COR#96/027

Heard:

February 28, March 1, 2 and 3, 1995 Decision: February 20, 1996

Gerald A. Cuttler, for Commission staff. Derek Duncan Mason, for himself, Greymont Capital (VCC) Corporation and Greymont Capital Corporation.

      This is a hearing under sections 144(1) and 144.1 of the Securities Act, S.B.C. 1985, c.83 (the "Act"). A notice of hearing was issued on June 9, 1994, setting out allegations with respect to the conduct of Greymont Capital (VCC) Corporation ("Greymont VCC"), Greymont Capital Corporation ("Greymont Capital"), Derek Duncan Mason, Michael Sanderson, Jeffrey B. Lightfoot, Conrad Cecil-Gunn and Rod Pennington.

      The notice of hearing was accompanied by temporary orders, made by the Superintendent of Brokers (now called the Executive Director) under section 144(2) of the Act, that the exemptions provided by sections 30 to 32, 55, 58, 80 and 81 do not apply to Greymont VCC, Greymont Capital, Mason, Lightfoot or to any person controlled by Mason or Lightfoot. The temporary orders in respect of Lightfoot were later dropped. The temporary orders in respect of Mason, Greymont Capital and Greymont VCC have been extended pending this decision.

      Also on June 9, 1994, a member of the Commission, pursuant to section 135(1) of the Act, issued a freeze order directing:

-		Greymont VCC and Greymont Capital to refrain from withdrawing or authorizing withdrawal of any of their funds, securities or other property from any person having them under control or on deposit; and
-		the Bank of Montreal to hold any funds, securities or other property of Greymont VCC and Greymont Capital held or controlled by the Bank.

      At the outset of the hearing, Commission staff advised that they would not be proceeding against Lightfoot, Cecil-Gunn, Pennington or Sanderson, but were reserving the discretion to proceed against Sanderson at a future time. The respondents in this hearing are therefore Mason, Greymont Capital and Greymont VCC.

      Commission staff allege that the respondents engaged in the following conduct in contravention of the Act and contrary to the public interest:

-		The respondents traded in securities without being registered and without an exemption from registration.
-		The respondents distributed securities without filing and obtaining a receipt for a prospectus and in the absence of any exemption.
-		Mason, on behalf of Greymont VCC, prepared and certified the content of an offering memorandum that contained misrepresentations.
-		Mason certified as true and correct and filed a report of exempt distributions on behalf of Greymont VCC when he knew or ought to have known that it contained misrepresentations.
-		Mason and Greymont Capital, in breach of fiduciary duties to Greymont VCC and in breach of representations to investors, used funds raised from investors by Greymont VCC for their own benefit and contrary to the best interests of Greymont VCC and the investors.

      Mason is a resident of West Vancouver and is about 45 years of age. He is a former member of the Law Society of British Columbia and has been involved since about 1980 in business activities related to investment. His activities in the early 1980s are summarized in a decision of the Court of Appeal, Mason v. Law Society (British Columbia), 63 B.C.L.R. (2d) 83 (B.C.C.A.), in which the Court dismissed Mason's appeal of a 1989 Law Society decision to refuse to reinstate his lapsed membership. At page 85, the Court outlined Mason's background as follows:

	The appellant was called to the bar in 1978 and practised as a sole practitioner. He then practised as a partner with another lawyer from February 1, 1979 to September of 1980 when he joined a firm of investment counsellors known as Kelly Peters & Associates (hereinafter "Kelly Peters") and has not formally practised law since that time. The appellant had no experience in business, financial and investment counselling and apparently expected to provide legal services to the firm as corporate solicitor but ended up by acting as a salesman, a self-styled financial planner and investment counsellor and was closely associated with his long-time friend and prime mover in the venture, William Kelly. He himself made a number of real estate investments based on recommendations made by Kelly and made the same recommendations to clients of Kelly Peters. Both the Appellant and the clients ultimately suffered severe losses as a result of investing in these vehicles which prominently featured tax-sheltered real estate and tailored life insurance policies.
	In the meantime, in August 1982, the appellant went to Hawaii to make certain inquiries regarding a Kelly-sponsored real estate project in which both he and his clients had invested. While there he learned that Kelly owned half of the local agent and had thus been receiving further commissions. He did not advise his clients of this information as he was of the view that if he did he would have destroyed the existing organization. He did, however, leave his employment with Kelly Peters ogether with others and founded his own firm which was eventually unsuccessful.
	During all this time he had remained a member but, for whatever the reason, allowed his practising certificate to lapse after the year 1982 and pursuant to s.33 of the Act he ceased to be a member on January 1, 1983 for non payment of fees.
	His personal financial situation declined rapidly, and some of his former clients commenced an action for fraud against him. On June 16, 1985 Meredith J. in the Supreme Court found all defendants liable to four plaintiffs, two of whom were clients of Mason, for damages brought about by fraudulent conduct [[1985] I.L.R. 1-1956]. The case was appealed to the Court of Appeal and is reported under the name of Burns v. Kelly Peters & Associates Ltd., 16 B.C.L.R. (2d) 1, [1987] 6 W.W.R. 1, 41 C.C.L.T. 257, [1987] I.L.R. 1-2246, 41 D.L.R. (4th) 577. The majority of the court absolved Mason of liability based upon fraudulent conduct but found him guilty of a breach of fiduciary duty to his clients, inter alia, as a result of his failure to disclose that he was receiving commissions with respect to the sale of the Hawaiian condominiums to these clients.
	In the meantime, being unable to meet his liabilities, the appellant declared bankruptcy in 1986. On December 3, 1987 he was granted a discharge on condition he pay $7,500 to the trustee within one year; in 1988 he met the condition and the discharge was made absolute.

