BCSC

Decisions

MINDORO CORPORATION, et. al. [Decision]

BCSECCOM #:	Document Type: Decision
Published Date: 1997-02-14	Effective Date: 1997-02-07
Details:

COR#97/039

IN THE MATTER OF THE SECURITIES ACT
S.B.C. 1985, c. 83

AND

IN THE MATTER OF MINDORO CORPORATION,
RONALD VICTOR MARKHAM, DR. JOHN BERRY, RONALD JAMES CONN AND
ARTHUR EDGAR CLAXTON

HEARING

PANEL:	JOYCE C. MAYKUT, Q.C	VICE-CHAIR
	GORDON M. CLARK	MEMBER*
	BRENT W. AITKEN	MEMBER

^{* Commissioner Gordon M. Clark sat on the panel but his term of appointment to the Commission expired on October 14, 1996. Mr. Clark did not participate in this decision.}

DATE:

JUNE 4, 5, 6, 7, 10, 13, and 25 1996

APPEARING:	TODD FOLLETT	FOR COMMISSION STAFF
	STEPHEN ZOLNAY
	DAVID ANFIELD	FOR MINDORO CORPORATION
	CORY H. KENT	AND DR. JOHN BERRY
		AND RONALD V. MARKHAM
	RONALD J. CONN	FOR HIMSELF

DECISION OF THE COMMISSION

1. INTRODUCTION

On August 31, 1994, a notice of hearing was issued in this matter. At the same time temporary orders were made under section 144(2) of the Act cease trading the securities of Mindoro Corporation and of any other issuer controlled by Mindoro or Ronald Victor Markham. These orders have been extended by the Commission and remain outstanding.

On December 15, 1995, an amended notice of hearing was issued under sections 144 and 144.1 of the Securities Act, S.B.C. 1985, c. 83 against Mindoro Corporation, Ronald Victor Markham, Dr. John Berry, Ronald James Conn and Arthur Edgar Claxton.

In summary, Commission staff alleged that:

1. from 1988 to 1994, Mindoro Corporation distributed Mindoro shares to at least 170 residents of British Columbia without registration, without filing and obtaining a receipt for a prospectus, and without an applicable exemption from the registration and prospectus requirements contrary to sections 20 and 42 of the Act;

2. Markham caused Mindoro to distribute the Mindoro shares contrary to sections 20, 42 and 138(3) of the Act;

3. Conn, Claxton and Berry solicited investments in Mindoro in furtherance of the distribution of the Mindoro shares contrary to sections 20, 42 and 138(3) of the Act;

4. in November 1993, in connection with the distribution of Mindoro shares, Conn and Claxton, with the intention of effecting a trade in the securities of Mindoro, and without the written permission of the Executive Director, made written and oral representations to purchasers of Mindoro securities, that the securities of Mindoro would be listed and posted for trading on the North American Securities Dealers Automated Quotation System (“NASDAQ”) at a price not less than $10.00 US per share, contrary to sections 35(1)(b) and 35(1)(c) of the Act;

5. Markham misappropriated some of the proceeds of the illegal distribution of Mindoro shares for his own benefit and for the benefit of persons related to him, contrary to section 41.1 of the Act; and

6. in 1994, subsequent to the illegal distribution of Mindoro shares, Conn solicited Mindoro shareholders to purchase shares of La Paloma Resources Inc. The La Paloma distributions were made without registration, without filing and obtaining a receipt for a prospectus, and without an applicable exemption from the registration and prospectus requirements of the Act, contrary to sections 20 and 42 of the Act.

Although Commission staff alleged in the notice of hearing that the respondents in contravening sections 20 and 42 also contravened section 138(3) of the Act, they did not address this allegation in their submissions and we do not intend to deal with it further.

On March 14, 1995, the Executive Director and La Paloma signed an agreed statement of facts and undertaking. As part of the settlement, La Paloma delivered an offering memorandum to each of the La Paloma investors, offered to each of them a right of rescission to obtain a refund of subscription funds and undertook to pay to the Minister of Finance and Corporate Relations the sum of $3,500. On March 14, 1995, the temporary cease trade order made against La Paloma was revoked. The settlement documents were published in the BCSC Weekly Summary, (1995) Vol. 95:11 page 7.

On June 4, 1996, the Executive Director and Claxton signed an agreed statement of facts and undertaking and Claxton consented to an order under section 144(1)(d) of the Act that he be prohibited from becoming or acting as a director or officer of any reporting issuer for a period of five years and an order under section 144(1)(f) of the Act that his licence to trade in securities be restricted with certain conditions for a period of one year. Claxton also undertook to pay to the Minister of Finance and Corporate Relations the sum of $30,000, comprised of a monetary penalty of $10,000 inclusive of the costs of the investigation and a further sum of $20,000 representing a disgorgement of notional profits. The settlement documents were published in the BCSC Weekly Summary, (1996) Vol. 96:44, page 4.

The hearing proceeded against Mindoro, Markham, Berry and Conn and references in this decision to respondents do not include Claxton. Each of the respondents received notice of the hearing in accordance with section 156 of the Act.

Both Conn and Berry appeared and testified on their own behalf. Markham did not appear at the hearing although he was represented at it by the same counsel who represented Berry and Mindoro. Earlier attempts by Commission staff to serve Markham with a subpoena had been unsuccessful. Markham’s counsel advised that he did not know the whereabouts of his client and could only say that he received instructions regarding these proceedings when Markham telephoned from undisclosed locations. However, in view of the allegations and evidence received the Commission determined that every effort ought to be made to ensure Markham’s attendance. Accordingly after Commission staff had concluded their case, the Commission issued another subpoena seeking Markham’s attendance. That subpoena was given to counsel for Markham. While Markham’s counsel assured the Commission he would make every effort to inform Markham that the Commission would like Markham to appear and that a subpoena had been issued seeking his attendance, counsel could not give any assurance that he would be successful in doing so. Counsel subsequently advised that Markham had been made aware of the subpoena, that he advised Markham to attend. Markham chose not to appear.

2. BACKGROUND

2.1 The Respondents

Mindoro

Mindoro Corporation is named as a respondent in these proceedings. There are two companies with that name, one was incorporated in Oregon on April 4, 1988, and the other was incorporated in Nevada on June 23, 1992. Markham was the president and directing mind of both companies. As the facts below will indicate, most investors believed they were dealing with one company - Mindoro. Indeed, Commission staff in their opening alleged that there was no real corporate distinction between the companies and referred to the companies simply as Mindoro. We intend to do the same.

Mindoro operated out of the Executive Office Centre, #404 - 999 Canada Place, in Vancouver, British Columbia. State records show Markham as president and Berry as secretary and both as directors of the Oregon corporation. State records show Markham as president and Donald Scoretz as secretary and treasurer of the Nevada corporation.

Mindoro was not registered nor had it ever been registered under the Act to trade securities in British Columbia. Mindoro is not a reporting issuer under the Act.

A partial list of shareholders as of March 1, 1994, indicates that there were at least 190 shareholders (most of them residents of British Columbia) holding over 29 million shares. Although the documentation is far from being complete or consistent, major shareholders as of March 1, 1994, appear to have been Tom Webb - 4.5 million shares, Berry - 3.2 million shares, Geoffrey Caine - 3.2 million shares, Alexander W. Cox - 1.6 million shares and Markham and family - 12.144 million shares.

Ronald V. Markham

Markham was the president and by all accounts a “one man show” directing Mindoro’s business, which was, at its simplest, the exploration and development of the Mindoro mining claims. Markham held himself out, and was represented by the other respondents, as being one of the world’s most highly regarded and successful mining executives. He was said to have been a founder in 1969 of the Anvil Mine located in the Yukon Territory, which subsequently became one of the largest lead-zinc-silver producers in the world. During the period covering the allegations, Markham resided in Vancouver. His present whereabouts and activities are unknown to the Commission. Markham was not registered nor had ever been registered to trade in, or advise in the buying or selling of securities in British Columbia.

Dr. John Berry

Berry is 81 years old. He is a chiropractor and has operated his own clinic in Vancouver for many years. He still provides chiropractic services on a part time basis. At Markham’s request Berry became the secretary treasurer of Mindoro and was at times held out to be a director of Mindoro. Berry was not registered nor had ever been registered to trade in, or advise in the buying or selling of securities in British Columbia.

