Decisions
TRI-WEST INVESTMENT CLUB, et. al. [Findings]
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BCSECCOM #:
2001 BCSECCOM 1013
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Document Type:
Findings
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Published Date:
2001-10-24
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Effective Date:
2001-10-23
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Details:
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2001 BCSECCOM 1013
COR#01/115
IN THE MATTER OF THE SECURITIES ACT
R.S.B.C. 1996, c. 418
AND
IN THE MATTER OF TRI-WEST INVESTMENT CLUB, TRIWESTINVEST.COM, AND HAARLEM UNIVERSAL CORPORATION
AND
IN THE MATTER OF JASON KINGSLEY, MARK GOLDMAN, ALAN RICHARDS, ALEX HAARLEM, AND JOHN BYRON
PANEL
Adrienne Salvail-Lopez
Joan L. Brockman
John K. Graf
DATE OF HEARING
August 15, 2001
DATE OF FINDINGS
October 23, 2001
APPEARING FOR COMMISSION STAFF
Alan E. Keats
FINDINGS OF THE COMMISSION
INTRODUCTION
[para 1]
These findings relate to a hearing under section 161 of the Securities Act, R.S.B.C. 1996, c. 418. The Executive Director issued temporary orders and a notice of hearing in this matter on April 20, 2001.
[para 2]
The temporary orders cease the trading in Tri-West Investment Club securities and prohibit each of the respondents from using the exemptions in the Act, from engaging in investor relations activities, and from disseminating to the public misleading materials respecting Tri-West. The temporary orders also prohibit Jason Kingsley, Mark Goldman, Alan Richards, Alex Haarlem, Del Michel Albert Delisle and John Byron from becoming or acting as a director or officer of any issuer and require each of them to resign any such position currently held. On May 4, 2001, the temporary orders were extended pending the decision in this matter.
[para 3]
The notice of hearing alleges that Tri-West operated an internet based investment club purporting to offer high-yield, no-risk securities. The notice alleges that Tri-West distributed securities without a prospectus and that each of the respondents traded securities without registration and perpetrated a fraud on persons in British Columbia. The notice also alleges that each of Delisle, First Equity Capital and Byron acted as an adviser without registration.
[para 4]
Commission staff served copies of the temporary orders and notice of hearing on each of the respondents. They served Tri-West by mail to addresses in California, Florida, Belize and the Bahamas, as well as by facsimile and by email to info@triwestinvest.com. They served Kingsley, Goldman, Richards, Haarlem Universal and Haarlem by mail to the California, Belize and Bahamas addresses. They served Delisle and First Equity by mail and facsimile. They served Byron by facsimile.
[para 5]
Section 161 of the Act requires that a temporary order and notice of hearing be sent to any person directly affected. Section 180 provides that, unless the Commission orders otherwise, these documents must be mailed, personally delivered or transmitted by electronic means to the person’s latest known address. We are of the view that Commission staff have taken all reasonable steps to send the temporary orders and notice of hearing to the respondents and that the steps taken have satisfied the requirement under section 161 to send these documents to the persons directly affected.
[para 6]
On July 17, 2001, Delisle signed a settlement agreement containing an agreed statement of facts respecting his involvement and that of First Equity, through which he carries on business, in Tri-West. On July 18, 2001, the Executive Director amended the notice of hearing to remove Delisle and First Equity as respondents. Commission staff served copies of the amended notice of hearing on each of the remaining respondents.
[para 7]
The hearing was held on August 15, 2001. None of the respondents appeared.
[para 8]
The notice of hearing names triwestinvest.com, Tri-West’s website, as a respondent. Though we have not heard argument on this point, we are of the view that the website should be considered a medium through which Tri-West solicits investment rather than a respondent.
BACKGROUND
[para 9]
Tri-West is an internet based organization with a corporate mailing address in Belize and telephone and facsimile contact numbers in the United States and the United Kingdom. Tri-West is the registered owner of http://triwestinvest.com, the domain name of Tri-West’s website. Tri-West is not registered under the Act and has not filed a prospectus in British Columbia.
[para 10]
The website indicates that the day to day operations of Tri-West are conducted by Kingsley (the president of Tri-West), Goldman and Richards. The website states that Kingsley lives in the United Kingdom, but does not reveal the residency of the other two. None of the three is registered under the Act.
