Decisions
GORDON DIX JR., et. al. [Findings]
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BCSECCOM #:
2001 BCSECCOM 761
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Document Type:
Findings
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Published Date:
2001-07-20
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Effective Date:
2001-07-20
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Details:
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2001 BCSECCOM 761
COR#01/082
IN THE MATTER OF THE SECURITIES ACT
R.S.B.C. 1996, c. 418
AND
IN THE MATTER OF GORDON DIX JR., RONALD JAMES HENRY AND
SOTA MINING GROUP LTD.
PANEL
Brent W. Aitken
Joan L. Brockman
Roy Wares
DATE OF HEARING
July 12, 2001
DATE OF FINDINGS
July 20, 2001
APPEARING FOR COMMISSION STAFF
Lorne Herlin
APPEARING FOR HIMSELF
Gordon Dix Jr.
APPEARING FOR HIMSELF AND SOTA MINING GROUP LTD.
Ronald James Henry
FINDINGS OF THE COMMISSION
[para 1]
This is a hearing under section 161(1) of the Securities Act, R.S.B.C. 1996, c 418. The notice of hearing, issued January 15, 2001, alleges that:
1. Dix, Henry and Sota sold securities of Sota without being registered and without filing a prospectus, contrary to sections 34 and 61 of the Act,
2. Dix and Henry acted as advisers without being registered, contrary to section 34, and
3. Dix went to investors’ residences to sell securities, contrary to section 49.
[para 2]
The notice of hearing also alleges that Dix and Henry contravened section 50 of the Act. Commission staff abandoned those allegations at the hearing.
[para 3]
The notice of hearing identifies the corporate respondent as Sota Mining Corporation. Its actual name is Sota Mining Group Ltd. At the hearing, Commission staff amended the notice of hearing accordingly.
BACKGROUND
[para 4]
Henry has over 30 years experience in the mining industry. He incorporated Sota in May 1996 and is its President and sole director. Sota planned to enter joint venture agreements with other mining companies to carry out mining exploration and development. Its immediate objective was to raise sufficient funds to acquire a dormant listed company for reactivation. That company could then be used to raise capital from the public to fund its operations.
[para 5]
In the meantime, Henry evaluated mining prospects. When Henry found properties he considered worth exploring, Sota entered into “Letters of Intent to Joint Venture” with the owners of the properties. The intention of these arrangements was that Sota would operate the mines and earn a net profit interest, typically 60%.
[para 6]
Henry began raising money. In April 1998 he persuaded two men, both in their 70’s, to invest $2,500 each. Henry was introduced to these investors through a mutual friend; he had no prior relationship with them before they became investors in Sota. Each of their investments was evidenced by a receipt describing it as a “2.5 per cent net profit interest in the Lorna Judge Mine”.
[para 7]
Henry has never been registered under the Act to trade in securities.
[para 8]
Dix’s occupation is selling vacuum cleaners. He has been doing so for over 25 years. After operating for 17 years in the Victoria area, he moved to the Okanagan valley in 1995. There he met Henry, who was looking for someone to help Sota raise funds. In August 1998 Dix joined Sota as its Vice President, Investor Relations. Before joining Sota, Dix had nothing beyond a layman’s knowledge of mining or securities. Dix has never been registered under the Act to trade securities.
[para 9]
Between October 1998 and April 2000, Dix sold so-called “net profit interests” on behalf of Sota to 10 elderly individuals. Their investments totalled $123,000. The average age of the 8 investors whose ages are known was about 81.
[para 10]
The net profit interest sold by Sota was not always in a specific mine. Several investors received a net profit interest in “Sota Mining Group Ltd.’s first mine we begin operation or any joint venture mine we begin production [sic]”.
[para 11]
Sota gave investors packages of materials, the content of which varied from investor to investor. Apart from a short paragraph describing Sota’s business in general terms, the materials consisted primarily of copies of press releases, letters and various mining reports and descriptions. There was no description of Sota’s business plan or the securities being sold nor any disclosure of financial information or risk factors. The information the investors received did not remotely approach the standard of disclosure of a prospectus or offering memorandum.
