The author of the Portus debacle was born in Israel, where his father, Daniel, developed defence systems for the Israeli military before moving his family to Canada in 1988. In Toronto, Daniel founded EIS Electronic Integrated Systems Inc., which manufactures traffic-monitoring equipment. The younger Manor had a classic Toronto Jewish upbringing, growing up in Forest Hill and attending Forest Hill Collegiate Institute. His yearbook photo for 1992, his graduating year, sported this oddly prescient and creatively spelled caption: “Into the future I see an array of precious jems, dimonds, and rubies glowing with effervesent light…and a guy named Louie yelling ‘Put the jems in the yellow bag, the diamonds in the green bag, and get a move on it before we get busted.’”
Manor went on to attend the University of Toronto and completed a degree in applied science, graduating in 1996. But business was his calling. After working briefly for his father’s firm, Manor met entrepreneur Michael Mendelson, who was running a small merchant bank, KBL Capital. Mendelson gave Manor some work, and soon they were fast friends, united by a desire to become spectacularly rich.
After KBL Capital took a hit when the dot-com bubble burst in 2001-’02, Manor and Mendelson looked around for a new line of business and settled on hedge funds. They devised an investment plan that was brilliantly simple: They told investors that all of their money was going to be plowed into principal-protected notes issued by a large bank–in this case, the French giant Société Générale. The bank then promised the notes would be linked to returns of a basket of hedge funds.
Normally, retail investors are not allowed to invest in hedge funds; they’re too risky. But this structure provided a workaround. The upshot was that, after five years, investors would be guaranteed to get at least their principal back, plus whatever was made by being linked to the hedge funds. “You’re selling zero downside,” explains Mendelson. “And your upside is, you’re tied to a sexy asset class.” The duo’s dream was to build an investment management firm that would grow to $5-billion in assets, sell it off and pocket $250-million apiece.
They opened Portus in January, 2003, with Mendelson acting as the operations guy and Manor the investment guru. Things took off when they managed to land a referral arrangement with a group of securities dealers, including a branch of Manulife Financial Corp., one of the most solid names in the financial industry. This meant hundreds of brokers across the country were steering their retail clients to Portus. It was like striking oil, with hundreds of millions coming through the door every quarter at one point. Eventually employing 120 people, Portus leased offices on the 24th floor of BCE Place at the foot of Bay Street, with a stunning view of Lake Ontario. It was a cocky, young workplace that “reeked of arrogance,” recalls one former Portus salesman. “People wanted to work for us because we were the shit.” Hours were long, expectations high. Vacations were frowned on.
In the office, Manor was introverted and private. “Boaz was often in his office with the door closed,” says the former employee. “He was the strong, silent type. He was paranoid.” Nevertheless, Manor was the face of Portus in marketing material and on a ghostwritten book, A Guide to Alternative Investing.
Despite appearances of success, Portus had a design flaw. Its managed account agreement said Portus would be entitled to an annual management fee ranging from 1.9 per cent to 2.25 per cent of the market value of assets in an investor’s account. But Mendelson and Manor felt this was not enough money to grow the business as fast as they wanted. In particular, they needed a lot of cash to persuade financial planners to steer clients to Portus.
Their solution, as it turned out, was illegal. Although the firm’s managed account agreement explicitly said Portus was required “to invest all assets which the investor contributes,” in reality only 86 cents of every dollar was invested in the principal-protected notes. The remaining 14 cents went to meeting Portus’s payroll and expanding the business by paying fees to brokers. “That was the fraud,” says Joel Vale, a Toronto lawyer involved in a lawsuit against Portus’s auditors, PricewaterhouseCoopers LLP, after the hedge fund crashed.
Mendelson claims it was not this straightforward: He says Portus received a huge discount from Société Générale, which Portus then used, through a complex manoeuvre, to pay for operating expenses. And Portus received a thumbs-up from its lawyers that it was perfectly legal. What no one disputes is that none of this was disclosed to investors, as it should have been.
Follow us on Twitter: