The Ontario Securities Commission has called in offshore regulators to help gather information on PDP International Bank, a Caribbean financial institution that supposedly holds more than $700-million worth of securities on behalf of controversial hedge fund operator Portus Alternative Asset Management Inc.
Sources familiar with the probe say Portus has told the OSC it holds approximately $730-million worth of Canadian stocks and securities at PDP, a fledgling bank based in Kingstown, the capital of St. Vincent and the Grenadines. However, the sources say the securities watchdog has not been able to contact anyone at PDP to confirm the claim, nor has it determined whether Portus has ownership ties to the bank.
Wendy Dey, a spokeswoman for the OSC, declined to discuss the matter.
Provincial securities regulators across Canada are investigating sales and compliance practices at Portus, and have barred the hedge fund from opening new accounts or making redemptions to customers for the next three months. With no money coming in, Portus has effectively wound down its operations, and last week laid off almost all of its roughly 60 employees.
Offshore regulators have begun to provide some details to the OSC concerning PDP, which opened its doors for business less than a year ago. Little is known about the bank other than it is one of 10 offshore financial institutions licensed by the country's regulator.
Stanton DeFreitas, who helped to register the bank, said yesterday that he had never heard of Portus before the regulatory probe, and does not know Boaz Manor or Michael Mendelson, the fund company's co-owners.
Mr. DeFreitas is part of a Toronto consulting firm that specializes in offshore finance, and is a dual citizen of Canada and St. Vincent. He has no direct ties to PDP, but he said he was skeptical that hundreds of millions of dollars worth of securities would be lodged with a tiny bank in the Grenadines.
Mr. Manor could not be reached for comment.
The securities are believed to be part of a complex hedging strategy Portus used to protect the principal of its BancNote Trust funds. About 26,000 Canadians invested $730-million in these "fund of funds" products, which market themselves as principal-protected: in other words, if the underlying funds fare poorly, the amount of the initial investment is still supposed to be backed by notes or bonds from a major bank.
In a regulatory order earlier this month, the OSC said Portus entered into offshore derivative transactions, essentially swapping the returns on these Canadian securities in exchange for the returns on the principal-protected notes at Société Générale Canada.
The notes themselves are held in an account at Royal Bank of Canada, and the OSC said it believes the amount of the original principal is safe. However, the regulator is not convinced this guarantee would have extended all the way to investors under the elaborate structure that Portus employed.
Portus has maintained it is co-operating with the regulatory probes, but the OSC has said the process of collecting information is moving very slowly. In an interview last week, OSC director of enforcement Michael Watson described relations with the hedge fund as "less than fruitful" at times.
Regulators in the British Virgin Islands are also looking into Portus's operations in that country.
Portus created a BVI subsidiary in December, 2003, less than a year after the company was founded. According to its website, Portus's BVI branch specializes in offshore investment strategies including asset protection, tax minimization and estate planning.
"A carefully designed investment strategy using the managed account opened with Portus Alternative Asset Management Inc. (BVI) can assist you with each of the above-mentioned areas," the site says.
Leon Wheatley, an official with BVI Financial Services Commission, said the agency "has no record of the company making an application for licensing under the [Mutual Fund Act] or any other financial services legislation which requires licensing, registration and/or authorization."
Ruth Chadwick, who monitors hedge funds at the BVI FSC, said the commission is reviewing Portus's website.
© The Globe and Mail
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