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Provincial Court Releases Some Hardship Funds in Portus Affair

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TORONTO (–An Ontario court ordered the creation of a hardship committee for investors in the Portus hedge fund group, and called for the examination of one of the group’s key salesman, as the firm’s tangled affairs still have investigators shaking their heads.

In an order April 27, Judge C.L. Campbell authorized the release of some of the money now in the control of KPMG LLP, Portus’s receiver, but the order specifies that the aggregate of hardship distributions are not to exceed C$10 million (US$8 million).

This decree followed the court’s receipt of KPMG’s fourth report on Portus’s business records and assets. That report said that as many as 267 individual investors had been scheduled to receive periodic prescheduled payments from Portus between Feb. 18 and March 3.

They didn’t receive that money. Most Portus group employees were terminated on Feb. 17.

KPMG’s fourth report also states that according to Paul Ho, Portus’s district vice president for sales and service, the sales group was ordered on Feb. 17 not to provide to anyone any information about one member of the group, Portus Alternative Asset Management Inc. (British Virgin Islands), also known as Portus BVI. The report says that KPMG has been frustrated in its efforts to learn more about the group’s investment structure, because Mr. Ho won’t violate these instructions in the absence of a court order.

Accordingly, the April 27 order authorizing a hardship committee also provided for a deposition of Mr. Ho “respecting his knowledge of the affairs of the Respondents.”

Questions in Nova Scotia

Portus, founded in 2003, was the brainchild of Boaz Manor and Michael Mendelson. Over-aggressive marketing tactics lie at the heart of the developing controversy. The staff of the Nova Scotia Securities Commission apparently became concerned in the summer of 2004 that some investors were getting the impression that their money invested through Portus was guaranteed. Staff of the NSSC asked Portus executives at a meeting in Halifax last summer to explain what they were selling, and the answers appear to have been unsatisfactory.

The investigation inspired inquiries by other provincial securities authorities, which collectively unearthed increasing evidence that Portus was ignoring distinctions as to the suitability or unsuitability of investors for its products.

It is also becoming apparent that some investment advisers referred clients to Portus in exchange for referral fees, and that in some cases the referral and the fees were “off book,” meaning the referrers’ employers–brokerage houses–were not informed of the arrangement.

Portus Alternative Asset Management Inc., Toronto, which formerly was known as Paradigm, had an image before the freeze orders as an aggressive litigator. (Portus Asset Management Inc. is the investment adviser, whereas Portus Alternative Asset Management Inc. is the portfolio manager.) In May 2003, for example, Portus Alternative Asset Management brought two lawsuits against competitors alleging “injurious falsehoods” in each case–one against Pescara Partners Inc. and the other against BluMont Capital Corp., both of Toronto. The BluMont lawsuit also named as a defendant that company’s chief executive, Toreigh Stuart. Both cases settled out of court.

Steve Kangas, managing director at BluMont, said this week that the lawsuit came about because Blumont became “aware of marketing material in Power Point style that portrayed it and other competitors unfairly.” The Paradigm/Portus marketers involved in a presentation would cherry-pick the worst performing fund in a competitor’s stable and compare their own results (even the results of a fund with a different strategy) to that. Mr. Stuart took offence at this sort of proceeding, and the lawsuit resulted.

Mr. Kangas said that the settlement was made to avoid to avoid the spending of time and expense on a lawsuit and didn’t involve the payment of alleged damages by the defendant, although BluMont did make a small reimbursement for legal costs and a formal apology. He also suggested that Paradigm/Portus’ aggressive use of litigation may have helped silence other potential critics and allowed Portus to continue a policy of very aggressive marketing for as long as it did.

Heck Breaks Loose

On Feb. 2, the Ontario Securities Commission forbade Portus from opening any new client accounts, or accepting any new funds or other assets for investment for any existing accounts.

Although Ontario’s commission has the greatest prominence, this was part of a concerted effort by several provincial governments. On the same day, the Prince Edward Island Securities Office, for example, issued an identical order, after finding that more than 60 of Portus’s 26,000 clients reside on that island.

On Feb. 10, the OSC ordered the Portus group to stop trading in any securities, except with respect to preauthorized periodic withdrawals. It also made certain findings with regard to the involvement of co-founder Boaz Manor in the dealings that had gotten it into trouble.

Portus transacted with two offshore counterparties to create a position whereby certain Canadian equities were held in the name of one of its clients by one of the offshore counterparties, the OSC found. Portus then transacted in two derivatives to provide the client with the return on the five- to seven-year term notes issued by Soci?t? G?n?rale (Canada) in exchange for the return on the Canadian equities.

In February, when the OSC was investigating this matter, the notes were held in an account over which Boaz Manor had trading authority. Accordingly, it prohibited not only Portus, but also Mr. Manor separately, from authorizing, directing or executing trades in the notes.

On March 4, the Ontario Superior Court, on application from the OSC, appointed KPMG receiver of all the “assets” of Portus Alternative Asset Management Inc., Portus Asset Management Inc., and BancNote Corp.

April 6, a good Canadian financial scandal became a juicy international incident when KPMG reported that Boaz Manor had left the country–and had renewed his residency in Israel just days before KPMG hoped to interview him.

Mr. Manor has since said that he will cooperate with KPMG and Canadian authorities, but will do so from Israel, where he has counsel. He said that he would pay the costs of travel from Canada and accommodation for those who need to inquire of him about Portus practices and assets.

Greg Monforton & Partners, Windsor, Ontario, is representing investors in a class action lawsuit. On that law firm’s (), Mr. Monforton asserts that the fees paid in sales commissions by Portus have been “unusually high and likely were not disclosed to investors.”

Contact Bob Keane with questions or comments at: [email protected].


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