An Ontario Securities Commission (OSC) hearing panel has ruled that the principals in First Leaside Group violated securities law when they sold securities without first disclosing an auditor’s report raising questions about the firm’s viability.
The OSC panel handed down its decision Thursday in an enforcement case against David Phillips and John Wilson, former CEO and senior salesman, respectively, at First Leaside.
The panel ruled that Phillips and Wilson committed several breaches of securities law and violated the public interest when they sold more than $18 million worth of securities to investors without disclosing a report from accounting firm, Grant Thornton Ltd., which found that the First Leaside needed to raise fresh capital.
OSC staff alleged that by failing to disclose the report’s findings when selling First Leaside securities to investors, Phillips and Wilson placed investors’ interests at risk, and violated their obligation to deal fairly, honestly, and in good faith with their clients. According to the decision, among other things, Phillips and Wilson argued that they received legal advice that they could not disclose the report.
The panel rejected that defence, however. Instead, the panel ruled that Phillips and Wilson deliberately withheld the Grant Thornton report, and that they were aware that this could put investors’ interests at risk.
“We find that each of the respondents engaged in or participated in an act, practice or course of conduct relating to securities that they knew would perpetrate a fraud on [First Leaside investors],” the panel said in its decision.
The panel also found that the pair breached securities law by making misleading statements; failing to deal fairly and honestly with investors; and, that, as a result, they violated the public interest. A hearing to determine sanctions in the case will be held on May 11.
Motion by Phillips and Wilson rejected
The OSC also handed down a decision rejecting a motion from Phillips and Wilson seeking a stay in the proceedings, pending the outcome of a civil case brought by First Leaside investors against the OSC. According to that decision, the pair sought a stay, arguing that “there is a real possibility of a conflict of interest between the interests of the commission and its duty to hold a fair and proper hearing”, given the civil case against the regulator.
“The respondents submit that there is an actual or perceived incentive for the commission to deflect blame for the collapse of FLG onto, among others, the respondents, in order to protect its own interests and reputation,” the OSC panel said its decision.
However, the panel ruled that there is no reasonable apprehension of bias in the case. “We find that an informed person, viewing this matter realistically and practically, and having thought the matter through, would think that it is more likely than not that the panel would decide the merits decision fairly,” the panel said.
“While it is critical that the public’s confidence in the impartiality and integrity of governmental administrative agencies be maintained, the respondents in this case have not established a reasonable apprehension of bias on the part of the panel to warrant a stay of the proceeding,” the panel said.