This article is from our archives. It was published in September 2012.

"If you walk down a street with Kevin, it's like parting the Red Sea," says Stuart Coxe, the television producer who cast Kevin O'Leary on Dragons' Den in 2006. "It's 'Kevin!' and high-fives.… We've never had someone like Kevin."

O'Leary himself likes to tell the story of being buttonholed by a man in a bathroom at Toronto's Pearson International Airport not long after Dragons' Den went on the air. The stranger told O'Leary he was a "total asshole." This is an anecdote that O'Leary relishes. It shows he'd arrived.

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Welcome to another episode from The Kevin O'Leary Show—proof, perhaps, that Canada, too, has finally arrived. We now have our own celebrity businessman, our own Trump, our Branson: someone who is famous for being famous, who makes money just by being.

The story so far: O'Leary makes his name selling his software company to Mattel Inc. for billions. That's the backstory that he leverages into careers as a venture capitalist, board member, broadcaster, author, speaker and—critically for the story arc—fund-company executive. Coming up next—sorry if this is a spoiler—is O'Leary Fine Wines.

The twist is that, right now, O'Leary's performance is getting a critical drubbing. People in the investment community are turning on him over the performance and management style of his funds—a business, it turns out, that is less forgiving than reality TV.

However the plot turns out, July 30, 2008, will be a pivotal date. That is when O'Leary announced the first offering from O'Leary Funds and came squarely into the sights—should the story turn out this way—of his nemesis.

On that fateful day, O'Leary was holding forth on SqueezePlay, the Business News Network show he co-hosted with journalist Amanda Lang. O'Leary explained to Lang how his fund was designed to produce yield on a monthly basis. "You got to pay Daddy," he declared, "because my wife costs a fortune, my kids cost me a fortune. I need dough and I need dough every month. You got to pay Daddy number one."

O'Leary said his fund would not touch investors' principal. "This fund doesn't grind its capital, which means it has enough generation of yield to pay 5%, which is paid monthly because Daddy wants to get cash—that's what Daddy wants."

Nor would the fund invest in anything risky. In answer to a caller, O'Leary said that investing in National Bank "is too risky for my fund. My fund is for grandmothers, that's what it's for." Promotional materials for this and subsequent funds also emphasized that the O'Leary Funds were a natural "home" for value investors intent on capital preservation.

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One person who caught the segment on BNN that afternoon was Mark McQueen. He didn't like what he saw.

To McQueen, O'Leary was an interloper, someone without experience as a money manager—but someone who knew he could tap in to a vast pool of retail investors due to his television profile. McQueen has since used his blog to maintain a critical eye on O'Leary Funds. And of late, his skepticism has been seconded by a chorus of investment advisers who say Daddy isn't looking after them.

"Just because you're on television doesn't mean you'll be good at managing money," says McQueen, the CEO of Wellington Financial LP. "When a non-trained money manager shows up in the market…if it goes badly, what does this mean to everybody else whose stock-in-trade is this industry? If it brings the industry into disrepute, you bring a pox on all of our houses from investors."

Of course, O'Leary doesn't literally manage the funds himself—he's too busy, and he's not licensed. Yet when O'Leary promotes himself—which he does endlessly—he's also, like Trump and Branson, marketing his businesses. As the man promotes himself from multiple platforms, O'Leary's audience may not discern the distinction between O'Leary and O'Leary Funds. Nor do they likely know about the inconvenient details that complicate the founding myth of the guy who sold his software start-up for billions.

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Born in Montreal in 1954, O'Leary likes to say his mother, Georgette, endowed him with his investing savvy. Georgette studied the markets and developed a philosophy of only investing in bonds that pay interest and stocks that pay dividends. It's the same guideline that O'Leary proclaims for his funds today.

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Although he had ambitions of being a photographer, O'Leary entered the MBA program at the University of Western Ontario. After business school, he started Special Event Television, which produced shows including Don Cherry's Grapevine. From watching Cherry, O'Leary learned some critical lessons about being on television: Never be boring. Never be small. Make every gesture dramatic and bold. While the show was a success, O'Leary was eventually axed as a cost-cutting measure.

