2007 BCSECCOM 737

a. made the statement that Savage Tele.com Corporation was incorporated, when he ought reasonably to have known it was a misrepresentation, and
b. made the statement that Savage Tele.com Corporation had acquired two local internet service providers, when he knew it was a misrepresentation,

We are advised that your description of the contents of the conversation between our clients in Atlanta on June 6, 2000 is incorrect. In particular, we are advised that “the deal” has closed; that no representations were made about funds being held in trust (no funds are in trust); there were no material misrepresentations made to your clients; and no promise was made to return any funds.

…
Your assertion that the [Maier group] funds are or ought to have been held in trust is without merit. The documents disclosed to your clients that I have seen made it clear to them their funds were not going to be held in trust, and I am advised that your clients were kept informed about what [Savage Telecom (Canada) Ltd] was doing and must have been aware that their money was being used by [Savage Telecom (Canada) Ltd] in its business. My clients … had no duty to keep the money in trust.

…

Mr Savage and Ms Oslund advise that they did not appreciate and were not advised that this delay in the incorporation of the Company [Savage Telecom (Canada) Ltd] and the completion of the Offering Memorandum could affect their solicitation of investments. Prior to incorporation, the directors, officers and employees of the Company accepted subscription money for shares of the Company from close friends and relatives in order to assist with the start up of the Company.

… [The] Company’s Board of Directors ratified all of the subscription agreements after the Company was incorporated through a resolution dated April 4, 2000.

… [We] prepared revised subscription agreements in the name of Savage Telecom (Canada) Ltd and sent the revised agreement to fifty of the close friends and relatives who had initially invested in the Company. At present those subscription agreements are being signed and returned to the Company, and as they are received, share certificates are being issued. …

For the remaining 67 investors, we intend to provide revised subscription agreements and an offering memorandum (once completed), and once such agreements have been signed and returned to the Company, share certificates will be issued.

Separate from the above mentioned investors, we are advised that there is a group of eight sophisticated investors who purchased a total of US $765,000 worth of shares and warrants from the Company and for whom the Company has issued share and warrant certificates. Recently, due to changes in the investment climate, these investors have asserted a claim to the right to rescind their share purchase agreements with the Company. … Failing a settlement, the Company is prepared to have this matter proceed before the courts.

…

• the Savage Tele.com business was incorporated and named Savage Tele.com Corporation,
• the plan was a prospectus,
• Savage Tele.com Corporation had acquired two ISPs, and
• the CRTC had authorized Savage Tele.com Corporation to operate as a CLEC.

Savage Tele.com Corporation is seeking a combination of equity and or debt financing in the amount of $250 million for its acquisition strategy. (page 7)

• obtained funds from investors before filing a prospectus with the British Columbia Securities Commission and before completing the offering memorandum; and
• represented that Savage Telecom [the Savage Tele.com business] was incorporated before it had been incorporated. (para 98)

Q In the second paragraph, the second sentence begins, ‘This prospectus is a part of the registration statement’ and it’s referring to a registration statement that was -- that I guess had planned on being filed with the SEC. Again, it’s in your mind that this was just a business plan --
A Mm-hmm.
Q -- it wasn’t a prospectus.
A No, just a business plan.
Q Okay.
A And it was always presented as a business plan. And I do not remember [Roberts] ever referring to it other than a business plan when he talked to the shareholders.

We have completed the acquisition of Mountain Internet Ltd, the largest private ISP in Whistler and Squamish, British Columbia. (p. 6)

…

Using data from our initial ISP purchases of Mountain Internet and Net Puppy, we have concluded that our British Columbia subscriber base currently consists of approximately 50,000 subscribers. (page 39)

Savage TeleCom Canada Ltd. (“Savage”, formerly “Savage Communications Corporation”) expressed its intent to enter into the local exchange telephone market and offer local switched services in Alberta and British Columbia. ....

Savage is recognized as having met CLEC requirements at this time sufficient to make the further arrangements necessary to allow it to provide local switched services. …

Q Now, Ms. Oslund, after the eight investors we have been talking about asked for their money back, there was a meeting held … in Vancouver?
A Yes.
Q And you were present and Mr. Savage was present?
A Yes.
Q And it was decided at that meeting that the investors money would be split and moved from the corporate accounts?
A Yes.
Q And it was moved for the purpose of keeping that money away from the investors; isn’t that right?
A Yes. (transcript, April 10, 2007, p. 116, q. 437 to 440)

Q Ms. Oslund, in your role as at chief operating officer, you were aware of and familiar with the kind of employment or contractual relationships between the various personnel of the company and the company?
A Yes.
Q Could you tell me what the relationship between the company and … Menton was?
A [Menton] originally started with the companies at the very beginning. There was [sic] five or six or seven or eight companies that we were going to incorporate, one would be Savage Entertainment, which … Menton would be involved with. Savage Entertainment never went anywhere and that was the end of [Menton’s] involvement with the company. (transcript, April 10, 2007, page 117)

Q Do you want to expand on that [Savage’s personal life]?
A His significant other was Loree Menton who was involved with the entertainment way back, and she had a lot of control over [Savage] – well, to me, in my opinion – (interview transcript, May 28, 2004, page 24, line 22)

(a) traded in securities without being registered under the Act, contrary to section 34(1) of the Act;
(b) distributed securities without having filed a prospectus, contrary to section 61 of the Act;
(c) made statements that he knew, or ought to have known, were misrepresentations, contrary to section 50(1)(d) of the Act; and
(d) participated in a series of transactions that he knew, or ought reasonably to have known, perpetrated a fraud, contrary to section 57.1(b) of the Act.

