The Ontario Securities Commission has ordered the founder of failed investment group First Leaside Wealth Management Inc. to stop trying to raise new capital from investors in the firm.
The OSC said David Phillips has continued to work with investors even though his securities registration was suspended in February when the regulator shut down the group’s brokerage arm, First Leaside Securities Inc.
“Phillips is acting as a consultant to at least two groups of investors to raise capital in respect of First Leaside Group entities and has been or expects to be compensated for that activity,” the OSC said in an order Tuesday.
“In so doing, Phillips engaged in or held himself out as engaging in the business of trading after his registration was suspended. ... Phillips has acted contrary to the public interest.”
Commission staff sought a temporary order to halt Mr. Phillips’s business activities even before conducting a hearing on the matter, saying the OSC believed “that the time required to conclude a hearing could be prejudicial to the public interest.”
The temporary order will expire within 15 days unless it is extended at a hearing.
Mr. Phillips’ lawyer Alistair Crawley said that Mr. Phillips is disappointed that he was not consulted about this order, or able to respond to the allegations, with which he takes issue.
“Mr. Phillips intends to seek to overturn the temporary order at the earliest possible date,” his lawyer said.
While neither Mr. Crawley nor Mr. Phillips has yet seen the material that the OSC used to obtain the order, Mr. Crawley said that Mr. Phillips is of the view that the allegations are not accurate.
“It’s correct that he has been serving as a consultant to two groups of investors, however he has not been consulted with respect to those investors raising capital,” Mr. Crawley said. Mr. Phillips has been consulted primarily for his knowledge and understanding of the assets and legal structures surrounding them, and he has not been compensated, Mr. Crawley said.
“The only compensation that Mr. Phillips anticipates receiving is, in the event that either of the proposals is successful, he may be retained to provide property management services in relation to the properties,” 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. A report last year said First Leaside had about $370-million of assets under management as of June 30, 2011, but it also said the value of its U.S. real estate holdings has been declining.
The Uxbridge, Ont.-based firm offered investors limited partnerships and other investment pools primarily focused on real estate holdings.
First Leaside has been under investigation by the OSC since 2009. Last October, the OSC notified the firm that it was poised to launch proceedings against it, but First Leaside avoided the action by reaching an agreement with the commission to stop taking new money from investors.
The firm disclosed the OSC investigation to investors in November, and reported that the OSC had concluded it was “not appropriate” to use new money raised from investors to cover costs related to other limited partnerships or funds.
Since the firm was shut down in February, one group of First Leaside investors has pitched a new business proposal to the broader investment group, asking them to contribute new funds to take control of First Leaside’s largest group of U.S. real estate holding, known as Wimberly Apartments LP.
The holdings include about a dozen apartment complexes in the Dallas-Fort Worth area of Texas. The properties have been hard hit by the U.S. recession and many of the buildings have incomplete renovations and are “unrentable” as a result, according to an investment pitch obtained by The Globe and Mail.
The investment proposal warned the Texas properties could be sold in their current state for as little as $5-million, leaving investors to recover just 7 cents on the dollar from their original investments.
The proposal circulated to investors would see them raise an unspecified amount of money to pay to complete renovations to the buildings to bring their value back up to their 2011 appraised value of $30-million.
A source said the plan appears not to have proceeded because many investors were opposed to putting more money into First Leaside after losing so much.
The pitch sent to investors last month said Mr. Phillips remains the general partner for all the Texas partnerships and has “unlimited personal liability” on the mortgages should a default be triggered on any property. The notice said Mr. Phillips has agreed not to trigger a default by resigning as general partner until “all avenues for a rescue have been explored.”
He has also agreed to act as a consultant to the committee seeking funds to rescue the properties, the notice said. It did not specify any further details about his involvement or compensation.