Judge gives green light to Norbourg class action

"You can't win, for investors," she said. "I mean, you can, but odds are stacked against you."

There appears to be nothing outrageous about the anger Quebec investors feel toward Montreal-based mutual fund dealer Norbourg Asset Management Inc. The firm's former chief executive, Vincent Lacroix, faces 51 charges of swindling investors of more than $115 million (U.S.).

"Vincent Lacroix diverted the money of thousands of investors and is not cooperating, while claiming to be a victim," Jean St-Gelais, president and chief executive of Quebec's financial regulator, L'Autorit%E9; des march%E9;s financiers du Quebec in Montreal, said in a news release. Mr. St-Gelais also is chairman of the Montreal-based Canadian Securities Administrators, the de facto national regulator.

And now Mr. Lacroix faces more trouble. On Sept. 13, Quebec Superior Court Justice Pierre Jasmin authorized the launch of a class action against Mr. Lacroix and other defendants, including the AMF.

Mr. Lacroix's lawyer said his client is bankrupt and therefore is not suable.

More important was what the judge said. He indicated that there is enough evidence of fraud on the part of Mr. Lacroix and negligence on the part of the Quebec regulator and other parties to allow the suit to proceed against them.

AMF's failure to stop the siphoning of money from Norbourg mutual funds raises the question of whether the regulator was guilty of a "gross fault," the judge said.

Wilhelm Pellemans, the lead plaintiff in the class action, represents about 9,200 clients of the Norbourg group.

"The plaintiff alleges that several mistakes were committed by AMF representatives," Mr. Jasmin stated in his judgment. "He alleges that taken together, these mistakes constitute a gross fault of the kind that would deprive the AMF of its immunity defense."

The judge also authorized the class action against several other defendants, including Toronto-based Northern Trust Company Canada, the securities custodian used by Norbourg. Northern Trust has denied any wrongdoing.

Faced with the obvious embarrassment of being included in the suit, AMF will defend itself at the trial, scheduled for next spring, according to AMF spokesman Philippe Roy.

"We will show that the Autorit%E9; fulfilled all its obligations in terms of inspection and investigation in the Norbourg file," he said.

On May 31, Quebec Minister of Revenue Lawrence Bergman announced that the Quebec government would give investors $24 million of back taxes Mr. Lacroix owes the province. So far, Quebec has recovered $6 million of that amount.

June 30, New York-based Ernst & Young LLP's Montreal office began sending checks to about 5,600 investors.

According to industry experts, the investors have little hope of much further indemnification, apart from class actions.

Quebec's new indemnity program for mutual funds applies only to dealers or companies that sell mutual funds, as opposed to the companies that design and administer the funds.

CSA solution

The CSA's effort toward ensuring that the Norbourg fiasco won't be repeated is two pronged.

The regulator's new "registration reform" project proposes that fund managers be required to register in a newly created category, a move that would shift the registration obligation from fund issuers to fund managers. Regulators would have the ability to help pick fund managers.

Then there is National Instrument 81-107, which requires every investment fund that is a reporting issuer to have a fully independent review committee. The committee's role is "to oversee all decisions involving an actual or perceived conflict of interest faced by the fund manager in the operation of the fund." The new rule takes effect Nov. 1.

The problem is that "it is up to the manager to decide what is presented to the [independent review committee]," Steven G. Kelman, investment counselor and president of Steven G. Kelman & Associates Ltd. of Toronto, wrote in a column for Toronto-based Morningstar Canada's website. "L'Affaire Norbourg comes to mind as a situation where information apparently wasn't shared with directors. Would an IRC have prevented the alleged misappropriation of $130 million belonging to 9,200 investors? I doubt it."