In the eye of the storm

Date: Saturday, June 10, 2006
Author: Don MacDonald, The Gazette

Norshield scandal; Investors stand to lose $400 million after John Xanthoudakis's company was closed down. He says he's done nothing wrong. But that hasn't stopped someone from coming after him.

You had to look closely, but there was still a hint of redness around John Xanthoudakis's right eye this spring - the last vestiges of a savage beating he took before Christmas.

Xanthoudakis sat for an interview in the offices of a security firm he's hired to keep him safe from the people who attacked him last November.

Dressed in a dark, well-tailored suit, he has a muscular build, a smooth, tanned complexion and watchful eyes.

The hedge-fund firm he founded, Norshield Financial Group, collapsed a year ago, leaving individual and institutional investors facing about $400 million in losses.

He doesn't like to talk about details. But police say three individuals with connections to organized crime lured Xanthoudakis to a lawyer's office in Place Ville Marie and then demanded $5 million on behalf of someone they claimed had lost money in Norshield investments.

When Xanthoudakis tried to reason with them, he was punched.

"The guy sneaked behind him, without him realizing it, and whacked him. ... He had a sizeable cut and a sizeable eye injury for two weeks afterward," said William Urseth, a Xanthoudakis business associate who wasn't present during the assault but knows the story. "There was blood all over the room."

The harassment didn't stopped there. Xanthoudakis has received messages - "reminders" - and was even lured to another meeting where he was given a talking to. Charges are pending against the three men.

It's been quite a ride in the last year for the man they call Mr. X. He reaches for a cliche to describe the ordeal: "a perfect storm."

S The collapse of his firm has left his reputation in ruins. He's in the process of divorcing his wife with whom he has three children.

S His firm is being probed by a court-

appointed receiver, securities regulators in Ontario and Quebec and possibly the police.

S His assets have been frozen as part of a continuing fight with Cinar Corp. over investments the animation company made with Norshield-affiliated companies in the Bahamas in the late 1990s.

S He's been followed, harassed and threatened and now must "be constantly on the lookout" because "there are people running around with all sorts of perceptions of what happened in this situation. And because they are misinformed to a great degree, they act irrationally."

Xanthoudakis insists he has done nothing wrong and much of his personal net worth has been depleted by the Norshield collapse. He's even paid for two lie detector tests administered by former police experts. According to reports presented to The Gazette, the examinations found he was not lying when he denied wrongdoing in both in the Cinar dispute or last year's collapse of Norshield.

Xanthoudakis lays much of the blame for his firm's downfall on an aggressive and, he claims, unfair legal campaign by Cinar to recover money still owed to it from the transfers to the Bahamian companies in the 1990s.

Bad publicity from Cinar's activities led to a flood of investor redemptions that ultimately led to the collapse, he says.

Norshield and Xanthoudakis were making headlines yet again this week with news that RSM Richter Inc.,

the court-appointed receiver looking

into the firm's dealings, had seized dozens of boxes containing Norshield

documents from a hunting club in

Minnesota.

An executive of RSM Richter said, in an affidavit seeking a court order to seize the documents, that investor losses in Norshield hedge funds "may be due to the suspect activities and malfeasance of persons related to, involved or associated with the Norshield Group."

That brought an indignant response from Xanthoudakis, who insists nothing of the sort has come to light. He said that with his help, receivers have developed a clear understanding of where the money flowed that they're now in the process of confirming.

"The money was never missing," he said. "There were losses incurred. They were incurred legitimately. Nobody took money and put it into their pocket."

Still, Raymond Massi, the Richter receiver, said yesterday that there remains "a huge gap" between identified assets and the amount of money actually invested.

Final recovery by investors will be "nominal," less than 10 cents on the dollar, he said.

Some of the hardest questions are being asked by a group of Norshield investors who have lost tens of millions of dollars and claim there are clear indications that securities laws were broken by Norshield, once one of Canada's largest hedge-fund complexes.

