Cinar losses brought the house down

Date: Saturday, June 10, 2006
Author: Don MacDonald, The Gazette

Norshield received only rare mentions in the newspapers in the 1990s and then almost always regarding the company's many charitable activities in Montreal.

"I'm a private guy and I run my business kind of similar," John Xanthoudakis told The Gazette in an interview in 2000.

That had all changed on March 20 of that year, the day children's animation company Cinar Corp. issued a press release announcing it had filed a lawsuit against companies in the Bahamas with close ties to Norshield in Montreal - Norshield International Ltd., Globe-X Management Ltd. and Globe-X Canadiana.

That press release fired the starter's gun on what would become one of the biggest and longest-running scandals in Canadian stock-market history.

Already buffeted by allegations that it had improperly received federal tax credits, revelations that senior Cinar executives had invested the equivalent of one year of Cinar's revenue in the Bahamas without board approval led to the firing of founders Ronald Weinberg and the late Micheline Charest as well as chief financial officer Hasanain Panju.

The resulting litigation is working its way through the courts.

Cinar continues to try to recover the $41.6 million U.S. it says it's owed from the Bahamian transfers that occurred between October 1998 and November 1999.

Xanthoudakis says Norshield provided advisory services on investments to the Bahamian companies, but he didn't control them. They were free to decline his advice, for example, or use other money managers.

After an initial flurry of publicity about Norshield and the Bahamian transfers in 2000, interest in the story waned.

It looked as if Norshield and Xanthoudakis had emerged relatively unscathed. With stocks in a bear market, the hedge fund industry was taking off.

In 2001, Norshield launched its Olympus United hedge funds to retail investors and also began receiving mandates to manage the money of important institutional investors.

With his funds getting good results, Xanthoudakis began to be styled as a pioneer of the hedge-fund industry and attracted favourable media and industry attention.

But things took a turn for the worse after the badly wounded Cinar was sold to a group led by Toronto children's animation pioneer Michael Hirsh in 2004.

Under the terms of the sale, a $5-million fund was established to pursue litigation left over from Cinar's scandal-scarred recent past.

A litigation committee was formed under the direction of Toronto consultant Wes Voorheis. It's trying to recover money from parties, including Xanthoudakis, Norshield, Weinberg, Panju and the Royal Bank of Canada, bankers to both Globe-X and Norshield.

The Globe-X companies were ordered liquidated in 2002 and that led to an investigation by two chartered accountants who were appointed liquidators of the companies. As by far the largest creditor of the companies, Cinar is underwriting the work of the liquidators who are from the PriceWaterhouseCoopers office in Nassau.

It filed a report in 2004 with a Bahamian court raising grave doubts about the handling of Cinar's money. The liquidators state the Globe-X companies were controlled from Canada and their books showed "unnecessarily complex, bordering on creative accounting."

Tens of millions of dollars of Cinar's money was diverted to companies related to the Globe-X companies, redemptions of other investments and other uses, the liquidators alleged.

Norshield appeared in stories in The Gazette and La Presse about the liquidators' inquiry and explosive court-ordered testimony by Robert Daviault, the former chief financial officer of the Bahamian companies.

Daviault testified about a close relationship between Norshield in Montreal and the Bahamian companies. He alleged that Xanthoudakis played a leading role in a damage-control operation when Cinar Corp. began trying to recover money transferred to the Bahamas.

The operation in 2000 involved "cleaning up" the balance sheet of the company where Cinar's money had been invested, Daviault alleged.

He said Xanthoudakis had a hand in a shuffling of assets to make it appear the company, Globe-X Canadiana, had assets commensurate with the level of the Cinar's investments. Xanthoudakis was assisted in managing "the crisis" in the Bahamas by Matteo, Daviault said.

Daviault alleged that part of the damage-control operation in March 2000 involved the creation of a fictitious, back-dated letter to mislead Cinar and give time for Norshield to come up with money to repay Cinar.

Xanthoudakis acknowledges he and Matteo helped the principals of the the Bahamian companies - Thomas Muir and Daviault - deal with the crisis but

vehemently denies he quarterbacked the operation or that anything improper was done.

He maintains Daviault, under pressure from the liquidators, had changed his story from previous testimony.

"There are things in that testimony that are half-truths," he said. "I think the testimony is full of holes."

Xanthoudakis says Cinar's money was properly invested in accordance with an agreement between the company and Bahamian companies. Many of the problems that emerged in 2000 can be traced to sloppy bookkeeping, he said.

He noted Cinar has been refunded $86 million and had an opportunity to settle on a hefty portion of the remainder that he puts at about $22 million U.S.

He also noted the financial statements of Globe-X Canadiana had passed muster with auditors for the period the company's money was there.

Voorheis was unapologetic about Cinar's tactics in trying to recover the money.

"A significant portion of the monies were simply not invested for Cinar's benefit," he said, adding Xanthoudakis had ample opportunity to settle the dispute quietly. "It's not what I did that caused the collapse of his business, it's what he did."

In a lawsuit against Xanthoudakis and Muir, Cinar is seeking $58.8 million for the money it claims it's owed and other damages. The company alleges Xanthoudakis and Muir, head of the Bahamian companies, were "the directing minds" behind the operation. Cinar has obtained a court order seizing Xanthoudakis's assets pending a judgment in the suit.

In turn, Xanthoudakis and Norshield are suing Cinar and Voorheis, claiming $82 million in damages and are seeking another $10 million from the liquidators in a separate suit. Norshield accuses these parties of acting negligently and recklessly toward Norshield and Xanthoudakis by making numerous false and misleading statements.

Xanthoudakis added that the liquidators are in a conflict of interest because of earlier work for Cinar.

Cinar's Bahamian transfers are under investigation by the Surete du Quebec.