Michael Mendelson, a co-founder of Portus Alternative Asset Management, pleaded guilty to fraud yesterday in Toronto and was sentenced to two years in prison for his role in the hedge fund’s collapse.

The Toronto-based fund went bankrupt in 2005, leaving millions of dollars of investors’ money unaccounted for.

In a report last year, KPMG, the receiver of Portus, cited two principal factors contributing to the bankruptcy of Portus in the report; “misappropriation of investors’ funds that were used to finance the operations of the Portus group; and misappropriation of investor funds that were used for personal use of the principals and related parties.”

It has recovered more than 85% of the money.

Police said the Portus Group of Companies, which included the hedge fund, misused more than $100 million of the $750 million raised from 26,000 Canadian investors.

In September, a 27-month RCMP investigation concluded with the force charging Mendelson and the other Portus co-founder, Boaz Manor, with multiple counts of fraud over $5,000, money laundering and possession of property obtained by crime.

Manor was also hit with one count of obstruction of justice.

The other charges against Mendelson were dropped Monday. Mendelson got a reduced sentence in return for agreeing to testify against Manor.

Manor is free on $250,000 bail. He returned to Canada from Israel earlier this month and was arrested on his arrival in Toronto. He faces a court appearance next week. In the past, Manor has denied any wrongdoing.

None of the charges against Manor has been proven.