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The murky tale of a failed fund

Norshield founder maintains client assets will be recovered, BERTRAND MAROTTE reports

MONTREAL -- John Xanthoudakis wants to restore his shattered reputation.

The founder of troubled Norshield Financial Group has stepped back into the media glare in an effort to dispel the perception of improper dealings at his controversial hedge fund company.

In an exclusive interview with The Globe and Mail, Mr. Xanthoudakis said there has been confusion in the media between developments at Montreal-based Norshield and reports of the disappearance of investors' money at Norbourg Asset Management Inc. and Portus Alternative Asset Management Inc.

"There is a very large distinction between what happened at Portus, what happened at Norbourg and what happened at Norshield," he said, breaking months of self-imposed silence.

Regulators allege embezzlement and fraud occurred at Norbourg, while Portus co-founder Boaz Manor faces three charges filed by the Ontario Securities Commission. Each charge carries a maximum penalty of five years in jail and a $5-million fine.

So far, authorities have not levelled any allegations of fraud or improper behaviour at Norshield and efforts to recover about $300-million of clients' money that was sent offshore will be successful, Mr. Xanthoudakis promised.

Norshield is the erstwhile rising hedge fund star that was plunged into crisis in May when it suspended redemptions after clients withdrew $375-million over the previous nine months.

The company blamed bad press arising from its headline-making legal dispute with children's animation producer Cinar Corp. over offshore investments of Cinar money in Norshield-associated funds.

One of Canada's largest hedge fund companies, Norshield was put into receivership in June by the Ontario Securities Commission amid concerns over the redemptions and a lack of co-operation with regulators. A receiver, RSM Richter Inc., has been appointed and is trying to locate $135-million invested by 1,900 retail investors and $175-million (U.S.) invested by a group of institutional clients.

Mr. Xanthoudakis said the "misinformation" about Norshield led to his being attacked in late November, apparently by an investor.

Meeting with a reporter in the offices of an adviser in downtown Montreal, he produced documents that say he has submitted to two separate lie detector tests that indicate he did not take or hide any investors' funds at Norshield and that he did not conspire to defraud Cinar in connection with its Bahamian investments.

He said he is fully co-operating with Richter in its attempts to recover Norshield investors' cash.

He spent two days under examination by Richter in early December and one of the "outcomes" of those sessions, he said, is that "the money has been accounted for.

"Between the two of us we were able to piece together how the money was accounted for. The money was never really missing," Mr. Xanthoudakis, 47, said.

Raymond Massi, a partner with Richter, said in an interview that Mr. Xanthoudakis' examination helped "shed light" on the complex, multilayered structure at Norshield and the flow of funds within it.

He said Mr. Xanthoudakis "answered all the questions" and agreed to undertake to get missing data and supporting records that have made it difficult to locate assets. Richter is expected to issue an update on its activities within weeks.

The assets of Norshield and of Mr. Xanthoudakis, including a house in the Montreal northern suburb of Laval, have been frozen.

Mr. Xanthoudakis said Norshield's troubles arose from a "media-fed scare that was fuelled by unsubstantiated allegations" over the Cinar dispute.

The new owners of Cinar -- Toronto animation producer Michael Hirsh and his partners, including the private equity arm of Toronto-Dominion Bank -- allege in filings in the Quebec Superior Court that Norshield and Mr. Xanthoudakis had a hand in the transfer of more than $100-million (U.S.) of Cinar cash to two Norshield-linked funds in the Bahamas in the late 1990s. They say the transfers were done without the approval of Cinar's board.

Cinar claims that about $40-million has yet to be recovered.

Mr. Xanthoudakis and Norshield are suing Cinar for $82-million (Canadian) in damages and they strongly deny they were involved in the disappearance of any Cinar funds.

Mr. Xanthoudakis, a Montreal native, got his start in finance working for a local firm in the futures market.

He conceded that aspects of the financial modelling he created at Norshield might appear baffling to many outsiders.

Operating through offshore entities in such places as the Bahamas, for example, was a way of ensuring a more tax-efficient hedge fund portfolio for Canadian investors, he said.

Asked why Cinar has so forcefully pursued Norshield, Mr. Xanthoudakis replied: "They were going after who they felt were the deepest pockets" after efforts failed to recover the money directly from the two Bahamian funds, Globe-X Canadiana and Globe-X Management.

Contrary to reports that Cinar's money was invested without board approval, "our position all along has been that people that used to be on the board of directors were in full knowledge of these transactions and they -- if anybody -- should have disclosed it to the board, if the board indeed did not know what was going on."

He added that the $86-million (U.S.) or so that Cinar recovered between 2000 and 2002 out of the more than $100-million it invested is not so shabby, given the huge losses other investors suffered at the time.

"I think that they fared very well given what the circumstances were, but obviously it wasn't good enough."

What could Norshield have done differently to avoid all the trouble it finds itself in?

"We've quite often gone through the Monday morning quarterbacking routine, in terms of what could have been done and what should have been done," Mr. Xanthoudakis said. "We did everything that we could in order to protect our investors from having to suffer this kind of situation."

© 2007 The Globe and Mail. All rights reserved.

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