      In the summer of 1993, Greymont Capital had no business interest and Mason was looking for projects in any type of business through which he could make money by raising funds from the public. Mason had no other source of income at this time. One of the avenues Mason decided to explore was raising money through a venture capital corporation under a provincial government program that provides investor tax credits.

      The Small Business Venture Capital Act, S.B.C. 1985, c. 56 (the "SBVC Act") has been, through successive provincial government reorganizations, administered by variously named ministries responsible for small business (the "Ministry"). An investor in a venture capital corporation that is registered under the SBVC Act is, subject to specified conditions, eligible for a tax credit under section 8.3 of the provincial Income Tax Act, R.S.B.C. 1979, c. 190, equal to 30 per cent of the acquisition cost of venture capital corporation shares to a maximum amount of $60,000 per year.

      On July 22, 1993, Mason sought consent of the Ministry to reserve the name of Greymont VCC. Mason represented in the form that "I have identified at least $100,000 cash which would be used to acquire VCC equity shares in a company using the above name and I anticipate requesting a maximum VCC equity capital approval of $1,800,000 to be raised in the next 12 months." Greymont VCC was incorporated under the Company Act on August 20, 1993.

      Mason had not actually identified where or how he would get the $100,000 represented in the form but says he felt confident that he could raise the money easily. Nor had he identified the source of the $1,800,000 that he would be requesting. His intention was to raise the money from the public for a blind pool, and then to search for an appropriate investment. He did not initially intend to advertise the offering but later decided to do so. None of the respondents were registered under the Act. They intended to conduct the offering using registration and prospectus exemptions under the Act.

      Mason was the sole operating mind of both Greymont Capital and Greymont VCC. He expected that Greymont Capital would act as agent for Greymont VCC in raising money from the public, as well as pursuing other projects not related to Greymont VCC. However, by late August, Mason still had not raised any money for Greymont Capital or Greymont VCC, and Greymont Capital was running out of cash. Mason asked Jeffrey Lightfoot, a lawyer he had retained to act for Greymont VCC, whether he could charge expenses of Greymont Capital to Greymont VCC.

      On August 25, 1993, Lightfoot provided Mason with a copy of section 9 of the SBVC Act regulations, which sets out rules for payment of expenses by VCCs. Lightfoot's accompanying note advised Mason that approval by the Ministry was required before payment of any amount for administration fees. The section requires prior approval by the Ministry and, where expenses are to be paid to a control person of the VCC, prior approval by a special resolution of the members. According to Lightfoot, the Ministry practice is to approve administration fees not exceeding 20 per cent of the amount raised. Although Mason ultimately did cause Greymont VCC to pay expenses to and for himself and Greymont Capital, he never obtained the Ministry's approval or a special resolution.

      Meanwhile, Mason was attempting to register Greymont VCC under the SBVC Act. The Ministry officials did not share Mason's enthusiasm for a blind pool scheme. Instead they required him to identify a specific and qualifying small business opportunity before they would agree to register Greymont VCC.

      On or about September 13, 1993, Mason opened two bank accounts at the Bank of Montreal for Greymont VCC. One account was for general purposes and the other was to serve as Greymont VCC's "investment protection account". The SBVC Act requires that 30 per cent of any funds raised by a venture capital corporation be held in a special investment protection account meeting certain criteria and conditions established by the Ministry. The money in the investment protection account provides security for the     government to recover the tax credit paid to investors in the event the venture capital corporation fails to comply with the SBVC Act.

      On September 13, 1993, Mason received $50,000 from an investor named John P. Sunderland for investment in Greymont VCC. In soliciting the investment, Mason told Sunderland the money would be invested by Greymont VCC in a company called Able Walker Ltd. At that time, Mason was negotiating with Able Walker.

      Mason deposited the $50,000 in the Greymont VCC general account. He then transferred $15,000 to the investment protection account and paid almost all of the remainder, $34,000, to Greymont Capital.

      Mason then caused Greymont Capital to pay him $10,000 as a "draw" (his term for his personal remuneration) and to pay $21,825 in various expenses. Mason acknowledges that many of the expenses paid had nothing to do with Greymont VCC but he justifies the payment as a sales commission to Greymont Capital based on expected future capital raising for Greymont VCC.

      On September 17, 1993, Mason advised Ministry officials that Greymont VCC would invest in Able Walker, a private company that Mason described as "a British Columbia company which manufactures and sells mobility assisting' devices for the elderly and infirm." At that time, Mason was negotiating with Able Walker but Greymont VCC had no agreement to invest.

