BCSC

Decisions

ERON MORTGAGE CORPORATION, et. al. [Decision]

BCSECCOM #:	Document Type: Decision
Published Date: 1998-12-11	Effective Date: 1998-12-03
Details:

COR#98/285

IN THE MATTER OF THE SECURITIES ACT
R.S.B.C. 1996, c. 418
AND

IN THE MATTER OF ERON MORTGAGE CORPORATION, ERON INVESTMENT
CORPORATION, ERON FINANCIAL SERVICES LTD., CAPITAL PRODUCTIONS INC.,
BRIAN SLOBOGIAN AND FRANK BILLER

HEARING

PANEL:	JOYCE C. MAYKUT, Q.C.	VICE CHAIR
	BRENT W. AITKEN	MEMBER

DATE:

SEPTEMBER 30, 1998

APPEARING:	E. DAVID CROSSIN	FOR MR. BRIAN SLOBOGIAN
	MARK L. SKWAROK	FOR MR. FRANK BILLER
	AMES A. ANGUS	FOR COMMISSION STAFF
	NO ONE APPEARING	FOR THE COMPANIES

DECISION OF THE COMMISSION

1. INTRODUCTION

This is an application by Frank Biller for further particulars and disclosure of Commission staff’s case against him. Brian Slobogian supports Biller’s application. At the same time, Commission staff are seeking to have a date fixed for the hearing.

2. BACKGROUND

These proceedings were first initiated on October 3, 1997, when the Executive Director, under section 161(1) of the Securities Act R.S.B.C. 1996, c. 418, issued temporary orders, accompanied by a notice of hearing, against Eron Mortgage Corporation, Capital Productions Inc., Brian Slobogian and Frank Biller. Also 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 and judicial trustee of Eron Mortgage Corporation, Eron Investment Corporation, Eron Financial Services Ltd. and over 40 related companies. On October 17, 1997, the Supreme Court extended the receivership to Capital Productions Inc.

On October 31, 1997, Commission staff applied to adjourn the Commission hearing and extend the temporary orders made by the Executive Director to enable Commission staff to conclude their investigation. On November 26, 1997, the Commission issued its decision, in The Matter of Eron Mortgage Corporation et al., [1997] 48 B.C.S.C. 134, determining that it was in the public interest not to proceed with the hearing until Commission staff concluded their investigation, which in the circumstances was expected to take at least six months. In its decision the Commission noted that “[t]he 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.” The hearing was adjourned to March 31, 1998, with the expectation that the parties would be in an better position at that time to fix a date for the hearing.

On March 31, 1998, the matter was again adjourned to July 27, 1998. At that time Commission staff indicated that they were focusing on at least 26 different projects and that they would likely be adding new parties to the notice of hearing. On July 28, 1998, the Commission directed Commission staff to produce certain documents to the respondents by mid August and to issue an amended notice of hearing particularizing the allegations against the respondents by September 8, 1998.

On September 10, 1998, Commission staff advised counsel for Biller that the notice had not yet been amended but that it would likely focus on only nine projects as opposed to 26.

On September 17, 1998, Commission staff issued an amended notice of hearing under section 161(1) of the Act against Eron Mortgage Corporation, Eron Investment Corporation, Eron Financial Services Ltd., Capital Productions Inc., Slobogian and Biller. The amended notice stated that the Commission would be asked to consider the following facts and allegations in determining whether certain regulatory orders should be made against any of these respondents:

1. Eron Mortgage Corporation (“Eron”) was incorporated under the Company Act, R.S.B.C. 1979, c. 59 (the “Former Company Act”) on January 4, 1993, is not a reporting issuer and has never been registered under the Act to trade in securities;

2. Capital Productions Inc. was incorporated under the Company Act, R.S.B.C. 1996, c. 62 on June 18, 1997, is not a reporting issuer and has never been registered under the Act to trade in securities;

3. Eron Financial Services (“EFS”) and Eron Investment Corporation (“EIC”) were incorporated under the Former Company Act on October 31, 1988, and June 13, 1995, respectively, are not reporting issuers and have never been registered under the Act to trade in securities;

4. Slobogian was the sole director and the president of Eron and Capital and has never been registered under the Act to trade in securities. He is also the president and a director of EFS and EIC;

5. Biller was an officer of Eron, and Capital, a director and officer of EIC and has never been registered under the Act to trade in securities;

6. Eron was registered as a mortgage broker under the Mortgage Brokers Act, R.S.B.C. 1996, c. 313. Slobogian and Biller were registered as sub-mortgage brokers under that Act;

