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'Illegal' glacier investment juiced returns: OSC

FUNDS REPORTER

His funds were the envy of the imploding hedge fund sector, managing to deliver a 159-per-cent return so far in a year marred by the worst bear market in decades. Now Otto Spork, a former dentist, is facing allegations that the fund's returns were juiced by unsubstantiated valuations in several underlying investments in Icelandic glaciers.

The Ontario Securities Commission has ordered Mr. Spork and related parties at Sextant Capital Management Inc. to temporarily stop selling his fund in Canada, alleging it is "investing illegally" in firms with rights to the glaciers.

Mr. Spork is the founder of Toronto-based Sextant Capital, whose star fund is the Sextant Strategic Opportunities Hedge Fund, which had assets of $53-million at the end of last month.

The temporary cease-trade order is the latest blow to the domestic hedge fund industry.

The industry has seen managers forced to wind down their funds or suspend redemptions as they deal with a brutal bear market.

Mr. Spork - who is now a resident of Iceland and spends up to 40 days a year in Ontario - and other executives of Sextant did not return calls or e-mails.

His daughter, Natalie, is president of Toronto-based Sextant Capital, and Robert Levack is the chief compliance officer and a portfolio manager who approved of investments made by the hedge fund.

Sextant Strategic Opportunities Hedge Fund has about 240 investors across Canada. Newedge Canada Inc. is the custodian and prime broker for the fund.

According to OSC staff, the fund had 5 per cent of its assets in cash, stocks, future contracts and equity in private companies.

But 95 per cent of the fund was held in two private Luxembourg companies - Icelandic Glacier Products (IGP) and Iceland Global Water 2 Partners (IGW) - and these investments were "not recorded or valued on Newedge's books and records," according to the OSC's statement of allegations released yesterday.

"IGP and IGW both purportedly own rights to glaciers in Iceland and intend to use those rights for the purpose of developing and selling bottled water," the statement of allegations notes.

"Neither IGP or IGW have earned any revenue and there are no indications that they will do so in the in the immediate future. Neither is currently operating ... Despite having earned no revenue and having no immediate prospect of doing so, IGP's shares have purportedly increased in value by 984 per cent since the initial investment by the Mr. Spork's hedge fund started in 2006, the OSC says.

"There are no third-party valuation reports that support the monthly, material upward revisions in value of IGP, and therefore there is inadequate support for the claimed return of the Sextant fund."

The OSC alleges that the fund made advance payments against anticipated future performances that constitute a loan to related parties contrary to the provincial securities act. The fund also invested in the two glacier companies when Mr. Spork had a "significant interest" in both of them.

"Significant performance fees, in excess of $3-million have flowed out of the Sextant fund, based entirely on its purported rate of return. Fees for the month of November, 2008, alone were assessed at over $1.5-million," according to the allegations.

The commission expects to ask for an extension of the cease-trade order on a hearing set for Dec. 16.

Mr. Spork also runs two offshore funds totalling $100-million (U.S.) - Sextant Strategic Hybrid2 Hedge Resource Fund Offshore Ltd. and Sextant Strategic Global Water Fund Offshore Ltd. - which do not have Canadian investors.

After his fund shot up 74 per cent in July alone, Mr. Spork was reluctant then to reveal how his commodities-focused strategy has been racking up stellar returns.

"We make our returns or business grow by having an edge that is not transparent," Mr. Spork told The Globe and Mail at that time.

© 2007 The Globe and Mail. All rights reserved.

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