COR #94/073

Kathleen Reilly, for Commission staff. Harry Cluade Faulkner, on his own behalf.

On December 18, 1991, the Superintendent of Brokers issued a notice of hearing under section 144(1) of the Securities Act, S.B.C. 1985, c. 83, setting out certain allegations with respect to the conduct of Harry Claude Faulkner, Peter Hunton Blanchet and Margaret Lewis and asking the Commission to determine whether to make orders under sections 144(1)(c), 144(1)(d) and 154.2 of the Act against them.

On April 9, 1992, a hearing was held before another panel of the Commission.  Counsel for Commission staff represented that Lewis had settled the proceedings against her and that Blanchet and Faulkner had agreed to settle the proceedings against them, but had not yet signed Settlement documents. Staff also represented that Faulkner had admitted the facts and allegations as set out in the notice of hearing; that Faulkner and Blanchet had agreed to the removal of their exemptions and to a prohibition against their acting as directors or officers of any reporting issuer, or any issuer that provides management services to a reporting issuer, for periods of 12 and 5 years, respectively; and that Faulkner had agreed to pay costs in the amount of $5,000.

On June 5, 1992, Blanchet signed the Settlement documents, including an agreed statement of facts and undertaking, and the Commission issued orders under section 144(1)(c) and (d) of the Act, as described above, against him.

Faulkner did not sign the Settlement documents.  On June 9, 1993, the Superintendent amended the notice of hearing to remove Blanchet and Lewis as respondents and to set down the hearing with respect to Faulkner.  The hearing was held on August 4, 1993.

The allegations in this matter concern the conduct of Faulkner in connection with the affairs of International Shasta Resources Ltd.  Commission staff allege that Faulkner misappropriated funds from Shasta, failed to cause Shasta to disclose material changes in its affairs, traded in Shasta's shares with knowledge of material facts or material changes in Shasta's affairs that he knew had not been generally disclosed, caused Shasta to breach its listing agreement with the Vancouver Stock Exchange, breached his duties as a director of Shasta, and caused Shasta to breach the Company Act prohibition against providing financial assistance to a director.

2. BACKGROUND

International Shasta Resources Ltd. is incorporated under the Company Act, R.S.B.C. 1979, c. 59.  It is a reporting issuer under the Act and its common shares are listed on the Vancouver Stock Exchange.

Faulkner was the president and a director of Shasta from September 2, 1966, the date of incorporation, until October 11, 1988.  During this period, he managed the business and affairs of Shasta on a day to day basis.  All of the Shasta's news releases were signed by Faulkner.

Harco Management Ltd. was a private company incorporated under the Company Act and controlled by Faulkner.  Its primary purpose was to provide Faulkner's management services to Shasta.  Shasta and Harco entered a management services contract effective October 1, 1981, for a three year period. It was renewed for a further three years effective October 1, 1984, and for five years effective October 1, 1987.

The renewal of the management contract effective October 1, 1987, established Harco's remuneration at $48,000 per year. The renewal was approved by Shasta's shareholders.  Under Shasta's listing agreement with the Exchange, the renewal was required to be filed with and accepted by the Exchange.  The Exchange has no record of approval having been sought or granted for the remuneration under the contract, which was in excess of the $24,000 maximum permitted by Exchange policy. Faulkner claimed that Shasta's lawyer obtained verbal approval from the Exchange.

Blanchet was a director of Shasta from September 2, 1966, to October 11, 1988.  Lewis, a cousin of Faulkner, was the secretary of Shasta between July 25, 1986, and October 11, 1988.

Shasta was in the business of resource exploration.  It held an interest in some oil and gas leases in Kentucky, which included a few producing oil wells that operated at a loss.  It also held interests in three mineral properties in British Columbia and Arizona, all of which were at the exploration stage.

Shasta's total assets at April 30, 1988, were $814,492, of which $432,653 represented investments in resource properties, $272,669 represented cash and $86,776 represented loans receivable from Faulkner.  For the fiscal year ended April 30, 1988, Shasta received operating revenue of $44,432 and incurred an operating loss of $27,882 before general and administrative expenses of $185,091.  After taking into account "other items", the net loss for the year was $86,430.

