Decisions

CARTAWAY RESOURCES CORPORATION, et. al. [Decision]

BCSECCOM #:
2001 BCSECCOM 594
Document Type:
Decision
Published Date:
2001-06-07
Effective Date:
2001-06-01
Details:


2001 BCSECCOM 594


COR#01/064

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

AND

IN THE MATTER OF CARTAWAY RESOURCES CORPORATION

AND

IN THE MATTER OF ROBERT ARTHUR HARTVIKSON AND
BLAYNE BARRY JOHNSON


HEARING

PANEL
Joyce C. Maykut, Q.C.
Joan L. Brockman
Roy Wares

DATES OF HEARING
May 14-16, 2001

APPEARING FOR COMMISSION STAFF
J.A. (Sasha) Angus
Patricia A.A. Taylor

APPEARING FOR BLAYNE BARRY JOHNSON
Howard Shapray, Q.C.

APPEARING FOR ROBERT ARTHUR HARTVIKSON
Mark L. Skwarok


DECISION OF THE COMMISSION

[para 1]
We issued our findings in this matter on September 29, 2000: see 2000 BCSECCOM 88. Since then the respondents, Robert Hartvikson and Blayne Johnson, and Commission staff have made extensive written and oral submissions about sanctions and costs. In addition, each of Hartvikson and Johnson filed several affidavits in support of their submissions. This decision should be read together with our findings.

[para 2]
The affidavits filed by Johnson were from individuals in the business and securities communities. Some were clients and had invested in Cartaway. Based on their personal and business dealings with Johnson they:

· characterize Johnson as a knowledgeable professional and a forthright and honest individual;

· comment favourably about Johnson’s extensive knowledge of the capital markets, securities regulation and skills in assisting emerging companies to raise financing;

· never had complaints about how Johnson conducted himself and his Cartaway clients were aware of the nature and extent of his Cartaway holdings;

· believe the Commission findings are inconsistent with the conduct and character of the person they know;

· have no hesitation in continuing to do business with Johnson and to obtain his advice because of his extensive corporate finance skills;

· are aware Johnson refused opportunities to act as a director and participate in lucrative options because he believed that while this matter was pending his association with the company might be detrimental to the company’s interests;

· believe Johnson brought integrity and credibility to the process of raising venture capital for emerging companies and believe that preventing him from continuing to do so would be a loss to the investment community and detrimental to the public interest.

[para 3]
Johnson also filed an affidavit in which he states, among other things, that:

· he acknowledges that the Commission found his conduct was harmful to the integrity and reputation of the capital markets and he understands why the Commission considers such conduct to be harmful to the public interest; he regrets any errors in judgement that contributed to these findings;

· he is not a threat to the public interest and is ashamed and dismayed over the damage to his reputation, one he valued highly and worked hard to build; he is highly motivated to rebuild his reputation and it distresses him greatly that he will never again enjoy the standing, respect and stature in the investment community of Vancouver that he once had;

· he has learned a bitter and expensive lesson from his experience; he and his family suffered greatly, personally and financially, as a result of his involvement with Cartaway and moved to Ireland after he voluntarily surrendered his registration at First Marathon; since then he has given up his valuable client base and declined many lucrative business opportunities because he was reluctant to accept them while these proceedings were pending;

· he has, before and after Cartaway, made significant contributions in advancing the interests of investors in the capital markets; apart from one client complaint that was eventually withdrawn, his 10 years as a broker has been without blemish; not one Cartaway client complained that he, Johnson, had taken advantage of them, deprived them of an opportunity or put his interest ahead of theirs;

· all his expertise and skill has been in the capital markets and to accede to Commission staff’s recommendations on sanctions would effectively foreclose him from any opportunity to provide for his family as a businessman; he would like to continue to be able to make an ongoing positive contribution to the capital markets by assisting junior companies or companies in financial difficulties.

[para 4]
Hartvikson also filed several affidavits from various individuals in the securities and business communities. Based on their personal and business dealings with Hartvikson, they:

· characterize Hartvikson as a knowledgeable professional and a straightforward honest individual who follows through on his commitments;

· comment favourably about his extensive knowledge of the capital markets, securities regulation and skills in assisting emerging companies to raise financing;

· are not aware of any complaints about the way in which he conducts himself in the industry nor are they aware of him suggesting any action that was contrary to securities legislation or policy; they have never seen him put his own interests before those of his clients.

