Portus Alternative Asset Management Inc. has taken the extraordinary step of telling clients they cannot withdraw any money from the company's investment funds.
The fund manager, which is under investigation by regulators across Canada, says it has suspended all redemption requests from investors, effective immediately.
A client service representative at Portus said the firm sent out an "e-mail blast" yesterday to sales agents across the country, notifying them of the suspension. The e-mail prompted a flood of calls from worried clients to the firm, the service rep told The Globe and Mail. "Right now, every series is doing very well, but if we receive mass redemption requests then it will affect the performance of the fund," she said.
The move is the latest blow for embattled Portus. Last week, securities regulators imposed a temporary ban on the firm that prevents it from signing up new clients or accepting more money for existing accounts. The temporary order is in place for two weeks, pending a regulatory hearing.
Portus had been one of the fastest-growing hedge fund firms in Canada, with 26,000 clients and $800-million in assets under management.
It is highly unusual for an investment firm to suspend redemptions. However, a clause in an August, 2003, Portus offering memorandum stipulates the conditions under which its fund managers can do so -- "if unrestricted redemptions would be detrimental to the interests of non-redeeming unitholders," the document says.
The suspension came as a surprise to the regulators. Ontario Securities Commission enforcement director Mike Watson said he wasn't aware Portus had suspended redemptions in its funds. "It's definitely something we'll want to have a discussion with them about."
Boaz Manor, the firm's managing director and founder, did not return telephone messages yesterday. In a message posted on the firm's website this week, Mr. Boaz said the firm's investment strategy is sound and clients' principal investments are protected if held to maturity. Commenting on the temporary freeze order, he said: "We are taking the matter seriously."
In one fund alone -- the Market Neutral Preservation Fund -- investors have attempted to redeem an estimated $8-million, or roughly 40 per cent of it, according to client representatives at Portus. The fund had assets of $19.9-million as of last June.
Unlike some of Portus's funds, which enable investors to participate for as little as $5,000, the Preservation fund is marketed exclusively to so-called sophisticated investors and requires a minimum investment of $150,000. The fund was started in February, 2003, and is managed by Mr. Manor.
All redemptions in the Preservation fund have been suspended as of last Friday, "until further notice," according to a memo sent to dealers, a copy of which was obtained by The Globe.
The client services representative said Portus is suspending redemptions until regulators lift the order that prevents the firm from taking in new money. A hearing before the OSC is set for Feb. 17.
The regulators' concerns are centred around compliance issues, "so we should be able to resolve them," she said.
Portus has been under investigation by regulators in Nova Scotia since last summer. The OSC launched its investigation last month by sending staff from enforcement and compliance into Portus's Toronto head office. Mr. Watson said about five staff remain on site at the firm's office.
Portus markets what are known as "funds of hedge funds," which have grown in popularity over the past few years. Regulators are investigating the firm's marketing practices as well as books and records.
As part of that probe, regulators have sought information from Société Générale (Canada), a subsidiary of the French bank. According to Portus's website, the fund has a relationship with Société Générale, which it describes as one of "the world's largest banks specializing in guaranteed notes."
However, a Portus offering memorandum makes no mention of the bank guaranteeing a client's principal investment. Rather, it states that the fund has the obligation to return an amount to investors "equal to the aggregate original investment amount, provided that the bank fulfills its payment obligations to the [fund] at maturity."
Diletta Prando, director of legal affairs for the Montreal-based subsidiary of Société Générale, confirmed the bank has been contacted by regulators and said it is co-operating with their requests.
Ms. Prando acknowledged the bank has a relationship with Portus, but declined to comment on the nature of their business dealings, or whether SocGen is now re-evaluating its partnership with the hedge fund dealer. "We're reviewing the whole matter."
There is no indication or suggestion that SocGen has done anything improper, but the issue of bank guarantees has been raised as a potential problem by the Prince Edward Island Securities Office in its temporary order against Portus.
The regulator alleged in a notice that Portus has created the impression "through direct and indirect misrepresentation" that clients are purchasing funds guaranteed by a bank. No client portfolios were structured to contain such a guarantee, the regulator alleges.
© 2007 The Globe and Mail. All rights reserved.
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