Fareport update re: Litigation and restatement of financial results

TORONTO, Aug. 29 /CNW/ - Fareport Capital Inc (TSX-V; CAB). Further to
the information disclosed in the press releases issued by the Fareport Capital
Inc. ("Fareport") dated February 15, 2005, April 14, 2005 and July 19, 2005,
as well as the interim financial statements of the Company released on June
27, 2005 and the Material Change Report issued on July 21, 2005, and in
compliance with its obligations pursuant to Ontario Securities Commission
Policy 57-603, Lou Elmaleh, Chair and Chief Executive Officer of Fareport
today provided the following update to shareholders and other stakeholders of
Fareport in connection with the matters alleged in the statement of claim
issued by Fareport on July 19, 2005 (the "Civil Claim") as well as the various
actions taken by Fareport since its discovery of the alleged malfeasance of
former insiders and others disclosed therein.

Securing of Company Assets and Operations
-----------------------------------------

Following the dismissal of former senior officers, Mr. Robert Donaldson
(Director and former President) and Mr. Nikolai Choumakevitch (former Chief
Operating Officer), Fareport took the following steps to secure Fareport's
assets and operation:

1. The locks to the doors of all Fareport premises were immediately
   changed;

2. Fareport's signing authorities in respect of all its bank accounts
   (including the secret account previously unknown to the Chief
   Executive Officer or the Board of Directors) were changed to remove
   the authority of Messrs. Donaldson and Choumakevitch within days of
   their dismissal. All relevant bank account managers at Fareport's
   banks were advised by Fareport counsel of the pending change of
   signing authorities on the same day as Messrs. Donaldson and
   Choumakevitch were terminated and requested not to honour cheques
   signed by them without first checking with Mr. Elmaleh;

3. Letters were sent to all Fareport's vendors and clients notifying them
   of the dismissal of Messrs. Donaldson and Choumakevitch and clarifying
   that they no longer represented Fareport, or had the ability to bind
   Fareport to any obligation;

4. All other employees in any way related to, or responsible for, the
   alleged malfeasance were terminated as and when their participation
   was discovered in the course of the investigation;

5. Fareport's former external audit firm was consulted in respect of the
   evidence and advised as soon as it became apparent that one of its own
   employees appeared to be involved in the alleged malfeasance;

6. Fareport's external auditor firm was requested to resign immediately
   prior to issuance of the Civil Claim, which it agreed to do, and, upon
   its resignation was immediately replaced; and

7. Fareport demanded, and by way of the Civil Claim, in addition to
   seeking the recovery of up to $12 million alleged to have been
   wrongfully taken from it by former management and others, has now sued
   for, the return of certain of its property (the "Property in Dispute")
   that it alleges was either (a) wrongfully taken from Fareport by
   certain of the defendants to the Civil Claim on or about
   February 15, 2005 or (b) already in the possession of certain of the
   defendants to the Civil Claim and has been retained by them
   notwithstanding Fareport's demand that it be returned. The Property in
   Dispute includes Fareport files, computer equipment and motor
   vehicles, as well as corporate records and legal files retained by its
   former counsel over which such counsel enjoys no solicitor's lien.

Management is now satisfied that, since February 15, 2005, except to the
extent of the Property in Dispute, none of the persons named in the Civil
Claim have had any access to the premises, assets, operations, books or
records of Fareport; nor, to the knowledge of management, has any such person
participated in any decisionmaking in respect of the Company.

Conduct of Business and Operations
----------------------------------

Following the dismissal of the former senior officers, Fareport also took
the following steps to ensure that the conduct of its business would no longer
be vulnerable to malfeasance of the sort alleged in the Civil Claim:

1. A new corporate controller, Mr. Paul Straatman, was hired;

2. A new accounting system was installed to maintain accounting records;

3. All accounting records are now being maintained strictly in accordance
   with GAAP;

4. A corporate governance policy was implemented;

5. A "Whistle Blowing" policy was implemented; and

6. New internal control policies were introduced to deal with cash,
   banking, cash receipts etc.

7. Banking and treasury policies were implemented to establish strong
   internal controls over cash in order to minimize the risk of errors,
   fraud, theft or misappropriation, including (1) feedback controls to
   help detect and measure deviations from certain expected actions and
   to allow corrective actions to be taken, including introduction of a
   Projected Statement of Cash Flow and the Bank Reconciliations; (2)
   approval procedures that stipulate that appropriate approvals be
   obtained for all acquisitions and expenditures, all supported by
   sufficient supporting documentation; and (3) structural and
   organizational controls to reduce the risk or likelihood of fraud,
   theft or misappropriation, including (i) a division of duties in the
   cheque requisition process, controls over methods of payment (i.e. by
   cheque only other than for petty cash items), (ii) use of pre-numbered
   and securely stored cheques only, (iii) proper retention and securing
   of VOID cheques, (iv) prohibitions against issuing blank (i.e. no
   identified payee) cheques, (v) strict requirements for 2 authorized
   signatories on all cheques, (vi) strict requirements related to the
   deposit of all funds, (vii) daily review of banking transactions and
   balances together with follow-up on any unusual items, (viii) proper
   completion of bank reconciliations and appropriate follow-up, (ix)
   physical safeguarding and securing of all cash, cheques and similar
   items; (x) recording of all cheques or similar items as being "for
   Deposit Only" to the credit of one of Fareport's bank accounts, (xi)
   maintenance of a deposit log for each day's deposit that is reconciled
   to the bank deposit record and (xii) monitoring of all accounts for
   returned items with appropriate follow-up.

