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The Black Rod previews the Crocus Audit

The entire board of directors of The Crocus Fund has been replaced as a result of the provincial Auditor General's report.

We can't overstate this fact.

The entire board.

Yet, what should have been front page news, under a huge headline, has been reported in a whisper, proving once again how easily manipulated the mainstream news media can be.

The transformation of the Crocus board occurred in a piecemeal fashion to hide what was really happening.

The latest announcement has been a delay in the release of the Provincial Auditor's report until at least May 27, but The Black Rod sees no reason not to reveal what's in the report now.

So, based on half a dozen announcements made after those on the inside got to read a draft of the Crocus report, we will tell you today exactly what the Auditor's findings are.

The Black Rod's preview of the Crocus report is based on these developments:

1. Crocus plans to chop the value of its shares by almost a third as soon as trading re-opens.

2. Crocus is a labour-sponsored fund, yet every board member of the sponsor, the Manitoba Federal of Labour, has resigned.

3. Crocus Chief Financial Officer Jane Hawkins has gone public with her fears that the Auditor is making her the scapegoat.

4. Funding to the Crocus labour education centre has been cut.

5. The entire sales staff has been laid off.

6. Ron Waugh, the government representative on the board, has hired a lawyer.

Together, these announcements tell a sad story.


To begin with, the Auditor General's report has found that the Crocus Fund was disastrously mismanaged and the blame lies firmly with the board of directors which failed to apply any appropriate measure of oversight despite many loud and repeated warning signals.

The pending devaluation of Crocus shares proves that the fund has been overvalued for much longer than anyone has heretofore admitted---certainly well before November, when Crocus held a special board meeting to discuss devaluation; certainly well before October when an amended prospectus was approved; certainly before September, when the valuation sub-committee recommended a small drop in share value and just before Crocus Chief Investment Officer James Umlah left the building.

The big question left sitting there, like the 600 pound gorilla in the corner, is how far back will the auditor general track this reluctance on the part of the Crocus board of directors to admit the fund was overvalued? As far as 2004's RSP season? Or further back than that?

And how long before someone raises the F-word - and demands that the Fraud-squad start questioning the principles?

Perhaps first in the interview room will be the former directors appointed by the MFL? Their departure, en masse, speaks volumes.

The Crocus report, according to The Black Rod's preview, says the MFL directors had too much influence on the valuations and the direction of the Crocus Fund.
The MFL hired former Crocus CEO Sherman Kreiner and CIO James Umlah and supported their Mondragon "alternative to capitalism" ideology which sacrificed returns to shareholders to protect jobs at companies that Crocus invested in, even if that meant propping up a losing company and refusing to admit a drop in fund value.

The MFL has filled their appointed seats with new directors, including a former provincial auditor and an accountant (and well-known troubleshooter).

These appointments indicate a new direction for Crocus--- making shareholder value a priority. This has certainly not been the case for years, and if anyone knows that, it has to be Crocus CFO Jane Hawkins.

She miraculously managed to fly under the radar throughout most of the time the Crocus Scandal has unfolded.

But Hawkins has just learned a hard lesson, one that anybody who has watched a single episode of The Apprentice could have told her---the project leader carries the responsibility for the team's loss and is usually the first one to be fired.

Oh Jane - what part of Chief Financial Officer did you not understand?
Was it Chief?
Or Financial?

The disastrous performance of the Crocus Fund this past year, and indeed over the course of its existence, has to reflect the performance of the Chief Financial Officer.

The Black Rod wonders whether the Crocus report will delve into why Hawkins approved the disguised loan of $10 million from a Quebec labour fund, le Fond du Solidarite?

Crocus could have raised $10 million in half an hour in Manitoba, by offering Manitobans the same rate it paid the Fond, ten percent for one year and twenty percent for two years. Why were they so desparate to raise the money out of province, and hide its origin under the guise of an "investment".

Did that money go into the new Arena?

And why did Hawkins approve spending more than $100,000 a year for a labour education centre to train union members how to manage pension funds? This was an expense with no value to Crocus shareholders.

