Portus hit with further regulatory restrictions

(February 11, 2005) The Ontario Securities Commission has imposed further restrictions against Portus, ordering the hedge fund manager to cease trading in securities and stop paying out assets from client accounts.

The temporary order also extends to Portus owner Boaz Manor, who will not be allowed to execute trades in Portus’s BancNote Trusts or direct other parties in the firm to make trades.

“Withdrawal of clients’ funds further to the maturity of the [BancNote Trusts] could result in a loss to certain clients and preferential treatment for some clients to the detriment of others,” the OSC says.

The commission will allow clients who have entered into a pre-authorized periodic withdrawal plan with Portus to continue the arrangement, as long as the plan was set up before February 10, 2005 and as long as future payments do not increase.

Earlier this week, Portus took the unusual step of suspending account withdrawals “to protect the value of the investments for the large majority of investors who wish to hold their investments to maturity.”

Tim Niblett, CFP, of Strategic Tax Planners in Oakville, Ontario, has a number of clients in Portus products. He agrees with the decision to suspend account withdrawals. “Frankly, it’s in nobody’s best interest if investors do that wholesale right now.”

Niblett says clients are naturally concerned about the situation and have been calling, but he thinks the problems at the firm are mainly related to paperwork and sales practices.

“Currently, there’s no reason to be concerned about the capital,” he stresses, noting that some of his clients have been in Portus products for more than a year and have “enjoyed slow, steady growth from a tax-preferred investment that has low volatility and low correlation to the stock market, both of which are important, of course, in a well-designed portfolio.”

The OSC’s temporary order also includes new details on the Portus investments. “The structure of the investment provided by Portus appears to be such that clients’ funds flow through bank accounts held by Portus on behalf of Portus’s off-shore counterparties, and eventually flow to an account held by Portus,” the regulator says.

“Portus deposits sufficient client funds into five-to-seven-year term notes issued by Société Générale Canada to guarantee a minimum return of the principal invested with Portus. Société Générale then promises to return to the holder of the note the higher of the principal invested with Portus or the return achieved by a fund of funds selected by Portus.”

“This appears to be the basis for Portus’s representation to clients that their investments are guaranteed,” the order continues.

The notes are being held in an account at RBC Dominion Securities over which Manor has trading authority, the OSC adds.

Last week, the commission ordered Portus to stop opening new accounts and to stop accepting new assets under an initial temporary order.

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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.”

Both temporary orders could be extended at a hearing scheduled for February 17. Several other provincial regulators have issued similar orders and scheduled hearings.

Portus has about 26,000 clients, mostly in Ontario, and about $730 million in asserts, according to the OSC.

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

(02/11/05)

Doug Watt