Norshield report to come in September

(August 2006) The potential recoveries aren’t looking any better for Olympus hedge fund investors, nor is the principal cooperating quite as much as he has privately told investors, says RSM Richter in its latest update. Richter is the receiver for the whole Norshield complex of hedge funds and private equity investments.

Canadian retail investors put $132 million into Olympus United-branded hedge funds, whose investment manager was Norshield Asset Management (Canada). Institutional investors put in $200 million more, according to Richter’s February accounting to investors, and “in-kind” investors contributed indeterminate investments valued at $177 million, in related Olympus structures. All told, claims are now $509 million.

Almost all of those funds flowed through the Barbados-based Olympus United Bank and Trust, who in turn put the money into a series of funds managed by the Bahamian firm Olympus Univest. Univest, ultimately, gave investors the economic exposure to a basket of hedge funds through an option contract with RBC in New York, which also vetted the underlying hedge fund managers.

But Univest didn’t do this itself. Instead, another Bahamian entity took care of the hedge fund exposure. For $300 million of economic exposure, Mosaic Composite seems to have paid around $30 million to $34 million for the option.

The rest of the money, according to Richter, flowed through to other entities which, according to Norshield founder John Xanthoudakis, were supposed to provide collateral for the option. Mosaic invested that collateral in a series of private-equity entities largely bereft of marketable assets or significant revenue. For example, Norshield sold its 49% ownership stake, with a book value of almost $3 million, in Vezina Composites, a Quebec aerospace-industry supplier, for $1 in 2004, according to the receiver’s reports.

A newsletter posted to Richter’s website in early August provides little in the way of explanation of these fund flows. But it does clarify that the $34 million it discovered Olympus unitholders may have a claim on is tied up in the disputed option contract with RBC. Richter had already listed that asset in its February accounting to unitholders, and estimated the value at $8.4 million. Xanthoudakis, in a May letter to Olympus, heralded this discovery as something that occurred through his efforts, while disputing the magnitude of investor claims. The main disputant is Cinar, the children’s film company now known as Cookie Jar Entertainment, which is about to be taken public.

In his May letter, which many investment advisors did not receive, Xanthoudakis wrote, “Most of the information investors receive through the media is incomplete and narrow at best, and it could possibly be interpreted that the principals (including the undersigned) have absconded with hoards of money at the expense of the little guy. This is simply not the case!”

He added that the “press has also consistently stated or implied that ‘money is missing.’ Once again, this is simply not true. There is substantial difference between impairment of asset values and ‘missing money’.” He did not explain how asset values became impaired.

In his defence, Xanthoudakis argued that investor claims of more than $500 million were overstated by up to $100 million, while acknowledging that, with the collapse of the RBC option agreement, investor recoveries would have to come from the private equity portfolio held as collateral.

For its part, Richter said, “we wish to advise the investors that the receiver had no involvement whatsoever with this letter and does not endorse any of its contents. Despite its ongoing review of available books and records and the numerous requests for documents and information as well as examinations under oath, the receiver has not received from Mr. Xanthoudakis or from any other principals of the Norshield Companies a complete and satisfactory explanation or reconciliation as to the significant shortfall between investor claims and the value of the identified assets.”

In other recoveries, Richter is expecting to sell a Bahamian building for about $9 million. The receiver has tracked down another $8 million in cash, with $1.9 million expected to come from the sale of a Bajan property. Mosaic Composite companies might yield $10 million, along with a $1 million deposit Richter found in the Bahamas related to Mosaic.

Among the major Mosaic companies, Niocan, which has claims on a niobium deposit outside Montreal, has found its attempts to build a mine thwarted, thanks to local resistance. Norshield has a $1.5 million investment. AMT International, which possessed a copper mine claim in Arizona, was sold before Richter stepped in, and Norshield is supposed to receive a royalty. That investment was worth $1 million. Microslate, which manufactured durable laptops for police forces, went bankrupt in December. Norshield had a $19 million interest. That leaves Oceanwide, which produces logistics software for shippers. In June, Richter announced that it was upping its stake in Oceanwide, by $300,000, to preserve its interest in this investment. Norshield’s original investment was almost $15 million, which represented a 36% share.

Missing files

That’s mundane receiver’s work. What is more dramatic is that Richter discovered that Norshield files were shipped from Chicago to a hunting lodge south of Minnesota in early May. Richter got a court order to have them seized. Some of the files related to Norshield’s Chicago subsidiary, Norshield Investment Partners and to Norshield Mosaic Fund, which may be related to Mosaic Composite, a.k.a. Norshield Composite. In Montreal press stories, Xanthoudakis said he had the documents shipped to Minnesota from Chicago to cut down on storage fees.

The co-owner of the hunting club, William Urseth, also spoke to The Gazette. He formerly served as Xanthoudakis’ spokesperson during the Cinar scandal, and his resume mentions performing “crisis management” work for Norshield International, the entity that originally invested Cinar money. Over the years, Urseth has edited hunting-related magazines, owned breweries in Ottawa and Montreal and managed companies that marketed health supplements, some of which were part of the Mount Real fold.

