A high-profile regulatory probe is taking a costly toll on Bermuda investment management company LOM (Holdings), managing director Scott Lines says.

Mr. Lines revealed in a recent letter to shareholders that LOM?s bill for legal costs in connection with the investigation ? underway for two years now ? had climbed to some $2.75 million.

In 2004 alone, the legal bills added up to $1.7 million and Mr. Lines said the net result had been a serious drag on earnings.The company said for the 2004 year a net income of $2 million was recorded, or 32.3 cents per share for those holding the BSX-listed stock. Mr. Lines said earnings had plummeted 34 percent year on year, with the decline being largely blamed on fall-out from the regulatory scrutiny.

Mr. Lines and his brother, Brian Lines, also a LOM senior officer, have been personally named as part of the investigation by US regulators into the dealings of Lines Overseas Management Limited. A Canadian investigation is also underway by regulators in British Columbia.

In the two years since LOM has come under regulatory scrutiny, subpoenas from the US Securities and Exchange Commission have sought information from the company ? including requests for the personal mobile phone records of the Lines brothers ? in relation to its alleged securities fraud involving Sedona Software Solutions Inc. and SHEP Technologies Inc., both of Vancouver, Canada, and HiEnergy Technologies Inc., of Irvine, California.

Most recently, the SEC has been seeking tape recordings of meetings LOM had with regulators locally at the Bermuda Monetary Authority.

?LOM?s performance was significantly hampered by legal costs related to the widely publicised SEC investigation of our Lines Overseas Management Limited and certain senior officers including myself,? Mr. Lines wrote to shareholders.

?The SEC?s allegations have included some very sensationalist and completely unsubstantiated statements that have generated press interest. This publicity, which at times has been excessive, has harmed the group?s ability to attract new business and resulted in some business being withdrawn.

Thus our net profits were down 34 percent versus 2003 despite a more positive market environment. Thankfully most of our customers have remained loyal to the group and we thank them wholeheartedly for their support and patience.?

The heavy legal costs associated with the probe were said by Mr. Lines to continue to be ?a significant drag on earnings?.

?It has taken significant time and effort away from many of our senior staff and I would like to thank our very loyal and hardworking employees for their fortitude throughout this extremely trying time.?