[para 11]
The website describes Tri-West as “a worldwide private membership club formed to assist members in investing offshore – showing a good return on investment with a minimum of risk.”
[para 12]
The investment sold by Tri-West is a US$1000 unit; investors can purchase any number of units. According to the website, the duration of the investment is one year, at the end of which the principal will be returned to the investor. The rate of return of the investment is “pegged” at 10% per month, payable on the first banking day of the month.
[para 13]
To make an investment, the investor completes a club application and sends it to Tri-West’s Belize address, along with a money order or bank draft payable to Haarlem Universal Corporation. According to the website, Tri-West “trades exclusively through Haarlem Universal Corporation.”
[para 14]
The website describes Haarlem Universal as a Panamanian investment company specializing in bond and currency trading. The website describes Alex Haarlem as the founder and chair of Haarlem Universal and as a consultant to the company’s management. Neither Haarlem Universal nor Haarlem is registered under the Act. According to the website, Haarlem Universal represents investors with $10,000,000 or more to invest and, through its trading program, provides them with returns that generally exceed 300% per year. The website claims that: “In 30 years, Haarlem has never failed to show a substantial return to investors and no investor has ever lost any of the funds invested.” Haarlem Universal’s trading program is called the Bank Debenture Trading Program.
[para 15]
The website devotes several pages to a description of this program. The description is complicated and uses many seemingly accepted financial terms. For example, the description begins:
“WHAT IS A BANK DEBENTURE TRADING PROGRAM?
“Also referred to as a secured asset management program, this is an investment vehicle commonly used by the very wealthy where the principal investment is fully secured by a Bank Endorsed Guarantee. The principal is managed and invested to give a guaranteed high return to the investor on a periodic basis. There is no risk of losing the investor’s principal investment.
“This investment opportunity involves the purchase and sale of Bank Debentures within the International Market in controlled trading programs. The program allows for the investor to place his funds through an established Program Management firm working-directly with a major Trading Bank.
. . .
“The Instruments to be transacted under the Buy/Sell Program are fully negotiable Bank Instruments, delivered unencumbered, free and clear of any and all liens, claims or restrictions. The Instruments are debt obligation of the Top One Hundred (100) World Banks . . .”
[para 16]
The website later provides more details respecting the program:
“In the U.S., the supply of money or credit is regulated by the Federal Reserve, an independent body which came into existence by an Act of Congress in 1913, and in part by means of the authorization of certain key International ‘Prime Banks’. Prime Banks comprise the top 250 banks worldwide, as ranked by net assets, long term stability and sound management. These banks are authorized to issue blocks of Bank Debenture Instruments, such as Bank Purchase Orders (BPO’s), and Prime Bank Instruments or Guarantees such as Promissory Bank Notes (PBN’s), Zero Coupon Books and Letter’s of Credit issued under the International Chamber of Commerce (ICC 400) guideline requirements for banking, and as developed and periodically dated by the same international organization. The prices for the instruments (usually with the face values of $100 million USD or greater), are quoted as percentage of the face amount, and usually bear interest over a certain time frame such as five to fifteen years. The initial market price is established on issuance depending on demand and may be anywhere from 65% to 75% of face value. Thereafter, they are sold and re-sold down the money market chain to the retail level at escalating prices, thus realizing a higher profit on each transaction, which can take as little as one day to complete. A trader, who by agreement, is empowered to receive and place the first issue of a Bank’s $100 million PBN’s and who has a waiting supply of end retain buyers, can sometimes clear 6-10 points ($6-10 million USD) or more per issue. A good trader is capable of closing 1-2 trades per day, 4 days per week. At these spreads over a 40 week trading period, it is not difficult to understand why the investor, as capital provider, receives such a high guaranteed rate of return for funding this operation. Further, the trader will not undertake to buy the PBN issue unless he has a contract for the re-sale to a retail buyer in hand so that the investor’s capital and the trader’s position are not put at risk. Most trades are done instantly by election’s ledger to ledger transfers.
“The trader will use your investment as part of a fund to buy the first issue PBN’s and you will share in the profits along the way.”
[para 17]
Tri-West offers its investors an additional opportunity to share in the profits – its member referral program. According to the website, the referral program enables “members to earn income while introducing their business associates, friends and family to the Club.” Tri-West offers to pay a referral bonus of 15% of the referred investment plus 15% of the income earned by the referred member. Tri-West undertakes to pay an additional $1000 for every $50,000 in referred investments.
