Bridging Finance under RCMP investigation amid private lender’s collapse and $1.3 billion in expected losses

The Royal Canadian Mounted Police has launched a criminal investigation into Bridging Finance Inc., the private lender that was placed into receivership in 2021 and whose bankruptcy is expected to result in $1.3 billion in losses for investors.

Investigators from the RCMP’s Integrated Market Enforcement Team in Toronto, the group tasked with investigating alleged fraud and criminal behavior in Canada’s capital markets, are interviewing witnesses and searching for records, sources confirmed to The Globe and Mail. The Globe did not identify those sources because they were not authorized to speak on the matter publicly.

In an emailed statement, the RCMP said it “does not confirm or deny whether an investigation is ongoing unless criminal charges are laid.”

It’s unclear what aspect of the scandal the RCMP are focusing on, and the investigation may not lead to charges. But there have been numerous allegations of wrongdoing since a Toronto judge, at the urging of Ontario’s securities regulator, placed Bridging under the control of PricewaterhouseCoopers Inc. in April 2021

At the time, the Ontario Securities Commission revealed that it was investigating Bridging for alleged impropriety and fraud, with a particular focus on Bridging’s husband-and-wife management team: David Sharp, who was CEO at the time, and Natasha Sharp, then Bridging’s Chief Investment Officer and previous CEO.

The OSC alleges that Ms. Sharp approved a $32 million loan to a businessman, Gary Ng, two weeks before Mr. Ng bought out some of Ms. Sharp’s stake in Bridging. The regulator also alleged that David Sharp received $19.5 million in payments into his personal checking account from a Bridging borrower, Winnipeg businessman Sean McCoshen.

Both Sharps were fired shortly after PwC took control of the company. None of the allegations have been proven in court.

Since then, PwC has estimated that bridge investors will lose up to 66 percent of their money, marking one of the biggest mutual fund collapses in Canadian history. As one of Canada’s best-known private lenders, Bridging raised money primarily from retail investors and lent those funds to mid-sized companies that didn’t meet the banks’ credit standards. At its peak, the company managed $2.09 billion on behalf of 26,000 investors.

Although the RCMP is investigating, any prosecution of Bridging officials or employees will face many obstacles, experts said in interviews, in part because of the OSC’s prior investigation.

As the primary regulator of capital markets in Canada, the OSC has extensive powers to obtain evidence, which include instructing companies to produce records upon request. The regulator also has the power to compel witnesses to answer questions – a power the police do not have because of the constitutional rights of people under criminal investigation.

As a result of this disparity in authority, the RCMP will be somewhat limited in its ability to rely on evidence gathered by the OSC. And if the government were to prosecute someone from Bridging, it would have to be able to prove to a judge that the evidence gathered would not violate that person’s Charter rights.

“Parallel regulatory and criminal proceedings often present real challenges to law enforcement in Canada,” said John Pirie, a partner at Baker McKenzie LLP in Toronto with expertise in fraud and white collar cases.

Two of the biggest investment scams in Canadian history, Bre-X and Sino-Forest, famously ended with no criminal charges against employees of the two companies. In both cases, sanctions were imposed by the OSC.

However, other cases show that it is possible for the two agencies to simultaneously investigate the same issue without tripping over each other. Robert Waxman, the former president of Philip Services Corp.’s metals recovery division, received a 20-year ban from the OSC in 2007, and four years later he was convicted of fraud and sentenced to prison.

Similarly, Garth Drabinsky, the former chairman of bankrupt theater production company Livent Inc., was found guilty of fraud in 2009 and years later was barred from serving as an officer or director of a public company for life by the OSC.

Any potential criminal charges stemming from the Bridging affair would also be complicated by the fact that OSC officials have faced some criticism for including Mr. Sharp’s compelled testimony in a public court document.

When the OSC approached the court to install a receiver over Bridging in 2021, it provided the court with a voluminous record of its findings. Included is a transcript of an intrusive interview with David Sharp that OSC investigators conducted just a day before they tried to put PwC in control of the company.

In the interview, the regulator confronted Mr Sharp about the $19.5 million in payments he claims he accepted from Mr McCoshen. Mr. Sharp argued that the payments were loans.

When the OSC asked Mr Sharp why the payments always seemed to be made shortly after Bridging had made loans to Mr McCoshen’s companies, Mr Sharp replied: “It certainly doesn’t look good. That’s for sure.”

In the months that followed, Mr. Sharp argued that his mandatory testimony had been improperly released to the public, and that if the regulator wanted to disclose that evidence, it needed permission from an OSC tribunal. An OSC panel of judges agreed. In a March ruling, the commission ruled that the regulator’s actions “violated Mr. Sharp’s reasonable expectation of privacy.”

However, the same panel decided that the consequence sought by Mr Sharpe – the lifting of an order allowing OSC staff to investigate him – was not an “appropriate remedy”.

The OSC is currently pursuing enforcement action against Mr Sharp, Ms Sharp and Bridging’s former chief compliance officer Andrew Mushor. Again, Mr. Sharp’s lawyers are back before the commission, arguing that the case should not be allowed to proceed because the public release of his coerced testimony violates his right to privacy.

A date for Mr Sharp’s proposal has not been set, but the OSC has said it will oppose it.

In an interview, Brian Greenspan, one of Mr. Sharp’s lawyers, said it was news to him that the RCMP had launched an investigation. “Any criminal investigation into David Sharp would be misguided and without substance or merit,” Mr. Greenspan said.

A lawyer for Ms. Sharp declined to comment.

In January, the RCMP laid criminal charges against Gary Ng, a case that has a number of connections to Bridging. Mr Ng, who was briefly part owner of Bridging, was charged with fraud and money laundering in connection with the alleged use of false collateral to secure hundreds of millions of dollars in loans. A lawyer for Mr Ng said he would fight the charges.