Stock market regulators are set to go after millions of dollars in commission fees paid to investment advisers by Portus Alternative Asset Management Inc. as part of the investigation into the notorious hedge fund.
About 1,000 advisers steered some 26,000 clients to Portus in exchange for 5-per-cent referral fees before the hedge fund operator was shut down and forced into receivership last March. One-per-cent trailer fees and performance fee commissions were also paid out from the pool of $800-million investors plowed into the company. Now the Ontario Securities Commission and the Mutual Fund Dealers Association of Canada are probing the role agents played in the distribution of Portus products.
"If in fact, as we say, it was an illegal distribution -- that everything Portus did was an illegal distribution -- any commissions that were paid were fruits of an illegal distribution," said OSC enforcement director Mike Watson.
The OSC charged Portus co-founder Boaz Manor on Oct. 5 with three counts of violating provincial securities laws. The regulator alleges Portus took approximately $95.4-million of investor funds and used the money to bankroll the firm's operations, including the payment of referral and trailer fees. The OSC said the Portus "operation was not sustainable without the infusion of new funds from investors."
None of the allegations have been proven in court.
Mark Kent, president of Portfolio Strategies Corp., a Calgary-based mutual fund dealer, said agents at his company would be happy to refund fees. Last year, his 340 agents were offering Portus funds for several months until Mr. Kent became concerned about the hedge fund's structure.
The firm's "advisers have pretty well universally said they would be more than willing to pay back the commissions to help make the accounts whole," Mr. Kent said. Some of his agents have offered to refund client investments in Portus. In return, the clients would sign over their accounts to the advisers, who would collect whatever money is recovered through Portus's receivership.
He added that he believes advisers at other companies would also agree to refund commissions.
"They obviously didn't want to go into that kind of a transaction thinking it possibly could be a fraud. They had the best of intentions when they did it. If it's a matter of putting a 4 or 5 per cent commission back in their client's pockets to help make them whole, then I don't think anybody has an issue with that."
Independent brokers of Manulife Securities International Ltd. were by far the single biggest source of Portus recommendations. Roughly 300 Manulife agents referred $235-million in client funds to Portus. Four senior executives, including Manulife Securities president and CEO Greg Gray, left the firm this month. Parent Manulife Financial Corp. has pledged to refund clients money and has ordered advisers to return all fees.
A separate group of approximately 25 investment dealers led by Burlington, Ont.-based Berkshire Group of Cos., is "strongly advocating" individual advisers return Portus fees. Berkshire itself has committed to repay the dealer fees it received from Portus, according to senior counsel Julie Clarke. "An overwhelming majority" of Berkshire advisers who referred roughly 2,300 clients to Portus have agreed to return fees, Ms. Clarke said.
Refunding commission fees, however, may not be the end of the matter. According to the OSC, regulators are also investigating whether agents adhered to so-called "know-your-client" obligations.
"There are people who got put heavily into [Portus] that simply shouldn't have been," the OSC's Mr. Watson said.
© 2007 The Globe and Mail. All rights reserved.
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