Class-action lawsuit against Emerge ETFs abandoned because fund company has no money

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A proposed class-action lawsuit against asset manager Emerge Canada Inc. will no longer advance in court because lawyers representing harmed investors have found the fund company has no assets to recover.

Toronto-based law firm Kalloghlian Myers LLP sent a motion to the Ontario Superior Court of Justice on Friday asking for a discontinuance of a proposed class action against Emerge Canada. The reason, said Garth Myers, a partner with Kalloghlian Myers, does not lie in the merit of allegations against the company, but rather in a lack of insurance and financial resources at Emerge Canada.

“I bring this motion with a heavy heart,” Mr. Myers said in an interview. “I know a lot of people were significantly impacted by Emerge’s alleged misconduct and, from our perspective, the merits of the case remains strong. This was an abuse of the capital markets and I do hope that the regulator will step in to continue to pursue these matters.”

Emerge missed a deadline to pay back $4.7-million it owes to several investment funds it manages, leaving investors as unsecured creditors without their money.

The proposed class action, which was filed in June, 2023, had not yet been certified by the court.

Mr. Myers told The Globe and Mail the law firm had recently been denied funding from Ontario’s class proceedings fund – a source of financial support for approved class-action plaintiffs for legal disbursements. It can also compensate plaintiffs for costs that may be awarded against them. During the application process, Mr. Myers obtained a legal letter from Emerge, in response to his statement of claim, saying the company no longer had any business insurance or any financial assets.

Investors were first alerted of trouble at Emerge on April 14, 2023, when the Ontario Securities Commission imposed a temporary trading halt – known as a cease-trade order – on the company’s 11 exchange-traded funds. At the same time, The Globe reported that Emerge Canada, which manages about $118-million in assets, owed a total of $2.53-million to its six Emerge ARK funds. The funds are branded Emerge ARK because of a partnership with U.S.-based ARK Investment Management LLC, which is run by ARK’S Cathie Wood, a prominent U.S. investor.

A month later, the OSC suspended Emerge Canada’s operating licence. The OSC revealed that the amount owed was $5.5-million, and that Emerge Canada was short of cash because it hasn’t collected money owed to it by U.S.-based Emerge Capital Management Inc. Both companies are led by chief executive Lisa Langley. At the end of 2023, Emerge Canada disclosed it still had not been able to pay back a remaining balance of $4.7-million to fund holders, including accrued interest, and shut down the ETFs on Dec. 29.

Last June, Kalloghlian Myers filed the class-action lawsuit on behalf of Ian Cluroe, an Arizona-based investor who invested about $156,000 in four of the Emerge ARK funds. He received approximately $58,000 in proceeds. Mr. Cluroe told The Globe he first came across the Emerge funds because of the link to Ms. Wood’s brand, ARK.

“I was researching if there was a Canadian equivalent fund to the ARK funds and saw that there was a company called Emerge that mirrored the portfolios – so I didn’t hesitate to put a significant chunk of my savings in there.”

Mr. Cluroe says with the discontinuance of the class action, he has very little hope in recovering any of the $98,000 in retirement savings he has lost in the Emerge ARK funds.

“It is very unfortunate because it doesn’t feel like there was very much regulatory oversight at all,” Mr. Cluroe said. “We need to shine a light on this behaviour because whether it was just incompetence or outright fraud, it is something that the regulator should pay more attention to.”

The OSC has an “active investigation” and continues to oversee Emerge, but has not yet disclosed what issues are under review or the timing for completion.

The proposed class action claimed the fund company was negligent and breached its fiduciary duty to investors who held assets in an Emerge fund as of April 6, 2023 – the date of the cease-trade order on Emerge Canada by the OSC. According to court filings, Emerge – as a manager and trustee – breached its duty of trust, among other things, when it failed to maintain a minimum excess working capital of $100,000 and failed to file its annual audited financial statements for 2022.

Without the breaches, the suit argued, the Emerge ETFs would have continued to trade at or around their net asset value and the class members would not have sustained any damages.

At the time, Mr. Myers said while many Emerge ETF investors “took the risk that their securities would fluctuate in value,” the fund company failed to comply with basic ETF and accounting rules, outside the “ordinary” risk assumed by investors.