LSIF’s death rattle rumbles through the industry

In an effort to maximize whatever value is left for unitholders, the board is now soliciting offers to assume the management and/or ownership of its portfolio of almost 50 investee companies. It plans to make a written recommendation to unitholders within a few weeks.

The process could be taken over by a receiver if Crocus isn’t granted an extension to its directors and officers insurance, says Alfred Black, Crocus’s CEO. He says the board and senior executives will know shortly if they will continue to have personal liability protection from the fund’s losses.

“If we don’t, we’ll all be tendering our resignations effective June 30 and the Manitoba Securities Commission will appoint a receiver. The fund ceases to exist without [directors and officers insurance],” he says.

Hall says the board has already received
offers from three suitors: rival Ensis Growth Fund, Toronto-based Jovian Capital Corp.
and GrowthWorks Capital Ltd. in Vancouver.
He expects “considerably” more interest to surface shortly.

“Our primary objective is to make sure shareholders come out of this in the best possible position, considering the difficulties Crocus has experienced,” he says.

The share value will, in all likelihood, be less than the $7 valuation announced in April, he says. “This board came in after that,” he says. “It really depends on what [potential buyers] are willing to pay. Part of the problem is the more quickly you do it, the less chance you have of maximizing value.”
He hopes the new shareholder-approved strategy can be implemented in fall.

Dan Hallett, analyst and president of Windsor, Ont.-based Dan Hallett and Associates Inc., says long-time competitor Ensis will bear the brunt of Crocus’s demise because of geographical proximity. The backlash began during the RRSP season, which kicked off with Crocus announcing the freezing of its shares and the retirement of its founder and CEO, Sherman Kreiner.
Despite having the whole provincial LSIF market to itself, Ensis raised just $10 million from Manitoba investors, a 33% decline from the $15 million it raised in 2004.

As well, the almost 50 other LSIFs across Canada experienced some fallout, Hallett says, because Crocus’s failures raises
questions about their own operations.
“People say, ‘If it’s happened there, where else is it happening?’” he says.

“It has long been a concern for the LSIFs that they lack transparency in terms of how portfolio values are adjusted from time to time and what the carrying values of each specific investment are,” he adds.

Criminal investigations

To make matters worse, the Winnipeg RCMP commercial crime division has announced it will undertake a criminal investigation into Crocus’s activities. No details of the investigation were given, but Manitoba Auditor-General Jon Singleton more than hinted at them in the much anticipated 245-page report he released May 31.

He cited possible breaches of the Criminal Code related to fraud, filing a false prospectus and counselling somebody to commit a crime. Singleton also says Crocus’s transactions and involvement with two companies in its investment portfolio, neither of which were named, should be investigated for possible criminal offenses.

“We will support the investigation in any way we can,” Black says.

Crocus has been in turmoil since December 2004, when it halted the trading of its shares the same day it announced Kreiner’s retirement.

It has since announced a $46-million writedown in the value of the fund, and has been subject to extensive investigations by the auditor general and the MSC.

Singleton’s report highlighted extravagant travel and spending, inflated portfolio values and misrepresentation of a $10-million cash infusion from Montreal-based Solidarity Fund.

The MSC alleges 10 former directors failed to act quickly enough to prevent investors from buying shares at an inflated price late last year. As well, the MSC accuses certain directors of failing to follow weekly procedures for valuing the fund’s shares.

@page_break@Capital markets and investor confidence can be negatively affected when directors forget their responsibilities, says Steven Kelman, president of Toronto-based Steven G.
Kelman & Associates Ltd. He questions whether advisors will consider the increased due diligence when recommending an LSIFs that will undoubtedly result will be worth the payout.
“You have to do a lot of work for your $200,” he says, noting LSIFs could go a long way toward boosting investor confidence if they provided more transparency with their operations.

Hallett warns the wind-down of Crocus may not be as simple as selling off the portfolio and writing cheques to unitholders.
“Technically, investors have to pay back their tax credits,” he says.

On a $5,000 investment in Crocus, unitholders would have received $1,500 back. Even though the fund has been devalued twice since last September, anyone who redeems his or her shares early would have had to pay back the full tax credits, he says.

Ideally, he says, regulators will be flexible and allow Crocus unitholders to roll their investments into Ensis, the only other LSIF in the province that’s eligible for both federal and provincial tax credits.

“That will allow people to keep their money invested and it’s still going to the same purpose: venture capital financing in Manitoba. People could get out of Crocus, keep that exposure and not pay back the tax credits,” he says.

John Bart, president of the Canadian Shareowners Association, says the government should make an exception for Crocus investors. “If it were me, I’d want my money out, and I’d go after the government to solve the problem,” he says. “The government is a party to this problem. All the little investors got lured into this by the tax return; the least it could do is let them out.”

Manitoba Finance Minister Greg Selinger says it’s too early to say what the province will do. Once he receives a proposal from Crocus, he says, he will make a decision that’s fair to both shareholders and taxpayers. IE