B.M. Isman, for Lester Gene Chapman.

B. Tyzuk, for the Superintendent of Brokers.

REASONS FOR DECISION:-- This hearing arises out of a temporary cease trade order and suspension of trading exemptions issued by the Deputy Superintendent of Brokers on January 25, 1988 in response to certain activities of Boulder Creek Development Limited ("Boulder Creek") and Lester Gene Chapman ("Chapman"). The two key issues are whether, firstly, Boulder Creek and Chapman were trading in securities without having first filed a prospectus and obtained registration, and secondly, whether they were involved in telephone "cold-calling" of residences to effect trades in securities contrary to section 34 of the Securities Act of British Columbia.

Were Boulder Creek and Chapman Trading in Securities contrary to the Securities Act?

The evidence indicates that Boulder Creek and Chapman, its key director and officer at all material times, offered for sale and sold, between at least March 15, 1987 and January 25, 1987, two types of instruments which clearly fall within the definition of "security" in section 1 of the Securities Act.

The first were previously unissued "Series A" promissory notes of Boulder Creek in denominations of $5,000 with interest payable at 18% per annum and maturing on July 20, 1991. The printed promissory notes represent on their face that they are redeemable, at the holder's option, at any branch of the Royal Bank of Canada.  The reference to the bank was unauthorized and no redemption arrangements had in fact been made. The sole connection of Boulder Creek to the bank was a small account. A copy of a promissory note sold by Chapman to his sister was tendered into evidence. On this note, the reference to the bank had been stroked out, but it has not been established that the other promissory notes sold contained a similar correction. Reliance by an investor on any purported redemption guarantee could well prove costly, since the evidence indicates that Boulder Creek does not have the financial resources to pay interest on the promissory notes and is relying on a somewhat nebulous royalty stream to do so.

Some of the promissory notes were issued to persons in exchange for their interests in certain oil and gas leases in the United States which had proved worthless, thereby allowing these investors to exchange their interests for an ostensibly better investment. The oil and gas leases acquired by Boulder Creek were in turn to form part of a vaguely defined plan of reorganization of Boulder Creek's assets which would ultimately result in Boulder Creek reselling the interests to other investors. In any event, regardless of the motives behind the issuance of the promissory notes, they clearly fall under paragraph (d) of the definition of "security" in the Securities Act, and are therefore subject to the Act.

The second type of instrument sold by Boulder Creek and Chapman consists of interests in at least three oil and gas leases in the state of Kansas which I will refer to as "participation agreements". These agreements entitle the purchaser, upon payment of a certain amount of money, to a percentage working interest in an oil and gas lease held by Boulder Creek. The working interest would purportedly result in royalty payments being made to the purchaser. These participation agreements were sold to investors with a minimal amount of information but a significant number of vague, glowing promotions. For example, a letter from Boulder Creek to investors touting the participation agreements states, in part:

	"FIRST: We will spell out clearly to you the RISK FACTOR involved in everything we present to you. We have some producing gas wells we will share interests in where the RISK FACTOR is ZERO, that is, -0-. Others, LIKE A WATERFLOOD, have a RISK FACTOR of FIFTEEN, THAT IS, -15-for 85% of all waterfloods ARE successful. Still others have a 50-50 chance of success and these will have a risk factor of FIFTY, that is -50-., etc.
	SECOND: After we find, work over or drill a well, and see production, we will see that cost factors are not too high. Many investors were caught in a real squeeze when the price of oil fell because the cost of production was more than the profits from the sale of oil...
	THIRD: If, for any reason you're dissatisfied with ANY participation agreement, we will work with you to either place you in another lease more to your liking, exchange your investment for corporate bonds, or capital stock in our company, or work out some other arrangement to make you satisfied and KEEP YOU AS A CONTINUING INVESTOR WITH US!...
	If the price of oil goes to $5 per barrel and gas to .25cts per 1,000 CF investors ARE PROTECTED and will still make money, and if the price goes to $35 per Barrel on oil and $5 per MCF on gas, G-R-E-A-T, investors will become part of the group known as the RICH AND FAMOUS.... If you have any questions whatsoever, please call me collect at [Chapman's Lions Bay phone number]. I know we are in a position to make money for you.....but..... you don't know that. Let me send you a prospectus, or engineering report on one of our leases. Try us with a small investment, perhaps $500 or a $1,000 investment. Once you have proved us with a small investment, you'll be most happy with the results and will try on a larger scale. Then you'll have the confidence to invest with us on some of our major plays."