      It appears that, on this basis, Ministry officials advised Mason that Greymont VCC would be registered and would be authorized to raise $2 million under the SBVC Act. Mason immediately began to solicit further investments in Greymont VCC.

      On October 8, 1993, Greymont VCC was formally registered under the SBVC Act. It was then authorized to raise equity capital of $2,000,000, made up of $50,000 initially approved and $1,950,000 approved subject to additional conditions set out in a letter sent to Mason's attention. The conditions included the following:

-		Greymont VCC was required to advise the Ministry of any changes in the information previously submitted.
-		The approval to raise additional capital expired December 1, 1993. If any of the $2,000,000 approved capital remained unsubscribed after December 1, 1993, a further application would be required under the SBVC Act.
-		Greymont VCC was required to advise the Ministry on a monthly basis of the results of its efforts to raise capital.
-		Greymont VCC was required to submit all promotional material to the Ministry for approval before distribution to investors.
-		Greymont VCC was required to submit any offering document required under the Securities Act to the Ministry to be reviewed for compliance with the requirements of the SBVC Act. No tax credit certificate would be issued under the SBVC Act until the offering document had been reviewed and approved. The review was not related to compliance with securities legislation.

-		Greymont VCC offered 2 million common shares at a price of $1 per share for gross proceeds of $2,000,000. Payment of agents' selling commissions of 10 per cent would leave net proceeds, before the costs of the offering, of $1,800,000 for Greymont VCC. Other costs of the offering were estimated at $200,000, leaving proceeds available for investment of $1,600,000.
-		Greymont VCC had engaged Greymont Capital as agent to sell the offering. Greymont Capital would be entitled to commissions of 10 per cent of the amount sold.
-		Greymont VCC would invest 80 per cent of the gross proceeds of the offering in the share capital of Able Walker by December 31, 1994. If Greymont VCC were unable to conclude an agreement with Able Walker or to qualify Able Walker as an eligible investment under the SBVC Act, it would call a special shareholders' meeting to seek approval of two-thirds of the shareholders for a change in investment focus. No disclosure was provided that Greymont VCC would be paying Mason's salary or Greymont Capital's expenses.
-		Greymont VCC would "only invest in Companies whose shares are, or will be listed and traded on a recognized public stock exchange."
-		Mason, president and director of Greymont VCC, had over 15 years experience in senior financial, legal and administrative management functions in both public and private companies. No disclosure was provided that Mason had been found in breach of fiduciary duties as a result of the Kelly Peters matter, that he had declared personal bankruptcy, or that he had been refused readmission to the Law Society.
-		The proceeds from subscriptions for Greymont VCC shares would be deposited with Greymont VCC in trust. Mason agrees that this statement was false.
-		The offering would be done in reliance on the exemptions in section 117(a) and (b) of the former Securities Regulation, B.C. Reg 270/86.

      Greymont VCC raised no funds in October 1993. It paid out a mere $100 for postage.

      Greymont Capital's sole source of cash in October 1993 was a loan of $5,000 from Mason's mother, E.M. Mason. Mason took a draw from Greymont Capital of $1,000 in October and caused Greymont Capital to pay some $6,525 for other expenses.

      On November 4, Greymont VCC began advertising its offering in the Vancouver Sun. The advertisement caught the attention of Commission staff. Investigator Donna Bobbett contacted Mason on November 8 and 9 and they apparently agreed on some changes that would be made to the advertisement to address her concerns. Bobbett confirmed the discussion and requested copies of the offering memorandum in a letter dated November 9, 1993.

      During November 1993, Greymont VCC raised $100,000 from four investors, purportedly under the SBVC Act. Mason had still not received approval of Greymont VCC's offering memorandum from the Ministry.

      Mason transferred $30,000 of the $100,000 raised in November to Greymont VCC's investor protection account. Most of the $70,000 remainder was paid out by Greymont VCC as follows:

-		$25,000 was transferred to Greymont Capital on three cheques drawn by Mason. Of this, $20,000 was designated as a "loan" by Greymont VCC to Greymont Capital, although there is no loan documentation.
-		Mason paid himself $10,700 for a sales commission and as draws, extracted $500 for petty cash and a further $850 cash for postage.
-		Mason drew a number of other cheques for a total of more than $13,000 for various expenses, salaries and commissions.

      By December 1, 1993, when Greymont VCC's approval to raise $2 million under the SBVC Act expired, Mason had not obtained the Ministry's approval of its offering memorandum or its promotional materials but had raised $150,000 from investors. A further $45,000 was raised from three investors on December 1. On the same day, Mason drew cheques on the Greymont VCC account paying $5,000 to Greymont Capital and $5,000 to himself.

      Mason claims that he had been told by a Ministry official that the December 1 deadline was simply a formality and would be extended, although he has no note of any such conversation. Indeed the notes in files indicate the contrary, that he knew he had to formally apply for and receive approval for an extension of the deadline, and steps were taken in an attempt to do that. We reject Mason's evidence and find that he knew that the December 1 deadline would not be extended without a formal application.

