Regulator charges 24 Mount Real advisors

Quebec’s securities regulator is taking 24 advisors and company officials to court for their role in selling $160 million in unregistered promissory notes issued by the failed Mount Real group of companies. They face $4.2 million in fines, with each of the 619 charges carrying a fine of $1,000 to $15,000.

Mount Real, a listed Montreal company that provided financing and accounting support to a series of affiliated companies selling magazine subscriptions to largely American clients, came under investigation in June 2005 for its links to the failed hedge fund promoter Norshield Financial Group. Mount Real was originally spun out of Norshield and had been issuing promissory notes since 1993, claiming they were exempt securities. At first, it issued the notes on its own; later the issuance was transferred to three other companies.

In November 2005, the regulators put Mount Real and many of its affiliates under administration, after complaints by investors that Mount Real was defaulting on the notes, which had a coupon of up to 12%. The administrator, Grant Thornton Raymond Chabot, later declared that the Mount Real companies were an “empty shell,” with minimal cash on hand, little cash flow from servicing the contracts, and assets consisting mostly of investments in related companies and accounts receivable from the subscription contracts.

Mount Real was petitioned into bankruptcy last spring. Four of the 24 advisors facing charges were sanctioned by Quebec’s securities regulator, the Autorité des marchés financiers, for their role in trying to prevent Mount Real’s bankruptcy.

The 24 are charged with acting as a dealer or advisor without being registered; assisting in the distribution of unregistered securities; and making misrepresentations to investors. Some 1600 investors are creditors of Mount Real, including some of those charged.

Of the 24, only 19 have so far been named. Many were advisors working through iForum Financial Network, which has also been pushed into bankruptcy. Others worked for Mount Real companies but were not registered. The president of iForum, Joseph Pettinichio, who was also Mount Real’s president, is not among those charged.

In a related development, according to Montreal’s La Presse, Mount Real’s liquidator now has access to boxes of documents seized from lawyer Michael Maloney in November 2005. The 150 cartons contain information on 90 companies related to Mount Real, as well as to another 20 companies, including Norshield Capital Management. Norshield Capital Management and two companies caught up in the tangled Cinar-Norshield affair, Silicon Isle and Mendota Capital, are still claiming client–solicitor privelge over material in the boxes. Cinar, now Cookie Jar, is suing Norshield for an authorized investment made in the late 1990s.

In other developments, the Ontario Securities Commission has held over until April a hearing into allegations that Norshield principals John Xanthoudakis, Peter Kefalas and Dale Smith violated securities regulations. The three face seven charges, each of which carries a $1 million fine.

And just before Christmas, Norshield receiver RSM Richter announced that it would publish another report on Norshield within 30 to 45 days, once it received permission from foreign authorities to release information that is still confidential in their jurisdictions.

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

(01/25/07)