The Ontario Securities Commission says it is unable to account for more than $90-million in the accounts of hedge-fund operator Sextant Capital Management Inc.
The OSC alleges that the fund company and its "driving force" Otto Spork inflated returns of the Sextant Strategic Opportunities Hedge Fund through self-dealing and investments in glacier companies purported to have increased significantly in value despite producing no revenue or profit.
Mr. Spork denies the allegations.
In a decision released yesterday to settle an argument over the OSC's right to freeze Sextant's assets, the regulator said "more than $90-million is unaccounted for and a combined total of only about $7.6-million is in the custodial accounts of the Sextant Fund and the Sextant Offshore Funds."
The OSC said that because the large sum of funds can't be traced "it is appropriate and in the public interest to preserve and freeze the funds that can be traced and are available.... This also prevents situations where there is a risk that funds can be transferred offshore and dissipated."
Sextant Capital Management's funds at Royal Bank of Canada and Newedge Canada Inc. were frozen under an order endorsed on Dec. 15 by the Ontario Superior Court of Justice.
Mr. Spork's lawyers Joe Groia and Kevin Richard went to the OSC last week to oppose the freeze after a judge in a separate civil class-action case declined to impose a Mareva order on Sextant's assets. (A Mareva injunction is a powerful tool that freezes assets so they can't be dissipated before a judge decides whether money is owed.)
In yesterday's decision, a panel of OSC commissioners ruled that the court's refusal to grant a Mareva injunction in the civil case should not restrict the OSC from taking action it considers to be in the public interest in a separate regulatory proceeding.
The regulator took action against Sextant after a routine "compliance" review revealed what appeared to be "significant breaches" of a section of the Securities Act prohibiting "self-dealing," Susan Kushneryk, a lawyer for the OSC, said at a hearing this month. Of particular concern, she said, was a company in which the fund invested that was said to have increased in value by more than 1,400% since late 2007, with commensurate increases in advisory fees.
Mr. Spork, who used to live in Toronto but now lives in Iceland, denies the charges which carry the prospect of hefty fines among other possible sanctions. In a statement after the allegations were filed, Mr. Spork said Sextant's 730% return for investors over the past three years was achieved through a "conservative posture" and with the fund's prin-cipals "knowing full well that these returns would draw attention and be subject to scrutiny."
An OSC hearing is scheduled for March 16.
According to a statement of allegations issued by the regulator this month, Mr. Spork, working with his daughter Natalie and Sextant's chief compliance officer Robert Levack, inflated the returns of the high-flying Sextant Strategic Opportunities Hedge Fund through investments in two glacier companies that were to become suppliers of bottled water. The regulator claims there are no third-party valuation reports that support the purported appreciation in value of the investments, and "therefore there is inadequate support for the claimed rate of return of the Sextant Fund."
The regulator further alleges that the two Luxembourg companies, which have rights to glaciers in Iceland, are owned almost entirely by the Sextant Fund, the Sextant Offshore Funds and Mr. Spork.
