Hedge fund Portus to liquidate

Date: Tuesday, September 20, 2005
Author: Matt Miller- TheDeal.com

Portus Alternative Asset Management Inc., the Canadian hedge fund that collapsed earlier this year and has been under government-ordered receivership since March, is headed for liquidation. Although Portus had 18 separate investment funds, its receiver will push for a single bankruptcy overseen by a single trustee. All the assets would be thrown into one pool. All investors would divvy up proceeds on a pro-rata basis.

Receiver KPMG Inc. made known its preference in its latest status report on Portus released this week. A multistep bankruptcy process should begin next week, when lawyers for the receiver are scheduled to ask an Ontario Supreme Court justice to approve a creditor notification scheme. If creditors don't derail the plan through legal challenges, the bankruptcy itself could come as early as the first quarter of 2006.

Portus is the largest hedge fund scandal in Canadian history. The Toronto-based group marketed heavily throughout Canada and offshore, appealing primarily to small, retail investors. By the time Ontario authorities froze operations in February, more than 30,000 account holders had invested a total of almost $700 million in Portus funds. The vast majority of clients invested less than C$75,000 ($64,000). According to the report, KPMG has located and secured about $600 million of these funds. The vast bulk — C$529.3 million at cost — is in secured Société Générale SA bank notes, with maturity dates from 2008 to 2011.

Tens of millions of dollars are still missing, however. In one instance, investigators traced $11 million to diamond merchants in Hong Kong, where the money disappeared. Boaz Manor, Portus' controlling co-founder, fled to Israel days after the collapse. He has communicated only through his Israeli lawyer, who claims Manor is too sick to tell his side of the story.

This latest report also provides further details of the fund's operations. Most notably, the receiver discovered that Portus thoroughly commingled monies from its different funds. The company had no legally binding trust agreements for most of its investment vehicles. It funded company operations, commissions and early redemptions by routinely skimming money from clients' accounts before any investments were made. Portus took an average of 13.3% off the top of these investments.

It was, in the words of one source close to the receivership process, a "classic Ponzi scheme." The source added that Portus had no means of sustaining operations without first peeling off investor funds.

Also, Portus failed to invest in many of the instruments it said it would. Those included a basket of Canadian securities tied to what was supposed to be the basic, underlying hedge for the various trust funds. And it kept tens of millions of dollars parked in offshore banks. In one case, the company kept $3.1 million in a Swiss safety deposit box.

If and when Portus does go bankrupt, the largest creditor by far will be Manulife Financial Corp., the insurance giant. That's because it assumed responsibility for C$246 million worth of investments in Portus funds made by its customers. Portus funds were peddled through a Manulife investment subsidiary, and more than 6,600 Manulife account holders signed up. Early this month, Manulife finalized arrangements that give these customers repayment options, including immediate cash or a guaranteed investment certificate.

In the new report, KPMG attempts in great detail to explain just how Portus channeled its money. Diagram after diagram shows an elaborate flow of funds from investors to various Portus accounts. Monies divided. Some would zoom one way, some zip another. They would bounce from Canada to offshore havens and then back again. Receiver investigators have been able to locate accounts in Canada, the Cayman Islands, Turks and Caicos Islands, St. Vincent and the Grenadines, Bermuda, England, Switzerland, Israel and Hong Kong.

But throughout the report, KPMG repeatedly emphasizes that Portus so commingled funds that it's virtually impossible to determine how much remains of each individual trust series or what investment gains or losses there may be. So Portus creditors can't expect a typical winding up of an investment house, where regulators return to investors the stocks, bonds or other financial instruments purchased.

Instead, the receiver will push for a bankruptcy under Part XII of Canada's Bankruptcy and Insolvency Act. This would involve first a proposal for organizing the various fund vehicles and their assets under a single administrative umbrella, then a bankruptcy scheme.

But the receiver, KPMG senior vice president Robert Rusko, in this latest report acknowledged that certain "stakeholders" have yet to sign off on the idea of a single bankruptcy and may push for two or even three separate bankruptcies. The report doesn't name the reluctant creditors. However, they appear to come at least in part from the ranks of so-called U.S. dollar investors, who thought they were investing in an offshore vehicle. Some 840 clients invested a total of $52.8 million in this fund, which appears to have been substantially looted by Portus. U.S. dollar investors believed they were depositing funds in a British Virgin Islands corporation. However, according to the latest report, Portus never established a BVI company and instead deposited the funds in the same bank accounts as Canadian dollar investors.

In addition, Portus offered a small market-neutral hedge fund, which attracted C$13 million.