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David Phillips, accused of misleading investors of his investment firm First Leaside Wealth Management Inc. arrives to the Ontario Securities Commission to testify on Queen St., Toronto June 19 2013.Fernando Morales/The Globe and Mail

Two senior executives from investment firm First Leaside Wealth Management Inc. defrauded investors of almost $19-million in 2011 and cannot now argue they had to raise the money to save the business from collapse, an Ontario Securities Commission hearing was told Wednesday.

In closing statements Wednesday in the case involving First Leaside founder David Phillips and senior salesman John Wilson, OSC lawyer Yvonne Chisholm said the men wrongly sold investment units in First Leaside funds without telling investors about an accountant's report by Grant Thornton Ltd. that raised questions about the firm's viability.

She said investors testified during the hearing in June that were upset and "horrified" when they finally saw the report after First Leaside had been shut down by the OSC. Some said they likely would not have invested if they had seen the findings at the time.

"The evidence that you have heard in this case clearly establishes that David Phillips and John Wilson acted dishonestly and in so doing they deprived investors of $18.6-million in just 10 short weeks," Ms. Chisholm told the OSC hearing panel.

The sales were done from late August to late October, 2011, after Grant Thornton reported that First Leaside's future viability hinged on its ability to raise new funds from investors because it did not have enough cash to support its operations. The report also said the firm had a significant "equity deficit" and its real estate assets were worth less than their outstanding mortgages.

Ms. Chisholm said the two men have argued they clearly had to raise new funds to keep the business afloat as Grant Thornton outlined in its business plan for the company, but she said that didn't make it right to do so without revealing the report's findings.

"It is no answer to save your business on the backs of the good people who invested in your company in good faith," she said.

Uxbridge, Ont.-based First Leaside was ordered by the OSC to stop raising funds in November, 2011, and was shut down in early 2012 when it filed for court protection, leaving more than 1,000 investors in the lurch.

Lawyer Alistair Crawley made closing statements on behalf of both accused, telling the panel Wednesday there was no intent to commit fraud because the men believed the Grant Thornton report was not material information. He said they also believed they were not allowed to release it under securities laws that prohibit revealing information about an OSC investigation.

Mr. Crawley said the hearing panel must consider when non-disclosure of information is an error, and when it crosses a line to become fraud. He said fraud requires a willful intention to deceive, and not just a mistake.

"Simple knowledge of facts that were disclosed or not can't be equated with the type of intent required to make out a case of fraud," he said.

He said if the two men are guilty of fraud, then so is the whole board of First Leaside, because they also knew about the report and allowed units to be sold at the time.

The two men have also argued the OSC should have known they were selling units throughout 2011 because it was openly discussed in the Grant Thornton report, and the commission raised no objection until late October.

Ms. Chisholm said evidence in the case showed the men did not seek approval from the OSC to sell units and also did not ask for authorization to distribute the Grant Thornton report. She said the OSC believes there was no legal barrier to distributing the report to investors.

"We see it is clear there was no effort through contacts with staff or Grant Thornton to see if there was any way to provide the report," she said.

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