Michael Mendelson, a co-founder of Portus Alternative Asset Management, pleaded guilty to fraud Monday 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.

KPMG, as the receiver of Portus, left no doubt about what it thought was the cause of the Portus bankruptcy. In a report last year, it blamed "the misappropriation of investors' funds that were used to finance the operations of the Portus Group."

KPMG further alleged that investors' money was misappropriated for the "personal use of the principals and related parties" of Portus. It has recovered more than 85 per cent 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.

The biggest Portus creditor is Manulife Financial, which steered many of its clients to Portus financial products. Manulife announced in 2005 that it would guarantee the recovery of all the money its clients had invested with Portus.