[para 18]
When Commission staff reviewed the Tri-West website on May 17, 2000, it stated that the bank instruments traded under the Tri-West program “are backed by the IMF.” That statement was subsequently removed from the website.
[para 19]
Commission staff retained Dr. Maurice Levi to review the Tri-West website. Dr. Levi has been a professor of international finance at the University of British Columbia since 1989 and has published many books and research papers in the areas of money and banking, and monetary and fiscal policy. At the hearing, we recognized Dr. Levi as an expert on international banking, economics and financing for purposes of the hearing.
[para 20]
Dr. Levi was out of the country on the day of the hearing, but Commission staff submitted an affidavit prepared by Dr. Levi after his review of Tri-West’s website. Dr. Levi took issue with several of the assertions and phrases used in the description of the bank debenture trading program.
[para 21]
He said that international “prime banks” play no role in the regulation of the supply of money in the United States and that he has never heard the term “prime banks”. He also said that he knows of no published numerical ranking that ranks banks on the basis of “net assets, long term stability and sound management”. Nor has he heard of many of the other terms used in the website, such as bank purchase orders, prime bank instruments or guarantees, promissory bank notes, or zero coupon books. He is therefore unable to understand how such instruments could be traded “down the money market chain”.
[para 22]
Finally, Dr. Levi stated: “In my opinion, there is no possible basis for a claim that an investment can be both risk free and generate trading profits of 10 percent monthly. In fact, even by taking substantial risk, returns like this could not be made, except perhaps on a very rare lucky break when massive leverage is used.” One of the reasons he provides for reaching this conclusion is that “[f]or an investor to earn ten percent per month a borrower must pay 10 percent per month. Financial institutions are ultimately intermediaries between borrowers and lenders, so they serve to bring lenders and borrowers together. No borrower with low risk would ever be forced to face such a high cost of capital. In fact, in my opinion, borrowers willing to pay 10 percent a month are likely to be most desperate indeed. The association of this type of return with zero risk makes no sense to me at all.”
[para 23]
Commission staff submitted evidence that two people in British Columbia solicited investments in Tri-West. Neither is registered under the Act.
[para 24]
In his agreed statement of facts, Delisle admitted that in July 2000 he solicited British Columbia residents to invest in Tri-West. Delisle sent a facsimile to potential investors in which he stated that “[i]f you want to explode your investment and savings portfolio, you must look at [the Tri-West] web site”. Delisle also represented in his facsimile that “due diligence” had been carried out and that if the investor borrowed $100,000 from the bank, “in ten months you have repaid the loan and have $100,000 invested”. Based on Delisle’s advice, four British Columbia residents invested approximately US$12,000 in Tri-West. Delisle admitted that he and First Equity traded in the securities of Tri-West and acted as an advisor without registration.
[para 25]
On November 5, 2000, Byron sent a seven page facsimile to an investor in British Columbia in which he solicited investment in Tri-West. The facsimile was sent from (604) 585-4236 and gives Byron’s telephone number as (604) 585-4235. These two numbers are also those of the “International Philanthropist Society”, as noted on the society’s website. The website describes the goal of the society as follows:
“The goal of the I.P.S. is to create a membership that will number in the millions. We make our dreams a reality by making your dreams a reality! A membership in the I.P.S. is a very valuable asset. It gives you an opportunity to qualify for an incredible investment portfolio. Those who have it will earn as much as $6,000.00 per month in royalties in less than one year.”
[para 26]
Byron is not referred to on the society’s website. Nor is he a director of the society. One of the directors of the society advised Commission staff that the society had not operated, and that he had not had any contact with Byron, for a number of years.
[para 27]
Byron’s facsimile respecting Tri-West begins as follows:
“Hope you are well!
“I am putting together a select group of ten people for what is a promising investment. As a long-time supporter of IPS, you are being offered the opportunity to become part of this group.
“For a number of years, I have been propositioned by well-meaning people who honestly believe they have “great opportunities” to show me. I have become quite expert at evaluating most money-making enterprises.
“99% are not as great as people would like me to believe. One did come across my desk several months ago that showed some promise. Since then, I have researched, evaluated and closely observed a number of people who have been profitting from this particular investment – the results have been excellent.
