Ashley Redmond: I'm here with Steven G. Kelman, who wrote two articles on First Leaside for us. Steven, thanks so much for being here.
Steven G. Kelman: Thanks for having me here today.
Redmond: There is a lot to talk about with First Leaside. So, we'll start with the OSC accusing David Phillips, the former Chief Executive and directing mind of First Leaside Group, of intentionally, deceiving investors by selling nearly $19 million in securities while withholding important information. At its peak, First Leaside had over 1,000 clients and about $370 million in assets under management, and I know Steven here is under the opinion that investors probably won't be getting their money back?
Kelman: That's correct. The money that First Leaside raised was primarily through limited partnerships and the firm entered creditor protection last February. With limited partnerships -- these are exempt issues -- the issuers do not have to provide the information that you would get if you're buying something offered under prospectus. The reason for this is that at one point exempt issues were only sold to institutions such as pension funds where the assumption was that the pension funds had the staff to evaluate and to ask questions. They didn't need all that information; they could get it on their own. The problem is that many of the issues today are sold primarily to individual investors who do not have this -- the ability to do the sort of work and in many cases they are working in a bit of a vacuum.
Redmond: So, basically retail investors were blindsided?
Kelman: In this case, I would say they were definitely blindsided. One of the problems is that some of the financial information wasn't available. I'll just read you something that came through. One of the things, it is impossible to evaluate a company unless you have proper financials and in a letter written to the investors in limited partnerships in February 2010, Mr. Phillips stated that in 2009 after a delay of more than three years, when Wimberly Apartments Limited Partnerships audited the financial statements for 2006 to 2008 were completed by the auditors.
Well, that's a red flag. If you can't produce financial statements for a three year period, it means that you – the company and the auditors are disagreeing over a major point. So, that was one of the things that happened. I attended a meeting at First Leaside investors in early May, and the investors were well aware that distribution had seized before year-end, and that First Leaside was being wound down.
First Leaside had commissioned a report by an accounting firm, previous August or earlier than that, they got the information previous August. They did not release that information to the investors until the following November. The key point in that report is that the auditors or the accountants thought that the company could not survive unless it continued to raise money for new investors to pay down the debt that was already outstanding. It wasn't viable. That information was withheld, and during the intervening months, that's when the company raised the additional $19 million.
Redmond: So, when you were at this meeting, May 1, I believe it was in Bolton, the First Leaside meeting, what were investors saying about this, like the fact that the financials were withheld?
Kelman: Well, most of them were saying that they had no idea of the risk, they had no idea of the money that we are putting into specific investments, could actually be loaned to other investments, and that's disclosed in the documents. But very few of these people read the documents, and when you look at them, a lot of it is in a legal language that many people would not really understand.
Redmond: Okay. And on June 25, the OSC has a hearing with two executives from First Leaside. What do you think OSC can do to prevent this from happening in the future?
Kelman: My personal view is that anything that is aimed at retail investors should have the same disclosure and requirements that we expect for mutual funds and listed stocks. The information has to be fully disclosed and, plainful and true disclosure to start off with and ongoing information should be posted on SEDAR, so investors can take a look at it, know what's happening and go from there.
Redmond: Great. Thanks so much Steven.
Kelman: You're most welcome.
Redmond: Steven is always giving us great articles which can be found on Morningstar.ca in the Investor Insights section.
