Portus Fund Investors Can Recover Money Outside of Bankruptcy

Date: Wednesday, March 22, 2006
Author: Bloomberg.com

March 22 (Bloomberg) -- Portus Alternative Asset Management Inc. customers who invested in the defunct hedge fund's Market Neutral Preservation Fund won't have to file bankruptcy claims to recover their money, a judge said.

Ontario Superior Court Judge Colin Campbell, in a ruling today, said the Market Neutral Preservation Fund investors, who made deposits totaling C$19.2 million ($16.5 million), are entitled to their money now because the funds were separated from the rest of the assets.

The judge is scheduled to rule tomorrow on KPMG LLP's request to place Portus and its subsidiaries into bankruptcy. Placing Portus in bankruptcy will let a trustee liquidate the investments and distribute the money among the eligible creditors. Treating one group of creditors differently is unusual, the judge said.

``I would hope that the circumstances in which a claim such as that of the MNPF investors would arise would be infrequent,'' Campbell said in his 18-page ruling.

Portus, founded in 2002 by Boaz Manor and Michael Mendelson, became one of the fastest-growing hedge funds in Canada, with about 26,000 customers investing almost C$800 million, which didn't include the money in the preservation fund.

The Ontario Securities Commission sued Portus last March over questionable fund transactions. Campbell ordered KPMG to seize the Portus assets and track down money that was moved out of Canada. KPMG is still attempting to recover about $17.6 million, including diamonds worth about $8.8 million that Manor arranged to buy in Hong Kong using investors' money.

C$19.2 Million

Customers gave Portus C$19.2 million to invest in the Market Neutral Preservation Fund. The fund bought a basket of non-dividend paying securities listed on the Toronto Stock Exchange. The basket was pledged as security to the Royal Bank of Canada, which created a trust called MNB.

Royal Bank agreed to pay the Market Neutral Preservation Fund on maturity the value of the MNB Trust in exchange for Fund's basket of securities.

The transaction ``was conceived to maximize investment return and at the same time to minimize the impact of tax,'' Campbell said.

Companies including Manulife Financial Corp. referred clients to Portus, in exchange for referral fees. Manulife refunded its clients their investments and is the fund's biggest creditor now.

Canada's federal police are investigating whether criminal charges are warranted as a result of the collapse of the fund. Manor went to Israel after losing control of the fund.

The case is Ontario Securities Commission v. Portus Alternative Asset Management, 05-CL-5792, Ontario Superior Court (Toronto).

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