Decisions

Canada Orient Resources Inc. et al. [Decision]

BCSECCOM #:
---
Document Type:
Decision
Published Date:
1993-11-19
Effective Date:
1993-11-13
Details:

COR #93/183
Canada Orient Resources Inc. et al.  (Re)
IN THE MATTER OF the Securities Act, S.B.C. 1985, chapter 83
AND IN THE MATTER OF Canada Orient Resources Inc.
AND IN THE MATTER OF Joseph Ernest Hooi,
Robert Mah Shing Voong, Edward Clive Ashworth,
James Arthur Barnes and Donald Lynn Whorley
Hearing
J.C. Maykut, Q.C., E.L. Lien, S.M. Davison*
Heard:  April 19, 20, 29, June 9, 11, 1993
Reasons:  November 13, 1993

COUNSEL:

James Williams for Commission Staff;

Kenneth Ball for Edward Clive Ashworth;

Rod Anderson, Cameron Strang for Donald Lynn Whorley;

James Arthur Barnes on his own behalf.


DECISION OF THE COMMISSION:--

INTRODUCTION

These proceedings were commenced by a notice of hearing issued by the Superintendent of Brokers on April 14, 1992.

The notice stated that the Commission would be asked to consider whether it is in the public interest to make orders under sections 144(1)(c) and (d) and 154.2 of the Securities Act, S.B.C. 1985, c. 83, against Joseph Ernest Hooi, Robert Mah Shing Voong, Edward Clive Ashworth, James Arthur Barnes and Donald Lynn Whorley based on the allegation that they, during the period from July 13, 1988 to April 12, 1990, directly or indirectly, engaged in a scheme relating to a trade or acquisition of Canada Orient Resources Inc. securities when they knew or ought to have known that the scheme would perpetrate a fraud in connection with Canada Orient.

In May 1992, Hooi and Voong, were each convicted of one count of giving secret commissions contrary to section 426(3) of the Criminal Code of Canada in the Provincial Court of British Columbia and received fines of $22,000 and $4,000, respectively.  The convictions related to the fraudulent scheme alleged in the notice.

On the first day of the hearing, Hooi and Voong entered into Settlements with the Superintendent regarding the allegations raised in the notice.  Under the Settlements, the Superintendent issued orders against Hooi and Voong under section 144(1)(c) and (d) of the Act withdrawing their statutory exemptions and prohibiting them from acting as officers and directors of reporting issuers for a period of 25 years.  As part of the Settlements, Hooi and Voong each paid $10,000 to the Minister of Finance and Corporate Relations of the Province of British Columbia.

The remaining respondents are Ashworth, Whorley and Barnes. At the conclusion of the hearing, the panel issued orders under section 144(1)(c) of the Act against Ashworth, Whorley and Barnes withdrawing their statutory exemptions until this decision was rendered.

BACKGROUND

Canada Orient Resources Inc. was incorporated in 1987 under the Company Act, R.S.B.C. 1979, c. 59.  Canada Orient's shares were listed for trading on the Vancouver Stock Exchange and it was an exchange issuer under the Act.  Hooi and Voong were directors and officers of Canada Orient.  Hooi was its president and Voong was its secretary and treasurer.

Although Canada Orient's stated corporate purpose was to acquire mineral properties for exploration and development, according to Hooi, the reason Canada Orient was incorporated was to facilitate the trading activities of Hooi, Voong and an associate.  Hooi testified that the three got together after realizing that each of them were active traders of shares listed for trading on the Vancouver Stock Exchange and that they could do better financially if "they could control their own public company".

In August 1987, Canada Orient commenced operations by purchasing from Ashworth an option to acquire a 50% interest in the Langara mineral claims in the Clinton Mining Division.  In July 1988, Canada Orient completed an initial public offering of 800,000 shares through the facilities of the Exchange raising $600,000.  The prospectus stated that over half of the offering proceeds was to be used for a two stage work program on the Langara mineral claims.  It appears that little of these proceeds were actually spent developing the Langara claims.

