Lines Overseas Management has taken exception to a securities lawyer?s assertion that if the company were Canadian it would ?likely lose its licence? for the statements it prepared for a collapsed Canadian hedge fund.

Before regulators shut it down in February 2005, Portus Alternative Asset Management was one of the fastest-growing hedge funds in Canada, raising in excess of US$700 million from almost 30,000 customer accounts including 45 in Bermuda, representing some $1.5 million in investments.

LOM?s Cayman Affiliate, LOM Securities (Cayman) Limited maintained several accounts for Portus and affiliated entities which were active over a 4- month period until March, 2004.

Two months after LOM suspended activity on the accounts, Joseph Groia, a principal of the Toronto litigation boutique Groia & Company Professional Corporation, who was then acting for Portus, discussed LOM?s transactions at a meeting with Portus principal Boaz Manor and accountants from the firm of Kroll Lindquist Avey.

The written account of the June 14, 2004 meeting and other documents would normally be privileged, but they were unsealed last month after Portus receiver, KPMG, obtained a court order from the Ontario judge handling the Portus receivership and bankruptcy.

According to a Kroll memo on the meeting, Mr. Manor indicated he had not performed any due diligence to ensure that the share purchases reflected in the LOM statements were actually purchased because ?he didn?t care if the shares were bought; they would be exchanged for cash in any event (pursuant to the swap)?.

The memo continued: ?[Mr. Manor later added that LOM did not keep an inventory of the shares but that he wasn?t worried because the counter-party?s (PDP) books were unauditable.?

Mr. Manor explained that he had an agreement with the principals of LOM whereby every dollar flowing into one LOM account would flow into another LOM account and then back to Canada.

?LOM simply ?books? the buying and delivery of the TSX shares for a fee ? i.e. no shares are ever purchased,? Mr. Manor explained. ?The agreement with LOM was a verbal agreement only,? the Kroll memo said. Mr. Groia, who began his career with the Ontario Securities Commission and was the OSC?s Director of Enforcement between 1987-1990, told the meeting: ?If a Canadian brokerage had prepared statements similar to the LOM statements, and that fact was discovered, it would likely lose its licence.?

He later warned Mr. Manor against providing documents to his auditor that he had reason to believe were fictitious. Mr. Groia was holding LOM statements at the time and gesturing to Mr. Manor that the LOM statements were an example of such documents because he could be guilty of uttering a false document, according to the Kroll memo. In a follow-up letter, Kroll principal Alan Stewart wrote to Mr. Groia about the issues discussed at the meeting including commingling of funds at several levels and ?doubts over the authenticity of some documentation supporting some transactions e.g. LOM statements and transactions?.

LOM responded to the details of the unsealed documents by stating that all of LOM Cayman?s dealings with Portus were conducted in good faith. The company noted it had ceased doing business with Portus three months prior to the meetings and was not privy to the internal discussions nor aware of them until they were unsealed by KPMG.

In its written statement, LOM said that a Cayman lawyer introduced LOM?s Cayman office to Portus? principal in 2003 and due diligence confirmed that Portus was a large, very well-known Canadian investment manager, licensed and regulated by Canadian securities regulators.

?Due to the complex nature of the transactions that Portus requested LOM Cayman to execute on their behalf, steps were taken to ensure that all applicable regulations were followed,? LOM said in its statement.

?The transactions that Portus wanted to execute in the LOM Cayman accounts were specified in writing by the directors of Portus and the LOM Cayman account holders. Portus provided several Canadian legal opinions from a leading Toronto law firm which supported the transactions and the structure used. Subsequent opinions also confirmed that the transactions need not take place in Canada or on an exchange,? LOM said in a statement.

It continued: ?As specified by the customers? instructions and detailed in the legal opinion, the transactions were off-market, i.e. securities were bought and sold (crossed) internally between accounts (using market closing prices), and not executed on the external markets.?

LOM compliance temporarily suspended the four-and-a-half month old Portus accounts in March 2004 due to an increase in size of the transactions. While the company was in the midst of seeking legal opinions in both Cayman and Canada with regard to the Portus business, LOM Cayman was informed by Portus and their legal counsel that certain tax regulations were changing which would preclude them from continuing to use the current structure.

LOM said its Cayman arm has fully cooperated with the Portus Receiver. All Portus funds which flowed through LOM Cayman accounts have been accounted for and in December last year LOM Cayman voluntarily contacted the Receiver and arranged to reimburse all commissions and fees LOM had received from Portus accounts. LOM said the reimbursement totalling more than C$254,000 (USD$229,000) was to assist the underlying Portus investors.

Mr. Groia?s firm and Kroll both later ceased to represent Portus, but not before advising their clients to inform the OSC and investors of the problems they had uncovered, including the commingling of investors? funds and the transfer of funds between various companies within the group.

Despite the warnings, the Portus group took in a further C$500 million (USD$450 million) more of investors money before it was finally shut down in February 2005.

While KPMG has located the bulk of the money, millions remain unaccounted for. In January, the OSC said it did not know how much investors would eventually be able to recover.

Last month, the OSC charged Mr. Manor and Portus co-founder Michael Mendelson with failing to act in good faith with clients. Mr. Mendelson also was charged with unregistered trading and issuing securities without filing a prospectus.

The charges were the first for Mr. Mendelson while Mr. Manor was charged in October with misleading OSC staff and unregistered trading. None of the allegations have been proven.