Decisions
ERON MORTGAGE CORPORATION, et. al. [Decision]
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BCSECCOM #:
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Document Type:
Decision
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Published Date:
1997-12-05
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Effective Date:
1997-11-26
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Details:
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COR#97/232
IN THE MATTER OF THE SECURITIES ACT
R.S.B.C. 1996, c. 418
AND
IN THE MATTER OF ERON MORTGAGE CORPORATION, CAPITAL
PRODUCTIONS INC., BRIAN SLOBOGIAN AND FRANK BILLER
HEARING
| PANEL: | JOYCE C. MAYKUT, Q.C. | VICE CHAIR |
 | BRENT W. AITKEN | MEMBER |
| PETER A. MANSON, Q.C. | MEMBER |
DATE: OCTOBER 31, 1997
| DATE: | OCTOBER 31, 1997 |
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| APPEARING: | JAMES A. ANGUS | FOR COMMISSION STAFF |
| E. DAVID CROSSIN | FOR MR. BRIAN SLOBOGIAN |
| MARK L. SKWAROK | FOR MR. FRANK BILLER |
DECISION OF THE COMMISSION
1. INTRODUCTION
This is an application by Commission staff to adjourn the hearing and extend the temporary orders made by the Executive Director on October 3, 1997, against Eron Mortgage Corporation, Capital Productions Inc., Brian Slobogian and Frank Biller (collectively, the “Respondents”). The temporary orders were set to expire on October 17, 1997. The basis of the application was to allow Commission staff to complete their investigation.
The temporary orders were made under section 161(1) of the Securities Act R.S.B.C. 1996, c. 418, and ordered that the exemptions described in sections 44 to 47, 74, 75, 98 and 99 of the Act do not apply to the Respondents and that Slobogian and Biller are prohibited from acting as directors or officers of any issuer and each must resign any present position as a director or officer of any issuer.
Pursuant to section 161(5) of the Act, the temporary orders were accompanied by a notice of hearing to be held on October 17, 1997. The hearing was adjourned to October 31, 1997, by consent, and the temporary orders were extended until October 31, 1997.
On October 3, 1997, under the Mortgage Brokers Act, R.S.B.C. 1996, c. 313, the Registrar of Mortgage Brokers suspended the mortgage broker registration of Eron Mortgage and issued an order freezing its accounts. On October 3, 1997, at the request of the Registrar of Mortgage Brokers, the Supreme Court of British Columbia appointed Price Waterhouse Ltd. as receiver of all the undertaking of Eron Mortgage and Eron Financial Services Ltd., a related company, for a period not to exceed 14 days without further order of the court. On October 3, 1997, the Supreme Court also appointed Price Waterhouse as judicial trustee of Eron Mortgage, Eron Financial and certain other related companies. On October 17, 1997, the Supreme Court also appointed Price Waterhouse as receiver of all the undertaking of Capital Productions for a period not to exceed 14 days without further order of the court. The receivership and judicial trusteeship orders were extended by the court and are still in effect. The trusteeship covers 47 related companies.
