Calpine Resources Inc. and Pezim, Page and Ivany (Re)

Gregory Walsh and Catherine Esson, for the Superintendent of Brokers.

D.M.M. Goldie, Q.C., D.G. Cowper, and D.M. Andrews, for Prime Resources Group Inc.

Winton K. Derby, Q.C., J. Kenneth McEwan, and Nicholas Hughes, for Murray Pezim.

Peter W. Butler, Q.C., and Robert S. Anderson, for Lawrence Page.

Leon Getz, Howard Shapray and Gerald Cuttler, for John Ivany.

DECISION OF THE COMMISSION:--

INTRODUCTION

We released our findings in this matter on November 16, 1990. On December 3, 1990, we reconvened to hear submissions with respect to the terms of orders to be made by the Commission under sections 144 and 154.2 of the Securities Act. This decision should be read in conjunction with the findings.

The Superintendent argued that, based on the findings, the Commission should order that:

	- Senior Management resign as directors of reporting issuers and be prohibited from becoming or acting as directors or officers of any reporting issuer for a period to be specified by the Commission;
	- the exemptions described in sections 30 to 32, 55, 58, 80 and 81 of the Act do not apply to Senior Management, except for the sole purpose of liquidating their holdings through a registered dealer, for a period to be specified by the Commission; and
	- Senior Management pay the prescribed fees and charges for the costs of or related to the hearing as incurred by the Commission and the Superintendent, with the amount to be determined on further application to the Commission if the parties are unable to agree on the amount.

The Respondents argued that the Superintendent had failed to prove the central allegations of his case and that the contraventions found by the Commission were really just peripheral matters and involved policy questions on which reasonable persons might disagree. They also argued that the hearing process had already caused them significant hardship and adverse publicity. Accordingly, they took the position that no orders should be made against them under either section 144 or section 154.2.

Section 144 of the Act empowers the Commission to make certain orders where it considers that it is in the public interest to do so.

THE OPTIONS

Our findings identified four occasions during July and August 1989 when Prime or Calpine contravened section 67 of the Act in failing to disclose material changes in their affairs before granting or repricing options. We also found that Pezim, on two occasions, falsely certified to the Vancouver Stock Exchange (the "Exchange") that there were no material changes in the affairs of Calpine and Prime, respectively, that had not been previously disclosed.

The Respondents argued that these contraventions resulted from Senior Management's reliance on the so-called "Chinese Wall" system, under which they were not informed of assay results until they were publicly disclosed. They advised that, as a result of our findings, they had already dismantled the "Chinese Wall" and, therefore, that no orders were necessary for this aspect of the findings to have the intended regulatory effect.

Senior Management also argued that, in employing the "Chinese Wall", they thought they were complying with disclosure requirements. They described the "Chinese Wall" as "a respected and accepted procedure" and claimed that it was set up with the advice of legal counsel. They also claimed that it was discussed with regulators and given the "green light", and that it was known to the public.

We can find no foundation in the evidence for these arguments. Nothing in the evidence indicated that the "Chinese Wall" was a respected or accepted procedure or, indeed, whether it had ever been used in this way by anyone other than the Respondents. No evidence was provided of any legal advice supporting the "Chinese Wall". There was testimony that the "Prime philosophy" was discussed with regulators but there was no suggestion in the evidence that this included the "Chinese Wall". Nor was there any evidence that the existence of the "Chinese Wall" was disclosed to or known by the public.

Even if Senior Management thought the "Chinese Wall" was appropriate when it was set up, it should have been obvious to them that it was inappropriate to rely on it in the circumstances that prevailed in July and August 1989. How could persons with the vast experience of Pezim, Page and Ivany have considered it reasonable to engage in securities transactions, most notably in repricing their own options in the midst of an active and increasingly successful drilling program, without even considering whether all material changes had been disclosed!

Our concern is with the nature and extent of an issuer's obligation to disclose information to the public, not with particular procedures that an issuer may choose to adopt to control the internal flow and public release of information. The Respondents' preoccupation in their submissions with the workings of the "Chinese Wall", and their decision to restructure it following the release of our findings, misses the main point. Senior Management had the responsibility to ensure disclosure by Prime and Calpine of all material changes when they issued securities, and this responsibility was not affected by the existence or non-existence of a "Chinese Wall".