Hooi stated that as soon as Canada Orient's shares became listed on the Exchange, stock promotion became the first item on the agenda.  He testified that it was common practice in the local market for a broker underwriting a public company to put pressure on the principals to get the price of the stock higher.  Continental Securities (now Yorkton Securities Inc.) was one of the underwriters of the offering.  To assist Canada Orient in its promotional efforts, Carlo Nigro, a registered representative with Continental, recommended May Joan Yee to Hooi.  Yee was in the business of providing public relations services to companies listed on the Exchange and Canada Orient agreed to pay her a 15% fee for every 100,000 Canada Orient shares she arranged to sell.

Initially, Canada Orient paid for Yee's services with Canada Orient shares.  However, as time progressed Yee told Hooi that she could create shares for promotional purposes without cost to Canada Orient.  Yee told him that many geologists in the local market were prepared to vend in mineral claims to companies in exchange for shares.  The practice was to arrange a property vend-in for 100,000 shares whereby the geologist would take only 10-15% of the shares as payment and deliver the rest to the principals of the company for promotion of the stock.  Hooi was told that if the consideration did not exceed 100,000 shares, the Exchange would not scrutinize the transaction.  Canada Orient proceeded with the acquisition of five groups of mineral claims precisely in this fashion.

The first three transactions involved Ashworth and two of his employees, Janet Stritychuck-Hopkins and John Fleishman. Ashworth was the beneficial owner of all three groups of mineral claims involved and Stritychuck-Hopkins and Fleishman simply acted as his nominee.  Although structured as three separate transactions, the sale of these three groups of claims was negotiated as a package deal between Ashworth and Hooi and Voong.  Hooi said Canada Orient ended up paying Ashworth a total price of $20,000 for the three groups of claims.

The first sale agreement was executed between Canada Orient and Ashworth on January 31, 1989, for the purchase of the Lynx mineral claims in the Clinton Mining Division.  This group of claims included the Lynx IV, Silver Bullet I, Silver Bullet II, and Camelsfoot claims.  Under the sale agreement Ashworth was to receive 100,000 shares of Canada Orient and to retain a net smelter return (NSR) of 3%.  However, at the time the sale agreement was entered into, Ashworth agreed with Hooi and Voong to deliver the 100,000 shares to Hooi and Voong.  Canada Orient issued four certificates for 25,000 shares each to Ashworth for the Lynx claims.  In accordance with their agreement, Ashworth endorsed and delivered these certificates to Hooi and Voong.

In connection with this sale, Ashworth said he received $15,825 from Canada Orient for a data base, which included geological reports, on the Lynx claims.  Ashworth produced a copy of an invoice to Canada Orient dated January 30, 1989.  It was noted on the invoice that $10,825 had been received on February 7, 1989 and that the balance owing had been paid in full by March 30, 1989.

Shortly after the execution of the sale agreement, Hooi, on behalf of Canada Orient, notified the Exchange and issued a news release stating that Canada Orient had purchased the Lynx claims from Ashworth for 100,000 shares, subject only to Ashworth retaining a 3% NSR.

The second sale agreement was executed between Canada Orient and Fleishman on February 27, 1989, for the purchase of the Clover mineral claims in the Clinton Mining Division.  These claims included the Clover I, Clover II, Clover III, and the Hummingbird Lot 4815A claims.  The Clover claims were initially registered in Ashworth's name and were transferred into Fleishman's name on February 3, 1989.  Under the sale agreement with Canada Orient, Fleishman was to receive 100,000 shares of Canada Orient and $5000 and to retain a NSR of 3%.  However, prior to the execution of the sale agreement, Ashworth had agreed with Hooi and Voong that he would arrange for his nominee, Fleishman, to deliver the share certificates to him and he in turn, would deliver 90,000 of the shares to Hooi and Voong.  Canada Orient issued two share certificates to Fleishman, one for 10,000 shares and one for 90,000 shares. Fleishman endorsed both certificates and delivered them to Ashworth.  Ashworth deposited the certificate for 10,000 shares into a brokerage account in his name and delivered the 90,000 share certificate to Hooi and Voong in accordance with their agreement.  Ashworth said Canada Orient never paid the $5,000 owing under the sale agreement.