Commission staff’s notice of hearing and the temporary orders were stated to be issued on the following facts and allegations:
1. Eron Mortgage Corporation (“Eron”) was incorporated under the Company Act, R.S.B.C. 1996, c. 62 on January 4, 1993, is not a reporting issuer and is not registered under the Securities Act, R.S.B.C. 1996, c. 418, (the “Securities Act”) to trade in securities;
2. Capital Productions Inc. (“Capital”) was incorporated under the Company Act on June 18, 1997, is not a reporting issuer and is not registered under the Securities Act to trade in securities;
3. Brian Slobogian is the sole director and the president of Eron and Capital and is not registered under the Securities Act to trade in securities;
4. Frank Biller is the only other officer of Eron and Capital and is not registered under the Securities Act to trade in securities;
5. Eron is registered as a mortgage broker under the Mortgage Brokers Act, R.S.B.C. 1996, c. 313 and Slobogian and Biller are registered as submortgage brokers under that Act;
6. since January, 1993, and most actively during the past two years, Eron, Capital, and Slobogian and Biller on behalf of Eron and Capital, (collectively, the “Parties”) have been in the business of:
- (a) soliciting residents of British Columbia and elsewhere, through radio, television and print advertisements, to invest in mortgages and other encumbrances on property, including syndicated interests in mortgages (collectively, the “Mortgage Securities”);
(b) engaging in trades in the Mortgage Securities; and
(c) participating in distributions of the Mortgage Securities;
8. the Mortgage Broker Exemption provides that mortgage brokers registered, and therefore regulated, under the Mortgage Brokers Act may trade in mortgages and other encumbrances on property in compliance with the terms of the section 46(e) of the Securities Act (the “Exempt Mortgage Securities”) without being registered under section 34(1)(a) of the Securities Act;
9. since January, 1993, the material period, over 10,000 investors have invested in excess of $250,000,000 in approximately 73 distributions of Mortgage Securities traded by the Parties in reliance on the Mortgage Broker Exemption;
10. several distributions of Mortgage Securities, representing investments totaling in excess of $25,000,000, were effected by the Parties contrary to sections 34 and 61 of the Securities Act as the securities distributed were not as described under the Mortgage Broker Exemption and no other exemption applied;
11. staff have been informed by staff of the Financial Institutions Commission that:
- (a) sales agents of Eron who were not registered as required under the Mortgage Brokers Act have traded in Mortgage Securities and have received more than $600,000 in Commissions for these trades from Eron; and
(b) financial records are either non-existent or are improperly prepared and maintained for the proceeds of distributions of Mortgage Securities by Eron;
- (a) Slobogian and Biller have an interest in, or control, a number of the issuers of the Mortgage Securities;
(b) Slobogian and Biller control the trustees acting on behalf of the investors in the Mortgage Securities;
(c) in respect of at least one such issuer of Mortgage Securities, at least 23% of the approximately $4.7 million in proceeds raised from the distribution of Mortgage Securities were redirected from purported trust accounts to unrelated issuers, projects and expenditures, and more than an additional 50% of the proceeds raised was paid as fees to Eron and sales agents of Eron and as interest payments and other fees to investors in connection with their investments; and
(d) it is not uncommon for Eron to fund mortgage-related distributions, such as interest distributions or borrower advances, directly out of other unrelated mortgage funds.
The notice went on to state:
- …that at the Hearing, Staff will bring the following applications:
2. that the Temporary Orders be extended until such time as the Hearing in this matter has been reconvened and a decision rendered on the merits.
Biller opposed Commission staff’s application to extend the temporary orders made against him on the basis that:
1. the temporary orders are null and void because there is no notice of hearing accompanying the temporary orders as required under section 161(5) of the Act; and
2. there is no justification for the broad temporary orders against him in light of the court ordered receivership of Eron and Capital and the attendant judicial trusteeship of certain related companies.
Biller filed his own affidavit in support of his argument.
On October 31, 1997, we adjourned the hearing and extended the temporary orders under section 161(3) of the Act until our decision on Commission staff’s application is rendered.
2. BACKGROUND
The evidence before us indicates that the background to this matter is as described in the facts and allegations set out in the notice of hearing and it is not necessary to repeat it here. We intend to highlight only that evidence that is particularly germane to our consideration of whether the temporary orders ought to be extended.
During the material period, Eron, Capital, and Slobogian and Biller on behalf of Eron and Capital, were in the business of soliciting residents of British Columbia and elsewhere, to invest in mortgages and other encumbrances on property, including syndicated interests in mortgages. These investments have been referred to as the Mortgage Securities. With respect to the trading and distribution of the Mortgage Securities, the Respondents purported to rely on the exemptions from registration and prospectus requirements provided by sections 46(e) and 75(a) of the Securities Act.
