Decisions

Growth Capital Securities Inc., et al. [Decision]

BCSECCOM #:
Document Type:
Decision
Published Date:
1992-05-15
Effective Date:
1992-05-14
Details:

COR #92/104
Growth Capital Securities Inc. (Re)
IN THE MATTER OF The Securities Act, S.B.C. 1985, c. 83
AND IN THE MATTER OF Growth Capital Securities Inc., Gary
George Anderson, Elizabeth Anne Morgan and Michael McLoughlin
Hearing Decision
D.M. Hyndman, H.D. Browne, D. Devine
Heard:  April 27, 1992
Reasons:  May 14 ,1992

COUNSEL:

Mark Skwarok, for Commission Staff.

DECISION OF THE COMMISSION:-- WHEREAS under a notice given on March 17, 1992, a hearing under section 144(1) of the Securities Act, S.B.C. 1985, c. 83, was held on April 27, 1992;

AND WHEREAS Growth Capital Securities, Inc., Gary George Anderson, Elizabeth Anne Morgan and Michael McLoughlin (the "Respondents") were given notice of the hearing;

AND WHEREAS Morgan (represented by counsel) and Anderson appeared and made submissions at the commencement of the hearing and then left the hearing;

AND WHEREAS on March 16, 1990, the United States Securities and Exchange Commission (the "SEC") filed a complaint in the United States District Court for the Western District of Washington under the Securities Act of 1933 and the Securities Exchange Act of 1934 for a permanent injunction and ancillary relief against the Respondents in connection with securities transactions conducted between June 1987 and November 1988;

AND WHEREAS on October 30, 1991, the U.S. Court issued Findings of Fact and Conclusions of Law with respect to the conduct of Growth and Anderson in connection with the securities transactions including:

1.that Growth was incorporated in Panama and that Anderson, a Canadian national, dominated and controlled Growth's activities;
2.that Anderson and others incorporated Southern Hemisphere Consultants in Panama and that Southern Hemisphere maintained a bank account in Florida in which Growth deposited investor cheques and from which Growth transferred funds to various accounts in other countries;
3.that Growth and Anderson promoted and offered investments in securities of Rich Coast Sulphur, International Mitek Computer, Inc. and Stina Resources through a newsletter and through high pressure telephone solicitations, without authorization of the issuers, raising at least $3,501,811 from at least 962 U.S. investors;
4.that Anderson, Growth and others did the following in furtherance of the scheme:
a)Anderson, Growth and others engaged in a nationwide advertising campaign in the United States to generate telephone sales leads for Growth;
b)Anderson, Growth and others mass mailed glossy monthly newsletters to condition investors favourably toward making speculative investments in the securities Growth intended to promote and, thereby, lulled investors into a false sense of security about their investments and encouraged investors to make additional investments;
c)Growth provided a Toronto address in correspondence and newsletters, in order to lend an aura of legitimacy to Growth, which address was merely a private mailbox service;
d)Anderson caused employees of Growth to falsely imply that Growth had an office or affiliate in Buffalo, New York, in order to lend an aura of legitimacy to Growth, when Growth's only presence there was a rented mail box;
e)Anderson and Growth maintained a "boiler room" in Costa Rica with approximately 15 telephones from which salespersons, who were recruited from Canada, the United States and Great Britain, coached in high pressure sales tactics and provided with "sales pitches", called investors and potential investors;
f)Anderson caused Growth salespersons to use fictitious names and to be paid in cash in order to conceal their true identities;
g)Anderson caused salespersons to convince investors to leave their securities with Growth, purportedly for ease of transfer after sale, to promise immediate delivery of securities to investors who asked for their securities and, when no delivery was made, to offer excuses or otherwise lull investors into a false sense of security about their investments;
h)Anderson caused salespersons to falsely represent to investors and potential investors that Growth was operating as a "broker" in San Jose Costa Rica and to falsely state or imply that Growth was registered with the SEC to sell stocks in the United States;
i)Anderson, Growth and others mailed or caused to be mailed fictitious confirmations of purchases and sales to investors, falsely confirming purchases and sales of stock through the Vancouver Stock Exchange and the Alberta Stock Exchange, when in fact no such purchases had been made through those or any other exchanges;
j)Anderson, Growth and others mailed or caused to be mailed fictitious monthly account statements to investors, showing securities purchases and sales for each month after a purchase had been made, in order to lull investors into a false sense of security concerning their investments;
k)Anderson caused Growth to establish bank accounts in foreign jurisdictions with bank secrecy laws and caused funds received from investors to be transferred from country to country through those accounts as part of Anderson's and Growth's deliberate attempts to conceal the use of investors funds and to make tracing the funds difficult for authorities;
l)Anderson caused various Growth records to be burned in approximately December 1988;
m)Anderson made telephone calls, or caused Growth salespersons to make telephone calls, to United States investors and potential United States investors, soliciting investments in Rich Coast, which solicitations included the false representations, promises and statements that:
i)Growth would purchase and sell Rich Coast securities for investors, when in fact it would not,
ii)Growth would deliver Rich Coast certificates to investors requesting delivery, when in fact it would not,
iii)Rich Coast would be listed on NASDAQ within 30 to 90 days, when in fact there was no reasonable basis upon which to make this statement,
iv)Rich Coast's stock would move up in price 60 to 70 per cent within 30 to 90 days, when in fact there was no reasonable basis for such a prediction,
v)Rich Coast would rise in price from $3 to $8 per share in ten days because production of silver was about to begin, when in fact there was no reasonable basis for such a prediction, and
vi)T. Boone Pickens was interested in acquiring Rich Coast in a takeover, when in fact this was untrue;
n)Anderson made telephone calls, or caused Growth salespersons to make telephone calls, to United States investors and potential United States investors, soliciting investments in Mitek, which solicitations included the false representations, promises and statements that:
i)Growth would purchase and sell Mitek securities for investors, when in fact it would not,
ii)Growth would deliver Mitek certificates to investors requesting delivery, when in fact it would not,
iii)Growth had purchased a large block of Mitek shares from Mitek's underwriter and therefore could sell them at a better price than any other broker, when in fact this was untrue,
iv)Mitek stock would likely increase ten times in value during the twelve months following March 1988, when in fact there was no reasonable basis for such a prediction,
v)Growth had sold investors' shares in Mitek and used the sale proceeds to purchase shares in Stina, and that the purchase of the Stina shares required investors to send additional funds to cover the price difference, when in fact Growth had not purchased or sold stock in either Mitek or Stina on behalf of investors;
o)Anderson made telephone calls, or caused Growth salespersons to make telephone calls, to United States investors and potential United States investors, soliciting investments in Stina, which solicitations included the false representations, promises and statements that:
i)Growth would purchase and sell Stina securities for investors, when in fact it would not,
ii)Growth would deliver Stina certificates to investors requesting delivery, when in fact it would not,
iii)investments in Stina through Growth were safe, secure investments, when in fact virtually all persons investing through Growth would lose their investment funds,
iv)a 10,000 share block of Stina stock "held by someone in immediate financial distress" was available to Growth customers at a one-time only below-market price of $.60 per share, when in fact this was untrue,
v)Stina was about to be taken over by Royal Dutch Petroleum Shell which would result in a $3 per share return to investors, when in fact Royal Dutch Petroleum Shell never expressed any interest in buying Stina,
vi)there was no risk in investing in Stina through Growth because the takeover by Royal Dutch Petroleum Shell was certain to occur, when in fact this was untrue,
vii)investors in Stina also owned Stina warrants which, like options, entitled investors to purchase, at a special price, an additional share of Stina for each fifteen shares of Stina already owned, when in fact persons investing in Stina through Growth owned neither Stina shares nor warrants,
viii)investors could exercise their Stina warrants to purchase additional Stina shares at $1.02 per share and that those shares would almost immediately be worth $3 per share because a buyout of Stina by Royal Dutch Petroleum Shell was imminent, when investors did not in fact own any Stina warrants and when Royal Dutch Petroleum Shell never expressed any interest in buying Stina, and
ix)Stina would be listed on the New York Stock Exchange after the Royal Dutch Petroleum Shell takeover, when in fact this was untrue;
5.that Growth and Anderson intentionally, knowingly or recklessly in connection with the securities transactions employed devices, schemes and artifices to defraud, made untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, and engaged in acts, practices and courses of business which operated as a fraud or deceit upon persons who purchased Rich Coast, Mitek and Stina securities;
6.that there is a reasonable likelihood that Anderson and Growth will, unless restrained and enjoined, continue to engage in the kind of conduct as set out;
AND WHEREAS on October 30, 1991, the U.S. Court issued a Final Judgment of Permanent Injunction by Default ordering that Anderson and Growth be permanently restrained and enjoined from engaging in future violations of U.S. securities laws, that Anderson and Growth account for all proceeds, interest thereon, and the disposition of all monies and property resulting from the securities transactions and that Anderson and Growth disgorge $3,501,811 and prejudgment interest thereon;

AND WHEREAS on March 20, 1992, the U.S. Court issued Findings of Fact and Conclusions of Law with respect to the conduct of Morgan and McLoughlin in connection with the securities transactions including:

1.that Morgan and McLoughlin did the following in furtherance of the scheme:
a)Morgan was Anderson's executive assistant at Growth actively assisting Anderson in all aspects of Growth's operations;
b)McLoughlin was a salesperson and sales manager for Growth and used a fictitious name with investors;
c)Morgan and McLoughlin were aware that Growth salespersons used fictitious names when soliciting investments;
d)Morgan was a signatory on at least one bank account controlled by Growth;
e)Morgan travel led from Costa Rica to Florida approximately once each week to pick up thousands of dollars in cash to be paid to Growth's salespersons;
f)Morgan endorsed cheques received by Growth from investors;
g)Morgan and McLoughlin caused Growth to promote offer, and sell the common stock and warrants of Rich Coast, Mitek and Stina to United States citizens, raising at least $3,501,811 from at least 962 U.S. investors;
h)Morgan and McLoughlin were aware that funds sent by investors to Growth for the purchase of securities would in fact be permanently retained by Growth and its principals and that investors and potential investors were not aware of this;
i)Morgan and McLoughlin caused Growth to offer and sell securities and failed to cause Growth to deliver the securities or repay to investors funds received by Growth for the securities;
j)Morgan assisted Anderson in causing Growth to mail a newsletter that contained false and misleading statements about the securities offered by Growth;
k)Morgan signed letters that Growth mass mailed to potential investors, which described investment services and opportunities offered by Growth and lulled investors into investing with Growth;
l)McLoughlin made telephone calls, and caused other Growth salespersons to make telephone calls, to investors and potential investors, soliciting investments in Rich Coast, Mitek and Stina, which solicitations included the false representations, promises and statements cited above;
2.that Morgan and McLoughlin intentionally, knowingly or recklessly in connection with the securities transactions employed devices, schemes and artifices to defraud, made untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, and engaged in acts, practices and courses of business which operated as a fraud or deceit upon persons who purchased the securities;
3.that there is a reasonable likelihood that Morgan and McLoughlin will, unless restrained and enjoined, continue to engage in the kind of conduct as set out;
AND WHEREAS on February 5, 1992, the U.S. Court issued a Final Judgment of Permanent Injunction by Default ordering that Morgan and McLoughlin be permanently restrained and enjoined from engaging in future violations of U.S. securities laws, that Morgan and McLoughlin account for all proceeds, interest thereon, and the disposition of all monies and property resulting from the securities transactions and that Morgan and McLoughlin disgorge $3,501,811 and prejudgment interest thereon;

AND WHEREAS Anderson, Morgan and McLoughlin now reside in British Columbia;

AND WHEREAS Rich Coast (now named "Consolidated Rich Coast Sulphur Ltd.") and Stina are listed on the Vancouver Stock Exchange;

AND WHEREAS, during the period the boiler room was operating in Costa Rica, Growth deposited investor cheques in the Florida bank account of Southern Hemisphere Consultants and Morgan, on behalf of Growth, transferred funds by wire from this account to various accounts in British Columbia;

AND WHEREAS Southern Hemisphere maintained the following accounts in Vancouver with registered dealers and law firms:

1.a brokerage account at Continental Carlisle Douglas, then a member firm of the Vancouver Stock Exchange, for which certain documentation was signed by Morgan as witness, for which McLoughlin had a power of attorney and which held shares of Stina;
2.a brokerage account at First Vancouver Securities Inc., then a member firm of the Vancouver Stock Exchange, for which Anderson had trading authority and gave instructions and which held, at various times, shares of Rich Coast, Mitek and Stina;
3.an arrangement with the law firm Richards Buell Sutton, under which the firm held shares of Stina for Southern Hemisphere; and
4.an arrangement under which the law firm Hemsworth Schmidt held in trust shares of Stina received from Southern Hemisphere;
AND WHEREAS we consider it to be in the public interest;

NOW THEREFORE 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
a)Anderson and Growth for a period of 25 years from the date of this order, and
b)Morgan and McLoughlin for a period of 15 years from the date of this order;
2.under section 144(1)(d) of the Act, that each of Anderson, Morgan and McLoughlin is prohibited from becoming or acting as a director or an officer of
a)any reporting issuer,
b)any issuer that, in connection with a distribution of a security other than a security described in section 32(j) of the Act, is required to comply with section 42 of the Act or relies on any exemption from section 42 under the Act or the Securities Regulation, B.C. Reg. 270/86, and
c)any issuer that provides management and administrative, promotional or consulting services to a reporting issuer,
for a period of,
d)in the case of Anderson, 25 years from the date of this order, and
e)in the case of Morgan and McLoughlin, 15 years from the date of this order;
3.under section 154.2 of the Act, that Anderson, Morgan and McLoughlin pay prescribed fees or charges for the costs of the hearing in the amount of $1,000.
D.M. HYNDMAN
Chairman
H.D. BROWNE
Member
D. DEVINE
Member