By 1983, O'Leary saw the potential in the emerging software and personal computer industries. With a programmer partner, he formed SoftKey Software Products Inc. in the basement of his Toronto home. O'Leary was a talented salesman, knocking on doors of computer companies to convince them to bundle SoftKey's software into their products. The company eventually moved to Boston and focused on the burgeoning field of educational software. As president of the company, O'Leary broke certain taboos in the industry: Instead of selling software disks solely through computer retailers, he put them into big-box, book, video, music and even grocery stores, at cut-rate prices. By 1993 SoftKey was trading on Nasdaq and had revenues of $110 million—and a loss of $57 million (all currency in U.S. dollars unless otherwise noted). The company went on to make a string of acquisitions. But a case study by Dartmouth's Tuck School of Business found that "two of [SoftKey's] deals…rank among the 10 worst U.S. acquisitions during 1994-1996 as measured by shareholder value two years after the deal."

SoftKey's most prominent takeover was the consummation of its 1995 hostile bid for San Francisco-based The Learning Company (TLC). As part of its due diligence, TLC hired the Center for Financial Research and Analysis (CFRA), a forensic accounting firm, to examine its suitor's financials.

Thus began the counternarrative to O'Leary's heroic foundation story. Reports by CFRA were the first in a series of analyses that stand in stark contrast to the O'Leary version of events. One of CFRA's reports alleged that SoftKey may have overstated its earnings by bundling various general and administrative costs into write-offs. CFRA was also unhappy with SoftKey's response after its auditor, Arthur Andersen, found deficiencies in the company's internal controls.

SoftKey had reacted by hiring a consultancy to strengthen financial controls—but the consultancy was headed by a SoftKey vice-president. Andersen expressed dissatisfaction with this outcome, suggesting more reforms. SoftKey then fired Andersen. CFRA thought the appointment of the vice-president was a clear conflict of interest and also noted that SoftKey's audit committee "holds several questionable members, including the CEO… as well as an outside member associated with two public companies charged with financial improprieties and another member who is a paid consultant to the company." Over all, says former CFRA president Howard Schilit, his firm found evidence that SoftKey was making "operating profit from normal activities look stronger."

When asked about accounting complaints from this period, O'Leary says, "That does not sound right. We didn't have small-time accountants. We had Big Five firms. We were a public company."

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In any case, SoftKey's acquisition of TLC went through, and SoftKey adopted the TLC name. By 1996, the company had 3,000 employees and was the biggest educational software company in the world. TLC continued to grow via acquisitions, driving revenues up over $800 million.

But while O'Leary says in his memoir, Cold Hard Truth, that TLC was a money-making machine, an SEC filing shows that TLC suffered net losses of $376 million in 1996, $495 million in 1997 and $105 million in 1998. Moreover, TLC's accumulated deficit topped $1.1 billion by the end of 1998. In an interview, Scott Murray, TLC's former CFO, attributed the losses to goodwill write-offs that stemmed from buying other firms. He concedes there were a lot of "accounting losses" but contends that if one looked at EBITDA—earnings before interest, taxes, depreciation and amortization—it was a different matter. "So the company was making $800 million in revenues and about $120 to $125 million of operating income before goodwill, depreciation and amortization," Murray says.

Still, in 1997, TLC called in a group of investment firms, including Mitt Romney's Bain Capital Inc. Together, they pumped in $123 million in exchange for an ownership stake and the right to name three board members.

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In 1998, toy giant Mattel Inc. made a takeover bid for TLC. Desperate to reverse a steep slide in the company's stock price, Mattel CEO Jill Barad seized on educational software as a driver of future growth.

The takeover offer shocked many. Software-industry analyst Sean McGowan couldn't believe that Barad zeroed in on TLC, given that it was a well-known "house of cards" that was burdened with tired brands—not helped by the fact that O'Leary had slashed R&D from 24% down to 11% of expenditures. "There was a lot of [TLC] inventory out there that was not moving very well," McGowan says. "They pumped up the sales by repackaging and distributing to convenience stores and drugstores. And that's stuff which sits there and gets returned." Indeed, TLC was accused in a shareholders' lawsuit and later by a Mattel executive of "stuffing the channels"—shipping product at the end of a quarter and recording it as revenue, even though much of the merchandise would be returned. "Stuffing the channels was part of the business back then," says a former TLC sales rep based in California. The suit's allegation is denied by former TLC executives such as former CFO Scott Murray. "There was no overstocking in the channels or overinventorying in the channels," he says.