7. from January, 1993 until October, 1997 (the “Relevant Period”), the Respondents:

7.1. solicited residents of British Columbia to make investments by way of loans, either purportedly secured by interests in mortgages on real property (“Mortgage Securities”), or evidenced by promissory notes (“Notes”) or both; and

7.2. as such, engaged in the trading and distribution of the Mortgage Securities and the Notes

8. the Respondents, or representatives of the Respondents, represented to investors that these investments were short term, secure loans to Eron, EIC, EFS, CPI and a variety of entities to be used primarily as investment capital;

9. the Respondents solicited investors to invest in excess of $200,000,000 during the Relevant Period either by way of Mortgage Securities or Notes or both;

A. The Trading and Distribution of the Mortgage Securities

10. the Respondents relied on the exemptions from registration and prospectus requirements provided by sections 32(e) and 58(a) of the Former Act and sections 46(e) and 75(a) of the Act for the trading and distribution of the Mortgage Securities;

Misrepresentations and Fraud in Respect of the Mortgage Securities

11. the Respondents, or representatives of the Respondents, made statements, with the intention of effecting a trade in securities, which they knew or ought to have known were misrepresentations, contrary to section 35(1)(d) of the Former Act [now section 50(1)(d) of the Act ];

12. during the Relevant Period, the Respondents engaged in or participated in transactions or a scheme relating to trading in securities, which they knew or ought reasonably to have known perpetrated a fraud on persons in British Columbia, contrary to section 41.1 of the Former Act [ now section 57(b) of the Act ];

13. during the Relevant Period the Respondents acted contrary to the public interest in respect of the investments solicited;

14. particulars of the allegations set out in paragraphs 11., 12. and 13. are as follows:

14.1 the Respondents, or representatives of the Respondents, in the course of trading in and distributing the Mortgage Securities:

(a) misrepresented the value of mortgaged properties to investors;

(b) falsely assured investors that the value of mortgaged properties significantly exceeded the value of mortgages registered against it, and that the mortgage in which they were investing therefore provided good security;

(d) falsely assured investors that their invested funds would be used by borrowers to further develop or to enhance the value of mortgaged properties;

(e) falsely assured investors that the securities they were offering involved no or minimal risk;

(f) promised investors returns of 15% to 24% on funds invested, while they knew, or ought to have known, that such rates of return were not realistic under the circumstances and could not be maintained;

(g) represented to investors that the loans were short term, for periods varying from 6 to 12 months, repayable on demand, while they knew or ought to have known that the loans would not or could not be repaid as agreed without raising more funds from additional investors; and

(h) represented to investors that repayment of the funds was guaranteed by Eron, Slobogian or Biller while they knew or ought to have known that they would not or could not do so;

14.2 the Respondents failed to provide investors with the Mortgage Securities they had promised to them, and in particular:

(a) put some investors, who were promised an interest in a particular mortgage, such as a second mortgage, into a mortgage with lower priority, such as a third or fourth mortgage, without their knowledge; and

(b) put some investors, who were promised an interest in a particular mortgage, such as a $2 million mortgage, into a mortgage with a higher principal amount, such as a $5 million mortgage, without their knowledge;

14.3 the funds raised by the Respondents from investors for investment in particular mortgages exceeded the amounts secured by the mortgages;

14.4 the Respondents did not advance some of the funds raised from investors for investment in particular mortgages to the borrowers, but expended it in ways not disclosed to the investors;

14.5 the Respondents applied funds raised from subsequent investors to make the interest or capital payments to existing investors without the knowledge of the investors;

14.6 the Respondents knew or ought to have known, when they solicited investors to invest in particular mortgages, that the amount secured by the mortgage exceeded the value of the underlying equity;

14.7 the Respondents knew or ought to have known, when they solicited investors to invest in particular mortgages, that the investments would not or could not be repaid by the maturity date;

14.8 the Respondents knew or ought to have known, when they advanced investors’ funds to particular borrowers, that the funds would not be expended by the borrowers in connection with the development or servicing of the mortgaged property; and

14.9 the Respondents failed to keep complete and adequate financial and other records in respect of the money raised from investors;

B. The Trading and Distribution of the Notes

I. Illegal Distribution

15. the Respondents traded in and distributed the Notes to investors, with the total amount of investments exceeding $30 million;

16. the Respondents failed to file and obtain a receipt for a prospectus qualifying the distribution of the Notes to the investors;

17. as none of the Respondents were registered to trade in securities, and as no exemption from the requirements of sections 20 and 42 of the Former Act (now sections 34 and 61 of the Act ) was available to the Respondents for most transactions with investors, the trades and distributions of the Notes to investors were made contrary to sections 20 and 42 of the Former Act (now sections 34 and 61 of the Act );

