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Some 2,000 institutional and retail investors looking at as little as three cents on the dollar on the $330 million they placed with failed Montreal hedge fund complex Norshield Financial Group have company. About 1,600 creditors of another Montreal firm whose principals had long-standing business associations with Norshield also have claims to the firm’s scant $25 million in assets still to be recovered, according to recently-released documents.
Mount Real Corporation, a publicly-traded firm that provided financing as well as accounting, management, e-billing and database-mining services to companies mostly engaged in telemarketing magazine subscriptions or vitamin supplements to low-income U.S. consumers, also invested in Norshield funds or companies and shared in private-equity placements with Norshield.
Mount Real creditors held up to $101 million in promissory notes from Mount Real or its associated companies, Mount Real Acceptance Corporation (renamed MRACS Management), Real Assurance Acceptance Corporation and Real Vest Investment, says Mount Real’s administrator, Raymond Chabot Grant Thornton. When Mount Real began defaulting on the notes in late last year, after a year of liquidity problems, the Autorité des marchés financiers, Quebec’s securities regulator, put it under provisional administration, along with a related publicly traded financial dealer, iForum Financial Network, whose reps sold at least $55 million of the promissory notes
Business associates
Norshield Financial Group founder John Xanthoudakis served as a director of Mount Real in the 1990s and, for a time, was its biggest shareholder. Norshield Fund Management, a mutual fund dealer, and Norshield Securities, once parts of Norshield Wealth Management, were, in turn, incorporated into iForum Financial Network, whose president, Joseph Pettinicchio, served as president and COO of Mount Real.
Jean Robillard, the Raymond Chabot Grant Thornton official leading the file, told an investor meeting in Montreal this month that Mount Real and its associated companies have little in the way of assets to back up the notes. Out of $99 million in accounts receivable, well more than half are two years old, even though the term for payment is 26 months. Apart from that, subscribers to the magazine instalment contracts that were Mount Real’s stock in trade are unreachable or terminated their subscriptions, leaving about $5 million in potentially recoverable accounts receivable.
Investments booked at $8 million in related public companies — where Mount Real CEO Lino Matteo often served on the board of directors or acted as president or CEO — are probably worth $500,000. Investments in private companies, most indirectly controlled by Mount Real including goodwill and loans and advances, amounting to $104 million, are expected to have a value on realization substantially lower than the book value.
Nor is there much for Mount Real investors to gain from investments in Norshield hedge funds or holding companies of approximately $7 million. What Norshield’s investors may recover from Norshield group is a share of the proceeds of a $37 US/$44 CAD million option premium — the vehicle by which investors gained exposure to a hedge fund basket — estimated at $8.4 million, $7.2 million in a Bahamian real estate company, and $10 million in investments in some not very liquid private and public companies, according to Norshield group’s receiver, RSM Richter.
The proceeds of the option premium are being disputed in New York courts by Cinar, the children’s filmmaker, which has been suing Norshield-associated entities for an unauthorized offshore investment dating to the late 1990s. In the meantime, retail investors, who purchased $132 million in hedge fund investments through Olympus, most of which flowed offshore, may only get $17 million — $6.4 from the option premium and $10.6 million in bank accounts and investments held by Norshield in Canada — because they have to share recoveries with institutional investors who placed $200 million with Norshield, and so-called “direct investors,” who contributed cash and in-kind assets of $177 million in exchange for hedge fund investments.
Between $40 million and $100 million of those assets were contributed in-kind, according to Raymond Massi, the liquidator working for RSM Richter. Recoveries also have to be shared with Globe-X companies, the vehicles for Cinar’s offshore investment, which are also under liquidation.
Mount Real, according to the receiver’s report had some direct investments in Norshield entities — $1.6 million in Olympus Univest and $5.5 million in Olympus United Funds Corporation, invested through MRACS — and another $1 million in a failed Xanthoudakis vehicle, Quantum Investments, invested through Real Vest.
Private equity hedge
There is indirect exposure as well, through accounts receivable from and investments in Harfang Investment, which had a $63 million stake in a Norshield property that now valued at nil, as well as in some companies where Norshield Capital Management or Norshield Investment Corporation was also a shareholder.
