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How the bloom came off Crocus

WHILE FLIPPING THE PAGES of the Crocus Investment Fund annual report a few years ago, Bernie Bellan, a mailman and shareholder had a thought. Its holdings were mainly in small businesses, a few of which he recognized as being in trouble. So how come Crocus was claiming to be doing so well?

With files from Keith Damsell

Bernie Bellan didn't pay much attention to the Crocus Investment Fund until one day in November, 2001, when he walked through Winnipeg's Grant Park Shopping Centre.

Mr. Bellan, a mailman for nearly 30 years, owned a few Crocus shares and he picked up a copy of the labour-sponsored fund's annual report from a booth in the mall. As he flipped through the pages, Mr. Bellan was shocked at some of Crocus's investments, which consisted mainly of holdings in small businesses. He recognized a few names and had heard they were in trouble. How could Crocus claim to be doing so well?

Mr. Bellan started asking questions of Crocus officials. When he didn't get what he considered to be straight answers, he wrote an article in a newspaper he published with his brother called the Jewish Post & News, circulation 2,600. It was titled "Some Things You May Not Have Known About The Crocus Fund." Crocus threatened to sue. Mr. Bellan backed off but he remained skeptical.

Today, just about all Mr. Bellan's fears have come true. Crocus is in receivership and under criminal investigation by the RCMP. Allegations are flying about misrepresentation, improper accounting and expenses so out of control one Crocus executive billed the fund for his parking tickets. Meanwhile, 34,000 shareholders are stuck in limbo wondering whether they'll ever get their money back.

"No, I never thought this would happen," said Mr. Bellan, 51, whoheads a shareholders' group that's planning a $100-million class-action lawsuit.

The story of the Crocus debacle is a tale of good intentions gone badly wrong. Crocus was never a huge player in the investment world -- it had only $174-million in assets at its peak -- but it was hailed across Canada as an example of how unions and government could work together to create a kind of financial superhero: capable of rescuing small businesses, saving jobs and helping communities, all while delivering returns to shareholders. It's also a story of how two men with no investment fund experience created a provincial institution and became so powerful their advice was sought by business leaders, premiers and prime ministers.

The story begins in 1989, when Sherman Kreiner arrived in Winnipeg from Philadelphia. A lawyer, Mr. Kreiner had become famous in U.S. labour circles for his work on innovative employee ownership programs. He'd been recruited to Canada by labour groups to help them cope with the North American free-trade agreement.

At first, Mr. Kreiner wasn't much help. Canada was full of branch plants, which he didn't think were good candidates for employee ownership. But then he suggested an investment pool for small businesses.

He pointed to Quebec's Solidarity Fund as a model. It was created in 1983 by the Quebec Federation of Labour and the provincial government. Solidarity was Canada's first "labour-sponsored investment fund." It invested in small and medium-size companies and its investors received provincial tax breaks.

Mr. Kreiner proposed adapting the model to Manitoba. The idea intrigued the Manitoba Federation of Labour, which took it to the Conservative government of Gary Filmon. He embraced it and, in 1992, the government passed a law creating Crocus, naming it after the provincial flower.

The legislation incorporated nearly all Mr. Kreiner's objectives -- Crocus was a labour-sponsored fund that focused on job creation, job retention and employee participation. Shareholders received a tax credit of up to 40 per cent of their investment, but had to hold their shares for seven years (the credit later fell to 30 per cent and the holding period increased to eight years).

Control of Crocus went to the MFL. It elected a majority of Crocus's directors while shareholders elected two and the province appointed one. Mr. Kreiner was named chief executive officer.

Running Crocus was a dream come true for Mr. Kreiner. He was going to do more than simply deliver returns to shareholders. He was going to spark social change. "When you invest in the Crocus Fund, you are taking a stand for all Manitobans against the effects of globalization," Mr. Kreiner once said. "You are saying there is an alternative to the low road of wage reduction, downsizing and community abandonment."

"Multiple bottom lines" became a Crocus hallmark and Mr. Kreiner defends them to this day. Social objectives can work with other business priorities to maximize shareholder value, he said in a recent interview. "They weren't in conflict with each other."

One of his first tasks after becoming CEO was hiring a chief investment officer. Mr. Kreiner chose James Umlah, a 12-year veteran of Winnipeg's brokerage community. According to allegations in a report released May 30 by the province's auditor-general, Mr. Umlah was "not known as a strong manager." He'd also been sanctioned twice by the Investment Dealers Association of Canada for minor infractions and paid $2,700 in fines.

Mr. Umlah was not available for comment. His lawyer, Robert Tapper, said the IDA cases were not relevant to Mr. Umlah's years at Crocus. He called the auditor-general's report unbalanced and inaccurate.

Crocus shares went on sale in January, 1993, at $10 a piece, and Mr. Kreiner pushed them on every front. The fund advertised heavily with slick commercials that extolled the virtues of investing in Manitoba. "We invest more than money in Manitoba companies," Mr. Umlah said in one TV ad. "We invest ourselves in helping those companies grow stronger."

One of its most popular slogans -- "Make a profit and a difference" -- had to be pulled last year after the Manitoba Securities Commission said it was inappropriate. Crocus faced other complaints its ads were overly promotional and misleading, the auditor-general said.

Mr. Kreiner also employed a unique sales practice. Like other funds, Crocus sold its shares through brokers and mutual fund dealers. But during RRSP season, Crocus put together teams of volunteer agents, usually union members seconded from their jobs, and had them man telephone banks to flog the shares. Every year, from mid-January to the end of February, Crocus used about 24 volunteer salespeople. Each was given a one-day course on Crocus and prizes were handed out for top sales.

The MSC went along with the system but required that a senior Crocus official approve every sale for client suitability. A review by the commission in 2000 found that Crocus was only doing spot checks. The MSC reiterated its requirement and Crocus promised to comply. Doug Brown, the MSC's enforcement director, said in an interview the commission has launched a probe into Crocus's sales practices.

Mr. Kreiner defended the tactics. He said Crocus adopted practices used by Solidarity, which sells all its shares through union members on a volunteer basis (they take a four-day course from the Quebec Securities Commission). And, he said Crocus was simply trying to make its shares as accessible as possible.

Whatever the issues about its promotional strategies, Crocus was a hit with investors. The fund's assets grew steadily from $2-million to a high of $174-million in 2003. It also invested in dozens of high-profile companies, including the Manitoba Moose hockey team, brokerage firm Wellington West Capital Inc. and pollster Ipsos-Reid.

The vast majority of shareholders were farmers, blue collar workers and union members who owned just a handful of shares. The average investment was $2,800.

Some were like Joyce Metelski, 70, who worked in the Manitoba legislature for 20 years until she retired in 2000. Crocus information "was in our pay envelopes, it was on our desks, it was on the bulletin board," she recalled. Ms. Metelski bought $32,000 worth of Crocus shares over the years.

"You thought it was government," she said. "I like Manitoba and I really wanted it to do good. I thought, I'm doing something for the province."


An investment fund as well known as Crocus doesn't fall overnight. Or does it? Tomorrow, Paul Waldie looks at how it all unravelled.

© 2007 The Globe and Mail. All rights reserved.

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