The Ontario Securities Commission should order former hedge fund manager Otto Spork to pay a $1-million fine and disgorge $6.75-million gained from perpetrating a fraud in his now-defunct investment, a hearing was told.
"We need an administrative penalty to be large enough to be a deterrent not only for Mr. Spork, but also like-minded individuals," OSC lawyer Tamara Center said Wednesday.
She made the arguments at a sentencing hearing for Mr. Spork, who has not attended any of the OSC proceedings against him and his firm, Sextant Capital Management Inc. The OSC ruled last year that the former Toronto dentist turned fund manager committed a "non-criminal" fraud by inflating returns in his funds.
Mr. Spork ran Sextant Strategic Opportunities Hedge Fund, sold in Ontario, and two offshore funds. By the time the commission ordered him to stop selling his Canadian fund in late 2008, it was only invested in two private Icelandic glacier companies. He had charged $6.75-million in performance and management fees from July, 2007, to December, 2008, based on the fund's reported returns.
The former fund manager committed fraud by selling funds with inflated values not supported by third parties, and also "misappropriated money" from these funds by taking $4-million in so-called loans for his personal benefit, the OSC said in last year's ruling.
All the Sextant funds were invested heavily in Iceland Glacier Products SA, a company with no revenues and controlled by Mr. Spork. About 250 investors had plowed $23-million initially into Mr. Spork's Canadian fund. OSC staff have said that investors were told in November, 2008, that this fund had gained 730 per cent in the two and a half years since inception.
Jay Naster, lawyer for Mr. Spork and other Sextant employees, argued the penalties sought by the OSC were "too harsh and excessive." The maximum $1-million fine is reserved for the worst offenders, and that is not the case with Mr. Spork, who did not set out to deliberately commit fraud, he maintained.
While the valuation of Iceland Glacier Products may have been difficult and represented about 90 per cent of Mr. Spork's portfolio at one time, it was still a real company with assets and a business plan to become involved in the water-bottling business, said Mr. Naster. "You are not dealing with a boiler-room operation."
The offering memorandum, a document used to sell the hedge funds to Canadian investors, indicates the manager also had discretion to determine the value of private companies in his funds, said Mr. Naster, who replaced Mr. Spork's former defence lawyer Joe Groia.
In 2009, an Ontario Superior Court Judge ordered that Sextant Capital Management and its Canadian hedge fund be put into receivership. If the OSC orders a disgorgement, any monies paid would go to receiver PricewaterhouseCoopers Inc. before being distributed to investors or other parties.