Portus notes

The judge overseeing the bankruptcy of Portus Alternative Asset Management has endorsed the twenty-seventh report of the receiver in the case. Justice Colin Campbell of the Ontario Superior Court of Justice has urged all parties to put the interests of investors first and accelerate the process of liquidating the deposit notes held by Portus’s receiver, KPMG.

The bank that issued the notes, Société Générale (Canada) has offered to buy back the notes, but so far the offer price has not met the receiver’s expectations. Based on a January 18, 2008, valuation of the notes, investors would have received an annual return of just 2.99% on their investment, compared to the 4.41% they could have earned on a zero-coupon Government of Canada bond.

The notes derive their value at maturity from the performance of a hedge fund of funds, the Portus Alternative Investment Master Fund (PAIMF).

But while the notes were principal protected, their structure virtually guaranteed that investors would never see anything near the full return of PAIMF, according to James Grout, partner at ThorntonGroutFinnigan, and counsel for KPMG as receiver.

The notes were designed in such a way that returns were based on the average asset value of the PAIMF, calculated monthly, rather than the actual return of the fund. Even if Portus had survived, investors would not have earned much of a return.

“These notes were a bad investment,” he explained to Justice Colin Campbell. “These notes should never have been purchased for 26,000 investors with average investments of under $30,000.”

For its part, Société Générale maintains that its bid pricing for the notes is in line with its usual commercial terms, and that the bank cannot be expected to offer special consideration to Portus investors.

“Société Générale has said from the outset that much of the information is derived from proprietary models,” says Robert Rusko, senior vice-president of KPMG. “These notes are very complicated and it’s very difficult to know what those notes would be worth.”

If the receiver were to place a sell order, it would not know the price Société Générale would pay for the note until about eight days later. In the intervening week, the value of the underlying assets could collapse, with that market risk being assumed by the seller, not the bank.

“Because of the time frame and the possible market volatility that takes place from the time you push the button to sell to when you get the money, you don’t know what you are going to get,” he says. “We know there’s market risk, and we know we bear the market risk.”

So far, KPMG has not been able to decipher the pricing model based on historical data.

Meanwhile, KPMG continues to pursue the missing $17.6 million allegedly siphoned off by Boaz Manor. The firm’s legal counsel in Israel has asked a court to compel any related parties to reveal the location of the missing funds, which had apparently been used to buy diamonds.

“We don’t know where the diamonds are,” says Grout. “One person [Manor] says they are in Israel, and the other [Israeli private banker, Yitzchak Toib] says he gave them back to [Manor’s] sister in Hong Kong.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com