Decisions
AMERICAN TECHNOLOGY EXPLORATION , et. al. [Decision]
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BCSECCOM #:
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Document Type:
Decision
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Published Date:
1998-01-23
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Effective Date:
1998-01-20
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Details:
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COR#98/013
IN THE MATTER OF THE SECURITIES ACT
R.S.B.C. 1996, c. 418
AND
IN THE MATTER OF AMERICAN TECHNOLOGY EXPLORATION
CORPORATION, PHILIP LIEBERMAN AND MARC ARTHUR LIEBERMAN
HEARING
| PANEL: | DOUGLAS M. HYNDMAN | CHAIR |
 | PETER A. MANSON, Q.C. | MEMBER |
| DIANE K. WOLCH | MEMBER |
| DATE: | OCTOBER 9, 1997 |
| APPEARING: | JAMES A. ANGUS | FOR COMMISSION STAFF |
| PATRICK ROBITAILLE | |
DECISION OF THE COMMISSION
1. INTRODUCTION
This decision relates to a hearing under section 161 of the Securities Act, R.S.B.C. 1996, c. 418. On June 6, 1997, the Executive Director issued temporary orders and a notice of hearing against American Technology Exploration Corporation (“ATEC”), Philip Lieberman and Marc Arthur Lieberman. The temporary orders, under section 161(2) of the Act, required that all persons cease trading in the securities of ATEC and removed the exemptions of all three respondents.
The hearing was originally scheduled for June 13, 1997. On that date, by consent, the hearing was adjourned to August 21 and the temporary orders were extended until the hearing was held and this decision rendered. On July 28, the Executive Director amended the notice of hearing to add further allegations and set out additional orders he was seeking. On August 18, in response to a request from the respondents, the Commission adjourned the hearing to October 9. The hearing proceeded on that date. The respondents were not represented at the hearing. Philip Lieberman did not attend. Marc Lieberman attended as a spectator for part of the hearing.
The notice alleges that Philip Lieberman was in contravention of previous orders made by the Commission, that the respondents contravened section 50(1)(d) of the Act by making, or causing to be made, misrepresentations while they were engaging in investor relations activities and that the respondents traded in securities without being registered, contrary to section 34 of the Act.
2. BACKGROUND
Philip Lieberman has been the subject of several previous Commission proceedings and is currently subject to two sets of enforcement orders. On March 4, 1988, the Superintendent of Brokers (now called the Executive Director) made an order removing Philip Lieberman’s exemptions under the Act for 10 years. The order was based on findings that he had made misrepresentations, in public disclosures by issuers he controlled, concerning the mineral prospects of a property in California. That order was confirmed by the Commission following a hearing and review of the Superintendent’s decision.
On March 7, 1994, the Commission found that Philip Lieberman had contravened the 1988 order and imposed new orders prohibiting him from being a director or officer of a reporting issuer for 8 years, removing his exemptions for 8 years, and ordering him to pay an administrative penalty of $10,000 and hearing costs of $1,000. He has failed to pay either the administrative penalty or the costs
Marc Lieberman is the son of Philip Lieberman.
ATEC is a Nevada corporation and was incorporated in August 1993. It operates from an office in British Columbia. It is not a reporting issuer under the Act. Its shares trade over the counter in the United States and are quoted on the NASDAQ OTC bulletin board. The original list of directors and officers filed with the Nevada Secretary of State showed Philip Lieberman and his daughter, Peppa Martin, as the only directors and officers of ATEC. The most recent list so filed showed Philip Lieberman as president and treasurer and Marc Lieberman as secretary. No directors were shown. However, disclosure statements filed and promotional material issued by ATEC showed Philip Lieberman as chairman of the board and chief executive officer and Marc Lieberman as president, treasurer and a director.
None of ATEC, Philip Lieberman or Marc Lieberman is registered under the Act.
