Barry Critchley

Saturday, December 22, 2007

The next time there is some less-than-satisfactory activity in the world of mutual funds, send in the men.

It's clear the Mutual Fund Dealers Association of Canada-- the body that regulates the distribution side of the fund business --is not up to the task.

The MFDA -- set up a few years back at the request of the Canadian Securities Administrators -- was given a golden opportunity to ask some serious questions of Berkshire Investment Group, but didn't. For those who haven't followed the story, the MFDA investigated Berkshire to determine whether it had conducted reasonable supervisory investigations of the activities of Ian Thow, a senior vice-president in its Victoria office. More than $30-million of misappropriation claims have been filed against Thow, who has been living in the United States for the past 2½ years. About 10 days back, Berkshire and the MFDA reached a settlement that called for Berkshire to pay $500,000.

The British Columbia Security Exchange showed it is made of sterner stuff yesterday when it fined Thow $6-million and banned him permanently from the industry. Earlier, the BCSC said the case "represents one of the most callous and audacious frauds this province has seen."

The $500,000 MFDA settlement is chump change given that Berkshire knew for more than eight months about Thow's activities. We know that because the point was made in the settlement agreement. In September, 2004, Berkshire was told about an investment that one of Thow's clients was supposed to have made in the National Commercial Bank of Jamaica, a bank owned by AIC/Michael Lee-Chin. But Berkshire chose not to notify the co-branch manager. In fact, it didn't do much to either reign in or get a handle on Thow's extra curricular activities. From that September to April, 2005, Thow obtained a further $5.8-million, of which $4.3-million was from clients. Over the next six weeks, another $500,000 arrived. Those monies have been lost.

Thow engaged in considerable outside activities. He was buying fancy houses, owning and leasing airplanes, flying guests to fishing camps and to Jamaica, hosting Lee-Chin at a meet-the-billionaire session, and making large donations to local charities. And he was doing it all on the salary of a financial planner, whose regular book of business wasn't expanding that quickly. Indeed, if Berkshire had been half on the ball, it would have asked the key question: Where is the money coming from? In short, how can Thow do all those things on what we are paying him at Berkshire? Readers can make up their own minds as to why Berkshire adopted a hands-off approach.

But just because Berkshire didn't do any probing, there's no reason why the MFDA, which has spent more than two years on the matter, should have ignored the issue. As the head of enforcement at the Ontario Securities Commission would note, it's just not the Canadian way. Apparently sending in the clowns is the Canadian way.