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Portus partner gets 2 years for fraud

Michael Mendelson, one of the founders of bankrupt hedge fund Portus Alternative Asset Management Inc., was sentenced yesterday to two years in prison after pleading guilty to one count of fraud and agreeing to co-operate with law enforcement officials.

Mr. Mendelson, along with Portus co-founder Boaz Manor, was charged in September with several counts of fraud, money laundering and possession of property obtained by crime in the collapse of what was once one of the country's fastest-growing hedge funds. Charges against Mr. Manor are still outstanding.

The Crown and Mr. Mendelson's defence lawyer presented the plea bargain and an agreed statement of facts to Ontario Court Judge Robert Bigelow. They told the judge that Mr. Mendelson has co-operated, and will continue to co-operate, with law enforcement officials.

While all but one of the criminal charges against Mr. Mendelson were dropped, the one to which he pleaded guilty made reference to all the investment products detailed in the other charges, Crown lawyer John Pearson said.

The Ontario Securities Commission has also dropped its criminal charges against Mr. Mendelson, but he still faces regulatory action from the OSC.

The statement of facts filed in court said Mr. Mendelson and Mr. Manor were "close business partners and the directing minds of the Portus companies."

They talked about decisions made by the Portus companies, although Mr. Mendelson "did not always know all the details."

In the case of each investment product referred to in the charges, "members of the public were induced to invest on the basis of dishonest representations, which resulted in them being at risk for substantial amounts of money," the statement said.

Money in the hedge fund was not invested as promised, the statement said, and Mr. Mendelson and Mr. Manor "agreed to use investor funds to operate and support the Portus companies."

About $106-million was misappropriated this way, the statement said. However, Mr. Mendelson "believed this was to be on a short-term basis."

At yesterday's hearing, Mr. Mendelson's lawyer, Peter West, noted that Portus's receiver believes as much as $760-million of $790-million in investors' money may be recovered, and suggested that should be a mitigating factor in Mr. Mendelson's sentencing.

In his submission to the judge, Mr. Pearson said that view "ignores the anxiety and feelings of insecurity the fraud caused Portus investors. It also ignores the impact of the fraud on the investment industry. The first casualty of investment fraud is the victims' trust in other people, investments and financial markets."

While he would normally have asked for a three- to five-year sentence, Mr. Pearson told the judge he agreed to two years because of Mr. Mendelson's "early plea of guilty [and] his co-operation with the authorities."

Mr. West had provided the judge with letters from several of Mr. Mendelson's friends, saying he had expressed remorse for his actions.

After the hearing, Mr. West said he would not comment on the plea bargain because the charges against Mr. Manor are still outstanding.

Mr. Manor returned to Canada last week from Israel, surrendered to police, and was released on $250,000 bail.

Mr. Manor's lawyer, Brian Greenspan, said yesterday that he was not consulted on Mr. Mendelson's plea bargain.

"I don't know the circumstances under which the plea was taken," he said. "I have not been made aware of any aspect of that resolution."

Bob Rusko, a senior vice-president at KPMG Inc., which is handling the Portus receivership, said in a statement yesterday that the plea bargain and sentencing was "a very positive development."

Mr. Rusko said the move "accelerates the process of getting to the truth," and that he hopes Mr. Mendelson's testimony "will contribute to maximizing recoveries to the Portus estate."

Portus was founded in 2003, raised funds from about 26,000 investors, and was shut down by regulators in 2005.

© 2007 The Globe and Mail. All rights reserved.

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