Decisions

EXCEL ASSET MANAGEMENT INC, et. al. [Findings]

BCSECCOM #:
Document Type:
Findings
Published Date:
1999-05-07
Effective Date:
1999-04-28
Details:


COR#99/108

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

AND

IN THE MATTER OF EXCEL ASSET MANAGEMENT INC., EXCELL ASSET
MANAGEMENT INC., EXCEL FUNDING INC., EXCEL INTERNATIONAL
INVESTMENT CORP., DIOMONDMARK INVESTMENTS LIMITED,
GARY STANHISER, DEL KNOWLTON AND LINDA KNOWLTON

AND

IN THE MATTER OF THE LOMA TRUST


HEARING


PANEL:ADRIENNE R. WANSTALLMEMBER
ROY WARESMEMBER
DIANE K. WOLCHMEMBER

DATES OF HEARING:OCTOBER 13, 14, 19 TO 22, AND
NOVEMBER 3, 1998

APPEARING:PATRICK ROBITAILLEFOR COMMISSION STAFF
H. RODERICK ANDERSONFOR DEL KNOWLTON
AND LINDA KNOWLTON

    FINDINGS OF THE COMMISSION


    1. INTRODUCTION

    This decision relates to a hearing under sections 161(1) and 162 of the Securities Act, R.S.B.C. 1996, c.418. On September 12, 1997, the Executive Director issued a Notice of Hearing alleging that Excel Asset Management Inc., Excell Asset Management Inc., Excel Funding Inc., Excel International Investment Corp., Diomondmark Investments Limited, Gary Stanhiser, Del Knowlton and Linda Knowlton distributed securities without filing or obtaining a receipt for a prospectus, contrary to section 61 of the Act. The Notice of Hearing was accompanied by temporary orders under section 161(2) of the Act that:

    1. under section 161(1)(c) of the Act, the exemptions described in sections 44 to 47, 74, 75, 98 or 99 of the Act do not apply to the Respondents;
    2. under section 161(1)(d)(iii) of the Act, the Respondents are prohibited from engaging in investor relations activities; and
    3. under section 161(1)(d)(i) and (ii) of the Act, the individual Respondents are prohibited from acting as directors or officers of any reporting issuer, and must resign any present position as a director or officer of a reporting issuer.

    On September 26, 1997, on application by Commission staff and the individual Respondents, the Commission adjourned the hearing and, under section 161(3) of the Act, extended the temporary orders until October 22, 1997.

    On October 22, 1997, on application by Commission staff and with the consent of the individual Respondents, Excel Funding and Diomondmark, the Commission adjourned the hearing until April 20, 1998, and extended the temporary orders until the hearing is held and a decision is rendered.

    On April 16, 1998, on application by Commission staff, the individual Respondents, Excel Funding, Diomondmark, Excel Asset and Excell Asset, the Commission adjourned the hearing until October 9, 1998.

    On September 10, 1998, the Executive Director issued an Amended Notice of Hearing alleging that the Respondents distributed securities without being registered and without filing or obtaining a receipt for a prospectus, contrary to sections 34 and 61 of the Act. The Amended Notice of Hearing also alleged that, through his participation in these distributions, Stanhiser perpetrated a fraud on persons in British Columbia, contrary to section 57 of the Act.

    On October 5, 1998, the Commission adjourned the hearing until October 13, 1998. The hearing began on that date.

    At the commencement of the hearing, Commission staff submitted a letter dated that day from California, in which Stanhiser requested an adjournment of the hearing due to a medical condition and his resulting inability to travel. We denied the application on the basis that Stanhiser had known of the proceedings for some time and yet had not sought an adjournment earlier, that there was no indication that he was trying to retain counsel, and that he had provided no doctor’s letter or other evidence respecting his medical condition.

    Stanhiser was not represented by counsel and did not attend the hearing. Commission staff produced a transcript of an interview under oath that Stanhiser had had with Commission staff on February 17, 1998.

    Del and Linda Knowlton were represented by counsel. Del Knowlton (“Knowlton”) attended most of the hearing but Linda Knowlton did not attend at all; their counsel was present for some parts of the proceedings. Neither of the Knowltons testified, but their counsel produced transcripts of interviews under oath that Knowlton had had with Commission staff on April 15, May 14 and September 30, 1998, and that Linda Knowlton had had with Commission staff on July 8, 1998. He also produced an agreed statement of facts signed by Linda Knowlton on October 13, 1998.

    On application by counsel for the Knowltons, we ruled that, at the completion of the hearing, we would first render our findings. Should we determine that some or all of the allegations against the Respondents have been proven, we will hear further submissions before issuing final orders in this matter.

    2. BACKGROUND - THE EXCEL GROUP

    2.1 STRUCTURE

    Stanhiser is a resident of California and has been a pastor in the Seventh Day Adventist church for approximately eighteen years.

    On Stanhiser’s instructions, a Vancouver lawyer named Stephen Dadson arranged for the incorporation of Excell Asset Management Inc. under the B.C. Company Act on January 10, 1994. The use of two l’s in the company’s registered name was an error; Stanhiser had intended that the company be called Excel Asset Management Inc. and the company used that name in conducting its affairs. In this decision, we will refer to the company as Excel Asset.

    Stanhiser was the president, secretary and sole director of Excel Asset. According to Stanhiser, Excel Asset was incorporated to review various companies in Vancouver and elsewhere in which Stanhiser may have been interested in investing. Dadson understood Excel Asset to be a management company, which would look after Stanhiser’s affairs generally, eg. as a vehicle to lease office space or hire assistants.