No registration was obtained or prospectus filed in order to trade in either the promissory notes or the participation agreements, nor was a statutory exemption available or a discretionary exemption order sought.  I must therefore conclude that Boulder Creek and Chapman are in breach of sections 20 and 42 of the Securities Act with respect to the trades in both those securities.

Were Boulder Creek and Chapman "Cold-Calling" Residences Contrary to the Securities Act?

The evidence pertaining to the sales techniques used by Boulder Creek and Chapman to sell the participation agreements is an almost textbook description of the development of a "boiler room" operation, albeit a small one. Chapman purchased a "seasoned investors" list for several hundred dollars which contained the names of individuals in the United States, many of them professional people, who had at any time purchased an oil and gas investment of any sort. He then methodically called those individuals, often working from 5:00 a.m. to 8:00 a.m. to compensate for time zones, and attempted to generate sufficient interest in the security to warrant follow up telephone calls or correspondence. There is no dispute that many of these calls were to residences. In addition, he used the telephone books of a number of cities in the United States to obtain, confirm or follow up leads to potential investors. Much of this activity was recorded on Chapman's computer and all of it was recorded by the British Columbia Telephone Company system.  Telephone records for Chapman's residence introduced into evidence indicated monthly averages of 250 to 300 calls, mostly short, to persons in a variety of cities in a number of states. A much smaller number of solicitations appear to have been made to persons in British Columbia and Alberta.

The operation produced some results, approximately $100,000 (U.S.) having been received by Boulder Creek during 1987. In fact, things were going well enough that chapman expressed his desire to "put 5 people on phones and pay them a commission on what they do".

There is no dispute that the overwhelming majority of these calls were to persons unknown to Chapman for the sole purpose of interesting them in the participation agreements sold by Boulder Creek. It is clear, therefore, that Chapman and Boulder Creek are in contravention of section 34(2)(b) of the Securities Act, which prohibits persons from telephoning "from within the Province to any residence within or outside the Province for the purpose of trading in a security."

Arguments Advanced By Boulder Creek and Chapman

On behalf of Boulder Creek and Chapman, Mr. Isman contends that the provisions of the Securities Act referred to above should not apply to his client, as the Securities Act was passed for the protection of investors in British Columbia, not other provinces or countries. Even if these provisions do apply, he argues that as Chapman has been co-operative throughout the investigation and was not aware that he or Boulder Creek was in contravention of the securities Act, his client's breach should attract little or no penalty.

The response to Mr. Isman's first argument is that the Legislature of this province (as well as those of most other provinces) has spoken clearly in formulating the Securities Act to capture precisely the kind of activity to which this hearing is addressed. Regulation of trading in securities is directed principally at selling, and the negative effect on the integrity and reputation of the British Columbia securities market is the same whether prospective purchasers are being illegally solicited outside the province by someone in British Columbia, or whether prospective participants in this province only are being sought.

The case-law on this subject also supports the view that solicitations by Boulder Creek and Chapman to persons outside of the province come within the purview of the Securities Act. In Gregory & Co. Inc. v. Quebec Securities Commission et al. (1961) 28 D.L.R. 721, the Supreme Court of Canada held that a person resident in the province of Quebec was trading in securities in that province even though the investors it solicited and sold to were outside the province. The court determined that since the appellant's head office was in Montreal, solicitations emanated from that office and payments were made to that office, sufficient activities were taking place in Quebec to subject the appellant to the Quebec Securities Act. In rendering its decision, the court considered the purpose of the Quebec securities legislation and stated:

"The paramount object of the Act is to ensure that persons who, in the Province, carry on the business of trading in securities or acting as investment counsel, shall be honest and of good repute and, in this way, to protect the public, in the Province or elsewhere, from being defrauded as a result of certain activities initiated in the Province by persons therein carrying on such a business." (at p. 725)

The clear conclusion to be drawn from the evidence and the law is that Boulder Creek and Chapman knowingly, consistently and blatantly breached the basic principles of the securities laws of British Columbia. Accordingly, the cease trade order against Boulder Creek will continue in effect until the expiry of the period noted below and, further, until the Securities Act is complied with in connection with any trades in Boulder Creek securities. The removal of the trading exemptions of Boulder Creek and Chapman described in sections 30 to 32, 55 to 58, 81 and 82 of the Securities Act will continue in effect for a period of five years from the date of this decision.

N. de GELDER
Superintendent of Brokers