In some sense, Cinar precipitated the downfall of Norshield, and had close connections with it. One connection lay with Mount Real Corporation, a management firm that provided accounting services and took ownership stakes based on a proportion of revenues in small firms largely engaged in telemarketing magazine subscription packages to low-income Americans. It was spun out of Norshield, at the time known as Northern Shield, in the 1990s, by using an Alberta capital pool corporation. The Quebec securities regulator accused Mount Real of illegally issuing promissory notes — with interest rates of up to 12% — to retail clients on whom it was now defaulting. The companies it sponsored (and provided management accounting services to), were largely in the same boat.

Most, like Mount Real itself, have been cease-traded and face liquidation, with few of the assets having a liquid value — they’re mostly databases — and little business outside the Mount Real universe. That doesn’t mean the databases aren’t hotly contested, even if Mount Real’s liquidator Jean Robillard has pointed out that the magazine subscription contracts they support are hugely unreliable.

One of Mount Real’s management consultants, Mario Ricci, ended up moving to Cinar and thence to Norshield. At the same time, Mount Real’s CEO, Lino Matteo is being sued by Cinar, according to SEC filings. Norshield enters the picture as either the sponsor or the facilitator of a US$122 million investment Cinar made in the late 1990s in a corporate bond investment that had a high-yield overlay. That investment, made without the authorization of Cinar’s board, made the headlines almost contemporaneously with the revelation that Cinar was receiving Canadian film-production tax credits which were illegitimate, since U.S. residents were doing the heavy lifting.

The scandal forced Cinar off the stock exchanges and onto the pink sheets and its co-CEOs Martin Weinberg and Micheline Charest were forced to resign in 2002. In its 2003 filing, Cinar alluded to the lawsuits it had outstanding against Weinberg and Charest, as well as to lawsuits Weinberg and Charest had against Matteo. The filing was made to take Cinar private and off the pink sheets, which list speculative over the counter stocks.

One of Mount Real’s management consultants, Mario Ricci, ended up moving to Cinar and thence to Norshield. At the same time, Mount Real’s CEO, Lino Matteo, is being sued by Cinar, according to SEC filings. Norshield enters the picture as either the sponsor or the facilitator of a US$122 million investment Cinar made in the late 1990s in a corporate bond investment that had a high-yield overlay. That investment, made without the authorization of Cinar’s board, made the headlines almost contemporaneously with the revelation that Cinar was receiving Canadian film-production tax credits that were illegitimate, since U.S. residents were doing the heavy lifting.

Included in the filing were references to suits against Xanthoudakis and Thomas Muir, a former Montreal investment advisor who ran Norshield International in the Bahamas.

The scandal forced Cinar off the stock exchanges and onto the pink sheets, which list speculative over the counter stocks. Its co-CEOs, Martin Weinberg and Micheline Charest, were forced to resign in 2002. In its 2003 filing, Cinar alluded to the lawsuits it had outstanding against Weinberg and Charest, as well as to lawsuits Weinberg and Charest had against Matteo. The filing was done to take Cinar private and off the pink sheets.

Xanthoudakis and Matteo continue to figure in the Cinar litigation — this time, from Weinberg’s side. (Micheline Charest died in 2004). Cinar has court-ordered liens on both Xanthoudakis’ and Weinberg’s assets. Weinberg has been seeking to disqualify Davies Ward Philip and Vineberg as Cinar’s lawyer for conflict of interest.

The firm derived some of the information posted in statements of claim in Quebec Superior Court from Mount Real’s Matteo, Weinberg says. The information relates to whether Cinar advanced $7 million to Weinberg, or whether it was Globe-X, the Norshield-related entity where Cinar’s investment ended up. Weinberg says the money came from Globe-X, and so Cinar owes him.

For his part, Matteo told the courts, according to the Montreal press, that he was merely a consultant, called in by Norshield to help clear up bookkeeping issues relating to Cinar’s Norshield International investment. He said he was not the principal.

All the same, Weinberg’s lawyer Pierre Fournier has accused Cinar of unexplained financial dealings with Mount Real and Mount Real-related companies, some of which had ties to Norshield.

As for Mount Real, there seems little hope of recovery for promissory-note investors. Mount Real’s liquidator, Raymond Chabot Grant Thornton, has decided to sell one of Mount Real’s magazine subscription databases to raise income to pay to investors, and to cover expenses. In an earlier report, Raymond Chabot cast doubt on the value of the instalment contracts Mount Real and its subsidiaries claimed as assets, since many of the subscribers had never heard of the company.

Raymond Chabot think the recoveries are potentially so minimal that, after liquidator’s fees, they’re hardly worth it.

Still, four Mount Real-related companies are contesting the ownership of some of the databases. They are Overture Media, Red Chili Media, HoneyBee Technology and Sterling Leaf Income Fund. The latter two are publicly listed. Sterling Leaf was an income trust whose distributions were backed by magazine instalment contracts it bought from Mount Real, which in turn provided accounting services. It has been cease-traded since November. Honeybee Technology, while publicly traded, for a long time had as one of its principal shareholders Honeybee Software, originally Wannabee Software, whose beneficial owners were Jeffrey Klein, Lino Matteo and John Xanthoudakis.

Honeybee Software apparently took over Norshield Investment Corporation, and is now under Richter’s receivership. Overture Media, a private entity, both sold magazine subscriptions and published Menz magazine, edited by Urseth. Red Chili Media, originally Mount Real Innovation Corporation, an Internet incubator with ties to Norshield, was a magazine marketing organization.

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

(08/08/06)