Unitholders, for example, are clamouring for redemptions from a fund called the Canadian Advantage Limited Partnership, or CALP. But they can't get out. The fund's assets have been falling, while redemptions can only dribble out because the investments have plunged in value or are illiquid, according to documents obtained by the Financial Post.
It didn't start out that way.
In January, 1997, CALP had US$1.4-million in assets. In two years, the fund's assets soared to US$21.2-million and the units had returned a remarkable 137.3%.
By September last year, the assets had shot up to US$96.8-million and the units had returned 575.6% since inception.
But the party ended. By January this year, assets had plunged to US$62.5-million, still up 430% since inception, but with further declines expected for February and March, according to documents. Mr. Valentine's other funds have been losing assets too.
The call for redemptions also looks troubling. In communications to unitholders last month, the fund said a redemption pool for CALP and another fund (the two had been consolidated into CALP II) had reached US$40-million, meaning that unitholders wanted to redeem a little less half of the US$90-million in CALP II assets.
Furthermore, the fund was only able to provide a distribution of 0.8% under the monthly redemption program recently. "While we have managed to satisfy some US$11.6-million of redemptions since October, unless we see a marked improvement in market liquidity, we expect cash distributions will be lumpy and limited for the foreseeable future," unitholders were told.
Though the picture looks troubling, Mr. Valentine defends his funds. Many unitholders have over-submitted for redemptions, meaning they don't want all their money out now, but have submitted for more until they see liquidity improve, he said.
"We're continuing to focus this as an ongoing business. There is great upside for the investors. We've had a great track record in the past," said Mr. Valentine, who is president of VMH Management Ltd., which manages CALP. He says he is working on mergers, acquisitions and other strategies to improve liquidity.
In the second to last note to CALP's financial statements for last year, it says there are a number of legal proceedings pending by and against the partnership, dealing with trying to convert the fund's convertible securities. The partnership's management doesn't believe the proceedings will ever be material. That leads to the next hot spot.
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Internet Law Library Inc. of Houston launched a lawsuit against Thomson Kernaghan this year, also naming Southridge Capital Management LLC, Steve Hicks, Dan Pickett, Christy Constabile and Cootes Drive LLC.
According to the statement of claim, Internet Law Library was looking for financing in March, 2000, and talked to Mr. Hicks (a former senior executive with Mr. Valentine at VMH Management) and of Southridge. The result was that Internet Law says it was promised financing by way of US$3-million in convertible preferred shares and US$25-million in equity by a firm called Cootes Drive, which allegedly turned out to be a "straw man" for Southridge and Thomson Kernaghan, the suit says.
Internet Law says Southridge guaranteed it wouldn't sell any Internet Law stock short. That's key because Internet Law alleges that what happened was a "death spiral."
Internet Law alleges that Southridge and Thomson Kernaghan were short on its stock from March, 2000, though they told Internet Law they were not.
Later, Southridge and Thomson Kernaghan manipulated the stock lower by entering low bid prices at the daily close of the market and through other methods, the suit says. The stock fell from US$7 in March to US12 cents in January this year, losing US$200-million in value.
As for the US$25-million equity financing, Cootes delayed it until a provision was triggered that said it wouldn't be provided if the stock fell below US$1.50.
Cootes Drive has fired back a lawsuit against Internet Law, alleging that Internet Law refused to convert 100,000 preferred shares in January, breaching a contract. Mr. Valentine is adamant that his funds and Thomson Kernaghan never took a short position with Internet Law and never take a short position with convertible debentures, ever. "Absolutely not," he says.
Internet Law's suit alleges that the parties it is suing have engaged in similar financing with other companies and the combined losses total more than US$500-million. Thomson Kernaghan was sued at least five times a few years ago over similar circumstances and at least three times more recently.
"All those (five old) cases were successfully defended and won," Mr. Valentine said. "Thomson Kernaghan has done nothing wrong in any of those cases in the past and in the present."
Source: Financial Post -Canada
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