      On December 2, in seeking to have the deadline extended, Sanderson sent to the Ministry a list of persons who had purportedly invested a total of $836,000 in Greymont VCC. (In fact Greymont VCC had raised only $195,000.) It appears Sanderson was told over the telephone that an extension would not be provided. Lightfoot wrote to the Ministry on Greymont VCC's behalf on December 3 complaining that an extension had been refused the previous day. The letter claimed that Greymont VCC had raised $636,000 to date and expected to raise a similar amount in December. The letter also indicated that Greymont VCC had just become aware that the Ministry had not reviewed its offering memorandum.

      Despite knowing that the offering was not authorized under the SBVC Act, Greymont VCC continued promoting and selling after December 1.

      On December 3, Greymont VCC received $45,000 from three investors. On the same day, Mason drew cheques for $5,000 to himself and $1,000 to Sanderson. On December 8, Greymont received $20,000 from two investors.

      On December 8, 1993, Donna Bobbett of Commission staff called and sent a letter to Greymont VCC, advising that the offering memorandum was not in compliance with the required form, that consequently the offering constituted an illegal distribution and that the sales efforts should cease immediately. Mason was in Toronto at the time. He says he instructed Sanderson to stop the advertisements and to retain Lightfoot. He says that Lightfoot's position was that Greymont VCC would not necessarily have to stop selling and that Lightfoot said he would "schmooze" the Commission staff and get approval for some changes to the offering memorandum.

      Lightfoot could not recall providing any advice as to whether Greymont VCC could keep selling but he did work on changing the offering memorandum to address the concerns of Commission staff.

      Mason says that, although he told Sanderson to stop the advertisements, the Vancouver Sun "went right on printing". At least one more advertisement was published in the Vancouver Sun, on December 15.

      In addition, substantial further investments were raised by Greymont VCC during the following two weeks. A total of $61,000 was raised from three investors on December 10, $35,000 from two investors on December 14, and $49,000 from two investors on December 15. On December 17, Lightfoot wrote to Bobbett, and copied Mason, stating that Greymont VCC had not sold any securities after December 1. Greymont raised a further $35,000 from two investors on December 24, neither of whom was on the December 2 list sent to the Ministry.

      One of these investors was Ralph Pybus, who appeared as a witness. Pybus saw Greymont VCC's advertisement in late November. It attracted his attention because he was looking for an investment that would earn him a tax credit. At his request, his wife, Elizabeth Pybus, called in response to the advertisement in early December. She received a letter from Cecil-Gunn dated December 10, enclosing Greymont VCC information. After considering two other tax-driven investments, the Pybuses decided to go ahead and invest in Greymont VCC.

      On December 23, Ralph Pybus attended at the office of Greymont Capital, met with Cecil-Gunn, and was briefly introduced to Mason. Although Mason claims that he thought Pybus had decided to invest before December 1, Pybus testified that it was clear from their conversation that he had not already decided to invest. We prefer the evidence of Pybus and find that Mason knew Pybus had not decided to invest by December 1.

      Pybus made and delivered a cheque in the amount of $25,000 in favour of Greymont VCC. He was given a receipt by Greymont VCC, signed by Cecil-Gunn and dated December 23. Pybus then went to his Coquitlam residence to gather his family to depart for a Christmas holiday.

      After noticing the date on the cheque, Mason contacted the Pybuses and hurriedly drove from the downtown Vancouver office of Greymont VCC to Coquitlam, where he sought and obtained a new cheque for $25,000, backdated to November 28, 1993, and signed by Elizabeth Pybus. This was clearly an effort by Mason to conceal the fact that the Pybuses did not invest until after December 1.

      During December 1993, Greymont VCC received some $290,000 from investors, of which $87,000 was credited to the investor protection account. Of the remainder Mason caused Greymont VCC to pay himself $15,000, to pay Greymont Capital $21,000, to pay sales commissions of $20,600 and to pay a variety of other expenses.

      Greymont Capital's sole source of funds in December 1993 was the $21,000 from Greymont VCC. From this, Mason drew $5,000, paid his Visa account of $1,467.74 and paid a variety of personal and business expenses.

      In summary, from September 13 to December 24, 1993, Greymont VCC raised $440,000 from 22 investors. Fourteen of those investors made their investments, totalling $245,000, after December 2, 1993. Although Mason claims he understood that all of them had decided to invest by December 1, seven of them were not included on the list sent to the Ministry on December 2. (Many who were on the list did not ultimately invest in Greymont VCC.) Furthermore, $180,000 was raised from nine investors after December 8, when Commission staff advised Greymont VCC to stop distributing its shares.

      Meanwhile, Mason continued negotiations with Able Walker and, on December 14, 1993, he caused Greymont VCC to execute an agreement with Able Walker, under which Greymont VCC would invest up to $1,600,000 in common shares of Able Walker on or before January 31, 1994, subject to Able Walker filing a preliminary prospectus for an initial public offering of common shares and using its best efforts to obtain a listing on the Vancouver Stock Exchange. Greymont VCC would then be able to nominate two of five directors on Able Walker's board and Able Walker would enter into a 36 month management agreement with Mason for $5000 per month.

