Portus Investors Sue Law, Accounting Firms Over Fees

Date: Friday, October 6, 2006
Author: Joe Schneider, Bloomberg.com

Portus Alternative Asset Management Inc. investors sued two Toronto law firms and the accounting firm PricewaterhouseCoopers LLP, demanding the return of fees they received from the bankrupt Canadian hedge fund.

Portus probably paid between C$1 million ($888,570) and C$3 million to the law firms of Blake, Cassels & Graydon and McMillan Binch Mendelsohn, as well as PricewaterhouseCoopers, lawyer Joel Vale said today in an interview. Vale is representing Garry Hurst, the lead plaintiff in the proposed class actions in Ontario Superior Court.

The law firms should have known ``that at the same time they were receiving legal fees from Portus from 2003, those payments of legal fees improperly came from Portus funds which were trust monies,'' the complaint against McMillan Binch said.

Portus, founded in 2002 by Boaz Manor and Michael Mendelson, became one of Canada's fastest-growing hedge funds, with about 26,000 customers who invested C$800 million. The Ontario Securities Commission sued Portus over questionable transactions in March 2005, about a year before it was placed in bankruptcy. Trustee KPMG LLP is still trying to find as much as $18 million missing from Portus accounts.

Keith Cassidy, executive director at McMillan Binch, declined to comment. Jennifer Gery, an outside spokeswoman for New York-based PricewaterhouseCoopers, didn't respond to a request for comment.

``We don't believe there is any merit to the lawsuit,'' said Blake, Cassels spokeswoman Yula Economopoulos. ``We will vigorously defend it.''

Lead Counsel

McMillan Binch helped prepare Portus's promotional literature and contracts, and Blake, Cassels was the hedge fund's lead counsel and oversaw its structure, the complaints say. Companies referred clients to Portus in exchange for fees, which the Ontario Securities Commission said totaled about C$90 million, or 12 percent of the capital invested in the hedge fund.

Manulife, Canada's biggest insurer, refunded its clients' investments and is now Portus's biggest creditor.

Vale earlier sued Berkshire Securities Inc. to recover fees paid by Portus. Ontario Superior Court Judge Alexandra Hoy certified the suit as a class action Sept. 12 and approved a settlement under which Berkshire agreed to pay C$600,000 to the investors and C$300,000 to their lawyers.

Among the missing assets sought by KPMG are $8.8 million in diamonds that Manor arranged to buy in Hong Kong last year. Manor, who fled to Israel after the fund collapsed, was ordered by a court in that country to return the diamonds or face jail.

Missing Diamonds

Manor claims private banker Yitzhak Toib has the diamonds and sued him in Israel to recover them, KPMG lawyer James Grout said at a hearing in Toronto today. The Israeli judge hearing the case disqualified himself because he ruled against Toib in the past, and KPMG is waiting for a hearing to be scheduled before another judge, Grout said.

The class action suits are Between Garry Hurst and McMillan Binch, Ontario Superior Court of Justice (Toronto), Case No.: 06-cv-319555CP; Garry Hurst and Blake, Cassels & Graydon, Ontario Superior Court of Justice (Toronto), Case No.: 06-cv- 319679; Garry Hurst and PricewaterhouseCoopers (PwC) LLP, Canada, Ontario Superior Court of Justice (Toronto), Case No.: 06-cv-319818.

To contact the reporter on this story: Joe Schneider in Toronto at jschneider5@bloomberg.net .