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Are advisors being blamed unfairly in Portus fiasco?


Date: Friday, June 23, 2006
Author: Mark Brown, Advisor.ca

Investors weren't the only ones looking for answers at first meeting of creditors of Portus Alternative Asset Management. Advisors, many themselves investors, feel hung-out to dry in the whole affair. For many, the meeting on Wednesday was their first opportunity to get some information, but many left frustrated by the lack of answers receiver KPMG was able to supply.

Carmine Mazzotta was one of the advisors hoping for more, especially having flown in from Ottawa for the day to hear what KPMG had to say. He wasn't impressed. "I was expecting more than this," he says. Then again, he says, information hasn't been very forthcoming for sometime.

"When the shit hit the fan, KPMG said...we are not talking to you, you are the advisor, you are persona non grata," says the investment advisor from Innovative Financial Group. "I couldn't get any information on my clients; I couldn't get any information on anything."

Holding the meeting at the Ricoh Coliseum on the grounds of the Canadian National Exhibition in Toronto seemed apt, given the carnival-like atmosphere inside. It was a big show, with little substance, based on the opinions of those milling about in the corridors of the hockey arena.

The receivers, trustees and lawyers who gathered on stage baked under the heat beamed down from three spotlights tucked away in the rafters. Overhead, their image splayed for all to see on large screens built into the scoreboard for the hundreds of investors, proxyholders and advisors able to attend the meeting. The grey hair of many of those in the audience suggests many were at or near retirement.

And while the rest of the scoreboard remained dark through the four hour-long event, many of those in attendance know the score. To many, it favours KMPG given the millions it has already charged in fees. Meanwhile, investors feel like they've come away with nothing.

Admittedly, nothing is a bit of a stretch. As it stands it looks like investors could get as much as 86% of their investment back — some even think possibly more depending on how well the notes from Société Générale Canada perform if left to maturity. But KPMG, the receiver, is pretty confident the final figure will not exceed that amount, particularly when the receiver's fees, with the threat of additional claims against Portus and lingering questions about the reliability of the third party information used to calculate that figure continue to change.

Boaz Manor, the company's founder, is accused of destroying records, pocketing funds and converting some of the cash into hard to trace diamonds. He fled the country shortly after Portus was shut down. His case is slowly winding its way through Israeli courts, but there's doubt as to whether he will ever stand trial in Canada. No one from Portus attended the meeting.

Clients were hurt, of that there is no doubt, but for advisors, their reputation has been damaged. Bruno Mucci, a managing partner with Aegon Dealer Services Canada in Mississauga, Ont., says the Portus mess has had a domino effect on his business as one client spreads the word to another five or six. "My credibility has gone down from 110% down to maybe 50%," he says. "I've been fortunate that the clients have stayed with me, but I haven't seen any more money from them."

Mucci doesn't absolve himself from fault, but he feels too much blame has been placed on advisors. "It is not like we took a product and sold it illegally," he says. "It was an approved product on the shelf."

Portus, he continues, was marketed like a GIC by the wholesalers and approved by dealers. "My point is, there is a lot of blame to be spread out," he says. "Who shares that blame? Am I responsible for some of it: absolutely. It's debatable how much."

Other advisors like Mazzotta have similar stories. He's already spent $9,000 on a securities lawyer to make sure his and his clients' rights are protected and he estimates he could spend up to $50,000 by the time the dust settles.

Money aside, Mazzotta has a personal interest in seeing this through. He sold roughly $4 million in the hedge fund to 33 clients including his mother and uncle. Why? Because one of Portus' marketing vice-presidents, who worked for an insurance company that Mazzotta represented, made a good pitch and urged Mazzotta to sell it.

"We had a very strong relationship," Mazzotta recalls. "He approached me to sell the product and he made a very strong case. Think about how popular this was. You had 26,000 investors. The concept was phenomenal," he adds, noting the current popularity of principal-protected notes.

All in all, 86% is an impressive number that suggests that despite the mistakes that allowed Portus to get as far as it did, something worked at the right time to prevent things from getting even worse. If only Norshield investors were so fortunate. Currently, it appears investors in that hedge fund debacle will be lucky to get back three cents on the dollar. But that's not the point; conservative investors bought into Portus with the promise that at worst they would receive their principal back at maturity.

Almost adding insult to injury, many investors on hand at the meeting had a tough time grasping why the money couldn't be returned to them outright. Other focused their anger on KPMG and their fees — more than $13 million and rising.

But to be fair, without KPMG, investors would be getting back even less, including $35.2 US million located in the Turks & Caicos in a non-Portus name and another $17.2 US million secured from a U.S. account. The receiver was also able to track down other irregularities such as a $3 million fund to pay for a legal defence that was arranged in February 2005, and $658,000 in early payments to family members.

Mazzotta, like many others, left with many of the question he came with. So far the only support he says he's received has been from the Independent Financial Brokers of Canada.

Investors who grow tired of waiting for KPMG to unravel Portus also have another option. According to Robert Rusko, a senior vice-president with receiver KPMG there are two third party groups that interesting in acquiring the claims. He described them as "hedge funds that purchase distressed debt," or vulture funds, as suggested by one reporter, to which Rusko only smiled.

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