|Lee-Chin in the land of the Thow affair|
Monday, September 17, 2007
Michael Lee-Chin, one of the country's 23 billionaires according to a recent analysis by Forbes and the person who gave $30-million for the crystal at the Royal Ontario Museum, is in Victoria today for a breakfast meeting with a group of financial advisors. Lee-Chin, who formed AIC Funds in the late 1980s, is at the session -- to be held at the Victoria Marriott -- in his capacity as executive chairman and lead portfolio manager of the AIC Advantage Fund, a $1.2-billion fund.
Victoria can't be the happiest of capital cities for Lee-Chin. It was there that Ian Thow, the former senior vice-president of Berkshire Securities -- a financial planning firm set up by AIC and which was recently sold to Manulife Financial -- operated. Thow was a high-profile executive well-known in the community for his apparent support of a number of local charities. Two years back, Thow departed from Berkshire and is now based in the United States. He has left a wake of misery with clients who claim they are owed more than $30-million. His activities are the subject of numerous investigations: the RCMP is involved, as is the Mutual Fund Dealers Association. (The alleged fraud is the largest in MFDA's history.) The B.C. Securities Commission has conducted a hearing into Thow (It alleged fraud, registrant misconduct, misrepresentation and trading without registration) and is expected to present its findings next month.
While the regulatory process drags on, the way that Berkshire has dealt with some of Thow's former clients over the past two years has attracted considerable attention. (For them, the hope is that a new broom, Manulife, will step up the process and try and clean up the mess quicker than Berkshire.) For instance: - Many became involved because Thow told them about an investment opportunity, investing in shares of the National Commercial Bank of Jamaica -- a bank that AIC and Lee-Chin bought in 2002. (Thow also arranged for his clients to invest in mortgages.) But the allegation has been made that after taking their cash, Thow didn't use it to buy shares in the Jamaican bank. "Thow was, or at least became a predator [who] intentionally and systematically stole millions of dollars from his clients," said the BCSC in a closing statement.
Berkshire has adopted the position that the Jamaican investing activities were outside Thow's power, and hence isn't responsible. (Manulife has said it is "satisfied that his regrettable conduct was outside of his mandate with Berkshire.") In short, Berkshire's argument is that the clients should have known. (The BCSC said that many of Thow's clients were elderly and vulnerable to Thow's charms.)
But it has adopted a different stance for those who invested in mortgages. It's not exactly clear on what basis Berkshire made this distinction, given that those who invested in the mortgages were asked to sign a form that indicated it was non-member business. Yet they have been paid. About 18 months back, Lee-Chin said Berkshire has extended an "olive branch" not out of a legal obligation but a "moral obligation to help these people, some of whom will lose their homes." But those clients who invested in shares of the Jamaican bank haven't been forgotten. Berkshire has made settlements with some clients who invested in bank shares. - Berkshire has dragged the process on and on, all of which adds to the stress and financial hardship of Thow's former clients.
Some of the former clients have taken their claims to the courts. And Berkshire has been slammed for the way in which it hasn't complied with the rules of the court and various court orders. One justice termed Berkshire's behaviour unacceptable.
This isn't the first time Berkshire has dragged its feet involving compensating clients affected by its financial advisors. After a dozen years, a class-action lawsuit against Berkshire (then called AIC Investment Planning) was settled on the steps of the courthouse in London. The lawsuit related to the activities of Dino DeLellis, a former financial advisor who has been banned from the securities industry for life. As part of the lawsuit, a gag order was put in place, which means the victims of DeLellis's activities can't help Thow's former clients.
The Thow situation is an acid test for the MFDA, which has been around for almost 10 years, a surprise given that one wag thought it had died a few years back. The MFDA is a national self-regulatory organization that regulates the distribution side of the Canadian mutual fund industry. (While it has the power, its decisions are subject to approval by the provincial securities regulators.) From all reports, as it continues its two-plus year investigation of Berkshire's compliance activities, it is having a tough time deciding what is member business and what isn't. A perusal of the MFDA's rule book indicates the member firm is responsible for its staff at all times --especially if the activities are securities-related.