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Ian Cluroe intended to hold his four Emerge ETFs for at least a decade.

“I knew it’d be rocky in the beginning,” he said, referring to the funds’ focus on emerging technologies. “But I didn’t expect them to disappear altogether.”

Cluroe, 56, was one of the unitholders trapped in the 11 Emerge ETFs placed under an unprecedented cease-trade order that began in April 2023 and lasted until the ETFs were delisted in October. Unitholders remained trapped in the ETFs until the funds were terminated in December.

Cluroe was also the lead plaintiff in a proposed class action lawsuit filed against Emerge Canada by Kalloghlian Myers LLP in Toronto, which alleged that unitholders suffered damages because of Emerge’s misconduct and the cease-trade order.

Garth Myers, lawyer for the proposed suit, told Investment Executive on Friday that the action would not be proceeding because “the prospect of recovery is nil.”

The allegations have not been proven and the class action was not certified before Kalloghlian Myers filed its notice of discontinuance. A lawyer for Emerge Canada did not respond to a request for comment.

Cluroe’s experience

Cluroe is a Canadian marketing consultant who lives in Phoenix, Ariz. He grew up in Toronto and moved to the U.S. about 24 years ago. He spoke to Investment Executive from Toronto, where he’s moving his daughter out of her university dorm.

Cluroe maintains an RRSP account with a bank-owned direct investing firm, which is how he purchased the Emerge ETFs.

“I had a lot of cash sitting in that account, so I thought I might as well do something with it,” he said.

Cluroe has been investing on his own since his early 20s, and described himself as “one rung below sophisticated.” He does his own due diligence, and rebalances his U.S. retirement account quarterly.

He experienced the rise and fall of Nortel Networks Corp., and is no stranger to challenging investment situations. But the Emerge situation, he said, “was the biggest [loss] by far.”

Cluroe previously owned Cathie Wood’s ARK ETFs. “I’m familiar with her overall thesis of forward-looking technologies, biotech, AI and autonomous vehicles,” he said. “I admire her style and her approach.”

Wood’s company, ARK Investment Management LLC, was a subadvisor to Emerge Canada Inc.

Cluroe still holds the ARK Space Exploration & Innovation ETF in his U.S. retirement account. “It’s a very long-term hold,” he joked.

He doesn’t remember how he learned of Emerge Canada, but was glad for the option to own Canada-domiciled ETFs in his RRSP.

In November and December 2020, Cluroe bought about $155,000 worth of units in the flagship Emerge ARK Global Disruptive Innovation ETF, as well as the the AI and big data, fintech and genomics ETFs. His investment, dollar-wise, was spread about equally among the four ETFs.

The purchase represented about two-thirds of Cluroe’s Canadian retirement savings, and about 12% of his overall investment portfolio. He’d planned to hold the ETFs for 10 to 12 years.

Cluroe first learned of the cease-trade order in spring 2023 when he visited Emerge’s website to check performance of the four ETFs.

“A couple of links weren’t working, which was a little bit nerve-wracking,” he said. After searching for news stories about Emerge, he realized the ETFs were untradeable and saw that Emerge’s auditor had resigned in November 2022.

“That’s when I started to get very, very nervous,” Cluroe said.

Cluroe continued reading news about Emerge, learning that the fund manager owed its suite of ARK ETFs millions in receivables and that the Ontario Securities Commission (OSC) suspended Emerge Canada’s registration for capital deficiency. In the suspension decision, the OSC stated Emerge was likely capital-deficient at some point prior to Sept. 30, 2022, and ordered Emerge to wind down its funds.

“I said to myself, ‘This doesn’t smell right,'” Cluroe said. He emailed Kalloghlian Myers, stating he had already lost money with his Emerge ETFs and that he was unable to redeem his remaining funds due to the cease-trade order. He offered to be lead complainant on an action.

Myers replied quickly, saying the firm had been following the issue as well. The action was filed in June 2023.

