Kathleen A. Reilly, for Commission staff.

      On June 25, 1991, notice was given to Malcolm Richard Stone that a hearing would be held before the Commission to consider whether it is in the public interest to make orders against him under sections 144 and 144.1  of the Securities Act, S.B.C. 1985, c. 83.   The hearing date was set, by consent, for July 11, 1994.  Stone did not appear at the hearing but filed a written submission in support of an application to adjourn the hearing generally and in response to the allegations in the notice of hearing.  Stone's application to adjourn was in essence an application to dismiss the proceedings primarily based on delay.   We dismissed the application as the notice of hearing had been issued within the limitation period, Stone had consented to a three year adjournment, Commission staff's case consisted of documentary evidence and Stone chose not to provide any evidence.  The hearing was held on July 11, 1994.

      Commission staff alleged that Stone engaged in conduct that was prejudicial to the public interest, contrary to the securities legislation and in breach of his duties as a director and officer of a reporting issuer.

      In summary, Commission staff alleged that Stone, as the president and a director of Sino Pac International Investments Inc:

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certified that Sino Pac's Statement of Material Facts ("SMF") dated May 14, 1986, constituted full, true and plain disclosure of all material facts  relating to the securities offered by the SMF when he knew, or ought to have known, that certain material facts had not been disclosed  in the SMF, and that therefore Stone's certification was false. The material facts omitted included:

-		the existence of a pledge on all the shares of Grand China Limited, the company Sino Pac was proposing to acquire;
-		the existence of significant operating losses incurred by the Grand China Group between the date of the acquisition agreement and the SMF; and
-		the existence of exchange controls applied by the Peoples Republic of China  ("PRC") on the distribution of profits from Shenzhen Goodyear Printing Company Ltd.,  a Grand China Limited joint venture;
-		failed to cause Sino Pac to make adequate and timely disclosure of material changes in its business and affairs, including a change in the repayment terms of the Grand China Group's intercompany debt assumed by Sino Pac;

-		failed to act honestly, in good faith and in the best interests of Sino Pac by preferring the interests of Mandarin Resources Corporation Limited to those of Sino Pac, where he was a director and officer of both companies; and
-		directed that Sino Pac issue shares to an individual under an employee share option  when the individual was not an employee of Sino Pac, contrary to Exchange policy.

      Sino Pac was incorporated in British Columbia on March 25, 1982, as Target Resources Ltd.  It changed its name to Grand China Resources Limited in November 1985, to New China Resources Ltd. in September 1989, and finally to Sino Pac on February 6, 1991.  For convenience we have simply referred to the company as Sino Pac.

      Sino Pac is a reporting issuer under the Act and its shares trade on the Vancouver Stock Exchange.  Originally, Sino Pac was in the business of exploring and developing natural resource properties.  On September 19, 1985, Sino Pac's shares were suspended from trading for failure to meet the public distribution requirements of the Exchange.  At the time, Sino Pac was a shell company.

      Stone was a director and the president of Sino Pac from September 19, 1985, until December 29, 1987.  Stone was the managing director of Mandarin Resources Corporation Limited, a publicly traded holding company registered in Hong Kong, from February 8, 1985.  In October 1985,  Mandarin owned Grand China Limited, a private Hong Kong holding company, which in turn owned several other companies, collectively called the Grand China Group.  Two of these companies were Printrite Press (Hong Kong) Ltd. and Goodyear Printing Products (China) Ltd., which held a 50% interest in Shenzhen Goodyear Printing Company Ltd.  Shenzhen Goodyear was  incorporated in the PRC and located in a special economic zone in the PRC.

      Stone was a director of  each of the Grand China  Group companies from April 19, 1985, to June 25, 1988.