A British Columbia company with the same name, American Technology Exploration Corporation, was incorporated in October 1994. Corporate registry records show Philip Lieberman as president and a director and Marc Lieberman as secretary and a director. No other directors or officers are shown. This company was not directly involved in these proceedings.
Evidence presented by Commission staff shows that, in October 1996, Philip Lieberman contracted on behalf of ATEC with Stock Research Group Inc.(“SRG”), for SRG to develop and maintain for ATEC a World Wide Web site accessible through the Internet (the “Web site”). ATEC was responsible for the content of the Web site. Lieberman provided SRG with a diskette containing information in a word processing format. SRG converted it to the “hyper text” format used in Web sites. The site was easily accessed from British Columbia and contained nothing to suggest that it was not directed at investors in this province. The Web site displayed two telephone numbers, both in British Columbia. The number for the “Executive Office” was recorded by BC Tel as being in the name of Marc Lieberman. The “Private line Chairman of the Board” was a number recorded by BC Tel as being in the name of Philip Lieberman.
The Web site contained a description of ATEC and its mineral property, hot links to stock quotations and charts for ATEC shares and an inquiry form that could be sent by E-mail to obtain more information.
The Web site began by describing ATEC as “An innovative resource company developing major US gold deposits” and stated that it “trades on the NASDAQ small cap bulletin board”. It went on to describe ATEC’s business prospects in glowing terms, making a series of extraordinary claims about the Moapa property, a set of mineral claims in Nevada held by ATEC, and stated that “The company plans to begin production late spring 1997.” Readers were advised that “Shares can easily be purchased anywhere in the world through any securities house.”
The description of the property stated or implied in several places that considerable work had been done on the property, including assays using a “proprietary procedure”. Most notably, ATEC said that the property contained “232,734,870 tons of blocked out ore reserves, containing 76 million ounces of gold in place.” This statement implied that sufficient work had been done on the property to estimate the tonnage and grade of mineralized material. This work would have involved drilling many holes and assaying thousands of samples. ATEC also claimed that a U.S. government study and work on an adjacent property supported the presence of gold on the Moapa property. The description concluded by saying that ATEC had tested the property sufficiently to “guarantee” a mine life of over 30 years. The net revenue projected from the mine was more than $20 billion.
If the Web site description of the Moapa claims were to be believed, ATEC had the largest gold deposit in the world, larger even than the 71 million ounce deposit that had been reported — falsely — to be located on the famous Busang property of Bre-X. Furthermore, this vast deposit was not buried in a remote jungle on a tropical island, but was accessible from an interstate highway and mineable at the surface.
In fact, there is no basis to support ATEC’s description of the Moapa property. None of the required permits have been sought or obtained from the U.S. government or Nevada state agencies in order to authorize exploration or development work on the property. ATEC’s financial statements as at June 30, 1996, show that nothing had been spent on exploration or development of the Moapa property and ATEC had no resources to fund any meaningful work on the property. Nevada state officials indicate that there has never been any precious metals production in the Moapa area. The U.S. government study referred to in the Web site, which was produced more than a century ago, in 1890, does not even refer to Nevada, let alone the Moapa area.
In a page dealing with the management of ATEC, the Web site described Philip Lieberman as “a highly successful Chairman of many companies.” It made no reference to his past regulatory problems or the orders to which he is currently subject. The page also described a member of ATEC’s advisory team, Evaldo L. Kothny, Ph. D., and said that he “is listed in ‘Who is Who in the West’”. In fact, Who’s Who in the West, a bi-annual catalogue containing biographies of prominent individuals in the Western U.S. and Western Canada, listed Kothny in its editions from 1976 to 1982 but has not listed him since.