Following the revelations about Emerge, “it became clear that this wasn’t a company I wanted to deal with anymore,” Cluroe said. “The [alleged] apparent rule breaking they did was enough to make me want to get out of the funds altogether, and I was afraid their value could dwindle even further the longer [the cease-trade order] dragged on.”

Cluroe acknowledges he was not at risk of financial ruin.

“I knew I could have lost [my $155,000 investment] and not been destitute by any means,” he said. “But it was very nerve-wracking, and I was very angry [due to] the lack of proactivity and communication to investors about what was going on.”

Losses and lessons

Cluroe also acknowledges the thematic investments he chose were on the riskier side. “I believed in the thesis, I believed in the sectors [Emerge] was investing in, and I knew it would be rocky for the first four or five years,” he said, noting that he still believes in emerging technology investing.

After the ETFs were terminated in December 2023, Cluroe received about $56,000 in proceeds. Like the other former Emerge unitholders, he is now an unsecured creditor of Emerge Canada. As of Dec. 29, 2023, Cluroe is owed about $2,000, and all former unitholders are owed $4.7 million.

If Cluroe is repaid the receivable, he will have lost about 62% of his initial investment.

That loss means his retirement date will be pushed back by a year or two, he said. He’s also considering retiring in a region with a lower cost of living.

“I’ve been queasy a few times when I’ve looked at the numbers. But mainly angry, really,” he said. “I’m disappointed in myself for not having done better due diligence. But at the end of the day, you trust fund managers to act within the bounds of whatever regulations they’re supposed to act within.”

He said in his 30-odd years of investing, he’d never looked at the financial statements of an ETF or fund manager, but acknowledged Emerge ETFs’ financial statements disclosed the growing receivable balance.

Still, “I think regulators should do more to protect investors from things like this,” he said. “I would like to see not just the auditors be responsible for auditing the companies, but for the regulators to have more disciplined, regular oversight of [fund] companies. And to force them to communicate in a way that’s transparent to unitholders who are affected.”

JP Vecsi, senior public affairs specialist with the OSC, told Investment Executive about six months into the cease-trade order that it was Emerge Canada’s statutory duty to share details with unitholders.

In March, Vecsi shared additional context about the scant communications that came from the firm: “During our oversight of Emerge, we ensured that it kept the funds’ investors informed about the [cease-trade order] and the subsequent termination of the funds through various means, including press releases, investor letters, requiring it to actively maintain [its] website with a prominent page for investor questions on the wind-up and trading restrictions, as well as monitoring whether it was responding to investor questions,” he said in an email at the time.

A registered investment fund manager, as Emerge Canada previously was, must notify the OSC as soon as its excess working capital falls below zero, and the amount cannot be less than zero for two consecutive days. The regulator can impose terms and conditions on firms that do not meet their capital requirements.

“The OSC will take further regulatory action on firms that are unable to rectify a capital deficiency on a timely basis, including suspension of their registration,” Vecsi said in March.

The OSC continues to oversee Emerge Canada and require that its activities be monitored by a law firm. The OSC is also conducting “an active and ongoing investigation into Emerge Canada.”

Cluroe, like other investors interviewed about Emerge, has modified his investing style in response to his experience.

“The ETFs that I own now, most of them are in Vanguards and BlackRocks and larger funds by others,” he said. “If I were to ever invest in smaller ETFs — and I wouldn’t close the door completely — I would do more due diligence on the managers, and I would look at the size of the funds.”

With the pending discontinuance of the proposed class action, Cluroe said his goal now is to continue shining light on the Emerge situation so no other investor experiences what he did.

What’s his advice to other investors?

“It would be do all of the research that you possibly can from every angle,” he said. “Don’t just look at the holdings; don’t just look at the thesis the company has. Look at the actual manager. Look at their track record. Look at potential red flags, like the size of the fund. [Look at] the individual managers, the owners of the company and the track record of the company.”