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Mattel purchased TLC for about $4 billion in the spring of 1999. (Depending on how debt is considered, the figure ranges from $3.4 billion to $4.2 billion.) O'Leary took over as president of Mattel's new TLC digital division, having received a hike in salary from $400,000 to $650,000 and an increase in his severance package from $2.1 million to $5.25 million. A few months after the sale went through, O'Leary sold most of his Mattel stock and pocketed nearly $6 million, according to a court document.

Weeks after the sale, CFRA produced a critical report on Mattel, claiming TLC was already experiencing collapsing revenue, a surge in receivables and a deterioration of operating cash flow. In the third quarter of 1999, Mattel expected profits of $50 million from the TLC division. When Mattel revised that estimate to a loss of between $50 million and $100 million, the announcement wiped out more than $2 billion in shareholder value in one day, as the company's share price slid from nearly $17 to $11.69. The actual divisional loss for the quarter turned out to be $105 million; the next quarter, the loss was $206 million.

In November of 1999, O'Leary was fired, six months into a three-year contract. Four months later, Barad, the CEO, was forced out too. "There is nothing I can say to gloss over how devastating The Learning Company's results have been to Mattel's overall performance," she said.

Mattel hired Bernard Stolar, a video-game executive, to see if he could salvage TLC. "It was an absolute disaster," he says. "TLC had a lot of overhead and product wasn't selling. They were way overstaffed. They had 20 offices when they only needed two."

In 2000, Mattel handed over its multibillion-dollar acquisition to another firm for $27.3 million and a share of its future profits. Mattel's purchase of TLC was eventually labelled by Businessweek as one of "the Worst Deals of All Time." Shareholders launched a class-action lawsuit, naming O'Leary as a defendant, accusing him of insider trading and of being part of a scheme to obscure TLC's financial state. In court documents, O'Leary denied the allegations.

In 2003, Mattel settled the lawsuit for $122 million—considered a "mega-settlement" by Cornerstone Research, a litigation consulting firm. O'Leary has sometimes been called a billionaire due to the size of the original deal. That overstates things: O'Leary in fact netted $11.2 million between his severance package and sale of his Mattel stock. The real money in the transaction was made by Bain and its partners.

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O'Leary has no regrets. He says that TLC's problems were due to Mattel's mismanagement after the sale went through. "The legacy of The Learning Company I'm pretty proud of," he says. "It's sort of an unfortunate transaction. There have been many others since like it, where you try to merge cultures. I look historically back at that deal, I'm very proud of what we created there. We had some fantastic assets in that company and great people too."

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After licking his wounds from the Mattel eviction, O'Leary eventually looked at getting back into business. His first forays foundered. Along with backers from Citigroup, he tried to buy the video-game company Atari. When that fell through, he attempted unsuccessfully to get a TV video-gaming channel off the ground. "I have had some great successes and great failures," concedes O'Leary. "I think every entrepreneur has. I try to learn from all of them."

In 2003, O'Leary invested in a self-storage company called StorageNow Holdings Inc., which he learned about from Toronto entrepreneur Reza Satchu. Satchu's high-school friend Jonathan Wheler had a concept but not much money—he needed investors. According to court documents, O'Leary put in about $500,000 and ended up with almost 13% of the company (all currency Canadian).

But the relationship among the three men deteriorated, and Wheler was dismissed in May, 2005. In a $10-million wrongful dismissal lawsuit, Wheler contends that Satchu and O'Leary altered an agreed-upon compensation deal, reducing his cut of the profits substantially. "It's unfortunate," says O'Leary. "[Wheler] is a good guy. There's nothing wrong with him—but no performance metrics that even he put in place did he meet. So we had to part ways." Wheler, on the other hand, believes that once O'Leary and Satchu realized how profitable Storage-Now was going to be, they pushed him out.

In a defence statement, Satchu and O'Leary deny Wheler's allegations and state Wheler was let go because he was inexperienced, incompetent and lacking in initiative. However, Wheler went on to develop a storage business using his original concept; his stake in that company is now worth $10 million.

