Crocus receiver targets former executives

Holmes has declined to speak to the media, but in his report he says he uncovered evidence that managers and directors acted in bad faith. In particular, Holmes states he found numerous examples of investment valuations being deferred so that the fund’s shares would not be negatively affected during the lucrative RRSP marketing season.

Holmes says in his report that this evidence would probably justify the receiver stripping managers and directors of indemnification, which would force them to pay their own legal fees and civil judgments. He went on to suggest that he might even make a claim for the estimated $1 million in legal fees paid to date for the defence of Crocus managers and directors and seek repayment of imprudent follow-on investments provided to unworthy investee companies.

“It is the receiver’s view that the directors fundamentally abdicated their overall responsibility to manage the business and affairs of Crocus,” the report says. “That abdication manifested itself most significantly by allowing for the gradual, unsustainable inflation of the value of the investment assets and the net asset value per common share.”

Crocus stopped trading in December 2004 after concerns arose about the value of certain investments in its $125-million portfolio. Although the board of directors had a plan to revalue those investments and return to market, the fund was placed into receivership in June 2005.

After fending off demands by the Manitoba Federation of Labour, the sponsoring labour organization, to keep the investment portfolio intact and sell it to a British Columbia fund manager, Deloitte has been systematically liquidating the remaining Crocus investments.

The Crocus receivership has become an increasingly contentious affair as a $200-million class-action lawsuit launched by investors moves closer to certification. In response to Holmes’ report, some of the former managers and directors have launched their own allegations, accusing Holmes and Deloitte of being in a conflict of interest.

Holmes and Deloitte provided consulting services to Crocus prior to the fund going into receivership. These services included a major revaluation of the investment portfolio, which led to a $40 million write-down.

Bernie Bellan, the outspoken shareholder who’s spearheading the class-action lawsuit, says the receiver’s report enhances the evidence he and his group of former shareholders has compiled since Crocus halted trading. It’s also a significant shot in the arm for the lawsuit’s chances, he says.

“Holmes, in an effort to vindicate all the work he has done, is trying to show he’s doing something substantial. What he’s doing is adding evidence to the lawsuit. To that end, his work has been extremely beneficial,” he says.

Bellan adds he was buoyed by the receiver’s findings that there was a lack of supervision over the valuation process and that directors turned over complete responsibility for managing the fund to its officers. “Why were [the directors] so reluctant to voice objections to what was going on. What were they thinking?” he says.

Those named in Holmes’ report have claimed the receiver did not have the authority to conduct the investigation in the first place. Holmes authorized $700,000 in expenses to conduct the investigation, which he said was necessary so that he could determine why the fund collapsed.

Former Crocus CEO and founder Sherman Kreiner, who has been among the most criticized in the wake of the fund’s collapse, attacked Deloitte and Holmes in an affidavit filed in the Manitoba Court of Queen’s Bench following the release of the records review report. Kreiner says Holmes is in a direct conflict of interest and suggests the investigation was conducted to obscure Deloitte’s role in the lead up to the decision to put the fund into receivership.

@page_break@”Holmes’ report is an exercise in self-justification,” Kreiner states in his affidavit. “Based on my own recollection of what occurred, I believe he has presented a one-sided and distorted report to the court.”

Ken Filkow, the Winnipeg lawyer with D’arcy & Deacon LLP who’s representing a dozen former Crocus directors, says the report falls short of disqualifying the directors from being able to rely on their indemnification. In fact, he says much of what was referred to was already covered in a report released by Manitoba’s auditor general in the spring of 2005. The indemnifications were subsequently upheld by the court of appeal.

“I don’t think there is any evidence in the report of dishonesty or bad faith. To reach those conclusions is a leap of faith in terms of the documents they cite. The receiver made such a consequential issue of the report and its release and that there would be some kind of smoking gun. There isn’t and there wasn’t,” he says. IE