Otto Spork's Glacial Red Flags by CorgentumConsulting


									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 son-
in-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. Spork’s case, may go undetected and investors will be left focusing on recovering assets
rather than allocating capital.

© 2012 Corgentum Consulting, LLC

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