David Baines
Vancouver Sun

Saturday, December 15, 2007

Did the Mutual Fund Dealers Association do its job Thursday when it fined Berkshire Investment Group Ltd. $500,000 for failing to take swifter action against its former Victoria branch manager, Ian Thow?

The answer is, who knows? It depends on how you define the case.

Certainly the case that MFDA enforcement staff put before the hearing panel was handled sensibly enough. That was the issue of whether Berkshire responded appropriately to two complaints that were filed about Thow's illicit dealings in September 2004 and April 2005.

The MFDA panel decided that the firm had not, which is why it imposed a $500,000 fine and $50,000 in costs.

But there was another issue that was not mentioned. That was the question of what efforts Berkshire made to reconcile Thow's lavish lifestyle -- which included jet planes, a helicopter, and a waterfront home -- with his relatively modest income as a branch manager.

That was the elephant in the hearing room that everybody ignored. Everybody, that is, but the victims.

On Thow's advice, many of his clients had liquidated their accounts at Berkshire, incurring huge deferred service charges in the process. This large-scale liquidation of client accounts should have rung loud alarms at Berkshire.

Then these clients put their money into Thow's investment schemes. Or so they thought. In fact, Thow was taking the money and spending it on all sorts of insane luxuries, including flying planeloads of people on weekend trips to the West Coast Fishing Lodge, and buying $10,000 bottles of scotch.

It was a profligate spending pattern that was abundantly obvious to everybody who came within his orbit. This conspicuous consumption should have rung loud alarms at Berkshire. Where was all this money coming from?

The question, however, wasn't raised by enforcement staff at the hearing, or in the settlement agreement. It was like it didn't even exist.

When I asked MFDA enforcement director Shaun Devlin about this apparent omission, he insisted that his staff had reviewed the matter, and found no supervisory breaches.

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

Okay. So as part of its due diligence process, did Berkshire review the business's financial statements to make sure it was generating the kind of profits required to finance such an expensive lifestyle?

Surely this is the acid question. But at that point, things got fuzzy. Instead of answering the question, Devlin gave more vague assurances that, when it came to reconciling Thow's lifestyle with his income, Berkshire did not commit any supervisory breaches.

I'm skeptical. I don't think Berkshire made serious inquiries, otherwise Thow would have been immediately exposed as a fraud. But the point is, we don't know for sure, because this issue has not been publicly addressed. All we have is the vague response of a regulator who is essentially saying, "Trust us, we looked at this and there was nothing there."

As I have said so many times before, whenever a regulator asks you to trust him, you know you are on the road to hell.

▪

Birthdays are not always happy occasions. Certainly, the fourth birthday of the Vancouver RCMP Integrated Market Enforcement Team is no cause for celebration.

So far, the team has laid only one charge, against commodities fraudster Kevin Steele. He pleaded guilty and was sentenced to six years in jail.

This is a pathetic level of production. Taxpayers should be concerned.

The annual budget of the Vancouver team is about $2.5 million. It has 13 RCMP and civilian members, two Vancouver Police Department members, a forensic accountant, a federal prosecutor, and four public service support staff. Starting Monday, there will be two more RCMP investigators.

This is a lot of input for relatively little output. But Insp. George Pemberton, who heads the Vancouver IMET, says the team is "starting to get things together."

It has submitted two briefs to Crown for charge approval (one relates to Thow) and is working on the alleged case of assay-altering by former Southwestern Resources CEO John Paterson.

The team has also assisted on many other cases. For example, it helped the Investment Dealers Association of Canada investigate (and eventually shut down) securities dealer Graydon Elliott, and it helped U.S. authorities in their investigation and arrest of former Vancouver promoter Beverlee Kamerling.

The Vancouver team has also been doing a lot of "door knocking" in relation to dubious U.S. over-the-counter promotions that are being run out of Vancouver. The idea is to stop these deals before they gain any momentum.

But, sigh, we have heard all of this before. The bottom line is criminal charges, and the sad fact is that, so far, there has only been one.

Of course, charges are laid by the Crown, so we must also point the finger at the B.C. attorney-general's ministry. And there are many other impediments to the efficient operation of the criminal justice system that have nothing to do with the RCMP, ranging from onerous disclosure requirements to unreasonably high evidentiary standards.

The net result is that it is impossible to hold any particular component to account, which is why we are in such a mess.

dbaines@png.canwest.com

© The Vancouver Sun 2007

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