The 1,900 Canadian retail investors who put $130 million into Olympus Funds aren’t likely to see more than six to eight cents on the dollar, Norshield Group’s receiver, RSM Richter told an investor meeting on Tuesday.

At worst, they will see three to five cents on the dollar, and that only after two to three more years of investigation into the labyrinthine investment structures of former hedge fund giant Norshield Group — which once had almost $1 billion in assets under management.

After a run on the bank, Norshield suspended redemptions for its Olympus United Funds last May, prompting a cease trade order by securities regulators, who then appointed RSM Richter to monitor the company. When RSM Richter had difficulty following the paper trail of client money, the OSC and the Quebec’s AMF appointed RSM Richter as receiver.

John DiNovo, an investment advisor with clients invested in Olympus funds, says “It’s a disaster.” He’s forming a group, the Norshield Investors Advisory Group, to glean more information. In a statement, he said “We are very disturbed by the revelations in the receiver’s reports and the difficulties they have encountered in the recovery of investor monies.”

For his part, RSM Richter’s Raymond Massi, says “many of our findings are preliminary because we do not have access to all the records,” adding that, in the quest for information, “we also encountered opposition from certain parties who manifested a competing claim.”

Unlike the Portus Group, an untried management hedge fund distributor that offered little disclosure about its underlying managers, Norshield ran a fund of funds strategy that frequently topped the league tables for risk-adjusted returns. Its underlying managers were well known by the Royal Bank, which vetted them before providing Norshield leverage to invest with them.

Norshield was also something of a pioneer in establishing corporate governance and risk management practices. It also sponsored a foundation as well as university scholarships and a university chair in finance.

Its rapid descent from grace, along with the apparent disappearance of investor funds, had more than one investor or advisor yesterday wondering whether fraud had been committed.

Grant Moffat, a lawyer for Thornton Grout Finnigan, one of the firms advising RSM Richter and the firm appointed advocate for investors in the Portus Group receivership, said that the receiver’s duties were threefold: to identify assets, recover them, and ultimately distribute them to clients. But he assured the audience — 300 showed up in downtown Toronto while others in Montreal and Vancouver were teleconferenced in — that RSM Richter would pass on evidence of fraud to the police in Canada, the Bahamas and other jurisdictions.

He also indicated that, where there was evidence of misappropriation of funds, Richter would file a civil suit, providing the cost-benefit analysis made it worthwhile.

OSC litigation counsel Melissa MacEwan also told the audience that both the AMF and the OSC had forwarded information to the police .

So far, Richter has identified $10.6 million in assets under Norshield’s control, including bank accounts and a property in Barbados. There is another $25.5 million in Norshield investments that may be recovered, but the proceeds of the recovery will have to be shared with other investors and creditors.

But tracking investment flows has proven more difficult. Investor monies collected in Canada were sent to Barbados, to the Olympus United Bank and Trust, which is also now under liquidation. In a Globe and Mail interview, Norshield founder John Xanthoudakis argued the offshore structures allowed investors a more tax-efficient exposure to hedge fund assets. He also said all the money has been accounted for, an assertion Massi disputed.

“I stand by my report,” he said yesterday.

Most of the retail assets flowed from Barbados to Olympus Univest in the Bahamas, where they were mixed with institutional assets, some from the Laval and Sherbrooke’s municipal pension funds, and some from Industrial Alliance, which has taken a $77 million writedown on its Norshield investments. There were also “direct investors” who contributed cash and assets in kind for which they received Norshield shares.

In the end, Olympus United Funds investors sent $105 million offshore to Olympus United Bank, according to Norshield’s last audited financial statements, for the year ending September 30, 2003.

About $15 million in retail investments, out of the $105 million invested, was put in an overlay program that consisted in two funds managed directly by Norshield. Massi says these two funds were liquidated in 2004 to meet redemption requests.

There was $32 million in cash, while $90 million was directed to Olympus Univest. These investments were pooled with those of the other investors in Olympus Univest, who contributed some $330 million. Those assets, in turn, were invested in another Bahamanian entity, Mosaic Composite.

