Decisions
LARRY EARL WOODS [Decision]
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BCSECCOM #:
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Document Type:
Decision
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Published Date:
1997-02-21
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Effective Date:
1997-02-12
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Details:
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COR#97/040
IN THE MATTER OF THE SECURITIES ACT
S.B.C. 1985, c. 83
AND
IN THE MATTER OF LARRY EARL WOODS
HEARING
| PANEL: | DOUGLAS M. HYNDMAN | CHAIR |
 | BRENT W. AITKEN | MEMBER |
| PETER A. MANSON, Q.C. | MEMBER |
| DATES: | SEPTEMBER 9, 1996 |
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| APPEARING: | STEPHEN M. ZOLNAY | FOR COMMISSION STAFF |
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| LARRY EARL WOODS | FOR HIMSELF |
DECISION OF THE COMMISSION
This is an application by the staff of the Commission for orders under section 144(1) of the Securities Act, S.B.C. 1985 c. 83 (the "Act") denying Larry Earl Woods the benefit of exemptions under the Act, prohibiting Woods from acting as a director or officer of any issuer and ordering Woods to pay the costs of the hearing.
A notice of hearing was issued on November 28, 1990. The notice was accompanied by a temporary order denying Woods the benefit of the exemptions under the Act and prohibiting Woods from acting as a director and officer of any issuer. The hearing was adjourned from time to time and the temporary orders were extended until the hearing was held and a decision rendered.
The Commission staff argues that the orders would be in the public interest based on certain events and related legal proceedings that took place in Ontario.
BACKGROUND
Previous Proceedings
On October 5, 1990, Woods was convicted in the Ontario Court under the Securities Act (Ontario) of trading in securities of Plastic Engine Technology Corporation ("Petco") with knowledge of a material fact or material change that had not been generally disclosed and was fined $15,000.1 On February 24, 1994, Woods' appeal of this conviction was dismissed and the Crown's appeal of his sentence was allowed. The fine was set aside and a term of imprisonment of 90 days imposed.2 Woods' application for leave to appeal that decision was denied.3
1.Ontario Court (Provincial Division). Decision reported at (1992) 15 OSCB 2637; Reasons for Sentence reported at (1992) 15 OSCB 2651.
2.Ontario Court of Justice (General Division). Decision reported at (1994) 3 CCLS 1.
3.Ontario Court of Appeal. Reported at (1994) 3 CCLS 49.
On September 29, 1995, the Ontario Securities Commission ordered that, with some exceptions, all of the exemptions contained in the Securities Act (Ontario) not apply to Woods for a period of 15 years.4
4.Decision reported at (1995) 9 CCLS 308.
At the hearing before this Commission, staff submitted no evidence other than the reports of these decisions. Woods appeared on his own behalf and made submissions but was not sworn and did not testify or present any evidence. Therefore, the following summary of the events leading up to the Ontario court proceedings and the Ontario Securities Commission order is based on the facts as found by the Ontario courts.
Petco and its Financing Attempts
At all material times Petco was a reporting issuer under the Securities Act (Ontario). Its shares were traded on The Toronto Stock Exchange. Its president and CEO was Gerald McKendry. Woods was a director of Petco. Woods was also president of Head Start Capital Corporation ("Head Start") which was in the business of raising venture capital for small companies.
Petco was a start up company based in Kingston, Ontario that was formed to produce small engines with plastic components. Growing rapidly, the company was chronically short of cash. The relevant series of events began in December 1988, when Petco signed a letter of intent with certain investors providing for an equity investment of $11.25 million. At about the same time, Woods arranged a bridge loan of $500,000 to Petco from the Hon. James Richardson. The loan was to be repaid from the proceeds of the equity financing.
Richardson was a long-standing business associate of Woods. He had helped Woods set up Head Start with a loan that had been renewed from time to time and that was outstanding at all material times. Richardson had also lent money to Petco before. In October 1988 he had loaned $500,000 to Petco secured by a charge on Petco's assets. Petco repaid that loan in November 1988 from the proceeds of an asset-based financing.
On January 19, 1989, the day before the equity financing was to close, one of the major investors advised Petco that it would not proceed with the financing. The remaining investors scrambled to find a replacement. A new equity financing was arranged with a replacement investor. The new financing was conditional upon Petco's obtaining a federal government grant of approximately $2 million. The new financing closed in escrow on February 7, 1989, pending satisfaction of that condition.
