Berkshire reaches settlement over Thow

The Mutual Fund Dealers Association of Canada (MFDA) has imposed a $500,000 fine and a further $50,000 in costs against Berkshire Investment Group, now owned by Manulife Financial Corp. The settlement stems from accusations that the firm should have been aware of the actions of former vice-president Ian Thow, who stands accused of stealing millions from investors.

But the second hearing to reach an agreement between the MFDA and Berkshire in Vancouver Thursday was greeted with derision by upset investors. The association did not impose any further business restriction or suspension, as it had the power to do on Berkshire, but said this was the heaviest fine it has ever imposed.

Out-of-pocket investors were hoping the association would restrict the ability of the firm to operate for a period, saying that would be a far more effective penalty than a cash fine and send a strong message across Canada that investors can expect to be protected.

Brad, Daryl and Don Goodwin of Vancouver, who lost over $1 million, described the settlement “as a joke. It’s self-regulatory working at its best. This doesn’t cut it.”

Krista Kleven and Kirk Wong, who lost $244,000, said the agreement “is an insult to every investor who lost money. We were hoping this settlement would have sent a loud and clear message to investors across Canada that their interests would be protected; it doesn’t.”

Shaun Devlin, vice-president of enforcement for the MFDA, said he understands the anger but pointed out it was the heaviest penalty ever handed out by the association. He described the activities of the former Berkshire vice-president as those of a “thief and a liar.” The association does not have the power to award compensation.

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Berkshire gained international notoriety through the activities of Thow, who was Berkshire’s senior vice-president in its Victoria, B.C., office and once a prominent “pillar” of the community.

The agreement concerned Berkshire’s failure to conduct reasonable supervisory investigations between September 16, 2004, and June 1, 2005, in response to complaints it received from two individuals concerning Thow’s activities. “Over a period of several years, Thow persuaded numerous individuals, including clients of Berkshire, to provide him with money that he promised to invest on their behalf but instead used for personal benefit,” the association said.

The association found that Berkshire was not aware of Thow’s fraudulent activities but said “Berkshire acknowledged in the agreement that it did not take reasonable supervisory and disciplinary measures after it received the reports from the two individuals. Berkshire further acknowledged that, had it taken those measures, it is more likely that Thow’s activities would have been discovered and brought to an end. Thow was able to continue to persuade individuals to provide him with an additional $6.3 million, almost $4.5 million of which was received from clients of Berkshire.”

The panel noted that Berkshire has paid substantial amounts to compensate some of the individuals who provided money to Thow. It said investors do have other avenues to try to recover their investment, such as bringing a complaint to the Ombudsman for Banking Services and Investment, which can recommend compensation of up to $350,000, or commencing their own civil litigation.

It also pointed out that Thow remains the subject of an ongoing criminal investigation by the Vancouver Integrated Market Enforcement Team of the RCMP. It has handed in its report to the Crown and is awaiting the next move.

Meanwhile, Thow currently sits in a so-far safe haven of Seattle. He was found to have committed fraud by the B.C. Securities Commission (BCSC). It said he “perpetrated a fraud, made misrepresentations, traded in securities without being registered, and failed to deal fairly, honestly and in good faith with his clients when he took millions of dollars from his clients to invest in securities that did not exist.”

But the BCSC has investigated only about $8 million of missing investor monies, and Thow is alleged to have misappropriated many millions more. Sources say that 73 investors may have been fleeced of over $80 million by Thow.

Given investor distaste for this settlement, Berkshire’s new owner, Manulife, may feel compelled to weigh in with far-reaching compensation and put the business behind it, thereby demonstrating it really does care for its clients.

Self-interest provides part of the reason, as Manulife likely does not want to see the $13 billion of assets and 700 advisors it bought erode in value because of the antics of one former executive.

Kleven and Wong have laid a complaint with the Ombudsman for Banking Services.

“We have been told the complaint has been accepted but have not yet had any formal notification,” the pair said. Other investors attending the meeting said litigation is simply out of the question and would cost them hundreds of thousands of more dollars they now do not have.

Ashley Ford is a Vancouver-based financial journalist.

(12/14/07)