Shortly after executing the sale agreement, Hooi, on Canada Orient's behalf, notified the Exchange and issued a news release stating that Canada Orient had purchased the Clover claims from Fleishman for $5,000 and 100,000 shares, subject only to Fleishman retaining a 3% NSR.

The third sale agreement was executed between Canada Orient and Stritychuck-Hopkins on March 27, 1989 for the purchase of the Black IV mineral claim in the Omenica mining division.  The Black IV claim, which was initially registered in Ashworth's name, was transferred to Stritychuck-Hopkins on March 23, 1989. Under the sale agreement, Stritychuck-Hopkins was to receive 100,000 shares of Canada Orient and $5,000 and to retain a 3% NSR.  However, Ashworth had previously agreed with Hooi and Voong that he would arrange for his nominee, Stritychuck-Hopkins, to deliver the share certificates to him, and he in turn would deliver 90,000 shares to Hooi and Voong.  Canada Orient issued six share certificates to Stritychuck-Hopkins, four for 20,000 shares each and two for 10,000 shares each. Stritychuck-Hopkins endorsed all of the certificates and delivered them to Ashworth.  Ashworth deposited one certificate for 10,000 shares into his own brokerage account and delivered the other certificates for 90,000 shares to Hooi and Voong in accordance with their agreement.  Ashworth said Canada Orient did not pay the $5,000 owing under the sale agreement with Stritychuck-Hopkins.

Shortly after the sale agreement was executed, Hooi on Canada Orient's behalf notified the Exchange and issued a news release stating that Canada Orient had purchased the Black IV claim from Stritychuck-Hopkins for $5,000 and 100,000 shares, subject only to Stritychuck-Hopkins retaining a 3% NSR.

Canada Orient's audited financial statements for the year ended September 30, 1989, described the consideration paid for claims acquired from Ashworth.  The Lynx claims were acquired by the issuance of 100,000 shares at a deemed value of $0.74 per share, the Clover claims were acquired for $5,000 cash and the issuance of 100,000 shares at a deemed value of $0.90 per share and the Black IV claim was acquired for $5,000 cash and the issuance of 100,000 shares at a deemed value of $0.80 per share.

Ashworth is 43 years old and has been in the mineral exploration business for several years, although he has no formal geological training.  He is the president and secretary of Ashworth Explorations Ltd., a private company which provides such services as line cutting, camp set up, geophysical surveys and reports and claim staking.  For a short period of time, Ashworth was a director of a company whose shares were listed on the Exchange.

Ashworth said that he first met Hooi and began doing business with Canada Orient in 1987 when he experienced a dramatic downturn in his mineral exploration business as a consequence of the termination of the tax driven flow-through share program.  After Canada Orient purchased the Langara option, Hooi approached Ashworth to obtain further mineral claims.

Ashworth said Hooi spoke in grandiose terms about Hong Kong investors bringing in millions of dollars which would be directed to mineral exploration and resource development. Ashworth saw Hooi as a good client with a promise of future work.  Ashworth said it was this promise and expectation of future work that induced him to deliver the majority of the shares he received from these transactions to Hooi and Voong. Ashworth said it was his understanding that Hooi was going to sell the stock to private Hong Kong investors and not through the facilities of the Exchange.

Ashworth acknowledged that the three transactions had been negotiated as a package deal and that he arranged for nominees at the request of Hooi in an attempt to avoid attention.  The individual transactions were spaced a month apart for the same reason.

