Bridging managed funds as one big pool, court filings allege

Failed fund manager Bridging Finance Inc. effectively managed its various funds as one big pool of capital, transferring assets between funds indiscriminately, court filings allege.

Ahead of a hearing on May 11, new filings on behalf of the firm’s court-appointed receiver, PricewaterhouseCoopers Inc. (PwC), argue that the way funds were managed makes it premature to conclude investors’ assets shouldn’t be consolidated as part of the receivership.

The hearing is to consider a motion from Blue Cross Life Insurance Co. of Canada and Canassurance Hospital Service Association seeking a court order allowing them to recover some of their assets from a Bridging fund. The two institutional investors were the only two unitholders of the fund.

PwC’s filings contend that the Bridging Funds were managed in a way that “engages the element of comingling of assets and business functions.”

The fund manager had sole discretion over the allocations of assets to all of the Bridging funds, PwC said. While the firm had a “fair allocation” policy, the receiver said it’s still unclear whether that policy was followed in practice.

Additionally, it said the fund manager would revise the initial allocation of loan interests “on an ad hoc basis in its sole discretion, in some instances when the subject loan was at risk of default.”

These transfers were made at face value, it said, with no discount to reflect the elevated risk of default.

“This would have the effect of shifting risk amongst the Bridging funds. The commercial rationale for these transfers of loan interests is not clear to the receiver and, in many instances, such transfers were likely overvalued,” it said.

As a result, it argued that Bridging was “effectively managing the affected Bridging funds on a consolidated basis, without regard to the interests of the Bridging fund that was the purchaser of an overvalued loan interest at face value.”

“The receiver has significant concerns that loan interests were transferred indiscriminately amongst the Bridging funds (including at times when the underlying loans were demonstrating signs of impairment) as a mechanism to strategically allocate risk or anticipated losses,” it said.

As a result, the filings argued that it’s premature to decide that the various funds’ assets shouldn’t be consolidated as part of the receivership before harmed investors start to get some money back.

A variety of issues need to be resolved before that decision can be made, PwC said in its filings.

This position was echoed by lawyers from Bennett Jones LLP, appointed by the court to represent investors’ interests in the receivership.

In their filing, the lawyers noted that the court’s decision earlier this year in favour of Bridging investors that have rescission rights under securities law — entitling them to get their original investments back before other investors — “may result in greater inequalities of distribution between the Bridging funds, and a greater reason to consider the application of substantive consolidation.”

The investors have argued it’s not clear when these issues will be resolved, and that they should be able to recover some of their money, which is otherwise sitting dormant and uninvested.

“While the [institutional investors] state that they are suffering a prejudice as a result of delay, so too are all other unitholders — unitholders that are primarily individuals, not institutional investors,” Bennett Jones said in its filing.