Ronald J. Conn

Conn was registered as a mutual funds salesman from June 15, 1993, to October 21, 1994, with Vantage Securities Inc., a securities dealer under the Act. Conn’s registration was restricted under section 22(1) of the Act to the offering and sale of mutual funds in which his employer was permitted to trade under its registration. On October 21, 1994, Conn’s registration was terminated as a result of his leaving Vantage to pursue on a full time basis his own financial planning business, RJC Consultants Inc. Like Mindoro, RJC Consultants operated out of the Executive Office Centre, #404 - 999 Canada Place, in Vancouver, British Columbia. RJC Consultants is no longer in business. Conn said he is unemployed.

2.2 The Distribution of Mindoro Shares

Berry testified that in early 1988, he, Markham, and J. Paul Sawyer, Markham’s geologist went to southwestern Oregon to inspect what Markham had described to Berry as “this amazing property.” By April 1988, Mindoro had been incorporated and apparently had sufficient financing from Markham, Sawyer, Berry and others, to begin staking mineral claims in the area. What was needed was more financing to further explore and develop what Markham touted as one of the largest platinum and gold finds in the world.

The way Mindoro chose to raise further financing was through the sale of its shares. The evidence before us discloses two main stages of promotion and solicitation. The first was through Berry primarily in 1990 and 1991 and the second was through Conn and Claxton in 1992 to 1994.

The Berry Solicitation

In the early summer of 1990, Berry began soliciting his patients to invest in Mindoro. According to Gene Ramsbottom, one patient who became an investor, Berry repeatedly introduced the topic of Mindoro as a great no-risk investment opportunity. Through the summer of 1990, Berry presented himself to Ramsbottom and the Stuarts, friends of Ramsbottom who were also patients of Berry, as having special knowledge as an investor, director and secretary treasurer of Mindoro and long-time personal friend of Mindoro’s president, Markham.

In early June 1990, Berry met with the Stuarts and Ramsbottom at the Stuarts’ residence and provided them with further information about Mindoro. Some of the information Berry brought to the meeting was documentary and although Ramsbottom and the Stuarts were invited to make handwritten notes no one was allowed to take or copy any of the documents. Ramsbottom made extensive notes.

Ramsbottom testified that he and the Stuarts were shown a series of documents, including photocopies of laboratory assay results, which described in highly flattering terms the Mindoro platinum orebody discovery in Oregon. It represented that the size of the platinum metals orebody was proven to be 25 million tonnes and that a proposed drilling program would produce 12 million tonnes of ore to yield a potential resource of 3 million ounces of gold and platinum metals. Berry also told them that Mindoro’s geologist, co-founder, director, and major investor, Sawyer, was an acknowledged expert in discovering platinum metals orebodies and he quoted Sawyer as saying that this was the largest richest deposit in the world at that time. Berry suggested that as the ore body was so rich, Mindoro could afford to drill just a few test holes with minimum environmental impact, process the drill samples and make a lot of money just processing the test samples. Ramsbottom and the Stuarts were also told that all environmental safeguards and issues had been resolved.

Ramsbottom was a classical musician and the Stuarts were teachers. The Stuarts and Ramsbottom were told that they were chosen as part of a select group of 25 who had been invited to participate in Mindoro’s share offering before it went public because they had made significant cultural and educational contributions to the community. They were led to believe that Mindoro’s listing on an exchange was imminent. The sense of urgency was heightened when Berry represented that there were only two positions open as Mindoro had already found 23 of the 25 investors. Berry emphasized that tax secrecy laws required shareholders to remain anonymous. Berry impressed upon Ramsbottom and the Stuarts that this was the last chance for new investors to get in on the ground floor before it went public. If however they wanted to sell their shares before Mindoro went public, they were obliged to sell their shares back to Mindoro and not to anyone else.

Berry assured Ramsbottom and the Stuarts that a fantastic fortune was waiting with little or no risk. The ore was already proven and there was a guaranteed buy-back of shares if an investor wanted out at any time. At the end of the meeting, Ramsbottom went away agreeing to consider purchasing some Mindoro shares before it went public.

In the ensuing weeks Ramsbottom had more therapy sessions with Berry at which time Berry represented that discussions were ongoing with Yorkton Securities to take Mindoro public on the Vancouver Stock Exchange. The plan at this time was to let Placer-Dome develop a 50% interest in only 160 of Mindoro’s total claims for a $150 million fee thereby producing an immediate US $4-5 dividend for shareholders. Berry also represented that the starting price on the Vancouver Stock Exchange would be $10 per share, followed by a quick price rise to $50 a share and an eventual climb to $80 per share.

Unable to resist, Ramsbottom purchased the minimum buy-in of 5,000 Mindoro shares at US$2.50 per share on June 12, 1990. A receipt from Markham for US $12,500 followed the handwritten receipt Ramsbottom received earlier from Berry as secretary for Mindoro. Ramsbottom subsequently received a Mindoro share certificate for 5,000 shares from Markham.

Over the summer Ramsbottom received various progress reports from Mindoro and had several further discussions with Berry. The news was always positive. By December 1990, Ramsbottom purchased an additional 5,000 shares of Mindoro through Berry. As with his previous purchase, Ramsbottom eventually received a receipt and a Mindoro share certificate for 10,000 shares, which replaced the previous certificate.

Ramsbottom believed that the Stuarts also purchased Mindoro shares through Berry around this time. At no time did Ramsbottom or the Stuarts receive a prospectus or offering memorandum regarding the purchase of their Mindoro shares.

Then in the summer of 1991, in the course of settling matrimonial assets, Ramsbottom’s lawyer became interested in becoming a shareholder of Mindoro. To accommodate his lawyer and to flush out more information, Ramsbottom asked Berry to set up a meeting with Markham. At the meeting, Markham allowed Ramsbottom and his lawyer to review confidential Mindoro reports. One report was dated October 31, 1990 and written by Markham as president of Mindoro, another, dated January 1, 1991, was written by Caine as vice-president of Mindoro. Markham’s report represented that Mindoro had staked 1,455 mineral claims covering over 30,000 acres in southwestern Oregon. The report also represented that a series of sampling programs carried out over the claims averaged more than .20 ounces of gold per ton. A subsequent drilling program indicated approximately 20 million tons with potential reserves of about 3 million ounces of contained gold, plus platinum group elements. The report went on to state that in late 1989 Mindoro began to focus on the platinum group elements over gold because initial extraction rates were high and some platinum group elements were “going for US $5,200 an ounce”.

Caine’s report confirmed the richness of Mindoro’s claims and represented that because of their nature and location, mining would be inexpensive. Drill samples had been analyzed and averaged at least 0.1 ounces of gold per ton with the average in excess of 0.2 ounces per ton gold. Having quoted these figures Caine went on to state, “To put this in perspective, one mining claim (20 acres) mined to a depth of 100 feet, and averaging 0.1 ounces per ton gold would recover 1,000,000 ounces of gold with a value over $400,000,000. Since more than 1,200 of the Mender claims are underlain by the same formation the Company is convinced that it holds the largest storehouse of gold ever discovered.”

Although Ramsbottom’s lawyer declined to invest, Ramsbottom was so impressed he immediately purchased an additional 5,000 Mindoro shares at US $2.50 per share. Because Ramsbottom was a Mindoro shareholder already he was told he could purchase the shares at US$2.50 rather than the new going rate of US$5.00.

In early 1992, Ramsbottom began calling Berry for updates on Mindoro. While the news was always incredibly promising, there were many changes and delays began developing. By the fall of 1992, Ramsbottom began to question Berry about the non performing nature of his investment. Additional Mindoro progress reports raised more questions for Ramsbottom so he wrote Markham seeking information.

Finally in April 1993, Markham telephoned Ramsbottom. Among other things, Markham informed him that Mindoro was moving to Nevada to take advantage of more favorable tax and mining conditions and that certain Mindoro claims had been segregated to support an initial listing on the Vancouver Stock Exchange with an eventual move to the Toronto Stock Exchange.

That summer Ramsbottom began making independent inquiries regarding the Mindoro project, including attending at the Oregon corporate registry offices and Bureau of Land Management. The records disclosed confusion as to who actually had legal title to the claims and to Mindoro’s name itself. Furthermore an Oregon state ranger told Ramsbottom that it was “garbage” to suggest that Mindoro’s mining project had to stop because of the new environmental restrictions. Again Ramsbottom sought clarification and demanded that Markham verify everything Berry had been telling him and the Stuarts.

