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Crocus Fund and the Mystery Loan from Quebec

Today's topic: Will Crocus Bloom in Spring?
[originally published January 28, 2005]

You would think spring has sprung from all the references to Crocus this week.

Sadly, they were talking about the embattled Crocus Fund, and the only sign of rejuvenation at Crocus is the PR campaign launched to coincide with the month-end conclusion of an independent review into evaluations of the fund's investments.

First came the leaks to the Winnipeg Free Press over new board members. Then former director Wally Fox-Decent showed up on CJOB to say that while he always put investors first, but, well, James Umlah know... I can't say any more.

Next, Bob Jones, the former director of marketing, popped up. He had quit the fund for another job, but now he's back and talking to the press. Saying little, but talking more.

And, wonder of wonders, the week was capped with the appearance of acting CEO Alfred Black right there in the flesh on CBC Television answering questions (NOT) for the lovely and talented Krista Erickson.

You would think that with the sudden blooming of all these Crocus spokespeople, that one of them, at least, would answer the question on the minds of all Manitobans---what happened?

What happened to turn the Crocus Fund from a good investment to frozen-until-we-announce-how-far-the-share-value-will-fall?

Amid the flood of words pouring out of these stalwart Crocus defenders, there was only the faintest hint of an answer---blame the Americans. Yeah, that's it. Blame it on the value of the American dollar. If Krista has pressed a little harder she might have got Black to demand the withdrawal of American forces from Iraq.

Readers of The Black Rod, however, know more of the answer:

James Umlah left (and the time line suggests it wasn't his decision alone); the new boys Laurie Goldberg and Jim Pelton stepped into the posts he used to hold with Crocus; within a few weeks they ran, panicked, to a third board member and to Alfred Black, who wasn't on the board yet; and the four of them hightailed it over to the Manitoba Securities Commission to tell them to immediately stop trading in overvalued Crocus shares (presumably because any further sales would, effectively, be fraud).

But, why? What did they discover that scared them so much? Again, The Black Rod has sifted through the clues (many of them right there in the 2004 Crocus Fund prospectus) and supplies more of the elusive answer:

* Inc. - Crocus invested $8.5 million.
The company filed for bankruptcy protection in 2003 and a receiver was appointed over the company's assets later the same year. remains on the Crocus list of investments.

* Blye Brothers Entertainment Inc., Prairie Production Centre Limited Partnership, and Minds Eye Pictures - Crocus invested more than $5 million. Current value?
Well, the owners of the Prairie Production Centre tried to sell it to the City of Winnipeg for a dollar. One dollar. The city said no thanks. All three companies remain on the Crocus list of investments.

* Novra Technologies Inc. - Crocus invested $1.5 million.
The value of Nora shares dropped 50 percent in 2004, ending the year at 12 cents. Novra
remains on the Crocus list of investments.

* OpTx Corporation - Crocus invested $8.5 million.
The assets of the company were sold last March to Varian Medical Systems for $18 million. At the time, Varian said the company's facilities in Winnipeg, Edmonton and Denver would be kept "substantially intact." Has the rise in the Canadian dollar changed that promise?

* Acting CEO Alfred "Speak No Evil" Black says he won't identify which of the companies that Crocus invested in are ailing.
* Premier Gary "See No Evil" Doer says he doesn't want to know anything about Crocus investments. He appoints someone to the board only to make sure Crocus invests in Manitoba companies like they say they will. Whether those investments are good or not is irrelevent to our Premier.
* Industry Minister Jim "Hear No Evil" Rondeau says the first hint he had of trouble at Crocus was when trading was halted in December, and he doesn't want to know more, either. The Industry Minister feels the less he knows about investment in Manitoba, the better a job he's doing.

It's clear from our government officials that while they are willing to subsidize Crocus through tax credits, they don't care whether the investors get a good return, or any return, on their money. If they are going to lose money, all the government cares about is that they lose it in
Manitoba. We guess that's the NDP Casino Model of Investment.

We are now told that we must now wait until at least March to find out what Crocus shares are really worth. However The Black Rod knows that the whole question of valuation is a shell game. It's a diversion from the real, unspoken story behind the failures of the Crocus Fund and whether it can recover.

To understand the Crocus story you have to understand its history.

The Crocus Fund was born of desperation. In the early 90's, as Canada struggled under the Mulroney Recession, nobody wanted to invest in Manitoba. Harsh, but true.

The Manitoba Federation of Labour stepped in with a plan. If the Filmon Tories gave them tax breaks, the MFL would start a venture capital fund to raise money from unionists and invest in Manitoba themselves. Given the choice between half a loaf and no loaf, the Tories went along.

