Otto Spork’s Glacial Red Flags Hedge fund manager Otto Spork who ran Sextant Capital Management Inc. has been fined $1 milllion by the Ontario Securities Commission (OSC) for falsely inflating investor returns, The Globe and Mail reported. According to The Globe and Mail, “He committed fraud by selling funds with inflated values not supported by third party valuations.” Mr. Spork also apparently had no problem taking $4 mill in what he called “loans” for his own personal gain. Mr. Spork’s daughter as well as his sonin-law, who also worked with Mr. Spork, were also ordered to pay money to the OSC. In the case of Mr. Spork, it seems that a variety of operational due diligence red flags were present. Some of the more notable one’s include: The Globe and Mail reports, Inflated returns and asset control issues: In 2008, Spork told investors that his fund gained 730% in only 2 ½ years through investments in private startup companies which were to profit from selling glacier water. These unbelievable returns were apparently inflated just a bit. Furthermore, all of the Sextant funds maintained investments in an entity known as Iceland Glacier Products SA. This was a company with no revenues and controlled by Mr. Spork. Perhaps a potential conflict of interest? Presence of family members: One key element is the presence of family members working together. In Mr. Spork’s case it was reported that his daughter and her husband worked at the firm. Even if there is no actual conflict of interest in place, the perceived conflict of interest is too great to generally merit such relationships. In a hedge fund context, this is particularly true when employees responsible for cash oversight or risk management are related to investment personnel. Questions regarding qualifications of fund personnel: Another key concern during an operational due diligence review is the qualifications of key fund personnel. In Mr. Spork’s case he had little to no background as a fund manager and was actually previously a practicing dentist. Not sure that dental experience would convince most investors that someone is qualified to run a glacier water harvesting business. As this case demonstrates, it is critical for investors to perform both initial and ongoing operational due diligence. Without it a number of red flag items, such as those that were present
© 2012 Corgentum Consulting, LLC
in Mr. Sporkâ€™s case, may go undetected and investors will be left focusing on recovering assets rather than allocating capital.
ÂŠ 2012 Corgentum Consulting, LLC