In the end, O'Leary and Satchu were outpaced by their competitors, particularly InStorage Self Storage REIT. In 2006, StorageNow had 10 facilities and InStorage had two. One year later, InStorage had almost 30 and StorageNow still had 10. "We kind of blew past them in terms of growth," says InStorage's former CEO, Jim Tadeson. When InStorage offered to buy StorageNow in 2007, O'Leary and Satchu accepted (which required settling the lawsuit with Wheler). O'Leary argues that both firms were growing rapidly and they couldn't survive separately because the market wasn't big enough. InStorage bought StorageNow for $110 million, and O'Leary did well on his investment: He netted an estimated $4.5 million.

O'Leary did not do as well at Environmental Management Solutions Inc. (later called EnGlobe Inc.), an Ontario waste management firm. In 2004, O'Leary was asked to join the board (of which Mark McQueen was also a member). Soon after, the board fired the company's CEO. But the company's leadership was unable to arrest a decline in its fortunes brought on by an overambitious acquisition program; the stock price slid from close to $4 to 3.5 cents during O'Leary's term of almost five years as a director. When the company was bought by an Onex Corp. fund and privatized in 2011, shareholders received less than 30 cents per share. "I lost whatever my investment was in that," says O'Leary, who owned 500,000 shares. "Sometimes you win and sometimes you lose. ...It was a zero for me."

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In 2003, O'Leary cold-called Jack Fleischmann, general manager of Business News Network (then called ROBTv), and told Fleischmann he would be good on television. Fleischmann, who'd never heard of O'Leary, agreed to a meeting. O'Leary flew to Toronto from Boston the next day for an audition. "He absolutely totally from the moment he opened his mouth lit that camera up," recalls Fleischmann. The guy was a natural.

Eventually paired with Amanda Lang, O'Leary was given a show on BNN, SqueezePlay. It was a hit, thanks in part to O'Leary's derisive language and theatrics. "One day he had a box of dog biscuits with him and he began talking about some really bad stock as being a 'dog,' and he put the biscuits on the desk and began howling like a dog," Fleischmann remembers with a laugh. "It was very funny."

But O'Leary really became a star in 2006, when he was cast on Dragons' Den. O'Leary quickly established himself as the ingredient that contest-based reality shows cannot thrive without: a caustic judge. When one contestant burst into tears after being criticized by the dragons, O'Leary remarked, "Money doesn't care. Your tears don't add any value."

Dragons' Den debuted to weak ratings but soon grew into one of the most successful programs in CBC history, pulling in as many as two million viewers. And O'Leary is a big reason why, says Stuart Coxe, who hired O'Leary. "Editing that show without Kevin [would be] so hard," he says. "[The other dragons] play off of him. Even if he's not in on a pitch, they're waiting to see what he says."

The idea underpinning Dragons' Den is that the contestants receive money from the dragons if an on-air deal is agreed to. In reality, only a minority of deals actually close. And O'Leary has not always been astute in spotting the good ones. For example, in 2009, then-24-year-old Neil Currie and his business partner appeared on Dragons' Den pitching an online real-time stock quote website, seeking $150,000 for 15% of their company. O'Leary said he would finance them if they would hand over 50% of the company. The young entrepreneurs agreed, but after the show, "[O'Leary] wouldn't get on the phone with us," Currie says. "So there was no way we were going to give him 50% of our company." Meanwhile, the website's subscriber numbers continued to grow and it became a profitable enterprise. By the time CBC called a year later to see if a deal with O'Leary could be hammered out, Currie wasn't interested.

In 2011, the website did $4 million in sales. If O'Leary had bought in, he would have pocketed a dividend of almost $500,000 last year, says Currie, who is also now head of another enterprise, Stockpools.com. "Did he make the right decision? No, because he didn't take the time to pick up the phone.

"We did dodge a bullet, that's for sure…I'm glad he's not my business partner."

O'Leary responds by noting that so many deals come his way that he can't possibly participate in all of them. "I have seen literally thousands of deals," he says. "About a third of the deals close and about one in 17 make money. I think the national average for the venture-capital industry right now is achieving only one in 25."

