ACT R.S.0. 1990, c.S.5, AS AMENDED
IN THE MATTER OF
Staff of the Ontario Securities Commission (the "Commission") proposed to commence a hearing against Gordon Badger (the "respondent") for the Commissionto consider:
(a) whether, pursuant to subsection 127(1) of the Securities Act (the "Act"), it is in the public interest to order that the exemptions contained in Ontariosecurities law do not apply to the respondent, and
(b) such further and other order as the Commission may deem appropriate.
II. JOINT SETTLEMENT RECOMMENDATION
(a) Staff of the Commission ("Staff") agrees to recommend the settlement of the proposed proceedings in respect of the respondent in accordance with the termsand conditions set out below. The respondent agrees to the making of an order as against him as hereinafter provided.
(b) Staff and the respondent agree that if, as and when the settlement is approved by the Commission, this settlement agreement and Schedule "A" attachedhereto (the "settlement agreement") will be released to the public.
III. STATEMENT OF FACTS
1.01 The respondent agrees with the facts set out in Part III of this settlement agreement (to the extent that he is directly aware of them and, to the extent that hedoes not have direct knowledge, they are not inconsistent with his understanding).
1.02 Staff acknowledges that the facts contained in Part III of this settlement agreement are consistent with its investigation.
1.03 Section 2.0 below defines various of the parties involved in the transactions and events in issue; Sections 3.0, 4.0, 5.0, and 6.0 describe the characteristics ofthe transactions involved; and Section 7.0 lists the acknowledged defaults by the respondent.
2.0 The Parties
2.1 VRD Entertainment Limited ("VRDE") was incorporated pursuant to the laws of Ontario. VRDE is a reporting issuer in Ontario and its common sharestraded over-the-counter on the Canadian Dealing Network Inc. ("CDN") until CDN withdrew approval for its quotation on or about December 12, 1994.
2.2 V.R. Dynamics Inc. ("Dynamics") is a private company incorporated on or about October, 1992 pursuant to the laws of Nevada.
2.3 The respondent is the Chairman of VRDE and, at all material times, was one of its directors. He is also a director of Dynamics. The respondent resides inCreemore, Ontario.
2.4 Richard Smitten ("Smitten") is the President and a director of Dynamics.
2.5 James Hastie ("Hastie") was a chartered accountant who resided in the Dominican Republic until his death in about January, 1996. Smitten and therespondent were long-standing business acquaintances of Hastie. Hastie carried on business in the Dominican Republic and provided offshore accounting,financial and administrative services for a variety of clients.
3.0. The Reverse Takeover of VRDE
3.1 Pursuant to a share exchange agreement dated February 19, 1993, the shareholders of Dynamics sold their shares to Oreco Mines & Energy Corp. ("Oreco"),a dormant reporting issuer, in consideration for the issuance of an aggregate of 20 million Oreco shares (the "Reverse Takeover"), representing approximately99% of the issued and outstanding shares of Oreco after completion of the Reverse Takeover. Oreco's name was changed to VRDE as a result of the ReverseTakeover.
3.2 Smitten and the respondent knew that Hastie was the accountant for a number of Turks & Caicos companies which collectively controlled more than 20% ofDynamics (the "Turks and Caicos Companies"). Hastie was also an officer, director, shareholder or general manager of some of those companies. According tothe respondent, Hastie advised him that these companies had separate beneficial ownership and control by several of his clients and that Hastie acted only on hisclients express instructions in each instance. Hastie asserted that under the laws of the Turks and Caicos Islands he could not disclose the identities of his clientsand, accordingly, he would not. Notwithstanding Hastie's representation that he did not exercise de facto control, the respondent knew or ought to have knownthat Hastie exercised direction or control over the Dynamics shares held through the Turks and Caicos Companies.
3.3 In February 1993, before the Reverse Takeover, Hastie was the only individual who alone, or in combination with others, owned beneficially or exerciseddirection or control over more than ten percent (10%) of the voting securities of Oreco. The respondent was not aware that Hastie's clients owned suchsecurities.
3.4 The Oreco management information circular dated March 3, 1993 (the "Information Circular") prepared in respect of the Oreco shareholders' meeting toapprove the Reverse Takeover, failed to disclose that Hastie was an insider of Oreco, that he controlled Dynamics, or that he would control VRDE after theReverse Takeover.
