MFDA Case Summary

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Home › Case Summary 200719 - RE: Berkshire Investment Group Inc.

Contact: Hugh Corbett
Director of Litigation
February 15, 2008
Phone: 416-943-4685

MFDA Case Summary

This case summary was prepared by Staff of the MFDA.


Nature of
A Hearing Panel of the Pacific Regional Council of the Mutual Fund Dealers
Association of Canada (“MFDA”) has accepted a Settlement Agreement
between the MFDA and Berkshire Investment Group Inc. (“Berkshire”), a
member of the MFDA.

The Hearing Panel considered the Settlement Agreement at a hearing held on
Rules, Policies December 13, 2007 in Vancouver. In the Settlement Agreement, Berkshire
admitted that on two occasions it failed to conduct reasonable supervisory

investigations of the activities of Ian Gregory Thow (“Thow”), contrary to
MFDA Rules 2.5.1 and 2.1.1(c).
MFDA Rule 2.5.1 states that:
Member Responsibilities. Each Member is responsible for establishing,
implementing and maintaining policies and procedures to ensure the
handling of its business is in accordance with the By-laws, Rules and
Policies and with applicable securities legislation.
Standard of Conduct
MFDA Rule 2.1.1 states that:
Each Member and each Approved Person of a Member shall:
. . .

(c) not engage in any business conduct or practice which is unbecoming
or detrimental to the public interest;

Under the terms of settlement, Berkshire agreed to pay a fine in the amount of
$500,000 and costs to the MFDA in the amount of $50,000.