During the year, Shasta raised $538,000 in new capital under a private placement and the exercise of warrants.  Of this, $250,000 was raised through a private placement in June 1987 of 1,000,000 units at 25 cents.  Each unit comprised one share and one warrant to purchase, by April 10, 1988, a further share at 30 cents.  Faulkner purchased 150,000 of the units. The remaining $288,000 was raised from the exercise of 960,000 of the 1,000,000 warrants.  The new capital, plus $100,000 raised from the sale of geological data, allowed Shasta to fund its general and administrative expenses and the loss on its oil operations.

For the six months ended October 31, 1988, Shasta received operating revenue of $14,364 and incurred an operating loss of $15,984.  General and administrative expenses of $89,950 resulted in a net loss of $105,934.  Loans receivable from Faulkner and Harco increased by $115,418.  No new capital was raised during this period.  By October 31, 1988, cash was reduced to $62,072.

Shasta, Harco and Faulkner all maintained bank accounts at a branch of the Bank of Nova Scotia in North Vancouver. Faulkner had sole signing authority over Harco's account. Payments from Shasta's account required the authorization of Faulkner and any other director of Shasta.  According to Faulkner, the bank staff considered Shasta, Harco and Faulkner to be one and the same, because Faulkner handled all three accounts.

Shasta also maintained an account at a branch of the Royal Bank of Canada in Vancouver.  There was no evidence as to the signing authority for this account but the cheques in evidence appear to be signed by Faulkner and Blanchet.  In addition, Shasta had a bank account in Kentucky, over which Faulkner had sole signing authority.

Between May 1, 1987, and September 6, 1988, Shasta made payments totalling about $190,000 to Faulkner and Harco, over and above payments under the management agreement and reimbursements for expenses.  These payments were not authorized by the directors of Shasta.  No invoices were submitted to Shasta for the payments and no liability existed for them.  Exchange approval for the payments was not sought or received.

The unauthorized payments during the fiscal year May 1, 1987, to April 30, 1988, totalled about $80,000.  Harco received unauthorized payments of about $20,000 in May and $28,000 in June, part of which Harco repaid in subsequent months, and Faulkner received $50,000 on November 2, 1987.

The unauthorized payments subsequent to April 30, 1988, totalled about $110,000, of which $28,000 was paid out in May, $17,000 was paid out in June, $14,000 was paid out in July and $51,000 was paid out in August.

Although Faulkner described the payments as loans or advances, only the $50,000 paid to him on November 2, 1987, was covered by a promissory note.  This note was signed by Faulkner and witnessed by Blanchet.  It provided for interest to be paid at the rate of 10 per cent per year and was due on or before April 30, 1989.

Under a guarantee dated November 6, 1987, and signed by Faulkner on behalf of Shasta, Shasta guaranteed payment to the Bank of Nova Scotia of all debts and liabilities of Harco. This guarantee was not authorized by the directors of Shasta or approved by the Exchange.  A document signed by Margaret Lewis at the request of Faulkner, purporting to certify that the directors of Shasta had passed a resolution approving the guarantee and authorizing Faulkner to execute it, was provided to the Bank.  Lewis has admitted that this document was false and that there was no resolution.

No news releases were issued during this period by Shasta to disclose the payments or the guarantee.  Some disclosure of the payments was provided in financial statements, but they did not disclose the guarantee.  The interim financial statements for the six months ended October 31, 1987, which were filed with the Commission on January 18, 1988, showed an increase in "loans receivable [from] officer and related companies" of $28,778.  This appears to reflect the advances to Harco up to October 31, 1987.  The payment of $50,000 to Faulkner two days later, on November 2, 1987, was not disclosed as a subsequent event.

Shasta's audited annual financial statements for the year ended April 30, 1988, which were dated September 6, 1988, disclosed the following in a note on related party transactions:

At April 30, 1988, $86,776 (1987- $6,621) was receivable from an officer, personally together with companies controlled by him.  Interest at 10% is being charged on $50,000 of advances to an officer included above.

