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Portus Co-Founder Mendelson Pleads Guilty to Fraud

Date: Tuesday, November 20, 2007
Author: Joe Schneider, Bloomberg

Nov. 19 (Bloomberg) -- Michael Mendelson, co-founder of Portus Alternative Asset Management Inc., pleaded guilty to one count of fraud and was sentenced to two years in prison for his part in the collapse of the C$800 million ($812 million) firm.

Mendelson, 41, who entered the plea today during a hearing in the Ontario Court of Justice in Toronto, was accused with Portus co-founder Boaz Manor of misusing investor money. Mendelson admitted to taking part in the misappropriation of C$106 million ($108 million).

``To anybody who was negatively impacted by the creation of Portus, I deeply apologize,'' Mendelson said at today's hearing. ``I take responsibility for my actions.''

Mendelson, who was handcuffed in the courtroom and taken to a Toronto jail before his transfer to a federal facility, will be eligible for day parole in six months and full parole in eight months under Canadian rules. He struck a deal with prosecutors for the two-year sentence, agreeing to testify against Manor.

``I don't take parole into consideration'' when asking for a sentence, prosecutor John Pearson said in an interview after the hearing. ``Neither does the court of appeal.''

Portus, founded in 2002, attracted about 26,000 investors. The hedge fund collapsed after Ontario regulators ordered a freeze on new investments because the company didn't keep proper records and failed to deliver clients' statements.

Manulife Arrangement

The firm's growth was attributed to its arrangements with companies such as Manulife Financial Corp., Canada's biggest insurer, which referred clients for a fee. Manulife refunded its clients and is Portus's biggest creditor.

Mendelson and Manor diverted about 14 percent of investors' deposits and used some of the money to pay salaries and keep the company operating, Pearson said in a statement of facts agreed to by Mendelson.

Manor transferred about C$52 million to various accounts offshore, which he tapped to pay lawyers and buy diamonds after he fled Canada for Israel, following the fund's collapse, KPMG LLP, the fund's trustee, said in a report.

KPMG recovered all but C$18 million of the money. The investigation has cost C$16 million so far.

The Ontario Securities Commission also agreed to drop criminal charges against Mendelson, West said. Mendelson will agree to a lifetime ban from the securities industry, he said. Financial penalties are still being negotiated, West said.

`Transformed individual'

Mendelson pleaded for leniency in the sentencing, with his lawyer Peter West saying he is a ``transformed individual.'' Mendelson has set up a course at his synagogue and once out of jail will teach how to ethically manage companies, West said.

``It's a huge amount of funds that was put at risk,'' Judge Robert Bigelow said.

A sentence of about four years would have been appropriate, the judge said had it not been for the mitigating factors, including Mendelson's agreement to cooperate with police and prosecutors.

``It's clear Mr. Mendelson has accepted responsibility,'' Bigelow said. ``He has chosen to change his life.''

Manor, who was arrested at Toronto's Pearson International Airport when returned to Canada from Israel Nov. 13, was released on a C$250,000 bond. His next court appearance is scheduled for Nov. 27.

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