OSC penalizes 2 ex-Norshield executives

The Ontario Securities Commission has ordered two former executives of Norshield Asset Management (Canada) Ltd. to pay $2.1-million each in penalties after concluding they knowingly misled investors about the financial state of the fund before its collapse.

Former chief executive officer John Xanthoudakis and former president Dale Smith must pay $2-million each for breaches of the Ontario Securities Act, plus an additional $125,000 each for misleading staff during the investigation of the fund’s collapse. The commission also ordered the two men to jointly pay $295,000 to cover costs of the OSC’s investigation of the case.

The OSC hearing panel said sanctions in the case “should be sufficient to send the message that breaching the duty to deal fairly, honestly and in good faith with clients … will not be tolerated in Ontario capital markets.”

Norshield, a once high-flying hedge fund with $1-billion in assets under management, collapsed in 2005 amid a flurry of investor redemptions. The OSC said 1,900 retail investors lost at least $159-million in Canada after Norshield’s senior executives artificially inflated the value of the fund’s units in 2004 and 2005, giving investors a false impression about the health of the fund.

The commission also concluded Mr. Xanthoudakis and Mr. Smith misled OSC staff by telling them a majority of Norshield funds had been invested with U.S. hedge fund managers when the money had been transferred to offshore funds.

Both men are also both banned for life from being registered to work in the securities industry, from trading securities (with some exceptions for their own RRSPs) and from acting as a director or officer of any registered company.

A lawyer for Mr. Xanthoudakis and Mr. Smith could not be reached for comment Monday.

The men told an OSC hearing panel that their actions did not warrant the high penalties proposed by OSC staff, arguing one count involved a breach of an OSC rule rather than a Securities Act violation, and the other breaches have not warranted such high payments in the past. They also said they did not personally profit from the fund’s trading, and said they were in “crisis mode” when they met with OSC staff and thought they would have a follow-up interview where they could provide more information.

The OSC decision also prohibited a third executive, Peter Kefalas, from working in the securities industry for two years, but did not impose any monetary penalties on him. Mr. Kefalas was the firm’s designated compliance officer, but the commission said he played a lesser role in operations and he did not believe he was actually responsible for monitoring the firm’s compliance.