The 17th floor of 10 Queen St. West where the Ontario Securities Commission holds hearings into financial matters.Fred Lum/The Globe and Mail
Investors thought they were getting stable income with the upside of potentially funding the next motion-picture blockbuster. Instead, the Ontario Securities Commission says, the buyers of the Crystal Wealth Media Strategy fund shares were actually funding a yoga studio co-founded by portfolio manager Clayton Smith, and their shares in the fund may not be worth what Burlington, Ont.,-based Crystal Wealth said they were because internal documents suggest many of the fund's investments were flops.
In April, the OSC froze trading in the 15 funds managed by Crystal Wealth, filed allegations of fraud against Mr. Smith, who owns most of the company and put the funds, Crystal Wealth and the yoga studio's bank account into receivership.
Now begins the task of sorting out the true worth of the funds, which the company recently said reflected $177-million in assets.
"A lot of the stuff they present and the way they present it is not correct, certainly in their characterization and representation of it," Mr. Smith said in an interview on Thursday. "They're missing some key opposing elements of it. I find their actions are pretty severe and strong and are having a pretty radical impact not only on myself, but on our unitholders and investors, our advisers and employees, and I find that very unfortunate. …
"We're trying to help and co-operate as fully as possible in order to protect our investors' assets," he added.
"That's our key, overriding concern at this point."
Mr. Smith, whose LinkedIn profile says he founded Crystal Wealth in 1998 after working as a certified financial planner, started the existing funds over the past decade, with several launched in the past couple of years.
The company says the objective of the five-year-old Crystal Wealth Media Strategy fund, the largest, with $53-million in assets, is to "generate a high level of interest income with minimal volatility and low correlation to most traditional asset classes by investing in debt obligations of motion pictures and series television productions." The company website says: "We expect returns going forward will continue to be in the 8-10 per cent annual range, although this is not a guaranteed return and mutual fund returns do fluctuate."
In a September, 2016, interview on BNN, Mr. Smith said his funds partner with a company called Media House Capital to provide "gap lending" to complete a film's budget "typically in the 13-per-cent interest range, and we negotiate a profit-participation piece on the movie, so if it is the next Slumdog Millionaire, and it makes hundreds of millions, our investors will participate in that extra money."
The OSC alleges that internal documents show Crystal Wealth was aware some of its 24 loans-backed films were at the other end of the spectrum from the blockbusters. Its outside auditor tested the accuracy of Crystal Wealth's Dec. 31, 2014, forecast of $31.8-million in 2015 film receipts, and found the number was $6.6-million, $25.2-million less. The OSC said "in correspondence, Smith appears to have acknowledged that the film loans should be written down in value, but nevertheless he has not caused that to happen."
The impact, the OSC said, is that the net asset value (NAV) of the Media Fund is overstated, and investors who sell units would be paid too much, to the detriment of new and existing investors.
Mr. Smith said the OSC seems to be overlooking the fact that the fund has a loan-loss reserve for film loans that might become troubled and need writing down in value. As well, he said, film loans pay out as box office comes in over time, across the globe, and "the simple fact we tried to make a prediction about how much we'd be receiving and then didn't receive that amount does not imply we'll never receive those amounts. It's simply a timing issue. …
"I believe that the fund, and all of my funds, are valued as fairly as I can value them based on available information to me at the time of each NAV that we strike, which is each Friday."
The OSC also said five film loans in the portfolio went not to production companies, but directly to a movie producer as an individual – and more than $2.6-million of the money went back to Mr. Smith or one of his personal companies. It said the Media Fund has received no payments of principal or interest on the $17.8-million in loans to the five films.
Mr. Smith transferred $87,000 of the money to Chrysalis Yoga, a studio in Burlington, Ont., he co-founded with a woman who formerly worked at Crystal Wealth, the OSC said. Bruce O'Toole, a lawyer for Chrysalis Yoga, said Mr. Smith is no longer involved with the yoga studio or the woman, whom he referred to as Mr. Smith's "ex-common-law wife."
The OSC also said Mr. Smith made $118,300 in credit-card payments, an $80,000 RRSP contribution, and used $1.46-million to buy a $2.7-million home in Burlington.
Mr. Smith said money that came from the producer to him and his companies is "personal and business loans" that have documentation. "To characterize them as in effect flowing from the fund to them to me is inaccurate. They are separate transactions and whether I perform on those loans back to him has no bearing on whether the production loans with the fund will repay."
The OSC said that while the issues it identified occurred in the Media Fund, other Crystal Wealth funds invested in that fund. Grant Thornton Ltd. has been appointed as the receiver of all of the funds, the Crystal Wealth company and the yoga studio until experts can sort out the true value of the funds. Trading, including investor redemptions, is frozen, and Grant Thornton will review the business and possibly create a plan to monetize the funds' assets and distribute them to the fundholders.
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David Milstead