The reference on the Web site to ATEC shares being traded on the “NASDAQ small cap bulletin board” is also misleading. There is, in fact, no market by that name. The NASDAQ Stock Market Inc. operates both the NASDAQ Stock Market and the OTC (over the counter) Bulletin Board. The NASDAQ Stock Market is divided into the NMS (national market system) and the Small Cap market. The NMS has substantial listing requirements. The Small Cap market has lower listing requirements, including a public float of $5 million and either net tangible assets of $4 million, market capitalization of $50 million or net income of $750,000. (All these figures are in U.S. dollars.) By contrast, the OTC Bulletin Board, on which ATEC shares are quoted, is a quotation service for issuers that do not qualify for the NASDAQ Stock Market. An issuer is not required to meet any financial or other requirements, other than having a market maker apply on its behalf, in order to have bids and offers by dealers for its shares quoted on the OTC Bulletin Board.
On June 4, 1997, after locating the ATEC Web site and reviewing its contents, Commission staff member Dennis Paulley called both telephone numbers shown on the Web site and left messages under an assumed name. Marc Lieberman called him back. In response to Paulley’s questions, Marc Lieberman said that ATEC was a very small company, that Paulley should call his broker if he wished to purchase shares, that he should keep his eye on the Web site for more details about ATEC and that he should fax his name and address to Marc Lieberman in order to be put on the mailing list.
The Executive Director issued temporary orders against ATEC and both Liebermans on June 6. On June 10, Philip Lieberman faxed a hand written note to SRG, on ATEC letterhead, instructing that the ATEC Web site be suspended. Lieberman’s note said he intended to resume the service at a later date.
3. FINDINGS
Commission staff allege that ATEC, Philip Lieberman and Marc Lieberman
- made or caused to be made statements that were misrepresentations while they were engaging in investor relations activities, in contravention of section 50(1)(d) of the Act;
- traded in securities without being registered, in contravention of section 34 of the Act.
Staff acknowledged at the hearing that Marc Lieberman (and presumably ATEC) could rely on the registration exemption in section 42(2)(7) of the Act for trading through a registered dealer.. However, they noted that, because of the outstanding orders made against Philip Lieberman in the earlier proceedings, the exemptions do not apply to Philip Lieberman, with the result that any trading by him was in contravention of the previous orders.
The sections of the Act relevant to these allegations are as follows:
- Section 1 — definition of investor relations activities
“investor relations activities” means any activities or oral or written communications, by or on behalf of an issuer or security holder of the issuer, that promote or reasonably could be expected to promote the purchase or sale of securities of the issuer, but does not include
(a) the dissemination of information provided, or records prepared, in the ordinary course of the business of the issuer
- (i) to promote the sale of products or services of the issuer, or
(ii) to raise public awareness of the issuer,
that cannot reasonably be considered to promote the purchase or sale of securities of the issuer,
- (i) this Act or the regulations, or
(ii) the bylaws, rules or other regulatory instruments of a self regulatory body or exchange,
- (i) the communication is only through the newspaper, magazine or publication, and
(ii) the publisher or writer receives no commission or other consideration other than for acting in the capacity of publisher or writer, or
No activities have been prescribed under paragraph (d) of the definition.
- Section 1 — definition of material fact
“material fact” means, where used in relation to securities issued or proposed to be issued, a fact that significantly affects, or could reasonably be expected to significantly affect, the market price or value of those securities;
Section 1 — definition of misrepresentation
“misrepresentation” means
(a) an untrue statement of a material fact, or
(b) an omission to state a material fact that is
- (i) required to be stated, or
(ii) necessary to prevent a statement that is made from being false or misleading in the circumstances in which it was made;
Section 1 — definition of trade
“trade” includes
(a) a disposition of a security for valuable consideration whether the terms of payment be on margin, installment or otherwise, but does not include a purchase of a security or a transfer, pledge, mortgage or other encumbrance of a security for the purpose of giving collateral for a debt,
(b) entering into an exchange contract,
(c) participation as a trader in a transaction in a security or exchange contract made on the floor of or through the facilities of an exchange,
(d) the receipt by a registrant of an order to buy or sell a security or exchange contract,
(e) a transfer of beneficial ownership of a security to a transferee, pledgee, mortgagee or other encumbrancer under a realization on collateral given for a debt, and
(f) any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the activities specified in paragraphs (a) to (e);
Section 34(1) — registration requirement
A person must not
(a) trade in a security or exchange contract unless the person is registered in accordance with the regulations as
- (i) a dealer, or
(ii) a salesperson, partner, director or officer of a registered dealer and is acting on behalf of that dealer,
Section 50(1) — prohibited representations
A person, while engaging in investor relations activities or with the intention of effecting a trade in a security, must not do any of the following:
…
(d) make a statement that the person knows, or ought reasonably to know, is a misrepresentation.