Governance Matters
------------------

Mr. Donaldson has been requested to resign as a director of Fareport but
has not done so. In the circumstances, pending the resignation or removal of
Mr. Donaldson as a director, the business of Fareport, including the
termination of the employment of Messrs. Donaldson and Choumakevitch, the
subsequent investigations, the commencement of the Civil Claim, the
cancellation of certain debentures issued to certain of the defendants in the
Civil Claim and the introduction of new corporate policies and controls, has
been effected by Mr. Elmaleh in his capacity, and within the scope of his
authority, as Chief Executive Officer, each such executive action having had,
in all cases, the concurrence of all directors of Fareport other than
Mr. Donaldson, whose concurrence was not sought.
Although there have been numerous informal meetings of directors of
Fareport since its last annual general meeting in January, 2005, there have
not been any meetings involving Mr. Donaldson nor, for reasons of his refusal
to resign, any duly constituted formal meeting of the Board of Directors
concerning which Mr. Donaldson has received notice.
Although management of Fareport is of the view that formal Board approval
for any of the various executive actions is not required, counsel to
Mr. Donaldson has initiated legal proceedings challenging the executive
actions on the basis that they did not have the proper approval of Fareport's
Board of Directors, either pursuant to a duly called meeting or a unanimous
written resolution. Accordingly, Fareport is now proceeding with a duly
constituted meeting of its Board, for which Mr. Donaldson will be given
notice, to formally ratify the interim appointment of the new auditor required
due to the resignation of its former auditor and to ratify the executive
actions referred to above.
Whether or not Mr. Donaldson chooses to attend this, or any future,
formally constituted meeting of the Board of Fareport pending his resignation
or removal as a director, it is the position of Fareport that he is not
lawfully entitled to participate in discussions, or vote on resolutions, where
his interest and that of Fareport are adverse. Mr. Donaldson is an adverse
party to the extent of all of the executive actions that are proposed to be
formally ratified.

Restatement of Financial Results
--------------------------------

As confirmed in its press release of July 19, 2005, Fareport can now
confirm that, as a result of matters addressed in the Civil Claim, its revenue
has been understated and its losses overstated in its financial statements for
certain prior periods, although the extent of the variance cannot yet be
confirmed.
In relation to the requirement to restate its historic financial results
as a result of the discoveries that have led to the Civil Claim, Fareport is
now in default of its financial reporting obligations and, in particular, is
in default of the financial statement filing requirements related to its
historic quarterly unaudited and audited annual financial statements for, an
as yet, undetermined historic period. In connection with such default,
Fareport intends to comply with OSC Policy 57-603 - "Defaults by Financial
Issuers in Complying with Financial Statement Filing Requirements" and, in
particular, to make all filings and issue all notices contemplated thereby and
to comply with the Alternate Information Guidelines set out thereunder.
Fareport, in consultation with securities regulators, is now in the
process of generating a re-stated closing balance for the fiscal year ended
July 31, 2003 and re-stated financial results for the fiscal years ended
July 31, 2004 and July 31, 2005 (the "Restatement Period"). Fareport will
submit these re-stated financial statements for the Restatement Periods, when
complete, for subsequent audit by its new external auditors, Segal LLP.
Management projects that the process of completing the restatement of its
historic financial statements for the Restatement Periods and the audit
thereof to enable their public release will take a further ten weeks.
As a result of its default, Fareport could, in accordance with Policy  
57-603, become subject to a management and insider cease trade order or a
cease trade order pending the release of restated historic financial results
and compliance with its financial reporting obligations generally.

Conduct of Litigation and Ongoing Investigations
------------------------------------------------

Mr. Elmaleh, with assistance from newly appointed external corporate
counsel and in consultation with Fareport's directors (other than
Mr. Donaldson), is overseeing the conduct of the Civil Claim by external
litigation counsel. The Civil Claim is now available for review, together with
all of Fareport's other public documents, on The System for Electronic
Document Analysis and Retrieval ("SEDAR"). No statement of defence to the
Civil Claim has yet been filed.
The Company continues to cooperate and assist with ongoing investigations
by securities and other regulators in relation to the matters alleged in the
Civil Claim and is similarly committed to co-operating with any criminal
investigations into the allegations.
Fareport will provide further updates in these matters in accordance with
OSC Policy 57-603 including updates bi-weekly and otherwise as may be
appropriate.