Regulators Propose Plan to Augment Money Being Returned to Portus Investors

TORONTO – The Ontario Securities Commission (OSC) and the Mutual Fund Dealers Association of Canada (MFDA) today announced a plan that would require some 55 investment and mutual fund dealers to repay investors all fees received from Portus Alternative Asset Management Inc. in connection with client referrals. The Investment Dealers Association of Canada (IDA) supports the plan, which applies to five of its members. In total, excluding fees that have already been recovered, about $12 million in fees was paid out of funds invested in Portus to MFDA and IDA Ontario-registered dealers.

This payment will be in addition to the money investors stand to recover from the insolvency proceedings currently involving the Portus Group. Investors had placed approximately $800 million in Portus products. Portus assets located by the Receiver, KPMG Inc., include C$133 million and US$36 million in cash, as well as notes with a purchase price of $529 million and a maturity value of $611 million. No estimate of the likely realizable value of the notes is available at the present time. The best information available for investors is contained in a letter from the Representative Counsel for investors and the Ninth Report of the Receiver, excerpts of which are attached as Schedules “B” and “C” respectively.

The OSC, the MFDA and the IDA have been reviewing dealer regulatory issues arising from the referrals of clients to Portus. Regulatory issues arose from the due diligence process undertaken by dealers to approve referrals to Portus, the supervision of the appropriateness of client referrals and related compliance functions.

The regulators propose that dealers agree to Terms and Conditions that would result in the repayment of fees received for referring clients to Portus. Because the participating dealers will agree the Terms and Conditions apply to their clients across Canada, the regulators are communicating with other Canadian securities regulators about developments that may affect investors in their jurisdictions.

The regulators have already received indications from 28 dealers, representing more than 80% of fees paid out of funds invested in Portus to MFDA and IDA Ontario-registered dealers, that they are willing to accept the Terms and Conditions. Dealers have been asked to confirm by January 24, 2006 that they intend to comply with the request and repay investors by May 31, 2006 under oversight by the MFDA and the IDA. The dealers will contact investors prior to issuing payment to confirm the accuracy of the amount of their investment in the Portus products, net of redemptions.

In total, 64 dealers across Canada approved referrals resulting in their clients investing in Portus through some 25,000 accounts. Fifty-nine of these dealers are MFDA members and five are members of the IDA. Two of the IDA members are also affiliated with an MFDA member. Of the 64 dealers, approximately 55 have operations in Ontario. 

The Terms and Conditions on the registration of referring dealers also require dealers to:

• participate in regulatory studies relating to referral fee arrangements and non-mutual fund products; and
• enact and comply with practices, policies and procedures to reflect the findings arrived at pursuant to such regulatory studies (see Terms and Conditions attached as Schedule “A”).

Should dealers not agree to the imposition of the Terms and Conditions, regulators may continue to review and investigate all regulatory issues arising from referrals to Portus. Enforcement proceedings may be undertaken, as circumstances warrant. Participation in the Terms and Conditions process by dealers is encouraged in Ontario and will be viewed by the regulators as a cooperative response to regulatory issues which maximizes prompt recovery to investors.

Acceptance of the Terms and Conditions by a dealer will resolve the regulatory issues in Ontario regarding dealer due diligence and supervision. However, the MFDA will continue to investigate other matters relating to the conduct of dealers in referring clients to Portus. Investigations will also continue regarding the sales practices of referring advisors. The Terms and Conditions process does not affect the rights of clients to pursue further recoveries through the civil court process. Failure to meet the Terms and Conditions will lead to the suspension of the dealer’s registration.

The OSC initially took action on the Portus matter on February 2, 2005. Copies of the Order issued on that date and subsequent documents are available on the home page of the OSC’s website (www.osc.gov.on.ca).

KPMG Inc. was appointed as the Receiver of Portus on March 4, 2005 by the Ontario Superior Court at the request of the OSC. The Receiver was authorized to take control, preserve and protect the assets of the Portus entities. KPMG was also empowered to conduct investigations as appropriate and respond to Portus clients’ questions and claims.