Furthermore, it is important to note that, even after Pezim was informed of the discovery of visible gold in hole 109, he proceeded to certify to the Exchange, in connection with the options granted to MacConnell, that there were no material changes in Calpine's affairs that had not been disclosed. This certification stands in stark contrast to the significance of the information as expressed by Idziszek and as indicated by Pezim's jubilant reaction to it. Pezim ought to have known that the certification was false. Despite the Respondents' arguments to the contrary, the certification displays, at best, a casual and indifferent attitude to regulatory requirements.

Similarly, the Respondents' approach to the pricing of options reflected a lack of concern with the principle underlying section 67 of the Act and the Exchange's options policy. By mechanically applying the ten day average pricing formula in a rising market, in circumstances in which the Exchange had previously advised that the formula was inappropriate, the Respondents unfairly set options prices that were substantially "in the money". Senior Management's assumption that the pricing of options was not an important issue, because the Exchange could be relied upon to correct any inappropriate prices, was an abdication of their responsibility to ensure that options were priced fairly and reflected all material changes in the issuer's affairs.

The Respondents argued that, because this case was the first time the Commission had dealt with the question of a "Chinese Wall", our findings on this point represented a new policy pronouncement, made with the benefit of hindsight, on a point on which reasonable persons could disagree. They said it would be unfair to penalize them on the basis of this finding.

We reject this characterization of our findings.  The Respondents had no reasonable basis to consider that they could absolve themselves of their disclosure obligations by setting up a "Chinese Wall". It has been well established in previous decisions of this Commission that directors are responsible for ensuring that an issuer complies with its disclosure obligations. Our findings are based not on a new policy but on well established and fundamental principles of securities regulation.

Public confidence in the fairness of securities markets is damaged when directors and officers of reporting issuers, and their associates and employees, are seen to benefit substantially from unfairly priced options. Whether they intended it or not, Senior Management received a benefit of $2.1 million as a result of their failure to ensure that Prime complied with its disclosure obligations and their abuse of the options pricing formula. The public capital markets can be fair, and be seen to be fair, only if participants of the stature and experience of the Respondents are willing to comply with the basic regulatory requirements that govern trading in securities.

THE PRIVATE PLACEMENT

We found that Calpine contravened section 67 of the Act in failing to disclose in the July 14, 1989, news release that Prime was to be the placee under Calpine's private placement of two million units and in failing to disclose the effect of this transaction on the control of Calpine. We also found that Calpine misled the Exchange by representing in the July 17 notice that the private placement was to be brokered by Prime Equities and by representing in the August 18 certified filing that there were no material changes in the affairs of Calpine that had not previously been disclosed.

The Respondents dismissed these findings as being relatively insignificant. They argued that our finding that the placee should have been disclosed was a matter of opinion, arrived at with hindsight. They also suggested that it would have been difficult to make the disclosure because of the technical problem in identifying the actual entity that would take down the shares. They admitted that the notice concerning Prime Equities was misleading but argued that it was not intended to mislead anyone and that no one was in fact misled. Our finding on this point was described as "a salutary reminder that formal notices to the Exchange should be strictly factual". The Respondents noted that the false certification on August 18 was just a further consequence of their reliance on the "Chinese Wall".

We do not consider the question of the materiality of the placee to be a mere difference of opinion. As our findings stated, "This particular news release cried out to have the placee identified, given the number of shares to be issued and the non arms length relationship of the parties to the transaction." We further noted that "If Senior Management could not recognize the materiality of this information when they issued the July 14 news release, it should have become apparent in the following days when investors and brokers began phoning to ask who the placee was. A clarifying news release could and should have been issued at that time."

Pezim testified that he told anyone who asked that Prime was the placee. This fact demonstrates that it would not have been difficult to identify the placee in the news release and reveals a disturbing attitude to fundamental disclosure obligations. How can there be a level playing field in the securities market if certain investors and brokers who happen to ask for the information are "in the know" while everyone else is "in the dark"!

In arguing that the Exchange was not misled by the notice concerning Prime Equities, the Respondents pointed to testimony by Frank Stronach of the Exchange that no one deliberately tried to mislead him. However, Stronach's testimony on this point related only to the question of when the funds for the private placement were paid. No one testified one way or the other as to whether the Exchange was misled concerning the role of Prime Equities in the private placement.

The July 17 notice is misleading on its face, and nothing was provided to the Exchange to suggest that Prime was just "trying it on". The effect of the notice in misleading the Exchange did not have particularly significant consequences but, when viewed in conjunction with the failure to disclose the placee in the July 14 news release, it shows that the Respondents took a cavalier attitude to the contents of important documents related to the public disclosure and regulatory approval of a very significant transaction.

