Portus dealers to pool fees

Date: Wednesday, June 29, 2005
Author: Theresa Tedesco- Financial Post

A group of investment dealers who referred clients to now-defunct Portus Alternative Asset Management Inc. have agreed to create pools of cash to offset potential losses resulting from investments in the once high-flying hedge fund firm.

However, the Ontario Securities Commission, Canada's largest securities regulator, has not endorsed the voluntary plan.

About 21 dealers of a potential 50 have committed to the unprecedented industry initiative, spearheaded by Berkshire Group.

Investment firms and their sales representatives are required to pool the referral and trailer fees they received -- estimated to be $7.5-million -- for steering their clients into Portus' now-controversial investment BancNote trusts.

Those dealers and sales advisors who voluntarily signed the commitment release, now being circulated, admit they referred clients to open accounts and invest with Portus "in an honest exercise of our professional judgment."

However, as a result of ongoing investigations by securities regulators into their sales and compliance practices in the wake of the collapse of Portus, the dealers are now concerned "that products marketed by Portus were not as represented by Portus."

Still, the undertaking "is not an admission of any breach of duty or of any wrongdoing" by anyone who signs the commitment sheet.

"We've had overwhelming support from sales advisors," said Julie Clarke, senior counsel at Berkshire. "They don't want to be seen as having taken fees from a product that appears to have been so misrepresented. They don't want to be seen to have benefitted by the conduct of Portus in respect to those client accounts."

The initiative is two-pronged. The firms will pool the fees they earned from Portus. And the sales advisors who referred clients will be asked to return the fees they earned and place them into a second pool.

The plan is to obtain expert investment management advice for the Portus investments held by all clients. Ultimately, the purpose is to offset, on a pro rata basis, all or part of potential capital losses in those Portus investments once they mature.

"There's a strong possibility that these funds will go back to the clients if there is a shortfall," Ms. Clarke said.

Referring to the collapse of Portus, and the ensuing allegations of misappropriation of funds by one of Portus' principals, as "a black mark on the industry," she said Berkshire has worked closely with the Ontario Securities Commission, the Mutual Fund Dealers Association and the Investment Dealers Association on the initiative.

However, Michael Watson, director of enforcement at the OSC, said the country's senior securities regulator had "no role in approving it whatsoever."

Mr. Watson confirmed the provincial regulator is aware of the industry proposal and that it would be a "a factor we'll take into consideration in determining what our future action will be."

Some industry observers say the dealers are hoping their initiative will win favour with regulators currently probing the demise of Portus. The Toronto-based hedge fund firm had boasted 26,000 investors and more than $730-million in assets under management before securities regulators shut it down in February. While the OSC, the IDA and MFDA continue their probes, investor funds remain frozen.

The OSC placed Portus into court appointed receivership under KPMG LLP, which has been attempting to unravel a complex web of domestic and international entities. It is still not clear that regulators or court-appointed receiver know exactly where investors' money went and how much of it was funnelled offshore.

Mr. Watson stated publicly that the OSC doesn't attribute Portus's troubles to lack of regulation, rather he questioned whether the dealers and advisors who referred their clients to Portus investments understood the complex products and properly considered their suitability to the clients. "The next step is holding those people to account and the industry is hoping their plan will keep the regulators off their backs," said an industry observer who asked not to be named.

Berkshire is said to have represented about 9% of the referrals to Portus -- the second most of any dealer. Manulife Securities International Ltd., a subsidiary of the giant insurer, referred $240-million -- the most of any dealer -- to Portus. Manulife has already promised to guarantee the principal investments of those clients it referred to the embattled hedge fund firm.