A cautionary note on advisors
SEC Raps Firms For Failure To Sound Alarm On Dealings

Peter Brieger

Monday, September 10, 2007

Here's something that Canadian regulators -- including those who signed off on Manulife's purchase of Berkshire Investment Group -- may like to reflect on. It was posted last Thursday on the SEC's Web site.

"The SEC today instituted settled enforcement actions against Commonwealth Equity Services; Detwiler, Mitchell, Fenton & Graves, and James McCarty, for failing to reasonably supervise former registered representative Bradford J. Bleidt, who engaged in a multi-million dollar fraud while they were overseeing him. At least forty of Bleidt's victims were over age 70 at the time the Commission charged him."

"The protection of investors, including senior citizens, must be of foremost importance to broker-dealers and their personnel," said Linda Chatman Thomsen, director of the SEC's enforcement division. "Firms who fail to have or to enforce reasonable policies will be held accountable for their inaction."

David Bergers, director of the SEC's Boston regional office, added, "Investors should be able to feel safe knowing that broker-dealers and their representatives are designing and enforcing procedures to prevent and detect fraud."

Bleidt was associated with Commonwealth from 1991 to 2001 and with Detwiler from 2001 to 2004. In 2004, he was charged with securities fraud stemming from a scheme in which he misappropriated more than US$31-million from more than 100 victims. Bleidt is serving an 11-year jail term as a result of related criminal charges brought by the United States Attorney's Office in Boston.

The SEC's order against Commonwealth finds that it failed to establish reasonable policies and procedures for responding to red flags related to Bleidt's outside business activities. In particular, the order finds that Commonwealth's staff received, but did not review, financial statements for one of Bleidt's investment advisory businesses and thereby ignored a red flag that this business was failing and he was providing significant cash infusions to keep it afloat. In addition, no one at Commonwealth followed up when Bleidt failed to disclose the source of capital for a radio station that he partially owned.

The SEC's order against Detwiler finds that it failed to adequately monitor the outside business activities of Bleidt. For example, Detwiler personnel did not reasonably investigate how Bleidt was funding his outside business activities, including his two investment advisory businesses and the radio station. In fact, these outside business activities were being funded by Bleidt with the victims' misappropriated funds. These orders also find that Commonwealth failed to have reasonable procedures for the review of incoming mail and that Detwiler failed to reasonably implement the procedures it did have.

The SEC's order against Mc-Carty -- his supervisor -- finds that he did not follow Detwiler's procedures for the opening and review of incoming mail. The order further finds that Mc-Carty was not conducting the formal annual audits of each registered representative required by Commonwealth's and Detwiler's procedures and that he accepted Bleidt's explanation that the source of his money was a "trust fund" without any evidence of the existence of the trust fund and the supposed dollar amounts it contained.

The SEC imposed US$250,000 penalties against each of Commonwealth and Detwiler and a US$50,000 penalty against Mc-Carty.

Previously, Commonwealth, Detwiler and a third firm paid a combined total of more than US$6-million to victims of Bleidt's fraud. Earlier this year, judgments of more than US$31-million were entered against Bleidt and his investment advisory firm in the SEC's case against them.

That case brings us to the situation at Berkshire, a firm that employed Ian Thow, a senior vice-president in its Victoria office. Thow, who skipped out of the country more than two years back, has been the subject of a hearing before the B.C. Securities Commission that alleges fraud and misrepresentation and an investigation by the RCMP, which is ongoing. Berkshire is also being investigated by the Mutual Funds Dealers Association. Thow is alleged to have misappropriated more than $30-million of clients' money, a fair chunk of which had been invested in shares of the National Commercial Bank of Jamaica. AIC, the parent of Berkshire, bought the bank in 2002.

Berkshire said Thow was not authorized to buy shares in the bank. That approach ignored the reality: Thow allegedly told his clients they were buying shares in the bank -- a bank that was in effect part of the AIC family. Berkshire's mantra became, Thow was involved with outside business and his former clients should have known that. The MFDA seems impressed with that argument given the distinction it seems to be placing on member business and non-member business. We await the results of the Canadian investigations.




Ian Thow takes flight