On February 17, 1989 Petco learned that the federal funds would not be forthcoming and the new financing collapsed. On February 20 Petco issued a press release announcing that the financing would not be completed because of the lack of federal funding and that Petco was negotiating another new financing without federal government involvement.
McKendry, Woods and another director made intensive efforts to find new investors. Meanwhile, Petco had to borrow the funds to make its next payroll, take extraordinary measures to maintain its telephone service and was virtually bankrupt.
On February 21, 1989, Woods received an unsigned, draft letter of intent from Petco's lawyer purporting to outline the details of a new financing package. It contained a condition that Richardson's loan be converted to equity.
On February 24 Petco issued the following press release:
- Management is in the process of negotiating an investment in PETCO of an aggregate amount of $10 million dollars. If the entire package is placed the Provincial Government has indicated that they would be prepared to participate with $1.5 million based on a re-structuring of already approved commitments to PETCO. The $10 million package may also include a rights offering of approximately $1.5 million dollars. Tentative commitments for approximately $8.5 million of the aggregate $10 million have been received to date but no formal agreement has been reached.
None of Petco's efforts to seek financing succeeded and the company entered voluntary bankruptcy in April 1989.
The Trades
Between February 7, 1989 and February 20, 1989 Woods effected trades in Petco shares through a discretionary account at Merit Investment Corporation in the name of Sharon Jenkins, a friend of Woods whose funds Woods managed. These trades included the short sale of 12,400 shares and the subsequent purchase of 12,400 shares to cover the short position. The trades generated a profit of over $3,500 for Jenkins.
Before the Ontario court and the Ontario Securities Commission, Woods testified that these trades were made on Jenkins' behalf and without her knowledge in order to "teach her a lesson". Woods explained that Jenkins, motivated by reports about Petco in the Kingston media and knowing that Woods was involved with Petco, had been pressing Woods to acquire shares in Petco on her behalf. Woods says that to show Jenkins that it was not wise for her to make investment decisions based solely on press coverage, he effected the short sales to illustrate in dramatic fashion that acquiring Petco would not have been the right investment decision; in fact, Jenkins' profit was made by selling short.
Woods then effected further short sales of 380,000 Petco shares through trades made on February 23, 24 and 27, 1989. These trades were processed by Woods through Jenkins' account at Merit but this time the trades were made by Woods on behalf of Richardson. These short sales were covered and as a result, Richardson ultimately realized a profit from Woods' trades of about $217,000.
According to testimony accepted by the Ontario trial judge, Richardson had agreed on February 22 to convert his $500,000 bridge loan to Petco into shares of Petco and also had accepted Woods' suggestion that Richardson hedge this loan position by selling Petco shares short. Woods made short sales through Jenkins’ account of 380,000 shares to put this strategy into effect.
FINDINGS
The Ontario trial court made a number of findings. Those most relevant to these proceedings include the following:
- 1. Woods was aware of Petco's financial situation throughout the relevant time frame.
2. Given Petco's inability to meet its payroll from its own resources and the fact that no replacement financing that could even be called "tentative" was in place, Petco's press release dated February 24, 1989 (quoted above) was a material misrepresentation of Petco's affairs and Woods ought to have known that.
3. Woods therefore traded shares of Petco with knowledge of material facts respecting Petco that had not been generally disclosed, contrary to the provisions of the Securities Act (Ontario).
4. Woods' short selling was motivated, in the case of the trades made on behalf of Richardson, to protect Richardson against the loss of his $500,000 loan to Petco; in the case of the trades made on behalf of Jenkins the Court found that "it is a reasonable inference" that he was motivated by his belief that the price of the Petco shares would fall, based on Petco's dire financial condition.
Based on these findings, the Ontario Court of Appeal ultimately sentenced Woods to 90 days' imprisonment. The Ontario Securities Commission made similar findings and, with some exceptions, withdrew the application of exemptions under the Securities Act (Ontario)from Woods for a period of 15 years.
