An Ontario court has dismissed an appeal of the Ontario Securities Commission’s (OSC) ruling in the First Leaside fraud case.
The Superior Court of Justice’s Divisional Court has denied an appeal from the founder of First Leaside Group (FLG), David Phillips, and one of the firm’s executives, John Wilson. They had asked the court to overturn the OSC’s finding that they defrauded investors. They also asked it to reject the OSC’s $16.5 million disgorgement order against them.
In 2015, an OSC hearing tribunal ruled that the pair had defrauded investors by selling almost $19 million in securities in the FLG companies without making full disclosure to investors by deciding not to release a report on the financial condition of the companies that was prepared by accounting firm, Grant Thornton.
According to the court’s decision, among other things, Phillips and Wilson argued that the OSC “committed an error of law by failing to ask itself whether a reasonable person would stigmatize what the appellants had done as dishonest, a fundamental aspect of the test for fraud.”
The court sided with the OSC, dismissing the appeal. In its decision, the court says that the commission’s finding of fraud in the case was reasonable. “The basis for the commission’s fraud finding was not just that the appellants failed to disclose the report to potential investors, but also that they then went ahead and sold securities to those investors.”
“The commission found that the [Grant Thornton] report contained significant information that could adversely affect the pecuniary interests of anyone who invested in FLG, namely that FLG could not meet its stated distributions, that it had a significant equity deficit and that it had a cash flow deficit,” the court said.
Additionally, the court found that there was no merit to the appellants’ submission that the commission ignored relevant evidence in coming to its conclusion on fraud.
The court also upheld the $16.5 million disgorgement order against Phillips and Wilson, rather than the First Leaside entities that received the investors’ funds. The pair had argued that the commission erred in ordering disgorgement against them when the funds went to entities that were not named respondents in the OSC’s proceedings.
According to the court’s decision, OSC staff did not name the companies as respondents in their disciplinary proceeding because they were already in bankruptcy, and they did not want to deplete their assets. Ultimately, the court concluded that the commission’s decision on disgorgement, “… fell ‘within a range of possible, acceptable outcomes which are defensible in respect of the facts and law’ and the reasons given were justifiable, transparent and intelligible.”
“We are pleased with the court’s decision to uphold the OSC panel’s findings of securities fraud and misrepresentation in this matter,” said Jeff Kehoe, director of enforcement at the OSC. “This misconduct is harmful to investors and the integrity of our capital markets.”
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