Former hedge fund manger Otto Spork "profited handsomely" from an investment fraud that overstated the value of speculative investments in companies aiming to sell Icelandic glacier water, an Ontario Securities Commission hearing was told Monday.
"He [Mr. Spork]made millions of dollars over time" from performance and management fees charged to funds with falsely inflated values, said Brendan Van Niejenhuis, a lawyer representing OSC staff.
He made the statements on the first day of a hearing into allegations that Mr. Spork and two firms, including Sextant Capital Management Inc., were involved in a fraud from July, 2007, to December, 2008, through the Sextant Strategic Opportunities Hedge Fund in Canada and two offshore funds. The firm and the Canadian hedge fund were put into receivership last summer.
OSC staff allege that Mr. Spork sold funds at inflated values, and misappropriated money from the funds. The Sextant funds invested heavily in Iceland Glacier Products SA, a company controlled by Mr. Spork, and whose shares he valued using "unrealistic financial projections," said Mr. Van Niejenhuis. Investors were told in November, 2008, that the Canadian fund gained 730 per cent in the two and half years since inception, he added.
Mr. Spork breached rules prohibiting related-party transactions as well as a 20-per-cent restriction on holdings in any one company as more than 90 per cent of the Canadian fund was invested in two startup Icelandic glacier firms, the lawyer for the OSC said.
Defence lawyer Joe Groia acknowledged that "some technical violations" may have occurred, but argued "there is no fraud." Of the nearly $80- to $90-million raised from investors in the three funds, Mr. Spork and family received $13-million in fees that were largely reinvested into the funds, he said.
Mr. Groia also challenged the OSC assertion that the Canadian hedge fund violated the 20-per-cent restriction. OSC staff mistakenly used market value as opposed to the cost of the glacier company investments which were under the 20-per-cent guideline, he argued. The hearing continues.