Decisions
TAC INTERNATIONAL LIMITED, et. al. [Decision]
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BCSECCOM #:
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Document Type:
Decision
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Published Date:
2000-06-16
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Effective Date:
2000-06-08
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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 TAC INTERNATIONAL LIMITED AND CRAIG SOUTHWOOD
HEARING
PANEL: BRENT W. AITKEN MEMBER
JOHN K. GRAF MEMBER
ROY WARES MEMBER
DATE OF HEARING: MAY 15, 2000
DATE OF DECISION: JUNE 8, 2000
APPEARING: PATRICK ROBITAILLE FOR COMMISSION STAFF
DECISION OF THE COMMISSION
This is a hearing under section 161(1) of the Securities Act, R.S.B.C. 1996, c 418. A notice of hearing was issued December 13, 1999 alleging that:
- 1. the respondent TAC International Limited failed to comply with undertakings made in a settlement with the Executive Director; and
2. the respondent Craig Southwood acted in furtherance of TAC’s trading activities and participated in the distribution of securities in British Columbia without being registered and without filing a prospectus, contrary to sections 34 and 61 of the Act.
Commission staff is seeking a permanent cease trade order against TAC and orders against Southwood prohibiting his use of exemptions under the Act, requiring him to resign as a director or officer of any issuer and prohibiting him from engaging in investor relations activities. Staff also seeks orders that each of TAC and Southwood pay an administrative penalty and hearing costs.
BACKGROUND
On February 19, 1999 TAC entered into an Agreed Statement of Facts and Undertaking (the Settlement) with the Executive Director of the Commission. Southwood signed the Settlement on behalf of TAC. In the Settlement, TAC acknowledged as true that:
- between August 1996 and August 1997 TAC promoted an investment program in British Columbia purportedly involving trades in bank debentures or instruments;
- the program required an investor to pay TAC US $1,500 to facilitate the formation of an international business corporation for the investor; the investor was told that TAC would lend that corporation US $1,500 which would be pooled with the funds of other investors and invested in a “bank debenture” trading program;
- investors were told that the loan was interest free, that it was to be repaid from profits in the debenture trading program, and it was not repayable if the debenture trading program failed;
- investors were told to expect returns on their US $1,500 investment of 40% in the first 45 day period and 60% in every 45 day period thereafter; and
- TAC raised at least US $256,000 from approximately 171 investors in British Columbia.
In the Settlement, TAC agreed to an order of the Executive Director under section 161(1)(c) of the Act that “all of the exemptions described in sections 44-47, 74, 75, 98 and 99 of the Act permanently do not apply to TAC”. The effect of this order is that TAC is permanently prohibited from trading in securities in British Columbia. TAC also undertook in the Settlement to pay $25,000 ($10,000 of which represented costs of the investigation) to the Commission and to offer each investor in British Columbia the opportunity to rescind their investment. TAC undertook to complete the rescission by August 19, 1999.
The Commission has received no payment from TAC and there is no evidence that the rescission offer has been made. The Commission staff investigator in charge of the file has been in contact with several investors and has heard of no rescission offer; the Vancouver law firm through which the offer was to have been made has received no instructions in that regard; and investors testifying at the hearing said that they had received no offer from TAC. In addition, correspondence described below received by the Commission from Southwood suggests that the offer has not yet been made.
TAC investors testified that, far from receiving the promised 40% and 60% returns over 45-day periods, they have received no return. Neither has their principal been refunded, despite their demands.
Prior to the Settlement, TAC, Southwood and others consented to orders made in March 1998 by the Alberta Securities Commission. The consent orders provided that all trading in securities of TAC cease until further order of the ASC, denied Southwood the use of exemptions under the Securities Act (Alberta) for seven years, prohibited Southwood from acting as a director or officer of any issuer other than his own private holding company for five years and required Southwood to pay $5,000 in costs.
In the ASC settlement, in which TAC and Southwood consented to the ASC orders, TAC and Southwood admitted that:
- between October 1996 and February 1997, Southwood was Alberta provincial manager for TAC;
- while Alberta provincial manager for TAC, Southwood trained TAC’s sales force, assisted its sales persons in recruiting investors and processed funds collected from new investors;
- some investors recruited by other sales persons dealt directly with Southwood; and
- in May, 1997 Southwood became president and CEO of TAC.
