The Ontario Securities Commission has accused two Toronto-based hedge fund executives of fraud over a related-party business deal.
The OSC alleged Quadrexx Asset Management Inc. and its two leaders, Miklos Nagy and Tony Sanfelice, committed fraud by inflating the value of a hedge fund information company they owned during a deal that saw the firm purchased by a related company.
Mr. Nagy has played a prominent role in Canada's hedge fund sector as a frequent commenter and writer on hedge fund issues, and called himself "a leading authority on alternative investments and hedge funds in Canada" in his online biography. He served for five years as a director of the Exempt Market Dealers Association of Canada.
Mr. Nagy and Mr. Sanfelice could not be reached for comment Tuesday.
The OSC allegations involve Canadian Hedge Watch Inc. (CHW), an Ontario-based company that provided hedge fund data, reports, and news to Canada's hedge fund market. Mr. Nagy owned 45 per cent of CHW, while Mr. Sanfelice owned 30 per cent.
The men were also officers and directors of Quadrexx, a portfolio manager for a group called Diversified Assets Limited Partnership (DALP), which sold limited partnership units to the public in 2008 and 2009 to raise $5.65-million.
Quadrexx told investors that DALP would use funds raised in the financing to acquire CHW for a maximum value of $2.65-million, but the final purchase amount would be determined by an independent business valuator.
The OSC alleged Quadrexx hired Deloitte & Touche LLP to estimate the market value of CHW, but the two executives decided not to proceed with the valuation when Deloitte's estimate fell "well below" the anticipated $2.65-million valuation for CHW.
The OSC alleged CHW instead hired another valuator – HJF Financial Inc. – and gave the firm higher financial forecasts than those previously given to Deloitte.
HJF's valuation said CHW was worth between $2.1-million and $2.97-million, with a midpoint of $2.54-million. HJF said in its report to DALP that its conclusions were based on data provided by CHW that was not independently verified.
DALP proceeded with the purchase based on the second valuation, the OSC said, and Mr. Nagy and Mr. Sanfelice pocketed more than $1.2-million and $800,000 respectively from the sale of CHW.
Information about the process for valuing CHW was not communicated to DALP investors, the OSC alleged.
The OSC said that Mr. Nagy and Mr. Sanfelice and Quadrexx engaged in conduct they "knew or reasonably ought to have known perpetrated a fraud on DALP investors."
The regulator also accused the men of using funds from new Quadrexx investors to pay dividends to earlier investors, and alleged Quadrexx failed to maintain adequate working capital in October, 2012, but did not notify the OSC until January, 2013.
Quadrexx's registration with the OSC was suspended last May and the company filed for bankruptcy in June.