Settlements

JOHN BRIAN JOHNSTON [Settlement Agrmt.]

BCSECCOM #:
Document Type:
Settlement Agrmt.
Published Date:
2000-07-21
Effective Date:
2000-07-18
Details:


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

AND

IN THE MATTER OF JOHN BRIAN JOHNSTON


Settlement Agreement


1. The following settlement of issues has been reached between John Brian Johnston and the Executive Director.

Agreed Statement of Facts

2. Johnston acknowledges the following facts as correct only for the purposes of regulatory proceedings here or elsewhere:
      2.1 Canaccord Capital Corporation is registered under the Securities Act, R.S.B.C. 1996, c. 418 and was at all times material to this settlement, a member of both the Vancouver Stock Exchange (now the Canadian Venture Exchange) and the Investment Dealers Association of Canada.

      2.2 Johnston is registered as an investment advisor under the Act and has been employed in the securities industry since 1981. He has worked in the Vancouver office of Canaccord since May, 1985.

      2.3 Excell Asset Management Inc. (“Excell Asset”) is or was a company incorporated pursuant to the laws of the province of British Columbia on January 10, 1994. It is not a reporting issuer under the Act and conducted its business under the name of Excel Asset Management Inc. (“Excel Asset”).

      2.4 Excel International Investment Corporation (“Excel International”) is or was a company incorporated pursuant to the laws of the British Virgin Islands. It is not a reporting issuer under the Act and it has an office located on the Isle of Man. From or about May 28, 1996, to or about June 30, 1997, Excel International operated both Canadian and US dollar brokerage accounts at Canaccord (the “Excel International Accounts”).

      2.5 Diomondmark Investments Limited (“Diomondmark”) is or was a company incorporated pursuant to the laws of the British Virgin Islands and is not a reporting issuer under the Act. Diomondmark had an office in the Cayman Islands and from or about November 1, 1995, to or about July 31, 1997, operated both Canadian and US dollar brokerage accounts at Canaccord (the Diomondmark Accounts”).

      2.6 Excel Funding Inc. (“Excel Funding”) is or was a company incorporated pursuant to the laws of the Cayman Islands and is not a reporting issuer under the Act. Excel Funding had an office located in the Cayman Islands and from or about September 5, 1996, to or about July 31, 1997, operated both Canadian and US dollar brokerage accounts at Canaccord (the “Excel Funding Accounts”).

      2.7 Gary W. Stanhiser (“Stanhiser”) is a resident of Loma Linda, California, U.S.A., and was the sole director and officer of Excell Asset, and represented himself to be the president of Excel Asset. From or about August 5, 1993, to or about January 31, 1997, Stanhiser operated both Canadian and US dollar brokerage accounts at Canaccord (the “Stanhiser Accounts”).

      2.8 Del L. Knowlton (“Knowlton”) is a resident of British Columbia and worked for Excel Asset. From or about December 13, 1995, to or about January 3, 1998, Knowlton operated a Canadian dollar brokerage account at Canaccord (the “Knowlton Account”).

      2.9 None of Excell Asset, Excel Asset, Excel International, Diomondmark, Excel Funding, Stanhiser, or Knowlton (collectively, the “Excel Group”) have ever been registered to trade in or advise in securities under the Act.

      2.10 Johnston was the investment advisor for each of the Excel International Accounts, the Diomondmark Accounts, the Excel Funding Accounts, the Stanhiser Accounts and the Knowlton Account (collectively, the “Excel Group Accounts”).

      2.11 The British Columbia Securities Commission found, by a decision dated April 28, 1999, dealing with allegations concerning the operations of Excel Asset, that Stanhiser, Knowlton, and others, had operated or participated in an investment scheme (the “Scheme”) by which, among other things:
          2.11.1 client representatives of Excel Asset, including Knowlton and his wife, Linda Knowlton, raised money from clients, which would then be pooled in the Excel Group Accounts;

          2.11.2 in only a handful of cases did a single client invest $97,000 or more;

          2.11.3 once sufficient funds had accumulated, one of the Excel companies, or Stanhiser, purchased shares of a company pursuant to a previously negotiated private placement;