    During 1995 and 1996, three offshore companies, each wholly owned by a different offshore trust, were added to the Excel group. A diagram of the Excel group during this period, showing the three trust/company pairs, is attached as Appendix A to this decision.

    The first of the three pairs was the Loma Trust and Excel International Investment Corp. Dadson set up the Loma Trust on May 25, 1995, on Stanhiser’s instructions. The settlor of the trust was Eleanor Stanhiser, Stanhiser’s mother, and the trustee was Manxtrust, which was located in the Isle of Man. The property settled on the trustee was one gold coin. The beneficiary was the Seventh Day Adventist Church and the protector of the trust was Stanhiser. Pursuant to the trust indenture, the protector has the power to remove and appoint the trustee. The trust indenture also requires the trustee to give the protector 30 days notice of the trustee’s intention to change the beneficiaries of the trust or to distribute any capital or capitalized income of the trust. Thus, if the protector disagrees with the trustee’s proposed course of action, the protector can remove the trustee and appoint another.

    Excel International was incorporated in the British Virgin Islands on July 7, 1995, and was wholly owned by the Loma Trust. Dadson was a director of the company from its date of incorporation until 1997. The other directors were Paul Garret and Edward Gittins, both of whom were in the Isle of Man. Dadson was of the view that though Stanhiser was not a director, it was Stanhiser that controlled the company. Dadson understood that Excel International was incorporated to invest in projects in which Stanhiser was interested, using Stanhiser’s family money.

    The second pair was the Diomond Trust and Diomondmark Investments Limited. In October 1995, Stanhiser told Dadson that he wanted to set up another offshore trust. Dadson introduced him to Gary Oakley, the president of Britannia Corporate Management Ltd. Britannia was a Cayman Islands company licensed to provide corporate management services for companies. Diomondmark was incorporated in the British Virgin Islands on September 27, 1995. Dadson requested Britannia to provide directors and officers for the company. From October 27, 1995 to August 8, 1997, Britannia provided secretarial and director facilities for Diomondmark.

    The Diomond Trust was set up on October 27, 1995, by Britannia, on Stanhiser’s instructions conveyed through Dadson. The settlor of the trust was Stanhiser’s mother and the trustee was ATC Trustees (Cayman) Limited. The property settled on the trustee was one gold coin. The beneficiary was Oakley and the protector, once again, was Stanhiser. The trust indenture was in substance the same as that setting up the Loma Trust. In particular, it gave the same powers to the protector of the trust. Also on October 27, 1995, the one outstanding share of Diomondmark was transferred to the Diomond Trust. Dadson informed Oakley that Diomondmark would be investing in private placements organized by Stanhiser.

    The third pair was the Excel Funding Trust and Excel Funding Inc. Excel Funding was incorporated in the Cayman Islands on July 25, 1996. Britannia arranged for the incorporation, on Stanhiser’s instructions, and provided secretarial and director services for the company from July 25, 1996 to August 8, 1997.

    The Excel Funding Trust was set up on August 27, 1996. The settlor of the trust was Stanhiser’s mother and the trustee was ATC Trustees. The property settled on the trustee was one gold coin. The beneficiary was Oakley and the protector, as with the other two trusts, was Stanhiser. The trust indenture was substantially the same as that setting up the other two trusts and gave Stanhiser, the protector, the same powers. On August 27, 1996, the one outstanding share of Excel Funding was transferred to the Excel Funding Trust.

    It was through these three companies - Excel International, Diomondmark and Excel Funding - that Stanhiser is alleged to have carried out the investment scheme that is the subject of this hearing. None of the three trusts or three companies, nor Excel Asset, was registered under the Act. Nor did any of the Excel companies ever qualify any securities of any kind for distribution to the public.

    2.2 HOW FUNDS WERE RAISED

    In the spring of 1995, Stanhiser visited Knowlton in Knowlton’s home in Langley. Both of the Knowltons were teachers. Stanhiser and Knowlton had gone to university together in the 1960’s but had lost touch with each other until Stanhiser began calling Knowlton in 1994. Stanhiser knew that Knowlton had a background in geology and asked if he could do due diligence on some companies in which Stanhiser was interested in investing. Knowlton began working with Stanhiser in the summer of 1995, reviewing material relating to Kensington Resources Ltd.

    Later in 1995, Stanhiser asked Knowlton to increase his involvement by overhauling Kensington’s investor relations materials, in particular by developing a new brochure for the company. Knowlton agreed. He had been interested in the Vancouver Stock Exchange for several years and had collected files on a hundred or more companies; he used some of the brochures in those files to assist in the writing of the Kensington brochure. With the people from Kensington, he also developed a program under which they would send to every broker in Canada a copy of the brochure plus additional information.

    By late 1995, Knowlton had again increased his involvement. In his interview of April 15, 1998, Knowlton described his activities with Stanhiser and Excel Asset in late 1995 as follows:
        A And by this time I was probably working half time on Kensington stuff with the promise that I’d get options in the future, and contacted a number of people that had invested in Kensington before and indicated to them that another private placement was going to be offered. They could come in. They could either go in under Excel Asset Management or one of their trusts, or they could go in through Terry Kirby, who was doing investor relations at that time for Kensington. I also put in some of my own money. I can’t remember how much it was -- $6,000 or something like that.

