Some Portus investors may cash in soon

Date: Friday, June 29, 2007
Author: Scott Blythe, Advisor.ca

Unitholders in one of the investments in the collapsed Portus Group may soon be able to retrieve what's left of their money as the receiver moves to wind up the investment.

Portus Group had three investment vehicles: two managed accounts that were to buy both Canadian and U.S.-dollar denominated principal-protected notes, and the Market-Neutral Preservation Fund, a hedge fund that raised money through an offering memorandum. There were 328 unitholders in MNPF, compared to 26,000 investors in the managed accounts.

Portus Group receiver KPMG managed to trace the ownership stakes in MNPF; investors may soon be able to claim $8.81 per unit. KPMG has applied to Ontario Superior Court to wind up the fund and distribute the proceeds to investors. The $8.81 is a preliminary figure that does not include taxes, interest or professional costs.

But because Portus commingled funds for all investments, there was a dispute over whether the assets in the Market-Neutral Preservation Fund belonged to all Portus Group investors, or just the fund's unitholders.

But getting to a the point of unwinding the investor positions has proven complex, in part because of the structure used to shield unitholders from taxable distributions, and in part because of the commingling of MNPF and managed account investor money.

Investors originally purchased $19.5 million in units of the fund. All but $2.85 million was invested; $200,000 was used to fund redemptions and $2.65 million was diverted by Portus for expenses.

In order to shield investors from regular distributions, MNPF entered into a forward agreement with Royal Bank. It purchased four non-dividend-paying stocks whose returns would be swapped for the returns generated by an investment vehicle, MNB Trust, owned by RBC. MNB Trust bought a zero-coupon bond for $13.5 million, plus call options from Société Générale for $2.85 million.

When the Ontario Securities Commission froze further subscriptions to Portus, Portus cashed in the zero-coupon bond for $14.9 million. That money has been sitting in a prime brokerage account.

The call options are now valued at $1.5 million. If liquidated before the end of June, however, they would have incurred a redemption penalty of 2%, or $280,000 on an option face value of $14 million. After consultation, the receiver decided to hang on to the options until they could be cashed without penalty.

On the other hand, in the basket of non-dividend-paying funds, two of the stocks, ATI and Precision Drilling, have undergone a change in status. ATI was bought out by Advanced Micro Devices, which resulted in a taxable $3.8 million gain for MNPF unitholders.

Meanwhile, Precision Drilling converted to an income trust. The receiver sold half the shares for Research In Motion shares; the other half contributed to a partial settlement of the forward agreement, netting $2.1 million, which is now collecting taxable interest.

Further muddying the unitholder stake in MNPF's units was the commingling of $106 million of Portus investor money in MNPF's bank accounts. In all, $529 million in investor money flowed through MNPF's accounts.

In a settlement with representatives of the managed account owners, representatives of the MNPF unitholders agreed to pay $3.8 million for funds diverted from the managed account owners to pay for MNPF redemptions and fees, as well as $540,000 to cover receivership costs.

Filed by Scot Blythe, Advisor.ca, scot.blythe@advisor.rogers.com.