Instead, Ramsbottom received a call from Berry with more excuses. Delays were being caused by the size and complexity of the Oregon property, Mindoro was preparing a NASDAQ listing for the early spring and things were moving so fast that the annual general meeting Ramsbottom requested was the last thing on their minds. In the end, Ramsbottom told Berry that nothing Berry said could be corroborated and that Ramsbottom no longer believed him.

Ramsbottom pursued his search for independent information while at the same time demanded answers from Markham and Berry. While Berry continued with his assurances, Ramsbottom heard through the Stuarts in April 1994 that Mindoro’s financial books were in a mess and there were a number of disgruntled shareholders attempting to remove Markham from office. In May 1994, Markham tried to reassure Ramsbottom by telling him that Mindoro still existed and was pursuing new gold claims in an undisclosed location in Idaho.

Then on July 11, 1994, Ramsbottom was hit with a bombshell. The evening news hour ran a report by Stu McNish describing a gold scam run by Markham who claimed to have discovered an ore body containing 11 million ounces of gold - enough to control the world gold market. The report highlighted an independent consultant’s report that stated “...the likelihood of anyone finding gold in this part of Oregon is about the same odds as a meteor falling from space and striking that spot.” In a follow up meeting with the reporter, Ramsbottom learned that Markham had left England several years previously in the wake of a seed-stock-gone-sour scandal surrounding a company called ZAHAB Gold.

Ramsbottom said that from this point on he stopped trying “to figure out the riddle” and focused entirely on getting his money back. His perseverance paid off. On March 4, 1996, Cox, a major Mindoro shareholder, repurchased Ramsbottom’s 15,000 Mindoro shares for US $37,000, their initial cost. In consideration of this and $10 from Markham and the various Mindoro companies, Ramsbottom signed a release and undertook not to communicate with anyone about Mindoro or the settlement.

Berry’s Testimony

Berry testified that he and Markham have been friends ever since the early fifties when Markham came to Berry as a patient. Berry stated that he had successfully invested in other mining projects in which Markham was involved and so when Markham came back from Europe in 1988, Berry agreed to become involved in Mindoro. After inspecting the property Markham so glowingly spoke of, Berry invested US$100,000 dollars and received approximately 3 million Mindoro shares. According to Berry, Markham ran Mindoro himself. There were no directors meetings and Berry only became Mindoro’s secretary treasurer because Markham “needed another signature”. Berry had no control over the banking nor did he handle any of Mindoro’s correspondence. In fact Markham had a rubberized stamp made of Berry’s signature. This according to Berry was strictly for convenience and was not intended to deceive.

As for the information given and representations made to Ramsbottom, Berry claimed that he was simply passing on what Markham or Markham’s geologists told him. However, Berry could not account for a document entitled “Mindoro Corporation Interim Report to May 1994” which carried Berry’s signature as secretary treasurer on behalf of Mindoro. Berry was firm in denying that he wrote the report or that he had even seen it before. Apparently several investors received the report in June 1994 from Markham.

The report stated that in February 1994, the Clinton administration had enacted legislation that had the effect of curtailing Mindoro’s exploration and development in that area of Oregon in which its claims were located. The report stated their six million dollar exploration and development program had been put on hold until such time as the regulations were changed to permit mining. The report went on to state that as a result of Clinton’s legislation the company had moved its base of operations to Idaho and consequently the NASDAQ listing would not proceed. The “possibility of listing the company’s shares on a smaller exchange possibly the Vancouver Stock Exchange” was stated as being pursued. A further report on the results of this plan was promised “no later than June 1994.”

Despite what was stated in the report, Berry cannot recall speaking with Markham about the possibility of listing Mindoro on any stock exchange at this time. Furthermore, Berry said that as of May 1994, he was no longer the secretary treasurer of Mindoro. However, Berry did remember meeting with Cox, Caine and Markham on April 29, 1994, to discuss a proposal by Webb to have Markham step down. Webb’s concerns included Markham’s use of Mindoro funds to purchase an oceanfront residential building lot in Lions Bay, British Columbia. As far as Berry knew, Caine and Cox were still happy with Markham and Berry certainly wasn’t interested in Webb’s proposal. Berry also recalled that the first time he ever heard about Mindoro purchasing the Lions Bay property was at this meeting. Although he had heard Markham was thinking of building a new home in Lions Bay, Berry said he could not understand then or now why Mindoro would be getting into the real estate business. However he said he had great faith in Cox working something out to secure Mindoro’s interest and although he doesn’t know exactly what was done he believes Cox was successful.

Berry acknowledged that he has no idea how Mindoro was spending money. As far as he knew none of Markham’s wives or children worked for Mindoro and he wouldn’t know why Mindoro would have given them any money. He also admitted he never received any financial statements, offering memorandum or prospectus relating to the sale of Mindoro shares. He also doesn’t know what Mindoro’s source of income is now although he believes Cox still continues to provide funds to Mindoro.

As to the various companies involved in this matter, Berry believes all of them were subsidiaries of Mindoro, including International Gold Corporation, which according to Berry holds the gold claims in Idaho that are the new focus of Mindoro and Markham. Berry said he honestly believed, and still believes, that Mindoro is an unique opportunity for its shareholders to do very well if only they would allow Markham to continue.

Berry acknowledged that after investing himself, he introduced approximately 30 friends and patients to Mindoro. If they were interested, he referred them over to Markham. He also acknowledged that he did not tell any of his patients and friends who did invest that he was receiving a 10% sales commission. Berry said the sales commission was agreed to by Markham to help Berry through some financial difficulty. Berry said that at the time his wife was sick and his ability to work was limited as a result of an accident in 1988. He said that he didn’t know anything about the Securities Act then and didn’t believe he was doing anything wrong. During the period from approximately October, 1989 to December 1993, Berry received in excess of US $286,000 in commissions for selling Mindoro shares.

Berry said that he has already acknowledged his mistakes and was punished accordingly in September 1995, when he and the B.C. College of Chiropractors signed an agreed statement of facts. In the agreement Berry admitted that he encouraged some of his patients to purchase Mindoro shares and that he took financial advantage of them by failing to reveal that he would be receiving a commission if they purchased Mindoro shares. He also agreed that his conduct constituted professional misconduct for which he received from the College a reprimand, a $10,000 fine and an order for costs.

He said a further financial penalty would weigh heavily on him and his wife as their financial resources have been substantially depleted.

The Conn Solicitation

Conn first came across Mindoro in November 1992, through a client who already was a Mindoro shareholder. The client was considering buying more shares and he asked Conn to check Mindoro out for him. Over the next five or six months Conn did that.

Most of the information Conn sought and obtained regarding Mindoro and its business came directly from Markham and Berry although Oregon state corporate and land management officials did confirm the corporate existence of Mindoro and validity of its mineral claims. The information Markham and Berry provided was exceedingly positive - above normal assay results, glowing biographical information and personal references and financial statements prepared by Markham reflecting a mining company that spent most of its money on exploration and development. Follow up checks with the assayists and personal references gave Conn additional comfort. However, audited financial statements requested by Conn from Markham were never forthcoming as they were always in a state of being drafted or revised. Nonetheless, at the end of his inquiries, Conn said he found nothing to cause him any alarm and he so advised his client. In fact Conn stated that the more he looked into Mindoro, the more it seemed that there was a tremendous opportunity there for himself.

At the time of making these inquiries Conn and Claxton were mutual funds salespersons licensed with Vantage Securities. Vantage focused on selling its own products however from time to time they would circulate to their clients approved investment opportunities. Mindoro was not an investment approved by Vantage. Despite that, both Conn and Claxton advised their clients to invest in Mindoro and many followed that advice. Conn admitted that at the time he had no previous experience regarding investing in mining companies.

One of the ways that Conn and Claxton obtained clients was as a result of their teaching a course through the Vancouver School Board called Successful Money Strategies Seminars. The course was advertised as introducing participants to key concepts and wise money management, including maximizing investment returns. The seminar included a work book, personal data form, professional instructions and optional personal consultation.

At the seminars Conn, who was the primary instructor, held himself out as a financial consultant and president of RJC Consultant Inc. and Successful Money Strategies. His promotional brochure given to seminar participants represented that by 1992, RJC Consultants managed over $100 million dollars in assets of approximately 350 clients. Many of those taking the course pursued the optional personal consultation. Course participants prepared a personal assessment sheet disclosing the intimate details of their financial position. With their personal information in hand, Conn developed a personal financial plan.

