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The Ontario Securities Commission is probing Emerge Canada Inc. even after the troubled investment manager shut down all its retail funds by the end of last year.

OSC chief executive officer Grant Vingoe described the case as an “active investigation” in a recent interview with The Globe and Mail, but did not elaborate on the issues under review or the timing for completion.

“It was a unique event in the history of ETFs that we would take the action that we did and actually cause this type of freeze to be instituted – now that investigation has to take its course,” he said. “I do understand the frustration for holders of the Emerge units as that unfolds.”

A spokesperson for Emerge Canada and Lisa Langley, its chief executive officer and 100-per-cent owner, declined to comment for this article.

On April 14, 2023, the OSC imposed a temporary cease trade order on the company’s 11 exchange-traded funds because the funds were unable to file audited financial statements after auditor BDO Canada LLP resigned. In April, The Globe reported that Emerge Canada, which managed about $118-million in assets at the time, owed a total of $2.53-million to its Emerge ARK funds.

A month later, the OSC suspended Emerge Canada’s operating licence, saying the amount owed had increased to $5.5-million and Emerge Canada was unable to collect money owed to it by its U.S. affiliate, which was majority-owned and run by Ms. Langley.

Emerge Canada sold all the investments in its ETFs last October and terminated them by Dec. 29, but still owed money to fund unitholders. The unpaid loans ranged in value between 7 cents and 40 cents a unit at five ARK-branded funds.

Yves Rebetez, a partner with Credo Consulting Inc., a financial services consultant, says fundholders should question where the auditors and regulators were as Emerge Canada’s financial condition deteriorated.

“How is it that the investors find themselves in this situation when there is supposed to be processes, oversight, supervision, auditing et cetera in place that prevent these situations from coming into effect in the first place?” Mr. Rebetez asked. “What kind of a system is this? … There were signs things did not add up.”

Emerge Canada revealed Dec. 14, 2022, that, nearly six weeks earlier, BDO had resigned as the auditor of its funds. In regulatory filings, Emerge and BDO said there were no disputes over accounting issues. (BDO declined to comment,, saying it is a confidential client matter.)

However, when the OSC released a decision document supporting the May, 2023, cease trade order, Debra Foubert, the director of the OSC’s compliance and registrant regulation branch, said OSC staff had explicitly objected to Emerge Canada’s accounting and had been “in dispute” since OSC staff reviewed the unaudited third-quarter financial statements of the U.S. affiliate.

The OSC said that because the amount owed by the U.S. affiliate to Emerge Canada climbed by 155 per cent in the first nine months of 2022, the regulator did not agree it could be treated as a “current asset” on Emerge Canada’s balance sheet.

If Emerge Canada removed the amount from current assets, it would not count toward the funds’ working capital. And Emerge Canada would fall below the minimum required by the OSC.

Ms. Foubert wrote she did not accept Emerge Canada’s assertion that because the loan was a current asset in the last BDO-audited financial statements, Emerge Canada could continue to say it was. “I don’t find this reliance reasonable considering the material increases in the related-party receivable.”

With no additional detail available from the OSC since that May, 2023, document, investors are left wondering what happened.

“Is this a case of a company that just had really bad judgment but there was no wrongdoing?” Mr. Rebetez said. “Or did they invest in something where there was malfeasance and the regulator totally dropped the ball by not flagging that earlier, and not taking action earlier?”

As Emerge Canada contends with the OSC, Ms. Langley continues to face civil suits.

Lawsuits by three former employees, filed concurrently in Ontario and New York State, allege they are owed unpaid wages, as well as hundreds of thousands of dollars in personal loans they made to the company.

In the New York State case, Buffalo-based lawyer Charles Englert III told the judge on Jan. 16 that Emerge Canada and Ms. Langley had sent the ex-employees that day “a settlement offer which we believe will lead to the resolution of this matter.”

But Matthew Lazroe, a lawyer for the ex-employees, told the judge three days later his clients declined the settlement offer.

“My clients have been promised for months that there was funding to pay off the loans, just to be misled by defendants,” he wrote in a letter to the judge. “My clients believe that defendants are wasting funds of the business and personal funds in lieu of paying their debts.”

In a Feb. 9 statement of defence in the Ontario case, Emerge Canada and Ms. Langley denied the allegations, referring to the damages requested as “grossly inflated.”

Last November, The Globe reported that over the past 14 years Ms. Langley had been named in 12 lawsuits and three tax liens, and had filed for personal insolvency in Ontario. Ms. Langley made her personal insolvency filing in March, 2011. It was discharged Jan. 21, 2019, less than a month before the Emerge funds filed their first prospectus with securities regulators.

Under Ontario securities law, individuals must disclose information about past bankruptcies, insolvencies, consumer proposals and creditor arrangements in their application for registration. That information is kept confidential to the extent permitted by law, OSC spokesperson JP Vecsi told The Globe.

Investment funds are also required to declare in their prospectus to unitholders whether a director or officer has become bankrupt or made a proposal relating to bankruptcy or insolvency within the past 10 years.

None of the prospectuses filed between Feb. 13, 2019, and that June included a disclosure of Ms. Langley’s March, 2011, petition under the Insolvency Act.

Mr. Vecsi declined to answer whether Ms. Langley told the OSC about her insolvency filing, citing the confidentiality provisions.

“The trustee, manager and promoter of an investment fund are required to certify that the prospectus contains full, true and plain disclosure of all material facts relating to the securities offered by the prospectus as required by securities legislation,” he added. “In this case, the prospectus certificate was signed by Ms. Langley and two other individuals acting in various capacities.”

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