        From a half a dozen clients that I had contacted or they had contacted me or people that I knew that worked on Kensington or worked around Kensington or dropped into Kensington offices, I think I had – probably was responsible for about somewhere around $100,000 out of a million dollar private placement. I was told that I could -- from the finder’s fee that I would get 5 percent -- of what I think was a 10 percent finder’s fee, I would get 5 percent but only 5 percent on the 100,000.

        Q And who told you this?

        A Gary [Stanhiser] told me that.

    By late 1995, Knowlton’s wife Linda had also begun to work part time for Excel Asset. In her interview of July 8, 1998, she described her job function at Excel Asset as “[r]aising money”; her job title was “client representative”. Specifically, she was told by Stanhiser that she was to contact friends and family members and give them the opportunity to participate in private placements.

    Excel Asset’s fund raising activities increased significantly during 1996 and Stanhiser decided that the Excel group would participate in private placements in other companies. Several people were working for Excel Asset by this time. The client representatives included Stanhiser, Knowlton, Linda Knowlton, Landon Ritchie (in Kelowna) and Barbara Chizmas and others (in California). Terri Messer (who moved to Excel Asset from Canaccord Capital Corporation in October 1996) was Stanhiser’s administrative assistant and operations manager. Mary Vincelli (who was later replaced by Cindy Williams) acted as receptionist and maintained the client records on the computer. Neither Stanhiser, Knowlton nor Linda Knowlton was registered under the Act. However, Knowlton admitted in his interview of May 14, 1998, that he had been aware for over 30 years that a person has to be registered to sell securities in British Columbia.

    Knowlton had responsibilities in addition to those of a client representative. He would evaluate companies that were seeking funds and recommend possible investments to Stanhiser; it would be Stanhiser, however, who negotiated the terms of the private placements with the recommended companies. Knowlton also had signing authority for Excel Asset’s bank account from 1996 into early 1997, and then again in November 1997. When Stanhiser was not in Excel Asset’s Vancouver office, Knowlton would be responsible for administrative duties. Knowlton was in the office on a regular basis throughout 1996 and early 1997.
        In his interview of April 15, 1998, Knowlton described the activity during 1996 as follows:
        Q So how did Excel Asset Management market or attract investors?

        A Well, this is almost unbelievable but -- maybe it isn’t unbelievable. When the market is going up very, very rapidly, you don’t really have to market. In 1996 when prices of Vancouver stocks were doubling between January and May, everybody wanted Vancouver stock. We never ran an advertisement in any newspaper. The phone went from dead in January to unbelievably active in a very short period of time.

        Q But as I understand your earlier evidence, you did proactively phone potential investors; is that not correct?

        A Not very often, and not an awful lot. Mostly it was word of mouth from one client to another client. They would call and say, “Hey, Willie got into a private placement with you. He’s done very well, and we’d like to do the same thing.” And mostly very, very few calls were made.

        Q Very few calls were initiated by yourself or other people at Excel?

        A Nobody. I mean, it’s just an answer, just sitting down and answering phone calls that came to you.

        Q Okay.

        A And they’d start at 5:30 on the east coast. I can remember those days.

        Q Yeah, I think in your earlier evidence you identified something about seminars that were organized by Excel.

        A Yes.

        Q Was that part of your marketing program?

        A Excel did have seminars once a quarter in Vancouver and they were also part of what was in California. Oftentime had -- I don’t know about often, but a number of companies from here did go to California to present themselves at a seminar.

        Q And so who specifically at Excel Asset Management would organize these things?

        A Different components of the seminar was [sic] done by different individuals. Mary Vincelli did the work of reserving the hotel, preparing what the snacks would be, telling the number of people that were going to be there. She also kept a list in the Excel office here in Vancouver of clients who said that they were going to attend. Mary Vincelli had of course all the names and addresses on the computer in the database, and when we were going to have a seminar, a notice of a newsletter would go out to clients indicating that we were having a seminar, and if they were going to be here, then they should give a telephone call to Mary so that she knew how many people to have.

        Q What about at the actual seminars? Who would address the audience?

        A I think, Rod, we can find out, and we can go through a typical day’s session with the seminar. There, this is it. Let’s go past the front page, and then this is what the seminar format would be starting from 8:30 to 9:00 in the morning, juice, coffee and tea; 9:00, this is fairly established that John Johnston [a salesperson at Canaccord] would give a market overview highlighting specifically the performance or lack of performance of private placements that Excel had been involved in, followed by half-hour slots roughly for different companies, the different companies that we were either committed to doing a private placement to, contemplating doing a private placement to, or already had completed a private placement to. And this particular one on April 4th, 1997, starts out with an explanation of Windsor International Bank and how that bank could be used by investors, followed by –

        Q Do you recall who gave that particular segment, who talked during that particular segment of the seminar?

        A Yes, that would be Richard Bullock.

        Q In these things, who from Excel Asset Management actually talked? There doesn’t appear to be anything here except maybe closing remarks.

        A That’s it.

        Q And who would have provided the closing remarks?

        A Generally Gary [Stanhiser] would provide the closing remarks and oftentimes would welcome people at the beginning. Other than that, it was generally a slide preparation or an audio-visual presentation of somebody from the company. In this particular case I think it was -- I think all three people from Global Diamonds were present. Almost always the president of the company and one or two of the other persons from that company would come and make their presentation.

        Q And so who would invite these people to seminars, the issuers, the presidents, that sort of thing?