II. Misrepresentations and Fraud in Respect of the Trade and Distribution of the Notes

18. the Respondents, or representatives of the Respondents, made statements, with the intention of effecting a trade in securities, which they knew or ought to have known were misrepresentations contrary to section 35(1)(d) of the Former Act [ now section 50(1)(d) of the Act ];

19. during the Relevant Period, the Respondents engaged in or participated in transactions or a scheme relating to trading in securities, which they knew or ought reasonably to have known perpetrated a fraud on persons in British Columbia, contrary to 41.1 of the Former Act [ now section 57(b) of the Act];

20. during the Relevant Period, the Respondents acted contrary to the public interest in respect of the investments solicited; and

21. particulars of the allegations in paragraphs 18, 19 and 20 are as follows:

21.1 the Respondents, or representatives of the Respondents, in the course of trading in and distributing the Notes:

(a) either failed to apprise the investors of the risk involved in the investments, or falsely assured investors that the investments involved minimal or no risk;

(b) promised investors returns of 15% to 24% on funds invested, while they knew, or ought to have known, that such rates of return were not realistic under the circumstances and could not be maintained;

(c) represented to investors that the loans were short term, for periods varying from 6 to 12 months, repayable on demand, while they knew or ought to have known that the loans would not or could not be repaid as agreed without raising more funds from additional investors;

(d) represented, by implication, or otherwise, to investors that the funds raised would be applied to generate revenue, while the intention was primarily to pay fees to the Respondents, maintain interest payments or repay capital to existing investors and make miscellaneous inappropriate payments; and

(e) represented to investors that repayment of the funds was guaranteed by Eron, Slobogian or Biller while they knew or ought to have known that they would not or could not do so;

21.2 the Respondents applied funds raised from subsequent investors to make the interest or capital payments to existing investors without the knowledge of the investors;

21.3 the Respondents advanced funds raised from investors to entities which they knew or ought to have known would not or could not maintain the interest rates applicable or repay the capital;

21.4 the Respondents applied some of the funds raised, or permitted the funds to be applied, in ways not contemplated by the individual investors, such as purchasing a Rolex watch for $34,500, making a deposit of $24,810 on a Mercedes Benz vehicle and advancing funds to projects without the knowledge of investors; and

21.5 the Respondents kept incomplete and inadequate financial and other records in respect of the money raised from investors.

Despite the amendments to the notice, Biller argues that there still is not sufficient particularity in the allegations to enable him to properly prepare and answer the case against him. Biller argues that despite staff’s earlier assurance that the allegations would focus on only nine projects, the amended notice is not so restricted and simply covers a five year period and supposedly all of the numerous transactions. Specifically Biller asked, in response to the numbered paragraphs in the notice of hearing:

7.1. What are the specific, improper solicitations by Mr. Biller that are referred to in that paragraph? To whom were they made? With respect to which projects?

8. Same demand as above. In addition, which representatives of Mr. Biller allegedly made the representations referred to in that paragraph? On what basis are they alleged to be representatives of Mr. Biller, rather than Eron? To whom were the representations made? For each investor covered in this paragraph, please particularize what statements were made to them and by whom?

9. Same demand as with respect to paragraph 7.1.

11. Same demand as with respect to paragraph 8.

12. Same as above.

13. What are the particulars of the conduct of Mr. Biller relating to breaches of the public interest? Does this allegation embody something different from the specific allegations of breaches of the Act contained throughout the Notice of Hearing?

14.1 Same demand as with respect with paragraph 8. for each of the sub-paragraphs therein enumerated.

14.2.a Which investors? Which mortgages are in question?

14.2.b Same as above.

14.3-.5 Same as above.

18-21 These allegations relate to fraud. Natural justice requires that Mr. Biller be advised in detail which transactions are being identified, what he allegedly said, to whom did he say it, and what is it he is alleged to have known or ought to have known with respect to the transactions referred at the time he made each of the alleged representations. Mr. Biller also requires particulars of the allegations that he applied funds in a fashion other than what was represented by him to investors.

Biller argues that the particulars referred to in paragraph 21 of the notice do not constitute full particulars. Biller argues that he is also entitled to “full disclosure of all the evidence now”. Indeed, he argues that without further particulars and complete disclosure he is not in a position to fix a date for the hearing because he cannot estimate the time required for the hearing.

