Certain Bridging investors get priority, court rules

Investors who were sold funds from failed fund manager Bridging Finance Inc. shortly before it was placed into receivership are entitled to get paid back before other investors, an Ontario court has ruled.

Last November, Chief Justice Geoffrey Morawetz of the Ontario Superior Court of Justice heard arguments from two sets of investors contending for priority over other investors in the receivership of Bridging.

One group included investors who had submitted redemption requests that hadn’t been processed before the firm was placed into receivership by the court at the request of the Ontario Securities Commission.

The other group was comprised of investors who bought their funds within 180 days of the firm being placed into receivership — entitling them to invoke their statutory rights of rescission involving securities sold under an offering memorandum that contained misrepresentations.

Bridging’s receiver, PricewaterhouseCoopers Inc. (PwC), and the court-appointed counsel to the Bridging investors generally argued that neither group deserved priority and that all investors should be treated equally in the winding up of funds and distribution of assets to investors.

However, the court has determined that the investors with rescission rights should take priority, since securities law grants them the right to undo purchases that were made based on misrepresentations in offering documents.

This provision allows them to cease being investors before the receivership took effect, and creates a priority for them over other investors, the court ruled — entitling them to the return of their initial investment minus any distributions paid while they owned the funds before other investors can get their money back.

“The misrepresentation claimants, upon exercising their statutory or contractual rescission rights, cease to be unitholders. They have different legal rights than unitholders. They have a different relationship to the assets,” the decision said.

An earlier court filing estimated that investors in this position represent $202.4 million of the $2.2 billion invested in the funds when the receivership was ordered.

It’s expected that losses for the remaining investors will exceed $1 billion.

As for the investors with unprocessed redemption requests, the court rejected their claim for priority, saying that they “seek an outcome that in essence requires the receiver to make a retroactive adjustment to the records of Bridging, so as to complete redemption requests after the fact.”

“In my view, in order to achieve priority status, the redemption process must have been fully completed. In this case, it was not,” the court said.

Separately, the court also granted a motion pausing the limitation period for potential investor lawsuits against industry firms and advisors that sold the Bridging funds, which will prevent these rights from expiring while the receivership is ongoing.

On Monday the Globe and Mail reported that PwC is suing KPMG LLP, the auditor of the Bridging funds, for $1.4 billion, alleging KPMG didn’t adequately audit the fund manager and detect misstatements.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.