“Here’s what I will attempt to explain in this letter:
1. the amount of the investment
2. the amount of money you can earn on the investment
3. a history of Haarlem Universal Corporation
4. a history of Tri-West Investment Club
5. how Haarlem makes their money
6. how Tri-West makes their money
7. your options
“Even though every investment carries some risk, Haarlem Universal Corporation has never failed to show a substantial return to investors in the past thirty years and no investor has ever lost any of the funds invested. This is a remarkable track record.”
[para 28]
Byron’s facsimile includes information about Tri-West and Haarlem Universal copied from the Tri-West website and goes on to explain the Tri-West program:
“How does Haarlem make their money?
There are only a handful of companies in the world who are able to participate in bank debenture trading (trades are normally a minimum of $10 million to $100 million). In simple terms, Haarlem leases assets, usually in the form of US government Treasury Bills and sells them to the top 250 prime banks worldwide. Haarlem generally shows returns of more than 300% per annum – therefore paying returns of 10% monthly to us is well within their budget.
“How does Tri-West make their money?
Tri-West is like a “middle man”, between Haarlem and small investors like ourselves. Without Tri-West, we would not be allowed to participate. Tri-West has an agreement with Haarlem which permits small investors to invest in $1000 units. Tri-West coordinates thousands of small investors – Haarlem pays Tri-West the interest payments and Tri-West then pays us.”
[para 29]
Byron’s facsimile describes a variation on the basic Tri-West program that Byron is organizing – the “Group of Ten”. He describes it as a group of 10 individuals, each of which invests $1000, which is locked in for seven years. The facsimile continues:
“The big advantage of belonging to the Group of Ten is that the return on your investment is about $2,000,000 after seven years whereas your return would only be $1,000,000 if you did it on your own.
“Why is the profit doubled? The compound interest on $10,000 invested by the Group of Ten grows MUCH quicker than $1000 invested by one individual.
“What is the disadvantage for the Group of Ten? Your money is locked in for the full seven years. We make the commitment not to withdraw any of the money during the seven year period because it seriously affects the compounding factor. For those individuals who want to withdraw funds during that time period, we suggest that you consider investing another $1000 under your own name – then withdraw funds any time you desire.
“There is another advantage to being a member of the Group of Ten that is worth mentioning – the $2 million return on your $1000 investment might be tax-free! This is because IPS is a non-profit society and there is a good possibility that we will acquire an off-shore bank account.
“We ask each member of the Group of Ten to be fully aware that there is a risk to every type of investment, therefore they must invest their $1000 with the knowledge that it is possible they could lose – there are no guarantees.
“With that said, remember that Haarlem has never failed to show a substantial return to investors in the past thirty years and no investor has every lost any of the funds invested.”
[para 30]
The facsimile includes an application form headed “Tri-West Investment Club”. Under the Member Information section of the form is a box titled “Referred By:”, in which is typed the following:
“Referred by:
IPS
Member # 11519”
[para 31]
Commission staff was unable to speak to Byron. They did receive from him a brief note which was faxed on April 23, 2001, from the IPS facsimile number and reads as follows:
“Message:
I have no affiliation with the Tri-West Investment Club.
“About a year ago, I was approached by a friend to consider investing with Tri-West. I wrote to a few acquaintances asking if they would be interested in “pooling” their money to invest with Tri-West. The answer was “No”. That was the end of the matter.”
[para 32]
There is no evidence as to how many letters Byron sent to persons inside, or outside, British Columbia or as to whether anyone invested in Tri-West as a consequence of receiving one of the letters.
[para 33]
After the temporary orders were issued on May 4, 2001, Commission staff received calls and correspondence from investors in British Columbia, the United States and Australia. Based on this information, Commission staff confirmed that at least 17 investors in British Columbia invested US$100,000 in Tri-West. These investors stopped receiving their monthly payments from Tri-West, which had been in the form of cheques issued by Haarlem Universal, in May 2001.
ANALYSIS AND FINDINGS
[para 34]
Commission staff allege that:
1. each of the respondents traded securities of Tri-West without being registered, contrary to section 34(1)(a) of the Act;
2. Tri-West distributed its securities without a prospectus, contrary to section 61(1) of the Act;
3. Byron acted as an adviser without being registered, contrary to section 34(1)(c) of the Act; and
4. each of the respondents perpetrated a fraud on persons in British Columbia, contrary to section 57 of the Act.
