First Leaside Group was in the business of putting together limited partnerships, primarily in the real- estate sector, which it sold through its own direct sales force. It raised more than $330 million, most of which was in promissory notes and equity positions through limited partnerships. Some investors received distributions over the years, but I doubt many will get any of their capital back.

On May 1 in Bolton, Ontario, more than 100 First Leaside investors attended a meeting of the First Leaside Investor Protection Association, which was formed after the firm entered creditor protection back in February. It wasn't a typical investor get-together and a far cry from the luxury parties that First Leaside Group used to throw for its investors.

It was a sombre event. People were there to find out what they would receive, if anything, from the money invested in more than 40 different First Leaside entities.

They were for the most part prepared for the worst. They were familiar with the 134-page report that Grant Thornton LLP, the court-appointed monitor of the company, had prepared on the First Leaside entities, which concluded that the future viability of the FL Group was contingent on its ability to raise new capital. The investors were well aware that distributions had ceased before year-end and that First Leaside was being wound down.

Now they were getting a new report addressed to them from Grant Thornton, and the news was bad. The various entities had losses and for the most part minimal or negative equity. A case in point is the largest entity, Wimberly Apartments Limited Partnership: it owns 11 properties that were appraised earlier this year at $59.6 million. If they were sold there would be mortgage payouts of $59.5 million including prepayment penalties.

On top of that there would be closing costs and broker's fees of another $3 million. But it's worse than that. In addition to the mortgages, promissory notes of $68.3 million have to be paid as well as $21.9 million owed to other First Leaside entities.

The end result is a partners' deficit of $93.5 million, which can best be described as the result of placing more debt on top of debt put in place to pay the interest on other layers of debt. In fact the total amount of debt and equity raised by this entity was $152.6 million.

What upset many investors at the meeting was that the deficits were funded in part by new money coming in from investors as well as intercompany loans. In essence, investors were told they were buying real-estate-related investment products when in reality, their money was used to finance previously contracted debt.

Some of the people in the room had invested all their savings in First Leaside investments, believing they were secure. Some may have thought their investments were diversified because they held more than one First Leaside issue. What they didn't realize was that the money they put into a specific First Leaside entity could be lent to any other First Leaside entity.

This was disclosed in the lengthy and complex offering documents, which unfortunately few investors read and fewer understand. This is not the sort of item generally included in a sales pitch.

Most of First Leaside's investment products were exempt issues, with information provided by offering memorandum and not with the protection of a prospectus. The initial Grant Thornton report stated that about 90% of the 1,000 investors were accredited investors, which means that buyers were supposed to have substantial income or substantial financial assets. The other 10% would have bought a minimum of $150,000 in a single investment.

Still, this was not an exclusive gathering of millionaires. There were many in the group who had simply invested their couple of hundred thousands of savings, their RRSPs, their RRIFs. One told me while we were lining up for coffee that she was trying to return to the workforce. She was totally unaware of the risks of the investment she had been sold. This was a common story told by many investors.

As I pointed out in a column last December, the regulators' premise behind the exemptions is that someone playing with large amounts has a certain level of sophistication, the ability to withstand financial loss, the financial resources to obtain expert advice, and the incentive to carefully evaluate the investment, given its size.

The key problem, as I see it, is that many exempt issues are sold to people who haven't a clue about what they are buying and are given information that they don't understand and, in many cases, is incomplete.

Furthermore, since First Leaside was a direct seller, there wasn't a layer of due diligence that investors are supposed to get when they buy from dealers who sell products from many sources.

On top of that, disclosure was dismal. A limited partnership is what is called a non-reporting issuer. They are not offered to the general public but only to accredited investors and individuals willing to invest a minimum of $150,000. They don't have to publish financial information or even notify investors about changes in its business. In fact an offering memorandum dated November 3, 2010 for Wimberly Fund unsecured promissory notes stated "You will not receive ongoing information about this issuer." The offering memorandum did not include financial information.

It's impossible to evaluate an investment without proper financial statements. In a report to partners written in late February 2010, David C. Phillips, the managing partner of the First Leaside Group of Companies, stated that in 2009, "after a delay of more than three years, Wimberly Apartments Limited Partnership's (WALP) audited financial statements for 2006-2008 were completed by KPMG."

The reason for the delay, however, was more than a little spat over a few numbers. The auditors included a going-concern note on the 2006-2008 Wimberly financial statements, questioning the continued viability of the entity.

I have no doubt that auditors and corporate managements may have disagreements over items and allocations. But from my perspective anything as important as a disagreement over the viability of the company is something that should be disclosed to potential investors before raising a single additional dollar.

The buyers I saw at the meeting were not sophisticated investors who were familiar with these companies' businesses and finances and could evaluate the investments offered. They were retail investors who were sold risky products without, in my opinion, full disclosure of the risks.

My suggestion to the regulators is that if something is aimed at retail investors, apply prospectus protection and require the same reporting standards for to all issuers. The markets have changed over the years, and many exempt offerings today are aimed at individual investors rather than institutions. First Leaside is an example of where the regulations failed.

In a follow-up article, I'll examine in further detail how investors were victimized in this case.