2008 year in review, part 7 of 8.

The past year has been a remarkable one for investors in many ways, including the spectacle of several high profile cases lurching through the Canadian regulatory system. From the $86 million lost by investors who placed their trust in Montreal-based Triglobal Capital Management, to the on-going battles over the mismanagement of labour-sponsored venture-capital funds at Crocus Investment Fund in Winnipeg, Canadian regulators have had their hands full: in most cases, allegations of wrong doing have yet to be finally resolved, and some are complicated by ongoing efforts to compensate investors.

Several closely watched cases are being prosecuted by Quebec’s provincial regulator, the Autorité des marchés financiers, and the enforcement agency says it is becoming more aggressive. AMF spokesman Sylvain Théberge says the agency has increased its staffing levels and taken on more files than in the past: its powers have also been broadened by the Quebec government.

In the Triglobal case, for one, investigators have alleged that from 1997 to 2007 principals of the company breached securities laws by selling illegal investments to clients who believed them to be conservative investments. The funds were funneled to accounts in the Cayman Islands and the Bahamas. The fraud came to light in late 2007: by early 2008, the remaining advisor network of the company had been sold to Quebec City insurer Promutuel Capital Trust Co. Most recently, the Royal Canadian Mounted Police launched a criminal investigation into the case. In addition, the Bureau de Revision en Valeurs Mobilieres (the independent tribunal that oversees the AMF) has approved an AMF request to extend a freeze on Triglobal assets until March 9, 2009, according to Théberge. “Meanwhile, our investigation on that company is still on going,” he said.

A particularly lengthy prosecution involves Montreal-based Norbourg Group, which defrauded investors of an estimated $115 million between 2000 and 2005. The 51 charges laid by the AMF range from 27 for manipulating the price of mutual fund units, to 24 for providing misleading financial filings to regulators. The extremely complex prosecution has dragged on for years: in July 2008, the Quebec Superior Court reduced the jail term of the group’s principal, André Vincent, to 8.5 years from 12 years. That decision is being appealed by the AMF, with a hearing scheduled for February 27, 2009.

Another Quebec case involves now bankrupt Mount Real Corp., also of Montreal. Two dozen people were slapped with a total of 619 charges on Jan. 24, 2007, but only four have been found guilty to date: Victor Lacroix, Armando Ferruci, Christophe Balayer and Luigi Muro. The four were convicted of a total of 134 charges and fined about $800,000. About 1,600 retail investors lost an estimated $130 million after buying unregistered notes with high rates of return. The notes were distributed mostly through the now-defunct iForum Securities Inc. and iForum Financial Services Inc. In late December, the AMF was still waiting for the courts to set a date for a hearing so that allegations may proceed against 19 other accused people in that file. The AMF’s Théberge says he expects that it may be set for February. The case grew even more complex at the end of 2008 when investors launched a class-action lawsuit against three accounting firms, two securities custodians and Mount Real’s former CEO, Lino Matteo.

Proceedings continued against the players in the Norshield Asset Management (Canada) Ltd. hedge fund bankruptcy scandal. The Ontario Securities Commission is pursuing charges of misleading investors and investigators brought against Montreal-based Norshield, Olympus United Group Inc., Norshield founder John Xanthoudakis, and company officers and directors Dale Smith and Peter Kefalas. According to the OSC, most of the company’s assets were moved offshore, and about 1,900 retail investors lost a total of approximately $132 million. The case took an unexpected turn at a commission hearing on Dec. 11, when a lawyer for Xanthoudakis and Smith asked that the charges against his clients be stayed. Lawyer Alistair Crawley argued that OSC chairman David Wilson is biased in the case: during a CBC interview in November, Wilson said Norshield was run by people who weren’t “honest.” The panel members must rule on the bias allegation before they can deal with the scheduling of final arguments in the case.

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There was significant progress in the widely-watched Portus Alternative Asset Management Inc. hedge fund case in 2008; in December, Société Générale (Canada), the Montreal-based Canadian arm of the French bank, agreed to pay the securities subsidiary of Toronto-based Manulife Financial Corp. $611 million to compensate Portus investors: SGC had backed securities issued by Portus. Manulife investors had already been compensated by the insurer, but Manulife pursued the suit against Portus on behalf of all Portus investors, and to recoup its own costs. As part of the settlement, SGC agreed to buy back its own deposit notes, now held by the Portus receiver, before they reached maturity. The agreement received court approval on Dec. 18. In addition, Manulife was taken to task by the Mutual Fund Dealers Association of Canada over fee arrangements with Portus. Although the panel found that Manulife did tell clients that its advisors received referral and trailer fees from Portus, it also concluded that Manulife failed to reveal that Manulife (not its advisors) received syndication fees from Portus. Manulife Securities was fined $200,000 for the contravention and $50,000 in costs.

Manitoba’s Crocus Investment Fund scandal still isn’t over for 34,000 investors. Unitholders of the labour-sponsored fund were expecting to be reimbursed in the fall of 2008, but a recent report by the receiver indicated more details — including settlement agreements in a $200-million class action lawsuit filed in the case — need to be resolved before any money can be paid out. Crocus went into receivership after a probe raised concerns about how the venture-capital fund was valuing the companies in its portfolio. According to the Sept. 30 quarterly report from Crocus receiver Deloitte & Touche LLP, the net carrying value of the 18 portfolio holdings is nearly $21 million. There is more than $64 million in cash and equivalents.

Not all the year’s notable enforcement cases involved provincial regulators or courts. The Investment Industry Regulatory Organization of Canada objected strongly when a former financial advisor managed to avoid allegations of breaching securities law by resigning from the industry self-regulatory organization. Toronto securities lawyer Robert Brush, who is representing former advisor Stephen Taub, persuaded the Divisional Court of Ontario that Taub could not be disciplined by his regulatory organization because he had resigned from its membership before discipline proceedings were launched. According to the Ontario Securities Act, self-regulatory organizations have authority to regulate members, but it does not specifically address the status of former members. The Ontario Securities Commission has since been granted leave to appeal the ruling. The matter is likely to be heard in February, 2009. A similar case in British Columbia involving former advisor Charles Dass was recently resolved in favour of the regulators when the B.C. Court of Appeal held that the SRO has the power to pursue former members.

IE