Regulator says Emerge knowingly took estimated $6 million of investor money in 'self-dealing loans'
Emerge Canada Inc., an investment firm known for selling Toronto-listed versions of Cathie Wood’s popular exchange-traded funds, has allegedly violated securities laws, according to Ontario’s securities regulator.
The Ontario Securities Commission alleges Emerge “acted in its own interests by knowingly taking an estimated C$6 million of investor money in self-dealing loans over a period of nearly four years,” or $4.2 million, it said in a statement. Most of the diverted money was allegedly used to prop up Emerge’s own businesses that were in financial distress, the regulator said.
Emerge was unable to file audited financial statements for 2022 after its auditor quit. That led the OSC to ban trading in all 11 of its funds — including six Ark Investment Management LLC-partnered funds that follow Wood’s investment strategies — in April 2023.
A month later, the OSC found that Emerge had insufficient capital and banned it from operating as an investment fund manager, portfolio manager or exempt-market dealer. The regulator also ordered that Emerge be wound down.
Ontario, like other jurisdictions, has capital rules for investment managers to protect investors in case of insolvency.
The wind-down took several months, and unitholders in those funds were trapped until the process was completed in December 2023. Emerge owed five of its Ark-partnered ETFs C$4.7 million as of Dec. 29, 2023, which it never repaid. The unitholders are now unsecured creditors of the funds and a class action effort to recover the money was abandoned in April 2024.
Emerge’s founder and chief executive officer, Lisa Langley, is also named in the OSC’s application for enforcement, as well as the fund manager’s chief financial officer, Desmond Alvares. Neither immediately responded to requests for comment.
The OSC is also taking enforcement action against the members of the independent review committee that oversaw Emerge’s ETFs: Marie Rounding, Monique Hutchins and Bruce Friesen.
“This is the first time the OSC has named IRC members as respondents,” Julia Mackenzie, a spokesperson for the regulator, said in an email.
The regulator alleges the committee “breached its duties to investors, caused the funds to enter into prohibited loans, failed to properly address the conflict of interest created by the receivable, and failed to maintain proper books and records, or an adequate system of controls and supervision to ensure compliance with securities legislation.”
Jennie Baek of McMillan LLP, a lawyer for Rounding and Hutchins, called the OSC’s action “unprecedented.” “These women have impeccable records,” Baek said in an interview. “We believe the grounds that OSC enforcement is relying upon are tenuous.” Friesen declined to comment.
All public investment funds must have independent review committees, which review conflicts of interest referred by the fund manager.
The OSC’s action is aiming “to obtain changes in how IRCs function through enforcement rather than through proper legal rulemaking,” Baek said. “They are also taking steps against individuals who the OSC may reasonably expect may not have the resources to sufficiently defend themselves against a proceeding from OSC enforcement.”
A person with knowledge of the matter, who spoke on the condition they not be named, suggested that a ruling against members of the IRC could deter people from joining those committees.
Representatives for Emerge Canada and Ark Investment Management did not immediately respond to requests for comment.
