The Black Rod

The origin of the Usher of the Black Rod goes back to early fourteenth century England . Today, with no royal duties to perform, the Usher knocks on the doors of the House of Commons with the Black Rod at the start of Parliament to summon the members. The rod is a symbol for the authority of debate in the upper house. We of The Black Rod have since 2005, adopted the symbol to knock some sense and the right questions into the heads of Legislators, pundits, and other opinion makers.

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Tuesday, February 27, 2007

Call Grissom: Crocus bullet matched to smoking gun

Manitoba's Opposition leaders are wasting their breath calling for NDP Finance Minister Greg Selinger to resign and the government to call another inquiry into the Crocus scandal.

That's like asking the leaders of the Gambino Family to come clean on who killed Jimmy Hoffa. Could happen. But not likely.

They still don't understand the importance of the "smoking gun" memo leaked to Liberal leader Jon Gerrard.

If they did, they would know the only call they have to make is to the RCMP.

The Selinger Memo is clear evidence that the NDP conspired with the Crocus Investment Fund to hide the fund's liquidity problems from future investors even to the extent of letting them run a Ponzi scheme.

Three paragraphs of the memo tell the entire story: (emphasis ours)

* Crocus recently requested two very significant changes that would allow it to raise more money from Manitobans and induce investors to keep their money invested for a longer period of time...These changes are thought by Crocus to be necessary to deal with a potential liquidity problem that could arise over the next few years.

* The possibility of liquidity problems is very real, but the two requested changes may only push the problems further into the future when they could be even larger. This is because Crocus has not done what its Prospectus says it will do, which is to arrange its investment portfolio so that funds are made available through liquidation of investments to fulfill requests for redemptions.

* In effect, Crocus is requesting the ability to use money from new investors to pay off earlier investors who want to redeem, rather than using profits earned on the investment portfolio.

Using money from new investors to pay off earlier investors is the very definition of a pyramid scheme, aka Ponzi. The Black Rod was the first to call this into question in our story almost two years ago

Ever since Watergate, the defining question of every political scandal is what did they know and when did they know it.

Here is proof that on November 27, 2000, the premier of the province, Gary Doer, the finance minister, Greg Selinger, and presumably the entire NDP cabinet knew that the Crocus Fund was in trouble. They knew what Crocus wanted the NDP to do to help, and they knew how investors would be affected.

A conspiracy needs an overt act to come into being. You can talk about robbing a bank all you want, but its only when one of you buys a gun that the talk becomes a conspiracy to rob a bank.

The Selinger Memo says Crocus wanted the government to make two changes to the rules governing the Crocus fund:

(a) removing the annual selling limit. Labour-sponsored venture funds like Crocus and Ensis were limited to selling $30 million worth of shares each year. Sell more and they would have to pay a penalty of 15 percent of what they collected over $30 million.

(b) eliminating the 'cooling-off' period. Investors who got a (generous) tax credit for buying into a labour-sponsored fund had to hold their shares for 8 years before they could redeem them. They then had to wait three years, the cooling-off period, before they were eligible for another tax credit for investing in Crocus (or Ensis).

The memo states:

By requesting elimination of the annual selling limit, Crocus is seeking to use money from new investors to pay for redemptions by existing investors...
That Cabinet maintain the annual selling limit for Crocus and ENSIS at $30 million, but agree to retroactively approve sales: over the limit for one year with no conditions.

Translation: Go ahead, run the Ponzi with our blessing.

The government also eliminated the cooling-off period, as requested.

Two for two. Crocus was very grateful.

Crocus Chief Financial Officer Jane Hawkins told the 2002 annual general meeting how happy they were:

For the year ending March 1, 2002 gross sales for the Fund were $25.1 million. With this result Crocus was the market leader among labour sponsored funds in Manitoba, capturing 58% of the gross sales in our province.

Redemptions for the period were $15 million including $5.3 million that was "redeemed and reinvested" as facilitated by the elimination of the "cooling off period". Since the "cooling off period" was eliminated, approximately 20% redeemed and reinvested, 35% of shareholders redeemed, and 45% have chosen to leave their investment in the Fund.