Investor Relations Activities
The evidence is clear that ATEC, on the direction of Philip Lieberman, contracted to have the Web site set up and provided the written content of the site. The site was accessible to anyone, in British Columbia or elsewhere, who had access to the Internet. The glowing descriptions of ATEC’s Nevada mineral property and its future prospects, together with the information about ATEC shares and how to buy them, clearly communicated information (and misinformation) that promoted the purchase of ATEC shares. The contents of the Web site did not fit within any of the exclusions in paragraphs (a) to (d) of the definition of investor relations activities. On this basis, we find that, in communicating to potential investors through the Web site, ATEC was engaging in investor relations activities.
As detailed in the background, the descriptions in the Web site of ATEC, its property and its management were riddled with false and misleading statements. The following are the most egregious examples:
- ATEC stated that it had blocked out reserves containing 76 million ounces of gold on the Moapa property, had tested the property sufficiently to guarantee a mine life of over 30 years, and projected net revenues from the mine of more than $20 billion, when in fact it had done little or no exploration work on the property and had no basis to support these statements.
- ATEC stated that it planned to “begin production late spring 1997” when in fact it had done little or no exploration work to establish the feasibility of a mine and had not applied for or obtained any of the numerous government permits or approvals that would be required before mining could begin.
- ATEC stated that work on an adjacent property supported the presence of gold on the Moapa property, when in fact there has never been any precious metals production in the Moapa area.
- ATEC falsely stated that a particular U.S. government study indicated the presence of gold in the Moapa area.
- ATEC described Philip Lieberman as the “highly successful Chairman of many companies”, while omitting to state that he had been subject to serious regulatory sanctions.
- ATEC stated that Evaldo Kothny “is listed in ‘Who’s Who in the West’”, when in fact Kothny has not been listed in that catalogue since 1982.
- ATEC stated that its shares were traded on the “NASDAQ small cap bulletin board”, which gave the misleading impression that its shares were listed on the NASDAQ Small Cap market, when in fact its shares were quoted only on the OTC Bulletin Board, a quotation service with much lower standards.
These statements all relate to ATEC’s business or to persons connected with ATEC. ATEC must be taken to have known that the statements about the Moapa property and about Philip Lieberman were false and misleading. The statements about the U.S. government study, the purported work on an adjacent property and Evaldo Kothny could easily have been checked, and therefore ATEC ought to have known they were false and misleading. The misleading reference to the “NASDAQ small cap bulletin board” could have been an honest mistake, but it is consistent with the reckless disregard for the truth that is reflected throughout the Web site contents.
Most of these statements concerned material facts, that is matters that could reasonably be expected to affect the market price or value of ATEC’s shares. The false and misleading statements as to material facts were misrepresentations as defined in the Act.
We find that ATEC, while engaging in investor relations activities, made statements that it knew or ought to have known were misrepresentations and, in so doing, contravened section 50(1)(d) of the Act.
Trading
The contents of the ATEC Web site were designed to excite the reader about the prospects for ATEC and its shares and to interest potential investors in buying ATEC shares. The reader of the Web site is told (misleadingly) that the shares trade on the “NASDAQ small cap bulletin board” and that “Shares can easily be purchased anywhere in the world through any securities house.” The material on the Web site could therefore be described as an advertisement or solicitation for investors to purchase ATEC shares, which would thereby create demand and allow others to trade their ATEC shares.
