BCSC

Notices of Hearing & Temporary Orders

FOSTER FIRST FINANCIAL CORPORATION, et. al. [Amended Sec. 161]

BCSECCOM #: 2001 BCSECCOM 792	Document Type: Amended Sec. 161
Published Date: 2001-07-31	Effective Date: 2001-07-18
Details:

2001 BCSECCOM 792

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

AND

IN THE MATTER OF FOSTER FIRST FINANCIAL CORPORATION,
M.W. FOSTER & ASSOCIATES LTD. AND FALCONHOUSE INVESTMENTS INC.

AND

IN THE MATTER OF MARK WEBSTER VAUGHAN FOSTER
AND TERESA INEZ MARIE MITROU

AND

IN THE MATTER OF SPECIALIZED SURGICAL SERVICES INC.,
JAMES SWANNEY, DAVID STEINART, WAYNE A. HANSEN,
PETER HOOGEWERF, BARRY CROCKER, GEORGE GOW, MILES F. KILSHAW,
AND ROBERT B. MURRAY.

(COLLECTIVELY, THE “RESPONDENTS”)

Amended Notice of Hearing Under Section 161

[para 1]
1. TAKE NOTICE that a hearing will be held (the “Hearing”) to give the Respondents an opportunity to be heard before the British Columbia Securities Commission (the “Commission”) considers whether it is in the public interest to make the following orders:

1.1 pursuant to section 161(1)(b) of the Securities Act, R.S.B.C. 1996, c. 418, (the “Act”), that all persons cease trading in or purchasing the securities of Foster First Financial Corporation (“Foster First”), M.W. Foster & Associates Ltd. (“M.W. Foster”), Specialized Surgical Services Inc. (“Specialized Surgical”), and Falconhouse Investments Inc. (“Falconhouse”);

1.2 pursuant to section 161(1)(c) of the Act that any or all of the exemptions described in sections 44 to 47, 74, 75, 98 or 99 of the Act do not apply to the Respondents;

1.3 pursuant to section 161(1)(d) of the Act that James Swanney (“Swanney”), Mark Webster Vaughan Foster (“Foster”), Robert B. Murray (“Murray”), David Steinart (“Steinart”), Wayne A. Hansen (“Hansen”), Peter Hoogewerf (“Hoogewerf”), Barry Crocker (“Crocker”), George Gow (“Gow”), and Miles F. Kilshaw (“Kilshaw”) and Teresa Inez Marie Mitrou (“Mitrou”) be prohibited from becoming or acting as a director or officer of any issuer;

1.4 pursuant to section 161(1)(d) of the Act that the Respondents be prohibited from engaging in investor relations activities;

1.5 pursuant to section 161(1)(e) of the Act that the Respondents are required to disseminate any orders or other records as required by the Commission to clients of Foster First;

1.6 pursuant to section 162 of the Act that the Respondents each pay an administrative penalty;

1.7 pursuant to section 174 of the Act that the Respondents pay prescribed fees or charges for the costs of or related to the Hearing; and

1.8 to make any other orders as may be appropriate in the circumstances.

[para 2]
2. AND TAKE NOTICE that the Commission will be asked to consider the following facts and allegations in making its determinations:

The Parties

2.1 Foster First is a non-reporting issuer incorporated in British Columbia and was a registrant under the Act. Foster First was registered as a securities dealer from December 18, 1997, to April 26, 2000, and as a mutual fund dealer from April 26, 2000, to August 19, 2000.

2.2 Foster was registered as a mutual fund salesperson from November 13, 1990, to September 22, 2000, for numerous employers including Foster First from December 22, 1997, to September 22, 2000. At all material times, Foster, Mitrou, and Swanney were directors of Foster First, and Foster owned 95% of the shares in Foster First.

2.3 Mitrou was registered in varying capacities from January 19, 1983, to February 24, 2000. Mitrou was a director of Foster First, and the Compliance Officer of Foster First from December 18, 1997, to February 24, 2000.

2.4 M.W. Foster is a non-reporting issuer incorporated in British Columbia on April 8, 1993. At all material times, the sole director and officer of M.W. Foster was Foster.

