Ontario’s financial regulator has added 10 former board members of PACE Savings and Credit Union Ltd. as defendants to its legal action against former senior executives, alleging the directors acted “negligently and in breach of their duty of care."
The former PACE directors are named in an amended claim filed by the Financial Services Regulatory Authority of Ontario (FSRA). The document, which was unsealed by an Ontario judge on Monday, adds to wide-ranging allegations of “civil fraud” and misconduct that the regulator has made against Larry and Phillip Smith, the father and son who were PACE’s president and CEO, their family members and business associates.
Both Larry and Phillip Smith have denied the allegations against them, which have not been proved in court. Both men have countered, through their lawyers and in court filings, that all transactions and payments disputed by the regulator had approval from PACE’s board, or from senior directors.
The regulator alleges two senior directors on PACE’s board approved many of those payments: Ian Goodfellow, who was the board’s chair, and Deborah Baker, who was chair of its audit committee. Both are defendants in FSRA’s civil suit, along with fellow former directors Brent Bailey, Al Jones, Wendy Mitchell, George Pohle, Peter Rebellati, Jim Tindall, Pauline Wainwright and Neil Williamson.
Several of the directors named in the legal action either declined to comment or could not be reached on Monday.
Frank Klees, a former director who previously served as an Ontario MPP, was already a defendant. And two former PACE directors, Ken Topping and Stan Dimakos, are not named. Documents filed in court note that Mr. Topping and Mr. Dimakos contacted the regulator to share concerns about conduct at PACE.
By adding most of PACE’s former directors as defendants to its legal action, FSRA is casting doubt on the quality of oversight the board provided, and the manner in which directors signed off on a complex web of payments and loans. Directors had a duty to make “meaningful enquiries” about payments made to Larry and Phillip Smith, their family members and friends, FSRA alleged. But the directors either “failed" to ask those questions, or “breached their duty of care in failing to prevent the improper payments," FSRA alleges.
“The conduct of the Defendants, individually and collectively, has resulted in the Credit Union suffering material losses, which in some instances are continuing,” according to the regulator’s court filing.
A predecessor regulator to FSRA, the Deposit Insurance Corp. of Ontario (DICO), seized control of PACE in September of 2018, alleging that Larry and Phillip Smith committed “civil fraud” by receiving “secret” payments tied to questionable loans PACE had made under their watch. DICO also alleges that they directed some of those payments to numbered companies owned by Larry Smith’s common-law spouse and one of his sons.
In its amended claim, FSRA alleges that Larry Smith concealed funds he was receiving from PACE by seeking board approvals through a strategy the regulator calls the “folder method.”
Larry Smith’s personal assistant and the credit union’s corporate secretary, Kim Colacicco, would prepare a folder of invoices, agreements and other documents that Larry would take to board meetings. No other officers besides Larry and Phillip Smith and Ms. Colacicco were aware of its contents, according to FSRA, and the documents inside were often stamped in advance as “Approved by Audit Committee."
Mr. Smith would then sit with two directors – typically Mr. Goodfellow and Ms. Baker – and have them sign or initial beside the stamp.
“Larry purposefully did not give accurate or sufficient information to the two directors as to the contents of the documents," the regulator alleges, and he "discouraged any inquiries by other directors as to the contents of the folder.”
Under cross-examination, Larry Smith acknowledged the use of such a folder and said he met with Mr. Goodfellow and Ms. Baker apart from the full board. But he claims they were fully informed of all payments he submitted for approval.
“[Larry] Smith’s experience was that Ian Goodfellow and Deborah Baker took their roles as chair of the board and audit committee seriously and served the best interests of PACE. He strongly disagrees with the insinuation that either was ‘beholden’ to management,” said Alistair Crawley, Larry Smith’s lawyer, in a statement. “Furthermore, [Larry] Smith only submitted requests for payment that he considered to be commercially reasonable and legally justified.”
Ms. Colacicco, the corporate secretary, is also named as a defendant. “She was the most senior officer who had any insight or knowledge into the amounts being paid to Larry, [Phillip Smith],” and numbered companies belonging to Larry, according to the regulator.
Ms. Colacicco declined to comment.
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