Did the Free Press fall for the Crocus confidence game ?
Once upon a time a daily newspaper like the Winnipeg Free Press could publish a fairy tale as if it was a legitimate news story and go unchallenged.
That day is l-o-o-o-o-n-g gone.
U.S. Senator Daniel Moynihan of New York used to remind people:
"Everyone is entitled to his own opinion. He is not entitled to his own facts."
The FP obviously forgot that maxim when trying to peddle its "Special Report" on the Crocus Fund collapse as truth.
This wouldn't be the first time a newspaper has interjected itself into an election campaign by presenting rewritten history as "facts" to deceive voters.
It is, nevertheless, still fascinating to watch them do it as if they think they can get away with it.
While eight pages of behind-the-scenes details into the final days of the Crocus Fund was interesting to those of us who actually plowed through to the end, it was Monday's piece by FP reporter Dan Lett that exposed the chicanery behind the series. Lett's article was nowhere designated as opinion, so we have to accept it was being sold to the public as true reporting with conclusions drawn from objective facts.
Lett revealed he had been working on the story for at least ten months. But his summary of the Crocus story is straight out of some alternate reality, an Alice-in-Wonderland story where truth is fiction and fiction is truth. The only thing missing is the hookah-smoking caterpillar.
At least we now can understand why the Winnipeg Free Press so diligently refused to report on the recent leaks of internal government memos and e-mails about Crocus.
They revealed a truth the FP could not accept if the newspaper's Crocus revisionism was to stand.
In Dan Lett's world, the Crocus Investment Fund was a successful venture capital fund that was destroyed by unnamed enemies in the Manitoba Finance department. It stuggled valiantly for years despite being hamstrung by unfair rules that prevented it from maximizing returns for its investors. It wasn't bad management that sank the Crocus Fund, it was the cowardice of the NDP government that "could have, should have, saved Crocus."
Step with us now into the fantasy...
*** "...the finance department obstructed fund managers as they tried to get changes to the Crocus Act to bring it into line with funds outside Manitoba."
*** " Senior bureaucrats couldn't decide whether Crocus was a job-creation scheme or a retirement savings fund. There was no ambiguity for investors, as they knew it was a retirement savings instrument. Government should have focused on what it could do to make sure Crocus thrived when it came to making money for its investors."
*** ... Manitoba's first labour-sponsored investment fund (LSIF) toiled on an uneven playing field maintained by bureaucrats who did not have the best interests of investors at heart."
Okay ... stop.
Look at what the Free Press has eliminated from its version of the Crocus truth.
Nowhere does the term "multiple bottom lines" appear.
Once upon a time, the managers of Crocus bragged about these basic tenets of their investment fund.
CEO Sherman Kreiner complained, after the excoriating Auditor General's report into Crocus, that the AG just didn't understand the "multiple bottom lines" philosophy that underpinned
Lett is right when he says "There was no ambiguity for investors, as they knew it was a retirement savings instrument."
He's just wrong about everything else.
Contrary to what Dan Lett would like you to believe, Crocus was not run as a pure "retirement savings fund" that was concerned about maximizing returns to its shareholders.
Crocus was run as a fund with a social conscience, where social investment was as important, if not more important, than pure financial returns.
Kreiner spoke often of his belief in the Mondragon model of labour capitalism (For a more detailed look at Mondragon see http://blackrod.blogspot.com/2005/05/crocus-fund-and-mystery-loan-from.html)
The labour movement would collect pension money and use it to support local businesses which, in turn, would create well-paying unionized jobs. A key element of Mondragon, and Crocus, is employee ownership and Crocus insisted on an employee ownership plan for every company it invested in.
So much for theory.
In practice, the Crocus model of "investment" proved a disaster.
- Employee ownership foisted on companies made those companies unsaleable.
- If a company was failing, Crocus subsidized it to save the union jobs.
- Every year Crocus could brag about the thousands of jobs it "created---and saved" but none of the business reporters examined the cost of "saving" those jobs.
When share prices began drifting downward, Crocus never failed to point out that it wasn't the value of the fund that gave investors a return on their money, it was the 30 percent tax break they got at the front end. Even if the company made zero percent, the investor was supposedly ahead over five years on the tax break alone.