On September 22, 1988, the loans to Faulkner were the subject of discussion at a Shasta directors meeting.  The meeting was attended by all four directors of Shasta, being Faulkner, Blanchet, Mel Rahal and Tony Dyakowski, as well as John Kingsmill of Shasta's solicitors, Mawhinney & Kellough, and Murray Nitikman of Shasta's auditors, Campbell, Saunders & Company.  The minutes of the meeting, which Faulkner acknowledged are accurate, record the following discussion:

	Mel Rahal reported to the meeting his concern about apparent unauthorized loans made by the President of the Company, Harry Faulkner, to himself and his company, Harco Management Ltd.  Mr. Rahal indicated that the audited financial statements for the Company for the year ended April 30, 1988 disclosed indebtedness of $86,776 from Mr. Faulkner and Harco.  In addition Mr. Rahal reported that approximately $100,000 had been advanced to Mr. Faulkner and Harco between May and September 6th and that none of those advances had been authorized by the Board.  Mr. Rahal indicated that approximately $64,000 had been transferred by the Company's bankers, The Bank of Nova Scotia, directly from the Company's account to Mr. Faulkner's personal account on the sole authorization of Harry Faulkner and without due authorization by the Company.  Mr. Rahal also indicated that to his knowledge only $50,000 of the total unauthorized advances had been documented by way of a promissory note from Mr. Faulkner to the Company.  Finally, Mr. Rahal noted that unauthorized advances in the amount of $9,650 has been made to Mr. Blanchet since the fiscal year end of the Company.
	Mr. Nitikman advised the meeting that according to his records the information tabled by Mr. Rahal was substantially correct and he reported to the meeting that the following monies were outstanding:

(1)		net advances to Harry Faulkner at fiscal year end totalling $52,297;
(2)		net advances to Harco as at April 30, 1988 totalling $32,409;
(3)		net advances to Harco as at September 6, 1988 totalling $95,000, comprised of $115,000 in advances less $20,000 in management fees to which Harco is entitled pursuant to the terms of its management agreement with the Company;
(4)		net advances to Harry Faulkner as at September 6, 1988 totalling $10,000, consisting of $13,000 in advances less $3,000 in expenses incurred by Mr. Faulkner on Company business (but which have yet to be accounted for by expense reports); and
(5)		advances to Tate Blanchet as at September 6, 1988 totalling $9,650.

Mr. Faulkner acknowledged to the meeting his agreement with Mr. Nitikman's report of the amount of the indebtedness of Mr. Faulkner and Harco to the Company and indicated that no further advances by the Company had been made to Mr. Faulkner, Harco or any related party since September 6, 1988.

Faulkner signed the promissory notes and guarantee on September 28.

When the directors meeting resumed on September 29, Faulkner resigned as president.  The majority of the other directors agreed to extend the due date on the $105,000 promissory note to December 31, 1988.  A news release was issued announcing Faulkner's resignation and the advances.

Shasta commenced a legal action against Faulkner and Harco to recover the unauthorized payments.  Shasta was granted default judgments against Faulkner and Harco by the British Columbia Supreme Court on May 23, 1989, but to the date of the hearing only $10,000 had been repaid by Faulkner to Shasta.

From May 1987 to September 1988, Faulkner was trading actively in the shares of Shasta.  The following table shows Faulkner's purchases and sales in the market during this period.

MONTH	SOLD	PURCHASED	NET SOLD
			(OR PURCHASED)

May 1987	7,500	25,000	(17,500)
June	47,500	25,500	22,000
July	78,500	20,000	58,500
August	66,500	19,000	47,500
September	86,000	18,000	68,000
October	26,200	16,500	9,700
November	38,500		38,500
December	32,000		32,000
Jan 1988	52,100		52,100
February	7,500		7,500
March	1,500		1,500
April	20,000		20,000
May	18,500	2,500	16,000
June	32,500		32,500
July	25,500		25,500
August	12,000		12,000
September	15,000		15,000
	-------	-------	-------
TOTAL	567,300	126,500	440,800
	-------	-------	-------

Faulkner's heaviest trading month was September 1987, when he sold 86,000 shares and purchased 18,000 shares.  Total market trading in Shasta shares in September 1987 was 723,000 shares.  Faulkner's sales in September were made at prices ranging from 61 to 75 cents.