Ashworth conceded that when he had been interviewed by Commission staff during their investigation, he told them that the Lynx claims were worth from $10,000 to $15,000 to him.  He said he ought to have told Commission staff that he delivered the majority of shares to Hooi and Voong only because of the expectation of future work, even though he never did receive any.  He said he did not mention the prospect of future work to Commission staff because the interview was long and intimidating.  Account statements indicate Ashworth sold the 20,000 shares he received on the Fleishman and Stritychuck-Hopkins transactions for approximately $15,000.

Simon, Ashworth Exploration's in-house accountant, testified that upon becoming aware of a consequent tax problem for Stritychuck-Hopkins and Fleishman in the spring of 1989, he tried to protect Ashworth.  He called Revenue Canada to see what documentation was required to satisfy their concerns.  An agreement was drafted whereby Hooi and Voong were to acknowledge that they received the 280,000 shares and that Fleishman and Stritychuck-Hopkins were only nominees for Ashworth, the beneficial owner of the claims.  In a meeting held May 11, 1989, Hooi and Voong ultimately refused to sign this agreement when their offer to get offshore interests to sign instead, was refused by Simon.

In considering this tax problem, Ashworth sought legal advice from a firm specializing in taxation matters.  In a letter dated December 1, 1989, W.J.A. Mitchell Q.C., advised Ashworth after meeting with him, that:

As I understand it, there were three mining claim groups which were transferred to Canada Orient...
...the consideration for those claim blocks would be paid as follows:
1.Black IV Claim
Cash of $5,000 and 10,000 shares to you and 90,000 shares to Mr. J. Hooi
2.Hummingbird [Clover] Claim Group
Cash of $5,000 and 10,000 shares to you and 90,000 shares to Mr. J. Hooi
3.Lynx Silver Bullet-Camelsfoot Claims

Cash of $15,000 to you and 100,000 shares to Mr. J. Hooi

In my view, the legal ramifications of this are as follows:
(1)From the point of view of Ms. Hopkins and Mr. Fleishman, they were throughout merely nominees.  They had no beneficial interest in the claims and they received no consideration for those claims.
(2)From the your (sic) point of view, you were the beneficial owner of the claims.  When the claims were sold to Canada Orient you received in total $25,000 cash and 20,000 shares of Canada Orient.  You should value the shares of Canada Orient at their fair market value at the time of your receipt and that, plus the cash, should be treated as your disposition proceeds from the mining claims and so declared on your 1989 tax returns.  In other words, to you the mining claims had a value equal to $25,000 and 20,000 shares of Canada Orient.
(3)For Mr. Hooi, he received in total 280,000 shares...
Ashworth acknowledged that he knew the collateral agreement to deliver to Hooi and Voong the 280,000 shares under the sales agreement would not be disclosed.  He said he was aware that transactions of this nature were required to be disclosed to the Exchange and the public.  Ashworth felt that it was fair for him to deliver the shares to Hooi and Voong in these circumstances because it would help Canada Orient.

Ashworth said there were no further discussions with respect to developing future prospects because, when Hooi and Voong refused to sign the agreement to clear up the tax problem, he realized that they "were not on the up and up".

The final two transactions arose after Yee approached Hooi saying that Canada Orient could purchase mineral claims for much less than what was paid to Ashworth.

In the first transaction Yee arranged for Whorley to vend in the Jen 1 mineral claim to Canada Orient.  The sale agreement for the Jen 1 claim was executed by Canada Orient and Whorley on July 26, 1989.  Under the sale agreement, Whorley was to receive 100,000 shares and $1,500.  However, according to Hooi, at the time the sale agreement was entered into, Whorley had agreed with Hooi and Voong to deliver 90,000 of the 100,000 shares to them.  On July 26, 1989, ten certificates for 10,000 shares each were issued to Whorley for the Jen 1 claim.  Upon receipt of the certificates, Whorley endorsed and delivered nine of them to Yee.  Brokerage account documents indicate that a 10,000 share certificate issued to Whorley was deposited into the account of Barnes.  Whorley said he gave 10,000 shares to Barnes as payment for the Jen 1 claim which he bought from Barnes.

