The scandal that has engulfed Norbourg Asset Management Inc. is another black eye for the recovering mutual fund industry and its chief advocate, the Investment Funds Institute of Canada.
"It clearly presents a problem for IFIC," Bill Holland, chief executive officer of CI Fund Management Inc., said yesterday. The fund association should rethink how it appoints its future chairman from major fund companies so that "the chances of something like this happening are all but eliminated."
That something was the Thursday resignation of Michel Fragasso, a well-regarded IFIC director and, since October of last year, chairman of the fund lobby group. Mr. Fragasso is also a senior vice-president of Norbourg, a Montreal financial services firm that allegedly embezzled $70-million from its clients. It's the first time in recent memory a retail fund company has come under criminal investigation.
The allegations come at a turning point in the history of IFIC, a vast group of about 200 large and small fund companies, banks and insurance providers with competing interests. A buoyant stock market has meant strong fund sales this summer and the search is on to replace Tom Hockin, IFIC's long-serving president and chief executive officer. For many, the troubles of 2004 -- including more than $200-million in settlements for fund trading irregularities as well as weak industry sales -- seemed a distant memory.
The Norbourg scandal may act as an impetus for a tighter regulatory regime for the fund business, said Brenda Vince, president of RBC Asset Management Inc., the mutual fund arm of Royal Bank of Canada. Ms. Vince was appointed IFIC's new chairwoman late Thursday.
"Nobody likes to see situations like this. In a business where trust is at the core, chinks in it have impacts on everybody," she said.
Dan Richards, a Toronto fund marketing consultant, said IFIC ultimately will be as effective as its membership permits.
"Do they want a strong voice for the industry?" he said. "Are you prepared to compromise some of your own short-term commercial interests to the greater good of the industry as a whole? There has been a notable reluctance to do that."
Mr. Hockin, the head of IFIC who is due to retire this fall, portrayed Norbourg's woes as an isolated incident. There is little the industry can do to protect unitholders and their savings in the event of criminal activity, he said. Norbourg's retail assets under management total about $180-million.
"This is clearly fraud. It's nothing to do with the industry itself," he said.
IFIC trio
Brenda Vince, the new chairwoman of the Investment Funds Institute of Canada
follows this trio.
Michel Fragasso
Term: IFIC chairman from October, 2004, to Aug. 25, 2005.
Credentials: Mr. Fragasso was IFIC's voice in Quebec and worked closely with the association for the past seven years. The former federal Liberal Party candidate was head of fast-growing Teraxis Capital Inc. In January, 2004, the money manager was acquired by Norbourg.
What happened: On Thursday, Norbourg offices in Montreal, Quebec City and Toronto were raided by police. Assets have been frozen amid allegations it embezzled nearly $70-million from thousands of investors to finance acquisitions. Mr. Fragasso, a Norbourg senior vice-president, resigned his IFIC post.
Terrence Wright
Term: IFIC chairman from September, 2002, to September, 2004.
Credentials: A graduate of the faculty of law at the University of Manitoba, Mr. Wright practised corporate law with Winnipeg's Pitblado & Hoskin. In 1992, he was appointed general counsel and senior vice-president of the mutual fund giant now called IGM Financial Inc., parent of Investors Group.
What happened: In September, 2004, Investors Group was one of four fund companies targeted by the Ontario Securities Commission's sweeping investigation of market timing in their funds. The allegations surfaced in the last days of Mr. Wright's two-year term as IFIC chairman.
Dax Sukhraj
Term: IFIC chairman from November, 1997, to June, 1998.
Credentials: Mr. Sukhraj, a successful financial adviser in the Toronto area, founded Keybase Financial Group in the 1996. He was active in many industry associations, including IFIC.
What happened: In 1997, Keybase considered buying a piece of ailing Provident Financial Services Inc. As part of the deal, Mr. Sukhraj promised to reimburse three elderly clients who had lost $800,000. He reneged on the promist, prompting the Ontario Securities Commission to take up the case, and Mr. Sukhraj resigned his IFIC post. Today, he continues to oversee Keybase and its team of 150 advisers with about $1-billion dollars in assets under administration.