3. FINDINGS

Commission staff allege that Faulkner misappropriated funds from Shasta, failed to cause Shasta to disclose material changes in its affairs, traded in Shasta's shares with knowledge of material facts or material changes in Shasta's affairs that he knew had not been generally disclosed, caused Shasta to breach its listing agreement with the Exchange, breached his duties as a director of Shasta, and caused Shasta to breach the Company Act prohibition against providing financial assistance to a director.

Faulkner argues that staff's allegations are based on hindsight and technicalities.  He says he managed Shasta for 20 years and did not take anything to which he was not entitled. He admits that some things could have been handled better but blames his problems on Rahal, who he says was out to get him, and on the Bank of Nova Scotia, which he says made unauthorized transfers from Shasta's account.

3.1 Misappropriation

The evidence shows clearly that large payments, in excess of the compensation and expenses payable under Harco's management contract, were made from Shasta to Faulkner and Harco.  Commission staff allege that the payments have resulted in the wrongful conversion of assets of Shasta for the benefit of Faulkner and Harco.

Faulkner admits that Shasta was not liable to him for the amounts paid and that he did not submit invoices for the payments.  Although Shasta's board of directors did not authorize the payments, Faulkner says that some of the other directors were aware of them prior September 22, 1988.

Faulkner says that the payments represented an interim loan against amounts that would become owing under his management contract.  He says that some of the transfers were made by the Bank of Nova Scotia without his knowledge.  These were apparently to cover overdrafts in Harco's account.  He says he was made aware of the transfers after they were made and that he told the bank as early as 1984 that it should not make such transfers.  He agreed that he was obliged to repay the amounts transferred by the bank but says he did not see it as a major problem because the amount outstanding never exceeded the balance of his management contract.

Faulkner says he had a plan to repay Shasta with the help of a personal loan from some investors.  He says he had talked with them prior to the September 22, 1988, meeting and met with them after the meeting but that Rahal had scared them off with threats about their being called in to the Commission. Faulkner also says he offered to work for Shasta to pay off the loans but that Rahal would not agree.

In our view, Faulkner's explanations are merely attempts to rationalize his misappropriation of Shasta's funds.  The simple facts are that $190,000 of Shasta's money was transferred to Faulkner's and Harco's accounts.  Some of it was transferred by Faulkner and some was transferred by the bank. Faulkner provided the bank with a signed guarantee on behalf of Shasta, issued without authority, which would have appeared to authorize the transfers.  He produced no evidence to support his claim that the bank acted without authority.  In any case, Faulkner admitted liability for the amounts, signed promissory notes for them, and allowed a default judgment to be obtained by Shasta against him.  A total of $190,000 was "advanced" by Shasta to Faulkner and Harco without authority and we find that Faulkner misappropriated this money for his personal use. Faulkner has subsequently repaid only $10,000 of the amount misappropriated.

3.2 Failure to Disclose Material Changes

Commission staff argue that the renewal of Harco's management contract and the unauthorized payments to Faulkner and Harco were material changes in the affairs of Shasta that ought to have been, and were not, disclosed under section 67 of the Act.

Section 1 of the Act defines a "material change" as "... a change in the business, operations, assets or ownership of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer ...".

For the fiscal year ended April 30, 1988, Shasta received operating revenue of $44,432 and incurred a net loss of $86,430.  During this period, Shasta paid Harco $48,000, somewhat more than its total revenue, under the management contract and made unauthorized payments of about $80,000, almost twice its total revenue, to Faulkner and Harco.

For the six months ended October 31, 1988, Shasta received operating revenue of $14,364 and incurred a net loss of $105,934.  During this period, Shasta paid Harco $20,000, almost fifty per cent more than its total revenue, under the management contract and made unauthorized payments of about $110,000, almost eight times its total revenue, to Faulkner and Harco.