[para 5]
Hartvikson’s affidavit states, among other things, that:

· he acknowledges that the Commission found his conduct was harmful to the integrity and reputation of the capital markets and he understands why the Commission considers such conduct to be harmful to the public interest; he regrets any errors in judgement that contributed to these findings;

· he relied on his supervisor and fellow senior brokers to ensure things were done right; he now realizes he made some significant errors in judgement in his involvement with Cartaway and the other First Marathon brokers; he was mortified to have his conduct scrutinized as a result but accepts full responsibility for his actions and their consequences; he is highly motivated to restore his credibility and good name;

· the findings made against him are completely out of character with his hard earned reputation and previously unblemished record of 10 years as a broker; he has never had clients complain that he had taken advantage of them, deprived them of an opportunity or put his interest ahead of theirs;

· he and his family have paid a great personal and financial price for his involvement with Cartaway; he moved to Ireland after he voluntarily surrendered his registration at First Marathon to avoid the glare of publicity; since then he has given up his valuable client base and declined many lucrative business opportunities because he was reluctant to accept them while these proceedings were pending;

· prior to Cartaway he was a significant contributor to the growth and development of numerous credible public companies that have enhanced the reputation and standing of the British Columbia capital markets; he wants to be given a chance to continue in the only business in which he has expertise and make a positive contribution to the capital markets.

[para 6]
Commission staff argue that in light of the leadership role the respondents played in the matter and the serious nature of the findings made by the Commission against them, it is in the public interest to effectively ban them from participating in the securities markets for 20 years. Specifically staff are asking for orders under section 161(1) of the Act that would prohibit the respondents from acting as directors or officers of any company, from providing investor relations services to any company and from trading in any securities for this period. In addition staff says it is in the public interest for the respondents to pay an administrative penalty of $10,000 each, plus costs to be assessed later on a joint and several basis. Both respondents argue that the Commission should consider the following in determining what orders need to be made in the public interest:

· The sanctions sought by Commission staff are completely inappropriate, unfair and have no measure of proportionality considering the circumstances.

· There is no justifiable reason to make any material distinction regarding culpability among the four Vancouver First Marathon brokers involved in these events. Each was a member of the Cartaway control group whose objective was to structure the entire transaction to ensure that the control group would acquire Cartaway shares at a price substantially lower than the price at which persons not in the control group would acquire shares. Each was a promoter of Cartaway. Each signed the same false private placement questionnaire filed with the Alberta Stock Exchange. Each took virtually the same amount of private placement stock. Each loaned money to the numbered company to fund the Voisey’s Bay claims. Each provided his own free trading Cartaway shares to cement the deal with Mason. Each was a registrant and “gatekeeper” of the industry. Each had the very same conflicts of interest. Therefore, even though the Commission is not bound to follow as precedent the settlements entered into by the Executive Director, principles of fairness and consistency dictate that Hartvikson and Johnson should be treated no different than Lyall and Savics.

· The Commission has created in effect a new rule concerning conflicts of interest for brokers that was not in place in 1995. There were no clear rules of conduct that prevented brokers from “loading up on cheap stock” in priority to their clients. The new “First Marathon Employee Investment Policy” that was put in place at First Marathon following the media publicity about Cartaway in 1996, and which specifically addresses employee conduct in these circumstances, confirms this. Therefore, to sanction the respondents now for practices that were widespread in the industry in 1995 would be unfair.

· The respondents’ immediate supervisors at First Marathon, Disbrow and Stuart, were aware of the circumstances concerning the brokers’ conflicts of interest and they, with First Marathon, admitted that the brokers were not properly supervised.

· There were no investor losses attributable to the respondents’ conduct.

· The Commission’s findings of deceitful conduct against the respondents should be disregarded because there was no specific allegation of deceit in the notice of hearing.

· The splitting of the $0.125 private placement and consequent breach of section 61 of the Act was based on a legal opinion and the express authorization and encouragement of First Marathon’s Vancouver branch manager. The respondents did this to confer a benefit on other First Marathon employees, not to enrich themselves.

