Decisions
ERON MORTGAGE CORPORATION, et. al. [Decision]
BCSECCOM #:
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Document Type:
Decision
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Published Date:
2000-02-18
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Effective Date:
2000-02-16
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Details:
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IN THE MATTER OF THE SECURITIES ACT
R.S.B.C. 1996, c. 418
AND
IN THE MATTER OF ERON MORTGAGE CORPORATION, ERON INVESTMENT CORPORATION, ERON FINANCIAL SERVICES LTD., CAPITAL PRODUCTIONS INC., BRIAN SLOBOGIAN AND FRANK BILLER
PANEL: JOYCE C. MAYKUT, Q.C. VICE CHAIR
BRENT W. AITKEN MEMBER
JOHN K. GRAF MEMBER
SUBMISSIONS JAMES A. (SASHA) ANGUS FOR COMMISSION STAFF
RECEIVED FROM: GEORGE B. COLEMAN
MARK L. SKWAROK FOR THE RESPONDENT
FRANK BILLER
DECISION OF THE COMMISSION
We made our Findings in this matter on November 26, 1999. See In the Matter of Eron Mortgage Corporation et al, [1999] 48 BCSC Weekly Summary 84 Submissions with respect to sanctions and costs were received from the Executive Director and from Frank Biller. No submissions were received from any other respondent. No party requested the opportunity to make oral submissions. This decision should be read in conjunction with our Findings.
The respondents in this matter are Eron Mortgage Corporation (Eron Mortgage), Eron Investment Corporation (EIC), Eron Financial Services Ltd. (Eron Financial), Capital Productions, Inc. (Capital), Brian Slobogian and Frank Biller. We refer to the corporate group generally as “Eron”, as we did in the Findings.
We found that all of the respondents:
- traded and distributed securities without being registered and without filing a prospectus, contrary to sections 34 and 61 of the Securities Act,R.S.B.C. 1996, c 418;
- made misrepresentations, contrary to section 50(1)(d) of the Act;
- perpetrated a fraud on persons in British Columbia, contrary to section 57(b) of the Act; and
- acted contrary to the public interest.
This is a case of massive fraud and misplaced trust. Investors were seriously misled about the nature of their investments, the level of risk associated with the investments and how their money was being invested and spent. Eron encouraged investors, many of whom were unsophisticated, to trust Eron and they did so. As is apparent from our Findings, this trust was abused by the respondents, who acted dishonestly, contrary to the public interest and contrary to fundamental provisions of the Act. As a result of the respondents’ actions, the investors’ financial losses will exceed $170 million. The loss of the investors’ health, their happiness and the security they expected to enjoy in their retirement years is incalculable.
Slobogian and the Corporate Respondents
We found that Slobogian and the corporate respondents traded promissory notes without being registered, contrary to section 34, and without filing a prospectus, contrary to section 61. These sections of the Act are fundamental to investor protection. The breach of these sections by these respondents was a significant factor in the investors’ losses.
Eron raised about $47.5 million from investors through notes issued by Maxim, Eron Financial, EIC and Capital, of which a maximum of $7.7 million (before costs) may be recovered. After costs are paid, the loss to the investing public will be well over $40 million from the sale of notes through Eron.
More serious are our findings with respect to misrepresentation and fraud. We found that these respondents knowingly made misrepresentations with the intention of effecting trades in securities, contrary to section 50(1)(d), and that they acted fraudulently, contrary to section 57(b). In particular, we found that:
- Eron Mortgage, EIC, Capital, Eron Financial and Slobogian knowingly made untrue statements;
- Eron Mortgage, EIC, Capital, Eron Financial and Slobogian promised investors returns that they knew were not sustainable;
- Eron Mortgage, EIC, Capital, Eron Financial and Slobogian promised terms of repayment that they knew were not achievable;
- Slobogian and Eron Mortgage knowingly put investors into mortgages with a lower priority than promised without the investors’ knowledge or consent;
- Slobogian and Eron Mortgage knowingly put investors into mortgages that were in higher amounts than promised without the investors’ knowledge or consent;
- Slobogian and Eron Mortgage knowingly raised funds from investors with respect to mortgages with face values that exceeded the amounts secured by those mortgages;
- Eron Mortgage, EIC, Capital, Eron Financial and Slobogian falsely assured investors that their funds would be properly spent on and by the projects, and spent those funds in other ways, without the investors’ knowledge or consent; and
- Eron Mortgage, EIC, Capital, Eron Financial and Slobogian used the funds of subsequent investors to make interest or capital payments to existing investors without the knowledge of the investors.
