Norshield dubbed potential

Questionable payments, overstated assets and faulty price calculations mean that investors in the Olympus United hedge fund of funds will likely see between 6 cents and 9 cents on the dollar for their $144 million investment. And the Olympus fund’s manager, Norshield Asset Management, will likely be the subject of a police investigation, based on receiver RSM Richter’s findings of possible fraud.

The questionable payments may be as high as $215 million — much more than retail investors’ exposure, but then, the Norshield-controlled funds also had institutional and “direct” investors, who may have contributed assets “in kind” for a cash consideration, the receiver says.

Still, the potential retail investor recovery is more than the 2 cents RSM Richter was originally predicting, thanks to an increase in realizable assets from $10 million to $31 million, it says in its sixth report to Ontario Superior Court Justice Colin Campbell.

The Olympus United funds were placed under a monitor in June 2005, after Olympus suddenly suspended redemptions. The receiver now says that redemptions were being paid out of incoming investor money as well as liquidation of assets. Some of the liquidated assets included exposure to an underlying fund of funds portfolio Norshield obtained by means of an over-the-counter option with Royal Bank of Canada in New York, which vetted the funds that made up the portfolio. The option typically allowed Norshield, through another entity, variously called Norshield Composite or Mosaic Composite, to put down roughly 10% for a 100% interest in the gains on the portfolio.

Norshield was then put into receivership in June 2005, after it was unable to account for its asset flows. Since then, the receiver has tried to track assets and asset flows. At the same time, Quebec’s market regulator, l’Autorité des marchés financiers began investigating links between the Norshield Financial Group and Mount Real Corporation, whose principal was a former Norshield official. The regulator put a monitor in place for Mount Real in November 2005, and the company has since been petitioned into bankruptcy, and there’s little left for the 1,600 investors who bought $130 million in Mount Real promissory notes.

Among Mount Real’s investments were a securities dealership, iForum Securities, formerly Norshield Securities, and a mutual fund dealer, iForum Financial Services, formerly Norshield Wealth Management.

Norshield Financial Group, through its underlying entities, also carried on its books an interest in iForum for a time. Some of its brokers as well as Mount Real officials — 24 in all — are facing Quebec securities charges for selling unregistered securities, not being registered, or not performing adequate know-your-client checks.

In a February ruling over Mount Real’s remaining assets — a database of U.S. subscribers who bought packaged magazine contracts over the phone as well as some subscription revenue — a Quebec judge ruled that Mount Real entities had no right to the income and characterized Mount Real as “a scheme concocted by treacherous and shameless people.”

Delays

This report, which Richter said just before Christmas would arrive in 30 to 45 days (once it received permission from authorities in other jurisdictions to report on some matters that are still confidential), fills in some elements from the receiver’s fifth report, made in October, which, along with elements from the fourth report, is still confidential. At the same time, Richter had to wait, in some Caribbean jurisdictions until January 2007 to be appointed as co-receiver or co-liquidator.

However, the sixth report sheds little light on how some $770 million in assets reported as of 2003 were reduced to $31 million by 2005. Complicating the explanation is the confusing welter of firms bearing the Norshield/Olympus moniker: Norshield Asset Management, Norshield Investment Partners, Norshield Capital Management, Norshield Investment Corporation (now Honeybee Software Technologies), Olympus United Funds, Olympus United Funds Holdings, Olympus United Group and Olympus United Bank and Trust and Olympus Univest.

Most of those entities were controlled by Norshield Financial Group’s principal, John Xanthoudakis. However, the files are incomplete. The receiver alleges that some computers were missing when it took control of Norshield Financial’s premises. In addition, banker’s boxes originally from Norshield Investment Partners’ Chicago office, were shipped to a Minnesota hunting lodge partly owned by one of Norshield’s former spokespersons. Of the 80 boxes transported there, only 36 have been recovered.

Other files, in the care of Cardinal International Fund Services, a Bahamas-based fund administrator, have been trashed for want of paying fees. Finally, Norshield is contesting access to files held by one of its lawyers, Michael Maloney, that were seized in the Mount Real investigation, according to a report in Montreal’s La Presse.