Did Hawkins ever say no to the Crocus fund's labour masters?

The Black Rod bets the Auditor's answer is no.

Hawkins will probably blame the valuations committee for pumping up Crocus shares. Yet she sat on that committee.

And obviously saw nothing wrong when, in November, the month the board sat down to discuss a major devaluation of fund value, Crocus was advertising a "no money down" offer to potential investors.

* In a full page advertisement distributed provincewide, Manitobans were invited to transfer their existing RSP's into Crocus and take instant advantage of the special tax deduction for labour funds. "SWITCH AND SAVE" indeed.

* This at a time the board knew that Crocus shares were about to be devalued.

* Anyone foolish enough to take the "no money down" deal was guaranteed only to lose their money.

Crocus made a big deal of promoting employee ownership in the companies it invested in. Propping up these new "owners" became paramount, even if it meant refusing to revalue Crocus shares so as not to discourage new investors.

If it wasn't for the large cash reserves the fund is sitting on to repay shareholders wanting to redeem their now devalued shares, the Auditor would be forced to call this the largest Ponzi scheme in the province.


The announcement that Crocus has cut its entire sales staff passed without comment in the press.

Crocus had two parallel sales tracks. The first was the existing network of mutual fund salesmen who emphasized the tax incentives of investing in a labour fund. The second was specially trained union workers who only sold Crocus shares and emphasized keeping capital in Manitoba.

The cut in sales staff refers to the union sales staff, who, believe it or not, were members of the MGEU-the Manitoba Government Employees Union.

Did anyone know that Crocus was staffed by government employees?

But cutting ties with its union sales staff is another indication that the auditor has found the MFL link too cozy for comfort. From now on Crocus shares will be sold by mutual fund sales people who will have to depend on returns to investors to interest new share holders.

And finally there's the interesting bit of news involving the government representative on the Crocus Board, Ron Waugh. It seems he has hired a lawyer to represent himself before the Manitoba Securities Commission.

Or rather, we the taxpayers, have hired a lawyer for him.

In another fascinating example of New Democonomics, the government is paying lawyers to investigate breaches of the Manitoba Securities legislation, paying lawyers to prosecute violators and, at the same time, paying lawyers to fight the prosecution.

We would expect the government to tell their representative on the board to meet with the Securities Commission, tell them the truth, the whole truth and nothing but the truth as he knows it, and let the Commission decide whether any laws were broken or not.

Instead, the government is acting like it has something to hide.

Which, of course, it has.

All along Gary Doer has been doing his best to wipe away the footprints leading from the Crocus Fund to his office door. And yet you don't have to be a member of CSI to see the trail:

· the government subsidizes investment in the Crocus fund through tax-benefits
· the government appoints its own member of the board of directors
· government employees (members of the MGEU) sell Crocus shares
· and best, of all, Crocus gets to call on an official NDP government cover-up when it needs one.

Crocus shareholders have been clamouring for months for an inquiry into the mismanagement at the Crocus Fund. The government stalled as long as it could, refusing to use its own representative to answer questions until now he can't under his government lawyer's instructions, and delaying the Auditor's Report until it can't be properly discussed in the Legislature.

There is no need to delay the release of the Crocus report. We know what the government's response is:

1. It's Gary Filmon's fault
2. Crocus has addressed its faults
3. The matter is before the Securities Commission so we can't answer questions
4. It's Gary Filmon's fault

The Black Rod knows Jon Singleton is going to excoriate the board and management of the Crocus Fund for their performance during their annus horribilis, the year 2004.

What the government is hoping is that the newsrooms in Winnipeg will overlook that the Auditor's terms of reference for investigating Crocus only applied to the year 2004, so that the question of how many years the mismanagement has been going on and how long the government has known about it, won't be answered in Singleton's Crocus report.

The truth will only come from a public inquiry.

Only the pressure of more than 30,000 Crocus shareholders can squeeze one out of the NDP.

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