We found that the elements of fraud, dishonesty and deprivation, were clearly established with respect to Slobogian and the corporate respondents. We found that total investor losses will exceed $170 million. Dishonesty was apparent from Slobogian’s conduct and knowledge, described in our Findings as follows (at page 166):
- The evidence also clearly establishes dishonesty. Slobogian directly solicited investment from investors. He was aware that the statements that he himself was making to investors, and that were being made by Biller and other Eron brokers, were misrepresentations. Slobogian knew everything that was going on at Eron and with respect to the management of its investments and projects. He insisted on tight control over all aspects of Eron’s business. He dealt directly with the borrowers. He prepared and approved the hot sheets. He increased mortgages and put new ones on existing projects. He improperly transferred funds among the projects. He was aware of all of the appraisals that showed the properties were worth less than what he told investors. He was aware of the problems with the projects, both through direct contact with them and through warnings he received from advisers and experts.
In making orders under sections 161 and 162 of the Act, the Commission must consider what is in the public interest in the context of its mandate to regulate trading in securities. The circumstances of each case are different, so it is not possible to produce an exhaustive list of all of the factors that the Commission considers in making orders under sections 161 and 162, but the following are usually relevant:
- the seriousness of respondent’s conduct,
- the harm suffered by investors as a result of the respondent’s conduct,
- the damage done to the integrity of the capital markets in British Columbia by the respondent’s conduct,
- the extent to which the respondent was enriched,
- factors that mitigate the respondent’s conduct,
- the respondent’s past conduct,
- the risk to investors and the capital markets posed by the respondent’s continued participation in the capital markets of British Columbia,
- the respondent’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.
Applying these factors to this case, it has been clearly established, and we have found, that the conduct of Slobogian and the corporate respondents is of the most egregious nature, has devastated investors and has damaged the integrity of the capital markets of British Columbia. Slobogian and the corporate respondents were substantially enriched by their actions – we found Slobogian’s direct income alone from Eron during the relevant period to be $2.7 million. There is no evidence of mitigating conduct. None of these respondents is fit for participation in our capital markets. It is important the orders we make fit these circumstances.
In cases of serious fraud, the Commission has in the past issued orders permanently cease trading issuers and permanently removing respondents from the market. See In the Matter of Mindoro Corporation et al, [1997] 7 BCSC Weekly Summary 13 and In the Matter of Armstrong [1999] 8 BCSC Weekly Summary 10. This case is the most serious fraud dealt with by the Commission in recent memory and similar orders are clearly warranted in these circumstances.
The respondents breached the Act as a result of their fraudulent activities and also committed other serious contraventions of the Act. We have ordered separate administrative penalties for these contraventions to reflect the following factors:
- the misrepresentations made by the respondents were with respect to the core of the investors’ decision to invest, and played on the investors’ desire to invest in high return, low risk investments,
- the misrepresentations and fraud pervaded Eron’s business,
- the respondents not only breached some of the most fundamental sections of the Act, but did so repeatedly, with respect to many different projects,
- the respondents’ conduct caused significant harm to a large number of investors, and
- the respondents’ conduct damaged the integrity of the capital markets of British Columbia.
The orders we make in this case must also demonstrate to the market the consequences of engaging in this sort of conduct, and establish a deterrent.
Accordingly, considering it to be in the public interest, we order:
Sections 161 and 162 – Eron Mortgage, EIC, Capital and Eron Financial
- 1. under section 161(1)(b) of the Act, that all persons cease trading in securities of Eron Mortgage, EIC, Capital and Eron Financial;
2. under section 161(1)(c) of the Act, that all of the exemptions contained in sections 44 to 47, 74, 75, 98 or 99 do not apply to Eron Mortgage, EIC, Capital and Eron Financial;
3. under section 162 of the Act, that each of Eron Mortgage, EIC, Capital and Eron Financial pay an administrative penalty of $100,000 for their respective contraventions of sections 34 and 61;
4. under section 162 of the Act, that each of Eron Mortgage, EIC, Capital and Eron Financial pay an administrative penalty of $100,000 for their respective contraventions of section 50(1)(d);
5. under section 162 of the Act, that each of Eron Mortgage, EIC, Capital and Eron Financial pay an administrative penalty of $100,000 for their respective contraventions of section 57(b);
Sections 161 and 162 – Slobogian
6. under section 161(1)(c) of the Act, that all of the exemptions contained in sections 44 to 47, 74, 75, 98 or 99 do not apply to Slobogian for the rest of his life;
7. under section 161(1)(d)(i) of the Act, that Slobogian resign any position that he holds as a director or officer of any issuer;
8. under section 161(1)(d)(ii) of the Act, that Slobogian is prohibited from acting as a director or officer of any issuer for the rest of his life;
9. under section 161(1)(d)(iii) of the Act, that Slobogian is prohibited from engaging in investor relations activities for the rest of his life;
10. under section 162 of the Act, that Slobogian pay an administrative penalty of $100,000 for his contraventions of sections 34 and 61;
11. under section 162 of the Act, that Slobogian pay an administrative penalty of $100,000 for his contraventions of section 50(1)(d); and
12. under section 162 of the Act, that Slobogian pay an administrative penalty of $100,000 for his contraventions of section 57(b).
