The Ontario Securities Commission has levelled a raft of allegations against collapsed hedge fund Norshield Asset Management (Canada) Ltd. and three of its former top executives, alleging most of the money deposited by investors was transferred offshore and cannot be recovered.
Norshield was put into receivership in June, 2005, after it suspended distributions following a flood of client redemptions.
The Montreal-based company blamed its misfortune on bad publicity over a legal dispute with Cinar Corp. over offshore investments of Cinar money in Norshield funds. In an interview in January, founder and former chief executive officer John Xanthoudakis pledged clients would recover about $300-million that was sent offshore.
But yesterday the OSC said receiver RSM Richter Inc. expects to recover only $8.5-million of the total $132-million lost by 1,900 retail investors, which may be "significantly diluted" by competing claims and litigation costs. Richter has also been trying to track down a further $175-million (U.S.) invested by institutional clients.
"It therefore appears that recovery for retail investors in the Norshield investment structure will be nominal," the OSC said in its statement of allegations.
The OSC yesterday named Mr. Xanthoudakis, former president Dale Smith and director Peter Kefalas in its case, as well as Montreal-based Norshield, which was registered in Ontario, and subsidiary Olympus United Group Inc.
Mr. Xanthoudakis and Mr. Smith are accused of participating in distributing a false offering document to investors and misleading OSC staff during their investigation. None of the allegations have been proved.
The OSC said Norshield has not produced records of the flow of funds through its investment structure after 2003, nor provided documentation of any transactions. The commission said the three former executives have been "unable or unwilling" to account for the flow of funds or provide documentation relating to offshore entities.
The commission also alleged Mr. Xanthoudakis and Mr. Smith "materially misled staff" by not informing the OSC about the existence of offshore accounts known as the "Channel Funds." The OSC alleges they also failed to disclose that the investments were impaired and had not been included in Olympus's net asset value calculations.
The OSC also said the two men did not "safeguard" key documents and that, in May of this year, 40 boxes of documents "were moved to a location in the United States" and "attempts were made to destroy all such documents." The commission said Norshield's receiver was able to recover some of the documents through court action in the U.S.
The commission also said Mr. Kefalas was the compliance officer at Norshield between 2000 and 2003, but "admitted he did not at any time during that period perform a compliance function."
Possible penalties for Norshield's executives include a ban on securities trading in Ontario, fines of up to $1-million for each rule breach, and an order to "disgorge" any improperly obtained funds.
