Vulture companies are circling, looking for cheap pickings from the remains of Portus Alternative Asset Management Inc.

Portus bankruptcy trustee KPMG Inc. has warned Portus investors that over the next weeks and months they may receive “multiple unsolicited offers to purchase their claims from a variety of third parties.” These so-called “vulture funds” are looking to purchase, at a discount, investors’ claims on the bankruptcy proceedings.

According to KPMG, three U.S. companies have expressed an interest in buying investors’ Portus claims: Davidson Kempner Capital Management LLC, PrimeShares World Markets LLC (both based in New York) and Silver Point Finance LLC of Greenwich, Conn.

Last month, in a second letter to Portus investors — who now are considered creditors — KPMG said it was advised by one of these companies that it had purchased a Portus claim. When a third party buys such a claim, KPMG says, it steps into the shoes of an investor/creditor, giving it access to the complete list of investors.

At the same time, advisors who referred clients to Portus are being warned not to give their clients advice about selling any Portus investments to a third party.

The Independent Financial Brokers of Canada expects that advisors will be asked by their clients whether the clients should sell their claims to a third party.

“In our view, it is not advisable for advisors to provide such advice, as there are many outstanding issues [that] would need to be taken into account before an informed decision is made,” Susan Allemang, the IFB’s director of regulatory affairs, wrote in a Sept. 12 e-mail to advisors and MGAs connected with the Portus case.

Advisors are already under scrutiny for referring clients to Portus. It could be perceived as a conflict of interest, says Allemang, if advisors turn around and advise those clients to sell their Portus claims.

Twenty-six thousand investors had $800 million tied up in Portus when the former hedge fund collapsed in 2005.

A preliminary estimate by KPMG shows investors eventually will get back 86¢ on the dollar. The bulk of the recoverable funds is tied up in notes held by Société Générale (Canada) that are set to mature over the next three to five years, says Bob Rusko, the KPMG senior vice president in Toronto who is handling the Portus bankruptcy. The rest is composed of cash and short-term investments. (For more details, visit www.portusgroup.ca/bankruptcy.html.)

However, the exact timing of any payout is not yet known, and some investors may want to sell their claims at a discount in exchange for getting cash now.

“We don’t have the details of the offers being made to creditors,” Allemang says. “There will be clients who want to get rid of all this and take the money.”

That is exactly what the vulture funds offer. “Money now,” says Roger Von Spiegel, a principal with PrimeShares. His company is one of many interested in the Portus bankruptcy claims. And PrimeShares would like to buy out any claims now rather than later. “We buy all sorts of distressed credit,” he says.

Investors are being advised that they should get expert advice with regard to tax treatment before deciding whether to retain or sell their Portus claims. If a Portus investment is in a registered vehicle such as an RRSP, Allemang says, there could be serious tax implications involved in selling a claim.

“Investors should seek independent tax advice if they wish to pursue the sale of their claim,” Allemang advises in her e-mail. She also notes that it may be advisable to tell clients to contact representative counsel Doug Knowles, a Vancouver-based partner with Fraser Milner Casgrain LLP, directly. Knowles has been appointed to represent the interests of investors.

Knowles says he and his firm would be willing to provide advice, but before doing so he would have to seek guidance from the courts to establish that it is within his mandate. Investor-creditors who decide to wait out the results of the bankruptcy are likely to balk at legal fees coming out of their share of bankruptcy proceeds to service a small number of investors who want to get out, he says, especially if those getting out are looking for individualized advice.

Knowles might be able to provide general advice, but requests for such advice would have to come directly from investors. “If we got enough inquiries from investors who were not getting answers from KPMG, we would be prepared to invest some time and see if we could come out with some guidelines,” he says.

@page_break@However, Knowles would encourage investors to go to KPMG first. KPMG may not be willing to provide individualized advice, either, but the firm may be able to set out general considerations that should be taken into account before selling a Portus claim.

In the September letter, KPMG says it is working to establish a procedure for transferring registered products to another registered plan or trustee of a registered plan, and warns that until proper procedures are in place to do so, selling a Portus claim will deregister tax-protected investments and trigger tax liabilities.

KPMG is working with Saska-toon-based credit union Concentra Financial to establish what needs to be done for investor-creditors who wish to sell their claims while maintaining the registered status of their Portus investments. Concentra is the named RRSP trustee in the Portus structure.

KPMG intends to go back to court this month to get the tax strategy approved so investors will know what to do, Rusko says. At the same hearing, KPMG also intends to get clarification from the court regarding the continued role of representative counsel.

“Our view is that representative counsel performed a valuable function during receivership,” says Rusko. But last June, during the first meeting of Portus creditors, five inspectors were elected from among the creditors to represent the interests of the group.

Working with direction from the inspectors, “the important role of representing the legal and fiduciary interests of investors falls to the trustee,” says KPMG in its first trustee letter of Aug. 10, 2006.

Since the Portus situation shifted in March 2006 from receivership to bankruptcy, KPMG’s role has changed from receiver to trustee in bankruptcy. A receiver cannot distribute the assets, but a trustee can, Rusko explains.

Meanwhile, two Toronto law firms — Thornton-GroutFinnigan LLP and McCarthy Tétrault LLP — hired as legal counsel to KPMG during receivership, continue to advise KPMG in its role as trustee.

Against the backdrop of these developments, the IFB is in the midst of negotiating an agreement with the Ontario Securities Commission not to proceed against its members if they return their commissions — a deal similar to the ones negotiated between the OSC and the Investment Dealers Association of Canada and the Mutual Fund Dealers Association.

The OSC has been provided with draft terms and conditions, says Allemang: “We’re waiting for OSC feedback. Hopefully, it won’t be too long.” (To be added to the IFB Portus update list, send an e-mail to portusupdates@ifbc.ca.) IE