But as predicted in the Selinger Memo, the problem only got worse.

In 2000, Crocus collected $35 million from investors (yes, $5 million over the legislated limit), and paid out $2.1 million in redemptions.

By 2001, redemptions more than doubled to $5 million. The auditors general's report says that in January of that year a senior account manager within the Industry, Economic Development and Mines department said Crocus needed to sell assets to fund redemptions or they would run into liquidity problems as early as 2002-3.

But 2002 was crunch time, as sales clocked in at $25 million and redemptions at $17.1 million. The Auditor General noted that in January, 2002, even before RRSP season, an official in the Department of Finance said the Crocus fund's "continuing requests for legislative amendments may be a sign of management issues and that an independent review of CIF's operations may be in order."

The government ignored him.

The quick fixes provided by Greg Selinger weren't working any more. Crocus had to act fast. Shareholder value was evaporating and, said the Auditor General, "funds raised from new shareholders were needed to cover redemptions."

"...(the Crocus Investment Fund) was heading for financial difficulties and non-compliance with its legislated liquidity requirements. This in turn, necessitated the Solidarity transaction."

Ahh, yes. The infamous Solidarity Fund "loan."

Crocus borrowed $10 million for two years from their counterpart, the Fond du Solidarite of Quebec, at a whopping interest rate of 10 percent. Oops, make that 20 percent when all was said and done.

Not one to hide their light under a bushel, Crocus management announced the loan as an "investment" by the Fond, which proved how well Crocus was doing.

The one thing Crocus wasn't about to do was sell assets to raise the money to pay off investors. Not even when their own prospectus (quoted in the Selinger Memo) said that's what they should do in these circumstances:

"... the Crocus prospectus states: "To the extent it is permitted, the Fund intends to arrange its investment portfolio so that funds are made available through liquidation of its investments and securities, for the fulfillment of requests for Permitted Redemptions." However, Crocus management are now advising us that the typical hold period for their investments will be ten to 14 years. This means that they do not expect to be able to sell assets in order to meet redemptions over the next few years."

We can now see why Crocus management was so reluctant to sell its investments. They had been hit hard by the market crash of 2000 and they were doing their darnest to prop up the valuations of the fund. Whether that meant, to quote the Auditor General, "the Fund's practice of investing, and providing follow-ons to maintain investment value" (read Maple Leaf Distillers), or hoping nobody would challenge the book value of an investment (the $1 million invested in the Blye Brothers movie dreams was eventually recouped at ten cents on the dollar).

If Crocus had started selling assets at fire-sale prices, the share value of the fund would have slipped faster than it already had. That would have meant more redemptions and fewer investors, which would mean still lower share value.

In other words---a death spiral.

So instead of liquidating investments, Crocus had another idea to pitch to the ever-so-helpful NDP.

From the Auditor General's report:

Over the last few years, CIF experienced liquidity issues and had revenues that were insufficient to cover operating costs. Divesting investments could be considered a key solution to liquidity issues. CIF identified the promotion and development of sub-funds whereby CIF could earn management fees and leverage public sector monies as the key solution to liquidity issues.

The Crocus Investment Fund, reeling from its own financial problems, saw the answer -- in handling other people's money.

And they had big ideas:
* The I-OVO Trans-Atlantic Growth and Accelerator Fund - to handle North American companies wanting to do business in Europe and European companies that wanted to do business in North America.
* The Institutional Superfund - a $250 million fund with money from the Civil Service Superannuation Fund, Workers Compensation Board, MPI, University pension plans, the Teachers' Retirement Allowances Fund and Civic Employees Pension Funds. Among others. CEO Sherman Kreiner personally pitched this to Gary Doer at a private meeting on November 19, 2002.
* An alternative energy fund
* A value added agriculture fund, and, of course,
* A First Nations businesses fund.

Have you noticed what's missing here?
Year after year it's the same story---Crocus has liquidity problems and management come up with one stop-gap solution after another to hide the problems and entice more investors to part with their money.

And Greg Selinger and Gary Doer pretend everything is fine.

