An Ontario Securities Commission (OSC) panel has ruled that Factorcorp Financial Inc. (FFI) violated the public interest when it raised $58 million from investors without making proper regulatory filings and misleading investors in its disclosure.

The commission ruled today that FFI failed to file offering memorandums (OMs) it used in order to raise $58 million from 700 investors; that it made materially misleading or untrue statements in the OMs and in its promotional materials; that the firm and its sole director, Mark Twerdun, breached a temporary order by redeeming certain FFI securities; and that Twerdun failed to ensure that investors were entitled to rely on the accredited investor exemption.

According to the decision, Twerdun, who represented himself in the case, argued that he never intended to mislead investors, and that he contracted with, and relied on, others to conduct the necessary due diligence, including relying on dealers to ensure the accredited investor status of those buying its securities. It says he also argued that he retained counsel to ensure that the OMs were filed and that he and the companies were in compliance with Ontario securities law.

Commission staff alleged that, in the OMs and the promotional materials, the companies were represented as being in
the business of providing short-term financing to commercial clients through factoring and other secured asset-backed loans; and that they would implement risk management practices. But OSC staff alleged these statements were materially misleading, and that many of the loans made by FactorCorp were not short-term, were inadequately secured, and that the risk management practices implemented to ensure acceptable risk levels in the use of investors’ funds were also inadequate.

The panel sided with OSC staff, finding that the firm failed to file the OMs as required, and that “the OMs were replete with statements that were misleading or untrue”; and that the obligation to conduct due diligence to ensure the proper use of exemptions cannot be contracted out. It said that relying on a dsitribution agreement with a dealer “was not sufficient to satisfy the responsibility to ensure that the accredited investor exemption was available.”

The panel didn’t hand down any sanctions yet in the case. It has set a hearing for April 18 to determine what the penalties will be.