Loose end in Manulife's Berkshire buy
Unanswered Questions About Thow Affair

Barry Critchley

Wednesday, September 05, 2007

On cue, Manulife Financial announced last Friday it had "received regulatory approvals" and had closed its purchase of Berkshire-TWC Financial Group -- a transacation that added more than 700 advisors and 237 branches to Manulife's operations.

Normally such an announcement wouldn't attract much interest, but this deal is a little special.

The reason: an ongoing investigation by the Mutual Fund Dealers Association, a self-regulatory body formed to deal with the distribution side of the mutual fund industry, into the affairs of Berkshire. (The RCMP is also investigating.) The investigation has taken more than two years and is not complete. The body -- it has a budget of $20-million -- has a number of powers including the ability to fine, suspend or limit Berkshire's activities. But the MFDA doesn't have subpoena powers, which makes it less than fully effective.

Berkshire employed as a senior vice-president in its Victoria office Ian Thow, who is alleged to have snared more than $30-million of clients' money. The BC Securities Commission has heard a series of hearings into Thow's activities. The hearings started last year, wrapped up in July and a decision is expected in October. The BCSC made it pretty clear what it thought of Thow: It said he "was, or at least became, a predator." In addition, the BCSC alleged that Thow, who now lives in the United States, "intentionally and systematically stole millions of dollars from his clients."

With that background, we decided to explore what regulatory bodies, and under what circumstances, gave the green light for Manulife to purchase Berkshire.

The first part was easy: OSFI, IDA, MFDA, provincial securities regulators and the TSX all approved the deal. The second part amounted to an exercise in frustration. -

   We called the OSFI. A spokesperson said he couldn't comment on this specific transaction. He said OSFI has an "approval process based on prudential grounds. In this case, we were satisfied with what we saw and gave our recommendation for approval."

   We then call the IDA, specifically Suzanne Wolburgh Jenah, who became chief executive effective July 1.

At the time that appointment was made, the IDA said, "Susan brings extensive regulatory experience, a deep understanding of the Canadian and international securities industry and capital markets, and a strong commitment to investor protection to her new role."

But she doesn't return phone calls.

On its Web site, the IDA said its values are: "Integrity. We will conduct ourselves in an honest and ethical manner with the highest degree of professionalism.

"Diligence. We will be dedicated to carrying out our duties in a timely and reliable fashion.

"Accountability. We will be transparent in our processes, ensure open communications with our stakeholders and take responsibility for our actions."

Connie Craddock, the IDA's vice-president of communications, did call but we weren't able to talk to her.

   We then called the MFDA, an organization of 164 members, which oversee $303-billion of mutual fund assets and employ about 71,000 salespersons. Its vision is to raise "the standard of firm, fair and transparent regulation in Canada for the protection of investors through commitment to collaboration, staff excellence and regulatory best practices."

Larry Waite, the MFDA's chief executive officer referred us to Sean Devlin, MFDA's vice-president of enforcement.

Devlin said that because the dealer is ongoing--meaning that Manulife has no plans to wind up Berkshire -- the MFDA "does not believe that it is appropriate to stop the deal. But the MFDA can still take disciplinary proceedings against Berkshire if we consider it appropriate. As well, the civil claims by clients can continue." Devlin said that, as a general matter, the MFDA could stop a proposed transaction "if the clients were adversely affected." Devlin said it would be "improper for the MFDA to use its approval powers to influence Manulife to settle its civil claims. We don't have that jurisdiction."

   We then called the provincial securities commissions. 

Naturally enough, we started with the BCSC, given that the alleged transgressions occurred in that province, even though Berkshire's head office is in Burlington, Ont. BCSC was the natural for another reason: A senior executive told one of Thow's former clients that it would have to okay the transaction.

That turned out to be a false assumption. The BCSC said the OSC and the MFDA are the lead regulators. "I suggest you call them."

We called the OSC. By press time, they hadn't called back.

Let's give the final word to Manulife. Naturally we were interested to know whether it had given any indication to the regulators what it might do regarding Thow's former clients.

Tom Nunn, its spokesman, said the following: "We've just announced closing of this transaction. We are aware of the allegations involving the conduct of Mr. Thow. However, we are satisfied that his regrettable conduct was outside of his mandate with Berkshire and is not representative of the manner in which Berkshire advisors conduct their businesses. Mr. Thow's activities are currently under review by regulators, Thow's trustee in bankruptcy and law enforcement officials. Berkshire will continue to co-operate with those investigations. It would be inappropriate to say more at this time."




Ian Thow takes flight