      Able Walker had previously applied to the Exchange's Pre-Listing Advisory Committee but had not received approval to proceed with a listing application.

      Mason told Lightfoot in December that he was spending more than 20 per cent of the money raised by Greymont VCC for administration. Mason claims that Lightfoot smiled and nodded and that he took this to mean that it would be acceptable to spend the funds raised from investors for administration provided that, after future investments were raised, total administration costs would be less than 20 per cent.

      Lightfoot testified that he was not asked for and did not give an opinion on whether Greymont VCC could spend in excess of 20 per cent on administration. Under cross examination by Mason, Lightfoot said they both had known that Greymont VCC was offside and they had no need to discuss it. Mason accepted that response.

      We prefer the evidence of Lightfoot and find that Mason was not acting on legal advice when he continued to spend the proceeds of the offering.

      In late December, Mason and Lightfoot began seeking an allocation under the SBVC Act for 1994, so Greymont VCC could sell shares during the RRSP season. He was unable to arrange a meeting with Ministry officials until February 9, 1994.

      Mason continued to use funds raised by Greymont VCC for expenses of Greymont Capital. He transferred a further $30,000 to Greymont Capital in January and early February.

      On February 4, 1994, Greymont VCC filed a Form 20, Report of Exempt Distribution. Mason certified "that the statements made in the report are true and correct." The Form 20 reported the distribution of shares of Greymont VCC to 22 investors for aggregate proceeds of $440,000. All investments were shown as having been made on or before December 1, 1993. This was not true; 14 investments were made after December 1. Total commissions paid were reported as $34,400. This was not true; the commissions paid were at least $66,000. If all of the transfers to Greymont Capital are regarded as commissions (Mason suggested they were advance payments of commissions), the amount would be more than $200,000.

      Attached were Forms 20A, Acknowledgment and Undertaking, for each of ten investors who had invested $25,000 or more. These showed that the purchases had occurred before or by December 1, 1993, and that the purchases were being made under the registration and prospectus exemptions in sections 76(b) and 117 (b) of the Securities Regulation.

      Forms 20A were not provided for the other 12 investors, who had invested less than $25,000 each. The Form 20 reported the sales to these investors as having been made under the registration and prospectus exemptions in sections 32(j) and 58(1) of the Act.

      At some point the Ministry learned that Greymont VCC had paid out more than 20 per cent of the offering proceeds and told Mason money would have to be put back to restore Greymont VCC's account to 80 per cent of the proceeds, or $352,000. On February 10, 1994, Mason offered to solve the problem by providing a promissory note for $99,017.58, by resigning as president and director of Greymont VCC in favour of Sanderson, and by placing his shares of Greymont VCC in a voting trust in favour of Sanderson.

      The Ministry told Mason that a promissory note was unsatisfactory and demanded that the money paid out in excess of 20 per cent of the offering proceeds be returned to Greymont VCC's bank account.

      On February 17, 1994, Mason undertook to:

-		"top up" the current balance in the Greymont VCC account, being some $121,492, to not less than $352,000 by March 4, 1994;
-		transfer all his Greymont VCC shares to Sanderson for $10;
-		cancel all agreements between himself and Greymont VCC;
-		resign as a director and officer of Greymont VCC.

      In order to restore the bank balance, Greymont VCC borrowed $100,000 from the Bank. The loan was fully secured by a certificate of deposit of funds from Greymont VCC's investor protection account. Mason acknowledges that the $100,000 was not really available to Greymont VCC but says this was the best he could do. We find that this arrangement had no purpose other than to mislead the Ministry.

      On March 4, 1994, Mason advised Ministry officials he had fully implemented his undertakings. This was not true.

      Mason continued to have signing authority on Greymont VCC's bank account and continued to cause it to pay funds to Greymont Capital. During March 1994, $20,000 was paid.

      Discussions continued between Greymont VCC's counsel and the Ministry. Greymont VCC wanted the Ministry to issue tax credit certificates to the investors and to authorize a new allocation for fund raising in 1994. The Ministry insisted that the tax credit certificates would not be issued until Greymont VCC completed its new agreement with Able Walker. A meeting was set up for March 24. The Ministry requested and was provided copies of Greymont VCC's bank statements prior to the meeting. The statements showed the $20,000 removed earlier in March and then redeposited on March 24. At the meeting, the Ministry learned that Mason still had signing authority for Greymont VCC's account. This was the last straw.

      The Ministry advised Greymont VCC's counsel by telephone on March 31 and April 5 and by letter on April 8 that Greymont VCC would be deregistered under the SBVC Act. As a result, Greymont VCC would be unable to raise any more funds under the SBVC Act and the investors would not receive tax credits for their previous investments in Greymont VCC.

      On April 2, 1994, Mason was reappointed a director of Greymont VCC, replacing Sanderson. Clearly, he had been in control of Greymont VCC throughout the period. With the deregistration under the SBVC Act, the facade no longer had to be maintained.

      During April 1994 Mason caused Greymont VCC to pay $20,000 to Greymont Capital, to pay $5,000 to Sanderson and to pay $10,000 to new solicitors.