· The proceedings have been unduly protracted and highly publicized. Both respondents voluntarily surrendered their broker’s registration in 1996 and gave up significant financial opportunities because they believed it was the right thing to do until these proceedings were concluded. Because of this and the harsh findings of the Commission, the respondents have already paid a heavy personal and financial price that addresses the deterrent aspect of the public interest.
· Apart from Cartaway, both respondents have extensive and exemplary track records regarding their participation in, and contribution to, the capital markets. There is no risk to the public in allowing them to participate fully in the capital markets.

· The public interest can be adequately protected with appropriate undertakings from the respondents during a probationary period. The respondents are prepared to voluntarily contribute $100,000 each towards a university foundation or program about business ethics.

[para 7]
In our view, this case is primarily about the respondents’ failure to address the conflicts of interest that arose as a consequence of their being part of a Cartaway control group consisting of First Marathon brokers, while First Marathon acted as agent in two of Cartaway’s financings. That failure was not passive and it did not belong to Hartvikson and Johnson alone. It came about because the control group decided that the financing of Cartaway would be structured in such a way as to ensure that the First Marathon group acquired a substantial number of shares before it was made public that Cartaway was going into Voisey's Bay and before the $1 private placement was announced. This common commitment to achieve the group's objective drove how the deal went forward and dictated the group's conduct. This included Hartvikson and Johnson, in their capacity as registered representatives, giving to their clients who subscribed to the private placement an offering memorandum that they must have known was misleading. The success of the control group in achieving their objective hinged on their unique status - they were all brokers at the very firm that was agent for the subsequent $1 private placement. They had access to the public markets and they controlled the show.

[para 8]
In short, they took unfair advantage of their positions as registrants. This kind of conduct seriously undermines public confidence in the fairness of the markets. In determining what orders should be made in the public interest we intend to focus primarily on the findings that relate to these issues.

[para 9]
Although we felt it was important to make other findings about the respondents’ conduct to make sense of the allegations and evidence and to give guidance to the industry, we do not intend to take into account some of these findings in considering what sanctions to impose. Specifically, the respondents argued that it would not be fair to consider our finding that they were de facto directors and officers of Cartaway because this was not alleged in the notice of hearing. Commission staff agreed. To be clear we will not take into account our finding, and any breaches of obligation that flow from it, that Hartvikson and Johnson were de facto directors and officers of Cartaway.

[para 10]
In making orders under sections 161(1) and 162 of the Act, we must consider what is in the public interest in the context of our mandate to regulate trading in securities.

[para 11]
We believe it is useful to repeat here some of the comments in our findings to dispense with the respondents’ argument that they are being unfairly judged by a standard of conduct concerning conflicts of interest that was not in place in 1995. Beginning with paragraph 231:

“… we find that when the control group decided that the acquisition and development of the Voisey's Bay claims by Cartaway would be financed by them through First Marathon, Hartvikson and Johnson as brokers placed themselves in a position where their personal interests conflicted with the interests of Cartaway. Indeed, we find that from the moment the Koguluk claims were brought to the attention of Hartvikson and Johnson, their objective as part of the control group, was to structure this entire transaction to ensure that the control group would acquire Cartaway shares at a price substantially lower than the price at which persons not in the control group would acquire shares. From that moment to the closing of the $1 private placement, Hartvikson and Johnson consistently chose to act in their own best interests over those of their clients at First Marathon, including Cartaway, in order to accomplish the control group's common purpose.

‘We find that in the process Hartvikson and Johnson deceived and misled First Marathon, the Exchange and the clients of First Marathon who purchased Cartaway shares under the $1 private placement and the public who were buying and selling Cartaway shares in the market. We saw this with respect to Hartvikson's and Johnson's dealings with 489895, Bethune and Singh. We saw this with Hartvikson's and Johnson's desire to keep out of "the limelight" and not disclose their role in 489895 and in Cartaway. We saw this with Hartvikson's and Johnson's involvement in Cartaway's news releases and communications with the Exchange. We saw this with Hartvikson's and Johnson's filings with the Exchange. We saw this in Hartvikson's and Johnson's responses to Commission staff.