2.5 Falconhouse is a non-reporting issuer incorporated in British Columbia on August 15, 1994. At all material times, the sole director, officer and shareholder of Falconhouse was Foster.

2.6 Specialized Surgical is a non-reporting issuer incorporated in British Columbia on March 8, 1995. The directors and officers of Specialized Surgical from January, 1996, forward (the “Relevant Period”) included Swanney, Foster, Murray, Steinart, Hansen, Hoogewerf, Crocker, Gow , and Kilshaw (collectively, the “Specialized Directors”).

Sale and Distribution of Securities

2.7 During the Relevant Period, investors in British Columbia were solicited by Foster, Foster First and its directors, officers, employees and agents (collectively, the “Agents”) to invest in securities of Specialized Surgical.

2.8 Royal Advent Securities Corporation (“RASC”) is a non-reporting issuer incorporated in British Columbia on August 3, 1994, and is a registered securities dealer under the Act. From November 13, 1996 to November 30, 1997 Foster was employed by RASC as a mutual fund salesperson.

The Original Investment in Specialized Surgical:
(i) The RACC Distributions

2.9 The initial solicitation of investment into Specialized Surgical was made on the basis that the individual investors would first purchase securities in Royal Advent Capital Corporation (“RACC”). Then, at some unspecified future time, these RACC securities were to be converted into an equivalent shareholding in Specialized Surgical or the Croft Clinic Limited Partnership.

2.10 During the period from December 1996, to May 1997, the sales agent for the distributions of securities of RACC, including the RACC shares, was RASC.

2.11 The RACC shares were not qualified for distribution to the public under section 61 of the Act. Rather, the RACC shares were sold under various exemptions from the registration and prospectus requirements of sections 34 and 61 of the Act pursuant to the exemptions contained in section 128(c) of the Securities Rules, B.C. Reg. 194/97 (the “Rules”), requiring, among other things, the use of an offering memorandum and a minimum subscription of $25,000.00.

2.12 An offering memorandum dated December 11, 1996, was issued by RACC (the “RACC OM”). However, neither the RACC OM, nor the subscription agreement for the RACC shares, mentioned Specialized Surgical or the Croft Clinic LP, or of the possible exchange of the RACC shares for securities of either Specialized Surgical or the Croft Clinic LP.

2.13 In or about March or April, 1997, RASC, using the RACC OM, raised $485,000 from 18 clients (collectively, the “RACC Investors”) who invested in the RACC shares for the eventual conversion into an equivalent shareholding in Specialized Surgical or the Croft Clinic Limited Partnership. $300,000 of this amount was raised by Foster through his clients. 10% commissions were paid to agents of RASC, including Foster, and RASC was paid a 5% corporate finance fee.

2.14 The RACC shares were risky, illiquid and speculative and unsuitable for many of the investors. Foster did not advise investors that the RACC shares were unsuitable, contrary to sections 14 and 48 of the Rules, which require a registrant to deal fairly, honestly and in good faith with the investor, and to determine whether an investment is suitable for an investor.

2.15 The subscription documents for the RACC shares were accompanied by a Letter of Instruction (the “Letter”). Once signed by the RACC Investors, the Letter gave RACC authority, on behalf of the RACC Investors, to exercise an exchange option (the “Option”) attached to the RACC shares. The Option purported to convert the RACC shares into an equivalent number of securities of Specialized Surgical or the Croft Clinic LP. These securities of Specialized Surgical or the Croft Clinic LP were to be issued some time in the future, under the terms and conditions specified in a future offering memorandum of either Specialized Surgical or Croft Clinic LP. The terms of the Letter were intentionally left vague, as it had not been determined if Specialized Surgical, or Croft Clinic LP, would be a party to the Option.

2.16 The Option was not included in the terms set out in the RACC OM, and as a result the RACC Investors were not given full disclosure relating to the securities that they were actually purchasing or the use of the subscription proceeds.

2.17 Foster knew or reasonably ought to have known that the RACC OM was not in the required form to solicit investments due to its lack of disclosure relating to the Option and the securities actually being sold, as required by section 133 of the Rules. Foster traded in the RACC shares knowing of the deficiencies in the RACC OM.
2.18 As a result of the deficiencies in the RACC OM, the RACC shares were issued without an exemption under the Act. As a consequence, Foster participated in an illegal distribution of the RACC shares, contrary to s. 61 of the Act.