And some Dragons' Den deals turn out differently than how they're first conceived. Wendy Johannson and Claudia Harvey invented a glove that makes it possible to work in the garden without ruining one's nails. They needed $50,000 when they went on the show in 2009. On-air, O'Leary agreed to give them the money in return for 3% of royalties. They eventually gave him 10% of their company, Dig It Apparel Inc. But the $50,000 never materialized. "When he said he'd like to have 10% for $50,000, I thought that would be a cash injection," says Harvey. Instead, O'Leary offered the pair a line of credit, which Dig It has not used. "He's never actually given us any money," says Harvey. "He is acting as a face for our company. We can use his name and we can say 'Kevin O'Leary is our business partner.' For that, he has 10% of our company." Harvey says they're delighted with O'Leary's participation and he has helped them expand their market and promoted their products.

O'Leary says Harvey and her partner wanted the money for inventory, which he didn't think was a wise use of his money. "If the Dig It girls called me today and asked me for the $50,000, they'd get it," he says. "I must say I am very proud of them."

In any event, the outcome of specific deals doesn't matter to ratings. O'Leary's presence on Dragons' Den was so compelling it caught the eye of Mark Burnett, the man behind Survivor and The Apprentice. When Burnett created an American version of Dragons' Den for ABC in 2009, he asked O'Leary to join the cast. Now entering its fourth season, Shark Tank has become another hit for both Burnett and O'Leary.

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As O'Leary became a household name, he occasionally quipped to associates that he needed to monetize the attention. Mulling over his options, he decided to put his weight behind an asset management company. In the wake of Ottawa's decision to tax income trusts, which had paid juicy yields to retail investors, O'Leary figured he could create dividend-oriented funds that targeted this income-starved group.

But there were two problems: O'Leary had publicly railed against mutual-fund fees for years, and he wasn't licensed to manage money.

O'Leary acknowledges that he regularly took mutual-fund managers to task for gouging investors, but he now argues for the benefits of professional money management. Among other things, a good manager helps investors diversify their holdings across stocks and bonds, he points out. "Think of the challenge for people that let themselves own 30% of their portfolio in RIM… if you only had a 5% weighting in it forced on you by an adviser, you suffered a lot less."

To solve the second problem, O'Leary partnered with Connor O'Brien, who was introduced to him by a consultant. Born in Montreal, O'Brien was a former Olympic skier for both Britain and Estonia, and he had worked on Wall Street in investment banking at Merrill Lynch and Lehman Brothers. O'Brien also had start-up experience, having created a private equity shop, Stanton Capital Corp., in 1995, with his wife, Louise Anne Poirier—who is now chief financial officer of O'Leary Funds—and a colleague in Peru.

Stanton morphed into an asset manager, and in 2004 it launched two hedge funds, managed by O'Brien. The fate of the Stanton International Equity and the Stanton Diversified Strategies funds, which has not been widely reported, may come as a surprise to investors in O'Leary Funds. Stanton's Diversified Strategies Fund blew up in late 2008, with massive losses amplified by the fund's use of leverage. Investors who had bought in 2007 or 2008 lost up to 70% of their money, according to a broker who put clients into the fund. Documents obtained by Report on Business magazine show that redemptions were suspended in January, 2009.

O'Brien does not deny that there was a meltdown in 2008 and 2009, but he adds that in the four years prior, investors earned a cumulative return of 30%, plus a significant tax break. He justifies the redemption freeze by saying matters were out of his hands. "We basically passed through, effectively, the policy decision of the bank," he says.

Turning to his new venture, O'Brien hashed out the division of labour with his partner: O'Leary would market the firm and generate investment ideas, while O'Brien would do the day-to-day portfolio management. O'Leary readily acknowledges that his partner is the "licensed money manager, and I'm just an investor." The two men split ownership of their joint venture 50-50, and both agreed on a specific investing strategy: "Get Paid While You Wait." This harked back to the mantra from O'Leary's mother about buying safe, conservative products and securities that either paid interest or dividends.

On July 30, 2008, O'Leary unveiled his venture with his "pay Daddy" spiel on SqueezePlay. His statement that he wouldn't grind capital meant the 5% annual yield his first fund promised would come from stellar returns, not from handing investors back their own money.

Early on, the funds flew off the shelves, in part because O'Leary launched closed-end funds, not regular mutual funds. Although the two can have similar management styles, they are sold differently. Mutual funds allow investors to buy from, and sell to, the fund company whenever they choose, but closed-end funds are marketed in one big push. Thereafter, no more units of the funds are issued. In most cases, investors who want to quit their positions must sell to someone else, much like they would a stock. There are opportunities to sell back to the fund company, but only on a few pre-set days each year.

