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First Leaside, based in Uxbridge, Ont., 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.Peter Power/The Globe and Mail

Two former senior executives of investment firm First Leaside Wealth Management Inc. defrauded investors of almost $19-million by not disclosing a negative report about the company when selling investment units in its funds, an Ontario Securities Commission hearing panel has concluded.

First Leaside founder David Phillips and senior salesman John Wilson knew a report by consulting firm Grant Thornton Ltd. contained warnings about First Leaside's viability and had an obligation to give the report to investors, the panel ruled in a decision released Thursday.

"Failing to disclose important information to investors constitutes a dishonest act," the ruling says.

A lawyer for both men said Thursday his clients are "disappointed but not surprised" by the decision, which they will appeal.

"It is unprecedented to make a finding of fraud in these circumstances," lawyer Alistair Crawley said in a statement. "The commission has diluted the concept of fraud such that any contentious non-disclosure to investors can be equated with fraud."

First Leaside, based in Uxbridge, Ont., 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.

The firm's two top executives were accused of fraud for raising $18.8-million in the fall of 2011 by selling units in First Leaside funds without telling investors that a report from Grant Thornton raised questions about First Leaside's finances.

The report was commissioned at the suggestion of OSC staff who began reviewing the company in 2010 and had concerns about its financial health. Grant Thornton completed the study in August, 2011, concluding the firm's viability hinged on its ability to raise new funds because it didn't have enough cash to support its operations.

The two-member OSC panel ruled it was "troubled" that Mr. Phillips represented to investors that it was "business as usual" at First Leaside in the fall of 2011, concluding "this was a deliberate falsehood."

Mr. Phillips testified at the OSC hearing in the case in 2013 that he thought the Grant Thornton report was not material information because it laid out a path to financial health for the company. He also testified that his lawyer, Peter Dunne, had advised him the company could not release the report because of rules prohibiting disclosure of information relating to OSC investigations.

Mr. Dunne, however, testified at the hearing that he was "not asked for an opinion" and never provided an opinion letter or e-mail stating that the company could sell investment units without disclosing the Grant Thornton report.

The hearing panel said in its ruling that it accepted Mr. Dunne's testimony as credible and concluded he did not provide an opinion on the issue.

Mr. Crawley said First Leaside was "consistently advised" that it could not disclose the Grant Thornton report, and said the OSC decision does not explain why the hearing panel disregarded evidence from two board members who confirmed the advice had been given.

The OSC will hold a hearing on May 11 to hear submissions about sanctions to be imposed in the case.