      The SMF

      Shortly after Sino Pac's shares were suspended from trading,  Mandarin  negotiated a reverse takeover of Sino Pac. The terms of the reverse takeover were reflected in an agreement dated October 17, 1985, between  Sino Pac, Mandarin and Grand China Limited.  Under the agreement:

-		Mandarin agreed to transfer 10 million shares of Grand China Limited, representing a 100% equity interest, to Sino Pac and in exchange Sino Pac agreed to issue to Mandarin 2 million common shares of Sino Pac, representing 1,083,000 free trading and 917,000 escrow shares;
-		Sino Pac agreed to conduct a public offering of a minimum of 250,000 of its common shares through the Exchange at no less than Cdn$1.50 per share;
-		Sino Pac agreed to repay, within one year after the completion of the agreement, all debts, plus 10% interest, owed by the Grand China Group to Mandarin (the "Intercompany Debt") which, at the time of the agreement, amounted to approximately HK$ 7.59 million; and
-		Mandarin warranted that it would transfer the shares of Grand China Limited to Sino Pac free from all liens, charges, pledges, or other encumbrances and that there would be no liens, charges, pledges or other encumbrances on the shares of the Grand China Group  companies.

      In September 1985, approximately one month prior to the acquisition agreement, Mandarin acquired Printrite, for HK $6.5 million.  To finance the Printrite purchase, Mandarin borrowed HK $3.0 million from the Bank of Credit and Commerce, which was secured by a fixed and floating debenture over all the assets of Printrite, and HK $3.5 million from Asian Oceanic Ltd., which was secured by pledges of the shares of Grand China Limited and Printrite.  The pledges to Asian Oceanic, the Bank of Credit and Commerce debenture and the particulars of Printrite's financing were not referred to in the October 17 acquisition agreement.

      On May 20, 1986, trading in Sino Pac shares was reinstated by the Exchange and Sino Pac distributed 400,000 shares at $1.50 through the facilities of the Exchange. The offering was made under a SMF dated May 14, 1986.  On May 27, 1986, Sino Pac received over $500,000 from the offering.

      Disclosure of the October 17 acquisition agreement was made in the SMF, including the terms of consideration and the repayment of the Intercompany Debt.  The SMF did not disclose the existence of the pledges of the Grand China Limited and Printrite shares to Asian Oceanic.

      As a condition of approving Sino Pac's SMF and reinstating its shares for trading, the Exchange required Mandarin to confirm in writing that the Intercompany Debt, which Sino Pac had agreed to repay, would not be required to be repaid to Mandarin until Grand China Limited had sufficient cash flow to do so.  In a letter dated April 18, 1986, Stone, on behalf of Mandarin, confirmed to the Exchange that, following the completion of the acquisition of Grand China Limited by Sino Pac, Mandarin would agree to a repayment schedule of the Intercompany Debt which would in no way impair the cash flow requirements of Grand China Limited.  It appears that Mandarin had sent a letter to Sino Pac to the same effect on April 16, 1986.  As a consequence, the SMF also stated that, in the event Grand China Limited was unable to meet the terms of repayment, Mandarin had agreed to defer such payment until cash flows were sufficient to extinguish the Intercompany Debt.

      In support of the acquisition of the Grand China Limited shares, an assessment  report of the Grand China Group was prepared for Sino Pac by John Heathcote of Print Marketing & Management Ltd., in compliance with then Local Policy Statement 3-04.  The Heathcote report, dated February 1986, formed part of the SMF and included projected net sales and profit and loss accounts for the Grand China Group for the five year period ending  August 1990.  For the five year period,  total sales were projected at over HK$343 million and total net profits were projected at over HK$44 million.  For the period from September 1985 to August  31, 1986, the Heathcote report projected total sales for the Grand China Group at over HK$53 million.  Total net profits for the Grand China Group for the same period were projected at over HK$6 million.

      The SMF included unaudited consolidated profit and loss statements (reported in Canadian dollars) for the Grand China Group for the period ending January 31, 1986. The statements showed that the Grand China Group had incurred significant operating losses to the end of the period and that actual profits were substantially less than as projected in the Heathcote report.  For the period ending January 31, 1986, the Grand China Group had retained profits of approximately HK$197,000.  Although the unaudited financial statements for the period ending January 31, 1986, were included in the SMF, the fact that the Grand China Group fell far short of its expected profit targets was not referred to in the text of the SMF or was any explanation given for the failure to meet projected targets.

      The Heathcote report showed that, for the five year period ending August 1990, Shenzhen Goodyear  would provide approximately 34% of the projected total sales and net profits of the Grand China Group.  The Heathcote report also showed that, for the period ending August 31, 1986, Shenzhen Goodyear was projected to provide over HK $3 million of the HK$6 million total net profits.