A person must not

(a) trade in a security … 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) a disposition of a security for valuable consideration whether the terms of payment be on margin, installment or otherwise, …
(f) any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the activities specified in paragraphs (a) to (e).

Unless exempted under this Act or the regulations, a person must not distribute a security unless

(a) a preliminary prospectus and a prospectus respecting the security have been filed with the executive director, and
(b) the executive director has issued receipts for the preliminary prospectus and prospectus.

a trade in a security of an issuer that has not been previously issued.

…
(c) a document evidencing an option, subscription or other interest in or to a security,
(d) a bond, debenture, note or other evidence of indebtedness, share, stock, unit, unit certificate, participation certificate, certificate of share or interest, reorganization certificate or subscription ….

(a) an untrue statement of a material fact, or
(b) an omission to state a material fact that is
…
(ii) necessary to prevent a statement that is being made from being false or misleading in the circumstances in which it was made.

where used in relation to securities issued or proposed to be issued, a fact that significantly affects, or could reasonably be expected to significantly affect, the market price or value of those securities.

A person in British Columbia must not, directly or indirectly, engage in or participate in a transaction or series of transactions 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 series of transactions
…
(b) perpetrates a fraud on any person anywhere.

33. The elements of fraud are set out in R. v. Théroux, [1993] 2 SCR 5 at page 20:

… the actusreus of the offence of fraud will be established by proof of:

1. the prohibited act, be it an act of deceit, a falsehood or some other fraudulent means; and
2. deprivation caused by the prohibited act, which may consist in actual loss or the placing of the victim’s pecuniary interests at risk.

Correspondingly, the mens rea of fraud is established by proof of:

1. subjective knowledge of the prohibited act; and
2. subjective knowledge that the prohibited act could have as a consequence the deprivation of another (which deprivation may consist in knowledge that the victim’s pecuniary interests are put at risk).

34. In R. v. Long (1990), 61 CCC(3d) 156 at page 174 (BCCA), the court said:

… the mental element of the offence of fraud must not be based on what the accused thought about the honesty or otherwise of his conduct and its consequences. Rather, it must be based on what the accused knew were the facts of the transaction, the circumstances in which it was undertaken and what the consequences might be of carrying it to a conclusion.

35. Théroux and Long are criminal law cases. In Anderson v. British Columbia (Securities Commission), 2004 BCCA 7, the court, having cited the excerpts above from those cases, said:

29. Fraud is a very serious allegation which carries a stigma and requires a high standard of proof. While proof in a civil or regulatory case does not have to meet the criminal standard of proof beyond a reasonable doubt, it does require evidence that is clear and convincing proof of the elements of fraud, including the mental element.

36. Therefore, to make a finding of fraud under section 57, the elements of fraud as set out in Théroux and Long must be established to the standard of proof set out in Anderson.

When considering the element of intent in fraud the principal concern is to determine what knowledge an accused had of the conduct which has been found to be dishonest, and what knowledge or foresight he had of the consequences which amount to the deprivation alleged. As will be apparent from my conclusions on this aspect of the matter, the inquiry is not what the accused himself thought about the honesty or otherwise of his conduct. The honesty of the conduct is to be decided applying the standards of the average person acting reasonably in similar circumstances.

1. there were securities involved,
2. Savage traded those securities in British Columbia,
3. for section 34(1), no registration exemption applied, and
3. for section 61(1), his trades were a distribution and no prospectus exemption applied.

(a) Savage Tele.com Corporation had been incorporated in British Columbia or the state of Delaware;

(b) shares in Savage Tele.com Corporation were, or were going to be, listed on the National Association of Securities Dealers Quotation system;

(c) the business plan was a prospectus;

(d) Savage Tele.com Corporation had acquired two local internet service providers; and

(e) Savage Tele.com Corporation was authorized by the CRTC to operate as a competitive local exchange carrier.

1. the untrue statements related to material facts, and therefore were misrepresentations, as defined in the Act,
2. Savage knew, or ought reasonably to have known, that they were misrepresentations, and
3. Savage made the misrepresentations with the intention of effecting a trade in a security.

a. made the statement that Savage Tele.com Corporation was incorporated, when he ought reasonably to have known it was a misrepresentation, and
b. made the statement that Savage Tele.com Corporation had acquired two local internet service providers, when he knew it was a misrepresentation,

and so contravened section 50(1)(d) of the Act.

By December 21, 2007 the executive director delivers submissions to Savage and the secretary to the Commission.

By January 11, 2008 Savage delivers response submissions to the executive director and the secretary to the Commission.

By January 18, 2008 the executive director delivers reply submissions (if any) to Savage and the secretary to the Commission.