(ii) The RACC Rescission

2.19 In the summer of 1997, RACC and RASC determined that the distribution under the RACC OM may have been a potential breach of the Act and took steps to unwind the transaction. RACC and RASC determined that the original arrangement to exercise the Option, exchanging RACC shares for securities of Specialized Surgical or the Croft Clinic LP, was unworkable.

2.20 On or about September 15, 1997, RACC delivered a Rescission Notice to the RACC Investors providing that they had the right of rescission relating to the RACC shares that could be exercised within 15 days of the notice date. Attached to the Rescission Notice was a Rescission Acceptance and Reinvestment Instruction (collectively, the “Rescission Documents”).

2.21 The Rescission Documents, once executed by the RACC Investors, would allow RACC to redirect funds made available through the rescission of the RACC shares to Specialized Surgical. Specialized Surgical was to then issue an equivalent number of securities of Specialized Surgical to the RACC Investors. In most cases, Foster assisted the RACC Investors in completing and returning the Rescission Documents to RACC. Eventually, all of the RACC Investors executed and returned the Rescission Documents.

(iii) The Specialized Surgical Distributions

2.22 Foster further assisted the RACC Investors in completing the new subscription forms for the RACC Investors to obtain securities of Specialized Surgical. Shares issued by Specialized Surgical through the Rescission Documents were to be subject to the terms and conditions set out in an offering memorandum issued by Specialized Surgical on August 26, 1997 (the “Transitional OM”).

2.23 The securities of Specialized Surgical were not qualified for distribution to the public under section 61 of the Act. They were sold under various exemptions from the registration and prospectus requirements of sections 34 and 61 of the Act pursuant to the exemption contained in s. 128(b) of the Rules.

2.24 Section 128(b) of the Rules requires, among other things, the use of an offering memorandum and a minimum subscription of $25,000.00.

2.25 The Transitional OM indicated:

2.25.1 a maximum offering of $2,500,100 in units of $25,001 comprised of 1 Class A Voting share, and 25,000 Class B Non-voting shares;

2.25.2 Specialized Surgical intended to use the proceeds of the offering to repay “subscriptions” receivable of $485,000, costs of the offering, and to cover part of the costs of renovating the Croft Clinic in the amount of $1,700,000 including:

2.25.3 the total cost of the project was in excess of $13,000,000;

2.25.4 the Croft Clinic would open in the third quarter of 1998; and

2.25.5 the directors and officers of Specialized Surgical included Foster.

2.26 The securities of Specialized Surgical were risky, illiquid and speculative and as a result were unsuitable investments for many of the investors. Foster did not advise investors that the securities of Specialized Surgical were unsuitable investments, contrary to sections 14 and 48 of the Rules.

2.27 Section 133(c) of the Rules states that an offering memorandum must be in the required form, which includes being free from misrepresentations. The Transitional OM contained misrepresentations, in breach of section 133(c) of the Rules, including:

2.27.1 Specialized Surgical did not intend to repay subscription receivables of $485,000;

2.27.2 it did not disclose that Specialized Surgical was paying commissions to the agents of RASC for the exercise of the rescission in favour of Specialized Surgical. The agents of RASC included Foster, who was also a director of Specialized Surgical;

2.27.3 it did not disclose the conflict of interest Foster had as an agent of RASC and as a director of Specialized Surgical; and

2.27.4 the Croft Clinic would not be open by the third quarter of 1998.

2.28 There was no exemption available for the distribution of the securities under the Transitional OM, because investors were not given full disclosure about the use of the subscription proceeds and misrepresentations were made to them as set out in paragraph 2.27. Due to those misrepresentations and the lack of disclosure, the Transitional OM was not in the required form pursuant to section 133 of the Rules. As a result, the distribution of shares pursuant to the Transitional OM was an illegal distribution, in which Foster participated as a director and officer of Specialized Surgical, contrary to section 61 of the Act.

2.29 Foster, Swanney, Steinart, Hansen, Hoogewerf, Crocker and Gow (collectively, the “Initial Specialized Directors”), as directors of Specialized Surgical at the time of the Transitional OM, authorized, permitted or acquiesced in the misrepresentations made in the Transitional OM, contrary to the public interest.