          2.11.4 these shares were then allocated to the clients in the records of Excel Asset. In a few cases the clients actually took delivery of their shares; and

          2.11.5 the private placements were purported to be made under the exemptions from the registration and prospectus requirements set out at sections 45(2)(5) and 74(2)(4) of the Act, which requires that the aggregate acquisition cost to the purchaser be not less than $97,000.
      2.12 The Commission found that those exemptions were not available for the private placements and, as a result, all of the Excel Group had carried out acts, solicitations, conduct, or negotiations in furtherance of the distributions without being registered, contrary to section 34(1) of the Act and that all of the Excel Group distributed securities without filing and obtaining a receipt for prospectus, contrary to section 61(1) of the Act.

      2.13 The Commission found that by his participation in the distribution of securities through the Scheme, Stanhiser perpetrated a fraud on persons in British Columbia, contrary to section 57 of the Act, and, as a result of the Scheme, clients of Excel Asset are still owed shares.

      2.14 As well as acting as investment advisor for the Excel Group Accounts, Johnston also acted as investment advisor for over 140 individual Excel Asset investors who personally opened accounts at Canaccord (the “Individual Investors”). Many of the Individual Investors transferred funds into their accounts at Canaccord, which were later transferred to the Excel Group Accounts at the clients’ written request and were subsequently used in the Scheme.

      2.15 Johnston purchased securities through the Scheme himself and knew or ought reasonably to have known that a primary purpose of many of the Individual Investors opening their accounts at Canaccord was to participate in the Scheme as well.

      2.16 Johnston represents that he failed to understand that the Scheme was illegal. As a result, he did not consider informing the Excel Group or the Individual Investors that the Scheme was a breach of the Act and did not consider informing the Individual Investors that their investments could be at greater risk, because of that illegality. Johnston did not disclose to Canaccord, or its compliance department, his knowledge of the Scheme, the investment intention of the Individual Investors with respect to the Scheme, or the nature of the Scheme.

3. The Executive Director has taken into account the following facts as mitigating the sanctions which would otherwise have applied in the public interest.
      3.1 Johnston has advised the Executive Director that he was unaware that the Scheme was illegal and did not attempt to conceal his participation in the Scheme from anyone including his employer, Canaccord.

      3.2 Johnston did not actively market the shares and warrants sold through the Scheme to the Individual Investors.

Breaches of the Act and Rules

4. Johnston agrees, only for the purpose of regulatory proceedings here or elsewhere, that he breached the Act and Securities Rules, B.C. Reg. 194/97 as follows:
      4.1 as a result of Johnston’s failing to understand that the Scheme was illegal under the Act, he failed to advise the Individual Investors that they were investing in an illegal Scheme. Because of this, Johnston failed to determine the suitability of the proposed purchase of securities by those clients, in breach of section 48 of the Rules; and

      4.2 by participating in the collection and payment of monies for the Scheme, and by assisting in the physical distribution of shares and warrants for the Scheme, and by acquiring securities pursuant to the Scheme, all in the absence of a prospectus or any exemption, Johnston unwittingly participated in a breach of section 61(1) of the Act.

Undertaking

5. Johnston undertakes and agrees to the following:

5.1 to comply fully with the Act and Rules;
      5.2 to successfully complete the Conduct and Practices Handbook Exam by no later than May 31, 2001; and

      5.3 to pay to the Commission the amount of $102,000, $77,000 of which represents disgorgment of commission, private placement fees and agents fees, $5,000 of which represents a contribution towards the costs of the investigation, and $20,000 of which represents a penalty.
Waiver

6. Johnston waives any right he may have, under the Act or otherwise, to a hearing, hearing and review, judicial review or appeal related to, in connection with, or incidental to this agreement.

DATED at Vancouver, British Columbia, on July 13, 2000.


“Sargent Borner”_____________ )
Witness Signature )
Sargent H. Borner______ ______ )
Witness Name (please print) ) “John Brian Johnston”
)
1000 - 595 Howe Street ________ )
Vancouver, BC _______________ )
Address )
Solicitor _____________________ )
Occupation

DATED at Vancouver, British Columbia, on July 18, 2000.



Steve Wilson
Executive Director