At the hearing of the application Commission staff confirmed that, subject to other material evidence coming to light, staff’s case would be restricted to nine projects, as indicted in the letter of September 17, 1998. Commission staff also confirmed that they have provided to the respondents all of the documentation they have and intend to rely on, including transcripts of any interviews done to date. Commission staff have not yet provided a list of witnesses they intend to call or their will-say statements as further interviewing needs to take place and the will say-statements are still being prepared. Commission staff indicate that although they intend to disclose this additional information as it becomes available they will provide all of this information by the end of February 1999 or at least eight weeks before any hearing date.

At the conclusion of submissions, the Commission indicated that it was not prepared to fix a date for hearing without knowing what has already been disclosed to the respondents and what representations Commission staff have made in their communications with the respondents. Instead it directed Commission staff to provide to the Commission and respondents: a list of the documentation, by class or category related to the projects, disclosed to date; what Commission staff intends to focus on that is not apparent in the notice and which has already been communicated to the respondents; and what further evidence Commission staff intends to disclose to the respondents and the time staff requires to do that.

In a letter dated October 8, 1998, Commission staff advised the Commission and respondents as follows:

We provided a list of documents to counsel for the respondents on June 29, 1998. A copy of our June 29, 1998 letter is attached. Messrs. Crossin and Skwarok declined our invitation to attend at our offices to review the listed documents, and requested that we provide a copy of each document. Staff began copying the materials for the respondents’ counsel. On July 28, 1998, Mr. Aitken ordered that staff provide copies of the documents by August 14, 1998.

We have provided to counsel for the respondents each of the documents set out in the 42 page List of Disclosure Documents and 4 page Supplemental List of Disclosure Documents. Mr. Aitken’s July 28, 1998 order related only to the documents listed in the initial list, and copies of each of those documents were provided to both Mr. Crossin and Mr. Skwarok by August 6, 1998. We provided counsel with copies of the documents listed in the supplemental list on September 22, 1998.

The disclosed documents were organized by project and, among other things, they include the following:

1. Documentation obtained from the files of Eron Mortgage Corporation concerning various projects, each of which was separately identified, including, where available: (a) investor lists setting out the names of investors in the project and the amounts invested by each investor; (b) term sheets issued by the respondents to the investors identified in the lists which set out, in each case, the identity of the investor, the nature of the security offered to the investor, the amount invested, the maturity date of investment, and the interest payable to the investor; (c) promotional material setting out representations made to investors concerning the particular project, such as the amount and priority of the mortgage, the value of the mortgaged property, and the nature of the development project; (d) mortgage documents purporting to set out, with respect to the projects, the amount and priority of the registered mortgages; (e) appraisals provided to Eron concerning the value of the mortgaged properties; (f) term sheets or loan agreements between Eron and the mortgagors; (g) ‘declarations of trust’ purporting to set out the security held by the Eron trustee companies on behalf of investors in particular projects; and (h) authorizations to pay out mortgage proceeds, which were issued by borrowers setting out how funds were to be disbursed.

2. Copies of 375 questionnaires completed by investors. The questionnaires requested the identity of the investors, the representations made to the investors, the identities of the individuals who made the representations to the investors, the amount invested by the investor and the project in which the investor had invested. Copies of the completed questionnaires, together with copies of promotional material, investor term sheets, and other documentation provided to Commission staff by the investors, were provided to Mr. Crossin on July 28 and to Mr. Skwarok on August 6, 1998.

3. Accounting records prepared by the receiver, Price Waterhouse Coopers (“PWC”) including: investor lists for identified projects setting out the names of investors who had invested in the project, and the amounts invested by and owed to each investor; transaction summaries for identified projects setting out the amount of funds raised by Eron from investors, the amount of funds advanced by Eron to the borrower, and how the balance of the funds were expended by Eron; and schedules of payments made by Eron to borrowers under specific mortgages;

4. Transcripts of interviews conducted by Commission Staff, including transcripts of the interviews of Mr. Biller, Mr. Schiel (who was the borrower in five projects), Mr. Larson (who was involved in the Nexus project), and of three former employees of Eron. We have been unable to serve a section 144 summons on Mr. Slobogian, and have requested Mr. Crossin’s assistance in that regard. Mr. Crossin has indicated to staff that he is unable to accept service of the summons on Mr. Slobogian’s behalf and has not provided an address at which Mr. Slobogian could be served; and

5. Appraisals of the mortgaged properties prepared on behalf of PWC.

As requested, attached are copies of our letters to counsel for the respondents dated September 17, 1998 and September 25, 1998. As stated in the attached correspondence, we intend to focus on nine projects at the hearing, including Maxim Resorts, Shuswap Falls, the South Thompson Guest Ranch, Nexus Ventures and the five Schiel projects. Should information come to our attention which ought to be put before the Commission concerning any other project, then we will seek to do so. Counsel for the respondents would be able to make any submissions they might want concerning that project.