However not all of the investments, for which the Respondents solicited and received funds, fit within the exemption from registration requirements and prospectus requirements provided by sections 46(e) and 75(a) of the Securities Act. This situation became apparent to the Registrar of Mortgage Brokers after an investigation into Eron’s affairs sometime in May and June 1997. Capital Productions was incorporated in June 1997 to respond to an order of the Registrar of Mortgage Brokers that several of the investments under Eron’s control did not constitute permitted investments under the Mortgage Brokers Act. The investments as a consequence did not qualify for the exemptions in sections 46(e) and 75(a) of the Securities Act. Accordingly, Capital was created for the purpose of holding these investments. Counsel for Eron also recognized that Eron was not in compliance with the Securities Act and attempted to work with staff of the Registrar of Mortgage Brokers and the Commission to address these regulatory issues. However as time passed and with closer scrutiny, it was apparent to staff of the regulators that the regulatory issues raised were not being adequately addressed and that there were other serious problems surfacing in the business and affairs of the Respondents. It was at this point that the Registrar of Mortgage Brokers petitioned the court for a receiver and judicial trustee.
The receiver confirmed that the books and records of Eron Mortgage, Eron Financial Services, Capital and the approximately 47 related companies that Biller and Slobogian controlled,are in complete disarray. Documentation to support transactions is scarce, incomplete and at timesinaccurate.
Despite the state of the records, the receiver’s preliminary review concluded that there are instances where it is apparent to him that more funds were raised by the Respondents and advanced to developers for investment projects than was secured by mortgage. In certain investment projects it was difficult for the receiver to determine how much money had been advanced. In some of the investment projects, Biller and Slobogian acted as mortgage broker, bare trustee (through various companies) and borrower. In a number of instances significant funds raised from investors for one project were diverted to other investment projects, the receiver noting that “it is not uncommon for Eron to fund mortgage related distributions such as interest distributions or borrowed advances directly out of unrelated mortgage funds.”
The receiver’s preliminary review also confirmed that in addition to raising funds for Mortgage Securities, the Respondents also solicited funds from residents of British Columbia for other investments.
One example involved a non-reporting company, owned by Slobogian, that was represented to investors as operating several producing oil wells. Funds were raised for the purpose of providing working capital to acquire certain oil properties. Investments were made pursuant to loan agreements or promissory notes issued by this company to investors under the signature of either Slobogian or Biller. These loan agreements or promissory notes were represented to investors as having been guaranteed by this company, Slobogian and Biller. There is no reference in the loan agreements or promissory notes to any security interest for investors in the oil revenues or the oil producing properties, despite a representation in the promotional material given to investors that the security was an “assignment of all oil revenues until all investors repaid”. Over $6 million was loaned by investors to this company and remains outstanding. Out of the $6 million raised, over 180 investments consisted of investments of amounts less than $97,000. The loan agreements or promissory notes are securities within the meaning of the Act. No prospectus or offering memorandum was filed with the Commission respecting these securities. It appears that there are no registration or prospectus exemptions available under the Act for these investments.
Other examples of such investments involved an airline company, a forest products company, a memorial park company, a golf promotion company, a ship and a housing development. In many of these Slobogian and Biller were officers and directors of, and controlled, the borrower companies and related investment holding companies. Many of the investors in these projects invested less than $97,000, although in filings with the Commission it was represented otherwise. In some cases investors were given promissory notes. Others were assured their investment was secured by mortgages of certain property, when that was not the case. In others, investors were assured that their investments were secured by assignments of certain corporate inventories, shares and other assets. Again, these representations for securing the investors funds were not carried out as stated. In several instances there is no accounting for some of the funds raised. No prospectus or offering memorandum was filed with the Commission respecting any of these investments and it appears that there are no exemptions available under the Act for these investments.
Capital was involved in some of these investments. The receiver reported that Capital’s bank statements show that it raised over $9 million while Capital’s records show that only $5.2 million in funds were raised. The receiver has yet to reconcile this discrepancy. The receiver reported that funds raised through Capital could be classified into two main categories: pooled funds raised under unsecured promissory notes (approximately $4.7 million) and funds raised for direct project loans (approximately $4.3 million). Of the $9 million the receiver reported was raised, approximately $3.7 million was advanced to borrowers or to bare trustees for advancing to borrowers. The balance appears to have been used to pay interest and to redeem earlier lenders, as well as to pay funds to Eron Financial Services.