In 1993, an investment in Mindoro became a recommended investment in the personal financial plan of several of Conn and Claxton’s clients. Some of those investors testified before us. In essence the stories they told were the same. However, because Claxton is no longer a respondent, the evidence below focuses primarily on Conn’s actions.

The Mindoro investors who became Conn’s clients through the seminar said they took the course to become more knowledgeable about making their money work for them. They thought a Vancouver School Board course would be a good safe place to start. None of those who testified before us was a sophisticated investor and each relied on Conn to deliver expert financial planning advice. We have chosen the story of Ms. Eleanor Thielke as an example.

Thielke was a 48 year old employee of a major airline when she took the course in May 1993. Although she had paid for her home and had some funds in RRSPs she wanted to start planning for her retirement. She had never invested in securities before. Because she was expected to pay a $250 yearly fee plus commissions on mutual funds, she considered Conn to be her personal financial adviser and she expected advice on investing.

Shortly after the consultation, Thielke was referred to a sample RJC client statement and given some client references. In early June 1993, Conn met with and provided information to Thielke regarding Mindoro and a real estate investment. Subsequent correspondence however only focused on Mindoro. Because of what she learned in the course, Thielke questioned Conn on the safety and wisdom of investing in Mindoro. Conn told her that he had spent three months investigating Mindoro and the people involved and he believed it to be a very safe and secure investment. He represented that Mindoro held one of the largest gold finds in the world and companies with similar properties were trading in the $50 range. He told her that Mindoro was preparing an initial public offering at $10 a share with trading contemplated on the New York Stock Exchange by September 1993. The sense of urgency was reinforced when Conn told Thielke that there were just a few spots left and she only had a few days left to invest in Mindoro.

Because she did not have the cash, Conn referred her to the Hong Kong Bank of Canada which approved a $125,000 mortgage. Because she trusted Conn and felt he knew a lot more than her, Thielke borrowed US $25,000 from the bank and purchased 5000 Mindoro shares at $5 a share on July 2, 1993.

Throughout the fall Conn continued to provide Thielke with “significant positive” updates regarding the Mindoro project. By the end of October 1993, Conn advised Thielke by letter that an application for a NASDAQ listing in New York was underway. He also enclosed the assay results for samples referred to a promotional video Conn had earlier sent to Thielke. The letter stated that a drilling program had begun that would “upgrade the classification of the present drill indicated reserves of 26 million tons of grading .414 ounces of gold per ton.” He closed with an invitation to an investor update with Markham and Webb at the Pan Pacific Hotel which was to be held on November 18. Conn indicated that the purpose of the seminar was to make selected clients of RJC Consultants aware of significant investment opportunities and to update current Mindoro investors. Conn’s letter stated, in part, as follows:

Mindoro Gold Corporation will be listed for trading on the NASDAQ Exchange in early 1994.

The first IPO (Initial Public Offering) will be made available at no less than $10.00 US per share. This IPO will be offered by a leading investment banker in New York to a select group of 500 private investors. Shortly thereafter, the first public trade will occur and will open above the $10.00 US. This seminar will allow clients of RJC Consultant Inc. to participant in this offering at $5.00 US per share. At the November 18 session Mr. Markham will be talking about his company and the investment opportunity”.

Clients of Claxton who were invited to the seminar received exactly the same information in their letter, but for an opening paragraph we thought was worth noting because of the emphasis given to this information by Conn and Berry in their oral representations to investors. Claxton stated he got the format and information from Conn. Conn said he got it from Markham. It stated:

I’m proud to invite you to a one night seminar featuring one of the world’s most highly regarded and successful mining executives today, Mr. Ronald V. Markham. Mr. Markham’s biographical references include Who’s Who in the World, Who’s Who in America, Financial Post - Directory of Directors and in 1975 became the only non American to receive the Horatio Alger Award which was presented to him in New York. Markham was a founder of Anvil Mining Corporation, located in the Yukon Territory, it produced and sold more than $1,500,000,000 in Lead-Zinc-Silver concentrates. In 1981 Cyprus Anvil Mining Corporation was sold to Hudson’s Bay Oil and Gas Company for $350,000,000.

Approximately 50 to 60 people, primarily Conn and Claxton clients, attended the November 18 seminar at the Pan Pacific. After Conn introduced Webb and Markham, Conn proceeded to enthusiastically describe the Mindoro project essentially repeating the representations made in the invitation letters he and Claxton had sent out. The group was told an investment made in Mindoro before the end of 1993 would double when the shares became listed in early 1994. While the price of a share now was US $5, the initial public offering price would be US $10 a share. Conn stressed however, that there was a very small 3 to 6 month window to accomplish the listing and so the money had to be in by end of 1993 if they wanted to get in on the ground floor. To get in the ground floor however required a minimum subscription of US $25,000.

Webb then made a slide presentation showing the location of Mindoro’s mine and its mineralization touching on the unique processing to be used to get a higher percentage of gold out of the property. A booklet passed out referred to a chemical process to be used that would get more gold out of the property than other mining processes.

When Markham finally spoke he confirmed what Conn had said, emphasizing that the assays were great, that core and drill results were fantastic and that it was the largest gold claim anyone saw in North America. He also emphasized that a large multimillion dollar company was planning to back Mindoro but he could not divulge its name because that would jeopardize negotiations.

As one investor recalled, the Mindoro speakers discussed many possibilities and few risks. In addition to some glossy brochures, a 3 month plan of action was handed out at the Pan Pacific. It stated:

1. Mindoro Will Incorporate A New U.S. Corporation, Mindoro Gold Corporation With An Authorized Capital Of 100,000,000 Shares.

2. Mindoro Will Transfer Its Mindoro Project To Mindoro Gold For 40,000,000 Shares Of Mindoro Gold Corporation.

3. Mindoro Gold Will Apply For A Nasdaq Listing In The U.S.

4. Mindoro Gold Will Carry Out A Percussion And Diamond Drill Program To Upgrade Its Drill Indicated Reserves Of 11,000,000 Ounces Of Gold To The Proven And Probable Categories, And To Increase Reserves To 20,000,000 Ounces Of Gold.

5. Representatives Of A Major Mining Company Will Monitor Mindoro Gold’s Drilling And Metallurgical Testing Program, And Will Make Its Research Laboratories Available To Mindoro Gold.

6. Majorco Will Have An Option During This Period To Take A Private Placement Of Mindoro Gold Of 5,000,000 Shares At $5.00 For A Total Of $25,000,000 US.

7. Mindoro Gold Will Place A First Public Issue Of 5,000,000 Shares At $10.00 Per Share For A Total Of $50,000,000 US.

8. Majorco Will Have An Option, For A Period Of One Year, To Purchase A Further 50% Of Mindoro Gold - 50,000,000 Shares At $20.00 Per Share For A Total Of $1,000,000,000 US.

9. Majorco May Appoint One Of The First Three Directors To The Board Of Mindoro Gold After Taking Down The Private Issue, And Will Be Entitled To Appoint A Further Two Directors To The Board Of Mindoro Gold After Purchasing The Total 55% Interest.

10. Mindoro Will Give A Right Of First Refusal To Mindoro Gold On Its Other Projects, The Proceeds Of Each Transaction Will Be Distributed To The Shareholders Of Mindoro Corporation.

Markham, however, withheld from Conn and those attending the seminar the fact that independent testing of samples from the Mindoro property did not remotely resemble the positive assays results obtained by the Mindoro labs. Correspondence from representatives of Consolidated Ramrod Gold Corporation indicated that Markham had been given this information in a telephone call and follow up letters dated January 4 and 8, 1993. The correspondence indicates that Consolidated Ramrod had visited the Oregon property and did some independent testing of samples with a view to participating in the project. Their letter to Markham stated:

None of our check assays using a variety of methods was able to remotely replicate the results obtained using bromine at your laboratory. While this might not have been surprising given your explanations of the difficulties in assaying this ore by conventional methods, what was very surprising was the high values found by your lab in the blind sample we submitted which was selected from a location quite remote from your property . No gold to speak of was found in this sample using the other assaying methods.

Based on the foregoing, we are not interested.....and we request that you inform anyone who has been told of our interest in this project that we have taken the foregoing decision.