Counsel for the Commission staff submitted that we are entitled to accept the findings made by the courts in Ontario, and cited case law in support of his submission. Woods did not take the position at the hearing before us that the factual issues ought to be relitigated. Woods did offer his description of the events that are the subject of this application, but entered no evidence. We consider it reasonable to rely on the findings of fact made by the courts in Ontario and accordingly we adopt the foregoing findings as our own.
DECISION AND REASONS
Based on the findings of fact and law of the Ontario courts, and the enforcement orders made by the Ontario Securities Commission, staff request that we impose upon Woods orders under section 144(1)(c) and (d), removing his trading exemptions and prohibiting him from becoming or acting as a director or officer of a reporting issuer for 15 years.
Provincial securities legislation in Canada is substantially uniform in most material respects. The Commission is therefore interested in the activities of persons found to have contravened securities legislation in other jurisdictions. This is particularly so since it is not unusual for persons involved in capital markets to conduct business in more than one jurisdiction. For example, persons from all provinces, including British Columbia, trade in securities through the facilities of all of the principal stock exchanges in Canada. Furthermore, a person may live in one province and be a director or officer of an issuer based in another province. For these reasons, applications are made to the Commission from time to time to issue orders on a more or less reciprocal basis to those issued in other jurisdictions. Similarly, applications are made to securities regulators in other jurisdictions to issue these types of orders based on orders made by this Commission in the first instance.
The orderly and credible regulation of the securities market throughout Canada, not to mention common sense, argues strongly that such applications be favourably received. However, the Commission's responsibility in hearing such applications is no different than in any other case. In each case, the Commission must consider what is in the public interest, and act accordingly.
Woods traded the shares of Petco through the facilities of The Toronto Stock Exchange improperly and illegally, violating section 75(1) of the Securities Act (Ontario). The Act contains substantially identical provisions, so Woods' trading, had it occurred in British Columbia, would have been illegal here.
Woods failed to appreciate that the press release of February 24 utterly failed to communicate the seriousness of Petco's financial situation. The release was misleading in two respects. First, it omitted to state Petco's generally insolvent condition. Funds for the payroll for the day of the press release, February 24, had to be borrowed. Extraordinary measures were being taken to ensure that the telephones were not cut off. None of the flavour of this desperation is to be found in the release. Second, the release seriously overstated the availability of financing. Contrary to what the release said, there did not appear to be any commitments to finance whatsoever, not even anything that could be properly characterized as "tentative". It is surprising that someone of Woods' apparent experience with financing could believe that the February 24 press release came close to describing Petco's true situation.
Woods also showed poor judgment as a director by trading in Petco shares at all in that time frame. It is hard to imagine what trading would be appropriate by a director of any company in the situation that Petco was in. Petco was on the verge of bankruptcy and its situation was changing almost by the hour. In a situation this volatile, it is almost impossible, even when timely and accurate releases are made, to be satisfied that all material facts about the company's situation are generally disclosed.
Woods refuses to acknowledge his failure to exercise proper judgment. In his submissions to us, Woods stated that he still believes he did nothing wrong. He says he continues to believe that the February 24 press release was not misleading.
The circumstances facing this Commission at the time of the application are somewhat different than those that faced the Ontario Securities Commission when it made its order. Furthermore, Woods has been subject to temporary orders in British Columbia prohibiting him both from trading and from being a director or officer for more than six years. In addition, we are looking at a broader sanction than that applied in Ontario, where the Commission is not empowered to prohibit a person from being a director or officer.
In light of these different circumstances, we think a somewhat different term of order is appropriate. We therefore order that:
- 1. under section 144(1)(c) of the Act that the exemptions described in sections 30 to 32.1, 55, 58, 80 and 81 do not apply to Woods for a period of 5 years from the date of this decision; and
2. under section 144(1)(d) of the Act that Woods resign any position he holds as a director or officer of any issuer and is prohibited from becoming or acting as a director of officer of any issuer until
- (a) he has successfully completed a course of study satisfactory to the Executive Director concerning the duties and responsibilities of directors and officers, and
- (b) a period of 5 years has elapsed from the date of this decision.
In the circumstances, we make no order in respect of costs.
DATED on February 12, 1997.
| Douglas M. Hyndman | Brent W. Aitken |
| Chair | Member |
| Peter A. Manson, Q.C. |
| Member |