In the context of Shasta's operations, the payments under the management contract and the unauthorized payments were Shasta's most significant financial activities and were changes in Shasta's assets that, if known by investors, would reasonably have been expected to have a significant effect on the market price or value of Shasta's shares.  We find that the renewal of Harco's management contract on October 1, 1987, and the unauthorized payments to Faulkner and Harco made between May 1, 1987, and September 22, 1988, were material changes in Shasta's affairs.

Section 67(1) of the Act reads as follows:

Where a material change occurs in the affairs of a reporting issuer, the reporting issuer shall

(a)		as soon as practicable issue and file a press release that is authorized by a senior officer and that discloses the nature and substance of the change, and
(b)		file a required report, as soon as practicable, but in any event no later than 10 days after the date on which the change occurs.

The renewal of Harco's management contract was disclosed in Shasta's financial statements for the six months ended October 31, 1987.  It must also have been disclosed earlier in an information circular for the meeting at which shareholder approval was obtained.  This disclosure was not made in the manner required by section 67 but, given that disclosure was made and shareholder approval was obtained, we do not consider that this failure caused significant prejudice to the public interest.

The unauthorized payments were not disclosed by news release until September 29, 1988.  The interim financial statements for the six months ended October 31, 1987, filed in January 1988, provided some limited disclosure of the payments during that period as an increase in "loans receivable [from] officer and related companies" of $28,778.

The audited annual financial statements for the year ended April 30, 1988, dated September 6, 1988, disclosed that $86,776 was receivable from an officer and that interest at 10% was being charged on $50,000 of these advances.  This disclosure in the financial statements was not made as soon as practicable and was not made by news release to ensure dissemination of the information.  It clearly did not meet the requirements of section 67.

Quite apart from the fact that the payments were unauthorized, they were the most significant financial activities of Shasta and were required to be disclosed on a timely basis.  The payments of $20,000 in May 1987 and $28,000 in June 1987 were certainly significant enough to require immediate disclosure.  The $50,000 advanced on November 2, 1987, should also have been disclosed immediately.  Disclosure ought to have been made one or more times during the May to September 1988 period, when $110,000 was paid.

Faulkner was a director of Shasta, he managed its day to day affairs, and he was aware of and responsible for the payments.  We find that Faulkner failed to cause Shasta to comply with section 67 of the Act.

3.3 Insider Trading

Commission staff argue that Faulkner, while in a special relationship with Shasta, traded in the shares of Shasta with knowledge of material facts or material changes (namely the renewal of Harco's management contract and the payments to Faulkner and Harco) that had not been generally disclosed.

Section 68(1) of the Act reads as follows:

No person that

(a)		is in a special relationship with a reporting issuer, and
(b)		knows of a material fact or material change with respect to that reporting issuer, which material fact or material change has not been generally disclosed,

(c) securities of that reporting issuer, ...

Under section 3 of the Act, a person in a special relationship with a reporting issuer includes an insider of the reporting issuer.  An insider of an issuer is defined in section 1 of the Act to include a director or senior officer of the issuer.  Faulkner was the president and a director of Shasta, and therefore an insider of and a person in a special relationship with Shasta.

We have found that the renewal of the management contract and the payments to Faulkner and Harco were material changes in the affairs of Shasta.

The renewal of the management contract was not disclosed by way of news release, as required by section 67, but it was disclosed in Shasta's interim financial statements for the six months ended October 31, 1987, and its annual audited financial statements for the year ended April 30, 1988.  It also received shareholder approval.  Given this, we do not accept Commission staff's argument that the renewal of Harco's management contract was not generally disclosed.

We will therefore focus on the unauthorized payments to Faulkner and Harco.  These were material changes.  The payments prior to April 30, 1988, were disclosed only in the most limited sense and not until the financial statements were published.  Furthermore, by the time disclosure was made in the financial statements, additional undisclosed payments had been made.  Faulkner signed all of Shasta's news releases, so he knew that these payments had not been disclosed.