Jon Singleton concluded the government missed all the "red flags". But the Selinger Memo puts a whole new perspective on Singleton's report.

We now know that in November, 2000, at the latest, Doer, Selinger and the rest of the NDP cabinet were aware Crocus was or soon would be bleeding money. The Memo wasn't a red flag; it was a red banner.

You would think that Gary Doer would demand a regular update on the financial health of the fund. And that the finance minister would immediately put the Crocus Fund under a microscope and dissect its every move. After all, in 2000 he wrote in his cabinet memo:

" Therefore, the Province must be concerned with both the effectiveness of the economic development role of the funds, and with the safety of the retirement savings entrusted to them by thousands of Manitobans, the majority of whom are neither wealthy nor sophisticated investors."

You would think...

But Gary Doer has told the Legislature he and everyone in his government took a hands-off approach to Crocus. See no evil. Hear no evil. Do...well, let's stop there.

The Auditor General never saw the Selinger Memo when preparing his report on the collapse of the Crocus Fund. It's obvious why. It's a cabinet document and it's radioactive. How many other cabinet documents discussing the Crocus Fund are there and what other secrets do they hide?

The NDP is sweating blood at the leak. Selinger says there's nothing new in the memo.

He's referring to this brief reference in Singleton's report:
CIF was very up front with IEDM as early as mid-2000 on the fact that they would run into liquidity problems if pacing continued to be based on 70% of gross sales...

It's a big leap from some mid-level wonk in the department of Industry being told of Crocus's financial problems, and the Minister of Finance, the Premier and the entire Cabinet learning of it.

Had Singleton known about the memo, he undoubtedly would have had more to say about government's influence in making Crocus's problems go away. As it was, Singleton's observations become even more pointed now that we know how far up the food chain Crocus's influence went.

Singleton wrote that the Department of Industry and Economic Development under the NDP had an extremely cosy relationship with the Crocus Fund.

* "IEDM advised that much of its efforts have been devoted to developing a relationship with CIF that was more positive and cooperative than it was when they first assumed responsibility for monitoring CIF in 1998.
* IEDM spoke at length about needing to develop a trusting relationship prior to assuming an effective monitoring role. As a result, IEDM advised that they were reluctant to use more intrusive actions in performing their monitoring role.
* IEDM... sees itself first and foremost as an advocate for the LSIF initiative and only secondarily as compliance monitor.
* IEDM's monitoring efforts were " inconsistent and insufficiently documented."
* (IEDM did not effectively monitor CIF's compliance and did not assess the eligibility of CIF's investments.) "As a result, ineligible investments may be inappropriately counted towards the fulfillment of the Fund's pacing requirements."

Singleton wrote that once, in mid-2001 Crocus reps outlined their vision for the next 10 to 15 years to IEDM officials, who indicated there were issues of policy and practicality that had to be addressed first.

Fuggedaboutit, said the Crocus people. The plans "had already been cleared by those in higher authority"

IEDM did not believe it worthwhile to further pursue their concerns regarding CIF's plans, wrote Singleton.

This anecdote takes on an even more sinister meaning in light of the Selinger memo.

Another time, said the Auditor General, "IEDM acknowledged that they could have intervened but chose not to, and questioned what would have been accomplished if they had intervened. IEDM noted that they are not responsible for the performance of CIF." (This last comment is almost word for word what Gary Doer says in the Legislature every day that he's asked about Crocus.)

Not responsible? Let's quote Selinger's words again.

"Therefore, the Province must be concerned with both the effectiveness of the economic development role of the funds, and with the safety of the retirement savings entrusted to them by thousands of Manitobans, the majority of whom are neither wealthy nor sophisticated investors."

Selinger will argue that he can't be guilty of conspiracy to commit fraud because he didn't profit from helping the Crocus Fund. And in that we believe him.

He did it for ideology.

Can a pyramid scheme for ideology warrant a criminal investigation?

If it does or if it doesn't, the one thing Greg Selinger can be assured of, the final verdict will be delivered by the voters of Manitoba, of whom almost 34,000 lost money in the Crocus Fund.

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