Investors Scrutinizing the Regulators

Home Page


Securities Regulation In CanadA

Fox Guarding the Hen House


Manulife faces class-action suit in Portus affair

Mar-3-2005 - Manulife Financial Corp is facing a multimillion dollar class action lawsuit for allegedly failing to conduct proper due diligence on investments sold by Portus Alternative Asset Management, a hedge fund currently under suspension by Canadian securities regulators.

The statement of claim, filed this week in the Ontario Superior Court of Justice, is seeking C$240 million (US$194 million) in compensation from Manulife Financial, alleging the firm should have had a "heightened" sense of duty to delve further into Portus's complex and risky strategy.

The claim also says other financial institutions in Canada had refused to recommend Portus to their clients after performing due diligence, while Manulife forged ahead with an arrangement that eventually saw it send more than C$240 million in client assets Portus's way.

The plaintiffs "were not qualified or accredited investors to invest in high risk and highly speculative hedge fund investments like those made by the Portus Fund," the claim said.

Portus was also entitled to charge "excessive and egregious" management fees, commissions and referral fees "significantly above those considered prudent, fair or reasonable by industry standards and industry practice," according to the claim.

As a result, Manulife should have been aware it was "virtually impossible and totally unrealistic" for investors to realize any return on their investment capital, given market conditions and the fees being levied, the claim said.

The lawsuit marks another chapter in the ongoing Portus saga, which began to unfold last month after regulators effectively shut down the fund amid concerns over its sales and compliance practices as well as its allocation of assets and promises of principal-backed guarantees.

A company spokesman had no comment on the lawsuit. However, Manulife has stated in the past that the Portus structure and products sold to their clients were not as presented to Manulife and not as disclosed in the Portus offering memorandum.

According to Portus's marketing materials, the Toronto-based firm struck a "strategic alliance" with Manulife Securities, the investment arm of Manulife, in August 2003. It also said Portus was selected by Manulife "after the company did extensive due diligence."

As part of the arrangement, Manulife Securities received a syndication equivalent to 0.5% of assets, which by some estimates amounted to more than C$10 million, plus "significant" trailing fees, according to the lawsuit.

Portus generally paid advisors 5% of referred assets, plus one-quarter of an 18% annual performance fee. The underlying fund-of-funds managers Portus selected were entitled to 1-2% annually, as well as a 20% upside performance fee.

The statement of claim was filed on behalf of some 10,000 class members comprising about 30% of Portus funds sold.

Portus, with approximately C$730 million under management and some 26,000 clients, was ordered by regulators last month to stop taking in new funds and opening new accounts. Its founder, Boaz Manor, was also ordered to stop trading on behalf of the firm's funds and accounts.

Investigators are also examining whether Portus shifted some of its assets offshore to St Vincent and the Grenadines, out of reach of Canadian regulators, and funneled other assets through additional offshore entities.