That letter was based on an enclosed report, entitled ‘Testing and Analysis of Mindoro Samples’ prepared by representatives of Golden Ramrod who had witnessed samples taken by Mindoro representatives from the Mindoro property undergo bromine leaching at the Mindoro Lab in Sun Valley Idaho. Golden Ramrod reps had taken pulps split out of the test samples and fire assayed them in a laboratory in Vancouver. Their report stated in part, that “ [I]t appears that someone at the Mindoro Lab introduced gold into our samples during the bromine test procedure. Any direct salting of the rock sample would have been detectable by fire assay or neutron activation analysis of the remaining pulp. The above results suggest fraud and should be reported to the appropriate authorities.”

Despite this information, Markham continued to discuss how Mindoro would develop the largest gold claim in North America and how those who invested in it would profit. The companies referred to in the plan were subsidiaries of Mindoro and had been, or were to be, incorporated simply to accommodate doing business in several jurisdictions. Investors were led to believe that they were really just investing in one company - Mindoro. No audited financial statements, prospectus or other offering documents were given, or made available to potential investors. Some investors, looking for more information specifically asked for these, but were told they weren’t available until 1994 because they were being revised to accommodate the NASDAQ listing application. Interested investors were given a RJC Consultants “Mindoro Reservation Form” to indicate how many shares they wanted.

Because investors believed that it was critical for them to meet the deadline, some of Conn’s clients, like Thielke, were referred to friendly bankers who helped them arrange the necessary financing. On November 25, 1993, Thielke purchased a further 1000 shares for $5,000 US.

The Bernas, other clients of Conn from the Vancouver School Board course, also invested out of a sense of urgency, albeit with a minor delay. The Bernas were a young couple starting out and had expressed a desire to Conn to make their money, some of which was borrowed, work better for them and to have their investments, along with their very young family, “grow over the years with us”. The Bernas heard a rumor from an ex-employee of the Twin Falls lab that Mindoro was all a hoax and alerted Conn. Before accepting the Bernas funds for Mindoro shares, he insisted on checking the rumor out. Conn then went to Twin Falls and after making certain inquiries determined that the assays were legitimate and that the rumor had been started by a disgruntled ex employee trying to get back at Markham. Satisfied with this explanation the Bernas gave their cheque to Conn.

From April 1993 through December 1993, over 500,000 Mindoro shares had been purchased by 45 to 50 of Conn’s clients. Conn received from Mindoro a 10% sales commission totalling at least US $393,000 as a result of his clients investing in Mindoro shares. According to Conn, approximately 85% to 90 % of the total US $7.2 million raised through the sale of Mindoro shares had been raised between September and November 1993.

Conn testified that the information about Mindoro and its plans seemed to change day by day. There always seemed to be new developments and directions from Markham and Conn felt obliged to convey these changing plans and consequent delays to his clients. So while Conn first heard from Markham in early 1993 about Mindoro listing on the Vancouver Stock Exchange by September 1993, the NASDAQ listing became the focus of Mindoro’s promotion.

However the NASDAQ listing did not occur in early 1994 as represented. Conn became concerned and met with Markham on January 24, 1994. Markham advised him that a NASDAQ listing had not even been made and provided a variety of excuses. Conn said he became very upset and had Markham agree that Conn would do whatever it took to get the listing application completed. In late February 1994, Conn and Webb went to Nevada and met with Mindoro’s lawyers and accountants. Conn came away from that meeting with a list of information he needed to obtain about Mindoro before the listing application could be made. Conn testified that he was unable to get many of the items including, company resolutions, financial statements, and material agreements. A further meeting was arranged for March 17 with Webb’s lawyers and Markham in Oregon. The day before the meeting Conn was shocked to receive from Webb’s lawyer a copy of several condensed versions of newspaper stories referring to the fact that Markham had been involved in a major stock scandal in London. Conn said that Markham denied each of the stories that were put to him by Webb’s lawyer at the meeting. Webb’s lawyer told Markham that if the listing application did not proceed, the shareholders were entitled to the return of their investment. Markham chose to try and get Mindoro listed on NASDAQ as soon as possible.

Conn was required to leave the meeting before it concluded because his wife had suddenly become very ill. However, as far as Conn was concerned the issues were not resolved to his satisfaction. While going over records on his way home Conn was alarmed to find that many share certificates could not be accounted for. By late March, Webb and Conn approached Markham to resign. Although he refused initially, Conn testified that Markham eventually agreed to resign. Markham however never did and continually refused to meet with Conn or answer his calls. Conn and Webb then met with Berry, Caine and Cox at the end of March. When it became clear to everyone that Markham had purchased property in Lions Bay with Mindoro money and that other funds were likely missing, a call was immediately made to Markham in San Francisco to get him back. When this failed, Conn was convinced there was a coverup.

Many investors, like Thielke, ultimately came to the same conclusion and commenced legal proceedings against the respondents. Thielke subsequently settled with Conn but did not receive any funds from Mindoro.

Most investors were less fortunate and are still attempting to deal with Mindoro in an effort to get information and their money back. They have been communicating regularly with Scoretz who still seems to be running an office for Mindoro in Vancouver, taking instructions from Markham and issuing progress reports on Mindoro’s mining activities.

Use of Mindoro Funds

No evidence was tendered on behalf of either Mindoro or Markham to show how the funds raised from the distribution of Mindoro shares was used. Unaudited financial statements Conn had received from Markham, in particular a Statement of Source and Application of Funds from April 18, 1988, to December 31, 1992, show that Mindoro’s total source of funds for this period consisted of US $2,402,920 from the sale of shares and a US$206,000 loan from Markham. The unaudited statement showed that 85% of these funds were used for exploration and development related expenses with the remainder being used for travel and miscellaneous expenses. Oregon state regulators confirmed that Mindoro had no other source of cash other than investor funds. These financial statements however are not reflective of the cheques issued by Mindoro during that period.

Commission staff investigator, Bruce Krutow, testified that as a result of being unable to locate Markham or any of Mindoro’s records, the information regarding the actual use of the proceeds from the distribution of Mindoro shares was primarily derived from banking and independent third party documentation. Mindoro had three bank accounts with the Bank of Montreal in Vancouver, two Canadian dollar and one US dollar account. Markham had sole signing authority over each of the accounts. The account documents did not indicate opening or closing balances and Krutow acknowledged that the banking records were not complete.

The documents indicate that some funds in each of the Mindoro accounts were spent on what appear to be typical corporate purposes such as legal fees, geological expenses, office rent and other administrative services. However a substantial portion of the funds in each of the Mindoro accounts appear to have been used for other than corporate purposes. To assist our analysis, Krutow segregated the use of funds in the Mindoro accounts into three broad categories: geological or business, legal and questionable expenses.

The records relating to what appears to have been Mindoro’s primary Canadian dollar operating account cover the period April 28, 1991 to May 25, 1994. During this period, disbursements from this account totalled over $2.5 million. Of that amount, about $1.5 million - could be characterized as questionable, in the sense that the proper business purpose of the expense in not apparent. In some cases, it is reasonable to conclude that there was no proper business purpose, such as in the following examples:

$1,112 to Holt Renfrew,
$22,000 to Brinkhaus Jewellers for a woman’s Piaget watch,
$130,118 to Carter Motors for the purchase and servicing of a Cadillac purchased by Catherine Louise Markham, Markham’s wife in 1993, and of a Rolls Royce purchased by Teresita Markham, Markham’s subsequent wife, and
$887,973 to the vendors of the Lions Bay property.

The Lion’s Bay property is a .75 acre ocean front residential building lot. The land was purchased by Markham under an interim agreement dated May 5, 1993 and is registered in the name of Sail View Ventures Ltd., a private company owned by Markham. Land Registry records show a number of mortgages on title, none of which is held by Mindoro.

The records relating to Mindoro’s U.S. dollar account cover the period October 10, 1989 to August 23, 1994. During this period, disbursements from this account totalled nearly $3.9 million. Of that amount, about $1.5 million could be characterized as questionable and such amount also included purely personal expenses, including $11,000 to Pine Manor College, a U.S. college attended by one of Markham’s daughters, and over $1.1 million in cash to Markham and three of his children.

These personal expenses total over Cdn. $2.5 million using a Canada/U.S. exchange rate of $.075.

The La Paloma Distribution

By May 1994, Conn, Webb and Claxton acknowledged that the Mindoro project had gone completely sour. Conn called a meeting for May 9 at the Pan Pacific in an attempt to salvage his and Claxton’s clients’ investment. Investors were told that the Mindoro project had failed and that Markham had made off with all the money. Conn proposed to incorporate a new company with two of the principals of Mindoro - Webb and a Dr. Hausen. Conn told them that investment in the new company would fund the development of a gold property in Mexico which would be the basis of a listing on the Vancouver Stock Exchange by the end of 1994. He believed this would give the investors an opportunity to recoup some of their lost Mindoro investment. Although no guarantees were given, many investors believed there was no other way for them to recoup their losses and so agreed to purchase shares in Conn’s new company, later named La Paloma.

