OSC moves against Portus

(October 5, 2005) After months of investigation, the Ontario Securities Commission announced today that it has begun proceedings against Portus and has filed court charges against Boaz Manor, the hedge fund firm’s principal.

In a statement released today, the OSC alleged that between January 2003 and August 2005, Portus Alternative Asset Management, Portus Asset Management and a shell company incorporated in the British Virgin Islands (collectively known as Portus), engaged in the illegal distribution of securities.

Portus did so by offering units of non-prospectus qualified mutual funds directly to retail investors, the regulator says. In addition, retail investors were not given adequate disclosure as to the investments being made and the fees associated with those investments. OSC staff alleges that investors were misled into believing that the investment structures offered by Portus would provide them with principal protection, favourable tax treatment and 100% Canadian content for registered accounts.

In total, approximately 26,000 Canadian investors, the majority of whom reside in Ontario, invested approximately $730 million in the domestic structures offered by Portus and $52 million US in the offshore structure. Another $20 million was invested in Portus’s first product, the Market Neutral Preservation Fund.

With respect to the domestic structure, staff alleges that approximately $95.4 million was improperly diverted by Portus to pay fees (including referral and trailer fees), to fund Portus’s ongoing administrative costs, and to fund redemptions. Staff also alleges that Portus’s use of these funds shows that its operations could not be sustained without the continual infusion of new investor money.

In addition, none of the funds collected by Portus for investment in the purported offshore structure was actually invested, the OSC maintains. Instead, Manor personally withdrew approximately 1.6 million euros and used approximately $2.7 million US for the payment of his legal fees in connection with the case and used approximately $11 million US for the purchase of gems and precious metals. Manor, who fled to Israel after Portus was shut down, has failed or refused to return these funds and assets to investors.

“Manor was the chief architect of all the investment products that are the subject of this proceeding and was a directing mind of all the entities involved in those products,” the OSC says in its statement of allegations.

The commission also alleges that Manor intentionally and irreparably frustrated their investigation by deleting and destroying all data associated with the offshore structure and numerous client and other records relating to the domestic investment structures. It’s also alleged that he created numerous false documents in an effort to hide the true use of investors’ funds.

Manor has been charged with destroying material documents, submitting misleading information to the commission, directing the trading of non-prospectus qualified mutual funds without proper registration and directing the distribution of units in the funds without having filed a preliminary prospectus.

Portus president Michael Mendelson, as well as compliance officers Michael Labanowich and John Ogg, are also named in the statement of allegations, accused of violating provincial securities laws. The OSC alleges that Labanowich “rented” his investment counsellor registration, but did no compliance work.

The hearing is scheduled to begin on November 14. Portus and its principals could face a number of reprimands, including a ban from the securities industry and administrative penalties of up to $1 million for each failure to comply with securities law. They could also be ordered to disgorge funds for the “benefit of third parties.”

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