2.30 The Initial Specialized Directors, as directors of Specialized Surgical, failed to ensure that Form 20A Acknowledgements and Form 20 Reports of Exempt Distribution were properly filed with the Commission by Specialized Surgical. As a result, the Initial Specialized Directors participated in the breach of sections 135 and 139 of the Rules by Specialized Surgical.

2.31 The Form 20s that were filed with the Commission by Specialized Surgical contained misrepresentations that the distributions were made to sophisticated purchasers and failed to disclose the true nature of the distributions. The Initial Specialized Directors authorized, permitted or acquiesced in these misrepresentations, contrary to the public interest.

2.32 The Initial Specialized Directors, by means of the conduct described in paragraphs 2.28 to 2.31, were in breach of their duties as directors of Specialized Surgical, contrary to section 118 of the Company Act, R.S.B.C. 1996, c. 62 (the “Company Act”).

Additional Specialized Surgical Distributions

2.33 During the period from December 12, 1997, forward, Foster First was the sales agent for the distributions of securities of Specialized Surgical. These further distributions were solicited by Foster First, Foster and their respective directors, officers, employees and agents (collectively, the “Foster First Agents”).

2.34 Foster First received a 10% commission for each subscription, plus an additional 5% corporate finance fee from Specialized Surgical. In addition, Foster First received a payment of 2% of gross proceeds from Specialized Surgical for any subscriptions for securities effected by any party other than Foster First.

2.35 The securities of Specialized Surgical were not qualified for distribution to the public under section 61 of the Act. Rather, the securities of Specialized Surgical were sold under various exemptions from the registration and prospectus requirements of sections 34 and 61 of the Act pursuant to the exemption contained in s. 128(b) of the Rules, requiring, among other things, the use of an offering memorandum and a minimum subscription of $25,000.

2.36 An offering memorandum dated November 12, 1997, was issued by Specialized Surgical (the “Specialized Surgical OM”) that contained misrepresentations in breach of s. 133(c) of the Rules, including:

2.36.1 it did not disclose the conflict of interest between the Foster First Agents and Specialized Surgical; and

2.36.2 it did not disclose that Specialized Surgical was paying commissions to the Foster First Agents, including Foster, a director of Specialized Surgical, for the sale of its securities.

2.37 From about November, 1997, to January, 1999, using the Specialized Surgical OM, Foster First Agents raised in excess of $500,000 from more than 20 clients and others (collectively, the “Specialized Surgical Investors”) for investment in the securities of Specialized Surgical. Foster effected most of the distributions of the Specialized Surgical shares during that period.

2.38 The securities of Specialized Surgical were risky, illiquid, speculative and were unsuitable investments for many of the investors. Foster did not advise investors that the securities of Specialized Surgical were unsuitable, contrary to sections 14 and 48 of the Rules. In addition, Foster knew or ought reasonably to have known that the Specialized Surgical OM was not in the required form to solicit investments, as required by section 133 of the Rules.

2.39 No amendments were made to the Specialized Surgical OM to disclose material facts or matters that arose subsequent to November 12, 1997, including:

2.39.1 the terms of the contract between Specialized Surgical and Foster First as its marketing agent;

2.39.2 the potential conflict of interest between the Foster First Agents and Specialized Surgical;

2.39.3 that liens had been registered against the Croft Clinic and that foreclosure proceedings had been instituted by one or more of the mortgage holders in 1998 and 1999;

2.39.4 that the Croft Clinic would not be open for business by the third quarter of 1998;

2.39.5 the changes in directors and officers of Specialized Surgical to include Robert Murray, one of the Foster First Agents;

2.39.6 the financial statements included were out of date and the financial information and condition of Specialized Surgical were not up-dated; and

2.39.7 the change of auditors.

2.40 There was no exemption available for the distribution of the securities under the Specialized Surgical OM, because of the misrepresentations that were made to the investors as set out in paragraph 2.36 and the failure to disclose material facts as set out in paragraph 2.39. Due to those misrepresentations and the lack of proper disclosure, the Specialized Surgical OM was not in the required form pursuant to section 133 of the Rules. As a result, the distribution of shares under the Specialized Surgical OM was an illegal distribution, in which the Specialized Directors participated, contrary to section 61 of the Act.