On May 16, 1994, Conn wrote to his clients and advised them that since the meeting on May 9, 1994, further positive developments had occurred and that he had received legal advice to the effect that La Paloma would be listed for trading within 4 to 6 months and an offering memorandum would be sent when completed in June 1994. A letter dated July 7, 1994 to one investor, confirmed that as of July 6, 1994, all 750,000 seed shares were placed by July 6, 1994. None of the La Paloma investors received a prospectus or an offering memorandum regarding the La Paloma shares.

Conn represented that those to whom he sold La Paloma shares were either business associates or friends in order to rely on a statutory exemption from the prospectus requirements. However La Paloma investors testified that while they were Conn’s clients they would not consider him to be a friend but a financial adviser on whom they relied for professional advice.

On October 29, 1994, a cease trade order under section 144 of the Act was made against the securities of La Paloma. By March 14, 1995, La Paloma had entered into a settlement with the Executive Director in which La Paloma agreed to give all its shareholders who subscribed to buy shares, a right of recission. As a result of the settlement all those who invested in La Paloma received their money back.

3. ANALYSIS AND FINDINGS

Our analysis and findings are focused on the following issues:

1. Were Mindoro, Markham, Berry and Conn trading in Mindoro shares without being registered and were they distributing shares without filing and obtaining a receipt for a prospectus without an applicable exemption from the registration and prospectus requirements contrary to sections 20 and 42 of the Act?

2. Did Conn with the intention of effecting a trade in the shares of Mindoro give an undertaking relating to the future value of that contrary to sections 35(1)(b) of the Act and did Conn represent, with the intention of effecting a trade in the shares of Mindoro and without the written permission of the Executive Director, that Mindoro would be listed and posted for trading on an exchange contrary to 35(1)(c) of the Act?

3. Did Markham, in misappropriating some of the proceeds of the distribution of Mindoro shares for his own benefit, participate in a transaction or scheme relating to a trade or acquisition of Mindoro shares when he knew, or ought to have known, that the transaction or scheme would perpetrate a fraud on any person in the Province contrary to section 41.1 of the Act?

4. Was Conn trading in La Paloma shares to residents of British Columbia without being registered, and was he distributing La Paloma shares without filing and obtaining a receipt for a prospectus, and without an applicable exemption from the registration and prospectus requirements of the Act, contrary to sections 20 and 42 of the Act?

3.1 Were the respondents trading in Mindoro shares without being registered and were they distributing Mindoro shares without filing and obtaining a receipt for a prospectus?

Commission staff alleged that each of the respondents traded in securities without registration contrary to section 20 of the Act and distributed securities without filing and obtaining a receipt for a prospectus contrary to section 42 of the Act.

Section 20(1)(a) of the Act provides that no person shall trade in a security unless he is registered as a dealer, or a salesman, partner, director or officer of a registered dealer and is acting on behalf of that dealer.

Security is defined in section 1(1) of the Act to include;

(c) a document evidencing [a]... subscription ... to a security,

(d) a bond, debenture, note or other evidence of indebtedness, share, stock, unit, unit certificate, participation certificate, certificate of share or interest, preorganization certificate or subscription...

Trade is defined in section 1(1) of the Act to include:

(a) a disposition of a security for valuable consideration whether the terms of payment be on margin, instalment or otherwise...,

...

(e) any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the activities specified in paragraphs (a) to (d).

Registrant is defined as “a person registered or required to be registered under this Act or the regulations”. The Rules (then Regulation) go on to require every registrant to deal fairly honestly and in good faith with the clients of the registrant and to comply with conditions applicable to its category of registration.

In this case there is ample evidence to conclude that each of the respondents were trading in securities of Mindoro without being registered.

Mindoro

The evidence relating to the Berry and Conn solicitations confirms that Mindoro was selling its shares to residents of British Columbia by 1990 and continued to do so through to 1994. Mindoro share certificates, signed by Markham as president and Berry as director were issued to these shareholders after they had forwarded the subscription funds to Mindoro or Markham. A partial shareholders list indicates that there were well over 170 Mindoro shareholders resident in British Columbia.

On this basis, we find that Mindoro was trading in securities and, accordingly, was required to be registered under section 20(1)(a). Mindoro was not registered under the Act and no exemption from registration was available for this trading. Therefore we find that Mindoro was trading in securities in contravention of section 20(1)(a) of the Act.

Markham, Berry and Conn

Markham, as the president and controlling mind of Mindoro, was also engaged in the same activities as Mindoro. Each of Markham, Berry, and Conn solicited individuals to purchase Mindoro shares. Markham and Berry caused share certificates to be issued to investors who had subscribed for shares. Conn provided share reservation forms on RJC Consultants letterhead to all who attended the November 18 seminar. Conn and Berry received substantial sales commissions for selling Mindoro shares. On these facts there is no doubt and we find that each of Markham, Berry and Conn was trading in securities and each was required to be registered under section 20(1)(a) of the Act.

Markham and Berry were not registered under the Act and no exemption from registration was available for their trading securities of Mindoro. Conn was registered as a mutual funds salesman from June 15, 1993 to October 21, 1994, with Vantage Securities Inc., a securities dealer under the Act. Conn’s registration was restricted under section 22(1) of the Act to the offering and sale of mutual funds in which his employer was permitted to trade under its registration. This category of registration did not allow Conn to trade shares of Mindoro.

Accordingly, we find that each of Mindoro, Markham, Berry and Conn was trading in securities without registration contrary to section 20(1)(a) of the Act.

Although it was not alleged in the notice of hearing, Conn was also acting as an adviser without registration contrary to section 20(1)(c) of the Act.

The significance of the registration requirement in the Act has been emphasized by the Commission in several recent decisions. The comments of the Commission in The Matter of Aatra Resources (1993) Vol. 93:37, page 4, bear repeating here.

A registrant holds a special position in the securities market and regulatory system. Subject to certain exemptions, trading in securities can only be done by or through a registered dealer. A registered salesman of a dealer is required to meet educational requirements and to conduct business in accordance with regulatory standards. The purpose of the registration requirement in the Act has been described as follows by the Supreme Court of Canada in

Gregory & Co. v. Quebec Securities Commission

, [1961] S.C.R. 584, where Fauteux J. observed at p. 588:

The paramount object of the Act is to ensure that persons who, in the province, carry on the business of trading in securities or acting as investment counsel, shall be honest and of good repute and, in this way, to protect the public, in the province or elsewhere, from being defrauded as a result of certain activities ...

It is easy to see in this case the extremely detrimental consequences to members of the investing public of the failure to comply with registration requirements and the accompanying standards of conduct. The Commission again puts everyone in the industry on notice that the unsuspecting public will not be left alone to pay the high cost for such non compliance.

Section 42(1) of the Act provides that:

Unless exempted under this Act or the regulations, a person shall not distribute a security unless a preliminary prospectus and a prospectus respecting that security

(a) have been filed with, and

(b) receipts obtained for them from,

the Executive Director.

Distribution is defined in section 1(1) as follows ...

“distribution” means, where used in relation to trading in securities,

(a) a trade in a security of an issuer that has not been previously issued, ...

The Mindoro shares were previously unissued securities when residents of British Columbia purchased them from Mindoro. These trades were therefore distributions. No prospectus was filed with the Executive Director under section 42 and no exemption from section 42 was available. Accordingly, we find that each of the respondents distributed Mindoro securities in contravention of section 42.

3.2 Did Conn make representations relating to future value and listing on a stock exchange with the intention of effecting trades in the securities of Mindoro ?

Commission staff alleged that Conn contravened section 35 of the Act by representing, with the intention of effecting a trade in the shares of Mindoro, that the shares of Mindoro would be listed and posted for trading on NASDAQ at an initial offering price of US$10 a share.

Section 35(1)(b) of the Act provides that no person, with the intention of effecting a trade in a security shall give an undertaking, written or oral, relating to the future value or price of that security.

Section 35(1)(c) of the Act provides that no person, with the intention of effecting a trade in a security

...

(i) the security will be listed and posted for trading on a stock exchange, or

(ii) application has been or will be made to list and post the security for trading on a stock exchange.