      In 1985 and 1986, Shenzhen Goodyear's profits were subject to the PRC's foreign exchange control regulations. Whether profits could be converted into foreign currency and distributed to Grand China Limited depended in large part on Shenzhen Goodyear's having a surplus foreign exchange trade position.   The SMF did not disclose that the distribution of Shenzhen Goodyear's  profits were subject to foreign exchange controls by the PRC.  The SMF simply referred to Shenzhen Goodyear 's projected sales and profits in both Renminbi and $HK and noted that the conversion rate for Renminbi was 1 Renminbi for HK$2.70.

      As the president and a director of Sino Pac, Stone signed the certificate of directors and promoters certifying that the SMF constituted full, true and plain disclosure of all material facts relating to the securities offered.   The SMF also stated that Stone  had been a director or officer of other reporting issuers within the previous three years.

      The Intercompany Debt

      By the end of July 1986, the Intercompany Debt had increased to HK$10.6 million from HK$7.59 in September 1985, as a result of Mandarin making additional loans to the Grand China Group.  Mandarin, Sino Pac and Grand China Limited agreed to execute a loan agreement whereby Sino Pac would become the principal debtor and Grand China Limited the guarantor of the Intercompany Debt, which Mandarin agreed to reduce by approximately HK$4.5 million.  The parties represented that the loan agreement was entered into in lieu of the promissory note and guarantee referred to in the October 17 acquisition agreement and to fulfil the terms of Mandarin's April 16 letter regarding the finalization of the schedule of repayment of the Intercompany Debt.

      Correspondence from Mandarin's Hong Kong and Vancouver lawyers indicates that, in preparing the loan agreement, the issue of consistency between the terms of the loan agreement and terms of the October 17 acquisition agreement as disclosed in the SMF was raised.  In a letter to Stone dated August 1, 1986, Mandarin's Hong Kong lawyers stated that, if the loan agreement incorporated a cash flow clause similar to that disclosed in the SMF, it would produce a loan agreement "commercially unacceptable to Mandarin".  Although Mandarin's attention was drawn to the risk of not following the wording in relation to the loan as stated in the SMF, Mandarin's board "decided to take a commercial view rather than compromise the repayment terms by reference to cash flow".  Stone advised Mandarin's Hong Kong lawyers that the terms of the loan agreement from Sino Pac's perspective were substantially better than the terms of the October 17 acquisition agreement and that, even though it did not accord exactly with the SMF, he confirmed on behalf of both the Sino Pac and the Mandarin boards that the agreement should be drafted without the cash flow clause.  Similarly, all references to the Asian Oceanic pledge in the loan agreement were deleted as being inconsistent with the October 17 acquisition agreement.

      Ultimately, Mandarin, Sino Pac and Grand China Limited executed a loan agreement, dated July 31, 1986, that did not incorporate a cash flow clause similar to the one described in the SMF and in Mandarin's letters to the Exchange and to Sino Pac.  The loan agreement represented  that the Intercompany Debt had grown to approximately HK$10.06 million and that the unaudited consolidated profit and loss accounts of Grand China for the period ending May 31, 1986, showed a loss of over HK$5.3 million.  The loan agreement also stipulated that the Intercompany Debt, which had been reduced to approximately HK$5.53 million, would be repaid by Sino Pac over a five year period ending June 30, 1992.

      Stone and two other directors of Sino Pac signed a consent resolution with a deemed date of August 6, 1986, approving the execution of the loan agreement.  The loan agreement was signed by Stone on behalf of both Mandarin and Grand China Limited and by another director of Sino Pac on behalf of Sino Pac.

      Sino Pac did not advise the Exchange, nor did it publicly disclose, that the terms of  repayment of the Intercompany Debt had changed, in particular that the sufficient cash flow clause had been deleted.

      Correspondence from Stone indicated that Mandarin had agreed on August 7, 1986, to sell its 1,083,000 free trading Sino Pac shares and 913,000 escrow shares to a third party for HK$3.9 million.

