Decisions
STEPHEN C. SAYRE, et. al. [Decision]
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BCSECCOM #:
2001 BCSECCOM 422
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Document Type:
Decision
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Published Date:
2001-04-23
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Effective Date:
2001-04-23
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Details:
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2001 BCSECCOM 422
COR#01/053
IN THE MATTER OF THE SECURITIES ACT
R.S.B.C. 1996, C. 418
AND
IN THE MATTER OF STEPHEN C. SAYRE, INDEPENDENT FINANCIAL REPORTS, INC., SILVER SCREEN INDUSTRIES, INC. AND PREMIER FILM ADVENTURES, INC.
AND
IN THE MATTER OF THE BANK OF MONTREAL
AND
IN THE MATTER OF STERLING INTERNATIONAL BANK INC.
AND
IN THE MATTER OF ANDALEX, LTD.
APPLICATION TO VARY A FREEZE ORDER
PANEL
Brent W. Aitken
Joan L. Brockman
John K. Graf
DATE OF HEARING
April 4, 2001
DATE OF DECISION
April 23, 2001
APPEARING FOR THE PROVISIONAL LIQUIDATOR OF STERLING BANK INTERNATIONAL INC.
John I. McLean
APPEARING FOR COMMISSION STAFF
Alan E. Keats
APPEARING FOR THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Mark L. Skwarok
Stephen M. Zolnay
DECISION OF THE COMMISSION
SUMMARY
[para 1]
This is a proceeding under section 171 of the Securities Act, R.S.B.C. 1996, c. 418. We are being asked to vary a freeze order made by Commission Vice Chair Joyce C. Maykut, Q.C.
[para 2]
There are two applications. The first (the Sterling application) is made by Graham R. Whiteside, the provisional liquidator of Sterling International Bank Inc. Sterling is incorporated in the Republic of Nauru and is insolvent. It has an account (the Sterling account) at the Bank of Montreal at its branch at 595 Burrard Street, Vancouver, British Columbia. The order that Whiteside seeks to vary has frozen this account. Whiteside wants the freeze order varied so that he can proceed with the liquidation of Sterling.
[para 3]
The second application is made by Andalex, Ltd., a corporation formed under the laws of Nevis, West Indies. Andalex says it has made deposits in Sterling by making deposits to the frozen account. It wants the freeze order varied (as it relates to Andalex) so that it can withdraw its money from Sterling.
BACKGROUND
The Freeze Order
[para 4]
The freeze order (In the Matter of Stephen C. Sayre et al., 2001 BCSECCOM 420)was made on April 13, 2000 and relates to Stephen C. Sayre and related companies (the Sayre group). The United States Securities and Exchange Commission alleges that members of the Sayre group made false and misleading statements through the internet for the purpose of manipulating the share price of eConnect, an issuer quoted on the NASDAQ OTC Bulletin Board. The SEC also alleges that members of the Sayre group transferred US $400,000 from bank accounts in the United States to the Sterling account and US $940,425 to another account at the Bank of Montreal in the name of Exchange Bank & Trust Inc. (EBT). Staff of our Commission is concerned that these transfers represent profits from alleged securities violations by the Sayre group and that members of the Sayre group may have traded securities from or into British Columbia and contravened the Act in doing so.
[para 5]
Vice Chair Maykut previously issued an order authorizing an investigation into the matter.
[para 6]
The freeze order requires that the Bank of Montreal hold any property that it has on deposit or under its control or safekeeping for members of the Sayre group, Sterling or EBT. The order also prohibits members of the Sayre group, Sterling and EBT from withdrawing any property held at the bank.
[para 7]
The Sterling account presently has a balance of about US $540,000.
The Sterling Bankruptcy Proceedings
[para 8]
Sterling is in bankruptcy proceedings as a result of a petition filed in September 2000 under the laws of Nauru by Medigenix Limited, one of Sterling’s creditors. Later that month, the Nauru District Court appointed Whiteside as Sterling’s provisional liquidator. It is up to Whiteside to locate and collect all of Sterling’s assets and sell them. He will then identify Sterling’s creditors and distribute the assets among them. Sterling’s assets include the cash in the Sterling account and real estate properties in the United States. Sterling’s liabilities at this point appear to consist of mortgages on the real estate properties and about US $9 million owed to Sterling depositors. Whiteside believes if the real estate properties are worth what Sterling’s president claims, and if they can be realized in an orderly fashion, “there may be sufficient funds to pay the creditors a substantial dividend”.