        A It’s outside of my box, but I know that a conversation would be held between Mary and Gary as to who they wanted to have present at this particular time, and then Mary would contact these companies and say, we’re having another investors’ seminar a month and half down the line or something like that. Where would you like to be included on that? Would you like to be in the morning session, would you like to be in the afternoon session?

        Q I see.

    As well as holding investor seminars, Excel Asset regularly mailed “Investors Updates” to clients who had previously invested. Knowlton prepared these updates, but they were approved by Stanhiser before they were sent to clients. The updates described current developments in the companies in which private placements had been made. They also referred to future investment opportunities. For example, the Investors Update of May 23, 1996, contained the following paragraph:
        More Projects Ahead

        Excel staff expect to conclude two additional private placement contracts in the next week to ten days. We have two South American projects that look interesting and another in Mexico. On the technology side we are looking at some excellent possibilities that we think will be very inviting to you. You may want to give Del or Linda a call to find out how these negotiations are progressing so you will be in a position to be included.

    In a similar vein, the Investors Update of July 10, 1996, contained the following paragraphs:
        Excel Prepares Summer Investment Package

        A group of preferred share offerings has been assembled that will continue to build client equity through participation in the precious metal and technology sectors of the marketplace. A binder with company profiles is available from the Excel offices in Vancouver, BC or San Bernardino, CA. A call is all it takes to get one on its way to you.
        Vancouver = 1-800-811-6677
        San Bernardino = 909-890-0355
        The six private placements in the summer investment program are outlined within this newsletter.

        Selecting an investment does not need to be a shot in the dark. Excel works to put together the best investment opportunities for it’s [sic] investor clients by selecting the right companies with the right property or project.

    Finally, the updates provided information about Excel Asset and the services it provided. The Investors Update of May 23, 1996, contained a paragraph welcoming Mary Vincelli to the office, which concluded: “she will be able to assist you in exercising warrants and in the transfer of stock. You may reach her at …”.

    The reference to “exercising warrants” and “the transfer of stock” is interesting in light of the fact that Excel Asset took steps to characterize the investments that clients were making as loans to one of the Excel companies, to help finance that company’s participation in a specific private placement, rather than as a direct investment by the client in that private placement. In his interview of April 15, 1998, Knowlton explained the process as follows:
        No, that they were making a loan to the trust and the repayment of that loan could be made in one of three ways. First of all, they could get the units, or they could have their money back with interest, or they could take their amount that they had invested and they could use it in a different private placement if they so wished. Those were the terms that were explained to me by Mr. Stanhiser.

    In his interview of February 17, 1998, Stanhiser told Commission staff that he had structured these investments as loans on the basis of advice he had received from Dadson, Johnston and Oakley. Specifically, Stanhiser claimed that all three had told him that a loan was not a security and that he understood that this structure would allow him to avoid the operation of the Act.

    The documentation sent to clients at the time they invested did characterize their investment as a loan; as well, it appears that a debenture was prepared that would give effect to the loan structure. However, the vast majority of clients did not receive the debenture or any other loan documentation. Further, the few debentures that were sent to clients were flawed, in that they were improperly signed by the company ostensibly borrowing the money or not signed at all. Finally, portfolio summaries were sent by Excel Asset to investors; each summary indicates the amount of funds that had been forwarded by the client and the number of shares or warrants to which the client was entitled.

    Each of the nine clients that testified at the hearing confirmed that he or she had believed that they were buying shares in the company doing the private placement, rather than making a loan to one of the Excel companies. For example, one of the clients, Dean Fenwick, invested $4,980 in what he thought was the Mosquito Consolidated Gold Mines, Ltd. II Private Placement. He was referred to a document he had been given entitled “Instructions for Participation in the Mosquito Consolidated Gold Mines, Ltd. II Private Placement”:
        Q Now, if you start reading the first sentence there, it just says that Excel Asset Management has entered into an agreement. The second sentence says:
                You have indicated your desire to loan money to Excel Funding, Inc. for its investment into Mosquito Consolidated Gold Mines, Ltd.
            Did you ever do that?

        A No. To be honest, if I did read this, which I probably didn’t, I wouldn’t have picked that up. I wouldn’t have picked up this loan thing. I talked to these guys so much it was clear to me I was buying stocks and not making a loan.

        Q So did anybody that you have spoken to around this investment tell - by anybody I include Mr. Knowlton, Mr. Stanhiser and Mr. Ritchey [sic], the people that you referred to -- you that you were making a loan?

        A No. The words they used was [sic] “pooling our money together to buy a hundred thousand dollars worth of stocks,” but I would receive those shares in my name.

    All of the investments made by the nine clients through Excel Asset, with one exception, were in amounts that were less than, and in most cases considerably less than, $25,000.00. None of these clients received a prospectus or offering memorandum with respect to any of their investments.

    Each of the nine clients had spoken with Linda Knowlton or Knowlton or both. Several had also spoken to Stanhiser, usually at one of the investor seminars. Their testimony with respect to their dealings with Linda Knowlton and Knowlton was consistent. The Knowltons had not been pushy or aggressive. However, they had been enthusiastic about the investments offered by Excel Asset and made them sound very attractive.

    For example, David Awram testified that Knowlton told him that the share price of RFID Systems Corporation would go from $US1.00 to “double digits”. Fenwick testified that Knowlton had made a similar comment to him. William Cooke testified that Knowlton told him that Knowlton expected the price of Samex Mining Corp. to “increase rapidly”.