2.41 The Specialized Directors authorized, permitted or acquiesced in the misrepresentations made in the Specialized Surgical OM, contrary to the public interest.

2.42 The Specialized Directors failed to ensure that Form 20A Acknowledgements and Form 20 Reports of Exempt Distribution were properly filed with the Commission by Specialized Surgical. As a result, the Specialized Directors participated in the breach of sections 135 and 139 of the Rules by Specialized Surgical.

2.43 The Form 20s that were filed with the Commission by Specialized Surgical contained misrepresentations that the distributions were made to sophisticated purchasers and failed to disclose the true nature of the distributions. The Specialized Directors authorized, permitted or acquiesced in these misrepresentations, contrary to the public interest.

2.44 The Specialized Directors, by means of the conduct described in paragraphs 2.40 to 2.43, were in breach of their respective duties as directors of Specialized Surgical, contrary to section 118 of the Company Act.

Other Private Distributions of Specialized Surgical

2.45 Foster acted as agent and assisted in the distribution of Specialized Surgical shares that were not qualified for distribution to the public under section 61 of the Act, and that had no exemption from the registration requirements of the Act, on the following occasions:

2.45.1 On or about December 1, 1997, there was a distribution of 25,000 shares of Specialized Surgical from a director/officer of Specialized Surgical, to a client of Foster.

2.45.2 On or about April 6, 1998, there was a distribution of 50,000 shares of Specialized Surgical at a price of $1.00 per share from another director/officer of Specialized Surgical, to a second client of Foster. Foster received a commission of 300,000 shares of Specialized Surgical at a deemed value of $0.17 per share, which were transferred from Steinhart to Falconhouse.

2.46 Foster by reason of his participation in the illegal distributions of Specialized Surgical securities as set out in paragraph 2.45, and due to his position as a director and officer of Specialized Surgical and as a registrant under the Act, acted contrary to sections 34 and 61 of the Act.

Distributions of Foster First and M.W. Foster

2.47 Between September 1997 and October 2000, while a director of Foster First, Foster effected at least fifteen (15) distributions of shares of Foster First to his clients. From December 18, 1997, to February 24, 2000, Mitrou was a director and Compliance Officer of Foster First, during which time at least eleven (11) distributions of shares of Foster First were made. The shares of Foster First were not qualified for distribution to the public under section 61 of the Act and no exemption from the registration and prospectus requirement of the Act was available.

2.48 Foster, by reason of his participation in the illegal distributions of Foster First securities as set out in paragraph 2.47, and as a registrant under the Act, acted contrary to sections 34 and 61 of the Act. As a director and officer of Foster First, Foster knew or ought to have known of the illegal distributions set out in paragraph 2.47, and that the distributions were contrary to the Act.

2.49 Mitrou, due to her position as Compliance Officer of Foster First, permitted, authorized or acquiesced in the illegal distribution of Foster First securities as set out in paragraph 2.47, and as a result acted contrary to sections 34 and 61 of the Act. As a director of Foster First, Mitrou knew or ought to have known of the illegal distributions set out in paragraph 2.47, and that the distributions were contrary to the Act.

2.50 Between March 1998 and June 2000, while the sole director and officer of M.W. Foster, Foster effected at least thirteen (13) distributions of shares of M.W. Foster to his clients. The shares of M.W. Foster were not qualified for distribution to the public under section 61 of the Act and no exemption from the registration and prospectus requirement of the Act was available.

2.51 Foster, by reason of his participation in the illegal distributions of M.W. Foster securities as set out in paragraph 2.50, and as a registrant under the Act, acted contrary to sections 34 and 61 of the Act. As a director and officer of M.W. Foster, Foster knew or ought to have known of the illegal distributions set out in paragraph 2.50, and that the distributions were contrary to the Act.

