The founder of failed investment firm First Leaside Wealth Management says he was stunned in late 2011 when the Ontario Securities Commission shut down his company, saying he felt it was viable and was in the midst of implementing a series of recommendations to improve its financial health.
David Phillips took the witness stand Wednesday at an OSC hearing, making his first public comments since his firm collapsed in 2012, leaving over 1,000 investors in the lurch. The OSC hearing room was so packed Wednesday with former First Leaside investors that the hearing had to be briefly adjourned to get more chairs.
Mr. Phillips told a panel of three OSC commissioners that he was delighted with the findings of a third-party report prepared by accounting firm Grant Thornton Ltd. in August, 2011, which concluded First Leaside needed to raise money to remain viable. The OSC asked First Leaside to commission the review because it was concerned about the firm’s health.
Mr. Phillips said he saw the report as an “affirmation” and “vindication” of his strategy and thought it would address the OSC’s worries. He said it was unsurprising to him that Grant Thornton said the firm needed to raise cash to remain viable, because that was always the case for an investment company.
“We thought maybe we had finally gotten the monkey off our back,” he testified, adding he felt “euphoria” when he first read the report.
It turned out, however, that the OSC did not view the report the same way.
Mr. Phillips and First Leaside senior salesman John Wilson are accused of committing fraud when they raised $18.8-million from investors over 10 weeks in the fall of 2011 without disclosing the findings of the Grant Thornton review.
The report said First Leaside’s viability hinged on its ability to raise new funds from investors because it did not have enough cash to support its operations, and said the company had an “equity deficit” because its real estate assets were worth less than their outstanding mortgages.
The OSC alleged that First Leaside had a duty to give that information to investors.
Mr. Phillips told the hearing that his lawyer, Peter Dunne, supported his view that the Grant Thornton report was positive news, not negative. At a First Leaside board meeting in September, 2011, both Mr. Phillips and Mr. Dunne told directors that the report was positive and they were hopeful the OSC was satisfied with the findings because it had not so far raised any concerns.
Mr. Phillips said his reaction was “stunned, shock, surprise, bewilderment” when he was told in late October, 2011, that the OSC was halting his firm’s ability to sell securities, effectively shutting it down, because of concerns about its viability stemming from the Grant Thornton report.
The Uxbridge, Ont., company ran investment pools primarily holding real estate assets, including a large apartment development in Texas.
The company was ordered by the OSC to stop raising funds from investors in November, 2011, and was shut down in early 2012 when it filed for court protection from creditors. Its assets were worth $370-million at their peak, but a receiver liquidating the holdings raised just $125-million and most of those funds were needed to pay off mortgages, leaving little recovery for investors.
At Wednesday’s hearing, Mr. Phillips revealed that he asked Mr. Dunne if he could give the Grant Thornton report to investors as soon as it was released, but was advised “probably not.”
The concern related to a section of the Ontario Securities Act that doesn’t allow anyone to reveal information about an OSC investigation while it is under way.
During the six months that Grant Thornton worked on its report, Mr. Phillips said only a couple of his most senior employees knew about it. He said he was very worried about breaching securities rules and ending up with “some kind of Conrad Black and the boxes moment,” referring to allegations Mr. Black removed evidence from his company during an investigation.
Mr. Phillips said one of the company’s directors also asked at the September board meeting if the report could be given to investors, and was again told by Mr. Dunne it was probably not allowed because of the OSC’s confidentiality rules.