    DLinda Knowlton followed a somewhat different approach with her clients. Darlene Johnston testified regarding her dealings with Linda Knowlton in respect of her investment in Samex.
        Linda Knowlton phoned me one day to say that she had a wonderful investment opportunity and she would like to come over and introduce me to it and tell me a little bit about it.
        …
        Well, she made it sound so attractive. She said many times, “You can’t lose. Look in the newspaper. The shares -- you are getting the shares for so much cheaper and you have made money before you have even bought them because they are this much in the paper. Then, if you buy it through us, you get warrants, which you don’t get if you buy them off the stock market,” or however you do the other way. I don’t know. But her -- she had -- hers was much more attractive because you weren’t paying what the rate was. It was cheaper than what was in the paper, than what they were marketing them for. Also, you got your warrants that you could exercise.

    Johnston testified that later, when Samex had “fallen through the floor”, and she voiced her concerns to Linda Knowlton, Linda Knowlton told her that she should diversify and recommended a company called Golden Hat Resources Inc. Johnston testified that “[Linda Knowlton] said - her words to me about Golden Hat was [sic] that Del said it was money in the bank.”

    Several of the clients that testified belonged to the same church as the Knowltons and had known them for many years. These clients characterized the Knowltons as honest, straightforward and upright. In some cases, their relationship with the Knowltons was a factor in their investment decisions. For example, Johnston testified as follows with respect to her investment in Samex:
        Q But why did you invest?

        A It sounded like it was a really good investment. I have known Linda and Del. I would -- they wouldn’t -- to me, their personal characters, they wouldn’t be involved in something that was not up-front, you know.

        Q How do you know them?

        A I have known them for years. He taught two of my sons in school. I played volleyball with Linda. I think that’s why I was off guard, as well, because they -- I trusted them. They have made investments through the years that I have known of, and it’s always -- they have done well. I just -- I trusted them.

    The client records of Excel Asset were in considerable disarray. However, it can be determined that Excel Asset had over 300 clients, most of whom were residents of British Columbia or the United States. Each of Knowlton and Linda Knowlton were responsible for over 100 of these clients. In other words, over 200 of Excel Asset’s more than 300 clients were clients of the Knowltons. In only a few of the hundreds of transactions made through Excel Asset did a client put more than $97,000 in any particular investment.

    Between 1995 and 1997, Excel Asset raised over $14.7 million from its clients. Approximately $1.2 million of this money was returned to them. Therefore, the net amount raised by Excel Asset during this period was approximately $13.5 million.

    2.3 HOW FUNDS WERE SPENT

    When a client of Excel Asset decided to make an investment in one of the private placements offered through Excel, the client was generally sent three documents:

    1. a letter from Excel Asset, acknowledging receipt of their funds and confirming their “loan” to Excel Asset;

    2. a form letter addressed to John Johnston at Canaccord, which the client was to fill out and send in; the letter referred to the client’s enclosed cheque or money order and instructed Canaccord to hold the funds; and

    3. a second form letter addressed to Johnston, which the client was to fill out and send in, instructing Canaccord to transfer the funds to one of the Excel companies.

    In her testimony, Messer gave a succinct description of what happened to the funds raised from the clients of Excel Asset:
        A The purpose for the funds to be raised was [sic] an offshore company or entity to participate in a private placement. The representatives, as I would say, Mr. and Mrs. Knowlton, and Barbara and the other names that I have mentioned, they would call their clients, and they would raise the funds, the funds would be placed in Canaccord, then they would be transferred over to the offshore company and the offshore company would participate in a private placement with those funds.

        Q When you say “offshore company”, do you recall the names of any of those companies?

        A Excel Funding, Diomondmark and Excel International.

        Q All of those companies had accounts at Canaccord?

        A Yes.

        Q When money was raised, where would a client deliver their cheque or money order?

        A Some cheques would go directly to Canaccord and some cheques would go to the office of Excel Asset Management.

        Q The cheques that went to Excel Asset Management, who would they be made out to?

        A To the offshore entity or company.

        Q They weren’t made out to Canaccord?

        A Excuse me. Yes, they were made out to Canaccord.

        Q Okay. So what would happen to those cheques?

        A They would be taken over to Canaccord.

        Q And deposited?

        A Yes, deposited.

        Q Do you know where they would get deposited?

        A They would be deposited into the client’s account.

        Q The client had an account with Canaccord, I guess?

        A Correct.

        Q So these funds would be raised in these accounts [of the offshore companies] at Canaccord, and then I think you said the monies would then be used to purchase a private placement from an issuer. Is that fair to say?

        A Yes.

        Q Who would decide what private placement would be purchased or which company’s shares would be invested in?

        A Gary Stanhiser.

        Q In all occasions did Gary Stanhiser make those decisions?

        A Yes.

        Q Who would negotiate the private placements with the issuing companies?

        A Gary Stanhiser.

    Each of the three offshore Excel companies had a US and a Canadian dollar account at Canaccord. All of the accounts had been introduced to Canaccord by Stanhiser, though Stanhiser was not authorized to give instructions on any of them. Oakley was authorized to give instructions on the Excel Funding and Diomondmark accounts, while Garret, Gittins, David Pope and Alison Ritchie were authorized to give instructions on the Excel International accounts.