Shortly after the sale agreement was executed, Hooi, on Canada Orient's behalf, notified the Exchange and issued a news release stating that Canada Orient had purchased the Jen 1 claim from Whorley for $1,500 and 100,000 shares.

Canada Orient's audited financial statements for the year ended September 30, 1989, described the consideration for the acquisition of the Jen 1 claim as $1,500 cash and the issuance of 100,000 shares at a deemed value of $0.38 per share.

Whorley is a 42 year old self employed plumber and part time prospector.  He said that over the years he has staked hundreds of claims selling them to anyone who was interested, including public companies.  Prior to 1989, he had been a director of an Exchange issuer.  Whorley described himself as a "busy trader" of Exchange listed shares.

While Whorley acknowledged that he sold the Jen 1 claim to Canada Orient for $1,500 and 100,000 Canada Orient shares, he asserted that he did not agree to deliver 90,000 shares to Hooi and Voong for their own use.  However, he said that Canada Orient refused to complete the deal unless he gave Hooi and Voong 90,000 shares.  This he said he did, but only to allow Yee to sell them for him.  According to Whorley, Yee was to get 30% for selling the shares and was to return the rest to him. When this did not happen Whorley began to press Yee.  He said he was upset because he wanted cash but got another 10,000 shares instead which Yee told him to sell himself.  According to Whorley, Canada Orient still owes him 70% of 80,000 shares.

In an interview with Commission staff, Whorley said that he received $1,500 for the Jen 1 claim and that he returned maybe 25,000 to 40,000 shares to Yee to sell for him.  He acknowledged that he gave Barnes 10,000 shares that he said he owed Barnes.  The rest, he said, he sold into the market.  By the end of the interview however, he was not sure how many he sold or Yee sold on his behalf, but he said was sure that he received all the proceeds from the 100,000 shares, which was approximately $25,000.

Whorley testified that the version of events he had first given to Commission staff was inaccurate because he did not have counsel nor was he under oath when he spoke to them. Whorley said he often gives shares back to the promoter to sell for him otherwise he would just dump them into the market which would not be good for anyone.

Canada Orient's final claims transaction took place on July 31, 1989 when Canada Orient entered into a sale agreement with Barnes for the purchase of the RJ 1 mineral claim.  The purchase price was $2,000 and 100,000 shares.  Hooi said that, as with the previous transactions, it was understood that the majority of the share certificates were to be delivered to Hooi and Voong.  Hooi testified that he never met Barnes, but knew him only as the vendor of the RJ 1 mineral claim, and that the transaction had been arranged by either Yee or Whorley.  Canada Orient issued ten certificates for 10,000 shares each to Barnes.  Barnes endorsed all of the certificates and they were delivered to Hooi and Voong.

Hooi, on Canada Orient's behalf, notified the Exchange and issued a news release stating that Canada Orient had purchased the RJ 1 claim from Barnes for 100,000 shares and $2,000. Canada Orient's audited financial statements for the year ended September 30, 1989, described the consideration for the acquisition of the RJ 1 claim as $2,000 cash and the issuance of 100,000 shares at a deemed value of $0.38.

Barnes is a 46 year old electrical contractor and part-time prospector.  He said that prior to these proceedings he invested regularly in Exchange listed securities and that he was familiar with how the market operated.

Although Barnes agreed that he sold the RJ 1 claim to Canada Orient on July 31, 1989 for $2,000 and that he delivered 100,000 shares of Canada Orient to Hooi, he asserted that he expected to receive the shares or payment for the shares later on.  Barnes said Imo Hudani arranged the deal on his behalf and Canada Orient was not to transfer the claim until they had paid him for the shares.  He trusted that Imo Hudani would get the shares back for him because he was a "promoter and a businessman".  Barnes's expectation was to get a return of approximately $10,000 overall for the transaction even though the claim, according to him, was probably worth at least $20,000.  He said that the $2,000 he received up front was not even close to the property's value and he expected a further return from the sale of the shares.