Unexplained Payments

The main explanation, Richter notes, is that “as funds originated from retail investors and other investors flowed from one entity/jurisdiction to the next with the Norshield investment structure, significant dissipation of investor funds occurred at each level as a result of redemptions at inflated net asset values (NAVs), unexplained third-party payments and the costs of maintaining the investment structure itself.”

The investment structure was complex. Money raised from investors by Olympus United Group was channelled to Olympus United Bank and Trust in Barbados. There, it was pooled with institutional investments and in-kind contributions of assets and invested in Olympus Univest in the Bahamas. But Olympus Univest turned the assets over to Mosaic Composite, which gave exposure to a portfolio of hedge funds through an option, using as collateral a series of private equity investments organized as the Channel Funds.

Among the third-party payments were $156 million disbursed by Mosaic. Another $60 million was disbursed by Olympus Bank and Trust. The receiver says Xanthoudakis did not benefit from the disbursements. Instead, the beneficiaries seemed to have had close connections to Xanthoudakis or Norshield.

The two funds made payments to entities whose investors are now making claims against it: C-Max Advantage Fund, Commax Management, Univest Fixed Return Fund and Balanced Return Fund.

Some payments were made to entities in the Mount Real web of companies, among them, Sterling Leaf Income Trust and Real Vest Investment. Real Vest, in turn, had a $7 million investment in Harfang Investments Limited, which in turn had a $63 million investment in Olympus Bank and Trust, according to Mount Real liquidator, Raymond Chabot Grant Thornton.

Other payments were made to entities being sued in the Cinar scandal, including Globe-X, Comprehensive Investor Services and Silicon Isle Ltd. Cinar, the children’s filmmaker is suing Xanthoudakis as well as a host of Norshield entities and Mount Real for their role in facilitating unauthorized investments in Globe-X entities.

Faulty Bookkeeping

Owing to incomplete Norshield records as well as an inability to gain access to some third-party records, Richter has not been able to identify all recipients of Norshield payments. Beyond that, Richter accuses Norshield of attempting “to camouflage the dissipation of investors’ funds by artificially inflating not only the underlying value of the assets purportedly held by each entity within the Norshield investment structure but also by artificially inflating the NAVs presented to the investors in each entity within the investment structure.”

The bulk of Olympus Univest’s investments flowed into Mosaic. Mosaic also had an interest in two Bahamian entities that have now been liquidated, returning $1.1 million.

Mosaic also had an interest in a set of funds called the Channel Entities in the form of a note receivable worth $172 million. The receiver thinks this is the same as another bookkeeping entry, an account receivable from Bice International. There are also notes receivable from four other companies, at least one of which is related to the director of Mosaic, who was a Mount Real officer, totalling $975,000.

The remaining proceeds from Mosaic include its interest in the RBC option and a real estate investment, together worth $16 million.

The receiver says “the assets of the Channel Entities are grossly overstated.” Indeed, although each of the entities in the overall Olympus investment structure was nominally independent, the receiver asserts that Xanthoudakis had de facto control over investment decisions. Since the assets of the Channel entities were overstated, the NAVs used to determine subscription and redemption prices were inflated.

Asset Flips

The receiver has identified a series of option agreements by which Xanthoudakis, Norshield Financial Holdings or Norshield Capital Management transferred assets to Liberty Trust and thence to the Channel Entities. The settlor of the trust was Thomas Muir; the beneficiary was Comprehensive Investor Services Ltd., of which he has been identified as a senior representative. Olympus Bank and Mosaic also made unexplained payments of $79 million US to Comprehensive Investor Services. Comprehensive Investor Services has also asserted a $47 million claim to some Norshield assets.

Under the option agreements, assets with a value for the Liberty Trust option agreement of $27 million US were then re-optioned, often on the same day, for $138 million. The receiver argues that this artificially inflated the NAV of the Channel Entities by $111 million US.

In another transaction, the Channel Entities interest in Emerald Key Management, worth $40.2 million US in 2002, was sold a year later for $148 million US ($172 million). The acquirer, Bice International, put no money down, but the Channel Entities booked a gain of $108 million US. The day of the sale, Bice International sold its rights to Emerald Key’s management and incentive fees, drawn from Olympus Univest, to Olympus Bank for $225 million US.

The Ontario Securities Commission has charged Xanthoudakis and two other Norshield officers with unexplained depletion of assets, failure to keep books and using false NAVs, among other charges. Another hearing is scheduled for April 4.