Former Norshield execs face fresh lawsuits

Former top executives of collapsed Norshield Financial Group engaged in wide-ranging misconduct at the hedge-fund operator where investors in various related companies are out close to half a billion dollars, a new lawsuit alleges.

Former Norshield CEO John Xanthoudakis and president Dale Smith are alleged to have, among other things, improperly diverted assets, engineered sham transactions to inflate asset values and used new investor money entirely to fund redemptions.

The Ontario Superior Court lawsuit is brought by RSM Richter Inc., receiver for various Norshield and related companies. It seeks $159 million in damages plus interest and other costs from Xanthoudakis and Smith, who are described as the "principal architects of the wrongful conduct" in the group's complex offshore investment structure.

The lawsuit alleges the two men hid from investors a deteriorating situation at Norshield caused by "the diversion and loss of corporate assets in undisclosed and speculative investments."

"Xanthoudakis and Smith intentionally turned to elaborate schemes to overstate the financial condition and performance of the plaintiff companies (Norshield and associated companies) to stem the tide of redemptions and attract new investors," the action alleges.

"Ultimately, the business of the plaintiff companies, and the Norshield Financial Group as a whole, ceased to have any legitimate business purpose and existed only to attract new investors to meet growing redemption requests."

"Xanthoudakis and Smith breached their fiduciary duties and other duties of care ... by concealing the diversion of corporate assets, hiding failed investments and presenting false financial information to attract additional investment in the plaintiff companies."

Norshield Financial Group collapsed in 2005. Investors are owed a total of $472 million, including $159 million owed to about 1,900 retail investors, living mostly in Ontario, the suit states.

It says that since Richter was appointed receiver in June 2005, just $31 million in assets have been identified or recovered in Canada or offshore and even this money may be subject to competing claims.

"Accordingly, approximately $441 million of investor funds entrusted to the Norshield Financial Group have not been recovered and/or identified," the suit states.

A lawyer for Xanthoudakis denied allegations of misconduct against his client. Alistair Crawley said the allegations in the suit mirror those in Richter's sixth receiver's report released last March and have not been proven in court. He noted the receiver's report stated there is no evidence that $215 million in unexplained payments to third parties had personally benefitted Xanthoudakis or Smith.

Smith's lawyer, Steven Sofer, said he hadn't had a chance to read the statement of claim. But he said Richter hasn't suggested in any of its reports that Smith "had got any of the money."

"We don't know why he's been included as a defendant," Sofer said. "He wasn't exonerated (in the receiver's reports), but there didn't appear to be any evidence of wrongdoing either."

Xanthoudakis, Smith and a third Norshield executive, Peter Kefalas, were accused in October 2006 by the Ontario Securities Commission of violating the provincial Securities Act by misleading investors and OSC investigators.

Richter partner Raymond Massi confirmed in an email yesterday that because of the complexity of the file, the liquidation of the Norshield companies is still continuing.

dmacdonald@thegazette.canwest.com