OSC releases new set of allegations against Sextant Capital

Date: Tuesday, April 6, 2010
Author: Megan Harman, Investment Executive

Hearing scheduled for May

The Ontario Securities Commission has released a new, more detailed set of allegations against Sextant Capital Management Inc., which the regulator alleges perpetrated a complex investment fund fraud between July 2007 and December 2008.

A 10-page amended statement of allegations against Sextant Capital Management, Sextant Capital GP Inc., the company’s founder and former president Otto Spork, and three fund managers was released last week.

The OSC alleges that Sextant Capital Management, Sextant Capital GP and Spork engaged in fraud in three ways: they sold investment fund units at falsely inflated values; they took millions of dollars in fees based on falsely inflated values; and they directly misappropriated money from investment funds.

The alleged fraud was perpetrated through three investment funds: the Sextant Strategic Opportunities Hedge Fund L.P.; the Sextant Strategic Hybrid2Hedge Resource Fund Offshore Ltd.; and the Sextant Strategic Global Water Fund Offshore Ltd. Together, the Sextant Funds raised in excess of $80 million from Canadian and offshore investors.

Spork invested significant amounts of money from the Sextant Funds in a company he controlled, Iceland Glacier Products S.A., according to the OSC. The regulator alleges that he set the share price for IGP shares and substantially inflated that price even though IGP is not operational and has no apparent prospect of profit.

As a result, “everyone who invested in the Sextant Funds after July 2007 overpaid for their investments and was wrongfully deprived of their money in the amount of the overpayment,” the statement of allegations says.

Furthermore, management and performance fees were “inflated and excessive” as a direct result of the inflated net asset values, the OSC says.

The OSC also alleges that money was misappropriated from the Sextant Funds for Spork’s benefit in two ways: he transferred money from the funds to Riambel Holding S.A., his holding company, with no legal basis; and he took money from the Sextant Canadian Fund from time to time with no legal basis.

The new set of allegations also includes breaches of fund managers’ duties to investors and failure to keep proper books and records. Spork, Sextant Capital Management and Sextant GP breached their duties by investing the assets of one of the funds outside of its stated investment objectives, the OSC says. It alleges that similar breaches were made by managers of the fund, including Konstantinos (Dino) Ekonomidis, Robert Levack and Natalie Spork.

The new allegations follow an original four-page statement of allegations that was released by the OSC in December 2008. Sextant issued a statement in response at that time, saying it would “vigorously defend” and prove wrong the OSC’s allegations.

In July 2009, as the OSC conducted its investigation into the matter, the Sextant Strategic Opportunities Hedge Fund L.P., Sextant Capital Management and Sextant GP were placed into receivership by Order of the Ontario Superior Court of Justice.

In addition, temporary cease trade orders have been placed against some of the respondents, and Sextant Capital Management’s registration has been suspended until the conclusion of the hearing on the merits.

The hearing is scheduled to take place from May 3 to 28.