2005 BCSECCOM 561

Panel	Robin E. Ford Marc A. Foreman Roy Wares	Commissioner Commissioner Commissioner
Dates of Hearing	December 1, 3 and 6, 2004
Date of Decision	August 31, 2005
Appearing	Ralph Sahrmann	For the Executive Director
Submissions on Sanctions by	Ralph Sahrmann Kristine Mactaggart Joseph A. Bernardo	For the Executive Director

	Para #
Introduction	1
Facts	12
Rosen	13
Statik Sports	14
The Investors	17
Prospectus	19
Representations	20
Wendy Betts	21
Claudio Martins	43
Evansens	55
Follow-up	57
Analysis and Findings	60
Law	61
Trading without registration	61
Distributing without a prospectus	62
Misrepresentation	63
Fraud	66
Findings	71
Trading without registration and distributing without a prospectus	71
Exemptions	73
Misrepresentations	76
Fraud	83
Conduct contrary to the public interest	87
Orders	88
Preliminary issues	89
Analysis	99
Orders	113

1. subjective knowledge of the prohibited act; and

2. subjective knowledge that the prohibited act could have as a consequence the deprivation of another (which deprivation may consist in knowledge that the victim’s pecuniary interests are put at risk).

¶ 68 McLachlin J also cited with approval (at 23) the words of Taggart JA who stated in R v. Long (1990), 51 BCLR (2d) 42, 61 CCC (3d) 156 at 174:

... the mental element of the offence of fraud must not be based on what the accused thought about the honesty or otherwise of his conduct and its consequences. Rather, it must be based on what the accused knew were the facts of the transaction, the circumstances in which it was undertaken and what the consequences might be of carrying it to a conclusion. [underlining added]

¶ 69 The BC Court of Appeal in Anderson went on to say:

Fraud is a very serious allegation which carries a stigma and requires a high standard of proof. While proof in a civil or regulatory case does not have to meet the criminal law standard of proof beyond a reasonable doubt, it does require evidence that is clear and convincing proof of the elements of fraud, including the mental element.

¶ 70 We must base our finding of the mental element of fraud on our findings as to what Rosen actually knew. The evidence must be clear and convincing.

Findings
Trading without registration and distributing without a prospectus
¶ 71 Statik sold shares not previously issued. We find that Statik traded and distributed securities under the Act. On the evidence before us, Rosen was Statik’s principal directing mind and will, and caused Statik to trade and distribute its shares. We find that Rosen traded in and distributed securities in that he acted, solicited and negotiated, directly or indirectly, to further “a disposition of a security for valuable consideration”, namely the sale of Statik’s shares for money to the investors.

¶ 72 From May 8, 2003 to November 17, 2004, Statik and, in relation to Statik, Rosen:

1. without registration under the Act, and without an exemption from the registration requirements, traded securities of Statik, by selling shares in the company for valuable consideration to the Statik investors, or acting in furtherance of such a sale, contrary to section 34(1)(a) of the Act; and

2. without filing a prospectus respecting the securities with the Executive Director, and without an exemption under the Act or the regulations, distributed securities of Statik, by selling shares in the company for valuable consideration to the Statik investors, or acting in furtherance of such a sale, contrary to section 61 of the Act.

Exemptions
¶ 73 The legislation provides exemptions from sections 34 (1) and 61(1). The onus of showing that any of those exemptions applies rests on the person who seeks to rely on the exemption (see Bilinski 2002 BCSECCOM 102). The respondents did not appear or present a defence, but staff nevertheless took us through the exemptions which might apply to show that they did not. The evidence before us shows that none of the exemptions applied.

¶ 74 None of the investments exceeded the minimum and neither Rosen nor Statik complied with any of the conditions attached to the exemptions that require a minimum investment or an offering memorandum. (See former sections 45(2)(5) and 74(2)(4) of the Act and former sections 89(b), 128(b) and 128(c) of the Securities Rules, BC Reg. 194/97; these provisions have been superseded by National Instrument 45-103 Capital Raising Exemptions.)

¶ 75 The “private issuer” exemption (formerly sections 46(j) and 75(a) of the Act, now in NI 45-103)did not apply because the investors of whom we are aware (with the possible exception of Dusty Evansen) were, with respect to Statik, “members of the public”. Three were friends or family of Dusty Evansen, who was not a director or officer of Statik. Staff told us that after asking the appropriate questions of the investors, they determined that the net worth of the investors did not meet the "sophisticated purchaser" test.