Because all of the fund money is raised during the intense marketing period, investment advisers are enticed to deploy client money through hefty upfront commissions. O'Leary Funds paid 3% commissions—the industry standard—for client money invested in their funds. In about two years, these funds raised $1 billion, which means a whopping $30 million was paid to advisers.

Because early performance from portfolios such as the Global Infrastructure Fund was strong, the company was able to add new funds every two to five months. The offerings got bigger quickly, and each of four funds launched in 2009 raised over $110 million, with distributions that provided investors with annual yields between 6% and 9%. In 2010, O'Leary felt confident enough to float the idea that the company would hit $5 billion in assets within three years—and that it could be taken public. Ecstatic that his funds hit $1 billion in assets under management so quickly, O'Leary celebrated by buying O'Brien a Cartier Roadster watch.

But underlying the success, some questions lurked. Despite their claims that the funds would never touch investors' principal, O'Leary and O'Brien evidently started doing just that. In 2009, Dan Hallett, vice-president of asset management at Highview Financial Group and a highly regarded expert on mutual funds, wrote a report on the performance of the O'Leary Funds up until that point. Hallett noted that while the fund's website said investors are "paid by true portfolio yield," this promise was "over-the-top" given that 81% of the O'Leary Global Equity Income's 2008 distributions were being paid from return of capital—giving investors their own money.

Hallett now says this was too narrow a snapshot to gauge the funds' distribution policy or performance. But he says that although there have been good years and bad, if one examines O'Leary's Global Equity Income Fund (OGE) and its successor mutual fund from 2008 to the present, original investors will have seen their investments decline in value. "One-quarter of OGE's distributions have been return of capital," says Hallett. O'Leary Funds says the real figure is 17%. Hallett's 2009 analysis also showed that most of O'Leary's funds would have a hard time sustaining their distribution rates from returns in the portfolios alone. "[O'Leary's] stated investment philosophy was at odds with what they are doing," says Hallett. "My basic conclusion was there was a lot more marketing than real investment steak." When asked whether he would invest with O'Leary Funds today, Hallett said, "There are no funds they have that really jump out at me."

The returns of capital continue in certain funds today. The Yield Advantaged Convertible Debentures Fund returned $11.1 million of investors' money in 2011 because the fund couldn't generate the promised yield on its investments.

O'Leary admits that his firm has paid distributions out of investors' principal—on occasion. "Nobody wants grind, but it's something you have to do," he says.

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Regardless of the returns of capital, sales of O'Leary funds continued to skyrocket in 2010, adding over $500 million in new closed-end fund assets that year and launching its first set of mutual funds. Such success had Mark McQueen of Wellington Financial, a $500-million Bay Street venture debt fund, scratching his head. McQueen worries that "the bill of goods O'Leary has sold investors is bad for our industry." Not only do O'Leary Funds grind capital, he argues, but the high yields promised by the company are unsustainable in the long run.

Yield is a hot topic in the industry. In June, Barry Allan, one of the most venerable bond managers on Bay Street and someone who advises on over $6 billion of debt assets, announced that he had to cut distributions on his flagship fund. The portfolio, he said on a conference call, was set up in 2009 when high-yield bonds paid 14% annually, making it easy to pay investors a targeted 8%. But with interest rates so low, it simply wasn't possible any more. Allan sounded a warning for the entire market: "People are reaching for yield and taking risks that they don't want to take."

If a dean of the industry admits 8% distributions on a high-yield portfolio are hard to deliver, how can O'Leary Funds generate its distributions? O'Brien says that good yield opportunities exist—it's just a matter of finding them. Asked whether he agrees with Allan's claims, he would neither support nor refute them. Instead, he said it's hard to compare between funds, because "every single portfolio [manager] has a different mandate, a different size, a different reality that they live with."

That answer may not assuage clients who have already spotted oddities in their portfolio mix. Recently, a well-respected adviser noticed that in the Yield Advantaged Convertible Debentures Fund, O'Brien purchased a "convert"—a bond that carries the right to be converted into common shares—for about $160, relative to its starting value of $100. At such a rich premium, these bonds no longer trade like stable investments; they swing like speculative stocks. Back in November, 2010, an industry veteran walked into an O'Leary Funds presentation and heard O'Brien touting his holdings of obscure securities, such as Brazilian bonds that paid 11% interest. Since risk is compensated through yield, a rate of 11% suggests these bonds are very speculative. Asked about these types of investments, O'Brien didn't deny they were made, but says that his exposure in these areas amounts to "very little, very, very little."

