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Quebec's regulator irks hedge fund investors

Date: Monday, July 24, 2006
Author: David Clarke, Investmentnews.com

OTTAWA - Quebec's Securities regulator, Autorit%E9; des march%E9;s financiers, is under fire from outraged investors in a bankrupt Montreal hedge fund, Norshield Financial Group, once one of Canada's largest hedge fund companies.

Stephen Jarislowsky, president of Jarislowsky Fraser & Co. Ltd., a Montreal-based investment counselor, is withering in his assessment of AMF. "It can only do better, because it can't do much worse," said Mr. Jarislowsky, a leading advocate of tougher regulation of Canada's capital markets.

Norshield is under investigation by Quebec and Ontario securities regulators, and the Quebec Provincial Police.

The firm abruptly stopped redeeming units last May after allegations emerged in a civil dispute with Cinar Corp., a Montreal animation company. Over nine months, unit holders yanked $330 million (U.S.) from its funds.

10 cents on the dollar

In a recent report to Norshield investors, a receiver said that they would recover, at most, 10 cents on every dollar invested in Norshield hedge funds. The recovery could be as low as 3 cents on the dollar.

Norshield CEO John Xanthoudakis blames his firm's business reversals on a long-standing legal dispute with Cinar over offshore investments the animator made in the late 1990s.

The Norshield case is just one of several major investment scandals that have come to light over the past year in Quebec. In total, the losses run to about $660 million (U.S.).

AMF alleges $101 million was embezzled by Vincent Lacroix, chief executive of Norbourg Asset Management Inc., a Montreal-based mutual fund group. Additionally, Mount Real Corp. was shut down last November by AMF after the firm began to default on promissory notes it had issued to investors. AMF said that some of those notes were issued and sold illegally, and that Montreal-based Mount Real had misled investors about its operations.

Norshield and Mount Real were affiliated companies.

AMF recently has moved to take away the licenses of a number of investment advisers who sold Mount Real promissory notes to their clients while at the now-bankrupt iForum Financial Services Inc. and iForum Securities Inc. of Montreal. And the regulator argues that the securities legislation creates no obligation on its part toward reps, whereas reps have specific and clearly defined obligations toward their clients.

This attempt to blame the reps is not appreciated by Mikos Nagy, president, co-founder and CEO of Toronto-based Quadrexx Asset Management Inc. "The due diligence onus shouldn't be placed on sales reps - or individuals, for that matter," he said.

Mr. Nagy also is chairman, co-founder and chief executive of Canadian Hedge Watch Inc., a Toronto-based publishing and educational firm focusing on the Canadian hedge fund industry. "In any event," he said, "you shouldn't have to use a forensic accountant on issues approved by the AMF, which hedge funds have to register with."

Rare bird among regulators

From AMF's start in February 2004, it has been unique among Canadian regulators. Modeled on the French agency of the same name, it handles duties previously performed by five provincial agencies supervising the securities, mutual fund, insurance and deposit-taking subsectors.

AMF does have some fans.

On May 26, it published a concept paper that proposes a new regulatory regime for derivatives markets in Quebec.

"This is good news for Quebec and for derivatives market participants,"said Luc Bertrand, president and CEO of the Montreal Exchange. "A modern and flexible derivatives regulatory framework will provide significant support for the Montreal Exchange's efforts to develop the derivatives markets, both in Canada and abroad."