“The expeditious application by the OSC to have the Receiver appointed enabled the Receiver to identify and secure a large proportion of clients’ funds and prevent misappropriation of those funds,” said Bob Rusko, Senior Vice President of KPMG. “We will report back to the Court on the disposition of Portus assets. We are in the process of moving the Receivership into bankruptcy and we will develop a plan to realize upon the assets of the Portus Group and distribute the proceeds to the investors.” Full copies of the Receiver’s reports relating to asset recovery can be found at www.kpmg.ca/portus.

Meanwhile, the OSC is proceeding expeditiously with the administrative and court proceedings commenced in October of 2005. The next appearance with respect to the administrative proceeding commenced against Portus, Boaz Manor, Michael Mendelson, Michael Labanowich and John Ogg is scheduled to take place on January 17, 2006. With respect to the court proceeding against Boaz Manor, the next attendance in provincial court will take place on January 18, 2006.

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For Media Inquiries:	Wendy Dey Director, Communications and Public Affairs 416-593-8120
	Eric Pelletier Manager, Media Relations 416-595-8913
For Investor Inquiries:	OSC Contact Centre 416-593-8314 1-877-785-1555 (Toll Free)

 

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For MFDA Details:	Shaun Devlin Vice President, Enforcement Mutual Fund Dealers Association of Canada 416-943-4672
For IDA Details:	Connie Craddock Investment Dealers Association of Canada 416-943-5870

SCHEDULE "A"
TERMS AND CONDITIONS FOR DEALERS
 

1. The dealer shall repay to its clients all fees (the “Fees”) received from Portus Alternative Asset Management Inc. (“Portus”) in connection with the “referral” of such clients by its registered investment advisors made pursuant to a referral agreement between Portus and the dealer. In addition, where any of the dealer’s investment advisers conducted Portus referrals outside the dealer, and the dealer was aware of those actions at the time, the dealer shall pay to such clients a sum equal to the referral fees paid by Portus with respect to those referrals. A schedule regarding clients to be paid is to be provided by the dealer to the applicable Self Regulatory Organization (the "SRO"), being the Mutual Fund Dealers Association of Canada or the Investment Dealers Association of Canada by March 1, 2006. The schedule shall outline details of all referral fees relating to the above, and the calculation methodology and the amounts of payments to each client.
2. The repayment of Fees referred to in paragraph 1 above, shall be completed as follows:

   (a) On or before March 1, 2006, the dealer shall submit its plan for repayment of funds (the “repayment plan”) to the applicable SRO for review, which shall include full details outlining how the dealer intends to make payment and remain in compliance with SRO capital requirements and shall ensure maximum efficiency from a taxation perspective;

   (b) The dealer shall make payments in accordance with the repayment plan as approved by the SRO with all such payments to be made no later than May 31, 2006 unless otherwise approved by the applicable SRO; and

   (c) On or before June 30, 2006, the Chief Executive Officer of the dealer shall certify that:

   i. the dealer has made payment in accordance with the approved repayment plan, noting any exceptions where such payment has not been made; and

   ii. in all dealings with the Commission, and the applicable SRO, in connection with the Portus matter, including the provision of the schedule of clients in section 1 above, the dealer has conducted reasonable due diligence to determine the relevant facts and has been truthful to the best of its knowledge, information and belief.

3. The repayment of Fees referred to in paragraph 1 above shall not be conditional on the signing of any form of release by clients in favour of the dealer and does not affect the rights of clients to pursue remedies in the civil court process. Prior to receipt of any Fees, clients shall certify the accuracy of the amount of the investment, net of redemptions, they made in the Portus products at issue.

