulates "the operations, standards of practice and business conduct of its members and their representatives with a mandate to enhance investor protection and strengthen public confidence in the Canadian mutual fund industry."

The MFDA is in the news because it oversees the activities of Berkshire Investment Group Inc. And Berkshire is in the news because of the activities of Ian Thow, a former senior member of its office in Victoria. Those activities came to a head in mid- 2005 when lawsuits were filed. Later, with debts of $43- million and assets of $7-million, Thow filed for bankruptcy protection. Later, he moved to the United States.

In July, 2006, the British Columbia Securities Commission got into the act when it scheduled a hearing.

The commission alleged at the hearing that Thow "violated securities laws and perpetrated a fraud on B.C. investors." From January, 2003, to May, 2005, "Thow told clients he was able to invest money for them in various securities, including shares in the National Commercial Bank of Jamaica, an initial public offering and mortgages. [AIC Ltd., a sister company to Berkshire, bought a 75% stake in NCB in 2002.] It is alleged that Thow's representations were false and that he used some or all of the clients' money for his own personal use."

That notice alleged Thow had breached the B.C. Securities Act and certain rules of the MFDA. A hearing has been scheduled, starting on May 29.

Berkshire has already reached settlements with a number of the affected parties.

But Berkshire has not settled with Kirk Wong and Krista Kleven, of Port Moody, B.C. The two say they are out about $250,000 as a result of investing with Thow. The two gave Thow $133,000 to invest in NCB preferred shares; the balance was for monies owed for work done but unpaid for.

The two notified Berkshire last March of their investments and say they have not received a reply. But they have heard from Berkshire's legal counsel, Torys. And the news isn't good. "The alleged transaction comprises shares in a public company, not mutual funds. ... If Ian Thow proposed to sell you shares of NCB, he would have been acting outside the scope and authority of his category of registration and would have been outside the scope of his authority with Berkshire," said the letter. "... You knew that you were not dealing with Berkshire with respect to the alleged transaction but rather with Ian Thow personally," it said.

While the two contacted the MFDA in August --and met with its representatives - - the comment from Berkshire's counsel swung the couple into action.

They read through the rules and regulations of the MFDA and, according to their interpretation, that entity should be doing something -- and not letting Berkshire and, by association, the MFDA -- get away with what it is doing. The MFDA can impose fines of up to $5-million per offence on Berkshire but doesn't have the power to order compensation.

"Berkshire could not have been in business had they not signed a contract with the MFDA or the securities commissions," said Kirk Wong. "The MFDA is absolutely not doing their job. The MFDA does not enforce their member dealers to follow the rules and regulations that are in place to protect the investor. We find absolutely nowhere in the MFDA rules where it states that the client/investor is strictly and only dealing with the registrant or the financial adviser. It says nowhere in this manual that the onus of responsibility is on the client."

- - -

So, what does the MFDA say?

Shaun Devlin, vice-president of enforcement, said it has been studying the matter for about 18 months. "In every case where there is conduct like that exhibited by Mr. Thow, we do open a case," he said, adding that he "can't predict" when it will come to an end." Devlin said 18 months "isn't a particularly long time for a supervisory investigation. It takes a long time to look at these matters."

As for what the MFDA is actually doing, Devlin was a little less precise. He said a typical investigation involves reviewing documents, conducting interviews and getting legal input.

Devlin would not be drawn into discussing Berkshire's argument that Thow was, in effect, a rogue trader.

"We have to look at all the facts and decide. We are looking at the issue of proper supervision and the issue of complaint handling," he said.

Julie Clarke, general counsel at Berkshire, said, "We are continuing to investigate the claims by persons involved with transactions with Mr. Thow. We have made 17 settlements. And we are defending the alleged NCB share purchases."



Ian Thow takes flight