One of the key questions in the case of Berkshire Investment Group Inc.’s supervision of rogue broker Ian Thow is: how did Berkshire reconcile Thow’s extravagant lifestyle with his relatively modest income as a branch manager? Much to the chagrin of his victims, that question remains unanswered.

In December, a Mutual Fund Dealers Association of Canada hearing panel ratified a settlement agreement in which Berkshire admitted it did not act diligently enough when it received two earlier complaints about Thow. That supervisory lapse gave Thow additional time to flog his bogus investment schemes, resulting in millions of dollars of additional losses for his victims. For these transgressions, Berkshire has agreed to pay a $500,00 fine and $50,000 in costs.

As has been well reported, Thow used his ill-gotten gains to finance a life of conspicuous consumption. He bought several jet planes and a waterfront home outside Victoria.

Thow incurred huge personal expenses, according to bankruptcy trustee Michael Cheevers of Vancouver. In the 30-month period from January 2003 to his resignation from Berkshire in June 2005, Thow charged about $2.7 million on his personal credit cards.

“Included in these figures are cash advances totalling $428,893, the majority of which were taken either in or close to casinos,” Cheevers has noted. During the same period, Thow spent $145,313 on dining, $826,079 on trips (mainly hotels), $100,546 on jewellery, $137,963 on clothing and $180,487 on furniture.

“How could Berkshire’s compliance people not know that something was going on?” wonders former client Brad Goodwin, whose family lost $1 million at Thow’s hands.

This was the elephant in the MFDA hearing room that everybody seemed to ignore. On Thow’s advice, many of his clients had liquidated their mutual fund accounts at Berkshire, incurring huge deferred service charges in the process. This large-scale liquidation of client accounts should have rung loud alarms at Berkshire.

Then those clients put their money into Thow’s investment schemes — or so they thought. In fact, Thow was taking the money and spending it on luxuries.

It was a profligate spending pattern that was abundantly obvious to everybody who came within his orbit, and this also should have rung alarms at Berkshire. Where was all this money coming from? The question, however, wasn’t raised by enforcement staff at the hearing or in the settlement agreement. It was as if it didn’t even exist.

In a later interview, MFDA enforcement director Shaun Devlin insisted that his staff reviewed the matter and found no supervisory breaches. He says Berkshire was aware that Thow had an outside business interest — selling block air time on his airplanes — and Berkshire had approved it as a “dual occupation.” Devlin also said this outside business had been reported to the B.C. Securities Commission, which had also approved it.

This begs the question: as part of its due-diligence process, did Berkshire review financial statements to make sure the plane business was generating the kind of profits required to support such an expensive lifestyle?

At that point, things get fuzzy. Instead of answering the question, Devlin gave more vague assurances that Berkshire did not commit any supervisory breaches.

It’s difficult to imagine that Berkshire made any serious inquiries. Otherwise, Thow would have been immediately exposed. But the point is, the public will never know for sure because this issue has not been publicly addressed. IE