Advisors wary as Portus lays off staff

(February 18, 2005) Hedge fund firm Portus — under investigation by the OSC — has terminated the bulk of its staff but continues to insist that all investments are secure.

In a statement posted on its Web site late Thursday, Portus said that as a result of the OSC’s regulatory order preventing deposits and withdrawals until May 17, it has issued “temporary notice of termination to the majority of its employees.” The layoffs are believed to affect about 60 Portus staff.

The move didn’t come as surprise to industry watchers. “That’s easy to understand, if you’re not allowed to bring in any money for three months, why pay salaries?” noted one insider.

“The $717 million in investments, currently held in managed accounts by Portus Alternative Asset Management are safe,” Portus added. Indeed, in its last notice, the OSC pointed out that the BancNote Trust units, if held to maturity, will have a value of at least the principal invested.

“Portus is prepared to work with the OSC and other regulators to determine how investors’ assets will be managed and paid out after the regulatory orders expire, and will continue to cooperate with the regulators to ensure client assets are prudently managed until maturity,” the company statement concluded.

However, the product was sold on the premise that investors would be free to withdraw any or all of their investment at any time. That’s a worry for some advisors.

“It sounds to me like they have the protection in place,” wrote one advisor in Advisor.ca’s Talvest Town Hall. “But if it takes nearly five years, I’m going to have a small number of clients wondering for that long what they might get back.”

“Tell clients that all you know is what appears in the press,” counselled another advisor. “Patience is required, and the regulators are on the case.”

“It’s sad to have 26,000 investors, and advisors are very stressed right now and worried,” says Steven Marshall, president of Open Sky Capital, a manufacturer of principal-protected notes. “I just hope it all settles out — that no one loses their money.”

Some advisors question the timing of the probe, noting that Portus has been under investigation by other regulators since last year, but the OSC chose RSP season to effectively shut down the firm. There’s a suggestion that the regulator was influenced by some bigger players in the industry who didn’t like the amount of money they were losing to Portus.

Still, other advisors aren’t concerned about liquidity at Portus. “The worst-case scenario is that you break even over five years,” said one advisor, who asked not to be identified. “But I don’t think that’s going to happen: the product has made money. All they have to is liquidate their positions prudently to enable whomever wants their money to get it in an orderly fashion.”

The OSC issued a temporary freeze order against Portus earlier this month, but extended that order to May, likely due to the complexity of the Portus products, which involve offshore investing and notes issued by a Canadian subsidiary of a French bank.

The OSC says Portus appears to have contravened various sections of the province’s securities laws regarding record-keeping, selling practices and suitability, and “has failed to take adequate steps to remedy those breaches.”

There are also questions about the way Portus promoted the product, as “100% backed by one of the world’s largest financial institutions,” when in fact, there’s nothing in the portfolio management agreement that says the notes are guaranteed by a bank, according to analyst Dan Hallett.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com