THE ALC MATTER

We found that Prime contravened section 67 of the Act in failing to make timely disclosure of the default by Canarim under the guaranteed agency agreement following the withdrawal by ALC of its purchase of one million units under Prime's public offering.

The Respondents argued that the non-disclosure was a judgment call, with respect to which we had the benefit of hindsight and simply came to a different conclusion than the Respondents. They suggested that Senior Management were faced with a dilemma between meeting their fiduciary obligations to Prime and their duties under the Act and that they made an honest judgment to favour the interests of Prime. They also argued that, in any case, the circumstances of the ALC matter were unusual and would be very unlikely to recur and that, accordingly, no order would be in the public interest under section 144.

We do not accept that this was merely a judgment call. Canarim was obligated under the guaranteed agency agreement to pay for the units on September 29, 1989. When Canarim failed to make payment on that date, it was in default of the agreement. The default under the financing agreement was undoubtedly a material change in Prime's affairs. Whether Canarim was justified in taking its position because of the background to the arrangement, and whether Prime thought the problem would be resolved by litigation or compromise, were irrelevant to Prime's obligation under section 67.

As to the dilemma faced by Senior Management with respect to the disclosure obligation and the interests of Prime, section 67(2) of the Act provides a mechanism for confidential disclosures to address cases where disclosure would be unduly detrimental to an issuer's interests. There was no evidence that the Respondents made any effort to use this provision.

The fact that the particular circumstances of this matter were unusual and are unlikely to be repeated is also irrelevant. The Respondents failed to meet their disclosure obligations under the Act and had no reasonable basis for concluding that disclosure was not required. The result of their failure was that Prime's shares traded actively for twenty days, during which the trading value was $14 million, while knowledge of a material change in its affairs was restricted to the Respondents and certain brokers involved in the deal or in the rumour mill.

CONCLUSIONS

Senior Management were responsible for the fact that Prime and Calpine committed a series of contraventions of disclosure obligations and misled the Exchange on several occasions. Their conduct showed a pattern of disregard for regulatory requirements in a variety of circumstances.

The purpose of the Act is to regulate trading in securities and one of its principal tools for doing so is the establishment of disclosure requirements. Senior Management are highly experienced and knowledgeable participants in the market and there was no reasonable explanation for their failure to ensure that Prime and Calpine complied with regulatory requirements. The shares of Prime and Calpine were the two most actively traded listings on the Exchange in 1989. It is damaging to public confidence in the integrity of the securities market and prejudicial to the public interest when such significant market participants contravene basic and fundamental rules.

The improper conduct of Senior Management was related to distributions of securities under the exemptions in the Act. To indicate the seriousness with which we view these contraventions, we consider it to be in the public interest to remove Senior Management's right to rely on the exemptions.

Pezim, Page and Ivany were directors and senior management of Prime and Calpine, and had responsibility for ensuring compliance with securities regulatory requirements. We do not propose to differentiate among them in making our orders.

COSTS

Section 154.2 of the Act provides that "The person presiding at a hearing required or permitted under this Act or the regulations may order a person whose affairs are the subject of the hearing to pay prescribed fees or charges for the costs of or related to the hearing that are incurred by or on behalf of the commission or the superintendent ...".

This power relates only to the recovery of the costs to the public of holding the hearing. It is not a power to award costs as between parties. The purpose of ordering payment of costs under section 154.1 is not to penalize the persons affected but to require those persons, rather than the general public, to bear the costs of a regulatory proceeding necessitated by their conduct.

The Respondents argued that we should make no order for payment of costs. They said that the length of the investigation and the hearing were made necessary only by the allegations related to insider trading and breach of directors' duties, which were not proven. However, most of the hearing related to evidence concerning those matters in respect of which we did find contraventions. Furthermore, the suspicions which led to the other allegations, about which the Respondents complained, were aroused, quite reasonably, by the Respondents' own conduct in failing to make required disclosure and in filing misleading documents with the Exchange.

In the circumstances, we consider that the Respondents should be required to pay a substantial portion of the costs.

ORDERS

	We order:
	- under section 144(1)(c) of the Act, that the exemptions described in sections 30 to 32, 55, 58, 80 and 81 do not apply to Pezim, Page and Ivany for a period of one year, beginning January 1, 1991; and
	- under section 154.2 of the Act, that Pezim, Page and Ivany pay prescribed fees or charges for two thirds of the costs of or related to the hearing that have been incurred by the Commission and the Superintendent, with the amount to be determined on further application to the Commission if the parties are unable to agree on the amount.