4. The dealer will:

   (a) As of the date of imposition of the terms and conditions:

   i. Where the dealer is an MFDA member, cease any activity that is not in compliance with MFDA Rule 2.4.2 and Member Regulation Notices MR-0030 and MR- 0043; and

   ii. For all other dealers, cease any activity that is not in compliance with prudent business practices;

   (b) By April 30, 2006, submit its referral policies and procedures to the SRO for review. Those procedures will meet the standards in section 4(a) above, and for purposes of clarity, will include that all referral arrangements are adequately and properly disclosed to clients prior to any referrals being made by the dealer and its investment advisors from a third party in connection therewith;

   (c) Correct any deficiencies in those procedures that are identified by the SRO during the above review, any sales compliance examination, or the SRO’s review of the dealer’s response to the industry study below;

   (d) Confirm to the SRO within a time frame identified by the SRO that the dealer:

   i. has corrected any deficiencies as above;

   ii. has distributed the revised procedures to all investment advisers and retained documentary evidence of that distribution;

   iii. operates in compliance with the revised procedures; and

   iv. will amend its procedures as required to meet any future requirements regarding referral arrangements that are established by the SRO or securities administrators.

5. The dealer shall continue to participate in an industry study on the issues arising from referral arrangements and non-mutual fund products, and shall promptly thereafter enact policies and procedures, subject to regulatory approval, to reflect regulatory and SRO requirements arising from the study.

SCHEDULE "B"
 

Excerpt from pages 5 and 6 of a letter from Fraser Milner Casgrain LLP, Representative Counsel to the Investors dated September 19, 2005.

Online source: http://www.portusgroup.ca/docs/rep_counsel/2005_09_19_portus_rep_cnsl.pdf

Summary of Assets and Liabilities

9. The Receiver has located and/or taken control of assets consisting primarily of cash and investments, Notes issued by Sociètè Gènèrale (Canada) (“SGC”) (the “Notes”) and miscellaneous options and Canadian Securities. The Ninth Report provides a consolidated and updated review of those assets and we refer the Investors to the Ninth Report for the detail. In summary, as at the commencement of the various receivership dates applicable to the entities within the Portus Group, the Portus Group assets that will form the greatest part of the assets available to satisfy the claims of Investors, consisted of:

(a) accounts in numerous financial institutions in various jurisdictions holding an aggregate amount of approximately CAD$132.9 million and approximately USD$35.9 million. All of these funds are now under the control of the Receiver subject to a reduction for funding the ongoing receivership costs, costs of Representative Counsel, and for certain distributions under the auspices of the Hardship Committee; and

(b) The Notes issued by SGC which are described in detail in the Ninth Report having in the aggregate a subscription price of approximately CAD$529 million and an aggregate maturity value of approximately $611 million.

It should be noted that the current value of the Notes is somewhere between $529 and $611 million. The Receiver states in the Ninth Report that the market value of the Notes (as at August 19, 2005) is $545.6 million. However, it is unclear whether the Notes can be redeemed or sold at this point in time or whether they can only be realized upon at maturity. It may well be that because the Notes do not provide for early redemption, in order to sell them at this time, they would have to be discounted from their current value and as such the $545.6 million figure could be high. The maturity dates are set out in detail in the Ninth Report and range between September 30, 2008 and December 31, 2011.

It should also be noted that the value of the miscellaneous securities and option contracts is unclear at this point but from the information that Representative Counsel has received to date, and assuming new information is not forthcoming, Representative Counsel does not expect these options and securities to provide significantly more value.

 
SCHEDULE "C"
 

Excerpt from Schedule B-2 of the Ninth Report of KPMG Inc., the Receiver of Portus Group, dated September 19, 2005.

