Canada regulator says Portus scandal "black mark"

Date: Tuesday, May 10, 2005
Author: Cameron French- Reuters

TORONTO, May 10 (Reuters) - A regulatory scandal involving Portus Asset Management Inc. has become a "black mark" on Canada's hedge fund industry, the head of the country's most powerful securities regulator said on Tuesday.

The firm was put into receivership in March amid regulatory investigations into its sales practices, freezing its assets and leaving thousands of investors in the lurch. The scandal has also cast an unwanted glare on the self-regulated asset class, which has seen huge growth in recent years.

David Brown, who on June 30 will finish his seven-year term as chairman of the Ontario Securities Commission, said a large chunk of the blame belongs to investment dealers who failed to make sure the investments were suitable for their clients.

"The industry has a black mark on it -- and it has to start looking very hard at itself to ensure that it doesn't become an indelible stain," he told a business audience in Toronto.

Investigators have been busy trying unravel Portus's complicated structure, hoping to gauge exactly where client money was invested. Adding to the drama was the abrupt departure of co-founder Boaz Manor, who fled to Israel shortly after the company was put into receivership.

Brown noted that Portus was able to sell about C$750 million ($605 million) of its complex products to about 26,000 retail clients over a relatively brief period, and suggested that might be due to the high referral fees the firm offered to dealers to send clients its way.

"We're working with the SROs (self-regulatory organizations) to look at how this product got into the hands of so many people in such a short period of time," he told reporters after his speech.

"These were fees being paid for referrals, and we need to understand whether that indeed was a factor in such a broad penetration of this product."

Brown said it is up to the SROs to make sure dealers understand the products they are recommending -- particularly as retail investors often dive into plays that used to be the domain of more sophisticated, professional investors.

INDUSTRY CHILL

The Portus collapse, and more recent troubles at Montreal-based asset manager Norshield, have put a chill on the industry, fund managers say.

Norshield surprised the market last week by suspending redemptions on about C$370 million of its hedge funds.

The manager blamed a sudden bombardment of heavy redemptions on allegations surrounding its dealings with the collapsed children's television producer Cinar Group.

"What we're hearing is there's been a big chill in the industry, first with Portus, and most recently with Norshield, which, while two completely different cases, with one coming straight after the other, people lump them all together," said Gavin Graham, vice-president and director of investments and Guardian Group of Funds.

Brown also noted that the circumstances surrounding Norshield and Portus were completely different, saying Norshield's products were sold only to investment professionals and not retail investors.