Portus investors to get back more than expected

Date: Monday, June 19, 2006
Author: Mark Brown, Advisor.ca

"Chalk it up to tuition at the school of experience." That's the way one Portus investor feels upon hearing news that she might get back up to 85.8% of her investment in the defunct hedge fund.

On Sunday, KPMG released its latest preliminary report on the bankruptcy of Portus Alternative Asset Management, which paints the clearest picture to date about the status of the monies entrusted to the fund. That news will likely lift the mood of investors as when they gather at the Ricoh Coliseum in Toronto Wednesday for their first meeting with the receiver.

So far $792.1 million has been recovered in the bankruptcy. (For a complete breakdown of the preliminary estimates on investors' claims, please see below)

The book value of all the outstanding investments that have been identified by the receiver include $14.8 million which was invested in the Market Neutral Preservation Fund structure; $730.6 million found in two different series of the BancNote Trust/BancLife Trust structure; and about $61.5 million (US$52.8 million) saved up in the U.S. dollar investment structure.

So far the receiver has located and/or taken control over 140 cash-settled call options sold by Société Générale and secured over 130 bank and investment accounts in the name of either Portus' or its related affiliates. The aggregate purchase price of all those notes was $529.3 million and at maturity the notes would be worth approximately $611 million. While this represents the bulk of the assets the receiver stresses that it is difficult to predict with certainty the value of these notes.

Last week, KPMG announced that the MNPF structure will be treated differently than the rest of the claims against Portus. Instead of being rolled in with the other structures, the judge overseeing the bankruptcy proceedings ordered that the proceeds of this fund will be paid out separately.

As the news sets in, the general response that seems to be emerging is that the amount of money available to investors is better than expected, particularly in the context of some of the other hedge fund blow-ups that have stung the industry in the past two years.

"When you think about hedge fund scandal people are usually lucky to get anything back; look at what's happening with Norshield," says Dan Hallett, of Hallett and Associates. Norshield, which caught more people by surprise, is the more serious example as those investors might only receive pennies on the dollar.

At least one investor who owned Portus says the return is better than she was expecting. "I found the bankruptcy disconcerting and was worried it was all gone," she says. "The process seemed long but I guess really it was faster and simpler than many."

Her main complaint however was that she found out more from the media than she did from her advisor and sponsoring firm. "I found little help from Berkshire or my investment agent," she adds. "That should have been different."

The receiver stresses that the 85.8% figure is only an estimate. The actual sum will most likely be lower considering the assumption does not include any additional costs associated with the receivership or bankruptcy. At the end of March the cost of the receivership was estimated to have hit $13.3 million.

The principal factors that led to the Portus bankruptcy included allegations of misappropriation of investor's fund which were used to finance operations of the Portus Group and the misappropriation of investor's funds for the personal use of the principals and related parties.

"It seemed more like a situation of really sloppy practices and procedures, or lack of procedures in some cases, than an outright fraud," says Hallett. "If they really wanted to steal all of the money there wouldn't be anywhere near 85% of the money left at this point."

While he says this is a good news story that such a large portion of the money has been recovered, Hallett still places some of the blame for the mess on industry and regulators for allowing this to happen. He notes that there were signs that something was amiss back in June 2004. "What did they do between June '04 and February '05? From a spectator's point of view that part seems like it was a bit slow," he says.

The receiver also explained how any additional money found would boost the capital to be returned to investors. According to the latest receiver's report, "for every $10 million of additional recoveries this would translate into approximately 1.2 cents per dollar of an investor's claim."

The number of claims and their value will be updated on Wednesday.

HOW THE NUMBERS BREAK DOWN As at June 18, 2006 ($mil CAD)
Item Description	Amount/Estimate
Cash and short-term investments as at the commencement of the receiverships and after conversion of $US to $CAD pursuant to court order dated April 19	$158.6
SGC notes — at aggregate purchase price	$529.3
Fixed assets	$0.02
Total estimate of assets before costs of realization and potential additional recoveries	$687.92
Add: Total estimate of additional recoveries and interest income as at March 31	$3.9
Less: Estimate of receivership costs as at March 31	($13.3)
Less: Additional costs of receivership and bankruptcy proceedings	Unknown
Total estimate of assets (before costs of realization including additional costs associated with the receivership and bankruptcy proceedings and before potential additional recoveries)	$678.52
Total investor claims per Portus record (before completion of claims process)	$792.1
Less: Hardship payments made to investors as at March 31	($1.3)
Total investor claims at book value (after hardship payments)	$790.8
Preliminary estimate of realization on investors' claims before additional costs of realization and potential additional recoveries	85.8%

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com