We will also lead evidence with respect to the distribution of the promissory notes, which generally did not relate to any project.

The conclusion of the investigation will focus on the nine projects identified in the September 17 letter, as well as the distributions under the promissory notes. Among other things, the staff will continue to interview former employees of Eron, will contact investors, and will meet with the receiver to further review the nine projects and the distributions under the promissory notes

From the material disclosed to date, counsel for the respondents should be able to identify who the potential witnesses are and how long the hearing may take, which is all that is in issue at present, given that counsel already knows the length of time anticipated by staff.

In order to avoid unnecessary delay, we wish to reserve dates for the hearing as soon as possible. We understand that the earliest available dates for a five week hearing are in the Spring of 1999. Witness will say statements and0 any additional relevant documentation, including transcripts or notes of interviews, will be provided to counsel for the respondents well in advance of the hearing.

Commission staff’s letters of September 17 and 25, 1998, state that they intend to call as witnesses two accountants from Price Waterhouse, four individuals who had worked for Eron Mortgage, approximately 20 investors and Mr. Edmonds, the staff investigator with primary conduct of the investigation. The ex-Eron employees and the investors were not identified.

In response to Commission staff’s letter, Biller submitted in a letter dated November 13, 1998, that Commission staff have yet to provide him with the particulars and disclosure that fairness requires. In response to Commission staff’s letter, Slobogian submitted in a letter dated November 13, 1998, that he is still assessing the documents disclosed and has made a request to Commission staff for further specific documents he says are relevant.

3. DECISION

The issue in this application is whether further particulars and disclosure are required to be made by Commission staff to the respondents, Biller and Slobogian.

Commission staff have a duty to provide a level of disclosure that ensures a respondent is fully informed of the case to be made against him so as to provide him with a reasonable opportunity to put forward his own position and correct or contradict any statement or evidence that is prejudicial to his position. In Re Simon Fraser Resources et al., [1996] 47 B.C.S.C. Weekly Summary 25, the Commission stated that this duty requires Commission staff to disclose:

1. the particulars of the case against the respondents;

2. the evidence that will be tendered, including any statements made against the respondents; and

3. any exculpatory evidence of which staff is aware, or ought reasonably to be aware, the omission of which would result in a miscarriage of justice.

This standard of disclosure is applicable here. The question to be answered is what further, if any, particulars are required to be disclosed in the circumstances of this case. We have described in some detail the allegations, the respondents’ requests for particulars and Commission staff’s responses, including those made at the hearing of this application and in subsequent correspondence.

There already has been significant disclosure made to the respondents. In addition, Commission staff have confirmed that their case will focus on the Maxim Resorts, Shuswap Falls, the South Thompson Guest Ranch, Nexus Ventures and the five Schiel projects as well as the distributions under the promissory notes. They have also confirmed that there will be further disclosure of transcripts of interviews and witness will-say statements as they become available. As reflected in the allegations in the amended notice of hearing, this is a complicated case covering a five year period and involving allegations of fraud. It has been further complicated by the intervening receivership.

In these circumstances, it is our view that it is necessary and appropriate for Commission staff to provide the respondents with the following information. We direct Commission staff to identify the names of the 20 investors, the four ex-Eron employees and the accountants Commission staff intend to call as witnesses. Regarding the allegations of fraud and misrepresentation referred to in the notice in paragraphs 11 to 14, and 18 to 21 under the headings Misrepresentations and Fraud in Respect of the Mortgage Securities and Misrepresentations and Fraud in Respect of the Trade and Distribution of the Notes we direct staff, where they have not already done so, to identify the investors to whom the misrepresentations were made or to whom the misleading information was given. We also direct staff to identify which respondents made the misrepresentations and when they were made. We direct staff to provide this information to the respondents by December 14, 1998.

In our view, with this information and further particulars, Biller and Slobogian will have the information and documentation to be fully informed of the case to be made against them so as to provide them with a reasonable opportunity to put forward their own position.

Once Commission staff have provided the respondents the list of witnesses and further particulars as directed in this decision, we direct that this matter be brought back before the Commission on January 5, 1999, at 10:00 a.m. to fix a date for the hearing unless the parties can agree before then on a date for the hearing.

DATED at Vancouver, British Columbia, on December 3, 1998.

FOR THE COMMISSION

Joyce C. Maykut, Q.C.	Brent W. Aitken
Vice Chair	Member