OSC's Crabbe Huson probe omits co-founder's affairs
Tahera Corp TAH
Shares issued 159,300,000 Jul 23 close $0.185
Fri 23 Jul 99 Street Wire
Also New Indigo Resources Inc (NDR)
Also Lytton Minerals Ltd (LTL)
Also Ontario Securities Commission (ONSEC)
THE SPONGE ESCAPES
by Brent Mudry
While high-profile fund managers Veronika Hirsch and Frank Mersch of Canada
and John Kaweske of the United States suffered devastating blows to their
careers after revelations of unusual personal trading in Canadian penny
stocks, Portland fund manager Jim Crabbe has emerged unscathed from the
Lytton-New Indigo affair. In its first public admission of its 13-month-old
probe of The Crabbe Huson Group, the Ontario Securities Commission revealed
Friday that the Portland, Ore.-based mutual fund and money management firm
has reached a tentative settlement of Canadian securities violations. While
the OSC rarely comments on its probes, spokesman Frank Switzer confirms
that no proceeding is anticipated against Mr. Crabbe for his personal
trading.
The pending OSC settlement comes more than a year after Crabbe Huson
management reported the unusual dealings of their firm and its managing
director, Mr. Crabbe, to Canadian securities regulators. The U.S.
Securities and Exchange Commission was not notified. After an audit or
in-house review, the Portland firm revealed it had sopped up a secret 25.9
per-cent stake in Lytton, just after Mr. Crabbe boosted his personal stake
in then-pending-merger-partner New Indigo Resources to 20 per cent.
While Crabbe Huson was in regulatory non-compliance for 12 or 13 months,
with a Lytton stake of over 10 per cent, Mr. Crabbe's heavy buying of New
Indigo was but an indescretion, not even a reporting breach. The veteran
fund manager bought 1.91 million shares on June 2, 1998, bringing his
personal stake to 3.01 million shares. Crabbe Huson officials revealed both
stakes to Canadian securities regulators on June 23, 1998, and to the
market a day later.
The bombshell came three business days before Lytton's special shareholders
meeting, and the planned merger with New Indigo was temporarily scrapped,
due to Crabbe Huson's violations of Canadian insider and takeover
securities regulations. (While Mr. Crabbe's personal New Indigo trading was
remarkable, especially in light of his firm's Lytton trading, he did not
violate insider rules, as his initial report was due July 10, 1998.)
Stockwatch dubbed Crabbe Huson the Lytton "sponge" and gave Mr. Crabbe the
"crown of penny stock trader extraordinaire" in a story on June 30, 1998,
after analyzing the Portland firm's long-overdue trading reports. For the
year ended April 30, 1998, Crabbe Huson was on the buy side for almost 71
per cent of Lytton's total trading volume on the Toronto Stock Exchange.
The prop's market dominance peaked in July, 1997, when it accounted for a
whopping 94.4 per cent of Lytton buying.
Crabbe Huson's massive Lytton buying spree was disastrous for its managed
money. The stock collapsed from $3.40 in April, 1997, when the firm was
nearing the 10 per-cent threshold, to a low of 42 cents when its stake was
revealed. Shares of Tahera recently bottomed out at 11 cents. (In the
revived merger, shareholders of Lytton received one share of the new
company, Tahera, for each share of Lytton they held.)
While the OSC notice of hearing and statement of allegations shed some more
light on the Crabbe Huson affair, these documents and recent regulatory
filings leave a number of questions unanswered.
The OSC reveals that Crabbe Huson stuffed 68 discretionary client accounts
with Lytton shares before suddenly deciding to come clean and tell
regulators about the firm's 26 per-cent Lytton stake. Left unexplained is
how Crabbe Huson's compliance staff were so blind and so speechless for so
long, especially as they are used to dealing with the SEC reporting
threshold of 5 per cent, half the 10 per-cent Canadian threshold.
Also unexplained is exactly when management of Crabbe Huson, Lytton and New
Indigo realized it would have to confess to the pickle the fund firm was
in. Lytton's May, 1998, meeting circular noted Crabbe Huson fund manager
John Johnson was a management board designate, underlining the Portland
firm's prominence as a key shareholder. The question is hardly moot, as
Crabbe Huson dumped a-not-insignificant 1.39 million Lytton shares in June
before revealing its huge stake.
It is also unclear how many client accounts have left Crabbe Huson in the
past year, whether fully, partly or not at all due to the Lytton affair and
the OSC investigation, and how many have taking voting control away from
the firm. Since Crabbe Huson's undisclosed Lytton stake peaked at 29.87
million shares in June, 1998, the Portland fund manager has chopped its
stake by more than one-third in the past year. While Crabbe Huson dumped a
significant amount of shares in open market and private sales, a large
portion of this shedding was due to client accounts departing Crabbe Huson.
>From March to June, Crabbe Huson's Tahera stake fell from 24.48 million
shares to 18.89 million shares, a 5.59-million share drop. At least 2.5
million of these shares were not actually sold, but removed from Crabbe
Huson's books due to "beneficial owners . . . removing such common shares
from the control and direction of the insider." In March, these control
removals amounted to 1.38 million shares. Crabbe Huson transferred control
of 426,300 shares on Mar. 5, 243,900 shares on Mar. 11 and 620,400 shares
on Mar. 29, according to filings with the British Columbia Securities
Commission. The next month, Crabbe Huson transferred control of 412,300
shares on April 1 and 396,800 shares on April 6, dropping its Tahera stake
to 22.29 million shares.
After a breather in May, the Portland firm's Tahera disposals reached a
climax last month. On June 11, Crabbe Huson sold 23,100 shares at 12 U.S.
cents, with Northern Trust Corp. as the registered owner. The big unloading
frenzy came in an eight-day stretch near the end of the months, which also
marks the June 30 mid-year client reporting date. On June 22, the firm sold
447,200 shares at 12 U.S. cents, with Bank of New York as the stated
registered holder. The same day, Crabbe Huson transferred 527,400 Tahera
shares out of its control. On June 11, the firm sold 130,300 shares at 11
U.S. cents, with Mellon Bank as the stated registered holder. On June 24,
Crabbe Huson transferred a further 526,400 shares out of its control.
The biggest transaction was the oddest. On June 29, the day before
month-end and half-year-end, Crabbe Huson claims it sold a block of
1.66-million shares at eight U.S. cents, or about 12 cents, in an
open-market transaction. TSE records indicate the largest market trade that
day was 97,500 shares, the total volume was 1.96 million shares, and the
most active selling brokerage, First Marathon Securities, was on the sell
side for just 359,000 shares. Crabbe Huson official Mr. Davidson could not
be reached for comment.
In an interview in June, 1998, Mr. Davidson downplayed Crabbe Huson's
Lytton imbroglio and Mr. Crabbe's own New Indigo trading. "There is no
personal trading violation here . . . I don't think there is any issue," he
told Stockwatch. The fund executive later called back to urge the reporter
to "exercise some responsibility." "You are trying to make something out of
nothing," he asserted. The OSC's hearing is set for Aug. 10, to approve the
tentative Crabbe Huson settlement. The proposed terms are unknown at
present.
(c) Copyright 1999 Canjex Publishing Ltd. canada-stockwatch.com
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