[para 9]
In February this year, Whiteside was declared by the Supreme Court of British Columbia to be a foreign representative under the Bankruptcy and Insolvency Act (Canada). The Court also ordered the Bank of Montreal to give Whiteside all but about US $39,000 of the money in the Sterling account. The Court’s order is subject to our setting aside or varying the freeze order. That brings us to the Sterling application.
The Sterling Application
[para 10]
Whiteside asks us to vary the freeze order as it applies to the Sterling account. He says that the purpose of freeze orders under the Act is to preserve assets for those who may have claims on them. He says that the order has served its purpose. With Sterling in liquidation, it is his duty to locate all assets and potential claimants and distribute the assets among the claimants. In other words, he says, it is time for the freeze order to be varied so he can carry on with the orderly liquidation of Sterling.
[para 11]
The funds in the Sterling account are apparently the only liquid assets that Whiteside has been able to find. The rest of Sterling’s assets consist primarily of real estate located in the United States. Whiteside says the cash is needed to fund the management and disposition of the real estate assets; until the cash is released, he says, the liquidation cannot proceed.
The Andalex Application
[para 12]
No one appeared for Andalex at the hearing. Its application is in the form of two letters, dated March 6 and April 2, 2001, and various enclosures. Andalex says its deposits in Sterling were the proceeds of its legitimate business operations. It argues that there is no evidence connecting it with the activities of Sterling, EBT or the Sayre group and therefore no basis on which to freeze its assets under the order. Andalex claims that as a result of the freeze order it has suffered great financial hardship and needs the freeze order varied so it can withdraw its money from its account at Sterling.
The Position of Commission Staff and the SEC
[para 13]
The Sterling application is opposed by Commission staff and the SEC.
[para 14]
Commission staff says the application is premature. It argues that Whiteside has not shown that Sterling will suffer irreparable harm if the freeze order is not varied, and that the balance of convenience is in favour of keeping the freeze order in place until the investigations of Commission staff and the SEC are complete.
[para 15]
The SEC sued Sayre and two other members of the Sayre group in California for disgorgement of the proceeds of their alleged wrongdoing. The actions have proceeded undefended and have reached the point where the California court has entered “defaults” against Sayre and one other member of the Sayre group, Independent Financial Reports, Inc. (IFR). The effect of a default in the California courts is that the SEC’s allegations are taken as admitted.
[para 16]
The next step in the California litigation is the Court’s decision whether to make disgorgement orders. In making the orders the Court may also order how the funds will be distributed. If it makes a distribution order, it may either direct that any funds recovered be paid to the SEC for distribution to eConnect shareholders who suffered losses, or direct that the funds be paid into court to satisfy private lawsuits. If the Court makes no distribution order, the funds will be paid to the United States Treasury.
[para 17]
The SEC’s motions for disgorgement orders are to be heard by May 14. Until these orders are made, the SEC has no enforceable claim. The SEC therefore argues that, at a minimum, the freeze order ought to remain in place until the Court has made the orders.
Sayre’s Position
[para 18]
Sayre, who did not appear but asked Commission staff to state his position, says the order should not be varied until the California courts rule on the SEC motions.
DISCUSSION
[para 19]
The freeze order was issued under section 151 of the Act, which provides as follows:
151 (1) The commission may make a direction under subsection (2) if
(a) it proposes to order an investigation in respect of a person under section 142 or during or after an investigation in respect of a person under section 142 or 147,
. . .
(2) In the circumstances described in subsection (1), the commission may direct, in writing,
(a) a person having on deposit, under control or for safekeeping any funds, securities, exchange contracts or other property of the person referred to in subsection (1) (a), (b), (c) or (d), to hold those funds, securities, exchange contracts or other property, and
(b) a person referred to in subsection (1) (a), (b), (c) or (d)
(i) to refrain from withdrawing any funds, securities, exchange contracts or other property from any person having them on deposit, under control or for safekeeping
. . . .
[para 20]
The power to make a freeze order is significant. The order can freeze assets before an investigation is complete or before any notice of hearing is issued or any hearing held. The power to make freeze orders exists so that assets that may be the proceeds of illegal or improper securities trading can be preserved.
