Two Vancouver brokers found to be in conflict of interest in Cartaway Resources stock promotion
Released: 10/02/00 Contact: Dean Pelkey
NR #00/42 (604) 899-6880 or
(BC only) 1-800-373-6393 Vancouver -- The British Columbia Securities Commission has found that Stockbrokers Robert Hartvikson and Blayne Johnson were in a conflict of interest, failed to act in the best interests of their clients and took personal advantage of their role in managing Cartaway Resources.
A decision regarding sanctions will be made after hearing from the parties.
The commission found Hartvikson and Johnson acted in their own interest by withholding information from clients and the market while acquiring large blocks of Cartaway shares. Trading reports show that Johnson and Hartvikson personally made more than $5.1 million by trading in Cartaway shares while the two were employed at First Marathon Securities' Vancouver office.
"The issue here is simply whether Hartvikson and Johnson, as registrants and employees of First Marathon, acted fairly, honestly and in the best interests of the clients of First Marathon, including Cartaway," the commission said in its decision.
"We find they did not. As a consequence, we find that they breached their duties as registrants and employees of First Marathon. By favoring their own interests to the prejudice of those to whom they owed a duty to act fairly, honestly and in their best interests, Hartvikson and Johnson acted contrary to the public interest."
Hartvikson and Johnson were among a group of eight brokers employed with First Marathon Securities who bought control of Cartaway Resources Corporation, a shell company listed on the Alberta Stock Exchange in October 1994. The brokers intended to change Cartaway’s business direction and finance it through First Marathon.
In early April 1995, Hartvikson and Johnson acquired a group of Voisey’s Bay claims for Cartaway through a nominee private company. At the time, the Voisey's Bay area of Labrador was experiencing a major staking rush as a result of a significant mineral discovery by Diamond Fields Resources Inc., a First Marathon client. On April 19, 1995 Cartaway announced its intention to proceed with a brokered private placement of seven million units at $0.125 per unit. This private placement closed May 5 without Cartaway disclosing its acquisition of the Voisey's Bay claims. The eight First Marathon brokers took down more than 82 per cent of the placement, bringing their holdings to more than 64 per cent of Cartaway shares issued.
On May 12, Cartaway’s stock was trading on the Alberta Stock Exchange at $0.95. At Cartaway’s request, the ASE halted trading pending an announcement. Cartaway told the exchange it was looking to acquire a large parcel of claims in the Voisey’s Bay area but had no firm transactions to disclose. Cartaway also told the exchange the $0.125 private placement had not been conducted with prior knowledge of the acquisition of the Voisey’s Bay claims.
On June 23, Cartaway released an offering memorandum for a brokered private placement of four million special warrants at $1. First Marathon was agent for the offering. On July 11, the $1 private placement closed. All of it was placed with First Marathon clients.
This sequence of events led the commission to describe the brokers' conduct as follows:
“It goes without saying that conduct by market participants that results in breaches of the letter and spirit of securities legislation is conduct that brings the capital markets into disrepute and undermines public confidence in the system. It is particularly egregious where it is demonstrated that registrants have taken advantage of their position and have been deceitful and misleading so as to personally benefit themselves to the prejudice of their clients. Such was the conduct of Hartvikson and Johnson. It was conduct that constituted a breach of their duties as gatekeepers of the securities industry. It was conduct that was highly prejudicial to the public interest.”
The commission found, among other things, that:
- The eight First Marathon brokers were a control group of Cartaway, and Hartvikson and Johnson were undisclosed promoters and de facto directors and officers of Cartaway.
- Hartvikson and Johnson, as registrants and employees of First Marathon, had a duty to act honestly, fairly and in the best interests of the clients of First Marathon, including Cartaway.
- The control group intended that the financing of Cartaway through First Marathon would be structured to ensure that the control group acquired a substantial number of shares before it was made public; that Cartaway was going into Voisey’s Bay and before Cartaway proceeded with the $1 special warrant financing.
- The acquisition of the Voisey’s Bay claims in early April was a material change in the business of Cartaway and it was not disclosed promptly as required and not before the $0.125 private placement closed on May 5, 1995.
- Hartvikson and Johnson organized a private company to warehouse the Voisey’s Bay claims for Cartaway until after the $0.125 private placement.
- Hartvikson and Johnson, as de facto officers and directors, failed to act honestly and in good faith and in the best interests of Cartaway. Instead they acted for their personal benefit by allowing the $0.125 private placement to be priced when they knew material information had not been disclosed.
- Hartvikson’s and Johnson’s conduct was deceitful and intended to, and did, mislead First Marathon, the Exchange and the clients of First Marathon who purchased Cartaway shares under the $1 private placement and the public who were buying and selling Cartaway shares in the market.
- Hartvikson and Johnson put themselves in a position where their interests were in conflict with their duties to their clients and to Cartaway and they acted in their own interests and not in the best interests of their clients and Cartaway.
Written submissions will be filed with the commission by November 10, 2000. The commission can make orders barring the respondents from the securities market in British Columbia, prohibiting them from acting as directors or officers of companies or requiring them to pay administrative penalties and costs of the hearing.
The B.C. Securities Commission is the independent provincial government agency responsible for regulating trading in securities within the province. Copies of this decision are available in the documents database of the commission's website at www.bcsc.bc.ca or by contacting Media Relations Officer Dean Pelkey.