Misrepresentations
¶ 76 We find that, from May 8, 2003 to November 17, 2004, Statik and, in relation to Statik, Rosen, with the intention of effecting a trade in a security, namely the shares of Statik, made statements that they knew or ought reasonably to have known were misrepresentations, contrary to section 50(1)(d) of the Act.

¶ 77 Statik and Rosen made the following statements to Statik investors:

· a “merger” between Statik and a US company (Rosen told the Betts and Dusty Evansen the US company was “Cal-Pro”) was to take place and it was a “done deal”;
· as a result of the merger, the share price of Statik would materially increase “within a few weeks”; and
· Statik would be listed on the NASDAQ OTC or AMEX.

¶ 78 These statements were without foundation and false. They were also statements of material facts, namely facts that, where used in relation to the Statik shares proposed to be issued, could significantly affect, or could reasonably be expected to significantly affect, the market price or value of those shares. Therefore, they were misrepresentations.

¶ 79 Clearly the statements were false. The purported merger was a sham. The share price of Statik did not and could not increase within a few weeks. There was no prospective merger or public offering on any stock exchange or quotation and trade reporting system. The Statik Business Plan was no more than a recycled version of the Sniper Sports Business Plan used by Rosen in connection with the promotion of Sniper Sports Ltd and described in Sniper Sports Ltd 2005 BCSECCOM 560. It too was a sham.

¶ 80 Each of these facts could have significantly affected the value of the Statik shares. Without a merger, there would be no additional capital investment or other support that would add substantial value to the business. If the shares were not to trade at the specified prices, then they would be significantly less valuable. Without the listing, the investors would be restricted in their ability to sell the shares on, and the investment would not have the credibility that comes with listing.

¶ 81 Rosen and (through Rosen) Statik must have known that these statements were misrepresentations. Rosen was in control of all of Statik’s activities. The purported merger, public listing and Business Plan were shams of Rosen’s making. The statements about shares increasing in value had no basis in fact. All the statements were designed to induce prospective investors to invest.

¶ 82 Statik and Rosen must also have known that these facts could significantly affect the value of the shares and the price investors were willing to pay - that was the whole point of the promotion.

Fraud
¶ 83 We find that, from May 8, 2003 to November 17, 2004, Statik and, in relation to Statik, Rosen, in British Columbia, engaged in or participated in a series of transactions relating to a trade in a security, namely shares in Statik, knowing that the transactions perpetrated a fraud on persons in British Columbia, contrary to section 57(b) of the Act. They did this by making the misrepresentations described above.

¶ 84 The actus reas of fraud is found in Statik’s and Rosen’s false statements of important facts which caused actual loss to Statik investors who lost their investment.

¶ 85 The mens rea of fraud is also established. Statik (through Rosen) and Rosen must have known that the statements were false and deceitful and that the falsehood and deceit could have as a consequence that the investor’s economic interests were put at risk. Rosen solicited or directed the solicitation of the investors on behalf of Statik. He created the representations about Statik’s business and its potential. The false statements were part of a wider web of deceit concocted by Rosen and, through Rosen, Statik, to lure investors into a scam.

¶ 86 The evidence is clear and convincing.

Conduct contrary to the public interest
¶ 87 We find that Statik’s and Rosen’s conduct, described above, was contrary to the public interest.

Orders
¶ 88 Staff say it is in the public interest that we make the following orders:

1. under section 161(1)(b) of the Act, that all persons cease trading in any securities of Statik Sports Inc;

2. under section 161(1)(c) of the Act, that any or all of the exemptions described in sections 44 - 47, 74, 75, 98 or 99, do not apply to Statik and Rosen;

3. under section 161(1)(d) of the Act, that Rosen resign any position he holds as a director or officer of any issuer, and that he be prohibited from becoming or acting as a director or officer of any issuer;

4. under section 161(1)(d) of the Act, that Rosen be prohibited from engaging in investor relations activities;

5. under section 162 of the Act, that the respondents each pay an administrative penalty; and

6. under section 174 of the Act, that the respondents each pay prescribed fees or charges for the costs of or related to the hearing.

Preliminary issues
¶ 89 The orders requested by staff were not set out in the notice of hearing. While we think this is a desirable practice, we do not think the omission has caused any unfairness to the respondents in this case. The conduct in the second matter is very similar to the conduct which is the subject of Sniper Sports Ltd 2005 BCSECCOM 560 which matter was heard together with this one. It was therefore to be expected, in our view, that staff would request similar orders in their submissions on sanctions, and that is in fact what happened. Rosen and Statik had the opportunity to respond to staff’s submissions on sanctions, but chose not to do so.