Philip Lieberman and ATEC were responsible for setting up the Web site and for the written material contained on it. Marc Lieberman may not have had the same degree of involvement in setting up the Web site or placing the contents on it, but he responded to Paulley’s telephone call, made to a number listed on the Web site, by telling him to call his broker if he wished to purchase ATEC shares. We find that, in their activities related to the Web site, Philip Lieberman, Marc Lieberman and ATEC engaged in acts, advertisements or solicitations directly or indirectly in furtherance of trading in ATEC shares and, therefore, they were trading in securities.
ATEC and Marc Lieberman could, at least arguably, rely on the exemption from registration in section 45(2)(7) of the Act for “a trade in a security by a person acting solely through a registered dealer”. However, under the orders issued by the Superintendent in 1988 and the Commission in 1994, neither that exemption nor any other applies to Philip Lieberman. Accordingly we find that, in trading in securities through the ATEC Web site, Philip Lieberman has contravened those orders.
4. DECISION
ATEC used the modern technology of the Internet for an old fashioned purpose — promoting its shares with outrageous misrepresentations. Information is the lifeblood of a securities market. A misinformed market lacks integrity and presents inappropriate risks to investors who are invited to trade in the promoted shares. Furthermore, ATEC is not a reporting issuer. Although staff did not allege or prove that ATEC contravened the prospectus requirements of the Act, it is difficult to imagine how a company based in British Columbia, like ATEC, could become publicly traded and promote its shares in this province while avoiding the need to comply with these requirements. We consider it in the public interest to cease all trading in ATEC shares until ATEC has filed a prospectus and obtained a receipt for it.
Despite some confusion in the corporate records, it is clear that Philip Lieberman and his son Marc Lieberman were the directors of ATEC and the individuals responsible for conducting its business. They must be held accountable for ATEC’s use of misrepresentations in its Web site promotion.
Philip Lieberman bears primary responsibility. He was undoubtedly the moving force behind ATEC. As in previous cases where he has been subject to discipline by this Commission, his activities reflect his total disregard for the truth in conducting his business affairs. In this case, he also violated two sets of orders already outstanding against him. In order to protect investors against his repeated misconduct, we consider it in the public interest to permanently remove him from the market and activities related to issuers and to require him to pay a substantial penalty.
Marc Lieberman was Philip Lieberman’s assistant, helping to run ATEC and to inflict its misrepresentations on potential investors. We consider it in the public interest to remove him from the market and activities related to issuers for a significant period.
We order:
- 1. under section 161(1)(b) of the Act that all persons cease trading in the shares of ATEC until ATEC has filed a prospectus and obtained a receipt for it from the Executive Director;
2. under section 161(1)(c) of the Act that the exemptions described in sections 44 to 47, 74, 75, 98 and 99 do not apply to Philip Lieberman for the rest of his natural life or to Marc Lieberman for a period of 5 years from the date of this decision;
3. under section 161(1)(d)(ii) of the Act that Philip Lieberman is prohibited from becoming or acting as a director or officer of any issuer for the rest of his natural life and that Marc Lieberman is prohibited from becoming or acting as a director or officer of any issuer until the later of 5 years from the date of this decision and the date he successfully completes a course of study satisfactory to the Executive Director on the duties of directors;
4. under section 161(1)(d)(iii) of the Act that Philip Lieberman is prohibited from engaging in investor relations activities for the rest of his natural life and that Marc Lieberman is prohibited from engaging in investor relations activities for a period of 5 years from the date of this decision;
5. under section 162 of the Act that Philip Lieberman pay an administrative penalty of $50,000 within thirty days of the date of this decision; and
6. under section 174 of the Act that ATEC, Philip Lieberman and Marc Lieberman pay prescribed fees or charges for the costs of or related to the hearing, in an amount to be determined following further submissions from the parties.
DATED at Vancouver on January 20, 1998.
FOR THE COMMISSION
| Douglas M. Hyndman | Peter A. Manson, Q.C. |
| Chair | Member |
| Diane K. Wolch |
| Member |