Canadian investors bought share classes, each tied to a particular strategy. Massi says “conceptually there was an effort by the principals to match at the various levels the strategies at the Univest level, but there were a lot of consolidations of share classes and also a lot of commingling and consolidation of funds.”

According to the receiver, there was a “purported agreement” between Olympus Univest and Mosaic Composite such that Mosaic would guarantee Olympus investors the full benefits of any hedged investments, provide leverage, and look after liquidity. Mosaic provided collateral for an option that allowed leveraged exposure to a hedge fund portfolio provided by RBC. It was to benefit from owning the collateral.

None of this was disclosed in Olympus Funds’ offering memorandum and marketing material, says DiNovo, who wonders whether charges are forthcoming under the Criminal Code or the Securities Act.

The leverage was around 10 to one, meaning that investors assets of $88 million had economic exposure to a $388 million US hedge portfolio, thanks to a $300 million US loan from RBC on the option. Most of the investor assets — $431 million US — however, went into non-hedged assets that provided collateral for the loan. These non-hedged assets included investments in Norshield-related companies as well as some private equities. Mosaic shareholders themselves held only a $100,000 stake, according to the receiver’s analysis. “Only 20% was invested in the hedge fund program,” Massi says. “The rest of your assets were used to purchase the assets of Mosaic.”

RBC collapsed the option in the spring, leaving only $US38 million for investors — the value of the option premium, leaving investors with the non-hedged assets in Mosaic.

Most of Mosaic’s assets were in a series of Bahamanian entities called the Channel Funds. Almost half consisted of two holding companies, OlympusUnited Holdings and First Horizons Holdings. Since their assets were, respectively, Olympus Units Funds and Olympus Bank, now under liquidation, their carrying values of $46 million and $92 million is thus now zero. There is also a $149 million receivable owed by Bice International, whose beneficial owners are unknown.

There was also $43 million in third-party investments, of which $9.9 million might be recoverable. Those assets include a placement in Oceanwide, a logistics software firm, and two small publicly traded mining companies, Niocan and AMT International Mining.

In addition, Mosaic had a $7.2 million investment in Premier Real Estate, a publicly traded Bahamanian REIT.

In addition, investors are entitled to $8 million from the RBC option premium. However, that is tied up in litigation in New York, with the liquidators of two other Bahamanian entities, Globe-X Canadiana and Globe-X Management, suing on behalf of Cinar, the children’s film maker. CINAR is claiming $40 million US from an investment Xanthoudakis apparently facilitated.

Massi says the receiver has not yet been able to get access to Mosaic Composite’s books, but applied to become receiver in November. It is also trying to recover the books and records of Cardinal International Fund Services, a Bahamian firm that did the fund accounting for both Mosaic Composite and Olympus Univest. One of its directors, Stephen Hancock was, for a time a director of Mosaic’s predecessor, Norshield Composite.

Mendota Capital Corporation, formerly Comprehensive Investor Services Limited, has asserted claims on two of the Norshield companies in receivership: $29 million from Norshield Capital Management and $18 million from Honeybee Software Technologies (formerly Norshield Investment Corporation).

One of the directors of Mendota is Minnesota businessman Lowell Holden, who is also a director of Mosaic Composite. Holden is under a cease trade order by the AMF as director of Mount Real Acceptance Corporation, one of the Mount Real group of companies currently under administration. The AMF put Mount Real under administration in November over concerns about $65 million in unregistered promissory notes it issued. At the time, the AMF said it is also investigating the ties between Mount Real and Norshield.

RSM Richter has disputed the claim and says Mendota has not presented documentation to support the claim.

Holden was also a director of Silicon Isle, which made claims as a creditor of Globe-X Management and Globe-X Canadiana, of which he was also a director, claims that Cinar has disputed in U.S. and Caribbean courts.

Massi plans to call Holden, among others, for examination. He also noted that Xanthoudakis is continuing to forward answers to questions posed to him during an examination in December.

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

(02/22/06)