Banks, clients look to dodge Norshield bullet

Date: Monday, February 27, 2006
Author: KEITH DAMSELL- Globe & Mail

Two of Canada's biggest banks and their clients may be among the few parties to get the bulk of their money out of Norshield Financial Group.

Investors in the troubled hedge fund company gathered in Toronto, Montreal and Vancouver last week to hear the fate of money sunk into the insolvent company. At the time Norshield filed for receivership, about 1,900 investors had $131.9-million in the company's funds, while a group of institutional clients had $210-million invested.

Receiver RSM Richter Inc. detailed a Byzantine scheme that involved millions of dollars in offshore accounts and dozens of companies. The best-case scenario for investors is a potential three-year wait for a dismal 10 cents of every dollar.

But Royal Bank of Canada and Bank of Montreal appear to be two Norshield partners that will escape relatively unscathed.

RBC lent $300-million to Mosaic Composite Ltd., Norshield's Bahamas-based investment arm. The loan was inherent in an option program that saw RBC manage a basket of $330-million in hedge funds. Mosaic used funds from the pool to cover increasing redemptions from Norshield investors.

RBC liquidated the basket of funds in 2004, leaving behind equity of $44-million. A Mosaic-related company then sold the bulk of the $44-million in shares to a unit of New York's Merrill Lynch & Co. Inc. A measly $8.4-million -- the subject of a series of lawsuits -- is potentially all that's left over from Mosaic's hedged assets.

Meanwhile, the Norshield team acted as an adviser to about $20-million in hedge fund-linked notes backed by RBC. The notes fell beyond the scope of RSM Richter's mandate and were redeemed in June last year. Similarly, Norshield managed about $2.2-million in funds for Bank of Montreal. Again, the bank notes were not part of RSM Richter's mandate.