    In an affidavit dated June 19, 1998, Oakley described how the Diomondmark accounts came to be opened and how trading instructions were given on the accounts:
        20. Shortly after our [Britannia’s] appointment as director and secretary of Diomondmark, Dadson instructed me that a company by the name of Canaccord Capital Corp. (“Canaccord”) of Vancouver, British Columbia, was to be appointed broker for Diomondmark. All trading instructions were to come from Stanhiser as protector or his duly authorised agents.

        21. The minutes of the company reflect the appointment of Canaccord as broker and the company’s private placement transactions with various corporate entities between October 1995 and June 1997. All private placements were pursuant to instructions by or on behalf of Stanhiser. What would happen in practice is that we would receive specific instructions concerning private placement investments from either Stanhiser himself or one of his agents through a company in Vancouver, B.C., which I verily believe is owned and controlled by Stanhiser called Excel Asset Management Inc. (“Excel Asset Management”). We in turn, on behalf of Diomondmark, would convey those instructions to the broker Canaccord who would make the investments in the companies nominated by Stanhiser.

    Oakley states in his affidavit that Canaccord was appointed as broker for Excel Funding as well, and that trading instructions were given on that company’s accounts in the same manner as they were for the Diomondmark accounts.

    Stanhiser and Knowlton also had accounts at Canaccord. These accounts were used in the same manner as the accounts of the three offshore Excel companies, to pool client funds, some of which were subsequently used to purchase shares in private placements.

    Knowlton opened his account in December 1995. He gave Stanhiser trading authority over the account in January 1996 and full authority over the account in March 1996. In his interview of April 15, 1998, Knowlton stated that all of the transactions in the account were done by Stanhiser and that he gave Stanhiser the monthly statements on the account, usually without reviewing them; therefore, he claims, he was not aware of what was happening in the account.

    However, there is evidence that Knowlton knew of at least some of the transactions. In May 1996, Knowlton signed documents authorizing the transfer of Kensington shares from his account to three other accounts. In his interview of May 14, 1998, Knowlton said that he signed these transfer documents because he was asked to, but he did not recall by whom. Also, Johnston testified that in April 1997, he called Knowlton to confirm an instruction he had been given by Stanhiser to purchase 15,000 shares of RFID for Knowlton’s account. Knowlton did not challenge this testimony.

    Knowlton’s name comes up in connection with another aspect of the private placements. In four of the Forms 20, Report of Exempt Distribution, filed by the companies doing the various private placements in which the Excel companies participated, Knowlton is shown as receiving a finder’s fee. For example, the Form 20 signed by Kensington on January 25, 1996, states that a finder’s fee of 66,667 shares, at a deemed price of $.90 per share, is payable to Knowlton in respect of the purchase by Diomondmark of $1.2 million worth of shares. The shares were deposited in Knowlton’s account at Canaccord on January 30, 1996.

    In the three other instances, the Form 20 refers to cash payments to Knowlton: $57,698, which was paid into Knowlton’s Canaccord account on March 25, 1996; $70,000, which was paid into Excel Asset’s bank account on June 5, 1996; and $70,000, which was paid into Excel Asset’s bank account on September 23, 1996.

    In his interview of September 30, 1998, Knowlton stated that the only benefit he or his wife ever received from working for Excel Asset was the proceeds from the sale of the 66,667 Kensington shares that had been deposited into his account at Canaccord, which amounted to approximately $80,000. Further, he claims that those shares were actually purchased by him and his wife with $60,000 of their own funds.

    We noted earlier that, between 1995 and 1997, Excel Asset raised a net amount of approximately $13.5 million from its clients. During the same period, Excel Asset orchestrated at least 22 private placements in amounts totalling over $9 million with a variety of companies, some of which were reporting and some non-reporting in British Columbia. A number of these companies filed a Form 20 with respect to their private placements. In each case, the exemption from the prospectus requirement relied upon by the companies was that in section 74(2)(4) of the Act. In the majority of the private placements, the purchaser was Diomondmark or Excel International though, on some occasions, the purchaser was Excel Funding. In one of the placements, one of the purchasers was the Loma Trust and in another placement, one of the purchasers was Excel Asset. In one of the placements, the purchaser was Stanhiser.

    Some of the shares purchased were actually distributed to clients. It appears that between 67 and 100 clients received some or all of the shares owing to them; the purchase price of the shares that were distributed appears to be between $1.5 and $2.4 million. However, the vast majority of clients received neither their shares nor their money back. It was when the clients began asking for their shares or their money back, in the spring of 1997, that the Excel investment scheme began to fall apart.

    As we noted earlier, the client records of Excel Asset are in considerable disarray. As well, we have no financial statements respecting any of the four Excel companies. Nor do we have any indication as to whether the Excel clients will ever be able to get back the remainder of their money or their shares.

    3. FINDINGS
        Commission staff allege that:

    1. the Respondents distributed securities without being registered and without filing or obtaining a receipt for a prospectus, contrary to sections 34 and 61 of the Act; and

    2. through his participation in these distributions, Stanhiser perpetrated a fraud on persons in British Columbia, contrary to section 57 of the Act.

    3.1 DISTRIBUTIONS WITHOUT REGISTRATION OR PROSPECTUS
        Sections 34 and 61 of the Act provide as follows:
        Section 34(1)

        (1) 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,

    A trade is defined in section 1(1) of the Act to include a disposition of a security for valuable consideration and any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of such a disposition.
        Section 61(1)

        (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.

    A distribution is defined in section 1(1) of the Act to include a trade in a security of an issuer that has not been previously issued.