¶ 90 There is another issue. The panel directed that the two matters be heard together for reasons of efficiency, having decided that this would not be unfair to the respondents. Staff did not apply for, and the panel did not direct, that the two matters be merged (or consolidated). The question is whether the matters should nevertheless be treated as merged for the purpose of deciding sanctions. In this case we were particularly concerned with the imposition of a second administrative penalty under section 162. We asked the parties for their submissions on whether we could impose a second penalty such that, taken together, the two penalties imposed on Rosen would exceed $250,000.

¶ 91 The two matters were heard together, but they have otherwise been treated as separate matters. The conduct alleged in the second matter was in many ways similar to that in the first matter and perhaps should be viewed as involving entirely the same respondent (that is, Rosen) since the corporate respondents were arguably themselves a sham. On the other hand, the conduct alleged in the second matter should not necessarily be viewed as a continuation of the conduct alleged in the first. Staff had by that time issued the notice of hearing with respect to the first matter and there was apparently a clean (and long) break between the conduct in the first matter and the conduct in the second.

¶ 92 If the conduct was continuing, then the proper course of action may have been to amend the first notice of hearing to pick up the new allegations. The Court might otherwise view treating the two matters separately as a colourable mechanism to avoid the requirements of section 162 of the Act. Biller v. British Columbia (Securities Commission), [2001] BCCA 208, although not precisely on point, may support that conclusion. To quote Mr Justice Low:

[7] … [Section] 162 empowers the Commission to impose only one penalty per hearing…. Contravention of a provision of the Act or regulations is simply a minimum requirement for the imposition of a penalty.

[17] … [The] penalty is related to the overall conduct of the person before the Commission and not to specific contraventions….

[18] [It was suggested that the Commission would get around this limitation by conducting a separate hearing for each contravention.] That is so only theoretically. The Commission has to act in good faith. I would think that conducting separate hearings with respect to related conduct for the purpose of collecting more money through administrative penalties would be an abuse of process.

¶ 93 Would the Court view two separate sanctions decisions under section 161 of the Act as an abuse of power in this case?

¶ 94 Staff say that when they became aware of the conduct which led to the issue of the notice of hearing, they faced a problem. Amending the notice of hearing might have meant that Rosen, faced with entirely new allegations, would seek – and might well be entitled to – an adjournment to prepare defences to the new allegations. This would have further delayed enforcement action on the allegations in the Sniper Sports matter.

¶ 95 In addition, staff questioned whether it would have been appropriate to amend the notice of hearing. The Statik conduct was in respect of a new issuer and had occurred well after the Sniper Sports conduct. Furthermore, the Statik conduct raised strong grounds for temporary orders which had not been sought in the Sniper Sports matter. On balance, staff decided it was preferable to issue new process to account for new conduct. The result was the November 15, 2004 temporary orders and notice of hearing.

¶ 96 In the event, the respondents did not defend either proceeding and the matters were heard together in the interests of efficiency.

¶ 97 Staff say that the current situation is entirely distinguishable from that discussed in paragraph 18 of Biller. The critical distinction lies in the fact that the Statik Sports events did not occur until after the first notice of hearing had been issued. Although Rosen’s misconduct is a common theme in both notices of hearing, the allegations in the first notice are concerned with events that ended in 2001, while the second notice is concerned with events in 2004. Staff say this was not a continuing course of conduct and two distinct sets of sanctions may properly be imposed.

¶ 98 We find that it is appropriate to treat the matters as separate courses of conduct. If we did not treat them as separate, it would be all too tempting for fraudsters to continue to take bites of the cherry after the Executive Director had issued a notice of hearing, but before the Commission had held a hearing and made a decision, knowing that any fine would be capped at $250,000.

Analysis
¶ 99 Re Eron Mortgage Corporation, [2000] 7 BCSC Weekly Summary 22 contains a non-exhaustive list of factors that are usually relevant to making orders against a person under sections 161(1) and 162:

· the seriousness of person’s conduct,
· the harm suffered by investors as a result of the person’s conduct,
· the damage done to the integrity of the capital markets in British Columbia by the person’s conduct,
· the extent to which the person was enriched,
· factors that mitigate the person’s conduct,
· the person’s past conduct,
· the risk to investors and the capital markets posed by the person’s continued participation in the capital markets of British Columbia,
· the person’s fitness to be a registrant or to bear the responsibilities associated with being a director, officer or adviser to issuers,
· the need to demonstrate the consequences of inappropriate conduct to those who enjoy the benefits of access to the capital markets,
· the need to deter those who participate in the capital markets from engaging in inappropriate conduct, and
· orders made by the Commission in similar circumstances in the past.