The receiver reported that the finances of all the companies, including those that are under the judicial receivership and trusteeship, are intrinsically intertwined and related. In addition these companies have a multitude of creditors and claims against them and theydo not have sufficient assets to meet liabilities. It also appears that there may be fraudulent conveyances and settlements involving the Respondents. The receiver has already initiated, on behalf of Eron Financial Services, a fraudulent conveyance action and accompanying Mareva injunction against Slobogian and his wife. In light of all these circumstances, the receiver is recommending that these companies be petitioned into bankruptcy.
Biller’s counsel, in pursuing his opposition to the extension of the temporary orders against Biller suggested that Biller was an insignificant player in the affairs and business of Eron and Capital. The sworn depositions from the related Washington proceedings, dated July 3, 1997 and June 26, 1997, respectively, in which Biller and Slobogian describe their roles in this business, suggest otherwise.
Slobogian deposed that he owns Eron, is its president and that Biller is one of two vice presidents. Slobogian also deposed that that the nature of Eron’s business is that of a mortgage broker, with “approximately $220 million out in loans. If we do a particular loan to a borrower, the normal practice is to put that loan into a specific corporation. So that it is isolated from all other business.” Slobogian deposed that he is an officer or director of approximately 60 related companies, some of which are involved in Eron’s lending business and some of which are involved in “doing development type deals in Alberta and the United States”. Biller deposed that he was vice president of Eron “in charge of putting the investors together, negotiations between the borrowers and our firm, and then structuring the lending side of the business, making sure the deal is complete.” Biller also deposed that he had “a number of vice presidents sort of beneath me with the designation that handle the actual mortgage brokers that work for us.”
3. DECISION
We reject Biller’s argument that the temporary orders are null and void because they were not accompanied by a notice of hearing as required under section 161(5) of the Act.
The document that was issued on October 3, 1997, and entitled “Temporary Orders and Notice of Hearing Under Section 161” was in form and substance precisely that. In our view, the suggestion that the notice of hearing accompanying the temporary orders must contain all the final facts and allegations upon which Commission staff intend to rely in the substantive hearing under section 161(1) of the Act makes no sense to us. Commission staff will no doubt finalize the facts and allegations in the Notice of Hearing as the investigation progresses. The investigation has just begun.
Having said that, we also note that the notice did set forth numerous facts and allegations based on evidence already garnered by staff for the case the Respondents had to meet at this time. We find that the notice of hearing that accompanied the temporary orders issued on October 3, 1997, meets the requirement of section 161(5) of the Act and therefore we find that the temporary orders are not null and void, but are valid.
We also reject Biller’s argument that, considering the circumstances of this matter, the Commission ought to apply section 161(2) of the Act strictly so that the temporary orders are not effective for a period longer than 15 days.
Under section 161 (1) of the Act, the Commission if it considers it to be in the public interest and after a hearing, may make certain administrative orders as described in that section. Section 161(2) provides that if the Commission or the executive director considers that the length of time required to hold a hearing under subsection (1) could be prejudicial to the public interest, the Commission or the executive director may make a temporary order, without a hearing, to have effect for not longer than 15 days after the date the temporary order is made. Section 161(3) goes on to provide that if the Commission considers it necessary and in the public interest, the Commission may, without a hearing, make an order extending a temporary order until a hearing is held and a decision is rendered.
In our view, section 161(2) was not intended to be read in isolation but in conjunction with the rest of the provisions of the Act, in particular section 161(3), which allows the Commission if it considers it necessary and in the public interest, to extend, without a hearing, a temporary order until a hearing is held and a decision is rendered. Although Biller has acknowledged that this section permits the Commission to extend, without a hearing, temporary orders for longer than the 15 day period referred to in section 161(2), he argues that only in exceptional circumstances, which do not exist here, would such an extension be appropriate. We disagree.