Mount Real’s indirect stake in Norshield assets reflects an unusual investment arrangement. Most Norshield/Olympus investors got exposure to the returns of a hedge fund basket managed by Royal Bank in New York, via a “Soho” option sold to Mosaic Composite in the Bahamas. But, apart from $37 million US used to pay the premium on the option, and another $50 million US in direct hedge fund investments, the rest of the investor money, — $382 million US — flowed to private equity investments managed by Mosaic that were supposed to be used as collateral for the option, says Massi. These investments were organized as a series collectively called the Channel Funds.
The option arrangement provided up to ten times exposure to the hedge fund basket, according to Massi. Among the collateral companies were First Horizon Holdings (later Olympus United Funds Corporation), a Barbados company that owned Olympus United Bank and Trust in the Bahamas, and Olympus United Funds Holdings, the majority shareholder of Olympus United Funds Corporation. Their asset value was established as a present-value estimate of future management and performance fees. (Hedge funds typically charge 1% to 2% in management fees, plus, in a fund of funds vehicle, 10% of the performance above a benchmark.)
In an investor meeting last month, Massi explained that Canadian retail investments flowed from Olympus United Funds Corporation to Olympus United Bank and Trust, where they were entrusted to Olympus Univest, who turned them over to Mosaic.
Now that the RBC option has been collapsed, like a foreclosed mortgage, whatever recoveries investors will receive depend largely on the status of the private companies Norshield indirectly put investor money into to support the option. Overall, the status is quite bleak: private investments booked at $343 million US will yield, maybe, $17 million US.
Public Sources
An examination of documents prepared by Norshield group receiver RSM Richter, Mount Real receiver Raymond Chabot Grant Thornton, as well as regulatory filings on the SEDAR clearing-house website, offers a complicated picture of Norshield’s non-hedge fund investments or associations.
One of the directors of the company that provided fund administration services — i.e., the firm responsible for tracking net asset value — Cardinal International Fund Services, was the sister-in-law of Olympus/Norshield’s Xanthoudakis. In turn, another director of Bahamas-based Cardinal, Stephen Hancock, was also a director of Norshield Composite, the owner of the option before Mosaic Composite. He was also a director of Olympus Univest. Cardinal officials also served as directors of a number of non-related Norshield funds. Norshield’s receiver is still trying to get access to the books of Cardinal International, which, in turn, is under investigation by Bahamian securities regulators.
According to regulatory filings, Mount Real’s promissory-note program dates as far as back as 1997, when in its annual report, the company booked note obligations, paying 5% to 12.5%. These funding activities were later transferred to its associated companies, Mount MRACS, Real Assurance and Real Vest. These three firms were apparently represented to note investors as subsidiaries of publicly traded Mount Real.
But Robillard says they were actually controlled by Mount Real CEO Matteo. On the other hand, their last listed director was Lowell Holden, a Minnesota businessman associated with other Mount Real-related entities, and the director of companies contesting Cinar’s claims to Globe-X assets, by virtue of their own debt claims. Holden was also a director of Mosaic Composite, and, as director of Mendota Capital, is contesting RSM Richter’s attempts to liquidate some other Norshield entities, thanks to a debt obligation of $48 million. Mount Real’s administrator has been unable to interview Holden, even though he apparently supported a last-ditch attempt to recapitalize Mount Real — and, Robillard alleges, help to divert magazine subscription payments ultimately owing to Mount Real to a Minnesota bank account after the AMF froze Mount Real’s activities.
Real Vest was 52% owned by Investsafe, and in turn owned Real Assurance. Investsafe’s U.K. division, to which Mount Real sold its promissory-note business through Real Vest in 2000, went declared bankrupt. On Norshield’s books, through the Channel entities, was a 100% stake in Investsafe valued at $6 million US in 2001, and $13.5 US million in 2002, before it disappeared from the books in 2003. RSM Richter is trying to get interviews with the auditors of the Channel funds.