[para 35]
Before we consider these allegations, we must determine whether the Tri-West units are “securities”. A security is defined in section 1(1) of the Act to include an investment contract. The Supreme Court of Canada laid down the test for an investment contract in Pacific Coast Coin Exchange of Canada et al v. Ontario Securities Commission (1977), 80 D.L.R. (3d) 529. In that case, de Grandpré, J., speaking for the majority, adopted the test established by the Supreme Court of the United States in Securities Exchange Commission v. W.J. Howey Co. et al (1946), 328 U.S. 293, as refined by two subsequent U.S. decisions: S.E.C. v. Koscot Interplanetary, Inc. (1974) 497 F. 2d 473 and S.E.C. v. Glen W. Turner Enterprises, Inc. (1973), 474 F. 2d 476. The test laid down in Pacific Coast Coin can be summarized as follows:
Does the scheme involve
1. an investment of money,
2. in a common enterprise, namely one in which the fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment or of third parties,
3. with profits to come from the efforts of others, provided that the efforts of those others are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.
[para 36]
We are of the view that the Tri-West units meet all three aspects of this test. An investor purchasing the units is required to make an investment of money. The fortunes of the investor are dependent upon the efforts of both Tri-West, which handles the administration, and Haarlem Universal, which does the trading. Any profits received by the investor will come only from the efforts of Haarlem Universal and, to a lesser extent, Tri-West; the investor is unable to have any effect on the failure or success of the Tri-West program.
[para 37]
We find that the Tri-West units are investment contracts and, therefore, securities under section 1(1) of the Act.
1. Trading without registration
[para 38]
Section 34(1)(a) of the Act provides that a person must not trade in a security unless the person is registered under the Act. 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.
[para 39]
Tri-West disposed of the Tri-West units for US$1000 per unit to at least 17 investors in British Columbia. Tri-West solicited these trades through its website. The website indicated that Tri-West’s day to day operations were conducted by Kingsley, Goldman and Richards, and that Tri-West traded exclusively through Haarlem Universal, of which Haarlem is founder, chair and consultant. The money orders sent by investors were made payable to Haarlem Universal and the cheques received by investors were issued by Haarlem Universal. Finally, Byron sent at least one fax to a resident of British Columbia soliciting investment in Tri-West.
[para 40]
We are of the view that the various acts, solicitations and conduct carried out by Tri-West, Kingsley, Goldman, Richards, Haarlem Universal, Haarlem, and Byron were in furtherance of trades by Tri-West in the Tri-West units to British Columbia residents. None of these respondents were registered under the Act and none of the exemptions from the registration requirements appear to be available for these trades.
[para 41]
We note that, other than the references on the Tri-West website, there is no evidence that four of the individuals – Kingsley, Goldman, Richards and Haarlem – exist. Even if they do, we cannot know whether the website references to their names and functions are accurate. Faced with a similar set of circumstances three years ago, the Commission found insufficient evidence on which to base any orders against the individuals involved: see In the Matter of Turner Phillips, Steven Phillips, Mark Stone, Jack Edwards, Jeffrey Miller and Richard Stewart, [1998] 29 B.C.S.C. Weekly Summary 92.
[para 42]
However, we also recognize that some individual or individuals must have devised the program, set up and maintained the Tri-West website, and processed payments from and to investors. The Internet has allowed them to carry out these activities in anonymity, should they so choose. It is not in the public interest to permit such persons to use technological advances to avoid compliance with the Act. As de Grandpré, J. observed in Pacific Coast Coin at page 538 in developing the test for an investment contract:
“Such remedial legislation [Securities Act, Ontario] must be construed broadly, and it must be read in the context of the economic realities to which it is addressed. Substance, not form, is the governing factor. As noted in Tcherepnin v. Knight (1967), 389 U.S. 332 at p. 336:
- ‘. . . in searching for the meaning and scope of the word “security” in the Act, form should be disregarded for substance and the emphasis should be on economic reality.
