In September, at the inaugural Canadian Hedge Fund Awards ceremony in Toronto, Sextant Capital Management Inc. was honoured for a performance that defied expectations in the battered-down hedge fund industry hit by a global financial meltdown.
This week, the fund and its "driving force," Otto Spork, appear headed for a showdown with regulators that accuse the money manager of inflating returns in the high-flying Sextant Strategic Opportunities Hedge Fund through self-dealing and investments in glacier companies that have generated no revenue and have no immediate prospects to do so.
Mr. Spork denies the allegations, which carry the prospect of hefty financial fines among other possible sanctions.
"The Ontario Securities Commission is making unproven allegations that we will vigorously defend against and prove wrong before the Commission," Mr. Spork said in a strongly worded statement defending the firm's track record.
"Sextant did not come to the party with its eyes closed," he said, adding that the firm's 730% return for investors over the past three years was achieved through a "conservative posture" and with the fund's principals "knowing full well that these returns would draw attention and be subject to scrutiny."
Sextant's eye-popping results did attract a lot of attention, including the award for 'Best Overall Return' for a fund with more than $25-million in assets under management at September's awards.
But a statement of allegations laid out by the OSC on Wednesday says the Sextant fund's returns were artificially boosted by the investment of 92% of its assets in two private Luxembourg companies whose share prices purportedly rose substantially despite the fact that the companies generate no revenue.
The two companies, Iceland Glacier Products (IGP) and Iceland Global Water 2 Partners SCA, own rights to glaciers in Iceland that are to be used to develop and sell bottled water. According to the OSC, the 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.
"Despite having earned no revenue and having no immediate prospect of doing so, IGP's 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 the statement of allegations. "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 regulator alleges that the bulk of the assets of the Sextant Fund have been invested "illegally" in breach of rules against self-dealing. The OSC also says "substantial" fees have been paid based on the illegal investments.
None of the allegations have been proven in the case, which also names Mr. Spork's daughter Natalie and Robert Levack, chief compliance officer and portfolio manager at Sextant.
A hearing is scheduled for Dec. 16 in Toronto.