New details of Crocus collapse rekindles interest in RCMP probe
What's wrong with this picture?
In the middle of an election, the Winnipeg Free Press runs eight pages on the collapse of the Crocus Investment Fund--- without a single mention of how deeply the NDP government is enmeshed in the scandal.
If the intent was to defuse the Crocus Fund as an election issue, somebody miscalculated.
New details of the Crocus story reveal that:
* the fund was in serious trouble much earlier than anyone knew before,
* that government officials were aware of it, and
* that the NDP government and Crocus engaged in a conspiracy of silence as Manitobans were being duped into putting their pension money into overvalued shares.
This only supplies more ammunition to calls for a public inquiry, if not a re-energized criminal investigation into fraud, conspiracy and cover-up involving government officials including Finance Minister Greg Selinger, Premier Gary Doer and Justice Minister Gord Macintosh. That's not the story the FP wanted you to read.
Their story was all about how a plucky company on the verge of an expansion hired two outsiders to help, and they, instead, turned on the founders and tried to take over the company for themselves, but wound up destroying it instead.
The government has barely a walk-on role in this fable.
If only the Crocus Fund wasn't hamstrung by intolerable rules unprecedented in Canada, the fairy tale goes, it would never have run into financial difficulties and would have easily weathered the storm.
And the Witch wouldn't eat Hansel and Gretel.
The FP story focus is on the final months of 2004 before trading in Crocus shares was suspended. It's a tale bolstered by ignoring the facts of the Crocus scandal, many of which surfaced in a series of leaked government documents which, for reasons not explained, the Free Press refused to report on.
We now know that since 2000 the Crocus Fund had been in deep financial trouble. It was spending gobs of money which it wasn't earning.
In 2000, 2001 and 2002 the NDP changed laws to keep Crocus solvent, but it wasn't helping.
Crocus had become a Ponzi scheme, needing money from new investors to pay off old investors. And even that wasn't enough.
The rules required Crocus to invest their shareholders' money in Manitoba firms within two years. If it was all going to redemptions, the day they would run out of money was fast approaching. The Crocus management had a grand plan to end their money woes.
Despite mismanaging their own money, they would become managers, for a healthy fee, of a Superfund, a pool of pension money from other government and private pension funds in the province.
To this end they hired Laurie Goldberg as chief operating officer and John Pelton as chief investment officer. The problem was that these two men insisted on satisfying themselves that Crocus shares were properly valued.
When they started looking into the closets, they found the skeletons the Crocus board had been hiding.
Crocus shares were vastly overvalued. Investors who bought in now would be cheated.
The Winnipeg Free Press reveals that in the summer of 2004, Pelton and Goldberg told Crocus officials that a writedown of $30-$40 million was likely by the end of September. The rest of the story is an account of how the writedown unfolded:
-- a partial writedown in September,
-- heated meetings over differences in the value of Crocus holdings, -- resignations of board members,
-- the release of a prospectus which did or did not include overstated valuations, and finally,
-- a walk to the Manitoba Securities Commission which halted trading in Crocus shares.
New information from Crocus directors provides a better understanding of why the labour reps fought so strongly against a devaluation.
To start, the Superfund was just around the corner.
From the FP:
"The local investment council, a creation of the Premier's Economic Advisory Committee, wanted to create a new capital pool with contributions by the six big public pension plans and Crown corporation investment funds." "the local investment council was, by the fall of 2004, drafting a plan to issue a request for proposals for a third-party manager."
A glance at the Premier's Economic Advisory group uncovers a raft of labour reps, almost all of whom have connections to the Manitoba Federation of Labour, the sponsor of the Crocus Fund, not to mention Sherman Kreiner and Gary Doer's pal, Costas Ataliotis, who was apparently using Crocus "investments" to cover weekly payroll for his company Maple Leaf Distillers.
Because a Superfund might take a while, CFO Jane Hawkins had a meeting arranged with Industry Minister Jim Rondeau on Nov. 16, 2004, to go over details of another change in legislation, this to eliminate the "pacing" requirements that Crocus hated.
In layman's terms, these were the rules that forced Crocus to invest the lion's share of new shareholders' money in local firms.
Scrapping them would allow Crocus to become a full Ponzi scheme, able to use all the new share sales revenue to pay off old shareholders who wanted to cash out.
According to the FP, Crocus CEO Sherman Kreiner was playing a game of chicken with the government.