      On August 25, 1986, Sino Pac filed a quarterly report for the period April 1, 1986, to June 30, 1986, in which it stated that Sino Pac's SMF had been approved and that Sino Pac  had acquired all the issued and outstanding shares of Grand China Limited.  No mention was made of the Asian Oceanic pledges or the changes to the terms of repayment of the Intercompany Debt.

      On November 5, 1986, Sino Pac's auditors, Thorne, Ernst & Whinney, wrote to Stone stating that they were unable to issue an audit opinion on Sino Pac's annual financial statements for the year ending June 30, 1986, a result of becoming aware of the pledge of the Grand China Limited and Printrite shares. They advised Stone that the pledge(s) "is a serious encumbrance on the assets of the consolidated group and as such we can not release our audit opinion until the pledge is removed.  The pledge calls into question whether [Sino Pac] actually acquired an asset.  If we were to issue a qualified opinion at this time and the pledge were not substantially removed, the ownership of a substantial portion (greater than 90%) of the consolidated asset would be called into question".

      Between November 19 and 21, 1986, a series of transactions occurred, culminating in Asian Oceanic discharging the pledges of the Grand China Limited and Printrite shares.  First, Mandarin's agreement to sell its Sino Pac shares to a third party for HK$3.9 million completed. It appears that funds from this sale were then used to repay the Asian Oceanic loan.  Asian Oceanic in turn discharged the pledges of the Grand China Limited and Printrite shares and advised Sino Pac's auditors that the pledges had been removed. Stone, on behalf of Mandarin and the only other shareholder of Grand China Limited, signed a resolution dated November 19, 1986, consenting to the transfer of Grand China Limited's shares to Sino Pac.  Finally, Grand China Limited's shares were recorded in the Hong Kong Companies Registry as having been transferred to Sino Pac on November 21, 1986.

      Commission staff certified that, as of March 26, 1992, Sino Pac had not disclosed to the public that the sufficient cash flow clause no longer qualified the terms of repayment of the Intercompany Debt.

      The Options

      In May 1986, Stone instructed another Sino Pac director to ensure that Sino Pac issue shares to Lori MacRae under an employee share option, although MacRae was not an employee of Sino Pac.  A directors' resolution directing the transfer agent to issue 91,500 shares to MacRae was signed by two directors of Sino Pac.

3.

FINDINGS

      Commission staff allege that Sino Pac's SMF dated May 14, 1986, did not constitute full, true and plain disclosure of all material facts relating to the securities offered by the SMF. The three material facts staff allege were not disclosed were the Asian Oceanic pledges, the significant operating losses incurred by the Grand China Group between September 1, 1985, and May 1986, and the currency controls imposed by the PRC on the distribution of profits of Shenhzen Goodyear. Staff allege that Stone knew, or ought to have known, that these facts were material and, consequently that Stone's certification was false.

      The relevant legislation in force at the time this matter arose was the Securities Act, R.S.B.C. 1979 c. 380 (the former Act) and the Regulations Made under the Securities Act, B.C. Reg.193/67 (the former Regulation).

      Section 42 of the former Regulation provided that an SMF shall provide full, true and plain disclosure of all material facts relating to the securities proposed to be issued. Section 41 of the former Regulation required that an SMF be prepared in accordance with  the prescribed form. Section 46 of the former Regulation required that the SMF contain a certificate signed by the directors and promoters stating that the SMF constituted full, true and plain disclosure of all material facts relating to the securities proposed to be issued.

      "Material" was defined in the prescribed form to mean, where used in relation to a fact, a fact that would reasonably be expected to have a significant effect on the market value of the securities of an issuer.

      At the beginning of October 1985, Sino Pac was a shell. The October 17 agreement to acquire the Grand China Limited shares was a material fact that was disclosed in the SMF. Mandarin warranted in the October 17  agreement that there had been no material adverse change in the affairs and financial position of Grand China Limited since August 31, 1985, except for its acquisition of Printrite.  Clearly, the materiality of the Printrite acquisition was acknowledged and was disclosed in the October 17 acquisition agreement and in the SMF.  What was not disclosed was the particulars of Printrite's financing, including the pledges to Asian Oceanic. In our view, Thorne, Ernst & Whinney in their letter of November 5, 1986, correctly characterized the nature and effect of the Asian Oceanic pledges on Sino Pac's affairs.  When it became apparent that the pledges had not yet been removed, they advised Stone that they could not release their  audit opinion for Sino Pac because the pledge(s) was "a serious encumbrance on the assets" of the Grand China Group and called into question whether Sino Pac actually acquired an asset, because the ownership of more    than 90% of the consolidated asset would be called into question.  Indeed, the evidence establishes that Sino Pac did not acquire the Grand China Limited shares until November 21, 1986, after Mandarin had sold its Sino Pac shares to a third party.

