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Fox Guarding the Hen House


Mutual Fund Dealers still pondering how to deal with Berkshire

David Baines

Tuesday, October 23, 2007

What are we to make of the Mutual Fund Dealers Association's rejection of a proposed settlement with Berkshire Investment Group over its alleged failure to properly supervise former employee Ian Thow?

On Monday, a hearing panel from the national association spent three hours reviewing the proposed settlement before finally rejecting it.

We don't know what was in the settlement. That's because the meeting was held in camera. There's good reason for that: if the settlement is rejected (which it was in this case) neither of the parties are prejudiced by admissions they conditionally made.

Thow, of course, is the rogue broker who persuaded several dozen clients to invest up to $30 million in non-existent investments. Even though the investments were not authorized and did not show up on client monthly statements, MFDA investigators have alleged that Berkshire didn't properly supervise him.

Under MFDA rules, errant members can be fined up to $5 million and, in the most serious cases, expelled from the association. Settlements, of course, are the product of negotiation, so there is no upper limit for penalties in instances where the parties agree to settle.

I think it is a reasonable bet that, whatever admissions were made, the hearing panel didn't think the penalties were tough enough.

Alternatively, the penalties might not have been adequately supported by the admissions. As a result, the panel might have found itself in the awkward position of not being able to assess the reasonableness of the settlement.

This is what we saw with the hearing panel struck by the Investment Dealers Association to consider a settlement proposal between IDA enforcement staff and Union Securities, which had committed serious compliance breaches.

In that case, the panel begrudgingly accepted the settlement last year, even though it complained that it didn't have enough information about the firm's misconduct to determine whether the agreed-upon penalties were appropriate.

In this case, Berkshire is probably not too anxious to make too many serious admissions lest they jeopardize the firm's position in upcoming litigation with Thow's victims.

Whatever prompted the rejection, it's the first time since December 2004 (when the association commenced disciplinary actions against mutual fund dealers) that a settlement has been recommended by both sides but rejected by the hearing panel.

Still, it's not a huge surprise. This is a very high-profile case, and no panel is going to approve a settlement that doesn't reflect the seriousness of the offences and needlessly subjects them to public criticism.

Also, this panel was headed by Vancouver lawyer Stephen Gill, who has chaired many IDA panels. My general impression, based on decisions arising from his panels, is that he has a firm grip on the issues and does not suffer miscreant brokers lightly.

After the panel announced its verdict late Monday, Berkshire in-house counsel Julie Clarke and outside counsel Joel Wiesenfeld (a high-profile Toronto securities lawyer) declined comment and quickly left the hearing room.
Later, Berkshire and Manulife Securities, which recently acquired Berkshire, issued a joint release in which Berkshire expressed its "disappointment" with the panel's decision, but promised "to continue to cooperate with regulators working to settle the matter."

The release also made it clear that Berkshire's former shareholders (including Michael Lee-Chin), "continue to be financially responsible, and have indemnified Manulife for all claims and losses relating to Thow's activities, including whatever financial penalties agreed upon or imposed by the MFDA."

It continued: "Although Manulife is not responsible for the unfortunate and regrettable activities of Thow, Manulife is monitoring the status of any remaining outstanding claims. Manulife is anxious to see that any remaining claims that are determined to be legitimate after receipt of additional information or determination by the courts are honoured and paid."

Monday was a busy day for the MFDA. In addition to dealing with the Berkshire matter, the association permanently banned Ravi Puri, a former mutual fund salesman with Ascot Financial Services.

MFDA enforcement staff had alleged that:

- Between July 2002 and May 2005, Puri redeemed $146,400 from the mutual fund accounts of five clients and diverted the proceeds to a company he controlled.

- Between November 2003 and October 2004, he failed to account for another $118,600 he received from two clients for investment purposes.

- Starting August 2006, he failed to attend interviews with MFDA investigators.

In addition to permanently banning him, the association fined Puri $50,000 for failing to cooperate with the investigation and $500,000 for failing to deal with his clients honestly and in good faith. It also assessed $10,000 in costs.



Ian Thow takes flight