“In the search for the true meaning of the expression “investment contract”, another guideline must also be present in the forefront of our thinking. In the words of the Supreme Court of the United States in Securities Exchange Com’n v. W. J. Howey Co. et al. (1946), 328 U.S. 293 at p. 299, any definition must permit
- ‘. . . the fulfilment of the statutory purpose of compelling full and fair disclosure relative to the issuance of “the many types of instruments that in our commercial world fall within the ordinary concept of a security.” . . . It embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.’”
[para 43]
The substance of the Tri-West program is that the activities in issue were carried out by an individual or individuals who may or may not be named Kingsley, Goldman, Richards and Haarlem. We must be prepared to adapt our regulatory processes to address the schemes made possible by developments in our commercial world such as the Internet.
[para 44]
Therefore, we find that Tri-West, Haarlem Universal, Byron, and the individuals holding themselves out as Kingsley, Goldman, Richards and Haarlem traded in securities of Tri-West without registration, contrary to section 34(1)(a) of the Act.
2. Distribution without a prospectus
[para 45]
Section 61(1) of the Act provides that a person must not distribute a security unless the Executive Director has issued a receipt for a prospectus respecting the security. 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.
[para 46]
We have found that Tri-West traded its securities to residents of British Columbia without being registered. Though these securities had not been previously issued, Tri-West did not file a prospectus respecting its securities. Nor does it appear that any exemption was available for these distributions.
[para 47]
Therefore, we also find that Tri-West distributed its securities without obtaining a receipt for a prospectus, contrary to section 61(1) of the Act.
3. Advising without registration
[para 48]
Section 34(1)(c) of the Act provides that a person must not act as an adviser unless the person is registered under the Act. An adviser is defined in section 1(1) of the Act to include a person engaging in, or holding himself out as engaging in, the business of advising another with respect to investment in or the purchase or sale of securities.
[para 49]
The Commission considered this definition in In the Matter of Robert Anthony Donas, [1995] B.C.S.C. 14 Weekly Summary 39. The Commission observed at page 45 of that decision that:
“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.”
[para 50]
In his facsimile of November 5, 2000, Byron provides more than factual information about Tri-West; he offers an opinion on the investment merits of Tri-West’s securities. Byron claims to have researched and evaluated the Tri-West securities for several months and that “the results have been excellent.” He also claims that, for 30 years, Haarlem Universal has never failed to provide investors with a “substantial return”, which is “a remarkable track record.”
[para 51]
Several factors indicate that Byron offered this advice with a business purpose. The first is Byron’s apparent connection with IPS, which appears from its website to be a dubious investment scheme masquerading as a charitable society. Byron’s facsimile is directed to a “long-time supporter of IPS” and includes a Tri-West application form indicating that the investor has been referred by IPS, rather than by Byron. Byron sent the facsimile from the facsimile number on the IPS website. Second, Byron claims in his facsimile that he has been propositioned with opportunities for a number of years and has “become quite expert at evaluating most money-making enterprises.” Third, Byron is not merely promoting a direct investment in Tri-West; he has put together his own “Group of Ten” program, which he claims will provide enhanced return to investors. Finally, Byron, either directly or through IPS, would earn income for referring investors to Tri-West, through Tri-West’s member referral program.
[para 52]
Therefore, we find that Byron acted as an adviser without registration, contrary to section 34(1)(c) of the Act.
4. Fraud
[para 53]
Section 57 of the Act provides that, among other things, a person must not, directly or indirectly, engage in or participate in a transaction relating to a trade in a security if the person knows, or ought reasonably to know, that the transaction perpetrates a fraud on any person in British Columbia.
[para 54]
The Commission has consistently applied the test for fraud established by 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.”
[para 55]
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 of that decision:
“…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)”.
[para 56]
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.”
[para 57]
The Tri-West program appears to be a quintessential example of what has come to be known world wide as a “Prime Bank Instrument Fraud”. Warning circulars and bulletins respecting these frauds have been issued by the International Chamber of Commerce (ICC), the International Monetary Fund (IMF), the World Bank, the Royal Canadian Mounted Police, the U.S. Federal Reserve and the U.S. Securities and Exchange Commission (SEC). The SEC has also created a website dedicated to investigations of prime bank instrument frauds.
[para 58]
Prime bank instrument frauds claim to involve the purchase and sale of fully negotiable bank instruments. These bank instruments are purported to be the debt obligations of the top, or prime, world banks. In fact, neither these instruments, nor the markets on which they allegedly trade, exist. According to the warning circulars and bulletins, each fraud will generally display several of the following common characteristics:
· The program guarantees unrealistically high rates of return within a short period of time.