Xanthoudakis, 48, rose from working-class roots in Notre Dame de Grace and LaSalle to run an international business that at its height managed or advised $1 billion in investment assets.

The son of Greek immigrants who worked at the Children's Hospital, Xanthoudakis put himself through Concordia University working as an orderly at the Children's.

He first became interested in investing in futures and options markets during his studies in engineering and computer science at Concordia University. While still in school, he says he began to work on the proprietary software to give him an edge in derivatives markets.

After leaving Concordia, a few credits shy of a degree, he set out to put his theories into practice. He began his career in 1983 at a firm he founded with partners called Ultron Technologies Corp.

His trading system was described in a 1987 Ultron brochure as being adapted from an engineering concept known as Filter Theory. It was "one of the most comprehensive and profitable commodity trading programs in existence," producing an astonishing 405-per-cent cumulative gain between 1983 and April 30, 1987," the brochure boasts.

But the Quebec Securities Commission, the province's market watchdog at the time, was far from impressed. The QSC acted twice to stop the sale of Ultron fund units to the public, including obtaining an 1987 Superior Court injunction against Xanthoudakis and an associate.

Xanthoudakis bounced back from that setback and established a company that would evolve into the Norshield Financial Group.

He further refined his expertise in a variety of so-called

alternative trading strategies that at the time were considered exotic but have become more mainstream in recent years thanks to a boom in hedge funds that make use of them.

(The term alternative trading strategies covers a wide variety of techniques aimed at squeezing returns out of markets by anticipating market moves or benefiting from market inefficiencies.)

In the 1990s, Xanthoudakis built a healthy business using his firm's expertise to manage money for, or advise, funds located in Caribbean tax havens, including those in the Bahamas, where Cinar's money was transferred. Norshield in Montreal referred investors to the Bahamian funds, but Xanthoudakis says the firm was always careful to advise clients of the need to declare all income to the tax authorities.

A different story was told by Robert Daviault, a former Norshield employee who worked for the investment companies in the Bahamas where Cinar's money went. In testimony last year, he said secrecy laws in the Bahamas that allow foreigners to hide income from tax authorities were a big attraction for Canadian investors referred to the companies by Norshield representatives.

Xanthoudakis contests the truthfulness of Daviault's testimony.

In the 1990s, Xanthoudakis was also developing several other financial-services businesses in Montreal, sometimes with his friend and long-time business associate Lino Matteo.

Mount Real Corp. was one of these companies. It was spun off from Norshield in 1993. Xanthoudakis was a director and principal shareholder of Mount Real until 2000. He now retains only a very small shareholding in the company and says he

hadn't been involved in the company for years.

Mount Real, whose principal business was selling magazine subscriptions, was shut down last November by Quebec's stock-market regulators. Small investors face an almost total loss on the $140 million they poured into investment notes issued by Mount Real. Matteo, who could not be reached for an interview, has denied any wrongdoing.

Xanthoudakis and Matteo have maintained a close personal and business relationship over the years, a person who has worked closely with Xanthoudakis said.

"Lino was his mentor ... They were attached at the hip," this person said. "I believe that Lino has had a great influence on him."

According to those who know him, the husky, bearded Matteo has a brusque, imperious manner. By contrast, Xanthoudakis is quiet spoken, calm and charismatic. He engendered deep loyalty among members of his staff.

"Barring any firm accusations by the authorities, I admire him," said a former mid-level Norshield employee who was let go with other staff when the firm shut down last year.

The publicity shy Xanthoudakis said he's decided to stay in Montreal to help in efforts to recover as much Norshield money as possible for investors.

"It's extremely frustrating because people always tell me: 'Well, you must be guilty. Don't you read the papers?" he said with a rueful laugh. "I think I've made some bad decisions, but I certainly didn't defraud the investors."

"I honestly don't think I've done anything wrong."