The founder of First Leaside Group defrauded investors last year when he failed to warn them about concerns raised in a review by accounting firm Grant Thornton, the Ontario Securities Commission alleged Monday.
In addition to founder David Phillips, the regulator has also levelled accusations of fraud against John Wilson, a senior salesperson at First Leaside, an Uxbridge, Ont.-based firm that offered investors limited partnerships and other investment pools primarily focused on real estate holdings.
Both men resigned from the firm earlier this year, and lawyer Alistair Crawley, who has been representing Mr. Phillips, said Monday that “the allegation of fraud is a clear case of over-reaching by OSC staff and we will be seeking early hearing dates to finally determine this matter.”
“In our view, there is no evidence of any intent by Messrs. Phillips and Wilson to mislead investors,” Mr. Crawley said.
First Leaside filed for bankruptcy protection in February, leaving about 1,200 investors in the lurch, many of them wealthy individuals in the Toronto area.
In its allegations Monday, the OSC said that Mr. Phillips directed and oversaw the sale of almost $19-million in securities while withholding important information.
The information stems from a report that accounting firm Grant Thornton Ltd. delivered on Aug. 19 last year. The report, which was the product of a six-month review of First Leaside Group, said that the future viability of the group depended on its ability to raise new capital and that there was a significant equity deficit.
The OSC alleges that Mr. Phillips supervised a sales effort that saw investors buy about $18.89-million worth of equity and debt offerings from First Leaside between Aug. 22 and Oct. 28, but did not tell those investors, or First Leaside’s other salespeople, about the Grant Thornton report. In addition to his oversight role, Mr. Phillips is alleged to have directly sold about $3.45-million worth to investors.
Mr. Wilson is alleged to have sold about $8.95-million directly to investors, and also to have failed to disclose the existence of the report, despite having received a copy.
Mr. Crawley noted that staff at the OSC also received a copy of the report, and did not talk to First Leaside at the time about disclosure. The report was reasonably viewed by management and the directors of First Leaside as not being a material change, he said.
The OSC said the Grant Thornton report came about because in February, 2011, OSC staff urged First Leaside Group to hire an independent accounting firm to conduct a viability study.
Months before that, in the fall of 2010, the OSC says its staff sought accurate, third-party valuations for some of First Leaside’s properties and the group hired CB Richard Ellis and Joseph J. Blake and Associates Inc. to carry those out. Their findings raised red flags for the regulator.
A hearing will be held June 25. Among other things, possible penalties being sought include that Mr. Phillips and Mr. Wilson pay a penalty of up to $1-million each and be banned from acting as a director or officer of any issuer or investment fund manager. The regulator has already ordered that Mr. Phillips stop trying to raise new capital from investors in the firm.
Mr. Wilson is one of First Leaside’s founding partners and was a long-serving member of its board. In 2002, First Leaside’s board asked him to relocate from Atlanta to become president of F.L. Securities Inc., and lead the company’s expansion of its real estate securities services, the group’s website says.