Manitoba's auditor general says that until recently the Workers Compensation Board had no clear conflict of interest policy. And the problems from that omission were never more obvious than when WCB went into the real estate development business with the Crocus Investment Fund.
Auditor Jon Singleton says the compensation board "placed their public reputation, and monies of the WCB, at risk" with the partnership because of the tangled web of interconnected relationships that created at least the appearance of a conflict of interest at almost every step.
Singleton makes clear he isn't speaking about anyone making a personal profit out of the deal, but rather about the power relationship between the major players that had underlings expressing concern, over and over, about how it looked. And it looked bad.
The auditor's review of WCB governance and other issues uses what it calls the "ABC Fund" to illustrate the conflict of interest situations.
The Black Rod can tell you that he's referring to the $25 million Manitoba Property Fund, which was announced with great fanfare by Crocus CEO Sherman Kreiner in the summer of 2004.
Singleton gives a blow by blow account of how the fund was put together, but the story is confusing and sterile without an understanding of how central the Crocus Fund is to the deal.
WCB and the Teachers Retirement Allowances Fund (TRAF) were to each contribute $10 million to the property fund, Crocus would kick in $3 million and Shelter Canadian Properties Ltd. would add $2 million.
The purpose of the fund?
"...to develop real estate in downtown Winnipeg," according to John Pelton, senior vice-president of investments at Crocus Investment Fund and president of the Manitoba Property Fund. The words revitalization and redevelopment were tossed around a lot.
The fund was a dream come true for Sherman Kreiner, who had, for years, talked about taking Crocus the next step up into managing third-party funds. In this case, Crocus and Shelter would collect a management fee of 1.5 percent of committed capital in a roughly two-thirds, one-third respective split.
The idea for the fund was first floated in December, 2001, according to Singleton. It was pitched to the WCB in March, 2002, a month after Kreiner squashed Bernie Bellan's plans to ask questions publically on behalf of shareholders about the valuations of Crocus fund holdings. Life was good.
Singleton's review makes clear how much of a one-man-show the Workers Compensation Board had become. Chairman Wally Fox-Decent ran a tight ship; staff told Singleton he micro-managed them to death. And 'What Wally wants, Wally gets' was pretty much the WCB motto.
But that's where the problems began.
* Wally Fox-Decent was chairman of WCB and at the same time the chairman of the Crocus Fund investment Committee.
* Sherman Kreiner was CEO of Crocus, and at the same time an advisor to the WCB investment committee.
* And Alfred Black, the chief investment officer of WCB, was at the same time the chairman of TRAF. He would later become interim, then permanent CEO of Crocus.
Confusing enough? We'll try to unravel the web.
- Sherman Kreiner wanted WCB to invest in the Manitoba Property Fund.
- Wally Fox-Decent stickhandled the idea through WCB committees, mollifying concerns raised by his own board members, consultants, and his director of investments.
The concerns? A lack of other institutional investors; conflicts of interest amongst certain of the parties; and the need for WCB to perform its own due diligence on the investment, among others.
- Kreiner was doing his part with the help of Alfred Black. They pitched the new fund to the TRAF board to become that other "institutional investor".
By December, 2003, it was almost a done deal. Kreiner informed WCB that TRAF was in, the deal could be consumated.
But who wasn't "in", was the CEO of TRAF who had resisted all the blandishments and kept raising concerns. In late January, 2004, he was advised by Black and the TRAF board that "his employment was terminated."
- The deal was announced in July, 2004---just before the Crocus Fund entered its own death spiral.
At year's end, says Singleton, WCB had advanced $2.3 million to the Manitoba Property Fund. The books still show the same value 18 months later and with the fund apparently moribund.
- Last July, WCB informed the management company partners (Crocus and Shelter) they were in default of their obligations.
- The vaunted property fund only ever invested in seven properties---four parking lots and three buildings.
1) The lines of authority were so blurred that a senior manager had to remind the Board that the interests of WCB were not the same as the interests of the Crocus Fund and WCB should conduct their own due diligence.
2) He couldn't find an explanation why WBC didn't have their consultant manage the properties as usual, and asked why WCB would allow Crocus and Shelter to manage the fund when they could have done it themselves.
But the answer eludes his review.
Nowhere does he mention that Kreiner had a vision of becoming the Mondragon King of the City, bringing the Spanish model of co-operative business and development to little 'ol Winnipeg through Crocus, through the property fund and who knows what else.
He hasn't given up on his dream. He's now one of the three directors of the University of Winnipeg's newly created U of W Community Renewal Corporation. It's goal: to revitalize and redevelop downtown Winnipeg.
It's only accomplishment so far has been to shut down a section of Spence Street to traffic and turn it into an empty space spotted with large planters holding dead flowers, surely a crude metaphor for the fortunes of the Crocus Fund.
But the university did add 81 new parking spaces at two new parking lots, one on Young Street and one on Spence.
Forgive us for speculating that one or both are the property fund's lamented holdings - where WCB clients can come and see their investment.