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A scandal engulfing Manitoba's Crocus Investment Fund has widened to include a number of labour leaders and government officials and threatens to tarnish the country's labour-sponsored investment fund industry.

Crocus, which has $154-million in assets, has been under investigation by the Manitoba Securities Commission and the provincial auditor for months. The labour-sponsored fund was created by the Manitoba government in 1992 and it has investments in about 50 companies including the Winnipeg Goldeyes baseball team and the city's new hockey arena, the MTS Centre.

Funds such as Crocus are allowed to provide generous tax breaks to investors because they are sponsored by labour organizations. The funds typically offer venture capital to private companies, which can make valuations difficult.

Crocus suspended sales last December and replaced its chief executive officer amid concerns about the value of the portfolio. The suspension has left 34,000 investors in limbo and they are threatening to sue.

Tuesday, the MSC released a series of allegations against 10 current and former Crocus directors, including several labour leaders and government officials. The commission alleges the directors ignored the fund's valuation rules and allowed shares to remain on sale for three months last fall even though they had been told Crocus faced a significant writedown.

"There was no discussion concerning whether to suspend trading," the MSC said in the allegations.

"Rather, the board was concerned about the upcoming sales season and the impact of any potential writedown on sales."

Doug Brown, MSC's enforcement director, said the commission is continuing its investigation, which may lead to further allegations.

Alfred Black, the fund's interim CEO, said the directors will respond to the allegations in the coming weeks. He said the fund is working with outside consultants on a number of organizational changes and it is negotiating a settlement with the commission. "It is important to acknowledge that the board initiated an organizational review in December in response to shortcomings it identified with respect to the fund's procedures and governance," Mr. Black said in a press release.

Crocus's board is largely made up of union leaders and one government appointee. The directors named in the allegations include Robert Hilliard, former president of the Manitoba Federation of Labour, Charles Curtis, former deputy finance minister, and Wally Fox-Decent, former chairman of the Workers Compensation Board and former president of the Winnipeg Symphony Orchestra.

The MSC alleges that the fund's senior staff first told a board committee about the need for a $15-million writedown on Sept. 14, 2004. They made further recommendations for another $23-million writedown at subsequent full board meetings in November, according to the allegations, but the board did not decide to suspend share sales until Dec. 9. The shares were suspended the next day at $10.45 apiece. Crocus has estimated the price could fall by as much as $4 because of the writedown, but others have said it could be cut by more than half.

During one board meeting on Dec. 5, a director indicated the board was concerned about the amount of the writedown and asked whether senior staff would consider "a lesser amount that the board was more comfortable with," according to the allegations. "The senior officers indicated they would not."

The MSC also alleged that a board subcommittee, which was supposed to review the valuation monthly, held no meetings between April and September, 2004. "The board of directors expressed no concerns that the valuation subcommittee had no meetings during this time," it said in the allegations.

Paul Walsh, a Winnipeg lawyer representing investors, said the allegations point to a cover-up and investors will now be launching a class action. "It's a virtual certainty that there will be a lawsuit filed, it's just a question of timing now."

John Loewen, finance critic for the opposition, called the allegations "very, very serious."

"This points to an appalling lack of oversight on behalf of the government," said Mr. Loewen, a Conservative member of the legislature. "Sadly, this is going to cost a lot of Manitobans a lot of money."

Labour-sponsored funds emerged in the 1980s with changes to tax laws. But the investment vehicle did not become popular until about 10 years ago. Today, there are 45 funds in Canada, a number that balloons to more than 100 when fund clones and different fund classes are included.

The investment vehicle has proven to be more popular with tax accountants than financial advisers. Investors receive an enticing 30-per-cent tax break on their investment in these funds, but many have posted poor returns.

Robert MacKenzie, an Ottawa financial adviser, is no longer recommending that clients buy labour-sponsored funds, citing high management fees, poor returns and the shift among some managers to invest in debt and mature businesses rather than startups. He expects the Crocus scandal will make the asset class even less desirable. "It's unfortunate that the [Crocus]news doesn't seem to get through to investors. I would hope that it would give them pause."

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