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Norshield Receiver Turns Matters Over to Authorities

Date: Monday, March 12, 2007
Author: HFN Daily

The receiver for defunct Canadian hedge fund Norshield is turning over evidence of possible fraud to authorities.

RSM Richter, the receiver for the fund, submitted a report to an Ontario court saying much of the money in the fund has been dissipated. The receiver also claims Norshield principals tried to hide problems by reporting artificially inflated net asset values.

The court granted the receiver permission on Wednesday to hand over evidence to regulators and law enforcement agencies. The Ontario Securities Commission (OSC) and Quebec's Autorité des marchés financiers (AMF) are already investigating the Montreal-based fund.

According to the receiver's report, Norshield invested less than half the CAN$265 million ($226 million) it collected from investors, with more than CAN$215 million going to unexplained third-party payments. The fund suspended redemptions in 2005 and investors are expected to get back just pennies on the dollar.

About 1,900 retail investors across Canada placed money with Norshield, which at one point claimed to have as much as CAN$500 million. Many investors are likely to sue the fund and its former executives, John Xanthoudakis and Dale Smith. While neither Xanthoudakis nor Smith were direct beneficiaries of any of the third-party payments made by the fund, many of the beneficiaries had close connections to the executives.

The receiver said the complex nature of Norshield's investment structure made recovering assets difficult, time-consuming and costly. It appears, however, that in the months prior to the fund being shut down, Norshield used incoming investments to pay redemptions by existing investors, leading to a downward spiral.

Last year, the OSC filed formal charges against Xanthoudakis, Smith and former Norshield employee Peter Kefalas for misleading investigators.