[para 12]
Sota paid Dix an immediate 50% commission on the funds raised. Sota also agreed to grant him 15% of the stock when the company went public.
[para 13]
Meanwhile, some of Sota’s activities came to the attention of Commission staff. In June 2000, Dix undertook to Commission staff not to trade securities of Sota. At this point his career with Sota came to an end and he returned to the vacuum cleaner business.
[para 14]
As part of its investigation, Commission staff asked the Sota investors to complete questionnaires about their investment. Of the 12 investors, nine completed questionnaires. Among other things, the investors were asked whether they were close friends, relatives or business associates of Sota, Henry or Dix. All said no. They were also asked to rank their investment knowledge on a scale of 1 to 10, with 1 being no knowledge at all, and 10 being highly knowledgeable. The two investors that purchased from Henry ranked themselves as 4 and 5; one of the other investors, 2; the rest, 1.
[para 15]
In total, Sota raised $128,000 from 12 investors. Sota has never been registered under the Act to trade securities, nor has it ever filed a prospectus or offering memorandum under the Act or filed a report of an exempt distribution.
[para 16]
Dix and Henry believed fervently, and still do, in the value of the investments. Indeed, Henry’s first words under oath were:
“Thank you I would just like to say that our investors are becoming stinking filthy rich. Sota Mining Ltd. is not an operation where you get rich quick but it is a mining company that is a very lucrative long term investment.”
[para 17]
To date, the investors have received neither a return on their investments nor a return of their capital.
ALLEGATIONS AND FINDINGS
[para 18]
The notice of hearing alleges that:
1. Sota, Henry and Dix traded securities without being registered, contrary to section 34(1)(a) of the Act, and distributed securities without filing a prospectus, contrary to section 61(1) of the Act.
2. Henry and Dix acted as advisers without being registered, contrary to section 34(1)(c) of the Act.
3. Dix went to investors’ residences to sell securities, contrary to section 49(2) of the Act.
1. Failure to register or file a prospectus
[para 19]
The relevant portions of the definitions of “security”, “trade” and “distribution” in section 1(1) of the Act follow.
“‘security’ includes
. . .
(b) a document evidencing title to, or an interest in, the capital, assets, property, profits, earnings or royalties of a person
. . .
(l) an investment contract . . .
‘trade’ includes
(a) a disposition of a security for valuable consideration whether the terms of payment be on margin, installment or otherwise . . .
‘distribution’ means, if used in relation to trading in securities, . . . a trade in a security of an issuer that has not been previously issued . . . .”
Section 34 of the Act says:
“34 (1) A person must not
(a) trade in a security or exchange contract unless the person is registered in accordance with the regulations as
(ii) a salesperson, partner, director or officer of a registered dealer and is acting on behalf of that dealer . . . .”
“61 (1) 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
(a) have been filed with the executive director, and
(b) receipts obtained for them from the executive director.”
[para 20]
The first question is whether the net profit interests sold by Sota are “securities” within the meaning of the Act. We find they are: they fit squarely in paragraph (b) of the definition of security. Furthermore, they meet the common law definition of an investment contract: an investment of money in a common enterprise with profits to come from the efforts of others (see SEC v. W. J. Howey Co. 328 U.S. 293 (1946), SEC v. Glen W. Turner Enterprises, Inc. 474 F. 2d 476 (1973), Pacific Coast Coin Exchange v. Ontario Securities Commission, [1978] 2 S.C.R. 112).
[para 21]
Dix, Henry and Sota sold securities of Sota to the investors for valuable consideration. None of the respondents was registered, and no exemptions applied. We therefore find that Dix, Henry and Sota traded securities without being registered, contrary to section 34(1)(a) of the Act.
[para 22]
The securities traded by Dix, Henry and Sota had not been issued before their sale to the investors. Sota filed no prospectus and no exemptions applied. We therefore find that Dix, Henry and Sota distributed securities without filing a prospectus, contrary to section 61(1) of the Act.