Unspoken (in the advertising, at least) was the underlying philosophy behind the Crocus Fund. It was nothing less than a bold alternative to Capitalism. Crocus was designed to be the local beginning of an experiment in community-based regeneration pioneered by the Mondragon network of employee-owned enterprises in Spain. Here's how Sherman Kreiner, the former CEO, described it in 1995:

"That system, driven by a financial institution like the Crocus Fund, has created more than 170 for-profit businesses and community based ventures, employing more than 21,000 individuals. Ninety of the businesses are capital intensive, high-tech industrial companies, with the largest employing 2000 workers. The system also has created the only Spanish research center invited into the European R & D consortium, a chain of supermarkets, service and agricultural co-ops, a comprehensive occupational retraining system, and schools and colleges offering cooperative education."

Big dreams, indeed. But Crocus was built on them.

Little discussed in public was the big fat string Crocus attached to all its investments, a push for employee ownership, one of the foundation stones of the Mondragon model. People didn't realize that when Crocus boasted, as it always did, that it had created or sustained 13,000 jobs in Manitoba, that this figure was more important to it, than the percentage return on investment.

That's the secret behind the trouble at Crocus.

Just as the Premier and the Industry Minister don't care about the investments made by Crocus, the fund itself is less interested in its return on capital than on promoting employee ownership and building an alternative to capitalism as we know it.

Crocus officials say that next year 8 percent of Crocus investors will be able to redeem their shares. But wait a minute, is this Crocus counting at work again? The government changed the rules so that investors have to hold their shares for 8 years instead of seven before being able to cash out.

So does that mean that the 8 percent includes all the people who couldn't cash out in 2005 plus all those who become eligible in 2006? Or is that 8 percent only those who become eligible to redeem their shares in 2006? Which would mean that there could be double the number of potential redemptions in 2006.

Last year the fund paid out $ll million in redemptions. The year before they paid out $20 million. Crocus says it has enough cash on hand to cover the cost of redemptions whatever they will be.

They may need it.

We think its going to be a hard sell to convince Manitobans to invest money in a company where 7 of 15 directors quit without explanation in one year and the share value has fallen between 28 and 45 percent, depending whether the final valuation is $2 or $4 a share less.

(Tip to Free Press reporter Geoff Kirbyson. You've got word harder at protecting your sources. In the middle of Thursday's story on Crocus, and following many quotes from interim CEO Alfred Black, you mention "sources" which say Crocus is "predicting" a writedown between $2 and $4. Your sources refer to this as a "material writedown", the unusual and exact phrase used on radio the next day but none other than interim CEO Alfred Black.)

That could mean that next year is going to be all redemptions, no investment. And that's sure to spark even more fear among the remaining, locked in, investees.

The good news is that Alfred Black can confidently tell the press, "We have lots of cash."

Which, however, raises another interesting question about Crocus investment decisions and practices.

In November, 2002, the fifteenth to be exact, Crocus received an "investment" of $10 million from the Quebec Solidarite Fund -aka the Fond, another provincial labour-sponsored investment fund.

Okay, you might be wondering why The Black Rod put those quotation marks in. Are we being too suspicious about an innocent transaction?

Lets look at the facts:
This is a great deal for the Quebec fund, but what did Crocus get out of it?
Crocus agreed to guarantee ten percent interest to the Quebec fund. Not bad, eh? Have you seen how low mortgage rates are these days? In return for the money, Crocus created a new set of shares specifically for Quebec, the only category of shares that pay dividends.

While Quebec could redeem its shares after 18 months, Crocus wanted them to keep it in for two years. So they sweetened the pot. If Quebec kept its money in Crocus for two full years, Crocus would pay them an additional 10 percent. Yup. Twenty percent - 20% - on an "investment" of $10 million.

To us folk unfamiliar with Crocus economics, this sure looks like a loan.

But why would Crocus need $10 million in November, 2002, when they apparently have lots of cash, and, presumably, had lots two years ago as well.

Oh sure, there is the intriguing rumour going around town that Crocus has more money in the MTS Centre than anyone knows. And the arena project did hit a snag in June, 2002, when David Graves pulled out an expected $20 million; and by January, 2003, the True North group had managed to raise $18 million of that shortfall. But what's that prove?

All we know for sure is that Crocus paid off Quebec $5 million on November 15, 2004, two years to the day of the initial "investment".

And that November 15 was the day before the grand opening of the MTS Centre.
A remarkable coincidence.

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