Undisclosed Conflicts of Interest

2.52 Specialized Surgical, Foster and Foster First were connected parties within the meaning of section 75 of the Rules, which states, among other things, that a registrant and a person that has any relationship with the registrant are connected parties if such a relationship leads a reasonable prospective purchaser of securities to question whether the registrant and the person are independent of each other. In particular:

2.52.1 Foster was a director of Forster First during the Relevant Period, and was a director and officer of Specialized Surgical from or about June, 1997 until December 31, 1997.

2.52.2 Foster was an officer of Specialized Surgical from January, 1998, to June, 1999.

2.52.3 Robert Murray, a Foster First Agent, replaced Foster as a director of Specialized Surgical and acted in such a capacity from May 21, 1998, to May 31, 1999.

2.52.4 Foster purchased 25,001 shares of Specialized Surgical on or about September 30, 1997.

2.52.5 Foster received a transfer of 100,000 shares of Specialized Surgical from Swanney on or about March 27, 1998, and a further 100,000 shares of Specialized Surgical from treasury on October 8, 1999, as partial compensation for past services rendered to Specialized Surgical.

2.52.6 On or about May, 1998, M.W. Foster entered into a contract with Specialized Surgical to provide administrative services to Specialized Surgical and those services were provided by Foster First Agents until about June, 1999.

2.52.7 On or about September 23, 1997, a Subordination Agreement was executed by Swanney with respect to a loan by Swanney to Foster First of $100,000 that represented the working capital requirement for Foster First as a securities dealer.

2.52.8 Swanney was a director and shareholder of Foster First from September 15, 1997, until some time in the spring or summer of 1999.

2.52.9 Foster First entered into a contract with Specialized Surgical in which Foster First agreed to provide marketing and sales services and in return receive commissions and finance fees.

2.52.10 Foster First took steps to set up a branch office at the offices of Specialized Surgical.

2.52.11 The investor relations person for Specialized Surgical worked out of the Foster First office. Upon the departure of the investor relations person, Robert Murray was hired by Foster First to perform investor relations for Specialized Surgical as well as marketing for Foster First.

2.53 Foster First traded in securities of Specialized Surgical, a connected party. The securities of Specialized Surgical were issued in the course of an initial distribution, without disclosing information required by sections 77(1) and 77(3)(a) of the Rules, in breach of sections 79 and 81 of the Rules.

2.54 Foster First did not file the written confirmation of the transaction required by section 36 of the Rules. Foster First did not disclose that the securities of Specialized Surgical were issued by a connected party in breach of section 80(1)(a) of the Rules.

2.55 Foster First and Foster acted as advisers in respect of an initial distribution of the securities of Specialized Surgical, and made recommendations to clients to purchase securities of Specialized Surgical, without disclosing the relationship between Foster, Foster First and Specialized Surgical to clients, contrary to sections 81(1)(a) and 83(1)(a) of the Rules.

2.56 Mitrou, as a director and the Compliance Officer of Foster First, failed to provide adequate supervision or to ensure compliance with the provisions of the Act and Rules with respect to the distributions of securities of Specialized Surgical, contrary to s. 65 of the Rules.

Exempt Product Advising and Suitability of Investment

2.57 The securities of RACC and Specialized Surgical were risky, illiquid and speculative. During the Relevant Period, Foster and Foster First recommended that clients purchase securities of RACC and Specialized Surgical, notwithstanding that that those securities were unsuitable for those clients, in breach of section 48 of the Rules. In some cases, the clients had an unsuitably high percentage of such holdings in their portfolios.

2.58 Some of the clients of Foster and the other Foster First Agents were unsophisticated investors and they relied heavily upon the professional advice and judgment of Foster and the other Foster First Agents. In some instances the clients, encouraged by Foster, transferred funds from money markets or T-bill accounts, and redeemed mutual funds, in order to complete purchases of Specialized Surgical, as recommended by Foster and the other Foster First Agents. To Foster’s knowledge, these purchases were inappropriate, unsuitable and not in the best interests of his clients, in breach of section 14 of the Rules.

2.59 Foster and other Foster First Agents specifically advised a number of their clients to invest in the securities of Specialized Surgical, without being registered as an adviser, contrary to s. 34 of the Act. During the Relevant Period, Foster was registered as a mutual fund dealer, and did not have proper registration under the Act to give advice regarding the securities of Specialized Surgical.

