Hedge fund manager John Xanthoudakis and two other Norshield officers face a hearing before the Ontario Securities Commission that could see each of them fined $1 million on charges of violating securities laws and conduct contrary to the public interest.
RSM Richter, Norshield’s receiver, has already said that retail investors who put $132 million into Norshield will likely see only three to seven cents on the dollar. Richter has not yet presented his latest report to the Ontario Superior Court of Justice, which was due in September.
At a hearing Friday morning, OSC legal counsel Melissa MacKewn requested an extension of the existing cease-and-desist order against Norshield Asset Management (NAM) and Olympus United Group, which have been suspended from trading since May 2005.
But she also called for a hearing to investigate a number of allegations made public by the OSC last week.
The OSC alleges that NAM, Olympus and Xanthoudakis, along with Peter Kefalas, a director and compliance officer at Norshield, and Dale Smith, Norshield’s chief financial officer, failed to deal with customers with honesty, fairness and good faith.
Other charges include failing to maintain proper records, filing a misleading offering memorandum, misleading OSC staff and endangering the integrity of Ontario’s capital markets. There are seven charges in all, each of which carries an administrative fine of up to $1 million.
MacKewn said the OSC investigation is being conducted independently of RSM Richter, Norshield’s recipient. So far, three boxes of documents supporting the allegations have been delivered to lawyers for Xanthoudakis, Smith and Kefalas, with another five on the way. Once the documents are provided, another hearing can be scheduled, which MacKewn said will take place in six to eight weeks.
The OSC made a number of specific allegations against Norshield. Among them, that no audited financial statements were prepared after September 2003; that neither Xanthoudakis, Smith, nor Kefalas were able or willing to explain how funds flowed through Norshield; and that they allowed redemptions by some investors when the underlying investments became impaired, contrary to the investors’ best interests.
The OSC alleges that the method of calculating net asset value has been improper since August 1999, when Norshield gave investors exposure to a portfolio of hedge funds by purchasing an option from RBC in New York. Additionally, Norshield failed to disclose in its offering materials that investors’ assets were not segregated, that the assets were used for illiquid private equity investments, and that some investors subscribed to the assets “in kind” but appear to have been able to redeem them in cash. The offering materials also do not mention “in-kind” investors or the nature of their assets.
Finally, the OSC alleges that Xanthoudakis failed to disclose to him the Channel Funds that held illiquid private equity investments, failed to inform him that he knew about the impairment of those investments since 2002, and failed to account for those investments in the net asset value reported to investors.
Submitted by Scot Blythe, Advisor.ca, scot.blythe@advisor.rogers.com
(20/10/06)
