Investors Scrutinizing the Regulators

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Fox Guarding the Hen House

Day of reckoning unlikely


Saturday, May 26, 2007


The B. C. Securities Commission’s hearing into rogue Victoria investment executive Ian Thow gets under way on Tuesday, but it would be an exaggeration to say this is any sort of “day of reckoning” or “ date with destiny” for either Thow or his victims.

The commission is alleging that Thow, formerly a senior vice- president at Berkshire Securities in Victoria, conned certain clients into buying unauthorized investments, most notably shares in the National Commercial Bank of Jamaica, that would supposedly yield high returns. However, the representations were false, he diverted most of the funds for his personal use, and his clients ended up losing about $ 30 million.

What makes this story so gripping was his pathological extravagance, which included jet planes, helicopters, yachts, a waterfront mansion and, most famously of all, $ 10,000 bottles of scotch. His nickname, appropriately enough, was “ Got- tohaveit- now Thow.”

In May 2005, Berkshire’s compliance people finally caught up with him. He resigned, declared bankruptcy, and made a midnight run to Seattle, where he has been holed up ever since.

The hearing into this matter has no material import, and little symbolic meaning. The worst the commission can do is ban him from the B. C. securities market, which doesn’t mean much: He long ago decided that the better part of discretion was Seattle.

Financial penalties mean nothing because he is already bankrupt. Victims are looking at a recovery of less than five cents on the dollar from his estate and, if a fine is imposed, the commission would likely postpone its claim to these people. Similarly, any order for disgorgement of illicit gains would remain bone dry.

It would be interesting if Thow actually shows up, but that won’t happen. There is already an outstanding warrant for his arrest for allegedly spiriting some of his personal assets, which are supposedly the property of his creditors, across the border. And there is an RCMP investigation in progress that will undoubtedly result in criminal charges and his immediate arrest ( should he happen to be on Canadian soil) or extradition from the United States ( should he still be in land of the free).

In his absence, the commission enforcement staff will go through the process of describing his alleged sins and producing documents and calling witnesses to prove those allegations. Given the massive amount of information we have already reported about this case, these proceedings are unlikely to be revelatory.

There are, however, several other areas of activity that have very material consequences and/ or are offering some dramatic relief. In the former category is the criminal investigation, which potentially offers Thow’s victims a degree of justice and vengeance.

Insp. George Pemberton, who heads the RCMP Integrated Market Enforcement Team, says the investigation is “ progressing well.” I’m not sure what that means, but speed is not critical here: We know Thow will be charged, it’s just a matter of when. The only suspense is, will he flee to an island in the South Pacific? And if he is arrested and brought back to Canada and convicted, how much jail time will he serve?

The real drama is being played out in the civil courts, where victims have launched several lawsuits against Berkshire Securities for allegedly failing to properly supervise their wonder boy.

Berkshire has taken the initiative and negotiated settlements with 17 former clients. But many others — most notably the people who bought shares of the Jamaican bank — have been left adrift. Some are pursuing their cases in B. C. Supreme Court.

I think these suits are quite viable. First, there’s a lot of money at stake, which make them worthwhile. I also think there are some good arguments for holding Berkshire vicariously responsible.

It’s true that the unauthorized investments Thow recommended to his clients did not show up on client statements, a clear sign they were outside Berkshire’s orbit. On the other hand, an effective compliance program might have determined at a much earlier stage that Thow was conducting private business with clients, a well- established no- no in the securities industry.

One of the lawsuits has been launched by Nanaimo businessman George Thomson, who is claiming $ 686,000 on account of an investment in the Jamaican bank. The voluminous court file shows that Berkshire’s lawyers have balked at answering questions and providing information.

Earlier this year, Judge Richard Goepel chastised the firm for its stonewalling tactics: “ Berkshire’s failure to comply with the rules of court and various court orders made during the course of this application is not acceptable,” he remarked.

Boosting the stakes is the spectre of regulatory action against Berkshire. The securities commission decided that the Mutual Fund Dealers Association — the self- regulatory body for mutual fund purveyors like Berkshire — should review the firm’s conduct in this affair. Based on the association’s record to date, I wouldn’t be terribly concerned.

Since it started taking complaints in November 2002, the association has concluded only two disciplinary actions in B. C., and neither was the product of a contested hearing ( one was settled, and in the other case, the respondent didn’t show up). I would have thought that, with more than 12,000 licensed mutual fund sales people in B. C., the association could have found more to do.

Two years have passed and association officials still aren’t saying when they will wrap up their investigation. If they ever wake from their slumber, it could be interesting: Their rules allow them to assess fines up to $ 5 million per offence.

The trustee who is handling Thow’s bankruptcy, meanwhile, is having his own struggles. With Thow in Seattle and refusing to cooperate, Michael Cheevers of Wolrige Mahon Ltd. has not been able to thoroughly examine him about his financial circumstances.

Thow’s second wife, Alyssa, whom he married after his world blew apart, said during an examination conducted by the trustee’s lawyer last September that Thow maintained two apartments in Seattle and paid for her rent, food, gas, and even her Pilates classes. She also revealed that Thow drives a Ford Explorer, and she drives a Cadillac Escalade that Thow gave her a couple of years ago.

Thow reportedly works as a mortgage broker in Seattle, but documents filed in U. S. bankruptcy court in Seattle reveal he has also been getting money from a surprising source — two of his victims.

One is Tom Harris, owner of a car dealership in Nanaimo, who claims that Thow burned him for $ 820,000. The other is Kevin Prins, owner of a potato farm near Lethbridge, Alta., who is claiming $ 577,000.

In a series of written questions, Cheevers asked Thow to describe his relationship with these two men, how much money he had received ( and expected to receive) from them, “ and the goods, services or consideration you provided in return for [ their] payments to you.”

Why in heaven’s name would these people — who have vocally expressed their disdain for Thow — advance him more money?

Prins confirmed in an interview that he had sent Thow more money “ for rent and stuff like that,” but refused to say how much. Asked why he would do this, he replied, “ My heart is a little soft.”

Harris ducked the question: “ I don’t know where they got that from,” he said in an interview.

So it’s not true that he gave Thow more money? I asked.

“ I’m not sure what document you are looking at, but it doesn’t make a lot of sense to me. . . . Probably it would be more appropriate if I called you back,” he said.

By late Friday, he had not called back.

Thow was not very forthcoming either. In response to each question posed by Cheevers, he advised that he was invoking the Fifth Amendment so he wouldn’t incriminate himself.



Ian Thow takes flight