He had, he told his board, already warned the government that if they didn't change the laws on pacing and reserves, Crocus would have to sit out the 2005 RRSP season. Did the NDP want that responsibility?
The Free Press made no mention of Exhibit A, the critical piece of evidence unearthed by The Black Rod. http://blackrod.blogspot.com/2005/07/hirst-rides-to-rescue.html
On November 13, 2004, Crocus launched its Switch-and-Save campaign to entice investors to switch their pension holdings from a safe investment into the Crocus Fund, to take advantage of the 30 percent provincial and federal tax savings on labour-sponsored funds.
By Nov. 13, the board of Crocus knew for almost a month that another writedown, and a major one at that, was imminent. And still they were advertising for Manitobans to buy Crocus shares at the overvalued price.
It now appears that this may have been a stop-gap effort to bring money into Crocus if sales were interrupted over the RRSP period, as looked possible.
The Winnipeg Free Press also failed to report that by November, 2004, the NDP knew all about the overvaluation of Crocus shares and would have known that Switch-and-Save was a scam offer.
One of the leaks of internal government documents that were ignored by the FP was reported by Tom Brodbeck in the Winnipeg Sun. It's now a crucial piece of the puzzle, and one you won't read about in the FP.
It was a three-page memo marked "Confidential, for Finance Department Only" written Sept. 13, 2004. Brodbeck wrote:
"The Crocus Investment Fund's cash-crunch problems were so bad in the months leading up to its 2004 demise, the fund didn't even have enough assets to sell off to pay investors who wanted to redeem their shares, a confidential provincial government memo obtained by the Winnipeg Sun states. And what assets the fund did have were worth far less than what shareholders were told their units were worth, the memo says."
The newspaper published some excerpts from the memo:
- "Crocus states it may not be able to profitably sell off investments (i.e. assets sales will not be sufficient to fund redemptions) and Crocus does not want to borrow to fund redemptions."
- "While new investors will expect a return on their investment, no money will be invested in assets that could reasonably be expected to generate that return."
- "Crocus has never provided the province with a business plan demonstrating how it will get out of the liquidity crunch."
- "There is a significant risk that Crocus's liquidity crunch will worsen and new investors will suffer losses."
- "Crocus has warned that its board is considering whether or not to offer shares in the 2005 selling season."
-- Federal-Provincial Relations and Research Division memo, Sept. 13, 2004
From Brodbeck's column (which we can't improve on):
"Crocus has taken the position that it does not have investments that can be sold off to raise enough money to fund redemptions," the memo says. "New investors will expect the province to bear responsibility for allowing Crocus to use their money to pay off old investors."
"In essence, Crocus is saying that the assets underlying the share value are not currently sufficient to cover the share value," the memo says. "If a publicly-traded company was in a similar circumstance, the share value would decline to reflect the value of the assets."
"Crocus is requesting that the province allow it to mask the poor marketability of its investment portfolio by allowing it to take money from new investors to prop up the share price for redeeming investors," the memo states.
In fact, things were so bad the provincial Finance Department suggested Crocus could tell new investors in 2005 -- on a separate form they would have to sign -- that their money may not be used to invest in Manitoba companies. The memo suggested the following wording:
"I also understand that Crocus might not use money raised through the sale of shares to invest in Manitoba companies, but might use it instead to fund the redemption of shares purchased by previous investors."
So here was the government suggesting taxpayers give new investors a 30% tax credit -- not for new investments into Manitoba companies to create more jobs -- but to help solve Crocus's cash-flow crisis.
"The memo debunks claims by Finance Minister Greg Selinger that the fund's cash-flow problems had nothing to do with its failure."
A mystery for any public inquiry to answer is how the Finance Department had such a detailed account of the problems within the Crocus Fund, when the Fund's Board of Directors apparently had no idea until late September at the earliest.
Was it the Eugene Kostyra-David Woodbury secret back-channel from Crocus to the NDP cabinet as revealed in The Black Rod (Leaked Crocus Document Shows Path to NDP Government's Back Door, Saturday, April 14, 2007 http://blackrod.blogspot.com/2007/04/leaked-crocus-document-shows-path-to.html)?
One thing is certain.
You can't expect the Winnipeg Free Press to provide the answer.
After all, a newspaper that hides the fact that its co-owner, Bob Silver, is the co-chairman of the Premier's Economic Advisory Committee, and may know more about the Superfund and Crocus than he's revealed so far, has bigger secrets to conceal.