    Though the documents sent out to clients characterized their investment as a loan to one of the Excel companies, it is clear that the clients were purchasing shares in a private placement. That is what they were told by the client representatives. That is what they read in the Investors Updates. That is what they heard at the investor seminars. That is what they saw on their portfolio summaries. Each of the nine clients who testified confirmed that he or she had understood that they were buying shares in a private placement, rather than making a loan to one of the Excel companies. Indeed, some of the clients actually received some of the shares they understood they had purchased.

    As well, even if we accepted that these investments were loans to the Excel companies, which we do not, it does not appear that the requirements of the Act were complied with. A security is defined in section 1(1) of the Act to include “a bond, debenture, note or other evidence of indebtedness…” Therefore, the Excel companies would have to have complied with the registration and prospectus requirements of the Act, or found an exemption from those requirements, before entering into these loan transactions with the clients. There is no evidence that the Respondents took any steps to comply with the Act in this regard.

    In each of the Form 20’s filed by the companies that did private placements through Excel Asset, the exemption from the prospectus requirement relied upon by the company was that in section 74(2)(4) of the Act, which provides as follows:
        Section 74(2)(4)

        (2) Subject to the regulations, section 61 does not apply to a distribution in the following circumstances:
            (4) The person is purchasing as principal, and the trade is in a security that has an aggregate acquisition cost to the purchaser of not less than a prescribed amount [$97,000];

    A corresponding registration exemption is provided in section 45(2)(5) of the Act.

    Local Policy Statement 3-24, Statutory and Discretionary Exemptions, sets out guidelines for the use of certain statutory exemptions. Section 3.8 of the Policy provides as follows:
        3.8 “Persons” Created Solely to Use Exemptions
            Under section 1(1) of the Act, a “person” includes a corporation, partnership, trust, fund, association and any other organized group of persons. The Commission takes the position that it would be abusive for a “person” to be created solely, or used primarily, to permit a group of individuals to purchase securities without a prospectus unless the issuer could use an exemption to distribute its securities to each individual.
            For example, if the person was created solely, or used primarily, to purchase securities without a prospectus, then in order for the person to use an exemption each of the individuals who form part of the group must:
            (a) where the issuer is using the $97,000 exemption in sections 31(2)(5) [now section 45(2)(5)] and 55(2)(4) [now section 74(2)(4)] of the Act, purchase securities having an aggregate acquisition cost of at least $97,000;

    The activities carried out by the Excel group fall squarely within the example set out in section 3.8 of the Policy. Client representatives would raise money from clients, which would be pooled in the Canaccord account of one of the Excel companies, Stanhiser or Knowlton. In only a handful of cases would a single client actually invest $97,000 or more. Once sufficient funds had accumulated, one of the Excel companies, the Loma Trust or Stanhiser would purchase the shares of a company pursuant to a previously negotiated private placement. The shares would then be allocated to the clients, as indicated in the Excel portfolio summaries. In some cases, the clients actually took delivery of the shares.

    We can interpret this series of transactions in one of two ways. In the first interpretation, there were two separate distributions of shares, the first from the company making the private placement to a member of the Excel group and the second from the member of the Excel group to the clients. In the second interpretation, there was only one distribution, from the company making the private placement, through the Excel group, to the clients.

    We do not need to determine which of these two interpretations is correct. We find that, under either interpretation, shares were distributed to the clients of Excel Asset in circumstances where the exemptions in sections 45(2)(5) and 74(2)(4) of the Act were not available.

    We are of the view that all of the Respondents carried out acts, solicitations, conduct or negotiations in furtherance of these distributions.

    The Excel companies - Excel Asset (and Excell Asset), Excel International, Diomondmark and Excel Funding - as well as the Loma Trust were the primary vehicles through which the distributions were made. It was through their accounts at Canaccord that the clients’ money was funneled to the companies issuing the shares and the newly issued shares funneled back, in unfortunately very few instances, to the clients.

    Linda Knowlton was a client representative for Excel Asset. As such, her job was to contact her friends and family members and give them the opportunity to participate in the distributions. She carried out this task with great enthusiasm and, by the time the Excel investment scheme unraveled, had over 100 clients.

    Del Knowlton performed a myriad of roles within the Excel group. Like his wife, he was an enthusiastic client representative with over 100 clients. He drafted investor relations material for Kensington. He prepared the Investors Updates that were regularly mailed to the clients of Excel Asset. He evaluated companies that were seeking funds and made investment recommendations to Stanhiser. He was responsible for administrative duties in Excel Asset’s Vancouver office when Stanhiser was not there. He had signing authority for Excel Asset’s bank account during much of the period from 1995 to 1997.

    Knowlton opened an account at Canaccord over which he eventually gave Stanhiser full authority. This account, like those of the Excel companies, was used as a vehicle for the distributions. Knowlton claims that he did not generally review his monthly statements from Canaccord and, therefore, was not aware of the transactions that Stanhiser was doing in the account. We do not accept this explanation. There is evidence that Knowlton knew of at least some of the transactions in the account. As well, Knowlton appears to be an intelligent person who is knowledgeable about and experienced in the capital markets. We are of the view that a person with these qualities in his situation with the Excel group would have had the wisdom and prudence not only to keep track of what Stanhiser was doing through his account, but to recognize the true nature of the Excel investment scheme.

    Gary Stanhiser was the mastermind of the Excel investment scheme. He orchestrated the incorporation of the Excel companies and was president, secretary and sole director of Excel Asset. Though he was not an officer or director of any of the remaining three companies, as protector of the trusts that owned them, he had effective control over their affairs.

