First Leaside Wealth Management's investors would still have the $18-million they invested in the fall of 2011 if the Ontario Securities Commission had not shut down the firm in November that year, company founder David Phillips testified Thursday.
Mr. Phillips told an OSC hearing he was certain in 2011 the firm was going to succeed and would meet the milestones in a three-year strategic plan.
He told OSC lawyer Yvonne Chisholm he did not think investors needed to know the conclusions in an independent report by accounting firm Grant Thornton Ltd. from August, 2011, that questioned the firm's viability and showed it had a significant equity deficit.
Ms. Chisholm suggested First Leaside did not need to sell securities during the fall of 2011 while it was implementing the recommendations of the Grant Thornton report.
"Then we would have been out of business," Mr. Phillips replied.
"And investors who invested $18-million would still have their money," Ms. Chilsholm remarked.
"If you hadn't shut us down, they'd still have their $18-million," Mr. Phillips said.
OSC commissioner James Carnwath, one of three on the hearing panel, asked Mr. Phillips whether he felt he sold securities "honestly, fairly and in good faith" to investors. Mr. Phillips said he had, and explained that he thought the firm was in better financial shape than the Grant Thornton report suggested.
"You were certain you were going to succeed," Mr. Carnwath asked.
"Yes, sir," Mr. Phillips said.
Mr. Philliips and First Leaside senior salesman John Wilson are accused of committing fraud when they raised $18.8-million over 10 weeks in 2011 without giving investors the findings of the Grant Thornton report.
The report said First Leaside's viability hinged on its ability to raise new funds from investors because it did not have enough cash to support its operations, and said the company had a $131-million equity deficit because its real estate assets were worth less than their outstanding mortgages and debt.
Mr. Phillips previously testified he was stunned when the OSC asked his Uxbridge, Ont.-based firm to stop selling securities in November, 2011. The company was shut down in early 2012 when it filed for court protection from creditors, leaving more than 1,000 creditors in the lurch.
Mr. Wilson testified Thursday at the OSC hearing, saying he sold $8.9-million of securities in the fall of 2011, the largest volume of any First Leaside salesman. He said he believed the Grant Thornton report was an affirmation that First Leaside was viable if it succeeded in its three-year business plan.
"I had no issue raising capital," he said. "In my mind, we were on the right track, moving forward."
He said he contacted a First Leaside investors in February, 2012, when he heard the man was upset about the firm's plans to file for court protection from creditors. Mr. Wilson said he was dismayed the investor was accusing him of knowingly "barrelling ahead" selling securities in 2011 "knowing we were in a sinking ship."
He told the investor "none of that" was the case, and said First Leaside staff and their families had also heavily invested. Mr. Wilson testified he personally owned $2-million worth of units when the firm was halted from selling securities in November, 2011.
Mr. Phillips and Mr. Wilson both testified Thursday they believed they were not allowed to give investors the Grant Thornton report because it was covered by an Ontario Securities Act rule that prohibits anyone from revealing information or documents related to an OSC investigation.
Ms. Chisholm asked Mr. Phillips whether that understanding was "an assumption" on his part.
Mr. Phillips said his lawyer, Peter Dunne, had told him it couldn't be distributed. He acknowledged there were no written documents to confirm that the issue of distributing the report to investors had been discussed in 2011, acknowledging the advice had never been put into writing in a lawyers' opinion letter, nor mentioned in any e-mails, nor included in minutes of a First Leaside board meeting.
Ms. Chisholm suggested Mr. Phillips could have directly asked Grant Thornton for permission to distribute the report to investors.
"My attorney has just told me I'd be violating the law if I do it, and you're asking me to override him?" Mr. Phillips replied.