2. Advising without registration
[para 23]
“Adviser” is defined in section 1(1) of the Act as:
“ . . . a person engaging in, or holding himself, herself or itself out as engaging in, the business of advising another with respect to investment in or the purchase or sale of securities or exchange contracts . . . .”
Section 34 of the Act says:
“34. (1) A person must not
. . .
(c) act as an adviser unless the person is registered in accordance with the regulations as
(i) an adviser, or
(ii) an advising employee, partner, director or officer of a registered adviser and is acting on behalf of that adviser.”
Section 8(c) of the Securities Rules says:
“8. A person registered as an adviser must be classified in one or more of the following categories:
. . .
(c) securities adviser: a person that engages or holds itself out as engaging in the business of advising others through direct advice . . . .”
[para 24]
Were Dix and Henry “engaging in, or holding [themselves] out as engaging in, the business of advising another with respect to investment in or the purchase or sale of securities”? The meaning of “advising” in this context was considered by this Commission In the Matter of Robert Anthony Donas [1995] 14 BCSC Weekly Summary 39. In that case, the Commission said the following, beginning at page 44:
“The concise Oxford Dictionary of Current English (1990 ed.) defines ‘advice’ as ‘words given or offered as an opinion or recommendation about future action or behaviour . . . ’.
“It is because the very nature of advising involves the offering of an opinion or recommendation to others that the Act requires advisers to be registered and to meet certain conditions as to their education and experience. This requirement is intended to protect the public . . .
“As indicated by the definition of ‘advice’, the nature of the information given or offered by a person is the key factor in determining whether that person is advising with respect to investment in or the purchase or sale of securities. A person who does nothing more than provide factual information about an issuer and its business activities is not advising in securities. A person who recommends an investment in an issuer or the purchase or sale of an issuer’s securities, or who distributes or offers an opinion on the investment merits of an issuer or an issuer’s securities, is advising in securities. If a person advising in securities is distributing or offering the advice in a manner that reflects a business purpose, the person is required to be registered under the Act.”
Dix and Henry provided information to investors about Sota’s mining prospects and recommended that they invest. It is clear they believed in the investments and recommended them without reservation. Their elderly and unsophisticated investors did not have the skills to evaluate the investments on their own and relied on Dix’s and Henry’s advice.
[para 26]
The business purpose in giving this advice is self evident. Henry was looking for funds to acquire a public financing vehicle. As for Dix, we need look no further than his eye-popping commissions.
[para 27]
We therefore find that Dix and Henry acted as advisers without being registered, contrary to section 34(1)(c) of the Act.
3. Going to residences to sell the securities
[para 28]
Section 49 of the Act says:
“49. (1) In this section, ‘residence’ includes a building or part of a building in which the occupant resides permanently or temporarily and any appurtenant premises.
(2) A person must not
(a) attend at any residence
. . .
for the purpose of trading in a security . . . .”
[para 29]
Dix admitted that he attended at the residences of all of the investors to whom he sold the Sota investments. This is a clear contravention of section 49(2) and we so find.
FURTHER SUBMISSIONS
In the notice of hearing, Commission staff asked that we make orders:
1. under section 161 of the Act that the respondents be:
· denied the use of the exemptions in the Act,
· required to resign any office they presently hold as director or officer,
· prohibited from acting as directors or officers of any issuer, and
· prohibited from engaging in investor relations activities;
2. under section 162 of the Act that the respondents pay an administrative penalty, and
3. under section 174 of the Act that the respondents pay the costs of the hearing.
[para 31]
We invite the parties to make submissions as to what orders, if any, we ought to make in light of our findings. We direct Commission staff to file its submissions with the Commission Secretary and to deliver them to the respondents on or before August 17 and that the respondents file any submissions they may have in response on or before September 14. Any party wanting to be heard orally on the subject of sanctions should contact the Commission Secretary.
[para 32]
DATED July 20, 2001.
FOR THE COMMISSION
Brent W. Aitken, Commissioner
Joan L. Brockman, Commissioner
Roy Wares, Commissioner