Unexplained payments of more than $215 million and artificially inflated fund values are among the allegations of fraud detailed in a receiver’s report on the collapse of Norshield Asset Management (Canada) Ltd.

Montreal-based Norshield was placed in receivership in June 2005, leaving retail and institutional investors facing hundreds of millions of dollars in losses.

The latest report of court-appointed receiver RSM Richter Inc. into the complex offshore dealings of Norshield estimates 1,900 Canadian retail investors, who are owed a total of $144 million, will recover no more than 6¢-9¢ on the dollar.

Canadian institutional investors, including Industrial Alliance Insurance and Financial Services Inc. , are owed another $209 million, of which gross recovery before expenses stands at less than 3¢ on the dollar. When all claims are tallied up in Canada and abroad, investors in Norshield-linked entities will be out more than $500 million, the receiver’s report, released in March, states.

An Ontario Superior Court judge gave Richter the green light to turn over evidence of possible fraud to law-enforcement and securities regulators in Canada and abroad. Justice Colin Campbell made an exception for transcripts of examinations by Richter, including those of Norshield CEO John Xanthoudakis and senior executive Dale Smith. The transcripts are not to be handed over to authorities.

The receiver’s report, prepared by Richter partner Raymond Massi, states that investors’ money was “dissipated” through inflated redemptions and unexplained payments to third parties. It also alleges that Norshield principals, among other players, sought to hide problems by artificially pumping up the value of investments and the net asset values of funds.

“The receiver has determined that as funds originating from retail investors and other investors flowed from one entity/jurisdiction to the next within the Norshield investment structure, significant dissipation of investors’ funds occurred at each level as a result of redemptions at inflated net asset values, unexplained third-party payments and the cost of maintaining the investment structure itself,” the report states.

COMPLEX STRUCTURE

“The principals of the Norshield companies, Olympus Univest Ltd.and Mosaic Composite Ltd., attempted to camouflage the dissipation of investors’ funds by artificially inflating not only the underlying value of the assets purportedly held by each entity within the Norshield investment structure, but also by artificially inflating the [net asset value] presented to the investors in each entity within the investment structure,” the report continues.

Norshield, which claimed to manage $1 billion, maintained a complex investment structure that saw money invested in Olympus United Group Inc. hedge funds in Canada flow offshore first to Olympus United Bank and Trust in Barbados, and then mostly into investment vehicles in the Bahamas known as Olympus Univest Ltd. and Mosaic Composite Ltd.

Despite its complexity, the report states, that Xanthoudakis “determined investment strategies and had de facto control over decision-making” in the investment structure including in offshore jurisdictions.

The receiver’s report says $215 million was diverted from Olympus Bank and Mosaic to third parties. Richter has found no satisfactory explanation for these payments, but has determined that the beneficiaries appear to have connections to Xanthoudakis and/or the Norshield companies, Olympus Univest and Mosaic.

Although the receiver has identified some of the recipients of the payments, it has not determined whether they received the money for their own accounts or as a conduit for others. The report adds that there is no evidence the payments had personally benefited Xanthoudakis or Smith.

A key group of assets in the investment structure was held in a series of companies known as “Channel entities.” The value of these mostly illiquid holdings was “grossly overstated” by at least US$300 million or 88% in audited financial statements for fiscal 2003, the report states.

The receiver’s report says Nor–shield’s investment structure was doomed to collapse once redemptions exceeded subscriptions, given the disparity between the value of the underlying assets and the net asset values reported to investors, as well as the illiquid nature of the assets.

The report also states that between 2001 and 2005 almost half the money collected from retail investors in Canada never even flowed into the investment structure but rather was used mostly to fund redemption demands at an accelerating pace.

In May 2005, Norshield halted redemptions, saying clients had withdrawn $375 million over the previous nine months. The company blamed the redemptions on negative press attention regarding Norshield’s involvement in a financial scandal at Montreal animation firm Cinar Corp.

@page_break@Alistair Crawley, a lawyer for Xanthoudakis, says his client has done nothing wrong. Specifically, Crawley says that Xanthoudakis has never knowingly engaged in any fraudulent activity and that he rejects the suggestion that he participated in a scheme to overstate assets or improperly divert money to third parties.

Crawley also notes that the receiver’s report reflects Richter’s conclusions, which haven’t been proven in a court of law.

Xanthoudakis, Smith and a third Norshield executive, Peter Kefalas, were accused in October by the Ontario Securities Commission of violating the Ontario Securities Act by misleading investors and OSC investigators.

Massi, who is overseeing the liquidation, is aiming to make an initial distribution to investors by the end of the year at the earliest, although possible difficulties could delay the process. IE