Ontario Tribunal Finds Emerge Canada Executives Improperly Borrowed Nearly $6 Million From Investor Funds
Ontario’s Capital Markets Tribunal ruled that fund manager Emerge Canada Inc., founder Lisa Langley, and CFO Desmond Alvares breached their duties by borrowing almost $6 million from investor funds to cover operating expenses between 2019 and 2022. Three independent review committee members were cleared of wrongdoing after the tribunal found they were never informed about the loans.
Ontario’s Capital Markets Tribunal has ruled that fund manager Emerge Canada Inc., its founder Lisa Langley, and chief financial officer Desmond Alvares breached their responsibilities to investors by improperly borrowing almost $6 million from investor funds to cover operating expenses.
The tribunal found that the executives violated securities regulations by failing to act in the best interest of the funds, borrowing investor money, and maintaining insufficient records. The improper transfers began shortly after Emerge Canada launched exchange-traded funds named Emerge ARK in 2019 in partnership with U.S.-based ARK Investment Management LLC, run by Cathie Wood. Investor money was moved into Emerge Canada’s own accounts and those of its U.S. affiliate, continuing until December 2022 when auditor BDO Canada LLP resigned. By that time, the loans had grown to approximately $6 million, representing 6.1 per cent of the funds’ total net asset value.
According to the tribunal, Langley was not familiar with regulations or compliance policies and held a complete misapprehension about conflicts of interest. She prioritized launching new funds using borrowed money despite commitments to pay down the receivable and concerns raised by Royal Bank of Canada and the company's independent review committee (IRC). Langley intends to repay $4.7 million of the borrowed amount.
The tribunal rejected Alvares’s defence that he should not be held responsible for deferring to Langley’s direction. It noted that Alvares signed off on documents authorizing wire transfers out of the fund, which constituted permitting or acquiescing to the conduct.
Three members of Emerge’s IRC — Marie Rounding, Monique Hutchins, and Bruce Friesen — were cleared of any failure in their duties. The tribunal determined they were not informed about the loans. While the Ontario Securities Commission (OSC) argued that Emerge sent a conflict-of-interest referral regarding the loan to the IRC in 2021, the tribunal found no such referral was made and concluded that executives did not flag any conflict issues to the committee. This marked the first time the OSC launched an enforcement case against IRC members, and industry experts closely monitored the outcome for its potential impact on IRC members at other funds.
Problems at Emerge Canada, which managed $118 million in total assets, became public on April 14, 2023, when the OSC imposed a temporary trading halt on the company’s 11 exchange-traded funds. Initial reports indicated Emerge owed $2.53 million to its six Emerge ARK funds, but one month after suspending the licence, the OSC revealed the amount owed was $5.5 million. Unable to pay back the remaining loan balance, Emerge Canada shut down the ETFs on Dec. 29, 2023.
Most of the borrowed money has not been repaid, leaving investors as unsecured creditors. The OSC has not yet set a date for a penalty hearing for Emerge Canada, Langley, or Alvares.