Despite a $200-million lawsuit launched by a group of shareholders, potentially insurmountable brand damage and a court-appointed receiver looking to wind up the beleaguered entity, a troupe of white knights is confident Crocus Investment Fund can still be saved to invest another day.

“We believe it’s not as big a disaster as some people think,” says Nick Hirst, spokesman for a Manitoba Federation of Labour-sponsored group proposing a new board of directors be formed to run the fund.

“We don’t disagree with any of the valuations that have been produced but we believe those valuations have been done in a climate to suggest they’re on the low side. If you were able to keep Crocus as a living entity, husbanding the resources would produce a better return for shareholders than disposing of its assets now,” he says.

Crocus halted trading of its shares on Dec. 10, 2004 — the same day it announced the retirement of its founder and CEO, Sherman Kreiner. Since then, it has been investigated by the Manitoba Securities Commission and the RCMP has launched a criminal probe into some of Crocus’s activities.

In April, Crocus’s board announced its share price would be “a nickel or two” below $7 as it announced a $46-million write-down to the fund. Crocus’s shares peaked at more than $15 in 2000.

“It seems to me that shares that go on the market for $6, after having had the crap kicked out of it by an accountancy firm and bankruptcy experts, is probably a good buy. We do believe it can be returned to market. It would need to be a revamped Crocus, with a new organization taking over,” Hirst says.

Manitoba Auditor General Jon Singleton issued a scathing report on Crocus in May, outlining a lengthy list of problems with the fund, including excessive spending, poor investment and valuation practices and poor supervision from the board.

Shortly after, the fund announced it could not recover from the repeated setbacks, would not return to market and would search out another entity to take over its assets. Before the fund’s officers and directors could act, they resigned en masse because they were unable to obtain insurance to cover them from financial liability in their positions.

Several other funds, including ENSIS Growth Fund in Winnipeg and GrowthWorks
Capital Ltd. have already expressed interest in taking over what’s left of Crocus.

“Manitoba is a province we would be interested in for a regional-style fund while having the advantages of the lower costs of being a national player,” says David Levi, president and CEO of GrowthWorks. He notes it has already partially fulfilled its mandate of creating a series of regional funds in B.C., Saskatchewan, Ontario, New Brunswick, Nova
Scotia, and Newfoundland and Labrador.

But Hirst says it would be better to have a third party run a new Crocus.

“Merging with somebody else isn’t in the best interests of Crocus shareholders, it’s in the best interests of the merging company,” he says.

The MFL, which was also Crocus’s labour sponsor, is proposing the new board be composed of Hirst, a former editor of the Winnipeg Free Press, Darlene Dziewit, president of the MFL, Michael Menzies, former CEO of Inner-Tec Security in Winnipeg, and Stuart Smith, former leader of the Liberal party of Ontario.

The situation is complicated by a $200-million lawsuit launched by a group of disgruntled shareholders in July against the fund’s former officers, directors, auditors, brokers and the MSC.

In a statement of claim filed in the Manitoba Court of Queen’s Bench, the group says the defendants portrayed Crocus as a “major success story, a business enterprise benefiting Manitoba with the expectation of growth in the future. The picture created was a sham.”

The suit has requested general and special damages of $150 million and punitive damages of $50 million. Two brokerages, Nesbitt Burns Inc. (now BMO Nesbitt Burns) and Wellington West Capital Inc. are named in the suit,

The suit claims both brokerages failed in their duty to ensure the Crocus prospective contained “full, plain and true disclosure” of its financial information, and to correct erroneous information so the value of the fund would be based upon “complete, accurate and truthful information.”

The close ties between Crocus and Manitoba’s NDP government have lead to repeated opposition calls for a public enquiry. John Loewen, Progressive Conservative economic development critic, has been the most vocal. In an open letter to Premier Gary Doer, he says the collapse of Crocus has put a cloud over capital markets in the province.

@page_break@“Stewardship of our capital markets is raising eyebrows nationally. We are in danger of leaving the impression with investors that our financial markets are not well managed.
Only by knowing what went wrong will we be able to prevent it from happening again,” he writes.

The Crocus saga has also presented a challenge to Bill Watchorn, CEO of ENSIS,
Manitoba’s only other labour-sponsored fund. After seeing its fundraising falter in the 2005 RRSP campaign while Crocus was unravelling — raising $10 million, two-thirds of what was brought in the previous year — Watchorn knows he has to set his fund apart if it is to regain investors’ trust. He says he’s optimistic ENSIS will exit from one to four of its 28 investments this year, which will generate profits and boost the fund’s return. IE