Receiver details Portus investments, recommends bankruptcy

(September 20, 2005) After six months, and nine reports, receiver KPMG has offered a first accounting of the Portus Group’s investment structure, a structure so complex that the receiver says it is not practical to trace Portus investments back to individual investors. Instead, the receiver has recommended that the best way for 29,000 investors to get at least some of their money back is to push the Portus companies into bankruptcy.

In addition, Portus failed to implement offsetting put and call options on a basket of Canadian securities that would have allowed investors to claim investment gains as capital gains.

At the same time, not all the money investors gave to Portus made it into investments. Of the $730 million Canadian investors put into the BancNote and BancLife series of funds, $717.5 million was supposed to have been invested. Of that, $529 million ended up in principal-protected notes issued by Société Génerale, which have a current value of $545.6 million and a maturity value of $611.1 million. KPMG thinks that $11 million that was not transferred may be part of $15 million in two bank accounts it has seized

The receiver has also identified $132.9 million and $35.9 US in cash in 132 bank and investment accounts that Portus Group entities held, money that was supposed to have gone into the BancNote/BancLife structure.

Manulife Financial has already promised to make over 6,000 investors good on $245.2 million in investments, rendering it the single largest Portus creditor.

Of the other money raised, approximately $95 million was held back by Portus — the receiver estimates an average 13.3% was diverted from each series of inflows — as a reserve to pay for commissions, management fees, referral fees, redemptions and working capital. That was in contradiction to the offering materials, which stated that fees were to be calculated and accrued weekly and paid out at the end of each calendar quarter.

More than half of that reserve amount, $54 million, was sent to Basel Trust and Bank Hapoalim. KPMG has been unable to establish what happened to that money, but says that former Portus employees have stated the money was channelled into the reserves. BancNote Corp, a Portus-associated company, received $41 million of the reserve amount.

There’s also $52 million in U.S.-dollar investments — which has attracted the majority of recent headlines — made mostly by Canadian residents with a sprinkling of Asia-Pacific investors. None of it appears to have been invested. KPMG has been able to freeze $35.2 US million in assets, but the whereabouts of $17.6 remains under investigation. Some has gone to pay lawyers in Israel and Canada and some, after circuituous routing from a Caribbean trust through Italian and Swiss banks, to Hong Kong to purchase $11.6 million in what Portus founder Boaz Manor has described to the receivers as “precious metals — precious stones.”

Interestingly, the book value of Portus’s original investment vehicle, the Market Neutral Preservation Fund (MNPF), is $13 million. However, the receiver has attributed $19.2 million to this account. As a result, KPMG is investigating whether it has a complete investor list for MNPF.

Commingling

The receiver says that it is impractical to try to trace individual investors’ funds because of the complexity of the investor structure, the use of investor money as working capital, the commingling of funds, and the destruction of Portus records. Much of the cash flowed through accounts for MNPF, rather than separate accounts for each series of notes.

To take an example, for the BancNote Trust Series II investment, investor funds of $36.5 million were flowed from a Portus Alternative Asset Management account at RBC through six other accounts, including a brokerage account in Bermuda. Ultimately, $30.8 million was invested in a principal-protected note and $4 million was deducted and flowed to Basel Trust. That $4 million went to the reserve fund, according to Portus insiders, but KPMG has not been able to confirm that that money was repatriated to Canada. The rest of the cash was transferred BancNote Corp, or back to the original accounts.

A similar process occurred with each series of the notes. However, money raised for one note was frequently commingled with funds for the next note, instead of remaining in a separate account, KPMG also suggests that some of the funds raised for a new series of notes were used to pay redemptions by investors in earlier series of the notes.

KPMG says it remains uncertain what the total assets that can be distributed to investors will be. The bulk is in the Société Génerale notes, which have terms of five to seven years. Even though Société Génerale is willing to quote a price on the secondary market for the notes, there is no guarantee they would buy the notes at that price, the KPMG report says.

Since investors gave PAAM discretionary authority to invest — they invested in a managed account, rather than in the notes themselves — the receiver argues that “the relative entitlement of each investor to the remaining assets of the Portus Group is therefore fortuitous because it was entirely dependent upon, and within the complete control of, PAAM.”

Consequently, KPMG is recommending that Portus Group assets be distributed proportionately. It plans to make a motion for bankruptcy later this month or early next month. KPMG has not decided whether there should be a single bankruptcy or whether the MNPF and U.S. dollar investment structures should be liquidated separately.

Filed by Scot Blythe, Advisor.ca, scot.blythe@advisor.rogers.com.

(09/20/05)