Newly released documents show Portus directors knew as early as March 2004 that their organizations were facing a number of compliance, privacy and accounting problems if their firms continued to raise capital. Despite this and legal advice urging them to stop their fund-gathering efforts, the company continued to pull in another $500 million in assets, significantly more than half of all assets raised by the company, before being shut down by the Ontario Securities Commission in February 2005.
Lawyers for KPMG Inc. appeared in court today to waive the Portus Group’s solicitor-client privilege over a number of legal documents, and obtain permission to release the privileged documents to the public and “interested parties”.
At the hearing, the receiver also gave Justice Colin Campbell an update about the claims process for clients invested in the funds, and discussed the status of Supreme Court hearings in Israel.
Bob Rusko, senior vice president at KPMG says proof of claims forms were sent on Friday to all Portus investors on record. The package includes a statement of the client’s position — the company is asking investors to sign off on the statement if they agree it accurately reflects their position — and a proof of claims form to provide more information if the statement is inaccurate.
“If investors could get that information back to us as soon as possible, it would be very beneficial to our administration,” says Rusko. “If we waited until the eve of the first creditors meeting and have a mass of these claims come in at the last minute it would make our administration much more difficult.”
The documents released by KPMG this morning include a number of e-mails between Portus executives and their lawyers, Groia & Company, risk assessment firm Kroll Lindquist Avey, and handwritten meeting notes.
The firm first retained Groia as legal counsel on March 4, 2004 after U.S.-based Paradigm Global Advisors threatened to tell investors that the firm (later renamed Portus) had committed fraud, “perpetrated on unknowing investors through false advertising and deceptive trading practices,” by using the name Paradigm.
Lawyers for Paradigm Global say the Canadian firm was infringing on Paradigm’s trademarks and actively deceiving the marketplace by passing itself off as an affiliate of Paradigm.
“Paradigm has invested millions of dollars and years of diligent effort building a solid reputation in the hedge fund community,” say the firm’s lawyers. “Southview has apparently determined to free ride off of Paradigm’s reputation and experience by passing itself off as the same entity in Canada. As mentioned, it has co-opted Paradigm’s database, track record, story and methodology.”
The letter goes on to say the company must cease and desist using the Paradigm name, provide accounting of all capital it has raised from investors and place the assets under control and guidance of an independent trustee.
Internal investigations resulting from the trademark suit found that the firm had no due diligence review processes in place, no clear corporate structures or written business models, no policies for trading, portfolio management, administration, money laundering prevention or privacy legislation procedures, no regulatory reporting procedures and no qualified compliance personnel.
Kroll also identified several issues associated with co-mingled funds, lack of transparency in transactions, and expressed doubt about the authenticity of some documents. At one meeting in June, Portus head Boaz Manor apparently refused to follow suggestions that the firm undertake an independent review, saying he would “attempt to recover the funds from offshore himself” and try to correct the administration of the funds to avoid co-mingling in the future. At this point, Kroll appears to resign the account in a note that suggests the firm’s retainer has concluded.
In an internal memo from Portus lawyers, Groia & Company, lawyers for the company finally suggest that Portus managers hire another firm and give “true, full and complete disclosure.”
“As we had in the past, we again advised them that PAM and PAAM should stop taking new investor funds immediately,” reads the memo. “Joe (Groia) also advised Mr. Manor and Mr. Mendelson that any further actions taken by them are very risky and may result in further criminal problems or aggravating the current problems that we have identified for them.”
On August 3, 2004, the firm resigns as Portus’s lawyer, and recommends Manor and Mendelson retain new lawyers to review their personal liability issues.
KPMG representatives say the receiver plans to issue a housekeeping report about the state of the company’s assets and liabilities, and an update on the status of proceedings in Israel in the next few weeks. Manor is scheduled to appear before the Israeli Supreme Court on April 13 and must turn over diamonds he allegedly has in his possession, or face jail time.
Filed by Kate McCaffery Advisor.ca, kate.mccaffery@advisor.rogers.com
(04/10/06)