Online source: http://www.portusgroup.ca/docs/reports/2005_09_19_portus_report_09.pdf

 

PORTUS ALTERNATIVE ASSET MANAGEMENT INC. ET AL
PRINCIPAL PROTECTED NOTES ISSUED BY
SOCIÉTÉ GÉNÉRALE (CANADA) ("SGC")
(in $CDN)
					Aggregate Quoted		Principal -
					Price as at		Protected
		Note Series		Purchase	August 19, 2005		Amount
	Purchaser (Note 1)	Number (Note 1)		Price	(Note 2)		(at Maturity)		Issuance Date	Maturity Date
1.	Bancnote Trust	Series I		$44,500,000	$48,935,000		$50,000,000		October 31, 2003	September 30, 2008
2.	Bancnote Trust	Series II		23,994,400	24,258,608		26,960,000		March 1, 2004	September 30, 2008
3.	Bancnote Trust	Series III		32,992,300	33,444,554		37,070,000		March 1, 2004	December 15, 2008
4.	Bancnote Trust	Series IV		11,177,510	11,252,864		12,559,000		March 12, 2004	December 15, 2008
5.	Bancnote Trust	Series VI (tranche 1 & 2)		81,495,800	85,841,840		95,200,000		July 9, 2004	April 30, 2009
6.	Bancnote Trust, Series VI	Series VI (tranche 3)		18,438,000	19,536,300		21,000,000		September 24, 2004	April 30, 2009
7.	Bancnote Trust	Series VI (a)		40,992,000	43,281,600		48,000,000		July 9, 2004	April 30, 2009
8.	Bancnote Trust, Series VI (a)	Series VI (a) (tranche 2)		6,321,600	6,698,160		7,200,000		September 24, 2004	April 30, 2009
9.	Bancnote Trust, Series VIII	Series VIII		62,707,000	64,459,000		73,000,000		September 17, 2004	August 31, 2009
10.	Bancnote Trust, Series VIII	Series VIII (tranche 2)		40,036,500	41,059,500		46,500,000		November 19, 2004	August 31, 2009
11.	Bancnote Trust, Series VIII (a)	Series VIII (a)		23,193,000	23,841,000		27,000,000		September 17, 2004	August 31, 2009
12.	Bancnote Trust, Series VIII (a)	Series VIII (a) (tranche 2)		14,981,400	15,364,200		17,400,000		November 19, 2004	August 31, 2009
13.	Bancnote Trust, Series X	Series X		81,978,750	81,326,700		94,500,000		December 17, 2004	December 31, 2009
14.	Bancnote Trust, Series X (a)	Series X (a)		35,133,750	34,854,300		40,500,000		December 17, 2004	December 31, 2009
15.	BancLife TM Trust, Series I	Series I		11,395,500	11,480,700		14,200,000		December 17, 2004	December 31, 2011
	TOTAL			$529,337,510	$545,634,326		$611,089,000
1.	Based on underlying subscription agreements, purchase and sale agreements, trade confirmations, global certificates and other information received from SGC.
2.	The aggregate quoted prices as at August 19, 2005 that are set out above were obtained by the Receiver from an SG group website provided by SGC.
	Although the Notes cannot be redeemed prior to maturity and there is no traditional market for the Notes, Société Générale Securities Inc. ("SGSI"), a securities dealer affiliate of SGC, quotes a price for the Notes that is determined by SGSI with reference to, among other things, the net asset value of the PAIMF. The prices that are quoted by SGSI from time to time are intended to provide nothing more than an indication of the price that SGSI would have been prepared to pay for the Notes at the relevant time if SGSI was purchasing the Notes at that time. The price that SGSI actually pays for the Notes may vary significantly from the then most recently quoted price and, therefore, the prices quoted by SGSI from time to time may not be representative of realizable values. Most notably, a quoted price may not reflect the price that may be obtained if all, or a large portion, of the Notes were sold within a short period.
	The prices that are quoted by SGSI from time to time will fluctuate based upon, among other things, the performance of the PAIMF and a number of other interrelated factors, including, without limitation, prevailing interest rates, the time remaining to the maturity date, the credit quality of the guarantor and market demand for the Notes. The relationship among these factors is complex and may also be influenced by various political, economic and other factors that can affect the price of a Note.

Unaudited – See Paragraph 2 of the Ninth Report of the Receiver