Vancouver-based FIC Investment Ltd., which does business across Canada as the Freedom Investment Club, looks very much like a mutual fund. But it is not registered with any securities commission and is run by unlicensed portfolio managers who make investments not often disclosed to investors. And it’s all quite legal, thanks to exemptions in provincial securities laws.

When FIC was created in 2002, its chairman and CEO, Michael Lathigee, billed the club as an alternative to traditional mutual funds. Unlike mutual funds, FIC would enable members to participate in investment decisions, he said, thereby “bringing financial empowerment to the masses.”

Under the stewardship of Lathigee and president Earle Pasquill, FIC and related companies now boast 4,500 members in Canada and the U.S. and $80 million in assets under management.

However, as membership has increased, shareholder participation in investment decisions has dwindled. Shareholders now have virtually no say in how their funds are invested. Those decisions are made by a “deal-flow committee” headed by Lathigee. In this respect, FIC has evolved into the sort of impersonal mutual fund that Lathigee denigrates. But unlike mutual funds, it has none of the usual consumer safeguards.

And some of FIC’s activities have attracted regulatory sanctions. In July, Lathigee and Pasquill paid fines under a settlement agreement with the B.C. Securities Commission in a dispute over management fees and other issues.

Conventional mutual funds launched in British Columbia must be registered with the BCSC. This means they must file a prospectus disclosing all salient aspects of the fund, including a list of their holdings, performance figures and management fees.

These funds can only be sold by registered dealers, who must know their clients and ensure the funds are suitable for them. Also, the portfolio can be run only by a registered portfolio manager.

FIC, however, operates under a loophole of sorts. Under the B.C. Securities Act, any company selling shares can be exempted from registration and prospectus requirements as long as investors sign a statement acknowledging the risk. There are variations of this exemption in other provinces. In Ontario, for example, units in such a fund can be sold only to accredited investors who meet minimum net-worth and income criteria.

Under these exemptions, the issuing company need only file an offering memorandum, which is a much less rigorous disclosure document than a prospectus and does not need to be “receipted” by a securities commission.

FIC, for example, is not required to include performance figures or even a list of its holdings. Also, FIC shares can be sold by non-registrants who are not subject to know-your-client rules; the portfolio managers do not have to be registered. This places FIC outside the jurisdiction of the regulators.

Clearly, the lack of consumer safeguards make these sort of investments inherently risky. When the BCSC devised its exemption several years ago, it never contemplated that it would be used by de facto mutual fund issuers such as FIC. Exacerbating the situation, FIC is making high-risk investments.

According to FIC’s most recent offering memorandum, one of the large items in its portfolio is a $5.5-million holding in related-company investments, almost all consisting of shares and notes issued by a B.C.-based numbered company. Lathigee says this company holds interests in 40 public companies, but he declines to name them.

So far, things have gone well. Lathigee says shares that members originally bought for $1 each are now worth $2.65. Of course, the market for junior resources issues has been very hot. Still, that could change quickly.

Making the situation even riskier, FIC automatically locks in its shareholders for three years. That reduces their ability to take profits or, in the event of downturn, mitigate losses.

There are also some aspects of the fund’s management that are controversial. One is the prior involvement of T. Harv Eker, a financial motivation speaker from North Vancouver. (The “T” stands for “the one and only.”)

FIC marketed the club at Eker’s so-called “Millionaire’s School,” which featured a variety of investment opportunities that Eker claimed he had pre-screened. In fact, most were dubious investments run by controversial businessmen, some with criminal and/or regulatory records.

Eker’s contract with FIC has since expired, but the company continues to use pitchmen to generate revenue. One is Jordan E. Goodman, who serves as president of FIC USA Financial Services and vice president of development for FIC. Jordan, who bills himself as “America’s Money Answers Man,” holds investment teleconferences with FIC members and, according to Pasquill, refers them to mutual fund and insurance salesman Ed Rea of Vernon, B.C.

@page_break@Rea, in return, splits his $1,500 consulting fee with FIC. Rea fully discloses this fee-sharing arrangement to his clients. When it comes to management remuneration, however, FIC has been less than candid with its members.

When investors buy shares of FIC, they are required to pay a $1,000 membership fee, which is used to fund the investor education division of the club. The division, in turn, pays Lathigee $115,200 a year and Pasquill $93,000, ostensibly for education services. The education division is supposedly self-supporting — that is, entirely funded by membership fees and education revenue. However, as shareholders are obliged to pay this fee and it circulates back to Lathigee and Pasquill, it could be viewed as a thinly-disguised management fee.

Also, Lathigee and Pasquill, along with several other employees and agents, have been granted thousands of options on FIC shares based on the amount of money the fund raises. This remuneration is not articulated in terms of a management expense ratio, which is required disclosure for registered mutual funds.

All of this has made the BCSC nervous. In December 2005, the BCSC issued a cease-trade order against FIC and two related companies, WBIC Canada Ltd. and China Dragon Fund Ltd., because the offering memorandum was not in the required form. The BCSC ordered FIC to offer investors their money back.

In June 2006, the BCSC began another investigation, culminating in a settlement agreement in July. The settlement agreement noted that Lathigee had issued a newsletter claiming that FIC inves-tors paid no management fees and that FIC offset most of its expenses through education-related revenue (including membership fees).

However, Lathigee admitted that these claims were not true. At the time, FIC’s education-related revenue was not sufficient to cover FIC’s management fees and administrative expenses, so FIC paid the excess fees and expenses from its general account. These payments “could reasonably be expected to affect the value of FIC’s securities significantly,” he admitted.

Lathigee also admitted he exercised options in FIC and WBIC, earning $250,000 in the process. Pasquill similarly admitted to exercising options in WBIC, netting him $65,000. These transactions, however, breached the three-year lock-in period. For these acts, Lathigee agreed to pay a $60,000 fine; Pasquill, $30,000. They also agreed to amend the offering memorandum and, once again, offer members their money back.

Pasquill says only two people have asked for their money back. IE