‘It is convenient for Hartvikson and Johnson to now suggest that, because there was disclosure in October 1994 about their acquisition of Cartaway shares, there was no intent to deceive when they signed, or in the case of Hartvikson had some else sign, the private placement questionnaires in which they certified they held no shares in Cartaway at the time of the private placement. It was their duty to ensure that the private placement questionnaires, upon which regulators and the public relied and which they certified as true, were in fact true. They were not. Each filed a false and misleading document with the Exchange. As a consequence the Exchange was misled and did not pursue its inquiry. We can now only speculate what damage to the public interest could have been prevented had the Exchange pursued its inquiry to make sure that a group of brokers were not "loading up on cheap stock."

‘That Hartvikson and Johnson knew and understood their duties as registrants where there were conflicts of interest, but chose to disregard them in any event, was made clear to us by their conduct and by the following testimony of Hartvikson. When discussing conflicts of interest with Seifert, Hartvikson said he recognized that he and Johnson were in a "difficult situation" because they on the one hand, wanted to be beneficiaries of 489895 but on the other hand were brokers and as such he did not think it was appropriate to be seen as its directors, officers or shareholders. If they were "it would have been difficult to get First Marathon to -- to fund it."

‘If Hartvikson and Johnson had any doubts about what their duties as registrants and employees were that doubt ought to have been dispelled when they read First Marathon's Guidelines for Business Conduct. In our view there was no confusion in the Guidelines about what their duties as registrants were. We do not accept Hartvikson's and Johnson's argument that Commission staff is trying to impose upon them some new and higher standard of conduct that no other registrant in 1995 was obliged in law to meet. Hartvikson and Johnson simply ignored the standards of conduct they were obliged to meet as registrants and as employees and as set out in First Marathon's Guidelines. Their suggestion that they dealt with any apparent conflicts by keeping themselves from being on record as officers, directors or shareholders of 489895 is specious. Similarly we do not accept Hartvikson and Johnson's argument that they took considerable financial risk in putting this deal together to the great benefit of their clients. In our view they took very little risk because they controlled Cartaway and they controlled how Cartaway's financings would proceed through First Marathon. They knew that any money loaned to 489895 to finance the acquisition of the claims or to Cartaway as interim financing, would be reimbursed, as in fact it was. In short, their conduct throughout was motivated by self-interest. They took advantage of every opportunity that their status as registrants gave them.”

[para 12]
These findings also lead us to dispense with the respondents’ argument that we should not consider our findings about the respondents’ deceitful conduct. In our view the respondents’ credibility and misleading conduct was in issue from the beginning even though the specific word “deceit” was not used in the notice of the hearing. The control group’s objective could only be achieved if others – First Marathon head office, the Alberta Stock Exchange, clients and the public - were deceived. It began with Bethune and 489895 BC and ended with the misleading statements made to staff in the interviews. The respondents were made aware of all this when these proceedings were initiated.

[para 13]
Turning now to the seriousness and effect of the respondents’ conduct as registrants on our capital markets it is useful to review here what we said in paragraph 239:

“It goes without saying that conduct by market participants that results in breaches of the letter and spirit of securities legislation is conduct that brings the capital markets into disrepute and undermines public confidence in the system. It is particularly egregious where it is demonstrated that registrants have taken advantage of their position and have been deceitful and misleading so as to personally benefit themselves to the prejudice of their clients. Such was the conduct of Hartvikson and Johnson. It was conduct that constituted a breach of their duties as gatekeepers of the securities industry. It was conduct that was highly prejudicial to the public interest.”

[para 14]
When considering what kind of public interest orders should be made in these circumstances we must stress again the seriousness of this conduct and the resulting damage done to the integrity of our capital markets. We are obliged to take whatever remedial steps we determine are appropriate to maintain the public’s confidence in the fairness of our markets.

[para 15]
What remedial action is appropriate here?

[para 16]
The penalties we impose must make clear to those who enjoy the benefits of access to the capital markets that there are consequences to them if they take unfair advantage of these benefits. Unless there is effective deterrence inappropriate conduct continues and public confidence in the fairness of our markets is eroded further.

