Portus misused funds- KPMG: Fund used $94.5M for fees, expenses -- not investments

Date: Tuesday, September 20, 2005
Author: Wojtek Dabrowski- Financial Post

Portus Alternative Asset Management Inc. allegedly used $95.4-million of investors' money to pay its expenses, referral fees to brokers and to fund the redemptions of other investors --similar to the notorious schemes operated by Charles Ponzi.

The latest report of KPMG Inc., Portus's court-appointed receiver, reveals that, on average, the collapsed hedge-fund firm deducted 13.3 cents of every dollar placed with it by investors for these purposes, instead of investing the money.

About a third of this amount was used for expenses, a third for referral fees and the remainder of new investor money was used to pay redemptions. A source familiar with the situation yesterday likened Portus to a "Ponzi scheme."

Mr. Ponzi, who operated in the United States in the 1920s, essentially made a pyramid scheme appear legitimate by paying investors with returns funded by other investors' money.

Portus was shut down by regulators in February. One of its co-founders, Boaz Manor, later left the country for Israel. The latest information shows the Toronto-based firm had more than 30,000 client accounts and in excess of $800-million invested in it. The RCMP has begun a criminal investigation of the firm's implosion and its aftermath.

Most investors were Canadian, but records of clients from Saudi Arabia, Oman, Nepal, Thailand, Kuwait, Australia and Venezuela have also been found.

The report published by KPMG yesterday depicted Portus as operating very differently from how it purported to operate: In many cases, the investment structure offered by Portus was implemented only partially; in other cases, not at all.

Portus, according to KPMG's report, routinely pooled often-unrelated millions of investor dollars, with frequent transfers offshore, the receiver's report states. This has made it difficult to trace the flow of funds. Tens of millions in investor funds was also flowed through Lines Overseas Management Ltd., or LOM, a Bermuda-based brokerage that was being investigated by U.S. regulators over allegations of fraud and market manipulation.

Also, LOM told KPMG that prior to March 20, 2004, the brokerage "would make book entries on behalf of various Portus group entities, either showing monies or shares being transferred through a series of brokerage accounts," the report states.

However, "the receiver understands from LOM that there was no actual purchase or sale of Canadian securities in the market by LOM" on Portus's behalf, the report adds. "The receiver is seeking additional information on this issue."

The so-called BancNote Trust series of offerings -- there were 12 issued by Portus between July, 2003, and February of this year -- were almost never properly documented, the KPMG report states. For instance, when Portus tried to have trust documents executed for the majority of the offerings, Computershare Trust Company of Canada refused to do so "due to inquiries in relation to [Portus] that were then being made by the Canadian securities regulatory authorities."

It is understood that it could be years before investors recover their money from Portus. KPMG believes the best way to proceed is to pool the assets it has found, restructure the principal-protected notes that Portus bought on investors' behalf into more liquid investments and then distribute the money to creditors.

The process will involve bankruptcy proceedings, a call for claims and meetings and negotiations with creditors. It is anticipated to be lengthy. For instance, it could be early next year before the first meeting of creditors is held.

Duff Young, a well-known fund analyst retained by Portus as a consultant before its collapse, has said he attempted to raise concerns about the firm with the Ontario Securities Commission as far back as December, 2003, but his telephone calls were not returned.

Wendy Dey, an OSC spokeswoman, said yesterday there is only a record of a call from Mr. Young about Portus in February of this year. That call was returned with a voicemail, she said. The OSC has spoken to Mr. Young about his claims and is waiting to hear back from him. Mr. Young has said he has notes that back up his claims.

Meanwhile, Mr. Manor has been accused of misappropriating millions of investors' money by KPMG. Through his lawyers, he has insisted he is innocent and too ill to be interviewed by the receiver. There was little in KPMG's latest report regarding his status or the receiver's efforts in Israel.