      In turn, during March and April 1994 Mason caused Greymont Capital to pay him some $13,650 and also to pay his club dues, his automobile expenses, rent, legal bills, trade creditors and the like.

      Up to early April, the respondents had provided no disclosure to investors of any of the difficulties being encountered by Greymont VCC. Ralph and Elizabeth Pybus had called Mason in February and March asking why they had not received a tax credit certificate. On each occasion they were told that there was no problem and that the Ministry would send a certificate.

      In early April, Greymont VCC received demands from some investors to have their funds returned because they had learned from the Ministry that they would not be eligible for tax credits. On April 22, 1994, Mason sent a letter to the investors advising them that "as a result of an issue that has arisen between [Greymont VCC] and the [Ministry], the Company is no longer registered as a venture capital corporation and there will be no tax credits available for you in respect of your investment in the Company." The letter did not disclose the reasons for deregistration or the fact that a significant amount of the funds raised had been spent. Instead, it painted a rosy picture of Greymont VCC's prospects.

      Pybus called Mason after receiving the April 22 letter and then sent a letter asking for his money back.

      Mason sent a follow up letter to the investors on May 11 advising of a shareholder meeting scheduled for June 10, at which Greymont VCC would seek approval for redirection of its investment from Able Walker to another company. The letter advised that "This redirection will result in:

1.		Your immediate receipt of a cash payment in the amount of 30% of your investment.
2.		Full RRSP qualification (if required).
3.		An investment which has phenomenal potential. (See Audited Financial Projections).
4.		No time restrictions on holding the investment."

      From May 10 to June 8, 1994, Mason caused Greymont VCC to pay Greymont Capital a further $30,000.

      On June 9, 1994, the Superintendent issued the temporary orders against the respondents and the Commission froze Greymont Capital's and Greymont VCC's bank accounts. At this time, only $175,000 of the $440,000 originally raised from investors remained in Greymont VCC's accounts. The other $265,000 had been spent.

3.

FINDINGS

Commission staff allege that:

-		the respondents, Mason, Greymont VCC and Greymont Capital, traded in securities of Greymont VCC without being registered and without being eligible for an exemption from the registration requirement;
-		the respondents distributed securities of Greymont VCC without filing a prospectus and obtaining a receipt and without being eligible for an exemption from the prospectus requirement;
-		Mason, on behalf of Greymont VCC, prepared and certified the offering memorandum, which contained misrepresentations and Mason and Greymont Capital used the offering memorandum to solicit investments in Greymont VCC from members of the public;
-		Mason certified a Form 20, Report of Exempt Distribution, filed with the Commission on or about February 4, 1994, as true and correct when he knew, or ought to have known, that it contained misrepresentations;
-		Mason and Greymont Capital, each in breach of the fiduciary duties they owed to Greymont VCC, and in breach of the representations to investors, used investors' funds for their own benefit and contrary to the best interests of Greymont VCC and the subscribing shareholders.

      The evidence is clear that the respondents distributed shares of Greymont VCC between September 13 and December 24, 1993. None of the respondents were registered under the Act and no prospectus was filed. The respondents purported to rely on exemptions from the registration and prospectus requirements of the Act to conduct the distributions. In the offering memorandum, Greymont VCC represented that the distribution was being done in reliance on sections 76(a) and (b) and 117(a) and (b) of the former Securities Regulation. Section 76 of the Regulation contained registration exemptions; section 117 contained parallel prospectus exemptions. (Similar exemptions are now contained in sections 89 and 128 of the Securities Rules, B.C. Reg. 479/95.)

      Sections 76(b) and 117(b) provided an exemption for trades where the cost to the purchaser was no less than $25,000 and an offering memorandum in Form 43 was delivered to the purchasers.

      Of the 22 investors to whom Greymont VCC sold shares, 12 purchased shares at a cost of less than $25,000 each. These trades could not be done in reliance on sections 76(b) and 117(b). The remaining 10 purchasers acquired shares at a cost of $25,000 or more each. These trades could be done under the exemption provided each of the purchasers was provided with an offering memorandum in the required form. However, as we will see below, Greymont VCC's offering memorandum contained misrepresentations and was therefore not in the required form. Accordingly, we find that the respondents could not rely on sections 76(b) and 117(b).

      Sections 76(a) and 117(a) provided an exemption for trades to not more than 50 purchasers per year, with no minimum dollar threshold. The exemption was only available where, inter alia, the securities were not advertised and no selling or promotional expenses were paid (except to a registered dealer), and an offering memorandum in the required form was delivered to the purchasers.

      Greymont VCC advertised the distribution of its securities, it paid sales commissions to its unregistered salespersons, and the offering memorandum was not in the required form. Accordingly, we find that the respondents could not rely on sections 76(a) and 117(a).

      The Form 20 filed by Greymont VCC in February 1994 represented that the trades of less than $25,000 had been done in reliance on the exemptions in sections 32(j) and 58(1) of the Act. Section 32(j) provides a registration exemption for trades in securities of a private issuer where the securities are not offered for sale to the public. Section 58(1) provides a parallel prospectus exemption. Greymont VCC advertised the distribution of its securities and sold to persons with no previous connection to Greymont VCC or Mason. Accordingly, we find that the respondents did offer Greymont VCC shares to the public and could not rely on sections 32(j) and 58(1).