      We find that the Asian Oceanic pledges were material facts that would reasonably be expected to have a significant effect on the market value of Sino Pac's shares and accordingly ought to have been disclosed in the SMF.

      During the course of the hearing, Commission staff conceded that the extent of the operating losses incurred by the Grand China Group between the date of the October 17 acquisition agreement and the SMF were disclosed in the unaudited consolidated profit and loss statements for the Grand China Group for the period from April 1, 1985 to January 31, 1986.  These statements, in Canadian dollars, were included in the SMF and showed the actual total profits and retained profits at the end of January 1986. These  figures were substantially less than the profit targets projected in the Heathcote report.  Although the most recent financial information, including the actual profits, of the Grand China Group was disclosed in the SMF, it was not referred to in the text of the SMF.  Nor was it in any way brought to the attention  of the reader.  The Grand China Group was Sino Pac's business. The profit projections in the Heathcote report would have been very important information to any prospective investor and would reasonably be expected to have a significant effect on the market value of the securities of Sino Pac. Any indication that Grand China Group was not, or would not be, meeting those projections, not only ought to have been disclosed by the inclusion of the actual operating losses and reduced profits in the most recent unaudited financial statements, but ought to have been brought home to the investor in the body of the  the SMF.  In our view, the discrepancy between the relatively minimal actual profits of the Grand China Group for the period ending January 31, 1986, and the substantial profits projected in the Heathcote report ought to have been discussed in the narrative of the SMF in a manner that clearly brought to the attention of the reader the fact that profit projections in the Heathcote report were not being met.  To have this material information buried in the unaudited financial statements was in our view not full, true and plain disclosure of all material facts relating to the securities offered by the SMF.

      The Heathcote report also showed that, for the five year period ending August 1990, Shenzhen Goodyear would provide approximately 34% of the projected total sales and net profits of the Grand China Group.  The Heathcote report showed that, for the period ending August 31, 1986, Shenzhen Goodyear was projected to provide over HK$3 million of the HK$6 million total net profits.  Clearly, Shenzhen Goodyear's profits were central to the realization of Grand China Group's profit targets. Any fact affecting the distribution of those profits, and hence Sino Pac's profits, would reasonably be expected to have a significant effect on the market value of the securities of Sino Pac.

      We find that the distribution of Shenzhen Goodyear's profits was subject to an undisclosed risk, namely the currency controls by the PRC, and that this was a material fact that ought to have been disclosed in the SMF.

      We find that Stone knew, or ought to have known, that the Asian Oceanic pledges, the discrepancy between actual profits and profit projections caused by significant operating losses of the Grand China Group, and the PRC currency controls on the distribution of Shenzhen Goodyear's profits were material facts and that they ought to have been disclosed in the SMF in a full, true and plain manner.  They were not.  As a consequence, Stone's certification that the SMF constituted full, true and plain disclosure of all material facts relating to the securities offered by the SMF was false.

      The Intercompany Debt

      Staff also alleged that the omission of the sufficient cash flow clause from the terms of repayment of the Intercompany Debt, as reflected in the July 1986 loan agreement, was a material change in the affairs of Sino Pac and ought to have been disclosed.

      The Commission's policy relating to an issuer's obligation to make timely disclosure of all material changes in its affairs that was in force at the time was Uniform Act Policy #2-12, Timely Disclosure.  The guidelines in the policy were to ensure that all investors be placed on an equal footing with respect to the material facts of a reporting issuer.  The policy provided that reporting issuers make immediate disclosure of all material and significant information through the news media, including material changes and proposed material changes in the affairs of the issuer that could reasonably be expected to affect materially the value of the issuer's securities.

