The B.C. Securities Commission has sanctioned one of Canada’s worst-performing mutual fund managers for taking undue risks with investors’ money.

In a settlement agreement released July 5, Raoul Tsakok admitted that he and his firm, Sagit Investment Management Ltd., failed to administer a family of 16 mutual funds “with the degree of care, diligence and skill that a reasonable person would exercise in the circumstances.”

He agreed to pay a $40,000 penalty and $5,000 in investigation costs, and submit to a permanent ban from acting as an advising director or trading officer of a mutual fund or registered securities dealer.

But the settlement agreement — which was negotiated by BCSC enforcement staff and did not require ratification by a commission panel — omits key information about Sagit’s offside investments that could be useful to investors who lost money in Tsakok’s funds.

The paucity of information in the agreement is “consistent with the securities commission’s policy of restricting information that should be in the public domain,” says John Woods, editor of Vancouver-based stock market information service Canada Stockwatch and a long-time critic of the commission’s disclosure practices.

Sagit was registered in British Columbia as an investment counselling firm and portfolio manager from 1986 to 2003. The firm managed a family of 16 mutual funds known as the Cambridge funds and the Trans-Canada funds. Tsakok was registered as Sagit’s advising director and trading officer, and was principally responsible for the investment decisions made by Sagit on behalf of the funds.

For years, Tsakok raised eyebrows in the investment community because of his penchant for risky stocks. Some of those investments, including Cycomm International Inc. and Turbodyne Technologies Inc., dissolved into scandals. Tsakok also worked closely with controversial Howe Street promoters, including Eugene Sirianni, who was eventually cited for stock manipulation and banished from the B.C. securities market.

Poor Returns

Because of exceptionally poor returns, the funds were inundated with redemptions. Total assets under Sagit’s administration dwindled from a peak of $238 million in early 1994 to $11.5 million by September 2002, when sales were suspended and the funds liquidated. At some point, Tsakok came under commission investigation. That investigation concluded with this settlement agreement.

In the agreement, Tsakok admits that between 1994 and 2003, he contravened securities rules by serving as an officer, director and principal shareholder of a company that traded on the TSX Venture Exchange at the same time as he was registered as a mutual fund manager. The company is identified as Richco Investors Inc.

Three other companies in which he bought inordinate amounts of stock for the funds are not identified.

In one case, he bought 173,700 shares of an unnamed company which, as the value of the funds declined, came to represent 20% of the net asset value of Cambridge Growth Fund and 20% of Cambridge Balanced Fund.

In another case, he acquired 6.7 million shares of an unidentified company. The agreement states that these investments “resulted in significant concentrations of securities that exposed those funds to unnecessary risk.”

In the third case, Tsakok directed Trans-Canada Dividend Fund — which was designed to provide unitholders a steady income stream — to purchase 35,000 shares of a company that had previously announced a special liquidation dividend.

“This dividend was a one-time return of capital. Since the company did not otherwise pay dividends, Trans-Canada Dividend Fund’s investment in the company could not be reasonably expected to produce a flow of income consistent with the investment objective of the fund,” the agreement states.

Once again, the investment was not identified. BCSC executive director Brenda Leong, who signed the settlement agreement on behalf of the commission, declined to explain why.

The issue is critical because such settlements are negotiated behind closed doors, thereby depriving investors of the benefit of a full public hearing. It is also critical because Leong can ratify such decisions unilaterally, without reference to or approval from a commission panel.

In contrast, settlements negotiated by enforcement staff at the Investment Dealers Association of Canada and the Ontario Securities Commission must be presented to and approved by hearing panels.

Masking Details

“By masking the details, as the BCSC has done here, the reader does not see the enormity of the abomination that took place under the noses of B.C. regulators for years,” says Woods. The wording of the agreement “is designed to be bland and to generate as little interest as possible while, at the same time, allowing the commission to say, ‘We did something about this’.”

@page_break@The settlement agreement also notes that the BCSC conducted a compliance review in 2002, the same year in which the mutual funds wound up, and found that Sagit’s policies and procedures were “incomplete, out of date and otherwise inadequate in respect of the business of mutual fund management.”

Tsakok now serves as chairman of Sterling Group Ventures Inc., a Vancouver-based mineral exploration company currently trading at 13¢ a share on the OTC Bulletin Board in the U.S. IE