    Stanhiser also established the procedures under which the distributions were made. When he was in Vancouver, he administered the Excel Asset office there. He recruited both Del and Linda Knowlton and gave instructions to the client representatives. He coordinated the investor seminars and provided the closing, and in many cases, welcoming remarks; he also had individual conversations with the clients present. He approved the Investors Updates before they were mailed to clients. He attempted to characterize the money invested by clients as loans to the Excel companies rather than as investments in the companies making the private placements.

    Stanhiser reviewed the investment recommendations made by Knowlton and decided in which private placements clients should invest. He negotiated the terms of those private placements with the issuing companies. In one private placement, he was the actual purchaser of the shares. He introduced the accounts of the Excel companies to Canaccord. Through Oakley, he gave trading instructions on the Diomondmark and Excel Funding accounts. He had full authority over Knowlton’s account and gave instructions on that account as well. He authorized the transfer of shares between accounts. In effect, Stanhiser had final say over which shares were purchased and to whom those shares were ultimately delivered.

    None of the Respondents was registered under the Act, no prospectus was filed with respect to any of the distributions and we have found that, except in a handful of cases, the registration and prospectus exemptions purported to be relied upon were unavailable. Therefore, we find that all of the Respondents traded in securities without being registered, contrary to section 34(1) of the Act, and distributed securities without filing a prospectus with, and obtaining a receipt for it from, the Executive Director, contrary to section 61(1) of the Act.

    3.2 FRAUD
        Section 57 of the Act provides as follows:
        57. A person must not, directly or indirectly, engage in or participate in a transaction or scheme relating to a trade in or acquisition of a security or a trade in an exchange contract if the person knows, or ought reasonably to know, that the transaction or scheme
        …
        (b) perpetrates a fraud on any person in British Columbia,
        …

    The test for fraud under section 57 of the Act was considered by the Commission In the Matter of Timothy James Pinchin, [1996] 41 B.C.S.C. Weekly Summary 7 and In the Matter of Mindoro Corporation et al., [1997] 7 B.C.S.C. Weekly Summary 13. In both of those decisions, the Commission referred to the decision of the Supreme Court of Canada in R. v. Olan, Hudson and Hartnett (1978) 41 C.C.C. (2d) 145 in which Dickson J. stated at page 150:
        Courts, for good reason, have been loath to attempt anything in the nature of an exhaustive definition of “defraud” but one may safely say, upon the authorities, that two elements are essential, “dishonesty” and “deprivation.” To succeed, the Crown must establish dishonest deprivation.

    With regard to the element of dishonesty, in R. v. Zlatic, [1993] 2 S.C.R. 29, the Supreme Court of Canada considered the concept of dishonesty in the context of an allegation of fraud pursuant to section 380 of the Criminal Code. McLachlin J. observed at page 45:
        …Would the reasonable person stigmatize what was done as dishonest? Dishonesty is, of course, difficult to define with precision. It does, however, connote an underhanded design which has the effect, or which engenders the risk, of depriving others of what is theirs. J.D. Ewart, in his Criminal Fraud, (1986), defines dishonest conduct as that “which ordinary, decent people would feel is discreditable as being clearly at variance with straightforward or honourable dealings” (p. 99)

    There can be no doubt that Stanhiser’s orchestration of the Excel investment scheme was dishonest. We consider his conduct to be underhanded, in that he consistently remained behind the scenes. He ensured that others acted as directors and officers of the three offshore Excel companies and that others had ostensible authority over those companies’ accounts at Canaccord. Yet, as protector of the trusts that owned the three companies, Stanhiser had ultimate control over their activities. Stanhiser also hid behind the client representatives, whose job it was to bring in clients and raise money. We are of the view that Stanhiser, in this underhanded manner, designed and carried out the Excel investment scheme to raise money from the public for the purchase of shares in contravention of the Act.
        With regard to the element of deprivation, Dickson J. observed at page 150 of Olan that:
        The element of deprivation is satisfied on proof of detriment, prejudice, or risk of prejudice to the economic interest of the victim. It is not essential that there be actual economic loss as the outcome of the fraud.

    Once again, there can be no doubt that the clients of Excel Asset have been deprived by Stanhiser. We have already determined that Stanhiser had ultimate control over the Excel companies. Therefore, he had the ability to order the payment of money and the distribution of shares to the Excel clients. Between 1995 and 1997, Excel Asset raised a net amount of approximately $13.5 million from its clients. Approximately $9 million of that was used to purchase shares. However, shares valued at only $1.5 to $2.4 million (based on their purchase price) were actually distributed to clients. This means that the clients of Excel Asset are currently owed money or shares in an amount between $11.1 and $12 million, which represents a very significant economic loss.

    On the basis of this, we find that through his participation in the distribution of securities through the Excel investment scheme, Stanhiser perpetrated a fraud on persons in British Columbia, contrary to section 57 of the Act.

    4. ORDERS

    We have found that all of the Respondents contravened sections 34(1) and 61(1) of the Act and that Stanhiser contravened section 57 of the Act in connection with the distribution of securities through the Excel investment scheme. In accordance with our earlier ruling, we will hear further submissions before issuing orders in respect of those contraventions.




    DATED on April 28, 1999.

    FOR THE COMMISSION



    Adrienne R. WanstallRoy Wares
    MemberMember


    Diane K. Wolch
    Member

    Appendix A
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