· The program claims to be risk free.
· Investors are told that they are among the privileged few whose money will be pooled to invest in secret programs reserved for top financiers.
· Investors are asked to sign secrecy or confidentiality agreements.
· Investors are told that regulators and banks will deny the existence of these programs.
· The description of the program is complex and difficult to understand.
· The description of the program refers to official sounding financial terms and instruments, such as prime bank notes, prime bank guarantees, standby letters of credit, bills of exchange, certificates of deposit or zero coupon books. Some of these instruments really do exist in the financial markets, but most do not.
· The program claims to be endorsed by the ICC, the IMF, the World Bank or some other well known international organization.
· Some part of the program is transacted through a country regarded as a secrecy haven, which, it is claimed, enables investors to avoid paying taxes on their returns.
· Investors are given financial incentives for bringing in new investors.
· The money from one group of investors is used to show a profit to a subsequent group. Eventually, the promoters pocket the proceeds and disappear, leaving the pyramid to collapse.
· Investors are solicited through the Internet.
[para 59]
The Tri-West program displays many of these characteristics.
· It describes its bank debenture trading program as a “Buy/Sell Program” involving “fully negotiable Bank Instruments”, namely debt obligations of the “Top One Hundred (100) World Banks”.
· It guarantees a rate of return of 10% per month with no risk to the investor’s principal, a claim that Dr. Levi says in his affidavit “makes no sense”.
· It claims that the bank debenture trading program is “an investment vehicle commonly used by the very wealthy”.
· The description of the program is very complicated and refers to several official sounding instruments such as bank purchase orders, prime bank instruments or guarantees, promissory bank notes and zero coupon books. In his affidavit, Dr. Levi says that he had never heard of these instruments.
· An earlier version of the Tri-West website said that instruments traded in the program were “backed by the IMF.”
· Tri-West has a member referral program, under which a member receives 15% of a referred investment and 15% of the income earned by the referred member, plus an additional $1000 for every $50,000 in referred investments.
· Investors in British Columbia stopped receiving their monthly payments in May 2001.
[para 60]
We are of the view that the Tri-West program satisfies both elements of the test for fraud. The inherent dishonesty of the program is glaringly apparent. The deprivation that will result is equally clear; once the principals pull out and the pyramid collapses, the Tri-West investors will lose their money. As the British Columbia investors have not received any payments for some months, it appears that the collapse may have already happened with respect to their investments.
[para 61]
We are also of the view that each of the respondents, other than the Tri-West website, participated in the program and that each of them knew, or ought to have known, that the program would perpetrate a fraud on any person purchasing Tri-West securities, including residents of British Columbia. Tri-West and Haarlem Universal were the vehicles for the fraud. The individuals behind Tri-West and Haarlem Universal – Kingsley, Goldman, Richards and Haarlem (or others using those names) – devised the program, set up and maintained the Tri-West website and processed payments from and to investors. Byron used his apparent involvement with IPS to solicit IPS “supporter[s]” to invest in Tri-West, even developing a special “Group of Ten” program to enhance their supposed returns; Byron held himself out to be an “expert at evaluating most money-making enterprises” and should have recognized the Tri-West program to be an outright scam.
[para 62]
Therefore, we find that, through their participation in the Tri-West scheme, Tri-West, Haarlem Universal, Byron and the individuals holding themselves out as Kingsley, Goldman, Richards and Haarlem perpetrated a fraud on persons in British Columbia, contrary to section 57 of the Act.
ORDERS
[para 63]
We have found that all of the respondents, except the Tri-West website, contravened sections 34(1)(a) and 57 of the Act, that Tri-West contravened section 61(1) of the Act and that Byron contravened section 34(1)(c) of the Act.
[para 64]
We will hear further submissions on November 9, 2001, at 8:00 a.m. at the British Columbia Securities Commission, 12th Floor, 701 West Georgia Street, Vancouver, British Columbia, before issuing orders in respect of our findings.
[para 65]
October 23, 2001
FOR THE COMMISSION
Adrienne Salvail-Lopez, Commissioner
Joan L. Brockman, Commissioner
John K. Graf, Commissioner