From May 1, 1987, until April 30, 1988, when Faulkner had knowledge of the undisclosed payments, he sold 463,800 Shasta shares and purchased in the market 124,000 Shasta shares.

Focusing on September 1987, Faulkner's most active trading month, we note that he sold 86,000 shares and purchased 18,000 shares, for net sales of 68,000 shares.  Faulkner's sales were at prices ranging from 61 cents to 75 cents, which were much higher than the 25 cents per unit he had paid in June 1987 to purchase 150,000 units in a private placement.  At this time, Faulkner knew what the investors purchasing his shares did not - that Shasta had made about $30,000 in unauthorized payments to him and Harco.

The payments between May 1, 1988, and September 6, 1988, were not disclosed until September 29, 1988.  During this period, when Faulkner had knowledge of these undisclosed payments, he sold 103,500 and purchased 2,500 Shasta shares.

In summary, through a period of 17 months, Faulkner actively purchased and sold, mainly sold, Shasta shares when he had knowledge of material changes that he knew had not been generally disclosed.

Accordingly, we find that Faulkner contravened section 68(1) of the Act.

3.4 Breach of the Listing Agreement

Staff submit that Faulkner caused Shasta to breach its listing agreement with the Exchange.  They say that Shasta was required to give prior notification to the Exchange and receive prior approval for Harco's management contract, which provided for monthly fees well in excess of the maximum permitted under Exchange policy, and for the non-arm's length payments to Faulkner and Harco.

Faulkner claims that Shasta's solicitor had received verbal approval from the Exchange for the fees payable under the management contract.  He presented no other evidence to support this assertion.  We reject Faulkner's evidence and we find that Shasta breached its listing agreement in failing to obtain Exchange approval for the management contract.

The payments to Faulkner and Harco are much more serious. Faulkner admits that approval was not sought or received for the payments.  Paragraph 3(a)(4) of the listing agreement requires that a listed company notify the Exchange and obtain prior approval before entering into a non-arm's length transaction.  Given Faulkner's position as president and a director of Shasta, the payments to him and his wholly owned company, Harco, were non-arm's length transactions.  Shasta ought to have notified the Exchange and obtained approval under paragraph 3(a)(4) before making the payments.

In addition, Paragraph 3(a)(8) of the listing agreement requires that a listed company notify the Exchange and obtain prior approval before making a loan or advance to a person or company that is not a wholly owned subsidiary of the listed company.  If the payments to Faulkner and Harco were, as Faulkner says, advances, Shasta ought to have notified the Exchange and obtained approval under paragraph 3(a)(8) before making them.

The listing agreement between a listed company and the Exchange is a key element in the securities regulatory system of this Province.  It is the vehicle through which the Exchange exercises supervision over the affairs of the company. Commission staff will generally not permit a junior issuer, like Shasta, to offer securities to the public under a prospectus unless the issuer is listed on the Exchange, or another exchange that exercises supervision over the issuer and provides a transparent market for secondary trading of the securities.  The listing agreement for a junior issuer requires the issuer to obtain the approval of the Exchange for various corporate activities and transactions that are important to the protection of investors and the maintenance of a fair and efficient securities market.  The Commission relies on the Exchange's supervision of junior issuers through this approval process.

As the person responsible for the payments and for managing the day-to-day affairs of Shasta, Faulkner was responsible for ensuring that Shasta complied with the listing agreement.  As a result of Faulkner's actions, Shasta breached the listing agreement.  We find that Faulkner caused Shasta to breach its listing agreement with the Exchange.

3.5 Company Act Violations

Staff allege that Faulkner, as president and a director of Shasta, failed to act honestly, in good faith and in the best interests of Shasta or to exercise the care, diligence and skill of a reasonably prudent person, thereby violating section 142 of the Company Act, and that he caused Shasta to violate sections 126 and 127 of the Company Act, which prohibit a company from giving financial assistance to a person in certain circumstances

Faulkner submits that he did not breach his duties as a director and officer of Shasta.  He says it is unfair to focus on 2 years of the 20 years he managed Shasta and says he did not take anything to which he was not entitled.  He argues that the case against him is built on hindsight and technicalities and he blames his failure to repay the amounts he owes to Shasta on Rahal, who he says was out to get him.

