Norshield principals face million dollar hearing

Date: Friday, October 20, 2006
Author: Scot Blythe

Hedge fund manger John Xanthoudakis and two other Norshield officers are facing an Ontario Securities Commission hearing that could see them fined $1 million each on charges of breaching securities law and conduct contrary to the public interest.

RSM Richter, Norshield's receiver, has already reported that retail investors, who put $132 million into Norshield are likely to see only three to seven cents on the dollar. Richter has yet to submit its latest report to Ontario Superior Court, which was expected to be delivered in September.

At a hearing Friday morning, OSC counsel Melissa MacKewn asked that the existing cease-trade order on Norshield Asset Management (NAM) and Olympus United Group, which have been suspended from trading since May 2005, be extended.

But she also called for a hearing to examine a set of allegations the OSC released last week.

The OSC alleges that NAM, Olympus and Xanthoudakis, along with Peter Kefalas, a Norshield director and compliance officer, and Dale Smith, Norshield's chief financial officer failed to deal fairly, honestly and in good faith with clients.

Other allegations include a failure to keep proper records, filing a misleading offering memorandum, misleading OSC staff and compromising the integrity of Ontario's capital markets. In all, there are seven allegations, each of which carries up to a $1 million administrative fine.

MacKewn said the OSC's investigation is proceeding independently of RSM Richter, Norshield's receiver. So far, three boxes of documents to support the allegations have been delivered to lawyers for Xanthoudakis, Smith and Kefalas, with another five on the way. Once the documents have been delivered, another hearing can be scheduled, which MacKewn expects will be in six to eight weeks.

The OSC has laid out 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 has been able or willing to account for how funds flowed through Norshield; and that they allowed redemptions by some investors when the underlying investments were impaired, against the best interests of investors.

The OSC says that the method of calculating net asset value was improper from August, 1999, when Norshield provided investors with exposure to a portfolio of hedge funds by buying an option from RBC in New York. In addition, Norshield failed to disclose in its offering materials that investor assets were not segregated, that assets were applied to illiquid private equity investments and that some investors subscribed assets "in-kind" but appear to have been able to redeem in cash. Nor did the offering materials name the "in-kind" investors or the nature of their assets.

Finally, the OSC accuses Xanthoudakis of failing to inform it about the Channel Funds that held the illiquid private equity investments, and of failing to inform it that he had known about the impairment of those investments since 2002, and of failing to account for those investments in the net asset values reported to investors.

Filed by Scot Blythe, Advisor.ca, scot.blythe@advisor.rogers.com