- Cartaway Resources originated as an Alberta registered company known as Cartaway Container Corporation, specializing in garbage removal and garbage bin leasing. The company was based in Kamloops with its shares traded on the Alberta Stock Exchange.
- In 1994, eight employees of First Marathon Securities' Vancouver and Calgary offices - David Lyall, Robert Hartvikson, Blayne Johnson, Eric Savics, Robert Disbrow, Larry Birchall, Michael Stuart, Charles Fraser, and Matt Aufricht - gained control of 46 per cent of Cartaway's shares, paying about 10 cents per share. They renamed the company Cartaway Resources.
- In April 1995, Cartaway announced a private placement of up to seven million units, priced at 12.5 cents per unit. First Marathon acted as the agent for the placement. By the end of the placement, the First Marathon employees and their families owned 66 per cent of the outstanding Cartaway shares.
- In May 1995, Cartaway halted trading of its shares on the ASE and announced a distribution of four million special warrants at $1 and $1.50 each with First Marathon acting as the underwriter.
- In June 1995, Cartaway announced it was changing direction to focus on mineral exploration and that the company had acquired a number of mining claims, including claims in Voisey's Bay. At the time, Voisey's Bay in Labrador was the subject of much speculation due to the 1993 discovery of large deposits of nickel, cobalt and copper in the region.
- It subsequently turned out many of Cartaway's mineral claims in Voisey's Bay had been acquired earlier in the year and held in a numbered company before being transferred to Cartaway. This information was not disclosed to the public or regulatory authorities prior the May distribution.
- In April and May 1996, Cartaway announced initial test results from its Voisey's Bay properties showed the likelihood of copper and nickel deposits. Share prices rose from $3.76 to $26.
- On May 17, 1996, Cartaway announced the assay results from the Voisey's Bay property did not support the earlier tests. Heavy trading in Cartaway shares ensued, crashing the ASE system. When trading in Cartaway resumed May 21, the stock opened at $2.78.
Cartaway Enforcement Chronology
The actions of the First Marathon brokers involved in Cartaway triggered allegations of conflict of interest. The Toronto Stock Exchange, Alberta Securities Commission and BC Securities Commission launched investigations into the brokers' conduct and the involvement of First Marathon.
1998 - July - First Marathon Securities reaches agreement with the TSE to pay a $3.5 million fine and $500,000 in investigation costs to settle allegations it failed to ensure proper compliance relating to Cartaway.
1998 - July - Lawrence Bloomberg, First Marathon president and CEO, reaches agreement with the TSE to pay $250,000 fine. Stuart Henry, First Marathon vice president agrees to a $485,000 fine and four-month suspension. Robert Disbrow, First Marathon vice-chair and former Vancouver branch manager, agrees to a $110,000 fine and three-month suspension.
1998 - July - First Marathon reaches a settlement with the ASC, agreeing that its staff made improper trades. First Marathon agrees to pay a $200,000 administrative penalty and $50,000 in investigative costs.
1998 - August - After completing it's investigation, the BCSC announces a date for a hearing into the Cartaway affair and the involvement of Robert Hartvikson, Blayne Johnson, Robert Disbrow, Eric Savics, David Lyall, Michael Stuart and First Marathon Securities.
1999 - January - First Marathon reaches a settlement with the BCSC, agreeing it failed to properly supervise employees and breached securities regulations. First Marathon agrees to donate $450,000 to the Mineral Deposit Research Fund at the University of British Columbia as well as pay $50,000 in investigative costs.
1999 - January - Disbrow settles with the BCSC, agreeing that he failed to properly supervise First Marathon employees. Since Disbrow was fined $110,000 by the TSE and suspended for three months, no additional penalties are levied against him.
1999 - April - The BCSC settles with Lyall and Savics. The two former First Marathon brokers agree to $25,000 administrative penalties
1999 - April - BC Supreme Court judge Marion Allen upholds the right of the BCSC to issue sanctions against those who violate securities regulations. The ruling came after Blayne Johnson and Robert Hartvikson petitioned the court saying the BC Securities Act was too vague and the BCSC should not have the right to levy sanctions against violators. The two former First Marathon brokers are the subjects of a BCSC investigation into the Cartaway affair. 1999 - May - BCSC denies Johnson's application to adjourn the public hearing. Hearing set to begin July 19, 1999.
1999 - September - Stuart reaches a settlement with the ASC and agrees to pay a $100,000 administrative penalty and $25,000 in investigative costs. Stuart agreed he was in a conflict of interest when he served as First Marathon's Calgary branch manager and as president of Cartaway. Walter Nash also settles with the ASC, agreeing to pay a $25,000 administrative penalty and $25,000 in investigative costs.
1999 - September - The ASC began public hearings into the Cartaway situation and the involvement of John Ivany, former Cartaway president, and William DeJong, a Cartaway director. The two are alleged to have violated securities disclosure regulations.
2000 - August - The ASC finds that John Ivany was responsible for misrepresentation in a news release. The commission found no wrongdoing on the part of William DeJong.
2000 - October - The BC Securities Commission finds that Robert Hartvikson and Blayne Johnson engaged in conduct that was prejudicial to the public interest.