A proposed settlement between the enforcement staff of the Mutual Fund Dealers Association of Canada and Berkshire Investment Group over Berkshire’s alleged failure to supervise rogue employee Ian Thow properly has been rejected by an MFDA hearing panel in Vancouver.
The panel announced after a three-hour in-camera hearing on Oct. 22 that it would not accept the proposal. No details were released and no reasons were given for rejecting it.
MFDA enforcement director Shaun Devlin in Toronto says the MFDA now has two options: negotiate a new settlement with Berkshire or issue formal allegations against the firm and proceed to a full-blown hearing.
“It has been one of the [MFDA’s] highest-priority cases,” he says, “and continues to be.”
Berkshire was recently acquired by Manulife Securities International Ltd. , but former shareholders, including Berkshire founder Michael Lee-Chin, continue to be financially responsible in the case.
The panel’s rejection leaves a number of disgruntled players, including Berkshire, which promises “to continue to co-operate with regulators working to settle the matter.”
Investors who are suing Berkshire for failing to supervise Thow properly are also disappointed. They say that, without formal admission from Berkshire, their litigation will be much more difficult.
Thow worked as senior vice president in Berkshire’s Victoria office and as a member of Berkshire’s advisory board until May 2005, when he suddenly resigned, ostensibly for personal reasons.
In ensuing days, several former clients filed lawsuits against Thow, alleging he had induced them to invest millions of dollars in non-existent investments, including preferred shares of National Commercial Bank of Jamaica and mortgage loans to real estate developers in Vancouver.
The clients claimed that, rather than investing the funds as promised, Thow used the money to finance an extravagant lifestyle that included an executive jet, a helicopter, a waterfront home just outside Victoria, a luxury yacht and numerous high-end cars.
Thow’s clients have also sued Berkshire, alleging the firm had failed to supervise its employee properly. Berkshire denied any responsibility, noting the investments were conducted without the firm’s knowledge or approval, and did not show up on client statements.
Nevertheless, the firm has settled with about 15 investors while leaving several large investors out in the cold. The latter group includes George Thomson of Nanaimo, B.C., who lost $686,000; and Brad Goodwin of Richmond, B.C., and several of his family members, who lost $1 million.
Shortly after Thow’s scheme was detected, he was assigned into bankruptcy and he fled to Seattle. The RCMP’s integrated market enforcement team in Vancouver has recommended criminal charges against him, which are expected to be laid shortly.
The B.C. Securities Com-mission enforcement staff had accused Thow of defrauding dozens of clients of up to $30 million. For hearing purposes, the BCSC narrowed the charges to 26 clients who lost $6 million. In an Oct. 17 decision, the BCSC panel found that Thow had perpetrated a massive fraud: “This case represents one of the most callous and audacious frauds this province has seen.”
The BCSC panel will consider appropriate sanctions at a later date, but those will almost certainly include a lifetime ban on Thow from the B.C. securities market. As a matter of practice, the BCSC panel has left the issue of Berkshire’s conduct to the MFDA, which can fine errant members up to $5 million and, in the most serious cases, expel them from the association.
Although nobody outside the hearing room knows for sure, there are several possible reasons why the MFDA panel rejected the proposed settlement with Berkshire. The most obvious is that the panel did not think the penalties were tough enough. This theory is consistent with the fact that the panel was led by Vancouver lawyer Stephen Gill, who has chaired many Investment Dealers Association of Canada panels and has a reputation for not suffering miscreant dealers lightly.
Alternatively, the penalties outlined in the proposed settlement may 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 happened last year with the IDA panel that reviewed a proposed settlement with Union Securities Ltd., which had committed serious compliance breaches. In that case, the IDA panel begrudgingly accepted the settlement, 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.
@page_break@In Berkshire’s case, the firm may be more willing to submit to heavy sanctions than make serious admissions, lest it jeopardize its position in upcoming litigation with Thow’s victims.
Asked how investors should view the rejection, the MFDA’s Devlin says: “They should view it as the process working.” He concedes, however, that Berkshire clients who have filed lawsuits against Berkshire and were hoping for substantive admissions to advance their cases “may have a different view.”
Goodwin, whose case is set for January, is certainly disappointed by the outcome. The failure to secure any formal admissions from Berkshire will “make our litigation harder,” he says.
Berkshire was represented at the hearing by in-house counsel Julie Clarke and outside counsel Joel Wiesenfeld, a high-profile Toronto securities lawyer with Torys LLP. Both lawyers declined to speak to reporters but, later in the day, Berkshire and Manulife issued a joint release in which Berkshire expresses its “disappointment” with the MFDA panel’s decision.
According to the press release, Berkshire’s former owners indemnify Manulife for all claims and losses relating to Thow’s activities, including “whatever financial penalties are agreed upon or imposed by the MFDA.”
The release adds: “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.” IE
MFDA panel rejects proposed Berkshire settlement
No reason given for decision, which stems from allegations against rogue employee Ian Thow
- By: David Baines
- November 12, 2007 November 12, 2007
- 11:05