MFDA rejects Berkshire’s Thow settlement

Berkshire Investment Group continues to be plagued by Ian Thow. The Mutual Fund Dealers Association of Canada has rejected the firm’s settlement proposal that would have established the responsibility, if any, for its former advisor’s multi-million-dollar fraud.

The MFDA’s rejection was met by disappointment by Berkshire and its new parent company, Manulife Securities, both of whom want to make Thow’s misconduct a matter of the past. Manulife was not connected to the Thow case in any way but says it is anxious to see the matter resolved.

Shaun Devlin, vice-president of enforcement at the MFDA, says the regulator was tasked with investigating Berkshire’s handling of the Thow case. The British Columbia Securities Commission has also conducted an investigation into Thow’s individual actions.

The MFDA says the settlement hearing addressed allegations that Berkshire failed to conduct reasonable supervisory investigations of the activities of Thow. If a settlement of facts had been agreed upon, the MFDA would have determined if supervisory or disciplinary measures were warranted. Both the MFDA and Berkshire would not comment any further on the details of the settlement offer and said they are subject to a confidentiality order.

The details of the BCSC investigation and hearing panel were released last week and determined Thow had committed fraud.

The BCSC had previously alleged that Thow defrauded hundreds of clients of upward of $30 million. But the BCSC panel’s decision was based on the submissions of 26 of Thow’s former clients, who, between 2003 and 2005, collectively invested $8.7 million, primarily in construction loans and shares of a Jamaican bank. These investments never existed. Thow instead took the money his clients trusted him to invest and spent it on his own lavish lifestyle, which included numerous luxury vehicles and his own private jet.

Thow raised a number of compliance red-flags over the years, such as reinvesting money without client’s permission, living well beyond the means of his Berkshire income, and the general lack of transparency in his dealings. Even if Thow’s fraudulent acts were took place outside of his Berkshire practice, some have argued that as one of their advisors, the firm’s compliance department should still have been able to recognize the warning signs.

Of the client submissions investigated, the BCSC said, all of Thow’s fraudulent activities were committed off-book and outside his relationship with Berkshire.

The MFDA has invited Berkshire to propose another settlement with the regulator. If the firm fails to do so, Devlin says, the MFDA will consider initiating enforcement proceedings.

“The options are we can negotiate another settlement with Berkshire, or we can proceed with a notice of hearing,” he says.

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Berkshire has indicated it prefers the former and says it will cooperate with regulators. The firm’s general counsel, Julie Clarke, will not comment on the merits of the case, however.

“In view of the outstanding regulatory matter and civil litigation involving Berkshire in respect of Thow’s activities, Berkshire is unable to comment at this time,” she said in a statement to Advisor.ca.

Manulife says it will ensure that legitimate claims against Berkshire will be honoured and paid, but Manulife itself will not be responsible for paying them.

“Manulife Securities acquired Berkshire on August 31, 2007. As is customary for transactions of this nature, the vendors [including Portland Holdings controlled by Michael Lee-Chin] continue to be financially responsible, and have indemnified Manulife for all claims and losses relating to Thow’s activities, including the MFDA settlement,” the company said in a statement.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(10/23/07)

Mark Noble