Shocking revelations prove NDP knew of performance problems at the Crocus Investment Fund in Nov 2000 but failed to act

A confidential cabinet document signed by Finance Minister Greg Selinger and dated November 27, 2000 shows that Mr. Selinger and the entire NDP cabinet were well aware of performance problems at Crocus as early as the fall of 2000. This is as close to a smoking gun over Crocus as one gets.

The cabinet document clearly stated the provincial government's particular responsibility with respect to the Crocus Investment Fund. Specifically it says: "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."

The document also proves that Mr. Selinger knew there were performance problems at Crocus in 2000. Indeed, in his document he says "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." Clearly, the Crocus Investment Fund was not performing as advertized in its Prospectus - a very serious breach when it comes to securities. The Finance Minister knew that in 2000.

Indeed, it would appear from this document that profits earned on the investment portfolio were not generating sufficient revenue to pay shareholders who were redeeming their investments, so (again quoting the document): "Crocus is seeking to use money from new investors to pay for redemptions by existing investors." This is without doubt a performance problem with the portfolio, not just a liquidity problem. The eventual liquidity problem was a result of faulty performance by Crocus and this was predicted in the 2000 cabinet document.

Greg Selinger, Gary Doer and the NDP have maintained up to this point that the only thing they were aware of at Crocus was a "liquidity problem". We now know that they were well aware of performance problems at Crocus so they have been misleading us and the public in answering questions about what they knew and when they knew it.

This is a very serious revelation. The deliberate decisions made by the NDP cabinet at this time and in following years had the effect of encouraging everyday Manitobans to invest in the Crocus Fund at a time when Greg Selinger, Gary Doer and the rest of the NDP cabinet were fully aware of performance problems at Crocus. These performance problems ultimately led to the collapse of the fund. With an eight year time from when new investments were made until they could be redeemed, this meant that there was a significant likelihood that new investors would see a major drop in the value of their investments before they could redeem them. In essence, new investors were being misled because Crocus was not doing what it said it would do in its Prospectus, and the NDP cabinet knew this.

The Minister of Finance must now resign. We must also have a full Public Inquiry into the Crocus Investment Fund. As well, the Manitoba Legislature needs to come into session as soon as possible so that questions can be asked of the NDP government about these revelations and why they have spent the past few years misleading Manitobans about just what they knew and when they knew it.

Part of the document follows. The rest is to be found at http://mlp.manitobaliberals.ca/). Certain sections have been put in bold in this blog presention to highlight them :

MANITOBA FINANCE SUBMISSION TO CABINET

SUBJECT:

Requested changes to the annual selling limit and "cooling-off" period for Labour-Sponsored Investment Funds

SUMARY:

Labour-sponsored invetment funds such as Crocus and Ensis have an important role to play in Manitoba's economic development. The Province recognizes that importance by offering a generous tax credit to help persuade Manitobans to invest in those funds. 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 tothem by thousands of Manitobans, the majority of whom are neither wealthy nor sophisticated investors.

Industry, Trade and Mines has been working with Crocus and Ensis to develop administrative changes to the relevant legislation. These wil be brought forward by the Minister of Industry, Trade and Mines shortly and have little bearing on the matters considered in this Submission.

In addition to these administrative changes, 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 (a) removing the annual selling limit, and (b) eliminating the "cooling-off" period (that is permitting an additional tax credit to be claimed at the end of every eight year period). These changes are thought by Crocus to be necessary to deal with a potential liquidity problem that could arise over the next few years. Crocus managers indicate that they only recently realized that this problem could arise.

The following observations are pertinent:

- Each of the Crocus requests could substantially raise the cost of the tax credit for both funds from $7.1 million in 1999 to $15 million or more in another four years. Removing the selling cap would also remove the upper limit on the cost of the tax credit, making the cost unpredictable and creating potential problems in the context of balanced budget legislation since sales could fluctuate widely.
- 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. Under one scenario, by 2003 virtually no money will be available for new investments. To the extent that new money might be used to pay off earlier investors, the tax credits earned on that new money would not be contributing to any net new investment in the Manitoba economy.
- Removing the selling limit might eventually result in one or both of the funds becoming very large and having a strong influence in the Manitoba economy. It would be best to consider the pros and cons of such a situation before deciding whether or not to remove the limit.

In view of these considerations, and

Given that Industry, Trade and Mines, in cooperation with Finance and the Manitoba Securities Commission, is conducting a thorough review of several substantive issues with regard to labour-sponsored funds, and

Given that the potential liquidity constraint identifed by Crocus is not expected to become a significant problem over the next year; this submission recommends that there be no major changes to the selling limit or cooling-off period until there has been more study and more consultation with both funds. However, given that Crocus might exceed the selling limit this year, three options are presented for dealing [with] that issue.

For the remainder of the document, go to http://mlp.manitobaliberals.ca/