2.60 In recommending the purchase of securities of RACC and Specialized Surgical to clients, Foster and Foster First were required to advise if the investments were unsuitable, given the investment needs and objectives of the client. Foster and Foster First failed to do this, contrary to sections 14 and 48(2) of the Rules.

2.61 Foster First and Foster had incomplete and inadequate know your client forms and information on file. Foster First and Foster failed to learn essential facts relative to clients to determine their general investment needs and objectives and the suitability of proposed investments, in breach of s. 48(1) of the Rules.

2.62 No exemptions from the registration requirements under the Act applied to Foster and the other Foster First Agents.

2.63 Mitrou, as a director and the Compliance Officer of Foster First, failed to provide adequate supervision or to ensure compliance with the provisions of the Act and Rules with respect to the distributions of securities of Specialized Surgical, contrary to s. 65 of the Rules.

Improper Supervision

2.64 Staff of the Commission conducted an audit of the affairs of Foster First in January 1999 and made the following findings:

2.64.1 At the time Mitrou acted as the Compliance Officer for Foster First, Foster and Mitrou failed to comply with section 65 of the Rules that required them to ensure compliance with the Act and the regulations by Foster First and its employees. Foster and Mitrou failed to ensure that new client accounts were approved and further failed to supervise the transactions of Foster First and its employees, contrary to section 47 of the Rules.

2.64.2 Foster First, as a registrant, was required to establish and apply proper compliance and supervision procedures. With proper compliance procedures in place, and properly applied, Foster First should have detected the extent of the activity in the exempt market and the investor accounts and should have been able to detect the unsuitable nature of the investments for the investors. Foster First’s failure to put in place proper compliance procedures in this regard allowed the sale of exempt product to continue unabated.

2.64.3 Foster First’s failure to establish and apply proper compliance and supervision procedures included the following:

2.64.3.1 The blotter did not provide sufficient detail to perform a suitability review and the review was not done on a consistent basis, nor was any review documented as required.

2.64.3.2 Foster First did not maintain a complete and accurate set of records at its chief place of business, in breach of sections 26 to 42 of the Rules.

2.64.3.3 The business procedures manual was not being followed.

2.65 Foster First acted in a manner contrary to sections 27 and 39 of the Rules when it failed to ensure books and records, and in particular, accounting records and blotters were complete and accurate.

2.66 As a result of the Audit, conditions were placed upon the registration of Foster First, by consent, effective April 22, 1999, including a condition that Foster First be restricted from trading in certain types of exempt securities.

2.67 The registration of Foster First terminated on August 19, 2000, and has not since been renewed.

Misrepresentations in Documents

2.68 Foster failed to disclose prior convictions on his Form 4, filed with the Commission, and failed to rectify the Form 4.

2.69 On or about October 31, 1997, Foster filed with the Commission a Form 7A Application for Transfer in order to effect a transfer of his registration from RASC to Foster First. Foster did not disclose changes to the information provided in his Form 4, filed October 4, 1990, including the fact that he had been appointed a director of Specialized Surgical.

2.70 As a result of the failures to disclose accurately the required information in his Form 4 and Form 7A, Foster made misrepresentations in a record required to be filed under the Act, contrary to the public interest.

2.71 The registration of Foster as a mutual fund salesperson was terminated on December 29, 2000, and has not since been renewed.

[para 3]
3. TAKE NOTICE that the Hearing will commence before the Commission, in the 12th Floor Hearing Room, 701 West Georgia Street, Vancouver, British Columbia, on October 15, 2001 at 10:00 a.m.

[para 4]
4. AND TAKE NOTICE that the Respondents may be represented by counsel at the Hearing, and may make representations and lead evidence. The Respondents are requested to advise the Commission of their intention to attend the Hearing by contacting the Secretary to the Commission at P.O. Box 10142, Pacific Centre, 701 West Georgia Street, Vancouver, British Columbia, V7Y 1L2, or by telephone to (604) 899-6500.
[para 5]

5. AND TAKE NOTICE that determinations may be made in this matter if the Respondents or their counsel do not appear at the Hearing.

[para 6]
DATED at Vancouver, British Columbia, on July 18, 2001.

Steve Wilson
Executive Director