Emerge Canada, senior executives improperly borrowed millions from ETFs, securities watchdog rules

Ontario’s securities watchdog has ruled that Toronto-based fund manager Emerge Canada Inc. and two executives, including founder Lisa Langley, had breached their responsibilities to investors when they improperly borrowed almost $6-million of investor money to cover operating expenses.

On Tuesday, Ontario’s Capital Markets Tribunal – an independent division of the Ontario Securities Commission that handles adjudicative matters – found that Emerge Canada, Ms. Langley and chief financial officer Desmond Alvares violated a number of securities regulations, including failing to act in the best interest of the funds, borrowing investor money and insufficient record keeping.

However, the tribunal decision found that three members of Emerge’s independent review committee (IRC) – Marie Rounding, Monique Hutchins and Bruce Friesen – did not fail in their duties to oversee conflicts of interest, saying they were not informed about what was happening with the loans. All fund companies are required to have IRCs, which are responsible for reviewing a fund manager’s potential conflicts of interest on behalf of unitholders.

The OSC had accused Ms. Langley and Emerge of improperly borrowing millions from a group of exchange-traded funds named Emerge ARK, investments that were launched with U.S.-based ARK Investment Management LLC, which is run by prominent U.S. investor Cathie Wood.

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Most of the money has not been repaid and investors remain unsecured creditors.

“We find that Langley was not familiar with the regulations and the compliance policies and procedures of her own firm,” the tribunal said in its findings.

“She had a complete misapprehension about what was a conflict, the nature of conflicts in fund management and the process for managing conflicts, including the purpose of an independent review committee.”

The tribunal said Ms. Langley failed to meet her obligations as an ultimate designated person and chief compliance officer. She also failed to identify the loan – known as a receivable – as a conflict and manage the conflict appropriately, and misunderstood the nature and permissibility of expenses charged to the funds, it added.

“The fact that she prioritized the launching of new funds using money borrowed from the funds and thereby significantly growing the receivable, after committing to paying down the receivable in the face of concerns expressed by Royal Bank of Canada and the Emerge Canada IRC, is a glaring example that she did not possess or exercise the level of competence, awareness, or diligence required of her roles,” it said.

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The tribunal also rejected Mr. Alvares’s defence that he should not be held responsible because he took direction from Ms. Langley as her subordinate.

“It is not a defence that he deferred, or may have felt he had to defer, to Langley’s direction,” the tribunal said.

The tribunal added that Mr. Alvares’s explanation that he signed off on certain documents to authorize wire transfers out of the fund is a “clear example of Alvares permitting or acquiescing to the conduct that was occurring.”

Ms. Langley did not respond to a request for comment Tuesday, while Cheyenne Parsons, a lawyer at Crawley MacKewn Brush LLP and legal counsel for Mr. Alvares, declined to comment.

Adam Chisholm, a lawyer with McMillan LLP and legal counsel for the IRC members Ms. Hutchins and Ms. Rounding, said his clients are relieved at the outcome.

“These are accomplished, professional women whose reputations were squarely attacked by the publication of these proceedings, which we have always believed were misplaced,” he said in an e-mail.

OSC alleges Emerge Canada, senior executives improperly borrowed $6-million of investor funds from ETFs they managed

It was the first time the OSC had launched an enforcement case against IRC members, and industry experts were closely monitoring the outcome for its impact on IRC members at other funds.

The OSC argued that Emerge had sent a referral of a conflict-of-interest matter to the IRC regarding the $6-million loan in 2021. However, the tribunal found that executives at Emerge did not flag any conflict issues to the IRC.

“This case should never have been brought,” said Rahul Shastri, a lawyer with Kagan Shastri DeMelo Winer Park LLP and legal counsel for Mr. Friesen. “The Commission publicly blamed the IRC for depriving investors of protection, but the Tribunal found there was never a referral and that the IRC’s duties were never engaged. Independent professionals who serve on IRCs deserve better from their regulator.”

Problems at Emerge first became known to investors on April 14, 2023, when the OSC imposed a temporary trading halt – known as a cease-trade order – on the company’s 11 exchange-traded funds.

The Globe initially reported that Emerge Canada, which managed about $118-million in assets, owed a total of $2.53-million to its six Emerge ARK funds.

A month later, the OSC suspended Emerge Canada’s operating licence. The regulator revealed that the amount owed at that time was $5.5-million.

The OSC said Emerge Canada began to transfer investor money from the investment funds’ bank accounts into its own bank accounts and those of its U.S. affiliate shortly after launching the ARK funds in 2019.

The transfers continued for four years until December 2022, when the company’s auditor, BDO Canada LLP, resigned. Over that time, the loans had grown to about $6-million, about 6.1 per cent of the funds’ total net asset value.

At the end of 2023, Emerge Canada was still unable to pay back the remaining loan balance and it shut down the ETFs on Dec. 29 of that year.

The OSC has not yet set a date for a penalty hearing for Emerge Canada, Ms. Langley or Mr. Alvares.