When Barnes didn't receive payment for the shares, he said he called Canada Orient's offices but there was no response to his calls.  He concluded the claim was never transferred and went back to the mining office some eight months later intending to take it back.  He said he couldn't determine which property he had sold to Canada Orient because neither the Jen 1 or RJ 1 had been transferred and both were still in his name.  He said he took back the Jen 1 but later discovered it was the wrong property.  He said he did receive 10,000 shares from his friend Whorley for the Jen 1 claim which he had previously sold to him.

Barnes acknowledged that he told Commission staff during an investigation interview that he did not receive the shares himself but that he just signed them off in street form at the transfer agent's office, put them in an envelope and handed them over to Hooi.  At that time, Barnes said he did not know where the shares were going but that returning the shares was just part of the agreement and all he really cared about was getting $2,000 for the claim.  Barnes told Commission staff that he assumed that he would get something back, maybe 10,000 shares.  However, Barnes acknowledged that the only thing that was definitive was the fact that he was getting $2,000 in cash.

All of the share certificates delivered to Hooi and Voong by Ashworth, Barnes and Whorley were deposited into and transferred among over twenty brokerage accounts, all of which were connected, directly or indirectly, to Hooi, Voong or Yee.

Hooi testified that in purchasing all of the above mineral claims, the primary purpose was to get the vendor to return the shares and to use them to promote the stock and the secondary purpose was to improve the mineral claim for resale.  Indeed, Canada Orient did not do any work on any of these claims and they all lapsed.

FINDINGS AND REASONS

It is well recognized that the purpose of our securities legislation is to regulate trading in securities so that our capital markets operate efficiently and fairly and thereby command a full measure of public confidence.  Clearly, fraudulent conduct involving securities undermines these goals and confidence in our capital markets.  Accordingly section 41.1 of the Act prohibits transactions or schemes involving securities which perpetrate a fraud.  Section 41.1 reads as follows:

41.1  No person, directly or indirectly, shall engage in or participate in a transaction or scheme relating to a trade or acquisition of a security if the person knows or ought reasonably to know that the transaction or scheme
(a)creates or results in a misleading appearance of trading activity in, or an artificial price for, any security listed on a stock exchange in the Province,
(b) perpetrates a fraud on any person in the Province, or
(c)perpetrates a fraud on any person anywhere in connection with the securities of a reporting issuer.
Hooi testified as to why and how the fraudulent scheme alleged in the notice evolved.  We found him to be a credible and forthright witness.  His version of events was supported by the documentary evidence.

Canada Orient was created solely to give Hooi and Voong access to our capital markets.  Hooi and Voong each perpetrated a fraud on Canada Orient in connection with each of the five transactions for mineral claims.  In doing so, Hooi and Voong caused Canada Orient to abuse a statutory exemption under section 55(2)(18) of the Act and the Exchange listing policy #9.

Section 55(2)18 of the Act provides a statutory exemption from filing a prospectus under the Act and reads:

(2)Subject to the regulations, section 42 does not apply to a distribution where
(18)the trade is made by an issuer in a security of its own issue as consideration for the acquisition of mining, petroleum or natural gas properties or any interest in them so long as the seller of those properties enters into an escrow or pooling agreement in the required form when ordered by
(i)the superintendent, or
(ii)a stock exchange in the Province authorized to so order by the superintendent,
Section B.3.2 Filing Exemption and Procedure (Resource or Commercial/Industrial Company of Exchange Listing Policy #9, Company Classifications, Filing Requirements and Exemptions states:

1.Notice Provisions
Notice of any arm's length transaction in a amount which exceeds $300,000 in value or involves the issuance of more than 100,000 shares, and which gives rise to a material change is to be filed with the Exchange.  The notice of proposed material change is to describe the change and enclose all pertinent documents.....
Clearly, the abuse of these exemptions by Canada Orient was to facilitate the fraudulent scheme initiated by the greed of Hooi and Voong.  However, this scheme could not have been effected without the willing participation of Ashworth, Whorley and Barnes.