Through the Channel entities, Norshield investors had a 7.2% stake in iForum, valued at $1.3 million US in 2001 and $576,000 US in 2002. The 7.2% stake remained on the books in 2003, with no value assigned to it. Real Vest also had a $1 million indirect investment in iForum, as well as another $3 million investment in Oympus, though the receiver’s report doesn’t specify which Olympus entitity.
The AMF charged, in November, that the Mount Real notes had been illegally distributed without a prospectus. Since then, three iForum reps who sold many of the notes have been suspended, while the securities branch of iForum, which had $183 million in assets under management has been sold to Industrial Alliance and the mutual fund dealership, which had $499 million in assets under management, to Quadrus.
Owls, bees and gophers
Perhaps the most substantial change in Mosaic’s Channel investments is the 2002 booking of a 47% share in Harfang Investments, worth $67 million US. It was no longer listed in 2003.
In his accounting to Montreal investors, Robillard noted that Mount Real had a 40% share in Trireme Management in the Bahamas, whose assets were a database, magazine subscription contracts and an investment in Harfang Investments. Harfang Investments owned the other 60% of Trireme. In an organizational chart distributed at the meeting, Harfang is connected to Tristar, which seems to be the predecessor to the Channel entities into which Norshield/Mosaic money flowed, according to Richter’s accounting of Norshield assets.
Public filings add more detail. Mount Real’s second-largest shareholder until 1999, after Norshield’s Xanthoudakis, was MR Investments, controlled by Thomas Muir. Later, Muir’s stake was held through Harfang Investments, according to proxy filings. Muir is also the Norshield International official being sued by Cinar, along with Xanthoudakis, as well as a former director of Olympus Univest.
In 1999, Mount Real’s new Barbados subsidiary Mount Real International announced that it had signed a contract to manage assets for a fund called Canadian Emerging Companies. Harfang was to act as the fund’s distributor.
Harfang is listed in Robillard’s report as a company effectively controlled by Matteo. One of its assets was a $63 million interest in Olympus United Bank and Trust, which is now worthless. (Harfang des neiges is French for snowy owl; the snowy owl figured in Mount Real’s corporate logo.) However, according to Massi’s records, the Channel Entities had a 40% share in First Horizon Holdings, valued at $46 million US, which had a 100% interest in Olympus Bank and Trust.
Another shared investment was Mount Real Innovation Corporation, an e-business incubator later known as Red Chili Media. Mosaic originally had a one-third share, valued at $8.3 million US in 2001; by 2003, it was no longer on Mosaic’s books. However, Red Chili, one of whose investors was Harfang, also made investments iForum and Olympus.
In addition, Honeybee Technology, a publicly listed company whose CEO until November was Matteo, received accounting services from Mount Real, and processed magazine subscription billings for Mount Real companies. Its largest shareholders were RFC consultants, controlled by Matteo, who was with Honeybee from the beginning, and Honeybee Software Technology, originally controlled by Matteo, Honeybee president Jeff Klein and Xanthoudakis.
While, in recent years Xanthoudakis has dropped off the proxy filings as major shareholder of Honeybee Technologies, nevertheless Norshield’s receiver has seized holding company Honeybee Software Technology as a business with connections to Norshield entities. In June, Honeybee apparently merged with Norshield Investment Corporation. Mendota Capital has asserted a claim to Norshield Investment Corporation’s assets, which RSM Richter has contested.
In addition, the AMF has put two subsidiaries of Honeybee Technology, the publicly traded company in which Honeybee Software Technologies had an interest, under administration, because they were collecting Mount Real-related subscription payments, with the help of Mendota/Real Vest’s Holden.
The AMF has also moved on Gopher Media Services, a web-design firm founded by Xanthoudakis as NorFin Business Advisors, and connected to Mount Real. Xanthoudakis sold his holdings in Gopher in 2005, according to the SEDI website. Its other principal shareholder was Magic Management, whose principal shareholder, Lowell Holden, stepped down from Gopher’s board of directors last November.
Filed by Scot Blythe, Advisor.ca, scot.blythe@advisor.rogers.com.
(03/27/06)