      The Exchange's corporate disclosure policy in effect at the time was VSE Listings Policy Statement #10/84, Corporate Disclosure.  It provided similar guidelines to those in Uniform Act Policy #2-12.  It stated that an Exchange issuer and its management must disclose promptly a change in the affairs of the issuer that might reasonably be expected to affect materially the value of its listed securities.  The policy also stated that the announcement of the change should be made in a manner that provides for wide dissemination of the news and that copies of the announcement should be filed with the Exchange contemporaneously with its release.

      As a condition of approving Sino Pac's SMF and reinstating its shares for trading, the Exchange required Mandarin to confirm in writing that the Intercompany Debt, which Sino Pac had agreed to repay, would not be required to be repaid to Mandarin until Grand China  Limited had sufficient cash flow to do so.  In a letter dated April 18, 1986,  Stone, on behalf of Mandarin, confirmed to the Exchange that, following the completion of the acquisition of the Grand China Limited shares by Sino Pac, Mandarin would agree to a repayment schedule of the Intercompany Debt which would in no way impair the cash flow requirements of the Grand China Group.  As a managing director of Mandarin and as president and director of Sino Pac, Stone knew, or ought to have known, that the significant operating losses of the Grand China Group would not produce the cash flow Sino Pac needed to repay Mandarin.  The Intercompany Debt was HK$5.53 million, which was a significant amount.  The omission of the sufficient cash flow clause from the July 1986 loan agreement changing the terms of repayment of the Intercompany Debt was a change in Sino Pac's affairs that could  reasonably be expected to affect materially the value of Sino Pac's securities.  Sino Pac and Stone were advised by lawyers involved in drafting the loan agreement that the omission of the sufficient cash flow clause would make it inconsistent with the disclosure in the SMF.  Despite this warning, Stone advised that the boards of both Sino Pac and Mandarin elected to proceed in this way.

      We find that the omission of the sufficient cash flow clause from the July 1986 loan agreement was a material change in the affairs of Sino Pac and ought to have been disclosed by Sino Pac.  We also find that Stone knew, or ought to have known, that the omission of the sufficient cash flow clause was a material change in the affairs of Sino Pac and that he ought to have caused Sino Pac to publicly disclose it in accordance with the guidelines set out in Uniform Act Policy #2-12 and the Exchange's Listings Policy Statement #10/84.

      It is a fundamental principle of securities regulation that all persons investing in securities have equal access to information that may affect their investment decisions. Public confidence in the integrity of  the securities markets requires that all investors be on an equal footing through timely disclosure of material facts and changes regarding the business and affairs of reporting issuers.  The public interest was seriously prejudiced by the lack of timely disclosure of material facts and changes regarding the affairs of Sino Pac.

      It is the responsibility of the senior officers and directors to ensure that a reporting issuer meets its regulatory responsibilities. That responsibility was not discharged here. Stone was the president and a director of Sino Pac.  The evidence indicates that he was the one orchestrating this entire transaction, which in essence began in September 1985 and completed at the end of November 1986. In doing so, he effectively acted on behalf of, and directed the affairs of,  Sino Pac, Mandarin and Grand China Limited. Stone must take responsibility in large part for the failure of Sino Pac to make timely disclosure of all material facts and changes regarding its affairs.

      Duties of a Director and Officer of a Reporting Issuer

      The omission of the sufficient cash flow clause from the July 1986 loan agreement raises two other regulatory concerns regarding Stone's conduct.

      The first concerns the representations Stone made on Mandarin's behalf to the Exchange in the letter of April 18, 1986.  Mandarin represented that the Intercompany Debt, which Sino Pac had agreed to repay, would not be required to be repaid to Mandarin until Grand China had sufficient cash flow to do so.  This representation was fundamental to the Exchange's approval of the SMF.  When the July loan agreement was entered into by Sino Pac, Grand China Limited and Mandarin, Stone's representation to the Exchange, made on behalf of Mandarin, was no longer true.  In our view, Stone as the president and a director of Sino Pac, ought to have brought to the attention of the Exchange the proposed omission of the sufficient cash flow clause in the loan agreement before the loan agreement was executed, in light of the nature and purpose of the representations he made in his letter of April 18, 1986, to the Exchange.