On May 10, 2000 Southwood wrote to the Commission stating, “An adjournment is required to finalize funding to enable commencement of the recision [sic] process.” He also said he was “expecting to receive dates certain in the next two days regarding our funding”. On May 11 Commissioner Aitken advised Southwood that the panel was not prepared to grant an adjournment in the absence of further information and that Southwood was welcome to apply for an adjournment at the opening of the hearing on May 15. As Southwood had said he was unable to travel to Vancouver, arrangements were made for him to make his adjournment application by conference call from Edmonton.
Commissioner Aitken also advised Southwood that the panel, in considering his adjournment application, would consider his evidence on the following points to be important:
- the amount of financing estimated to be required to meet TAC’s undertakings to the Commission, and the basis for that estimate,
- the amount and terms of the proposed financing,
- the identities of those providing the financing,
- the extent to which the financing has been committed, and
- the date by which the funds will be available to TAC.
On May 12 Southwood wrote back, stating that he did not “feel it prudent to publicly disclose sensitive financial information”. He went on to state that financing would be available in the amount of US $500,000 on June 20, 2000, another US $500,000 on July 31, 2000 and “any remaining balances to be paid September 30, 2000”.
Southwood did not avail himself of the conference call arrangements. Instead, at the opening of the hearing, counsel appeared on behalf of TAC and Southwood and advised that his instructions were limited to applying for an adjournment. Counsel was unable to provide any details of the financing, except that it was not “firm”. There being no other evidence in support of the adjournment application, the application was denied.
Neither TAC nor Southwood has ever been registered under the Act. No prospectus has been filed by TAC with respect to the interests in the investment program it sold to investors in British Columbia.
ALLEGATIONS AND FINDINGS
The notice of hearing alleges that:
1. TAC has not complied with its undertakings under the Settlement.
The evidence establishes that TAC has not made the $25,000 payment it undertook to make in the Settlement, nor has it made the rescission offer to investors, which it also undertook to make. We find that TAC has not complied with its undertakings under the Settlement. We also find that Southwood, as TAC’s chief executive officer, is responsible for TAC’s failure to comply with its undertakings under the Settlement.
- 2. Southwood acted in furtherance of the trading activities of TAC in British Columbia and participated in the distribution of securities by TAC to investors in British Columbia contrary to sections 34 and 61 of the Act.
The relevant portions of the definitions of “security”, “trade” and “distribution” in section 1(1) of the Act are as follows:
- "security" includes . . . an investment contract . . .
- "trade" includes
(a) a disposition of a security for valuable consideration whether the terms of payment be on margin, installment or otherwise . . . and
(f) any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the activities specified in paragraphs (a) to (e) . . .
- "distribution" means, if used in relation to trading in securities, . . . a trade in a security of an issuer that has not been previously issued . . .
The relevant portions of section 34 of the Act are as follows:
- 34 (1) A person must not
(a) trade in a security or exchange contract unless the person is registered in accordance with the regulations as
- (i) a dealer, or
- (ii) a salesperson, partner, director or officer of a registered dealer and is acting on behalf of that dealer . . .
- 61 (1) Unless exempted under this Act or the regulations, a person must not distribute a security unless a preliminary prospectus and a prospectus respecting that security
(a) have been filed with the executive director, and
The definition of security includes an investment contract, which has been defined in the common law as an investment of money in a common enterprise with profits to come from the efforts of others.1
- 1See SEC v. W. J. Howey Co. 328 U.S. 293 (1946), SEC v. Glen W. Turner Enterprises, Inc. 474 F. 2d 476 (1973), Pacific Coast Coin Exchange v. Ontario Securities Commission, [1978] 2 S.C.R. 112.
In this case, investments were made in TAC’s investment program. Investors’ funds were pooled. The investors relied on the efforts of TAC to produce the profits. We find that the interests in the investment program sold by TAC were investment contracts and therefore were securities within the meaning of the Act.