Ashworth

Ashworth was the beneficial owner of three groups of mineral claims which were purchased by Canada Orient under three sale agreements.  Under the agreements entered into in January, February and March of 1989, the consideration for these purchases was 300,000 shares of Canada Orient and $10,000 cash with the retention of a 3% NSR.

Ashworth consulted with a tax lawyer concerning his tax liability in connection with the transactions.  The letter from Ashworth's tax lawyer in December 1989, reiterated Ashworth's description of the transaction at that time.  Hooi's evidence is substantially consistent with the description of the transactions in the letter.  Ashworth's conduct in delivering 280,000 shares to Hooi and Voong provides confirmation that the transactions occurred as Ashworth initially described them to his tax lawyer.  We find that the consideration for the three groups of claims was $25,000 cash and 20,000 shares of Canada Orient.

Ashworth's conduct in delivering 280,000 shares to Hooi and Voong, in our view, provides confirmation of the true consideration paid for the three groups of claims and therefore the value of the claims.  We find that Ashworth knew that the value of the claims was significantly less than the consideration set out in the three sale agreements, and that at least 280,000 shares issued to him under those agreements were issued by Canada Orient for no value.  We therefore find that Ashworth contravened section 41.1 of the Act by engaging in a scheme relating to trades in 280,000 shares of Canada Orient when he knew that the scheme perpetrated a fraud on Canada Orient.

The financial statements of Canada Orient showed that the 280,000 shares were issued for deemed values per share as follows:  100,000 at $0.74, 90,000 at $0.90 and 90,000 at $0.80.  In the aggregate the deemed consideration for the 280,000 shares was $227,000.  Consequently, Canada Orient's assets and shareholder's equity were inflated by this amount. This amount represented a significant portion of Canada Orient's assets.  Ashworth knew that the notices to the Exchange and the news releases to the public describing the transactions were false and misleading.  Investors traded in the shares of Canada Orient on the basis of this false and misleading information.  Ashworth knew or ought to have known that when he traded his 20,000 shares, he was doing so in a market that was based on false information.

Ashworth knew the transactions were structured so that they would appear to comply with Exchange listing policy when in substance they did not.  He used his own employees to conceal his participation in the fraudulent scheme and exposed them to liability.

Whorley

Whorley sold the Jen 1 claim to Canada Orient on July 26, 1989.  Under the sale agreement, the consideration was 100,000 shares of Canada Orient and $1,500 cash.  Hooi's evidence is that Whorley delivered 90,000 shares to him through Yee.  The evidence from the brokerage accounts confirms his evidence. Whorley's viva voce evidence and his interview with Commission staff is inconsistent and we do not accept it.  We find that the consideration for the Jen 1 claim was $1,500 and 10,000 shares.

Whorley's conduct in delivering 90,000 shares to Hooi and Voong, in our view, provides confirmation of the true consideration paid for the Jen 1 claim and therefore the value of the claim.  Whorley's evidence that he received a further 10,000 shares later from Yee cannot be confirmed by the documentary evidence.  We find that even if Yee delivered the further 10,000 shares to Whorley, she did so not because the shares represented value for the Jen 1 claim, but because of the pressure Whorley was placing on Yee.

We find that Whorley knew that the value of the claim was significantly less than the consideration set out in the sale agreement, and that at least 90,000 shares issued to him under that agreement were issued by Canada Orient for no value.  We therefore find that Whorley contravened section 41.1 of the Act by engaging in a scheme relating to trades in 90,000 shares of Canada Orient when he knew that the scheme perpetrated a fraud on Canada Orient.