[para 21]
The purpose and application of section 151 was considered extensively by the Commission in Re Amswiss Scientific Inc. [1992] 7 BCSC Weekly Summary 12. In that decision, the Commission described the purpose of section 151 as follows (at page 32):
“In our view, the purpose of section 135(1) [now section 151(1)] is to preserve property for persons who may have common law or statutory claims to or interests in it, for example by way of rescission or damages under Part 14 [now Part 16] of the Act.
“The discretion accorded to the Commission to invoke this power to freeze is limited by the purpose of the Act, and specifically by the conditions outlined in section 135(1) . . . . Although there is no specific reference to the public interest in section 135, in our view, the Commission may only exercise the powers under this section where it considers that there is some connection to trading in securities and that an order is in the public interest.
. . .
“The immediate effect of a freeze order is to maintain the status quo, ensuring that the frozen property is not dissipated or destroyed before the Commission is in a position to determine what, if any, further steps or orders in the public interest should be made under the Act.
. . .
“Once a freeze order is issued, the Commission’s authority is limited to revoking or varying the order . . . where it is of the opinion it would not be prejudicial to the public interest to do so.”
[para 22]
Freeze orders are intended only as an interlocutory mechanism. The Commission has no authority to determine the distribution of assets among parties. That is a matter for the courts. The Commission’s only jurisdiction is to ensure that the assets are preserved for those who may have claims on them based on securities law violations. Given the purpose of a freeze order, once in place it normally stays in place until the Commission determines whether the assets are connected to illegal or improper securities trading and, if so, until the claims against those assets are determined in a proper forum. Anyone whose assets are caught by the freeze and who does not appear to be connected with the wrongdoing can always ask to have their assets released from the freeze.
[para 23]
In this case, the assets are in the name of Sterling Bank and apparently represent deposits made to Sterling bank by the Sayre group, Andalex and others. The investigations by Commission staff and the SEC continue and the SEC’s efforts to obtain disgorgement orders are pending.
[para 24]
On the other hand, Sterling is now insolvent and a liquidator has been appointed.
Sterling
[para 25]
In our opinion, this application is premature. In the present circumstances, a variation would be prejudicial to the public interest, for two reasons.
[para 26]
First, the SEC is seeking disgorgement orders in California that may preserve assets for the eConnect investors.
[para 27]
The SEC also plans to argue that its disgorgement orders will supersede other claims in the bankruptcy. The SEC intends to take legal steps to have the cash in the Sterling account paid to it, and not to Sterling’s liquidator. It cannot take these steps at least until it has its disgorgement orders from the California courts.
[para 28]
We are in no position to assess whether the SEC will succeed in this quest. However, the disgorgement motions are to be heard in the near future. Furthermore, if those orders are made, they will assist the SEC in preserving assets for the eConnect investors, whose claims are based on the alleged wrongdoing of the Sayre group. We therefore consider it to be in the public interest that the freeze order stay in place.
[para 29]
The second reason the application is premature is that the investigation of our Commission staff is not complete. Whether this alone continues to provide a basis for keeping the freeze order in place will depend on the status and circumstances of that investigation.
[para 30]
Whiteside says that without the cash in the Sterling account, he has no funds to properly maintain Sterling’s real estate assets or prepare them for sale. We recognize that one effect of our decision may be to delay Sterling’s liquidation. In considering this factor, we note that little evidence was produced to show the prejudice to Sterling or any of its creditors if the freeze order is not varied. On the other hand, if the freeze order is varied before the Courts rule on the SEC motions, there is the likelihood of significant prejudice to the claims of the eConnect investors.
Andalex
[para 31]
Andalex says that it has no connection to the alleged wrongdoing and therefore its assets should be released from the freeze.
[para 32]
There is a fundamental problem with the Andalex application. The bank account frozen by the order belongs to Sterling, not Andalex. If Andalex has any claim on the Sterling account, it is only because it is one of Sterling’s creditors. The freeze order does not identify any assets belonging to Andalex, so we have no basis on which to vary it.
DECISION
[para 33]
The Sterling and Andalex applications are therefore denied.
April 23, 2001
[para 34]
FOR THE COMMISSION
Brent W. Aitken, Commissioner
Joan L. Brockman, Commissioner
John K. Graf, Commissioner