OSC began investigating First Leaside in 2009: court filings

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The Ontario Securities Commission was poised to launch proceedings in October against failed high-end investment group First Leaside Wealth Management Inc., but the company avoided the action by agreeing to stop taking money from investors.

Details of the OSC's long-running – and ongoing – investigation of First Leaside were unveiled Friday in court documents filed as part of the Uxbridge, Ont.-based company's application for bankruptcy protection.

Grant Thornton Ltd., the court-appointed monitor overseeing First Leaside as it winds down its operations, said the OSC advised the company on Oct. 28, 2011, that it intended to bring proceedings against it.

"In order to avoid action by the OSC, the Group negotiated a voluntary cease-trade order over all its entities," the accounting firm said in a court filing.

First Leaside agreed to stop accepting new funds from investors and to appoint Grant Thornton as a monitor over its affairs. As part of the negotiation with the OSC, it also sent all its investors a copy of an August report by Grant Thornton outlining First Leaside's financial problems.

The court filing does not detail the OSC's concerns about the company. However, a November letter to investors, signed by three of the company's directors, said OSC staff felt "it is not appropriate to use money raised from new investors to fund the operating losses, rehabilitation costs and distributions of existing limited partnerships."

Founded in 1989 by David Phillips, First Leaside offered a variety of limited partnerships and other investment pools, primarily investments in real estate assets such as apartment buildings. Its 1,200 clients are mostly wealthy investors.

At the same time the OSC was acting, Canada's brokerage industry regulator also notified the company's securities arm, First Leaside Securities Inc., that major restrictions were being placed on its operations.

The Investment Industry Regulatory Organization of Canada told First Leaside Securities on Oct. 28, 2011, that it could not open new client accounts, reduce the firm's capital in any manner, or make any payments to insiders or related parties. IRROC held a hearing on Friday to suspend the investment firm's membership, effectively shutting it down.

A court affidavit by First Leaside's new chief restructuring officer, Gregory MacLeod, said the OSC investigation began in the fall of 2009.

"First Leaside co-operated with the OSC throughout the investigation and endeavoured to respond to each any every one of the OSC's inquiries," Mr. MacLeod said in his court filing.

First Leaside hired Grant Thornton last March at the OSC's request; the firm's August report concluded First Leaside had serious cash flow and operational challenges and weak financial reporting procedures.

Court filings show First Leaside's various limited partnerships and other investment pools had assets worth $370-million. It owed $176-million to mortgage holders and secured creditors, and a further $132-million to unsecured creditors. The company said it has also issued $199-million in equity to investors.

Based on its estimated asset values, First Leaside said its secured and unsecured creditors should receive payments, but there will not be enough money to full reimburse equity holders. The payouts will vary depending on the financial state of the various entities owned by the equity investors.

"Regardless, it is apparent that there is a material equity-holder deficit in both individual First Leaside entities, and the overall First Leaside group," the company said in a court filing.

First Leaside disclosed that its cash reserves have fallen to $1.6-million as of the end of January, and that it has no recurring revenue stream at present. The cash reserves will be exhausted by April, it said.

The company also provided brokerage services to investors, who owned other securities in their accounts unrelated to First Leaside investments. The court filings said those securities are all intact and the assets are being transferred to other investment dealers.