Portus fallout part 3: The blame game

(March 8, 2005) Advisors who sold Portus products are on the defensive. Unfairly so, some think, who blame the Ontario Securities Commission — for its slow and secretive investigation — and the media, who they feel are fueling the speculative fires.

“Why did the OSC shut down a company, throwing 90 people out of work and bring fear and loathing to the investment community?” asks Paul Freedman of The Westman Group in Toronto, who sold Portus to clients and bought the product for his own account. “From what I have seen, read and heard, the most egregious accusation is that Portus may have skirted the know-your-client rule.”

“Portus may very well be at fault, but so far I don’t see how anyone can make an informed decision,” Freedman says, adding he’s “dismayed and angered” by the media’s coverage of the Portus situation.

“There has not been one shred of evidence that the investments are not protected,” says Freedman. “The OSC seems to have gone on a fishing expedition but they don’t seem to be using the correct bait. Why is Portus guilty until proven innocent?”

The Ontario Securities Commission froze Portus’s assets last month and appointed KPMG as a receiver last week. KPMG has promised to report to the regulator by mid-month and the OSC has scheduled a hearing for May 17.

The commission has been chastised for delaying its investigation into Portus, given that the firm has been in operation for two years, but analysts note that such products do not require approval by regulators before they hit the market, although Portus did file an offering memorandum with the OSC.

The commission has provided little information on its investigation to date, but has stated that the Portus BancNote Trust units, if held to maturity, will have a value of at least the principal invested.

A Portus investor from Edmonton who called a helpline set up by KPMG (1-866-260-5439) on Monday was told that her principal was 100% secure and that the Portus money was safe. KPMG also says a “significant percentage” of Portus’s assets are being held in bank accounts, she adds, although the KPMG customer service representative was unable to provide further information.

“I have a hard time believing that 100% of client funds will be returned, but dreaming is always nice,” wrote one participant in Advisor.ca’s Talvest Town Hall. “For the sake of all advisors and the industry, I hope that the media will focus the attention on Portus [and stop] bashing dealers and advisors.”

Other advisors are upset over criticism of Manulife, whose advisors referred an estimated $240 million worth of client money to Portus. Manulife president Dominic D’Alessandro issued a public apology last week and promised that all client funds invested in Portus would be protected. The firm plans to announce details of its guarantee later this month.

“I really feel bad for the team at Manulife that originally did the due diligence on Portus,” said one anonymous advisor. “It appears they were told one thing, and Portus did something else entirely. Just how was Manulife supposed to know that was going to happen?”

“Everyone was sold a bill of goods here,” the advisor added.

And some in the advice community believe it’s unjust to criticize the 4% referral fee advisors received for sending clients to Portus. “The 4% fee is quite in line with other similar products,” Freedman points out. “Mutual funds have a 5% fee. The big change is that advisors could share in above-average returns, and of course, the investors do as well. Again, this is quite common practice in the hedge fund business.”

“Advisors sold these products because they were supposed to provide some guarantees to clients, not because they were going to be paid higher compensation,” added another advisor, who asked not to be named.

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