Bridging Finance Inc. executives drafted deceptive credit-committee memos and failed to disclose conflicts of interests on loans that ultimately earned them tens of millions of dollars, according to a key witness for the Ontario Securities Commission in its alleged fraud case against three of the private lender’s leaders.
Dennis McCluskey, a former Bridging Finance official who sat on the lender’s eight-person credit committee, testified Wednesday as part of the OSC’s enforcement hearings. He alleged that loan approval documents were sometimes altered for reasons that were unclear to credit-committee members like himself.
He also alleged that some of these documents provided false uses of proceeds, meaning credit-committee members, the majority of whom were needed to approve a loan, were not told what the money would really be used for.
The OSC has formally charged David and Natasha Sharpe, the husband-and-wife duo that ran Bridging Finance until its 2021 receivership, with fraud. Bridging’s former chief compliance officer, Andrew Mushore, has also been charged with fraud. The regulator’s enforcement hearing started in June.
The OSC is seeking to ban the Sharpes and Mr. Mushore from various types of participation in Ontario’s capital markets, and is asking for penalties of up to $1-million for each alleged breach of securities laws.
In June, the OSC said six Bridging Finance insiders would testify. Mr. McCluskey is a key figure because he was one of Bridging’s longest-serving employees, having joined the firm in 2015 when it was barely known and managed a small fraction of the $2.09-billion it ultimately oversaw. Mr. McCluskey worked closely with Natasha Sharpe, who sourced the majority of Bridging Finance’s loans.
The OSC’s case is largely built around loans to three of Bridging’s borrowers – companies owned or controlled by Rishi Gautam, Gary Ng and Sean McCoshen – and as a credit-committee member, Mr. McCluskey was integral to the approvals of all three.
On Wednesday, OSC lawyers went into the most detail on the loan involving Mr. Gautam. The regulator has previously alleged that the Sharpes asked Mr. Gautam to accept a “back-to-back loan” – an arrangement whereby he would receive a $35-million loan from Bridging, only to turn around and lend that money back.
This $35-million, the OSC alleges, was used by the Sharpes to buy out a co-manager of Bridging Finance’s flagship fund. In other words, the buyout was paid for with investor funds and disguised to look like the money came from elsewhere.
The back-to-back loan has gained prominence throughout the hearing because the OSC disclosed in June that it sparked the regulator’s investigation. In 2020, the OSC received an anonymous tip about it, and the regulator ultimately assigned a forensic accountant to study the matter.
On Wednesday, Mr. McCluskey said the approval process for this loan was “unusual.” For one, David and Natasha Sharpe called him early on a Saturday morning in September, 2018, to brief him on the loan – something they had never done before. Their false explanation for the extra care, he alleges, was that the borrower was considering making an investment in Bridging Finance, so they had to be careful concerning any conflicts of interest.
Mr. McCluskey said Wednesday that he found their actions so strange that he made sure to send copies of his approval feedback to his private e-mail address so that he would have a record in the future. (To this end, the OSC has alleged that Bridging Finance destroyed 34,000 e-mails in a “targeted effort to cleanse the record of evidence.”)
Adding to his confusion, Mr. McCluskey said that a falsified credit-committee memo for this loan was also drafted and backdated to Aug. 31, 2018, for reasons he could not quite understand.
As well, Mr. McCluskey testified that the approval process for a $32-million loan to Mr. Ng was unusual. When the loan was sent to the credit committee for approval, Mr. McCluskey said he noticed that the borrower named was a Manitoba numbered company, but the owner was not listed.
Ultimately, he inquired about this and was told that Ms. Sharpe instructed the person who drafted the memo to not include Mr. Ng’s name. “I thought it was ridiculous,” Mr. McCluskey testified.
Loans to Mr. Ng are a key element of the OSC’s case because the Winnipeg businessman bought a 50-per-cent stake in Bridging Finance for $50-million in 2019, and the regulator alleges that the Sharpes used investor money to enrich themselves.
The OSC also alleges that the Sharpes did not disclose that the money Mr. Ng borrowed would be used to buy half of their company.
Tim Kiladze