High-end investment firm First Leaside Group of Cos. has been granted bankruptcy protection and suspended payments to investors, saying they will be reimbursed if possible when its assets are liquidated.
The fund has also warned its investors that their losses might not be covered by the Canadian Investor Protection Fund, which compensates brokerage clients for money lost in their accounts when firms go bankrupt. In a communication to investors posted on its website, First Leaside said CIPF generally does not offer protection against loss of value on individual investments.
The two senior managers of the Uxbridge, Ont.-based investment group, president David Phillips and vice-president John Wilson, have resigned in recent weeks and the firm is being run by a new chief restructuring officer, Greg MacLeod, overseen by an independent committee of directors. The committee is headed by prominent investor and director Leo de Bever.
Mr. de Bever said Thursday he could not comment in detail about what is happening at First Leaside, but said the board felt a filing for bankruptcy protection under the Companies’ Creditors Arrangement Act was the best option for investors.
“What I’m trying to do as chair of the committee is to get maximum value for the underlying investments,” he said. “And this solution seemed to be the best one.”
Mr. de Bever is chief executive officer of Alberta Investment Management Corp., the Alberta government’s giant pension fund, but said his involvement with First Leaside is unrelated to his work at AIMCo.
The Investment Industry Regulatory Organization of Canada, which regulates brokerage firms, said it will hold a hearing on Friday to seek to suspend First Leaside Group’s securities division, First Leaside Securities Inc., from membership in IIROC. That means the firm would not be allowed to operate as an investment dealer, essentially shutting it.
First Leaside Group said it plans to liquidate its portfolio of real estate holdings over time and will use the money to compensate investors as it becomes available.
The firm was founded in 1988 by Mr. Phillips and created at least 19 companies and limited partnerships in which clients could invest. First Leaside managed 2,200 residential rental units in Canada and the United States and had about $370-million in assets under management as of last June.
In addition to investments in multiunit residential properties, First Leaside also offered investment opportunities in retirement homes, raw land in Southern Ontario, four small independent accounting firms, a cidery and brewery in Ontario, and high-tech startup companies.
At the request of the Ontario Securities Commission, the firm hired accounting firm Grant Thornton to report last year on its financial status. The August report concluded First Leaside was struggling because its properties had not achieved forecast income levels, rehabilitation costs to renovate the properties had been higher than expected, and the real estate market had not grown at the anticipated 5-per-cent rate.
The report said First Leaside had about 1,000 investors last year, 90 per cent of them accredited or high-net-worth investors. Investors in the firm’s real estate assets had average investments of $290,000 each.
The Grant Thornton report included an examination of First Leaside’s Wimberly Apartments LP (WALP) fund, which was launched in 1992 and has been a particular problem for First Leaside. The report said two valuators were asked to report on the value of WALP’s Texas properties and concluded they were worth about $83-million (U.S.) as of Dec. 31, 2010, while their outstanding mortgages and promissory notes were worth $121.6-million, raising concerns about WALP’s viability.
“WALP has been a significant drain on the resources of First Leaside Group,” the company said in a November letter to its investors.
In addition to its investment portfolio, First Leaside also managed standard brokerage accounts that contained other non-Leaside investments. A “frequently asked questions” page on the company’s website, dated Feb. 15, said the firm is arranging to transfer the accounts to other institutions.