OSC allege Sextant Capital Management has inflated returns

Date: Thursday, December 11, 2008
Author: Barbara Shecter, Financial Post

Sextant Capital Management Inc. was one of the bright lights recently in Canada's ailing hedge fund sector, despite the current financial crisis. But on Wednesday, the Ontario Securities Commission alleged that the fund manager's "driving force" Otto Spork inflated returns through self-dealing and investments in glacier companies that have generated no revenues and have no immediate prospects to do so.

The two private Luxembourg companies, Iceland Glacier Products and Iceland Global Water 2 Partners SCA, which together accounted for 92% of the assets of the Sextant Fund, own rights to glaciers in Iceland and intend to use those rights for the purpose of developing and selling bottled water.

"Despite having earned no revenue and having no immediate prospect of doing so, IGP's [Iceland Glacier Products] shares have purportedly increased in value from an initial average cost of €0.226 to €2.45, or approximately 984% since initial investment by the Sextant Fund," the OSC said in a statement of allegations released yesterday.

"There are no third party valuation reports that support the monthly, material upward revisions in value of IGP, and therefore there is inadequate support for the claimed rate of return of the Sextant Fund," the OSC contends.

The regulator said the purported returns contributed to the increase in value of the Sextant Fund by 730.7% over the less than three years since its inception in February of 2006.

None of the allegations have been proven. A hearing is scheduled for Dec. 16.

According to the OSC, the Sextant Strategic Opportunities Hedge Fund L.P

is a mutual fund in Ontario with about 240 investors across Canada, made up largely of Ontario residents. It had a net asset value of $53-million as of Nov. 28.

Investors have contributed more than $22-million to the Sextant Fund since its inception.

In its statement of allegations, the OSC says the two glacier companies are owned almost entirely by the Sextant Fund, the Sextant Offshore Funds and Mr. Spork, who at one time lived in Toronto but now lives in Iceland.

The OSC alleges that approximately 95% of the assets of the Sextant Fund have been invested illegally, in breach of rules against self-dealing by mutual funds. The regulator contends that "substantial" fees have been paid based on the illegal investments.