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Berkshire hearing a litmus test

Barry Critchley

Friday, December 07, 2007

If there is to be a new beginning to the effectiveness of Canada's securities regulatory system -- "Third World" is how one SEC official described it --it may start in a hearing in Vancouver next Thursday.

A three-person panel will assess the settlement agreement between the Mutual Fund Dealers Association of Canada and Berkshire Investment Group, a firm best known for its association with Michael Lee-Chin's AIC Funds. (AIC/Lee Chin used to be Berkshire's largest shareholder. The firm is now owned by Manulife Financial Corp.) Berkshire also formerly employed Ian Thow, who was a senior vice-president in its Victoria office and prominent in the local community.

In October, however, the B.C. Securities Commission said Thow, "perpetrated a fraud, made misrepresentations, traded in securities without being registered, and failed to deal fairly, honestly and in good faith with his clients when he took millions of dollars from his clients to invest in securities that did not exist."

The BCSC investigated about $8-million of missing monies, about 25% of what Thow, now living in Seattle, is alleged to have misappropriated.

Now it's the MFDA's turn to weigh in. The panel will focus on the extent to which Berkshire "failed to conduct reasonable supervisory investigations of the activities of Thow, and to take such reasonable supervisory and disciplinary measures as would be warranted by the results of its investigations …and the public interest."

And unless the settlement is large enough -- in monetary terms and/or penalties imposed on Berkshire -- investors will be left to wonder: Is there any hope after they get abused, and is the system set up to help them or not? "Canadians are watching and if nothing material happens, then real estate, art and old cars will become the chosen investments and not mutual funds," said one affected investor.

And the panel has shown it isn't a rubber stamp: Six weeks ago, it rejected a settlement agreement between the two parties, presumably because the penalties were the equivalent to being confined to Club Fed.

Restricting the ability of a firm to act is a far more effective penalty than imposing a cash fine. (Companies have lots of cash.) Just ask the gang at Canadian Imperial Bank of Commerce. As part of the Enron settlement, it was unable to be involved in certain U.S. business activities for a period of time.

Much has been happening behind the scenes since Oct. 22 when the panel rejected the initial settlement.

For starters, Manulife is now more involved. Self-interest provides part of the reason as it doesn't want to see the $13-billion of assets and 700 advisors it bought erode in value because of the antics of Berkshire. It also wants to put the mess behind it, even though it gave Berkshire the right to continue to litigate claims before the courts. (For giving that concession, part of the purchase price was put in escrow.)

Clearly Berkshire, which has been accused of legal piling on, has chosen not to follow the Manulife approach of taking care of clients: A few years ago, Manulife paid 100¢ on the dollar to its clients who had invested in Portus Alternative Asset Management Inc. Still to be heard from is the RCMP's Integrated Market Enforcement Team. It handed in its so-called "court brief" last July. The next stage, according to Sgt. David Ackerman, is "waiting for the Crown to lay charges." Berkshire did not return calls.

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Ian Thow takes flight