Lisa Langley, founder and CEO of Emerge Canada Inc. returns from a break during a Capital Markets Tribunal hearing on Tuesday. The Ontario Securities Commission has accused Ms. Langley and the company of improperly borrowing $5.5-million from ETFs to cover management costs.Fred Lum/The Globe and Mail
Emerge Canada Inc. chief executive officer Lisa Langley says she intends to repay $4.7-million that remains owing to investors after she settles two court cases in the United States.
At an enforcement hearing on Tuesday, Ms. Langley told the Capital Markets Tribunal, an independent adjudicative arm of the Ontario Securities Commission, that she did not set up a “prohibited loan” worth millions of dollars from a group of Emerge exchange traded funds her company managed. She acknowledged the money was moved, but said the transfer was approved by the firm’s auditors and legal counsel.
“If I had believed that there was an existing rule and we were knowingly, willingly breaking that rule, we wouldn’t have done it,” Ms. Langley said. “Why would we do something like that? It goes against the grain of everything we all stand for in capital markets.”
The OSC has accused Ms. Langley and Emerge of improperly borrowing $5.5-million from Emerge exchange traded funds to cover management costs. Most of the money has not been repaid and investors remain unsecured creditors.
Emerge Canada case to test responsibilities of funds’ independent review committees
But Ms. Langley, who is defending herself before the tribunal in Toronto, said in her opening remarks that she did not misuse investor money in Emerge business accounts or her personal accounts.
The ETFs were first launched in 2019 in partnership with U.S.-based ARK Investment Management LLC, which is run by prominent U.S. investor Cathie Wood.
On April 14, 2023, the OSC imposed a temporary trading halt – known as a cease-trade order – on the company’s 11 exchange-traded funds.
A month later, the OSC suspended Emerge Canada’s operating licence and revealed that Emerge Canada owed $5.5-million to its six Emerge ARK funds. The OSC said Emerge Canada was short of cash because it hadn’t collected money owed to it by U.S.-based Emerge Capital Management Inc. Both companies are led by Ms. Langley.
In opening remarks Tuesday, Khrystina McMillan, a senior litigator for the enforcement branch at the OSC, said Emerge Canada began to transfer investor money from the investment funds’ bank accounts into its own bank accounts, and those of its U.S. affiliate, shortly after launching the ARK funds in 2019.
There were between 117 and 120 transfers over four years until December, 2022, when the company’s auditor, BDO Canada LLP, resigned, the OSC said. Emerge Canada did not notify the funds’ independent review committee prior to setting up the loans.
Ms. McMillan alleged on Tuesday that at times, the money transferred out of the ETFs had been “co-mingled” with money used to pay for Emerge expenses as well as Ms. Langley’s personal expenses.
At the same time, the OSC allegations said it wasn’t until about two years after the start of the loans that the investment manager referred the loan to the Independent Review Committee for review as a conflict-of-interest matter. The OSC said the fund’s custodian, RBC Investor Services, was the first to flag the loan arrangement as a possible conflict of interest.
Every investment fund in Canada is required to have an IRC, which is responsible for reviewing a fund manager’s potential conflicts of interest on behalf of unitholders.
Ms. McMillan told the tribunal that the evidence at the hearing will show that without the millions of dollars taken from the funds, Emerge Canada and Emerge U.S. could not have afforded to pay for their own expenses, including payments toward Emerge’s significant debts.
She said the OSC evidence will show Emerge Canada had a total of nearly 900 transactions that were returned for non-sufficient funds, as well as multiple missed or late payments by Emerge to its various service providers including Royal Bank of Canada, BDO Canada LLP and the Emerge IRC.
In addition to the funds borrowed, the OSC said Emerge Canada did not disclose to investors that more than half of the 0.8-per-cent management fee collected was owed to U.S sub-adviser ARK LLC, who charged 0.45 per cent for its services.
The sub-advisory agreement depleted the $4.1-million in management fees earned by Emerge Canada from 2019 to 2022, to “less than $2-million,” OSC said.
“In borrowing the funds’ money for its own purposes, among other things, the Commission alleges that Emerge Canada put its own interests above those of the funds it managed and breached its fiduciary duty to the funds,” Ms. McMillian said.
In response to the OSC, Ms. Langley said the company had been operating an “expense absorption” model after Borden Ladner Gervais LLP had provided a legal opinion that absorption was not borrowing. She said BLG attended the IRC meetings where the model was discussed.
After the IRC meeting in 2022, Ms. Langley said Emerge Canada had intended to wind down the arrangement and return the borrowed money to the funds.
However, she said, her efforts to secure additional financing fell through after technology stocks fell nearly 70 per cent.
“Those loans were not there for us and that was very, very challenging,” Ms. Langley said.
Ms. Langley said she was in the process of obtaining a second loan in the United States when a U.S.-based client breached a contract with Emerge Capital Management. She is currently in litigation with this client and she said she expects to reclaim about $6.5-million between two U.S court cases.