Déjà vu all over again: SEC lays fraud charges against former Portus co-founder Boaz Manor

Boaz Manor – the co-founder of the failed investment manager Portus Alternative Asset Management Inc. (“Portus”) – finds himself once again at the heart of another securities scandal. The United States Securities and Exchange Commission (“SEC”) has recently brought an action against Manor, his associate Edith Pardo, and two companies controlled by Manor, CG Blockchain Inc. and BCT Inc. SEZC, in the U.S. District Court of New Jersey, alleging investor fraud in connection with an initial coin offering (“ICO”).

Manor’s past securities violations in Ontario

As many Canadians will recall, Portus collapsed and was placed into receivership in March 2005 by the Ontario Securities Commission (“OSC”) after financial irregularities were discovered in connection with Portus’ investment products. In its two years in operation, Portus had raised approximately $730 million from over 26,000 retail investors across Canada and other countries, with company liabilities totaling over $1.1 billion. At all times, Manor was the president and director of Portus, and “the chief architect” behind the investment products. When Portus was shut down, Manor fled to Israel, allegedly in possession of over US$7 million in diamonds bought with investors’ money, among other assets.

In 2007, the RCMP laid 18 charges against Manor, including fraud and money laundering. That fall, after his lawyers negotiated the terms of his return to Canada, Manor was arrested and released on $250,000 bail. In 2010, Manor entered a guilty plea in the Ontario Superior Court, admitting to transferring investor funds contrary to his obligations as a trustee and disobeying a court order. Mr. Manor was sentenced to four years in jail, but ultimately served approximately one year of that sentence.

In 2012, Manor entered into a settlement agreement [PDF] with the OSC for a series of securities law violations arising from Manor’s role in the Portus scheme. The OSC permanently banned Manor from trading in any securities as of the date of the settlement agreement, and permanently banned him from becoming a director or officer of any issuer. Manor was also ordered to disgorge to the Commission $8.8 million obtained as a result of his non-compliance with securities law.

Effective use of statutory protective powers

The OSC’s response to the Portus collapse was seen by many as a shining example of thoughtful and effective resort to the remedial tools in the OSC’s tool box.  By quickly moving to obtain a cease trade order in February 2005 and then subsequently moving in the courts for the appointment of a receiver over the Portus assets under s.129 of the Securities Act, the OSC was able to stem widespread investor losses. Under the court’s supervision, and with strong collaboration amongst interested parties, including a handful of financial institutions, Portus investors ultimately received approximately 95 cents on the dollar of their investments.

The SEC claim

The recent SEC claim [PDF] alleges that Manor, along with the other defendants, conducted a fraudulent and unregistered offering of digital asset securities known as BCT Tokens (the “Tokens”). The claim contends that between August 2017 and September 2018, the defendants raised at least $30 million from hundreds of investors through an ICO of the Tokens “in a purported effort to develop a suite of technology solutions for hedge funds and other traders investing in digital assets.”

The SEC alleges that the defendants fraudulently sought investments by lying to and misleading investors about material matters, including (i) Manor’s identity, criminal background, and role in the business; (ii) Pardo’s role in the enterprise; (iii) the composition of their business’ management team; and (iv) the use of their technology by certain hedge funds. The SEC contends that, amongst other things, Manor used an alias and changed his appearance to “hide his background as a convicted criminal and his involvement in the widely-publicized collapse of [Portus].” The claim states that the defendants also lied about the fact that Manor controlled both corporate defendants, instead misrepresenting to investors that Pardo was their sole owner and falsely claiming that she had invested millions of her own funds into the business. The SEC alleges that Pardo, in fact, had no managerial authority over the companies, but was merely a front to conceal Manor’s identity and control over the businesses.

The claim further contends that the defendants misled investors about the state of the technology they were developing. The defendants had claimed that the technology was “live in beta”, however, in reality, the technology remained in an early prototype stage and was never used or paid for by any of the hedge funds to which the technology was sent. Rather, the funds accepted a free shipment of the prototype from the defendants on a promise that they would assist the funds in securing $200 million in investments, a promise that was ultimately unfulfilled, and more importantly, never disclosed to Token investors.

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey also announced criminal charges against Manor.

Observations

The SEC had indicated that its investigation into Manor and the other defendants remains ongoing.
It also advised in a recent press release that it has received assistance from several other agencies including the OSC, highlighting that regulators will work together to protect cross-border investor interests.

We will continue to keep an eye on this matter and write again as matters unfold.

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Editors

Lawrence E. Ritchie

Partner, Litigation

Alexander Cobb

Partner, Litigation

Shawn Irving

Partner, Litigation

Kevin O’Brien

Partner, Litigation

Lauren Tomasich

Partner, Litigation

Malcolm Aboud

Associate, Litigation