We found that Biller knowingly made misrepresentations with the intention of effecting trades in securities, contrary to section 50(1)(d) and that he acted fraudulently, contrary to section 57(b). There is a difference, however, made clear in our Findings, in the culpability of Biller from that of Slobogian and the corporate respondents. Although we found dishonesty with respect to some of Biller’s conduct, we did not find that Biller had actual knowledge of all of the wrongdoing at Eron. We also found the following mitigating factors:
First, Biller did the following:
- Upon becoming aware of the EIC problem, he questioned Slobogian about the shortfall.
- After the EIC meeting, he tried to organize a comprehensive due diligence effort through the brokers.
- After Slobogian ended that plan, he continued to seek information on projects.
- He refused to fund new loans that he and Lehner believed did not make sense.
- He actively sought information from Pricewaterhouse and Eron’s counsel on the situation and asked to be copied on all correspondence.
- When overfunding concerns came to his attention about Arrowhead, STGR, Emerald Estates, Nexus and Shuswap, he stopped raising money for those projects (with the exception of the Reale investment in Shuswap).
- He had extensive discussions with Pricewaterhouse with a view to protecting the interests of the Eron investors.
Second, when trouble surfaced, Biller did not make efforts to see that he and his family and friends were paid out. He did not resign, nor did he simply carry on with business as usual. Biller ensured he was kept informed, especially once he understood the scope of the regulatory concerns, and he worked with Eron’s professional advisers to help find a solution to Eron’s problems.
Nevertheless, we also found that Biller failed in discharging his duties to the Eron investors. His failure to do so contributed significantly to the harm done to them.
Our task is to make orders in the public interest that are appropriate in these circumstances, having regard to the factors set forth above. We have found that Biller’s conduct was in some respects dishonest, but there is no question that the seriousness of his conduct was far less than Slobogian’s. Nevertheless, Biller’s conduct contributed significantly to the investors’ losses and to the damage to the integrity of the capital markets. In addition, Biller enjoyed substantial enrichment during the relevant period. We found his earnings from Eron to be between $6 million and $7 million.
Although his conduct demands his removal from the markets for a substantial period of time, we are not convinced that Biller is a permanent risk to the markets. He testified that he understood that he had acted wrongly and wishes to take responsibility for his actions. He also said that he has learned from the Eron experience. The mitigating factors referred to above indicate that Biller is capable of both taking responsibility and learning from his experience. Biller is a young man and we do not believe it will serve the public interest to permanently deprive him of career opportunities that will bring him into contact with participants in the public markets.
Accordingly, considering it to be in the public interest, we order:
1. under section 161(1)(c) of the Act, that all of the exemptions contained in sections 44 to 47 (except section 45(7)), 74, 75, 98 or 99 do not apply to Biller for a period of 10years;
2. under section 161(1)(d)(i) of the Act, that Biller resign any position that he holds as a director or officer of any issuer, except that he may continue to act as a director or officer of a company, all of the securities of which are owned directly and beneficially by him, his wife or his children;
3. under section 161(1)(d)(ii) of the Act, that Biller is prohibited from acting as a director or officer of any issuer for a period of 10years, except that he may act as a director or officer of a company, all of the securities of which are owned directly and beneficially by him, his wife or his children;
4. under section 161(1)(d)(iii) of the Act, that Biller is prohibited from engaging in investor relations activities for a period of 10years;
5. under section 162 of the Act, that Biller pay an administrative penalty of $100,000 for his contraventions of sections 34 and 61;
6. under section 162 of the Act, that Biller pay an administrative penalty of $100,000 for his contraventions of section 50(1)(d); and
7. under section 162 of the Act, that Biller pay an administrative penalty of $100,000 for his contraventions of section 57(b).
We direct Commission staff to file an application for costs with the Commission on or before March 3, 2000.
We have included orders under sections 162 and 174 notwithstanding the suggestion of counsel for the Executive Director that all available funds ought to go to the Eron investors. It is the Commission’s responsibility to make orders that are appropriate in the circumstances. We leave collection to the discretion of the Executive Director.
DATED February 16, 2000
FOR THE COMMISSION
Joyce C. Maykut, Q.C. Brent W. Aitken
Vice Chair Member
John K. Graf
Member