      Since no registration or prospectus exemptions were available for the distribution of Greymont VCC shares to the 22 investors, we find that the respondents contravened sections 20 and 42 of the Act.

Misrepresentations in offering memorandum

      Greymont VCC prepared an offering memorandum for the purpose of the offering that it purported to carry out under sections 76(a) and (b) and 117(a) and (b) of the former Regulation. The required form of offering memorandum under these sections is Form 43, which sets out 20 required items of disclosure and a required form of certificate. The certificate says "The foregoing contains no untrue statement of a material fact and does not omit to state a material fact that is required to be stated or that is necessary to prevent a statement that is made from being false or misleading in the circumstances in which it is made." It is required to be signed by the chief executive officer and chief financial officer of the issuer.

      Greymont VCC's offering memorandum contained a certificate in the required form signed by Mason.

      The certificate in Form 43 uses the same words as the definition of "misrepresentation" in section 1 of the Act. Both employ the term "material fact", which is defined in section 1 as "where used in relation to securities issued or proposed to be issued, a fact that significantly affects, or could reasonably be expected to significantly affect, the market price or value of those securities".

      We find that the following elements of disclosure in Greymont VCC's offering memorandum were misrepresentations:

-		Item 11(1) of Form 43 requires the issuer to state "the principal uses planned for the proceeds" of the distribution. The offering memorandum stated that "The net proceeds of this offering, after deduction of the Agent's fees and commissions and the expenses of the offering will be made available by the VCC to Able Walker Ltd." In fact, none of the proceeds were invested in Able Walker. At the date of the offering memorandum, Greymont VCC had no agreement with Able Walker. Most of the proceeds were used to pay for operations of Greymont Capital and to pay remuneration and benefits to Mason in excess of any amount disclosed.
-		The offering memorandum stated that "It is the intention of [Greymont] VCC to comply with all the investment restrictions and criteria imposed on it by the [SBVC] Act." In fact, even before the date of the offering memorandum, Greymont VCC had sold shares to one investor, Sunderland, and transferred most of the proceeds to Greymont Capital, in contravention of the requirements of the SBVC Act.
-		The offering memorandum stated that "[Greymont] VCC will only invest in companies whose shares are, or will be listed and traded on a recognized public stock exchange." In fact, Greymont VCC transferred substantial amounts to Greymont Capital, a non-reporting issuer with no intention or expectation of becoming listed. Able Walker, which was represented as the company in which Greymont VCC would invest, was not listed on an exchange and, although it was taking steps to seek a listing, had no assurance of becoming listed.
-		The offering memorandum stated that the "net proceeds received by [Greymont] VCC ... will be made available to Able Walker" and that Greymont VCC "will invest a minimum of 80% of the gross proceeds received from this offering in common and/or preferred shares of Able Walker Ltd. no later than the end of the next succeeding fiscal year". In fact, no funds were invested in Able Walker. Instead, a substantial portion of the offering proceeds were transferred to Greymont Capital and Mason and spent by them.
-		The offering memorandum stated that Mason "has over 15 years experience in senior financial, legal and administrative management functions in both public and private companies." It failed to state that, during that 15 year period, Mason had been found liable of breach of fiduciary duty to clients in relation to an investment scheme, had declared bankruptcy and had been denied readmission to the Law Society.
-		The offering memorandum stated that Greymont Capital was a "firm specializing in business finance, marketing and management". In fact, Greymont Capital had no significant business interests.
-		The offering memorandum stated that the proceeds would be deposited with Greymont VCC "in trust", when in fact a substantial portion of the proceeds were transferred to Greymont Capital and Mason and spent by them.

Misrepresentations in Form 20

      A person who distributes a security under certain exemptions, including section 117(a) and (b) of the former Regulation, is required to file a report of exempt distribution in the required form. The required form is Form 20 and it is required to be filed not more than ten days after the distribution. It requires the issuer to state, inter alia, the section of the Act or Regulation under which the distribution was made, the date of the distribution, the name of any agent in the distribution and the amount of compensation paid to any agent.

      It is important to note in this context that each sale to a purchaser constitutes a distribution. A single Form 20 filing may report on a series of distributions but a filing must be made within ten days for any particular distribution.

      Greymont VCC filed its Form 20 on February 4, 1994, well past the ten day deadline for all of the distributions to the investors. Mason signed the certificate in the report that the statements in it were true and correct.

      The Form 20 said the distributions to the investors were done under sections 32(j) and 58(1) of the Act and under sections 76(b) and 117(b) of the Regulation. As discussed above, the exemption in sections 32(j) and 58(1) was clearly not available to Greymont for these distributions because the shares were offered to the public. The reference in the Form 20 was the first time Greymont even purported to rely on this exemption. Previously it had claimed that the sales in amounts less than $25,000 were done under sections 76(a) and 117(a) of the Regulation. As discussed above, this exemption was not available either, because the offering was advertised and because sales commissions were paid to non-registrants.

