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Potential Norshield creditors swell

Date: Monday, March 27, 2006
Author: Advisor.ca

This article is courtesy of www.advisor.ca

Some 2,000 institutional and retail investors looking at as little as three cents on the dollar on the $330 million they placed with failed Montreal hedge fund complex Norshield Financial Group have company. About 1,600 creditors of another Montreal firm whose principals had long-standing business associations with Norshield also have claims to the firm's scant $25 million in assets still to be recovered, according to recently-released documents.

Mount Real Corporation, a publicly-traded firm that provided financing as well as accounting, management, e-billing and database-mining services to companies mostly engaged in telemarketing magazine subscriptions or vitamin supplements to low-income U.S. consumers, also invested in Norshield funds or companies and shared in private-equity placements with Norshield.

Mount Real creditors held up to $101 million in promissory notes from Mount Real or its associated companies, Mount Real Acceptance Corporation (renamed MRACS Management), Real Assurance Acceptance Corporation and Real Vest Investment, says Mount Real's administrator, Raymond Chabot Grant Thornton. When Mount Real began defaulting on the notes in late last year, after a year of liquidity problems, the Autorité des marchés financiers, Quebec's securities regulator, put it under provisional administration, along with a related publicly traded financial dealer, iForum Financial Network, whose reps sold at least $55 million of the promissory notes

Business associates

Norshield Financial Group founder John Xanthoudakis served as a director of Mount Real in the 1990s and, for a time, was its biggest shareholder. Norshield Fund Management, a mutual fund dealer, and Norshield Securities, once parts of Norshield Wealth Management, were, in turn, incorporated into iForum Financial Network, whose president, Joseph Pettinicchio, served as president and COO of Mount Real.

Jean Robillard, the Raymond Chabot Grant Thornton official leading the file, told an investor meeting in Montreal this month that Mount Real and its associated companies have little in the way of assets to back up the notes. Out of $99 million in accounts receivable, well more than half are two years old, even though the term for payment is 26 months. Apart from that, subscribers to the magazine instalment contracts that were Mount Real's stock in trade are unreachable or terminated their subscriptions, leaving about $5 million in potentially recoverable accounts receivable.

Investments booked at $8 million in related public companies — where Mount Real CEO Lino Matteo often served on the board of directors or acted as president or CEO — are probably worth $500,000. Investments in private companies, most indirectly controlled by Mount Real including goodwill and loans and advances, amounting to $104 million, are expected to have a value on realization substantially lower than the book value.

Nor is there much for Mount Real investors to gain from investments in Norshield hedge funds or holding companies of approximately $7 million. What Norshield's investors may recover from Norshield group is a share of the proceeds of a $37 US/$44 CAD million option premium — the vehicle by which investors gained exposure to a hedge fund basket — estimated at $8.4 million, $7.2 million in a Bahamian real estate company, and $10 million in investments in some not very liquid private and public companies, according to Norshield group's receiver, RSM Richter.

Owls, bees and gophers

Perhaps the most substantial change in Mosaic's Channel investments is the 2002 booking of a 47% share in Harfang Investments, worth $67 million US. It was no longer listed in 2003.

In his accounting to Montreal investors, Robillard noted that Mount Real had a 40% share in Trireme Management in the Bahamas, whose assets were a database, magazine subscription contracts and an investment in Harfang Investments. Harfang Investments owned the other 60% of Trireme. In an organizational chart distributed at the meeting, Harfang is connected to Tristar, which seems to be the predecessor to the Channel entities into which Norshield/Mosaic money flowed, according to Richter's accounting of Norshield assets.

Public filings add more detail. Mount Real's second-largest shareholder until 1999, after Norshield's Xanthoudakis, was MR Investments, controlled by Thomas Muir. Later, Muir's stake was held through Harfang Investments, according to proxy filings. Muir is also the Norshield International official being sued by Cinar, along with Xanthoudakis, as well as a former director of Olympus Univest.

In 1999, Mount Real's new Barbados subsidiary Mount Real International announced that it had signed a contract to manage assets for a fund called Canadian Emerging Companies. Harfang was to act as the fund's distributor.

Harfang is listed in Robillard's report as a company effectively controlled by Matteo. One of its assets was a $63 million interest in Olympus United Bank and Trust, which is now worthless. (Harfang des neiges is French for snowy owl; the snowy owl figured in Mount Real's corporate logo.) However, according to Massi's records, the Channel Entities had a 40% share in First Horizon Holdings, valued at $46 million US, which had a 100% interest in Olympus Bank and Trust.

Another shared investment was Mount Real Innovation Corporation, an e-business incubator later known as Red Chili Media. Mosaic originally had a one-third share, valued at $8.3 million US in 2001; by 2003, it was no longer on Mosaic's books. However, Red Chili, one of whose investors was Harfang, also made investments iForum and Olympus.

In addition, Honeybee Technology, a publicly listed company whose CEO until November was Matteo, received accounting services from Mount Real, and processed magazine subscription billings for Mount Real companies. Its largest shareholders were RFC consultants, controlled by Matteo, who was with Honeybee from the beginning, and Honeybee Software Technology, originally controlled by Matteo, Honeybee president Jeff Klein and Xanthoudakis.

While, in recent years Xanthoudakis has dropped off the proxy filings as major shareholder of Honeybee Technologies, nevertheless Norshield's receiver has seized holding company Honeybee Software Technology as a business with connections to Norshield entities. In June, Honeybee apparently merged with Norshield Investment Corporation. Mendota Capital has asserted a claim to Norshield Investment Corporation's assets, which RSM Richter has contested.

In addition, the AMF has put two subsidiaries of Honeybee Technology, the publicly traded company in which Honeybee Software Technologies had an interest, under administration, because they were collecting Mount Real-related subscription payments, with the help of Mendota/Real Vest's Holden.

The AMF has also moved on Gopher Media Services, a web-design firm founded by Xanthoudakis as NorFin Business Advisors, and connected to Mount Real. Xanthoudakis sold his holdings in Gopher in 2005, according to the SEDI website. Its other principal shareholder was Magic Management, whose principal shareholder, Lowell Holden, stepped down from Gopher's board of directors last November.

Filed by Scot Blythe, Advisor.ca, scot.blythe@advisor.rogers.com.

RCMP called in to investigate alleged Norbourg bribery attempt

The RCMP's Integrated Market Enforcement Team has been called in to investigate after Quebec's securities regulator, the Autorité des marchés financiers, says one of its employees was offered a bribe in the Norbourg case.

An internal investigation over the past few months conducted by the AMF found that some of its employees were in contact with members of Norbourg management, including the company's former president, Vincent Lacroix. The bribery attempt failed, the AMF says, with the employee refusing the offer.

Still, eight AMF employees have been suspended for periods varying from five days to three months. Although the Quebec regulator says no information concerning the ongoing investigation into Norbourg was relayed, the AMF concluded that some of its employees were "careless and displayed a lack of judgment."

"[The AMF] believes that the conduct of its employees must be above reproach, given the role they play in overseeing the financial markets."

In August, 2005, the AMF announced it was freezing Norbourg's assets as it looked into allegations that more than $130 million had been misappropriated from 9,200 investors by Lacroix between 2002 and 2005. He has maintained his innocence.

The AMF says it considers this to be a serious matter and is co-operating with the IMET probe.