If you thought Toronto-based Sextant Capital Management’s returns were too good to be true in this brutal economy, the Ontario Securities Commission thinks you may have been on to something.
The provincial regulatory yesterday charged Sextant founder Otto Spork with inflating the hedge fund’s returns, which in September were pegged at close to 100% year-to-date. According to the allegations, Spork has invested most of the Sextant Strategic Opportunities Hedge Fund’s assets in two private companies that own rights to Icelandic glaciers, with an eye toward selling bottled water. But the OSC says the companies, Iceland Glacier Products and Iceland Global Water 2 Partners, have done nothing that justifies Sextant’s valuation of them.
“Despite having earned no revenue and having no immediate prospect of doing so, IGP's shares have purportedly increased in value from an initial average cost of €0.226 to €2.45, or approximately 984% since initial investment by the Sextant Fund,” the OSC said in a statement. “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 rate of return of the Sextant Fund.”
What’s more, the OSC says that some 95% of the assets of the Sextant Fund, which is registered as a mutual fund under Canadian law, have been illegally invested, breaking mutual fund self-dealing rules. The OSC says that “substantial” fees have been paid on the illegal investments in the glacier companies, which are almost entirely owned by the Sextant hedge funds and Spork.
A hearing on the matter is set for Tuesday.
Sextant says the Sextant Fund has C$53 million in assets, having returned a whopping 730.7% since inception two-and-a-half years ago.