The financial statements of Canada Orient showed that the 90,000 shares were issued for a deemed value of $0.38 per share.  Therefore the deemed consideration for the 90,000 shares was $34,200.

Consequently, Canada Orient's assets and shareholder's equity were inflated by this amount.  Based on the audited financial statements of Canada Orient for the year ended September 30, 1989, this amount represented almost 10% of resource properties.  Investors consequently traded in Canada Orient shares on the basis of this false and misleading information. Whorley knew or ought to have known that any trading in the shares of Canada Orient subsequent to his transaction was occurring in a market based on false and misleading information.

Barnes

Barnes sold the RJ 1 claim to Canada Orient on July 31, 1989. Under the sale agreement, the consideration was $2,000 cash and 100,000 shares of Canada Orient.  Hooi's evidence is that Barnes delivered the 100,000 shares to him and the evidence in the brokerage accounts confirms this.  Barnes' evidence in his interview with Commission staff is that the consideration he expected to receive was $2,000 cash.  We find that the consideration for the RJ 1 claim was $2,000.  Barnes' conduct in delivering 100,000 shares to Hooi and Voong, in our view, provides confirmation of the true consideration paid for the RJ 1 claim and therefore the value of the claim.  We find that Barnes knew that the value of the claim was significantly less than the consideration set out in the sale agreement, and that 100,000 shares issued to him under that agreement were issued by Canada Orient for no value.

Therefore, we find that Barnes contravened section 41.1 of the Act by engaging in a scheme relating to trades in 100,000 shares of Canada Orient when he knew that the scheme perpetrated a fraud on Canada Orient.

The financial statements of Canada Orient showed that the 100,000 shares were issued for a deemed value of $0.38 per share.  Therefore, the deemed consideration for the 100,000 shares was $38,000 and Canada Orient's assets and shareholder's equity were inflated by this amount.  Based on the audited financial statements of Canada Orient for the year ended September 30, 1989, this amount represented 10% of resource properties.  Investors traded on the basis of this false and misleading information.  Barnes knew or ought to have known that any trading in Canada Orient shares subsequent to his transaction was occurring in a market based on false and misleading information.

The evidence clearly establishes that Ashworth, Barnes and Whorley participated with Hooi and Voong in a scheme which perpetrated a fraud on Canada Orient in connection with its securities contrary to section 41.1 of the Act.

Our task is to assess the participation of the respondents Ashworth, Whorley and Barnes in this scheme and to determine what, if any, orders are necessary in the public interest.

DECISION

In our view, the conduct of the Respondents is highly prejudicial to the public interest and brings the capital markets in this Province into disrepute.  Fraud attacks the very foundation of our capital markets thereby undermining investor confidence.

We consider it in the public interest to remove the Respondents from participating in our capital markets for significant periods.

Accordingly, we have determined that it is in the public interest to order:

1.under section 144(1)c of the Act, that the exemptions described in sections 30 to 32, 55, 58, 80 and 81 of the Act do not apply to Ashworth for a period of 10 years from the date of this decision;
2.under section 144(1)c of the Act, that the exemptions described in sections 30 to 32, 55, 58, 80 and 81 of the Act do not apply to each of Whorley and Barnes for a period of 5 years from the date of this decision;
3.under section 144(1)d of the Act that Ashworth be prohibited from becoming or acting as a director and officer of any reporting issuer for a period of 10 years from the date of this decision;
4.under section 144(1)d of the Act that each of Whorley and Barnes be prohibited from becoming or acting as directors and officers of any reporting issuer for a period of 5 years from the date of this decision; and
5.under section 154.2 of the Act, that Ashworth, Whorley and Barnes pay prescribed fees or charges for the costs of or related to the hearing incurred by the Commission and Superintendent, the amounts to be determined following further submissions from the parties.
J.C. MAYKUT, Q.C.
Vice Chair

E.L. LIEN
Member

* Mr. Davison's term as a Commissioner expired June 5, 1993. He did not participate in making this decision.