On a much smaller scale than Madoff Madness, Canada has its own version of hedge fund fraud investigations.

Please consider Illegal Glacier Investment Juiced Canadian Hedge Fund Returns

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. 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.

“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.

Unlike Madoff who turned himself in for running a Ponzi scheme, the Sextant manager will fight allegations

The founder of Sextant Capital Management Inc. vowed yesterday to fight allegations that his firm juiced hedge fund returns by investing illegally in Icelandic glaciers.

Sextant says the fund posted a 159-per-cent return for the first 11 months of this year, despite a brutal bear market. Its assets, which are 95-per-cent invested in two glacier firms that have no revenues, are frozen.

Sextant Strategic Opportunities Hedge and two offshore funds are invested in two private glacier companies in which Mr. Spork held “a significant interest,” the OSC alleges. The Sextant fund also made advance payments against anticipated future performance fees, and that constitutes a loan to a company owned by Mr. Spork, the commission adds.

The penalties for violating this section of the securities law include a possible fine of up to $1-million.

Here’s the deal: Spork invested 95% of his hedge fund in Icelandic glaciers, a private venture in which he held a significant interest. Furthermore he posted a 159% return without earnings, income or recorded values. To top it off he allegedly loaned himself money based on future performance fees.

Hey why not? The fine’s only $1 million and he has already booked $3 million in fees.

Mike “Mish” Shedlock
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