      The Form 20 represented that all of the distributions were done on or before December 1, 1993. This was clearly false in the case of Pybus and the other investors whose names were not on the list provided to the Ministry on December 2.

      The Form 20 reported amounts paid as compensation to Mason and others that were much less than the actual amounts paid.

      Mason might have been confused about the applicability of various exemptions, but he had an obligation to ensure that Greymont VCC was entitled to rely on the exemptions represented in the Form 20. He certainly knew or ought to have known that the other statements were false. We find that Mason falsely certified the Form 20.

Breach of fiduciary duties

      Mason set up Greymont VCC as a vehicle to raise money from the public, using as an inducement the tax credits available to companies registered under the SBVC Act. He had no other business interests at the time and hoped to derive his income from sales commissions on the investments, administration fees charged to Greymont VCC and a salary he was negotiating with Able Walker.

      However, immediately upon completing his first sale of shares and continually until the Commission froze the bank accounts of Greymont VCC and Greymont Capital, Mason drew upon Greymont VCC's money to fund the activities of his private company Greymont Capital, to pay his personal expenses and to provide himself an income. The amounts drawn by Mason contravened requirements under the SBVC Act, of which Mason had been advised at the outset by Lightfoot, were not disclosed to investors and were not of benefit to or in the interests of Greymont VCC. We find that Mason and Greymont Capital misappropriated funds of Greymont VCC for their own benefit.

      Mason and Greymont Capital also continued to sell shares of Greymont VCC after December 1, and represented to investors at that time that they would be eligible for tax credits, despite being clearly told that the allocation under the SBVC Act had expired and would not be extended.

      Similarly, Mason and Greymont Capital continued to sell shares of Greymont VCC after Commission staff told Mason the offering memorandum was not in the required form and the distribution was illegal.

      After the Ministry insisted upon Mason's resignation as a director and officer of Greymont VCC and the transfer of his shares to Sanderson, Mason continued to control Greymont VCC's accounts and to draw upon them for his own purposes. When the Ministry learned of Mason's continuing involvement, it deregistered Greymont VCC under the SBVC Act, resulting in the loss of tax credits for the investors and dooming Greymont VCC's business plans.

      As a director and officer of Greymont VCC, Mason owed the company a duty to act honestly, in good faith and in its best interests. He did not do so. We find that Mason's conduct was dishonest, in bad faith and contrary to the best interests of Greymont VCC.

4.   DECISION

      Commission staff submit that Mason is a threat to the investing public in British Columbia and should be prevented from participating in the securities market for a minimum of ten years. Staff also argued that there should be a permanent cease trade order imposed on Greymont VCC shares and that Mason, Greymont VCC and Greymont Capital should be ordered, jointly and severally, to pay an administrative penalty in the order of $40,000 to $50,000 and to pay costs of or relating to the hearing.

      Mason concedes he made "mistakes" but mostly blames his problems on others, including various lawyers retained by Greymont VCC. He says he did not try to hide anything and is prepared to face up to his problems, but then, amazingly, he volunteers that he has concealed from his wife the fact that he is subject to these proceedings.

      In our view, Mason must be held responsible for the many problems with the Greymont VCC offering. He was the heart and mind of both Greymont Capital and Greymont VCC. He conducted an illegal distribution, certified a false and misleading offering memorandum and caused it to be used in the distribution, misled investors about the availability of tax credits, backdated documents and cheques to misrepresent the dates when investments occurred, and misappropriated funds from Greymont VCC for his personal benefit. Mason acted not only with scant regard for regulatory requirements  seeking to hide behind purported legal advice  he acted dishonestly, in bad faith and contrary to the best interests of Greymont VCC and its investors. As a result of Mason's misconduct, 22 investors lost a substantial portion of the $440,000 they entrusted to him.

      This type of conduct is damaging to the capital markets in the province. The SBVC program was established by the government to assist small enterprises in raising capital. The abuse of the program by Mason is damaging to investor confidence in the program and in the venture capital market generally. Mason's conduct in this matter and his refusal to acknowledge his responsibility indicate to us that he is a threat to the investing public in the province. We consider it to be in the public interest to remove Mason from participating in the securities markets for a significant period and to impose on him a substantial administrative penalty.

Accordingly, we order:

1.		under section 144(1)(b) of the Act, that all persons cease trading in securities of Greymont VCC;
2.		under section 144(1)(c), that the exemptions described in sections 30 to 32.1, 55, 58, 80 and 81 do not apply to Mason or Greymont Capital for a period of 20 years from the date of this decision;
3.		under section 144(1)(d), that Mason resign any position he holds as a director or officer of an issuer and is prohibited from becoming or acting as a director or officer of any issuer until

(a)		he has successfully completed a course of study satisfactory to the Executive Director concerning the duties and responsibilities of directors and officers, and
(b)		a period of 20 years has elapsed from the date of this decision;

4.

under section 144.1, that Mason and Greymont Capital, jointly and severally, pay the Commission an administrative penalty in the amount of $30,000 on or before April 30, 1996;

February 20, 1996.

D.M. HYNDMAN, Chair
G.M. CLARK, Member
A.R. WANSTALL, Member