Some people aren't buying the official story, including five investment advisers who manage billions of dollars of assets and spoke to Report on Business magazine on the condition of anonymity because they work for Big Six banks that have strict media policies. Worried that O'Brien isn't doing what O'Leary preaches to retail investors, some of them have dialled the dragon directly to relay their fears. One member of this group recalls, "I said to Kevin, 'You're supposed to be the smartest businessman in the world. How'd you end up in this situation?'"

Former employees of O'Leary Funds who have intimate knowledge of operations say that complaints over inappropriate investments aren't the only frustrations voiced by a plethora of advisers who have called in the past year. Performance is an even bigger issue. Two funds launched in the first half of 2011, the Yield Advantage Convertible Debentures Fund and the U.S. Strategic Yield Advantaged Fund, have lost more than 20% each, before distributions. The advisers want to know how O'Leary's supposedly safe funds can lose so much money so quickly.

Their frustrations have hurt sales. The Floating Rate Income Fund sold only $67 million in August, 2011, and the Canadian Diversified Income Fund only $26 million last December—while O'Leary funds launched in 2009 and 2010 easily sold over $100 million each. O'Leary argues that the closed-end market in general has slowed, and that the firm has seen solid success with some mutual funds, such as its Canadian Bond Yield Fund.

But over all, advisers are clearly pulling their money. Earlier this year, McQueen wrote on his blog that redemptions seemed high at O'Leary Funds, based on last year's publicly available financial reports. He was right: It turns out that investors pulled $253 million last year, amounting to about 21% of all assets under management. This trend appears to have continued since January. The firm's assets under management stood at $1.2 billion at the end of 2011. The figure had slipped by early September to a little over $1 billion, even though the market had moved higher in the interim. (That said, assets under management can be a tricky indicator because the number rises when the market does, even though no new money may be coming in from investors.)

Of course, many firms in the fund industry, not just O'Leary, have been hurting. In June and July, giant AGF Management Ltd. reported a 5% drop in assets under management. However, industry money is flowing out of equity funds and into bond and balanced funds. In other words, it's flowing to the kinds of funds that O'Leary sells, yet the firm still has net redemptions. A big-name broker, who was one of the very first investors in O'Leary Funds back in 2008, is so frustrated that he's decided to pull all of his clients' money. Net redemptions in this environment "means they can't focus on making people money," the broker says. "They have to essentially put out fires all day long, and [focus on] raising money when it may not be the best time to be selling to the market."

O'Leary Funds undoubtedly has relationships with hundreds of brokers across the country, and some aren't worried at all. But there are some that O'Leary and O'Brien must now personally reassure—people like David Chellew, who works at Burgeonvest Bick Securities Ltd. in Toronto. Back in 2010, Chellew publicly said he would not recommend O'Leary Funds to his clients, since they lacked a long-term track record. Not long afterward, Chellew and some of his colleagues met with O'Leary, whom they grilled for two hours. Chellew came away from that meeting impressed but still unwilling to invest, taking a wait-and-see position. However, after the redemption issue blew up this year, he became skeptical again.

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No one is sounding the death knell for O'Leary Funds. But former employees say internal operations need to change if the firm is going to attract talent.

Employee turnover is high—and some of those who have left are disgruntled because, they say, they were promised equity that never materialized. O'Brien says some equity has been issued: "The equity is something that is granted to key employees that have made and continue to make a significant positive contribution to the value of the business." He and O'Leary now own 45% of the business each, he says, since there is an equity pool of 10% for employees.

On the record, O'Leary and O'Brien have downplayed employee turnover rates, arguing they are the norm in any start-up. They have also firmly denied that the firm has been shopped around. But one thing they do not deny is the potential for changing their product mix. The two men started out by exclusively selling closed-end funds, and lately they've been targeting mutual funds, yet several sources noted that O'Leary has been meeting with numerous people in the industry about the prospect of launching exchange traded funds, or ETFs, that charge extremely low fees. "If [investors] want to buy a product like that, we'll be there," O'Leary says.