In making this decision, we are mindful that the courts and the Commission have on numerous occasions emphasized that the primary goal of securities legislation is the protection of the investing public. The importance of that goal in assessing the decisions of securities Commissions has been recognized by the Supreme Court of Canada in the oft’ cited case of Brosseau v. Alberta Securities Commission, [1989] 1 S.C.R. 301 (Brosseau), where L'Heureux-Dube J., writing for the Court, stated the following at p. 314:
- Securities acts in general can be said to be aimed at regulating the market and protecting the general public. This role was recognized by this Court in Gregory & Co. v. Quebec Securities Commission, [1961] S.C.R. 584, where Fauteux J. observed at p. 588:
- The paramount object of the Act is to ensure that persons who, in the province, carry on the business of trading in securities or acting as investment counsel, shall be honest and of good repute and, in this way, to
protect the public, in the province or elsewhere, from being defrauded as a result of certain activities initiated in the province by persons therein carrying on such a business.
- [T]he public has a legitimate expectation that the Commission will discharge the regulatory duties entrusted to it, by effectively investigating those activities from which the trading public require protection, and by exercising its regulatory powers so as to ensure that the purpose of the legislation, namely, the protection of the public, is achieved.
Therefore in determining whether it is necessary and in the public interest to extend the temporary orders, without a hearing, we have considered the following.
Section 34 (1) of the Act provides that a person must not trade in a security or act as an adviser unless he is registered. Section 46 of the Act provides certain exemptions to this registration requirement in section 34 (1) of the Act.
Section 61 (1) of the Act provides that unless exempted under this Act or the regulations, a person must not distribute a security unless a preliminary prospectus and a prospectus respecting that security have been filed with the executive director, and receipts obtained for them from the executive director. Section 75 provides certain exemptions to this prospectus requirement in section 61 of the Act.
There is prima facie evidence before us that the Respondents were in the business of trading and distributing securities for which no exemptions under sections 46 and 75 of the Act were available. None of the Respondents was registered and no prospectus was filed for any of these securities they distributed. As a consequence there is prima facie evidence that the Respondents contravened sections 34 and 61 of the Act.
Slobogian as the director and president of Eron and Capital, and Biller as a senior officer of those companies, were responsible for ensuring that Eron and Capital complied with the Act. This they failed to do. The books and records of Eron, Capital and the related companies are in complete disarray. The finances and affairs of the Respondents and related companies appear to be completely intertwined. There also appear to be many questionable transactions, some of which may involve fraud. Significant amounts of the investors funds are at risk or unsecured.
Although Biller deposes that he has cooperated fully with Commission staff and the receiver, it is the Respondents’ abysmal record keeping that is the cause, in large part, of the expected lengthy investigation and the Commission staff’s inability to proceed with a hearing within the 15 day period set out in section 161(2) of the Act. To protect the public interest we must use the regulatory tools the Legislature has made available to us. This includes exercising our discretion under section 161(3), to extend, without a hearing, temporary orders for a period longer than 15 days. To enable staff to present a properly developed case, the receiver and Commission staff require time to sort out the records, business and affairs of the Respondents. During this period the temporary orders should remain in effect. We are of the view that there is more than sufficient evidence to justify our extension of the temporary orders in the public interest against all of the Respondents.
Based on the evidence before us, we also reject Biller’s argument that the temporary orders made against him are too broad and unnecessary in the circumstances. Considering the number of companies Biller and Slobogian were involved with, the disarray of their books and records and the fact that their affairs and finances are intertwined, it is our conclusion that, for now, such an order is indeed necessary in the public interest. However, if Biller wishes to sell specific securities or act as a director or officer of a specific issuer, an application under section 171 of the Act can always be made to the Commission for discretionary relief.
Although we have described some of the evidence, we emphasize that we have made no final determinations with respect to the allegations made in the notice of hearing and we cannot do so until the hearing is held.
We are of the view that it is in the public interest not to proceed with the hearing until Commission staff conclude their investigation, which they expect to do in 180 days. Accordingly, we consider it necessary and in the public interest to:
1. adjourn the hearing until 10:00 a.m. on March 31, 1998; and
2. extend the temporary orders under section 161(3) of the Act until a hearing is held and a decision rendered.
DATED at Vancouver, British Columbia, on November 26, 1997.
FOR THE COMMISSION
| Joyce C. Maykut, Q.C. | Brent W. Aitken |
| Vice Chair | Member |
| Peter A. Manson, Q.C. |
| Member |