Summary of

Berkshire has been a Member of the MFDA since March 8, 2002 and is
registered to carry on business as a mutual fund dealer throughout Canada.
Its Head Office is located in Burlington, Ontario.
Ian Thow
Between November 1998 and June 2005, Thow was registered in British
Columbia as a mutual fund salesperson, branch manager and officer with
Berkshire. Thow held the titles of Senior Vice-President of Berkshire and co-
Branch Manager of its Victoria branch office.
Prior to his resignation from Berkshire on June 1, 2005, Thow persuaded
more than 40 individuals (65 counting spouses and related companies
separately) to provide him with at least $18 million for the purchase of
investments outside of Berkshire which did not really exist (the “investment
schemes”). Many of the individuals who provided money to Thow in
connection with the investment schemes were clients or former clients of
Berkshire. Thow did not use the monies that he received from the individuals
to purchase investments on their behalf. Instead, Thow used the monies for
his personal benefit.
Although Thow did apparently repay approximately $3.2 million to certain
individuals prior to his resignation (using monies received from some
individuals to repay others) he has not repaid or otherwise accounted for the
rest of the money obtained in connection with the investment schemes.
Berkshire had not approved the sale of any of the investment scheme products
and none of the money paid for those investments was made payable to
Berkshire or deposited in any account of Berkshire or its clients. Thow
actively concealed his misconduct from Berkshire and Berkshire did not
benefit from his misconduct. Berkshire did not receive any client complaints
about Thow’s misconduct until after Thow’s resignation.
The Report from LV
On approximately September 16, 2004, Berkshire’s legal department received
information from a lawyer concerning the fact that a wealthy businessman,
LV, was one of three or four individuals who had given money to Thow to
invest in a Jamaican bank. LV was seeking information about his investment.
LV was not a Berkshire client. Berkshire was informed that LV had
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transferred $1.2 million to Thow’s bank account for the purchase of shares in
the Jamaican bank. When LV requested documentation from Thow
concerning his purchase, Thow instead provided LV with $1.2 million in
travel vouchers relating to Thow’s aircraft leasing business.
Berkshire notified its Compliance Department about the information received
concerning Thow’s dealings with LV but did not inform anyone in Thow’s
branch in Victoria, including the co-Branch Manager.
Thow denied that he received monies from LV to invest in Jamaican bank
shares and claimed that LV had purchased a block of flight time on his
aircraft and was now “playing hardball” to recover money from Thow.
On September 22, 2004, Berkshire’s legal department received a call from
LV who said that the information previously conveyed to Berkshire was “a
misunderstanding”. LV said Thow was his personal friend and that one of his
companies intended to do business with Thow’s aircraft leasing company.
Berkshire heard nothing further about the matter and considered it resolved.
Berkshire was not aware that Thow had contacted LV and agreed to repay the
$1.2 million if LV would tell Berkshire that the information provided by the
lawyer was a misunderstanding.
The Report From DS
On April 20, 2005, Berkshire received a call from DS who claimed that he
had provided U.S. $200,000 to Thow to purchase shares in the same Jamaican
bank. In response to requests by DS for documentation concerning his
investment, Thow sent DS a receipt from Thow’s aircraft leasing company for
credit towards flight time. DS was not a client of Berkshire, but after
pursuing Thow for between 6 months and 1 year he asked for assistance from
Berkshire to recover his money.
The report by DS was substantially similar to the information previously
communicated to Berkshire by the lawyer concerning LV.
Berkshire tried to arrange for senior representatives from its compliance
department to attend at Thow’s branch to conduct an investigation but Thow
refused to meet for the purpose of discussing his dealings with DS.
Berkshire scheduled an in-person meeting with DS but DS subsequently
cancelled the meeting when Thow and DS entered into negotiations for the
return of DS’s money. Berkshire was not aware of DS’s reasons for
cancelling the meeting. DS subsequently stated he was never repaid by Thow.
On May 5, 2005, Thow attended a meeting at Berkshire’s head office and
submitted a letter of resignation. Thow refused to answer most of Berkshire’s
questions concerning his dealings with DS and denied that he had sold DS
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shares in the Jamaican Bank. Thow insisted that DS had purchased a block of
flight time from Thow’s aircraft leasing business.
Berkshire accepted Thow’s resignation, but agreed to defer the effective date
to June
2005. Berkshire did not conduct any further supervisory
Losses Sustained After The LV and DS Reports
Between September 16, 2004, when Berkshire received the report about LV
and April 20, 2005 when Berkshire received the report from DS, Thow
obtained more than $5.8 million from individuals. Of that amount, more than
$4.3 million was obtained from clients of Berkshire.
Between April 20, 2005 when Berkshire received the report from DS and
June 1, 2005 when Thow’s resignation became effective, Thow obtained
approximately $510,000 CDN and $30,000 USD from individuals. Of that
amount, approximately $210,000 was obtained from clients of Berkshire.
In response to complaints from some individuals concerning losses sustained
in connection with Thow’s investment schemes, Berkshire voluntarily
initiated mediations with 29 of its clients. These mediations resulted in
Berkshire paying $4.1 million to the 29 clients in settlement of their claims.
Berkshire’s Failure To Conduct Reasonable Supervisory Investigations
Berkshire admitted that in light of the potentially serious implications of the
information communicated to Berkshire by the lawyer about Thow’s dealings
with LV, Berkshire should have conducted a reasonable supervisory
investigation concerning Thow’s dealings with LV and continued it even after
LV told Berkshire that the matter was a misunderstanding.
Berkshire also admitted that between April 20, 2005 and May 5, 2005, after
receiving the report from DS, Berkshire did not take sufficient steps in
furtherance of a reasonable supervisory investigation of Thow’s activities and
did not impose any interim supervisory measures to protect its clients’
interests until such time as it could assess the merits of DS’s report. The
Hearing Panel accepted that, in the circumstances, Berkshire had an
obligation, at a minimum, to suspend Thow immediately on May 5, 2005 and
to take other appropriate interim supervisory and disciplinary measures to
protect its clients’ interests and preserve relevant documentation.
The Hearing Panel also accepted that if Berkshire had conducted reasonable
supervisory investigations after receiving the reports relating to LV and DS, it
would have increased the likelihood that Thow’s misconduct would have
been discovered and Thow would have been prevented from continuing to
engage in such conduct while registered with Berkshire.
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The Hearing Panel accepted that Berkshire’s failure to conduct reasonable
supervisory investigations did not arise from any general failure to maintain
and adhere to appropriate supervisory policies and procedures or from any
intentional non-compliance on its part. The Hearing Panel also accepted that
prior to the hearing, Berkshire had reviewed its policies and procedures and
supplemented them to address deficiencies that may have accounted in part
for the failure to conduct reasonable supervisory investigations in this case.
The Hearing Panel determined that reasonable supervisory investigations
following receipt of the reports concerning LV’s and DS’s dealings with
Thow would have included, at a minimum, the following:
(1) Contacting LV and the lawyer to confirm the nature of the purported
misunderstanding between them regarding LV’s transactions with Thow;
(2) Taking steps to ascertain whether Thow obtained money for investments
from any other individuals who attended the fishing trip hosted by Thow;
(3) Taking steps to ascertain whether DS was aware of any other individuals
who had given money to Thow for investments outside of Berkshire;
(4) Ascertaining whether Thow’s co-Branch Manager at the Victoria branch
was aware of any unusual activity on Thow’s part which might suggest
that Thow was conducting securities related business outside Berkshire,
or was engaging in undisclosed outside business activities;
(5) Conducting a review of Thow’s office and client files; and
(6) Requiring Thow to provide written disclosure to individuals involved in
his outside business activities that the activities were not the business or
responsibility of Berkshire.
The Hearing Panel also stated that if Berkshire had conducted an
investigation of its clients over the 12 months prior to the date of the LV
information, a pattern may have emerged. If Berkshire had contacted clients
who cashed in accounts or transferred monies out, they may have discovered
Thow’s off book activities.
For greater detail, see the Settlement Agreement, accepted on December 13,
2007 and the Decision and Reasons, dated January 3, 2008, posted on the
MFDA’s website in the “Completed Cases” section under “Enforcement”.
DM #130248
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