Norshield receiver finds $35 million more

Date: Monday, May 15, 2006
Author: Scot Blythe, Advisor.ca

Norshield group's retail creditors — who could be looking at recoveries of as low as three cents on the dollar from their $132 million investment in the failed Montreal hedge fund complex that sponsored the Olympus United funds — may be able to draw on an additional $35 million identified by receiver RSM Richter. Prosecution for fraudulent conveyance may yield more as could suits for misfeasance by corporate directors, auditors and other investment fund professionals.

That at least is the gossamer-thin thread of hope floated in the receiver's May newsletter to investors, thin because while Richter has identified additional assets, it has not ascertained Olympus investors' rights to them, nor has it launched legal proceedings, though it has passed information on to regulatory authorities and the police. Whether civil suits for inappropriate asset transfers and preferential redemptions will yield anything depends on Richter's cost-benefit analysis. The receiver plans to publish two more monthly newsletters and then publish updates quarterly.

Richter has so far recovered $8.1 million for retail investors, mostly cash and invested funds related to Olympus United Bank and Trust, the Barbados company that collected the money raised in Canada by Olympus United Funds Corporation. In addition, an Olympus Bank property in the Bahamas could fetch $2.5 million. That adds up to $10.6 million for retail clients.

There are other Norshield assets, amounting to $25.5 million, according to Richter's last accounting, in February. To them, Richter may add another $34 million in assets, as well as $1.4 million owing to Mosaic Composite (U.S.), the entity that ultimately negotiated the Norshield/Olympus investments. Richter has not said where the new assets were found.

These other assets are subject to more an onerous liquidation that involves pro rata payments for $370 million in additional investments made, by institutional managers; a shadowy entity called Globe-X; and finally direct investors, who contributed assets in kind, with the possibility of direct redemption in cash. These investors, together with the Olympus United investors, were put in a fund called Olympus Univest, managed according to an agreement with Mosaic Composite.

In the Olympus United offering memorandum, there is no mention of Mosaic Composite. But Olympus Univest is characterized as a company owned by Bice International. Bice International in turn sold its management and incentive fee income stream to Olympus United Bank, for $225 million, for a period of five years. According to Richter, Bice International owes Mosaic $149 million.

The $25.5 million in shared Mosaic assets involve a stake in a Bahamian real estate company worth $7.2 million. Then there is $10 million in three Canadian companies in which Norshield entities made private placements. One is Oceanwide, which manufactures software logistics systems for Canadian importer/exporters. Another is Niocan, which is sitting on a niobium deposit in Oka, outside Montreal, whose First Nations residents are blocking further development. A third is AMT International, which owned an Arizona copper mining development whose property has mostly been sold off in return for royalty payments.

These are not the only private investments Norshield-related companies made — there was, for example, an investment in a failed Quebec insurance distributor, Gisco, as well as another in a company that manufactured composite aerospace materials and was later sold for $1, and finally there was Microslate, an illiquid company that manufactures heavy-duty laptops for police use, and whose president, Peter Rona, was listed as a director of the Olympus United funds — but these are the ones where the receiver sees some chance of profit.

Then there is $8.4 million remaining from Norshield's actual hedge fund investments, which it once claimed approached $1 billion. Before it shut down, Norshield had an economic interest in roughly $380 million in hedge fund investments. However, instead of investing directly in the underlying hedge funds it selected, it instead purchased a call option from Royal Bank in New York on a basket of hedge funds, vetted by RBC. Investor money was used as collateral, since the call option was inherently leveraged, like a mortgage, and channelled elsewhere. Thus, a $30 million direct investment — the option premium — supported a $330 million hedge fund portfolio. There was another $50 million direct investment in managed futures funds.

Where the rest of that money went — more than $500 million flowed to Olympus Univest — is the subject of Richter's inquiries. Olympus Univest is in liquidation in the Bahamas, with Richter as joint liquidator. Richter has examined under oath the auditors of the "Channel Funds," where most of the investor money from Univest went as collateral for the RBC option. It has also been appointed liquidator for Mosaic Composite, which managed the Channel Funds.

In this long money trail, Richter says that it has found evidence of "inappropriate asset transfers, preferential redemptions and other similar transactions." It is also considering whether to pursue damages against officers, directors, lawyers, auditors consultants and the like who participated in inappropriate transactions.

Richter expects to file its next report in August or September.

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