Section 1 of the Act defines misrepresentation tomean

(a) an untrue statement of a material fact, or

(b) an omission to state a material fact that is

(i) required to be stated, or

(ii) necessary to prevent a statement that is made from being false or misleading in the circumstances in which it was made.

In the course of soliciting individuals to invest in Mindoro, Conn routinely represented that the value of a Mindoro share would double once Mindoro’s shares became listed for trading on an exchange. These representations were made in Conn’s invitational letter, and repeated at the November 18 seminar. They read as follows:

Mindoro Gold Corporation will be listed for trading on the NASDAQ Exchange in early 1994.

The Mindoro investors’ testimony was uniform as to the representations and their effect. They heard them, they believed them and they invested on the basis of them. There is no doubt that this was the effect Conn desired when he made these representations.

By giving undertakings as to future value to induce investment, we find that Conn breached section 35(1)(b) of the Act. By representing that Mindoro would be listed and trading on NASDAQ, Conn breached section 35 (1)(c) of the Act.

Although it was not alleged in the notice of hearing it is clear that Markham and Berry made many similar representations in contravention of sections 35(1)(b) and (c) the Act in an effort to lure individuals to buy shares in Mindoro.

3.3 Did Markham perpetrate a fraud on British Columbia residents in relation to Mindoro shares contrary to section 41.1 of the Act?

Commission staff alleged that Markham, in misappropriating some of the proceeds of the distribution of Mindoro shares for his own benefit, participated in a transaction or scheme relating to a trade or acquisition of Mindoro shares when he knew, or ought to have known, that the transaction or scheme would perpetrate a fraud on any person in the Province contrary to section 41.1 of the Act.

Section 41.1 of the Act provides that:

No person, directly or indirectly, shall engage in or participate in a transaction or scheme relating to a trade or acquisition of a security if the person knows or ought reasonably to know that the transaction or scheme

...

(b) perpetrates a fraud on any person in the Province

In our view the evidence overwhelmingly demonstrates that Markham deliberately participated in a scheme to defraud Mindoro and its shareholders.

We have found that Markham distributed Mindoro shares without registration and without a prospectus in contravention of sections 20 and 42 of the Act. Several million dollars were raised pursuant to this illegal distribution.

While we do not know the ultimate disposition of all the investors’ funds, the evidence demonstrates that Markham misappropriated for his own personal benefit some of the money investors had given to Mindoro. All of the investors who testified before us said they gave their money to Markham and Mindoro so that it could be used for the exploration and development of the Mindoro gold claims and legitimate and related corporate uses. For the most part it was not. The most flagrant examples of Markham’s use of funds are the purchase of the $22,000 Piaget watch, the payment of over US $1 million in cash to his various children, the over $130,000 payment towards his wives’ Rolls Royce and Cadillac cars, and the payment of over nearly $900,000 towards the purchase of the Lion’s Bay property. These payments were kept from the Mindoro shareholders. Unaudited financial statements for 1988 - 1992 revealed none of these payments. They were clearly prepared with an intention to deceive. None of this evidence is contradicted or explained.

In considering the nature of Markham’s conduct regarding his use of Mindoro funds, we were guided by the Supreme Court of Canada decision of R. v. Olan, Hudson and Hartnett (1978) 41 C.C.C. (2d) 145. Mr. Justice Dickson in delivering the judgment of the court stated at page 150:

Courts, for good reason, have been loath to attempt anything in the nature of an exhaustive definition of “defraud” but one may safely say, upon the authorities, that two elements are essential, “dishonesty” and “deprivation.” To succeed, the Crown must establish dishonest deprivation.

With regard to the element of deprivation, Dickson J. observed at page 150 of Olan that:

The element of deprivation is satisfied on proof of detriment, prejudice, or risk of prejudice to the economic interests of the victim. It is not essential that there be actual economic loss as the outcome of the fraud. The following passages from the English Court of Appeal judgment in

R. v. Allsop

(1976), 64 Cr. App. R. 29, in my view correctly state the law on the role of economic loss in fraud, pp. 31-2:

Generally the primary objective of fraudsmen is to advantage themselves. The detriment that results to their victims is secondary to that purpose and incidental. It is “intended” only in the sense that it is a contemplated outcome of the fraud that is perpetrated. If the deceit which is employed imperils the economic interest of the person deceived, this is sufficient to constitute fraud even though in the event no actual loss is suffered and notwithstanding that the deceiver did not desire to bring about an actual loss.

Markham’s conduct with respect to the distribution of Mindoro shares and his use of investors funds was dishonest and deceitful. Mindoro was deprived of its money and the Mindoro shareholders lost their investment. We find that Markham acted fraudulently when he appropriated funds from Mindoro’s treasury for his own benefit.

We also find that the evidence overwhelmingly supports our conclusion that Markham deliberately participated in a scheme relating to securities that was intended to defraud, and did defraud, Mindoro and its shareholders.

Markham was a seasoned mining executive, familiar with the development and financing of major projects. Despite his considerable experience, he operated in flagrant breach of regulatory requirements right from the start. Although ignorance of these requirements is rarely a mitigating factor, it is not believable that a man of Markham’s experience was not aware that what he was doing was illegal. His conduct is further aggravated by his professing to be in compliance with the requirements when Conn asked him about it.

Markham’s behaviour bears all the hallmarks of a scheme calculated to defraud. First, he controlled the whole show. There was no functioning board of directors. He was sole signatory to the bank accounts. Where another signatory was required, he simply asked Berry to sign, who was happy to do so on the strength of Markham’s bland assurances. Later, he relieved himself of even this level of inconvenience by having a rubber stamp made of Berry’s signature. Other officers of the company were similarly compliant.

Second, he controlled all of the information available about Mindoro so that misrepresentations were difficult to discover.

Third, he found in Berry and Conn the exquisite combination of naiveté, greed (tempered perhaps in Berry’s case by need) and access to people with money to invest. He took maximum advantage of these attributes.

Finally, he created a vision of the prospect of imminent wealth, all wrapped up in an atmosphere of urgency and secrecy. Investors were told that their investment would double in a very short time, with the prospect of much greater returns to follow. They were flattered as being part of a select group. Confidential reports were carefully guarded, and the shareholders’ identities were kept secret from one another. An aura of credibility was fabricated by the off stage presence of a major respectable mining company with which a joint venture was supposedly being negotiated.

Markham never demonstrated any intention to arrange Mindoro’s affairs such that a stock exchange listing would be obtained. None of the basic steps required to do so, such as the preparation of audited financial statements, were ever begun, let alone completed. Instead, the shareholders were provided with false and misleading financial statements, along with a panoply of excuses for Mindoro’s failure to become listed.

The extent of Markham’s cynicism and contempt for his shareholders is demonstrated by his shameless touting of false assay results from salted samples and his misappropriation of Mindoro funds while continuing to lure in more investors.

And then when there finally became too many questions for which there were no acceptable answers, Markham made his cowardly getaway and has not been seen since by any of his victims. In the circumstances, Markham’s refusal to attend these proceedings to explain his conduct underscores the contempt he has for the regulatory system.

We therefore find that Markham engaged and participated in a scheme relating to a trade in a security that he knew would perpetrate a fraud on persons in the province, contrary to section 41.1 of the Act.

3.4 Was Conn trading in La Paloma shares without being registered and was he distributing shares without filing and obtaining a receipt for a prospectus?

Commission staff alleged that Conn caused La Paloma to distribute shares to residents of British Columbia without registration, without filing and obtaining a receipt for a prospectus, and without an applicable exemption from the registration and prospectus requirements of the Act, contrary to sections 20 and 42 of the Act.

When Conn called the meeting for May 9 in an attempt to recoup his clients’ investment in Mindoro, he proposed that his clients invest in his new company that he intended to list on the Vancouver Stock Exchange by the end of 1994. Many did. They signed subscription agreements to purchase shares in the new company, subsequently named La Paloma. By July 6, 1994, all 750,000 seed shares had been placed and Conn caused La Paloma share certificates to be issued to those who provided subscription funds.

Based on these facts, we find that Conn was trading in the shares of La Paloma. We have already determined that his registration did not allow for Conn to be trading shares like Mindoro. In our view that reasoning applies to the shares of La Paloma. Accordingly we find that Conn was required to be registered under section 20(1)(a) and he was not so registered. No exemption from registration was available for this trading. Conn was therefore trading in securities of La Paloma in contravention of section 20(1)(a) of the Act.

