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David Sharpe, right, the former chief executive officer of Bridging Finance and his wife Natasha Sharpe, the former chief investment officer and previous CEO, are being investigated by the RCMP.Fred Lum/The Globe and Mail

The Royal Canadian Mounted Police have launched a criminal investigation into Bridging Finance Inc., the private lender that was placed into receivership in 2021 and whose collapse is estimated to result in $1.3-billion worth of losses for investors.

Investigators with the RCMP’s Integrated Market Enforcement Team in Toronto, the group tasked with probing alleged fraud and criminal conduct in Canada’s capital markets, have been interviewing witnesses and seeking records, sources confirmed to The Globe and Mail. The Globe is not identifying those sources because they were not permitted to speak about the matter publicly.

In an e-mailed statement, the RCMP said it “does not confirm or deny if an investigation is under way unless criminal charges are laid.”

It is not clear what aspect of the scandal the RCMP is focusing on, and the investigation may not result in any charges. But there have been numerous allegations of wrongdoing since a Toronto judge, at the urging of Ontario’s securities regulator, placed Bridging under the control of PricewaterhouseCoopers Inc. in April, 2021.

At that time, the Ontario Securities Commission disclosed it had been investigating Bridging for alleged self-dealing and fraud, with a particular focus on Bridging’s husband-and-wife leadership team: David Sharpe, who was the chief executive officer at the time, and Natasha Sharpe, Bridging’s then chief investment officer and previous CEO.

The OSC alleged Ms. Sharpe approved lending $32-million to a businessman, Gary Ng, two weeks before Mr. Ng bought out part of Ms. Sharpe’s ownership interest in Bridging. The regulator also alleged David Sharpe had received $19.5-million in payments to his personal chequing account from a Bridging borrower, Winnipeg businessman Sean McCoshen.

Both Sharpes were fired shortly after PwC took control of the company. None of the allegations have been proven in court.

Since then, PwC has estimated that Bridging investors will lose as much as 66 per cent of their money, marking one of the largest collapses of an investment fund in Canadian history. As one of Canada’s best-known private lenders, Bridging raised money predominantly from retail investors, and lent those funds to mid-sized companies that didn’t meet the credit standards of banks. At its peak, the company managed $2.09-billion of behalf of 26,000 investors.

Although the RCMP is investigating, any criminal prosecution of Bridging officials or employees will face many obstacles, experts said in interviews, in part because of the preceding OSC investigation.

As a major regulator of Canada’s capital markets, the OSC has expansive powers to obtain evidence, which include instructing companies to produce records on demand. The regulator also has the authority to compel witnesses to answer questions – a power the police do not have because of constitutional rights for individuals under criminal investigation.

As a result of this mismatch of powers, the RCMP will be somewhat limited in its ability to rely on evidence collected by the OSC. And if the government were to pursue a criminal prosecution of anyone from Bridging, it would need to be able to prove to a judge the evidence collected won’t violate that individual’s Charter rights.

“Parallel regulatory and criminal proceedings often pose real challenges for law enforcement in Canada,” said John Pirie, a partner at Baker McKenzie LLP in Toronto with expertise in fraud and white-collar matters.

Two of the biggest investment frauds in Canadian history, Bre-X and Sino-Forest, famously ended with no criminal charges being laid against any officials with either company. In both instances, sanctions were pursued by the OSC.

However, other cases show it is possible for the two agencies to simultaneously probe the same matter without tripping over each other. Robert Waxman, a former president of the metals recovery division of Philip Services Corp., was given a 20-year ban by the OSC in 2007, and four years later he was convicted of fraud and sentenced to prison.

Similarly, Garth Drabinsky, the former chairman of failed theatre production company Livent Inc. was found criminally guilty of fraud in 2009, and years later, given a lifetime ban by the OSC from serving as an officer or director of a public company.

Any potential criminal charges stemming from the Bridging affair would also be complicated by the fact that OSC enforcement staff have faced some criticism for including the compelled testimony of Mr. Sharpe in a public court exhibit.

When the OSC went to court to install a receiver over Bridging in 2021, it supplied the court with a voluminous record of its findings. Included was a transcript of a compelled interview with David Sharpe that OSC investigators had conducted just a day before they sought to put PwC in control of the company.

In the interview, the regulator confronted Mr. Sharpe about the $19.5-million in payments he allegedly accepted from Mr. McCoshen. Mr. Sharpe alleged the payments were loans.

When the OSC asked Mr. Sharpe why the payments seemed to always take place shortly after Bridging had advanced loans to Mr. McCoshen’s companies, Mr. Sharpe replied: “It certainly does not look good. That’s for sure.”

In the ensuing months, Mr. Sharpe argued his compelled testimony had been improperly released to the public, and if the regulator wanted to disclose that evidence, it needed permission from an OSC tribunal. A panel of OSC adjudicators agreed. In a March decision, the panel ruled the regulator’s “actions defeated Mr. Sharpe’s reasonable privacy expectations.”

However, the same panel ruled the consequence sought by Mr. Sharpe – the revocation of an order that permitted OSC staff to investigate him – was not an “appropriate remedy.”

The OSC is currently pursuing an enforcement case against Mr. Sharpe, Ms. Sharpe and former Bridging chief compliance officer Andrew Mushore. Again, Mr. Sharpe’s lawyers are back before the commission, arguing the case should not be allowed to proceed because the public release of his compelled testimony violated his privacy rights.

A date for Mr. Sharpe’s motion has not been set, but the OSC has said it will oppose it.

In an interview, Brian Greenspan, one of Mr. Sharpe’s lawyers, said it was news to him that an RCMP investigation had been launched. “Any criminal investigation of David Sharpe would be misguided and without substance or merit,” Mr. Greenspan said.

A lawyer for Ms. Sharpe declined to comment.

In January, the RCMP laid criminal charges against Gary Ng, a case that has a number of connections to Bridging. Mr. Ng, who was briefly a part owner of Bridging, was charged with fraud and money laundering in connection with his alleged use of falsified collateral to secure hundreds of millions of dollars in loans. A lawyer for Mr. Ng has said he will fight the charges.