Crocus directors face charges about fund’s operation

“The shareholders should be able to rely on a board of directors to operate a fund in a proper manner,” says Doug Brown, MSC director of legal and enforcement matters in Winnipeg. “They had a responsibility to prevent further sales after they knew the value wasn’t accurate.”

The commission further alleges that five different board members acted “contrary to the public interest” at various times by failing to follow the proper weekly procedures for valuing the fund’s shares. The MSC will hold a hearing on May 6.

The uncertain future of the 13-year-old labour-sponsored fund has caused much anxiety among its more than 35,000 Manitoba investors in the past four months.
Since the shares were frozen at $10.45 a
share, and a complete review of its portfolio was undertaken, a number of high-profile executives and directors have resigned and the fund missed the RRSP season for the first time in its existence.

Just hours after the MSC allegations were made public, Crocus announced it had completed a much-anticipated valuation of its shares, which, it says, will be worth “a nickel or two” less than $7 when they resume trading.

Alfred Black, who had the “interim” removed from his CEO title at an April 6 board meeting, says the same directors have approved an approximately $46-million reduction in the value of the portfolio, which is made up of more than 50 private Manitoba companies. The adjustment is the result of the company’s internal work as well as independent valuations by four national accounting firms.

The Crocus portfolio was valued at $155 million in December and $170 million, or $11.55 a share, as recently as this past September. Crocus units peaked at $15.39 a share in July 2000, but fell steadily in the following years.

Black says the fund will make a formal reply to the MSC allegations. He says the requirement that two Crocus directors sign off on the fund’s valuation each week was difficult to enforce at times because they weren’t in the office on a regular basis. “We mailed it out to them; they’d sign it and mail it back. The paperwork was a few days behind the actual decision,” he says.

The weekly valuation wasn’t a “high-level policy issue” because it merely calculated the fund’s expenses and revenue for the previous seven days, he says. Major changes to valuations of individual companies, however, were approved by the board.

Black addresses the three-week gap during which, the MSC alleges, sales shouldn’t have been allowed, by saying the board was receiving conflicting information from Crocus about a possible portfolio devaluation. The board decided it was “appropriate to take a few days or weeks” to determine its eventual action.

During the 22-day period in question, Crocus had sales of $109,720 — about 1% of what it raises each year — and redemptions of $138,678.

Brown says a number of ongoing investigations — including the findings of the Office of the Auditor General and an independent corporate governance review of Crocus’s operations — must be completed before Crocus can apply to the MSC to resume trading. “Shareholders are basically in limbo at this point, but these steps are necessary to protect their interests,” he says.

The MSC first asked a few pointed questions of Crocus last September. The queries intensified in December, before turning into a full investigation early in 2005.
Brown says Crocus has cooperated fully, providing documentation and interviews when requested.

The MSC allegations are just that, Brown says, but they are supported with documentation. He says the MSC could impose financial penalties up to $100,000 each against board members if the charges are proven. The MSC wouldn’t want to penalize the fund itself, because that would only hurt investors .