In an attempt to rely on a statutory exemption from the prospectus requirements, Conn represented to Commission staff that those to whom he sold La Paloma shares were either business associates or friends. That was not always true, as investors testified. None of the La Paloma investors received a prospectus or an offering memorandum regarding the La Paloma shares.

Section 42(1) of the Act prohibits the distribution of a security without a prospectus or an available exemption. Like the Mindoro shares, the La Paloma shares were previously unissued securities when residents of British Columbia purchased them. These trades were therefore distributions within the meaning of section 1 of the Act. No prospectus was filed with the Executive Director under section 42 and no exemption from section 42 was available. Accordingly, we find that Conn distributed, and caused La Paloma to distribute, securities in contravention of section 42.

4. DECISION

Markham

Markham perpetrated an outrageous fraud on Mindoro and the residents of British Columbia who invested in Mindoro. In our view he was the ultimate con man who knew that high income or instant profits are always too good to resist and the fear of missing out can always be relied upon to override any fear of losing all. We found that he deliberately violated the most fundamental provisions of the Act, all with a view to defraud Mindoro and its shareholders. The exact extent of the loss is unknown although it appears to be in the several millions. Markham was, and still is, contemptuous of the regulatory regime and the public it serves to protect. The only interest he considers protecting is his own. His conduct is highly prejudicial to the public interest and warrants the severest sanction. In light of all the evidence, Mindoro’s fate lies with Markham’s. It too must pay the price of its regulatory misconduct.

The Commission considers that it is in the public interest to keep Markham and Mindoro order out of the public markets permanently and accordingly orders:

1. under section 144(1)(b) of the Act that the temporary orders made on August 31, 1994, cease trading the securities of Mindoro and of any other issuer controlled by Mindoro or Markham, be made permanent;

2. under section 144(l)(c) of the Act that, effective immediately, the exemptions described in sections 30 to 32.1, 55, 58, 80 and 81 of the Act do not apply to Markham for the rest of his natural life;

3. under section 144(l)(d) of the Act that, effective immediately, Markham is prohibited from becoming or acting as a director or officer of any issuer and is prohibited from engaging in investor relations activities for the rest of his natural life;

4. under section 144.1 of the Act that Markham and Mindoro each pay an administrative penalty of $100,000.

Berry

Berry’s situation is more difficult to assess. His counsel argues that he was only involved because of the long-standing friendship with Markham. He incorrectly believed he could sell to close friends (to a maximum of at least 50 investors). Counsel asks us to consider his age, his personal circumstances and the fact that he has already received a sanction from his professional body.

We found that Berry had difficulty recalling anything substantive, including his own actions and the reasons for them. Whether he was ever completely in the picture is not clear. Staff have not alleged that he knowingly participated in Markham’s scheme to defraud and we have not made any finding that he did. However, his continuing faith in Markham’s integrity and his optimism in the Mindoro project in light of the evidence is at best ‘interesting’. He became an officer and director of convenience because Markham needed another signature. This Commission has emphasized in many of its decisions that those who become so called officers and directors of convenience cannot thereby avoid their lawful duties as officers and directors. Such conduct will simply not be tolerated. Every officer and director of a company, in exercising his powers and performing his functions, is obliged to act honestly and in good faith and in the best interests of the company and to exercise the care, diligence and skill of a reasonably prudent person. Berry failed completely to meet this standard.

Berry also abused his doctor patient relationship of trust by encouraging patients to invest in Mindoro and in failing to disclose the fact that he was receiving substantial (10%) sales commissions - in excess of US $286,000. He willingly followed Markham’s directions and in doing so breached sections 20 and 42 of the Act. His conduct cannot be condoned. If it were not for individuals like Berry who allow themselves to be used, fraudsters like Markham would have a more difficult time operating. While we have taken into account counsel’s submissions on his behalf, the regulatory sanction we impose upon him must serve to deter not only him but others who are like minded.

The Commission considers it to be in the public interest to remove Berry from the market for a substantial period of time and to impose a significant administrative penalty under section 144.l of the Act.

Accordingly the Commission orders:

1. under section 144(l)(c) of the Act that the exemptions described in sections 30 to 32.1, 55, 58, 80 and 81 of the Act do not apply to Berry for 10 years from the date of this decision;

2. under section 144(l)(d) of the Act that Berry is prohibited from becoming or acting as a director or officer of any reporting issuer and is prohibited from engaging in investor relations activities for 10 years from the date of this decision; and

3. under section 144.1 of the Act that Berry pay an administrative penalty of $35,000.

Conn

Conn essentially admitted the allegations made against him. The question is only one of culpability. In his defence he submitted that he had been a mutual fund salesman for nine years and at the time of these events did not believe he was breaching any provisions of the securities legislation. He said he had spoken to several people at Vantage and elsewhere about Mindoro and was not alerted to any potential violations of the Act or problems with what he was doing. When it became clear Mindoro was a scam he made a sincere effort to help his clients recoup their investments. Again in doing so he did not believe he was violating any provision of the Act and said he acted on the advice of a securities lawyer. He, like others, was mislead by Markham and he has paid dearly. He says he has lost his livelihood, his home and car, his credit rating and his reputation with his family and friends. He says he cooperated completely with the regulators and the RCMP and gave them any information he had.

We have considered Conn’s submissions and while we agree that he was misled by Markham, he was a registrant, and an experienced mutual funds salesman. He had an obligation to prevent the very type of activity in which he participated. He breached several key provisions of the legislation by participating in an illegal distribution of Mindoro shares. He also repeatedly made representations as to Mindoro’s future value and listing on an exchange in contravention of section 35 of the Act in an effort to induce his clients to invest in Mindoro. His success in doing so brought him over US $393,000 in sales commissions. Like Berry he received a 10% sales commission. He proceeded to initiate another illegal distribution in a desperate attempt to recoup his clients’ investment in Mindoro. In doing so he breached sections 20 and 42 of the Act and abused a statutory exemption.

He admitted that he had no experience in mining securities or in the requirements of a company becoming listed on a stock exchange. It was clear he was in above his head and was acting outside his registration. He recruited unsophisticated investors at a seminar at which he held himself out as an experienced and successful financial planner - someone with specialized knowledge in investments, in particular Mindoro. We are particularly concerned that as a registrant he eagerly recommended this investment without having any meaningful and reliable disclosure documents such as audited financial statements, an offering memorandum or prospectus. His clients who invested in Mindoro and La Paloma were relying on his professional expertise. Indeed he expected them to and they did so to their detriment.

It is clear from the testimony of the witnesses that Conn gave little consideration to his clients’ individual financial circumstances when recommending Mindoro. Even if Mindoro had been a legitimate investment, it was entirely unsuitable for investors such as Thielke or the Bernas. Thielke had told Conn that one of her primary investment criteria was security of capital. The Bernas with their very young family told Conn they were looking for an investment that would “grow over the years with us’.

Conn’s behaviour went much farther than simply making inappropriate recommendations to such clients. As we were told by the investors, if cash for investment in such a venture was a problem, Conn recommended borrowing to invest and helped them arrange financing, all without a word regarding the risks of leveraged investing.

As a registrant he simply should have known better and not allowed himself to be swept into breaching such fundamental regulatory standards. Perhaps the prospect of substantial financial rewards clouded his judgment. As with Berry, the regulatory sanction we impose upon Conn must serve to deter not only him but others who find themselves in similar circumstances.

The Commission considers it to be in the public interest to remove Conn from the market for a substantial period of time and to impose a significant administrative penalty under section 144.l of the Act.

Accordingly the Commission orders:

1. under section 144(l)(c) of the Act that the exemptions described in sections 30 to 32.1, 55, 58, 80 and 81 of the Act do not apply to Conn for 15 years from the date of this decision;

2. under section 144(l)(d) of the Act that Conn is prohibited from becoming or acting as a director or officer of any reporting issuer and is prohibited from engaging in investor relations activities for 15 years from the date of this decision; and

3. under section 144.1 of the Act that Conn pay an administrative penalty of $50,000.

Finally the Commission is of the view that it is appropriate to order under section 154.2 of the Act that Mindoro, Markham, Berry and Conn pay the prescribed fees or charges for the costs of or related to the hearing incurred by the Commission and the Executive Director, the amount to be determined following further submissions from the parties.

DATED at Vancouver, British Columbia, on February 7, 1997.

FOR THE COMMISSION

Joyce C. Maykut, Q.C	Brent W. Aitken
Vice Chair	Member