In other words, the NDP government subsidized the investors who gave their money to Crocus to subsidize union jobs.
Socialism at its best.
Dan Lett's pronouncements about the finance department's obstruction tactics collapse in the face of the memos and e-mails that have leaked out and which the Free Press pretends don't exist or don't matter.
The documents show that Crocus had been going broke since 2000. The fund was spending so much money it didn't have enough to invest to earn a return for its shareholders. Even the eight-page Crocus apologia refers to a board meeting where senior officials presented details of the fund's desparate financial position.
"Pelton told the board "the fund could not pay its ongoing costs from investment income alone" and needed to start selling off some of its most successful investments. Goldberg added that Crocus was facing operating costs of $7 million for 2005 but was only expected to earn $1.5 million from the investment portfolio, other cash investments and management fees."
The leaked documents show that Crocus had been going to the government since 2000 to change the rules so that it didn't have to worry about return on investment to repay shareholders. It wanted the right to use the money from new shareholders to pay off old shareholders.
And here's what Dan Lett and the Winnipeg Free Press don't want you to know.
- To entice new investors, Crocus had to keep its share value high. That meant the value of the portfolio could not be allowed to go down.
Since the companies in the portfolio were, for the most part, not publicly traded, valuations were set by Crocus committees, and as we saw, by 2004, the portfolio was overvalued by at least 20 percent. This became immediately apparent to the two men who were not Crocus insiders and who ultimately took the fund to the Manitoba Securities Commission.
- When necessary, Crocus filed a false prospectus, as stated in the Auditor General's report, to claim a higher annual return on investment than true.
- A $10 million loan from a Quebec LSIF was improperly called an "investment" which allowed Crocus to claim its annual return was among the best in the country
- The AG said that when the loan was accurately reflected in the financial statements, the return became among the worst in the country.
The FP failed to mention this salient point.
- The memos and e-mails to the Finance Department show that Crocus wouldn't---or couldn't--sell any of its portfolio to cover the cost of redemptions. You can see why not.
If they sold the dogs in their portfolio, it would expose how overvalued they were and the share price they needed to lure new investors would drop.
If they sold the winners, the portfolio would be worth less and the share price would drop.
Solution: don't sell anything.
- This meant the only money Crocus had to pay off redemptions was new money, but the law required Crocus to invest most of that new revenue in Manitoba companies.
Solution: change the law.
- The bureaucrats who fought the change understood that a true retirement investment fund should be making its money from its investments.
To them, the "multiple bottom lines" argument didn't wash when taxpayers were expected to underwrite Crocus redemptions.
That fact didn't make the 8-page FP special report.
Dan Lett's "news story" reaches this conclusion:
"Opposition politicians have tried to pin a scandal on the NDP government by alleging it knew Crocus was a confidence game and covered it up. By employing this strategy, the Liberals and Progressive Conservatives have missed the real story. The NDP could have, should have, saved Crocus."
Answers.com provides this definition of a confidence game (Law Dictionary, 5th edition, by Steven H. Gifis, published by Barron's Educational Series, Inc.):
"[a]ny scheme whereby a swindler wins the confidence of his victim and then cheats him out of his money by taking advantage of the confidence reposed in him." 95 N.E. 2d 80, 83. The elements of the crime of the confidence game are (1) an intentional false representation to the victim as to some past or present fact . . . (2) knowing it to be false . . . (3) with the intent that the victim rely on the representation . . . (4) the representation being made to obtain the victim's confidence. . . And thereafter his money and property. 304 A. 2d 260, 275.
The facts are indisputable that the NDP cabinet was informed at least once, and the finance department knew for years, that Crocus was dependent on money from new investors to pay off old investors. That's the pure definition of a Ponzi scheme, aka a pyramid scheme.
" pyramid scheme is initiated by an individual or a company that starts recruiting investors with an offer of guaranteed high returns. As the scheme begins, the earliest investors do receive a high rate of return, but these gains are paid for by new recruits and are not a return on any real investment.
From the day the scam is initiated, a pyramid scheme's liabilities exceed its assets. The only way it can generate wealth is by promising extraordinary returns to new recruits; the only way these returns can be paid is by getting additional investors. Invariably these schemes lose steam and the pyramid collapses."
Does any of this sound familiar?