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Hedge fund manager Matthew MacIsaac was near the end of a pre-St. Patrick's Day party blitz when he allegedly bought cocaine for a woman at a Toronto after-hours club.

Unfortunately for the 32-year-old executive at MM Asset Management Inc., one of Canada's top-performing funds, the woman was an undercover cop.

On March 17, police said that Mr. MacIsaac, ranked among Canada's most successful fund managers, had been charged with conspiracy to traffic cocaine.

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He was among 33 people arrested after police raided a bar called the Comfort Zone at 4:30 a.m. on a Sunday.

Sources say Mr. MacIsaac, who lives in a nearby loft, tried to explain the $600 in cash in his pockets to police by saying: "I'm a hedge fund manager."

The arrest came after a six-week investigation known as Project White Rabbit, a probe that began when a 26-year-old Hamilton man died of an accidental overdose after allegedly purchasing drugs at the Comfort Zone. Police seized heroin, cocaine, ecstasy and GHB - known as the date rape drug - valued at $30,000 at the club, along with $35,000 cash.

"Drugs were being used openly; drugs were being sold openly," said Toronto Detective Sergeant Ed Roseto.

Over two weeks, MM Asset Management repeatedly denied any involvement by an executive with the firm, until Mr. MacIsaac's lawyer, Austin Cooper, confirmed Friday that his client works at the hedge fund, and had been charged. He said the fund manager, who is free on bail, has yet to enter a plea.

MM Asset Management executive Ben Cubitt insisted two weeks ago that the Mr. MacIsaac who serves as the fund's secretary was not the same Mr. MacIsaac charged after the raid. Mr. MacIsaac's first lawyer, Lenny Hochberg, declined to comment when asked if he was representing the same Mr. MacIsaac who worked at the fund.

Mr. Cooper quickly confirmed the affiliation when he was asked on Friday. He also said there had been no attempt to hide the information.

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"He is a good man," Mr. Cooper said. "I'm afraid that he was in the wrong place at the wrong time, and that police made a sweep and arrested everybody in the place. Of course, we are going to defend him vigorously."

Mr. MacIsaac likely earned $3-million last year. He and partner Hillel Meltz, MM Asset Management's president, and two remaining colleagues at the $300-million fund would have split $10-million of performance-based fees on a fund that returned 17 per cent for investors.

Through his lawyer, Mr. MacIsaac declined to be interviewed. Mr. Meltz was unavailable last week.

A rival fund manager said Mr. MacIsaac is building a sprawling cottage near Tofino, on Vancouver Island.

MM Asset Management runs what's known as an event-driven fund called MMCap Fund Inc. that plays takeovers and other stock market moves. It has stakes in a number of small Canadian resource companies. The fund was launched in 2002 and has among the highest returns in the industry, with 20-per-cent plus performance in five of the past six years and two years of 40-per-cent-plus returns.

Among its backers are Arrow Hedge Partners Inc., a well-known fund-of-funds manager that has $20-million invested. Sources say Toronto-based MM Asset Management has told its institutional and wealthy individual clients about the charges against Mr. MacIsaac. Investors in the fund say Mr. Meltz flew back from his home in Israel to help deal with the issue.

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"These guys are great traders, they've put up great numbers. Obviously, though, this problem is a setback,' said one investor in MM Asset Management.

The "setback" began with a St. Patrick's Day celebration that saw Mr. MacIsaac attend two parties before heading to the Comfort Zone club about 4 a.m., sources said. He took about $800 out of bank machines for the evening and had $600 in his pocket when he was arrested. There were 150 people in the club at the time.

He was allegedly approached for drugs by the undercover police officer, a source said. Mr. MacIsaac allegedly tracked down some drugs and gave them to her. When she insisted on paying him, he allegedly refused.

The hedge fund filed a report on charges facing Mr. MacIsaac with the Ontario Securities Commission (OSC) a few days after the arrest, sources said. The regulator must be notified if a registered company executive is charged with a criminal offence.

The OSC put out a notice last Thursday stating that Mr. MacIsaac's registration - which is needed for him to manage money - is now being reviewed monthly, rather than undergoing the typical annual review.

MM Asset Management's principals started their careers at Connecticut-based K2 Advisors LLC, a large U.S. hedge fund that states on its website that it "adheres to the highest standards of ethical conduct in an era of increased scrutiny and transparency."

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CORRECTION

Principals in MM Asset Management began their careers at a Toronto-based hedge fund called K2 and Associates Investment Management. In a story published yesterday, the previous employer was mistakenly identified as K2 Advisors, a Connecticut-based hedge fund. The two fund managers are not related.

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