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Berkshire to pay $500,000 in Thow affair

David Baines

Friday, December 14, 2007

Berkshire Investment Group Ltd. has agreed to pay a $500,000 fine and $50,000 in costs after admitting it should have done a better job checking into two earlier complaints about the dealings of its former Victoria branch manager, Ian Thow.

In a settlement Thursday with the Mutual Fund Dealers Association, the Burlington, Ont-based mutual fund dealer conceded that it if its compliance staff had dug deeper into complaints filed by investors in September 2004 and April 2005, Thow's bogus investment schemes might have been discovered at an earlier date.

As it was, Thow did not resign until June 1, 2005. In the meantime, Thow duped investors out of an additional $6.34 million, of which $4.51 million was provided by Berkshire clients.

The settlement notes that Berkshire's "failure to conduct reasonable supervisory investigation did not arise from any general failure to maintain and adhere to appropriate supervisory polices and procedures, or from any intentional non-compliance on the part of the respondent."

It also says MFDA staff are satisfied that since these events occurred, Berkshire -- which has since been acquired by Manulife Financial -- has reviewed its policies and procedures and supplemented them with new procedures relating to its supervision of its employees' outside business activities.

The settlement also notes that Berkshire settled with 29 clients, reimbursing them a total of $4.2 million. It also says MFDA staff will continue to monitor the firm's handling of other complaints related to Thow's activities and reserves the right to take further disciplinary action against the firm, if necessary.

The settlement does not address one of the over-arching questions in this case: How did Berkshire reconcile Thow's lavish lifestyle - which included jet planes, a helicopter and a waterfront home - with his relatively modest income as a branch manager?

MFDA enforcement director Shaun Devlin said in an interview that enforcement staff reviewed that issue and were satisfied that Berkshire committed no supervisory breaches in that regard.

He said Berkshire was aware of that Thow had an outside business - leasing block air time on his jet planes - and approved it as a "dual occupation." He said Berkshire also reported this outside endeavour to the B.C. Securities Commission, which also approved it.

Thow was working as a senior vice-president and co-branch manager of Berkshire's Victoria office when he persuaded at least 40 people to invest more than $18 million in three types of investment schemes: shares of the National Commercial Bank of Jamaica, a purported initial public offering of Berkshire shares, and short-term loans to property developers.

However, other than $3.2 million which he used to repay other investors, he has not accounted for or repaid the money. Instead, he used it to support his extravagant lifestyle.

In October, the B.C. Securities Commission described Thow's scheme as "one of the most callous and audacious frauds this province has seen" and banned him for life from the B.C. securities market. The RCMP is also conducting a criminal investigation. Thow has fled the country and is now living in Seattle.

Several clients have filed lawsuits against Berkshire, claiming the firm did not properly supervise Thow. Those cases revolve mainly around the question of when Berkshire knew or ought to have known that Thow was engaging in unauthorized dealings.

The settlement agreement notes that in September 2004, Berkshire was indirectly told by a wealthy businessman, who was not a Berkshire client, that he had given Thow $1.2 million for shares in the Jamaican Bank and had not gotten any confirmation of his investment. He also said several others had provided lesser amounts for the same purpose.

When Berkshire compliance staff confronted Thow, Thow claimed it was all a "mistake," that the money had been provided for block air time and that the businessman was trying to "play hardball with him."

The businessman subsequently confirmed that it was a "misunderstanding," that the money was for block air time and that Thow was his personal friend. On that basis, Berkshire's compliance staff considered the matter resolved and took no further steps.

Little did Berkshire know, but it was all a set up. According to the settlement agreement, Thow had promised the businessman he would repay the $1.2 million if he played along.

The settlement notes that during this period - from September 2004 to April 20, 2005 - Thow solicited $5.8 million from investors, of which $4.3 million was obtained from Berkshire clients. He failed to account for or repay that money, other than the money he used to repay other investors.

On April 20, 2005, another investor - once again, a non-client - advised Berkshire he had also given Thow $200,000 to buy shares of the Jamaican bank, but had not gotten any confirmation of the investment and Thow was not returning his calls. However, he later cancelled a meeting with Berkshire compliance staff and refused to cooperate.

Once again, unknown to Berkshire, the investor had pulled back because Thow promised to repay money. (As events unfolded, Thow never did return the money.)

On May 5, Berkshire compliance staff met with Thow, and Thow tendered his resignation. Once again, Thow denied the investor had given him money to buy bank shares, rather he said it was to purchase block air time.

But this response was not consistent with a $100,000 cheque the investor had given Thow. That cheque clearly indicated it was for bank shares.

The settlement says Berkshire had an obligation to immediately suspend Thow, but instead agreed that his resignation would not be effective until June 1, 2005.

During this period - from April 20 to June 1, 2005 - Thow solicited another $510,000 from investors, or which $210,00 was obtained from clients. Once again, he did not account for or repay any of that money, other than the amounts he used to repay other investors.

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Ian Thow takes flight