[para 17]
As we noted earlier the heart of this case concerns the conflicts of interest. Although the failure to address the conflicts was a failure of the whole control group and not just of Hartvikson and Johnson, we are left to weigh only the conduct of Hartvikson and Johnson. While we recognize that Hartvikson and Johnson’s conduct throughout was driven to fulfil the purpose of the control group, it is not a complete answer to say there is no distinction regarding culpability among the four Vancouver First Marathon brokers and therefore Hartvikson and Johnson must receive the same sanctions that Lyall and Savics agreed to in their settlements. While we will take into account the settlements of the other brokers, we must in determining what is in the public interest consider Hartvikson’s and Johnson’s situation in light of our findings and the evidence before us. We made some very serious findings about their conduct as registrants. Some of our findings are not reflected in the admissions made by the other brokers. We saw that Hartvikson and Johnson took a leadership role in the control group and made deliberate choices along the way about how to achieve the group’s objective. Some of those choices were going forward with deceitful conduct right through to their dealings with Commission staff.

[para 18]
We also recognize the fact that Hartvikson’s and Johnson’s misconduct was admittedly conducted in an environment that lacked the appropriate supervision to ensure that First Marathon's Guidelines for Business Conduct were complied with.

[para 19]
Commission staff draw our attention to the $5.1 million in trading profits made by Johnson and Hartvikson. Like the others in the control group they made a considerable amount of money by trading Cartaway shares. In considering these profits we note that the $0.125 private placement shares were restricted, first by a one year hold period, then for a further year at the request of the independent underwriter prior to a subsequent financing. Perhaps this underscores the importance of having an independent underwriter in a situation fraught with conflicts of interest. Nonetheless, it appears that the trading profits referred to here were most likely from the sale of the $0.10 shares acquired when the shell was picked up.

[para 20]
As for the breach of section 61 of the Act, Lyall and Savics’ admissions make it clear that each of the four Vancouver First Marathon brokers split the $0.125 private placement with persons who did not qualify for the relied upon exemption. While we consider any abuse of the statutory exemptions to be a serious matter, we have taken into account the fact that Hartvikson and Johnson said the Vancouver First Marathon brokers participated in these distributions in reliance on a legal opinion and the express authorization and encouragement of First Marathon’s branch manager.

[para 21]
Finally we recognize that, apart from Cartaway, Hartvikson and Johnson have extensive and commendable track records regarding their participation in and contribution to the capital markets. There is no evidence before us that they had any regulatory problems in the past. We believe that these lengthy proceedings and our findings have had a salutary effect. We have taken into account the fact that both Hartvikson and Johnson surrendered their licenses as registered representatives in 1996. We recognize that the respondents regret any errors in judgement they made that contributed to the findings against them and we believe they are sincere in their desire to rebuild their good reputations. We accept their representation that if given a chance they would, through their expertise and skills in corporate finance, continue to make a positive contribution to the capital markets in British Columbia.

[para 22]
In the circumstances we are not convinced that a lengthy ban against their participation in the capital markets of British Columbia is necessary to protect the public interest.

[para 23]
We are of the view that any order for costs should be assessed on a joint and several basis because we found that Hartvikson and Johnson were, with the other six First Marathon brokers, acting jointly and in concert by virtueof their agreement as members of the control group of Cartaway. In addition, Commission staff’s costs should be reduced by the costs agreed to be paid for by the other respondents. We are not prepared to rule any further on Commission staff’s request for an order for costs until the respondents and the Commission have been given more particulars about Commission staff’s bill of costs. In submitting bills of cost to respondents for payment we expect Commission staff to provide the kind of particulars that are necessary to support an order for costs in the Supreme Court.

[para 24]
Accordingly, we consider it to be in the public interest to order:

1. under section 161(1)(c) of the Act that the exemptions described in sections 44 to 47, 74, 75, 98 or 99 do not apply to Hartvikson and Johnson for a period of one year from the date of this order except that each may trade solely through a registered dealer and only for his own account under section 45(2)(7) of the Act;

2. under section 161(1)(d)(ii) of the Act that Hartvikson and Johnson are prohibited from becoming or acting as directors or officers of any reporting issuer until the later of
a) one year from the date of this order; and
b) the date each successfully completes a course of study satisfactory to the Executive Director concerning the duties and responsibilities of directors and officers; and

3. under section 162 of the Act that Hartvikson and Johnson pay an administrative penalty of $100,000 each.


June 1, 2001

[para 25]
FOR THE COMMISSION





Joyce C. Maykut, Q.C., Vice Chair





Joan L. Brockman, Commissioner





Roy Wares, Commissioner
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