¶ 100 We have concluded that Rosen intentionally lied to investors. He preyed on inexperienced investors. He was following what by now was a pattern of deceitful behaviour to exploit the vulnerabilities of prospective victims and induce them to part with their money. His method of operation included the following:

· He offered shares which he said were soon to increase significantly in value on an impending merger or public offering;
· These shares had to be purchased quickly or the opportunity would pass, or they would be snapped up by another purchaser;
· Alternatively, the money was needed urgently or the valuable merger would not go ahead;
· He solicited the friends or family of his existing investors and used social contacts both for funds and to help him solicit other investors;
· Although he provided some documentation in the form of a business plan and share certificates, and repeated additional oral and written information to provide reassurance that matters were proceeding as expected (or to explain why they were not) the documentation was not of the nature or quality that an experienced investor would expect to receive.

¶ 101 As Wendy Betts said to us - “We would never have given him that money as a stranger.” She also said of Rosen - “You have hurt people. You have hurt families.”

¶ 102 Rosen’s and Statik’s conduct seriously harmed investors and damaged the integrity of the securities market in British Columbia. Neither Rosen nor Statik have accounted for the monies they took from investors, and Rosen has shown no remorse or intention to repay investors or that he accepts the consequences of his misconduct.

¶ 103 Although in this case Rosen appears to have victimized fewer investors than in Sniper Sports Ltd and taken less money ($128,700 as opposed to $311,659), this case has additional aggravating factors that justify a more significant sanction.

¶ 104 Conduct prior to the period relevant to the allegations in the notice of hearing may be taken into account in making orders and setting penalties (see Diianni 2001 BCSECCOM 918). We have taken into account the fact of the notice of hearing issued to Sniper Sports Ltd, 592087 BC Ltd and Rosen on May 7, 2003. On receipt of that notice, Rosen would have known beyond any doubt that the conduct described in this decision was, in staff’s opinion, to breach the securities laws. He would also have been fully aware of the losses he had already caused to the investors in the earlier North American and Sniper Sports promotions.

¶ 105 Despite the issue of the notice of hearing dated May 7, 2003, Rosen continued to engage in conduct that was at significant risk of being found to be a deliberate flouting of the securities laws, and to have caused fraudulent losses to investors. The conduct described in this decision followed substantially the same methods as the conduct alleged in relation to Sniper Sports and North American. Rosen by this time could have been under no misapprehension about what he was doing (and doing to investors) in conducting the Statik promotion.

¶ 106 Rosen was convicted of theft related to securities in January 2005. We have taken into account the fact of the conviction.

¶ 107 We have permanently excluded Rosen from the capital markets, from acting as a director or officer of an issuer, and from investor relations activities, so he cannot continue to victimize the public (see Sniper Sports Ltd 2005 BCSECCOM 560).

¶ 108 The aggravating factors combine to allow us to describe Rosen's behaviour as reprehensible - clearly deserving the imposition of a significant administrative penalty. There do not appear to be any mitigating factors.

¶ 109 It is also important that we send a clear message to those who continue (or consider continuing) to breach the Securities Act after the clearest warnings from Commission staff.

¶ 110 It appears that sums raised from investors went straight into Rosen’s pocket. There is no evidence that the funds were placed in a corporate bank account or accounted for as company assets. There is no evidence that Rosen spent any money to further the business purposes of Statik.

¶ 111 The company itself is, in a sense, a sham. It appears that it served only to provide credibility to Rosen’s representations to investors. There is no evidence that it was a true enterprise in its own right. Rosen is apparently the only director. We do not think therefore that a fine against Statik would have any additional deterrent effect against the directors, officers and shareholders (most of whom are those who were defrauded).

¶ 112 However, in making orders, we wish to ensure that Statik cannot in future be used again for an improper purpose.

Orders
¶ 113 Accordingly, considering it to be in the public interest, we order:

1. under section 161(1)(b) of the Act, that all persons cease trading in the securities of Statik Sports Inc;

2. under section 161(1)(c) of the Act, that the exemptions in the Act do not apply to Statik Sports Inc permanently; and

3. under section 162 of the Act, that Rosen pay an administrative penalty of $200,000.

¶ 114 It is the Commission’s usual practice to award costs against an unsuccessful respondent under section 174 of the Act and Securities Regulation, BC Reg. 196/97, section 22. The respondents were given notice that staff would seek costs of the hearing. We received no submissions from the respondents on costs.

¶ 115 We order that Rosen pay the prescribed fees or charges of or related to the hearing in the amount of $20,233.88.

¶ 116 August 31, 2005

¶ 117 For the Commission




Robin E. Ford
Commissioner




Marc A. Foreman
Commissioner




Roy Wares
Commissioner