Emerge Funds liquidates investments, but millions still owed by fund manager

Emerge Canada Inc. still owes the exchange-traded funds it manages $4.7-million, which will leave the fund investors to become unsecured creditors if the management company doesn’t cough up the money in a week.

The troubled money manager sold all the investments in its ETFs in October and plans to terminate all of them by Dec. 29, it told fundholders in letters explaining how much money they would receive from the wind-up. Emerge Canada said it expected payments to be made “on or about” Wednesday of this week.

Emerge Canada filed the letters, dated Wednesday, with securities regulators on Thursday.

Emerge Canada borrowed the money from five of the ETFs it manages, starting in 2019. The five are branded as Emerge ARK funds, owing to a partnership with ARK Investment Management LLC, run by prominent U.S. investor Cathie Wood. All told, Emerge Canada managed 11 ETFs.

In a May order that suspended Emerge Canada’s operating licence, the Ontario Securities Commission (OSC) revealed Emerge Canada was short of cash because it hasn’t collected money owed to it by its U.S.-based affiliate, Emerge Capital Management Inc.

Both companies are run by chief executive Lisa Langley. In November, The Globe and Mail reported Ms. Langley faced federal tax liens and lawsuits for alleged nonpayment of money owed over the past 15 years in the United States and Canada.

When asked for comment on Thursday, Corey Goldman, a spokesperson for Emerge Canada, pointed back to the fundholder letters.

Wednesday’s letter from Emerge Canada said it has not paid the amounts owed the funds. Emerge Canada said if the company manages to pay the amounts owed before Dec. 29, the ETFs’ custodian and fundholders’ investment dealers will arrange for payments to fundholders.

“If Emerge Canada is unable to pay the receivables to the five ETFs by December 29, 2023, then these five ETFs will be terminated. ... Unitholders will be unsecured creditors of Emerge Canada for their pro rata portion of the Receivables. Emerge Canada, as trustee of the five ETFs remains responsible to pay you this amount,” the letter said.

Emerge Canada owes the most – $3.9-million – to the Emerge ARK Global Disruptive Innovation ETF. That works out to nearly 40 cents a unit. Absent that payment, fundholders are receiving $6.71 a unit.

It owes $589,714 to Emerge ARK Genomics & Biotech, which also works out to 40 cents a unit, owing to the smaller number of units outstanding. Fundholders are set to receive $6.61.

Amounts owed to Emerge ARK Fintech Innovation ETF, Emerge ARK AI & Big Data ETF and Emerge ARK Autonomous Tech & Robotics ETF, all less than $100,000, work out to seven cents to 13 cents a unit.

Emerge Canada owes nothing to Emerge ARK Space Exploration ETF or any of the five funds branded with “Empower.”

On April 14, the OSC imposed a temporary trading halt – known as a cease-trade order – on the company’s 11 ETFs because the funds were unable to file audited financial statements after its auditor, BDO, resigned in late 2022. In April, The Globe reported that Emerge Canada, which managed about $118-million in assets at the time, owed a total of $2.53-million to its Emerge ARK funds.

A month later, the OSC suspended Emerge Canada’s operating licence. At that time, the OSC reported Emerge owed $5.5-millon to the funds – about $800,000 more than current balance.

Emerge Canada continued to collect management fees on the funds while the cease-trade order is in effect, the OSC confirmed.

Law firm Kalloghlian Myers has filed a proposed class-action lawsuit on behalf of investors. Garth Myers, a partner with the firm, said the letters’ “disclosure was completely inadequate. It doesn’t contain any details with respect to the costs of this liquidation. The unitholders are the beneficiaries of this trust and Emerge, as a trustee, has a disclosure obligation far greater than what they provided.”

Dan Hallett, a long-time fund analyst and the director of asset management for HighView Financial Group, says the Emerge Canada collapse has multiple deleterious effects on Canada’s fund industry.

A fund family’s Investment Review Committee can only review issues that the fund manager refers to the committee, leaving the manager to decide what constitutes a potential conflict of interest. “That’s weak governance,” he said.

He also says Emerge’s failure will – for the time being – simply benefit larger ETF sponsors. “Nobody will blame you for recommending a Vanguard ETF, but if an investment in a small fund from a niche sponsor goes wrong, it will prompt a grand inquisition.”