As I was paging through the Gazette yesterday, I noticed an article by business columnist Paul Delean. It starts off like this:

“Gee a whole week without a fresh mutual fund scandal in Quebec. Nobody was closed down, nobody had their assets frozen by regulators. What’s the problem?…”

All that went through my mind was: “Oh, brother!”  But, Delean makes some good points, cryptic sarcasm aside, which I would like to share with you. First though, here’s some background on the mutual fund “scandals” he alludes to. Just the facts as we now know them.

First Norbourg is shut down

On August 25, the Quebec securities regulator, L’Autorité des marchés financiers (the AMF), announced that it was freezing the assets of Norbourg Asset Management  Inc. and requiring that it cease operations. The Norbourg group controlled by Vincent Lacroix, manages the Norbourg and Evolution fund families. It is also parent company to mutual fund dealer Tandem Wealth Management Inc.

At that time, the AMF had reason to believe that at least $70 million had gone missing from the Norbourg and Evolution mutual funds.

Last week, the provisional administrator Ernst & Young made its report on Norbourg’s financial situation public. With it came the shocking news that the discrepancy between Norbourg’s financial statements and the real balance on account in its mutual funds was $130 million – almost twice as much as originally estimated. The report also revealed that 17 of the 29 funds in the Norbourg group held balances of less than $300,000 and all of the firm’s main companies were operating at a deficit.

In its report, E&Y recommended that all the property of the Norbourg group be liquidated. The AMF did not waste time in acting on this recommendation.

As yet, it still has not been determined how $130 million could have gone missing, nor how much of it investors can expect to recover. There is no contingency fund to cover losses of this nature.

Then Zenith funds

Meanwhile, on September 14, the AMF reported that it had obtained the order to shut down another Quebec mutual fund company. Zenith Funds, the AMF announced, was now under investigation for alleged misappropriation of funds and fee abuse. We will only know more about this story as the investigation continues.

What to make of it all

Fortunately, none of you have any money invested with either the Norbourg, Evolution or Zenith fund families. To be quite honest, these companies never even came under my radar until now.

I also want to reassure you that I am not at all concerned about the integrity of the fund industry as a whole. And nor should you be. Nonetheless, the whole mess raises some serious questions.

The Norbourg scandal is the first real case of alleged embezzlement by a fund manager. It is still too early to say just what happened to all that money and who is to blame, so one can’t help but wonder. Were our securities regulators totally asleep at the wheel? Are there structural deficiencies within the industry itself that need revamping? Do we need, for example, more independent oversight of the operations of mutual fund managers? Or, was this just a “repeat” nightmare we can all hope to forget… as long as it does not turn into a “three-peat”?

If nothing else, the Norbourg affair points to the need for a contingency fund to cover this kind of loss for investors. There are some safety nets that already exist, but none that specifically protect against losses due to fraud or bankruptcy of a fund manager. Past efforts to get such a fund up and running have not been successful. Perhaps the Norbourg experience will provide the impetus that has been lacking up until now.  In the meantime, given the seriousness of the situation, the AMF has promised to provide resources and expertise to help investors recover their money.

Going back to Paul Delean’s article, there is one last remark I will make. The writer asks: “What compelling reason was there to be invested in, say, Zenith Stable Value Growth? Whose interests truly were served?” More importantly, as Delean goes on to point out, these are questions investors should ask on a regular basis. “It is fine to let an advisor you trust call the shots, but at least take the trouble to find out why they’re making the calls they are.”

In other words, with a little due diligence, we could all spare ourselves a lot of grief. I say “we” because I too must do my homework in asking the appropriate questions of my mutual fund suppliers (as I wade through the reams of marketing propaganda). I do not want to be associated with the likes of Norbourg or Zenith any more than you do!

Transparency is essential to any good business relationship. So do not hesitate to ask the important questions. For my part, you all know that I am committed to providing the answers (at least I hope you do) and I want to do more to make that transmission of vital information totally seamless. So you are informed, but never overwhelmed or confused with all the details. It can sometimes be a challenge. But I thank Norbourg for confirming it is definitely worth the time and effort!