To some, an emphasis on ETFs would mean the still-young firm would have changed its product mix, and O'Leary his investment philosophy, not once but twice. At the moment, the two partners are simply weighing the option. They know the more pressing concern is returns. Weak results will only encourage more investors to flee. No matter how hard they market the funds, the numbers don't lie. O'Leary knows investors value the cold, hard truth.

"Ultimately, in the end, it's performance. That's it. There's nothing else. It doesn't matter what the marketing is, or anything else. Are you performing? Are you doing what you said you were going to do?"

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O'Leary and the CBC: made for each other

When the CBC hired Richard Stursberg as vice-president of English Television in 2004 to revive the public broadcaster's anemic ratings, among his remedies was to improve the network's business coverage and shift the perception that it was too dependent on a leftish downtown-Toronto mindset. By putting Kevin O'Leary on the air, Stursberg solved these issues in one fell swoop. "He's very clever, he's quick, he's opinionated, which is always entertaining," says Stursberg, who was let go by the CBC two years ago. "All of that works really well on TV.…The fact that he was relatively right-wing was not a disadvantage."

While CBC programs that were sometimes critical of business—notably Marketplace and the fifth estate—had their budgets cut and seasons curtailed during Stursberg's tenure, O'Leary's on-air time ballooned. First, there was Dragons' Den; then, in 2009, O'Leary and co-host Amanda Lang moved their show over from Business News Network to CBC Newsworld and created The Lang & O'Leary Exchange, which airs every weekday. Finally, this past year brought Redemption Inc., O'Leary's short-lived effort to apply the Dragons' Den concept to former convicts.

O'Leary's presence on the CBC has run up against the network's own standards and practices about the neutrality of on-air staff and how they should conduct themselves professionally. But O'Leary is said to be a different case. "Kevin O'Leary is not a journalist," explains Kirstine Stewart, CBC's executive vice-president of English Services. "He works for us as a commentator. He gives on-air opinion like Don Cherry and Rick Mercer." (Except, one could note, that the only business Cherry and Mercer are in is being entertainers.)

In October, 2011, The Lang & O'Leary Exchange had Pulitzer Prize-winning former New York Times correspondent Chris Hedges on as a guest to speak about the Occupy Wall Street movement. O'Leary called those activists "nothing burgers" who "can't even name the names of the firms they're protesting against." Hedges objected, pointing out the role of Wall Street in causing the credit crisis and the ensuing global recession. In his retort, O'Leary attributed ideas to Hedges that he hadn't bruited himself: "Listen, don't take this the wrong way, but you sound like a left-wing nutbar. If you want to shut down every corporation, every bank, where are you going to get a job? Where are you going to work? Where's the economy going to go?"

O'Leary's remarks inspired complaints to the CBC ombudsman, who put out a report noting that Hedges was issued a private apology by the show's executive producer and that O'Leary was instructed to refrain from name-calling.

O'Leary has also used his CBC forum to attack unions. He's called them a "parasite," and declared, "Here's the right thing to do: Elect me as prime minister for 15 minutes. I will make unions illegal. Anybody who remains a union member will be thrown in jail." The CBC stood by O'Leary's comments and did not reprimand him, with the ombudsman noting that the network "has stationed O'Leary as a contracted commentator somewhat outside the ambit of CBC Journalistic Standards and Practices but kept the program [The Lang & O'Leary Exchange] within that policy."

In 2010, during a discussion with Lang about the implications of the proposed takeover of PotashCorp by Australian-based BHP Billiton, O'Leary opined that shareholders' interests should rank above the desires of Saskatchewan's citizenry. When Lang said some of the province's residents might disagree, O'Leary retorted: "You know, you are an Indian giver with a forked tongue. You sold these rights to somebody who paid hard cash for them. Now you don't like it any more." The CBC agreed that O'Leary's remarks were offensive and violated their policies about the characterization of minorities. O'Leary apologized in a press release after the ombudsman reprimanded him. /Bruce Livesey

From 2001 to 2009, Bruce Livesey was an investigative journalist at CBC programs the fifth estate, CBC News Sunday and The National

Editor's note: This article has been changed to provide further information on distributions of the O'Leary Global Equity Income Fund and to correct the interest rate on Brazilian bonds owned by O'Leary Funds.