Sunk by an iceberg? Sextant hits back at OSC allegations

Sextant Capital Management says it will “vigorously defend” allegations made by the Ontario Securities Commission on Wednesday that it has “illegally” inflated returns on its Sextant Strategic Opportunities Hedge Fund derived from ownership rights of glaciers.

With reported returns in excess of 158% year-to-date, the fund has raised a lot of eyebrows, considering we’re in one of the worst bear markets in history. The OSC alleged yesterday that these returns are artificial and unsubstantiated. It says 94.5% of the fund’s assets are invested with Iceland Glacier Products S.a.r.l. (“IGP”) and Iceland Global Water 2 Partners SCA (“IGW”), and there is no verifiable way to ascertain the value of these investments.

“IGP and IGW both purportedly own rights to glaciers in Iceland and intend to use those rights for the purpose of developing and selling bottled water. Neither IGP nor IGW has earned any revenue and there are no indications that they will do so in the immediate future. Neither is currently operating,” the OSC wrote in a statement of allegations.

Yet the OSC says shares of the two companies have purportedly increased from an initial average cost of £0.226 to £2.45, or approximately 984% since the initial investment by the Sextant Fund.

“This has contributed to the increase in value of the Sextant Fund by 730.7% over the less than three years between its inception in February 2006 and November 28, 2008,” the OSC said. “There are no third party valuation reports that support the monthly, material upward revisions in value of IGP, and therefore there is inadequate support for the claimed rate of return of the Sextant Fund.”

Further complicating matters is that it appears the two glacier companies are almost completely owned by entities affiliated with Sextant. The OSC says the IGP and IGW are owned almost entirely by the Sextant Fund, the Sextant Offshore Funds and the firm’s founder, Otto Spork.

The OSC says the sum of these actions, if proven, mean Spork and Sextant have broken numerous securities laws.

“Approximately 95% of the assets of the Sextant Fund have been invested illegally and are in breach of protections in the Act against self-dealing by mutual funds. Substantial fees have been paid to Sextant Capital GP and Sextant Capital Management Inc. out of the funds contributed by investors to the Sextant Fund, based on its illegal investments.”

In a statement released Thursday, Spork says there has been no wrongdoing. He claims his firm has made a long-term play in water investing that has proven a wise investment.

“The Ontario Securities Commission is making unproven allegations that we will vigorously defend against and prove wrong before the commission. Sextant did not come to the party with its eyes closed, thus maintained a very conservative posture over the past three years, while gaining a 730% return for its investors amidst the worst bear market in history, knowing full well that these returns would draw attention and be subject to scrutiny,” he says.

He adds, “Sextant has protected its investors’ assets by having the vision over two years ago to obtain exclusive 95-year rights to Glacier Water reserves. Water is fast becoming the world’s number one most sought-after commodity and investment. Many countries, including Canada, have blocked export of this vital commodity as water becomes scarcer worldwide. We will be presenting facts in our response to the staff’s statement of allegations specifically addressing these allegations. Sextant looks forward to the opportunity to present its case and counter these allegations in the proper venue.”

The OSC says the Sextant Strategic Opportunities Fund has about $53 million in assets under management representing about 240 investors, who primarily reside in Ontario.

(12/11/08)