The securities sold by TAC were also sold for valuable consideration and were not previously issued. We find that TAC’s sale of securities constituted trading in securities in British Columbia and that such trading constituted a distribution in British Columbia.
TAC was not registered under the Act, nor did it file a prospectus with respect to its distribution of securities. No registration or prospectus exemptions were available. We find that TAC distributed securities contrary to sections 34 and 61 of the Act.
We also find that, for at least part of the relevant period, Southwood was involved in managing the business and affairs of TAC, first as manager for Alberta, then as vice president for Canada and finally as TAC’s chief executive officer. In so doing, Southwood authorized, permitted or acquiesced in the contravention by TAC of sections 34 and 61 of the Act. We also find that Southwood's activities constituted conduct directly in furtherance of TAC's trading in securities and that therefore Southwood distributed securities in British Columbia without a prospectus, contrary to section 61 of the Act, and without registration, contrary to section 34 of the Act.
DECISION
TAC sold securities to investors in British Columbia in contravention of fundamental requirements of the Act. When faced with a notice of hearing, TAC agreed in the Settlement to the removal of its exemptions and undertook to pay the Commission $25,000 and to offer British Columbia investors a right of rescission. We have found that TAC has not complied with its undertakings in the Settlement.
In agreeing to settle allegations with parties instead of proceeding to a hearing, the Executive Director relies on the undertakings of the respondents who make them. If the Executive Director cannot rely on such undertakings, the integrity of the settlement process is compromised. This is contrary to the public interest, which is served by the resolution of allegations through the settlement process in appropriate circumstances.
Investors in British Columbia have lost money. The amount is unclear. We know that there were 171 investors in British Columbia and that the minimum investment was US $1,500, so the minimum amount TAC raised would be US $256,500. However, in commenting on the financing he is arranging for the rescission offer, Southwood speaks of raising US $1,000,000 in June and July with perhaps more to come in September. This could mean that TAC intends to offer rescission in other jurisdictions as well. It could also mean that TAC raised in excess of US $1 million from investors in British Columbia.
Therefore, considering TAC’s contraventions of the Act and the losses to British Columbia investors, and considering it to be in the public interest, we order:
- (a) under section 161(1)(b) of the Act, that all persons cease trading in securities of TAC, except trades made by investors of TAC in connection with the rescission contemplated in the Settlement; and
(b) under section 162 of the Act, that TAC pay an administrative penalty of $25,000.
The order made by the Executive Director in connection with the Settlement remains in full force and effect.
We have found that Southwood was at the centre of TAC’s activities. He controlled and managed the organization, handled investors’ funds and dealt directly with investors and the sales force. It appears that much, if not all, of what TAC did, it did at his direction. There is no reason therefore why Southwood should not incur the same administrative penalty as TAC. In addition, Southwood’s conduct indicates that he poses a risk to the capital markets of British Columbia.
- Therefore, considering it to be in the public interest, we order:
(a) under section 161(1)(c) of the Act, that the exemptions described in sections 44 to 47, 74, 75, 98 or 99 do not apply to Southwood for a period of five years from the date that TAC completes the rescission contemplated under the Settlement;
(b) under section 161(1)(d) of the Act, that Southwood resign any position he holds as director or officer of any issuer; provided, that Southwood may act in an appropriate capacity at TAC for the sole purpose of effecting the rescission contemplated under the Settlement;
(c) under section 161(1)(d) of the Act, that Southwood
- (i) be prohibited from becoming or acting as a director or officer of any issuer, and
(ii) be prohibited from engaging in investor relations activities
until he has successfully completed a course of study satisfactory to the Executive Director concerning the duties and responsibilities of directors and officers and a period of five years has elapsed from the date that TAC completes the rescission contemplated under the Settlement; provided, that Southwood may act in an appropriate capacity at TAC for the sole purpose of effecting the rescission; and
(d) under section 162 of the Act, that Southwood pay an administrative penalty of $25,000.
We also order, under section 174 of the Act, that TAC and Southwood be jointly and severally liable to pay the costs of or related to the hearing.
DATED June 8, 2000.
FOR THE COMMISSION
Brent W. Aitken John K. Graf
Member Member
- Roy Wares
Member