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Hedge fund manager Otto Spork at his office on Bay Street, Toronto.

Fernando Morales/The Globe and Mail

Canadian hedge fund manager Otto Spork committed fraud by falsely inflating returns from investments in Icelandic glacier-water companies and charging investors nearly $7-million in fees, the Ontario Securities Commission has ruled.

The former dentist perpetuated the "non-criminal fraud" from July, 2007, to December, 2008, in three investments funds, including the Sextant Strategic Opportunities Hedge Fund in Ontario, and two others sold offshore, according to a 73-page decision released on Wednesday.

The performance and management fees charged in the Canadian fund by Toronto-based firm Sextant Capital Management Inc. were "unreasonable," and "these payments made to Otto Spork constitute acts of fraud," the OSC panel said.

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Mr. Spork, who has been living in Iceland in recent times, also committed fraud by selling funds with inflated values, the OSC said. He also "misappropriated money" from those funds by taking $4-million in so-called loans for his personal benefit, the panel said.

A sanctions hearing will be scheduled by the OSC. Mr. Spork could be ordered to give back money he obtained illegally. He could also face a fine of up to $1-million for each breach of the Ontario Securities Act.

It is not clear yet whether Mr. Spork will appeal the decision. His lawyer, Joe Groia, did not return calls.

In a hearing that began last summer, OSC staff alleged that Mr. Spork "profited handsomely" from an investment fraud by overstating the value of speculative investments in companies aiming to sell Icelandic glacier water.

Mr. Spork made millions from fees of the funds sold in Canada and offshore that had "falsely inflated values," Brendan Van Niejenhuis, a lawyer for OSC staff, said.

The panel said Mr. Spork breached his duties as an investment fund manager. His daughter Natalie, an officer and director for Sextant Capital, and brother-in-law, Dino Ekonomidis, vice-president of corporate developments, also breached their duties to the detriment of investors, the OSC said.

Commission staff alleged that Mr. Spork broke rules prohibiting related-party transactions, as well as a 20-per-cent restriction on holdings in any one company because more than 90 per cent of the Canadian fund was invested in two startup Icelandic companies.

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The Sextant funds were invested heavily in Iceland Glacier Products SA, a company controlled by Mr. Spork. Investors were told in November, 2008, that the Canadian fund gained 730 per cent in the two and half years since inception, OSC staff said.

During the hearing, Mr. Groia said "some technical violations" may have occurred, but he argued "there was no fraud" because fees received by Mr. Spork and family were largely reinvested in the funds.

In mid-2009, an Ontario judge ordered that Sextant Capital and the Canadian hedge fund be put into receivership. PricewaterhouseCoopers was named receiver to ensure any remaining assets in the fund were managed and distributed back to investors.

Sextant Capital's chief compliance officer, Robert Levack, settled with the OSC last summer and paid a $15,000 fine for failing to ensure that Mr. Spork's Canadian fund conformed to its offering memorandum and securities laws.

"I got the impression that … the attitude was one of, 'well, yes, there are rules, but somehow those rules don't seem to apply to me,'" Mr. Levack told the hearing.

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