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OSC rules Norshield hedge fund misled investors

Date: Wednesday, March 10, 2010
Author: Globe & Mail

Two former executives of collapsed hedge fund Norshield Asset Management (Canada) Ltd. knowingly misled investors, failed to keep proper books and made misleading statements to investigators, an Ontario Securities Commission panel has concluded.

In a ruling released yesterday, the OSC said former CEO John Xanthoudakis and president Dale Smith breached Ontario Securities Act rules while running the $1-billion hedge fund.

Norshield collapsed in 2005 after receiving a flood of requests for client redemptions. The OSC said the executives lost at least $159-million invested by 1,900 retail investors in Canada, alleging that they did not reveal the true nature of its investment structure and did not inform investors about the true value of their holdings.

The hearing panel ruled that the company's calculations of the value of its investment units were artificially inflated in 2004 and 2004, giving investors a false impression about the success of the hedge fund. "Xanthoudakis and Smith were fully aware of this." It said Norshield, its fund company and the two executives "failed to deal fairly, honestly and in good faith with investors."

Lawyer Alistair Crawley, who represents Mr. Xanthoudakis and Mr. Smith, said yesterday that he had just received the OSC ruling and could not comment. He said it was too soon to comment on whether the decision will be appealed. OSC staff also alleged the companies never prepared audited financial statements for most of their corporate entities after September, 2003, and no books or records have been produced showing the flow of funds through the Norshield investment structure.

The hearing panel said the two men were liable for their companies' breaches of the securities act because they were "directing minds" and officers of the corporations. "Their direct involvement in these transactions demonstrates a much closer relationship than they acknowledge."

The ruling also concluded that Mr. Xanthoudakis and Mr. Smith had misled OSC staff by telling them that a majority of Norshield funds had been invested with U.S. hedge fund managers and not revealing that money had been transferred to offshore funds.

The OSC held its hearing in the case in 2008 and early 2009, and the hearing panel took almost a year to release a decision. A hearing has not been scheduled yet to determine sanctions in the case.

Unlike a criminal case, an OSC hearing panel cannot impose jail terms, but can order fines or ban people from working in the investment industry or at public companies.

The OSC decision also ruled against a third executive, Peter Kefalas, who was accused of failing to fulfill his responsibilities as the compliance officer for the firm. The panel said the fact Mr. Kefalas was never asked to fulfill a compliance function at the company was not an adequate defence, but can be raised as a mitigating factor at the sanction hearing.