Section 142(1) of the Company Act reads as follows:

Every director of a company, in exercising his powers and performing his functions, shall

(a)		act honestly and in good faith and in the best interests of the company; and
(b)		exercise the care, diligence and skill of a reasonably prudent person.

Section 126 of the Company Act prohibits a company from giving a loan to a person if the loan would render the company insolvent.  Staff argue that Faulkner caused Shasta to violate section 126 because on several occasions the payments to Faulkner and Harco left Shasta's bank account in an overdraft position.  The fact that a company has a bank overdraft does not necessarily mean it is insolvent.  A review of Shasta's financial statements suggests that it was not insolvent, although the payments certainly left Shasta with a working capital deficiency by September 1988.  As a result, we find no violation of section 126 of the Company Act.

Section 127 of the Company Act prohibits a company from giving financial assistance, including a loan or guarantee,  to a person "unless there are reasonable grounds for believing that, or the directors are of the opinion that, the giving of the financial assistance is in the best interests of the company."  Staff argue that Faulkner caused Shasta to violate section 127 because Shasta's directors never considered whether the guarantee of Harco's account given to the Bank of Nova Scotia or the advances to Faulkner and Harco were in the best interests of Shasta.

In our view, section 127 provides two alternative tests for the provision of financial assistance.  First, it can be provided if there are reasonable grounds for believing that the assistance is in the best interests of the company.  Second, it can be provided if the directors are of the opinion that the assistance is in the best interests of the company.

In our view, there were no reasonable grounds for believing that the guarantee or the advances were in Shasta's best interests.  This financial assistance was for Faulkner's benefit and would provide no apparent benefits to Shasta.

Clearly, Shasta's directors never came to the opinion that the guarantee or the advances were in Shasta's best interests. The financial assistance was not approved by the directors and, for the most part, the directors other than Faulkner were unaware of it.

Accordingly, we find that Shasta violated section 127 of the Company Act.

Faulkner was president and a director of Shasta and ran its day-to-day affairs.  He was responsible for ensuring that Shasta complied with its obligations under the Company Act.  We find that Faulkner caused Shasta to violate section 127 of the Company Act.

4. DECISION

We have found Faulkner responsible for a number of significant contraventions of regulatory standards in his role as president and a director of Shasta.  In summary, Faulkner:

--

misappropriated $190,000 from Shasta;

--		failed to cause Shasta to disclose the unauthorized payments to Faulkner and Harco as required by section 67 of the Act;
--		purchased and sold Shasta shares when he had knowledge of material changes that he knew had not been generally disclosed, in contravention of section 68(1) of the Act;
--		failed to notify the Exchange and obtain approval for the renewal of the management contract or for the unauthorized payments, thereby causing Shasta to breach its listing agreement with the Exchange;
--		did not act honestly, and in good faith and in the best interests of Shasta, and therefore breached his duties as a director of Shasta under section 142 of the Company Act; and
--		caused Shasta to provide financial assistance to Faulkner and Harco in violation of section 127 of the Company Act.

Accordingly, we consider it in the public interest to remove Faulkner from participation in the market and in the management of reporting issuers for a significant period.  We also consider it appropriate that Faulkner pay the costs of the proceedings necessitated by his conduct.

We order

1.		under section 144(1)(c) of the Act, that the exemptions described in sections 30 to 32, 55, 58, 80 and 81 of the Act do not apply to Faulkner for a period of 15 years from the date of this order;
2.		under section 144(1)(d) of the Act, that Faulkner is prohibited from becoming or acting as a director or an officer of any issuer for a period of 15 years from the date of this order;
3.		under section 154.2 of the Act, that Faulkner pay prescribed fees or charges for the costs of or related to the hearing incurred by the Commission and the Superintendent, the amount to be determined following further submissions from the parties.