      As noted by this Commission in The Matter of Prime Resources Corporation  [1990] 23 BCSC Weekly Summary, the effectiveness of the securities regulatory system depends in part on Exchange staff being able to rely on representations made by issuers.  It is prejudicial to the public interest for an issuer to withhold changes to material particulars of a transaction for which the Exchange specifically sought confirmation before it would grant approval of the transaction such as, in this case, the reverse takeover and the SMF itself.

      The second issue concerns staff's allegations that Stone was in a conflict of interest and that he failed to act honestly, in good faith and in the best interests of Sino Pac by preferring the interests of Mandarin to those of Sino Pac.

     As the president and a director of Sino Pac, Stone had a fiduciary duty to Sino Pac.  Section 142(1) of the Company Act, 1979 RSBC c. 59 provides that:

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

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

      The requirement of a director and officer to act "in the best interests of the company" means that he must give his undivided loyalty to the company.  He must prefer the company's interest over his own personal interests, the interests of any other company or any other competing interest.

      Stone was a director of Sino Pac, Mandarin and Grand China Limited. When Sino Pac, Mandarin and Grand China Limited agreed to restructure the terms of repayment of the Intercompany Debt in July 1986, Stone was faced with a conflict of interest.  Rather than absent himself from the negotiations and decision making process of the transaction, he appears to have orchestrated it.  Stone, as managing director of Mandarin, resolved that a loan agreement with a sufficient cash flow clause like that in the SMF would be "commercially unacceptable to Mandarin."  Stone, as president and director, with Sino Pac's board, resolved to execute a loan agreement with repayment terms of the Intercompany Debt that were not subject to sufficient cash flow.  This was a decision made without the best interests of Sino Pac in mind. The omission of the sufficient cash flow clause from the loan agreement, which changed the terms of repayment of the Intercompany Debt, conferred a material benefit on Mandarin and constituted an adverse material change for Sino Pac.

      We find that Stone did not act in the best interests of Sino Pac when he, as the president and a director of Sino Pac, consented to a resolution approving the July 1986 loan agreement without the sufficient cash flow clause.  As a consequence, Stone breached his fiduciary duties to Sino Pac as set out in section 142 of the Company Act.

      The Options

     The Exchange's policy in effect at the time, VSE Listings Policy Statement #1/82, Director and Employee Stock Options, provided guidelines applicable to incentive stock options granted to directors and employees of listed companies. Pursuant to the policy, as MacRae was not an employee of Sino Pac, she was not entitled to receive shares under an employee share option.  We find that Stone directed that shares be issued to her, contrary to the policy.

4.  DECISION

      On the basis of the evidence, we found Stone responsible for a number of significant violations of securities regulatory standards.  In summary, Stone, as the president and a director of Sino Pac:

1.		certified that Sino Pac's SMF dated May 14, 1986, constituted full, true and plain disclosure of all material facts  relating to the securities offered by the SMF when he knew, or ought to have known, that certain material facts had not been disclosed  in the SMF and that therefore Stone's certification was false;
2.		failed to cause Sino Pac to make adequate and timely disclosure of material changes in its business and affairs;
3.		failed to discharge his duties as a director and officer of  Sino Pac to act honestly, in good faith and in the best interests of Sino Pac, by preferring the interests of another company  to those of Sino Pac, where he was a director and officer of both companies; and
4.		directed that Sino Pac issue shares to an individual under an employee share option  when the individual was not an employee of Sino Pac, contrary to Exchange policy.

      In our view, it is in the public interest to remove Stone from participating in the market for a significant period. We therefore consider it in the public interest to order:

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 Stone for a period of 15 years from the date of this decision;
2.		under section 144(1)(d) of the Act that Stone is prohibited from becoming or acting as a director or officer of a reporting issuer:

a)		until he has successfully completed a course of study satisfactory to the Executive Director concerning the duties and responsibilities of directors and officers; and
b)		a period of 15 years has elapsed from the date of this decision; and

3.

under section 154.2 of the Act that Stone pay prescribed fees and charges for the costs of or related to the hearing, in an amount to be determined following further submissions from the parties.