4.0 The Offshore Distribution of VRDE Shares
4.1 After the Reverse Takeover, Hastie owned two million VRDE shares personally and, it is the position of staff, that he controlled eleven million additionalVRDE shares through six Turks & Caicos Companies, of which he was an officer, general manager, director or shareholder. Hastie caused some of the Turks &Caicos Companies to sell a large number (approximately 6 million) of these shares at Cdn $0.50 each to a securities firm operating in Europe, which in turn soldthe VRDE shares to numerous investors worldwide over the following several months.
5.0 The Preliminary Prospectus
5.1 On or about October 28, 1994, VRDE filed a preliminary prospectus with the Commission for the issuance of certain exchange units (the "PreliminaryProspectus"). The Preliminary Prospectus was signed by the respondent and Smitten and provided that, to the knowledge of VRDE, no person ownedbeneficially or exercised direction or control over more than ten percent (10%) of the voting securities of VRDE other than First Foundation Financial ServicesInc. ("First Foundation"), a holding company controlled by the respondent as its sole director which owned approximately 14.9%, and Smitten who ownedapproximately 14.9%.
5.2 The Preliminary Prospectus did not disclose that Hastie owned directly or exercised direction or control over more than twenty percent (20%) of the votingsecurities of VRDE personally and through the Turks & Caicos Companies. As a result, the Preliminary Prospectus failed to make full, true and plain disclosureof all material facts relating to the securities proposed to be issued by VRDE. Also, as a result, based on the circumstances described above, the PreliminaryProspectus contains a "misrepresentation", as that term is defined in subsection 1(1) of the Act, about the ownership of VRDE's capital. The PreliminaryProspectus was withdrawn in January 1995 and the offering of exchange units did not proceed.
6.0 Unlawful Sale From Control Block
6.1 In February 1995, Hastie attempted a form of rights offering in respect of which he offered shares in VRDE from his own holdings to other shareholders ofVRDE. This offer was made after CDN removed its approval for quotation of VRDE's shares. The proceeds of this distribution were to be paid to VRDE.Because this was a distribution from a control block and no prospectus nor Form 23 had been filed with the Commission, on March 23, 1995 the Commissionordered that trading in securities of VRDE cease for a period of fifteen (15) days. This temporary order was extended on April 5, 1995 until May 23, 1995, whenthe cease trading order was made permanent.
6.2 Hastie advised the other shareholders of VRDE that the purpose of the rights offering was to sell at $0.50 per share up to 2,000,000 VRDE shares ownedby Hastie personally in order to raise financing for him to acquire new treasury shares from VRDE. Hastie had agreed to buy up to two million new treasuryshares of VRDE at $0.50 per share, subject to obtaining financing (which was to be obtained from the sale of Hastie's personal share holdings in VRDE which hestated were "free-trading"). The net proceeds resulting from the sale of his VRDE shares were directed to be paid to VRDE's registrar and transfer agent whowas instructed to advance such funds directly to VRDE as part payment for the treasury shares to be issued later to Hastie. None of Hastie's shares was actuallysold pursuant to the offer and all funds tendered to the transfer agent were returned.
6.3 The respondent participated on behalf of VRDE in this proposed offer by Hastie to sell VRDE shares by giving instructions to VRDE's registrar and transferagent to accept funds from the purchasers of Hastie's VRDE shares and to use such funds in minimum subscription amounts of $150,000 to issue new treasuryshares to Hastie at $0.50 per share.
7.0 Conduct Contrary to the Securities Act
7.1 It is staff's position that the respondent committed the following breaches of the Act, and for the purposes of this settlement only, the respondent agrees that:
A. He failed to exercise sufficient due diligence in determining the officers and share holdings of Hastie in the Turks & Caicos Companies and, accordingly, theexistence of a control block of VRDE shares controlled by Hastie. The respondent signed a certificate contained in the Preliminary Prospectus filed with theCommission which Preliminary Prospectus contained a misrepresentation regarding the capital of VRDE. As a result, the Preliminary Prospectus did not containfull, true and plain disclosure of all material facts relating to the securities issued.
B. He knowingly participated in the offer by Hastie of his VRDE shares in February, 1995 which distribution was unlawful because no Form 23 had been filedwith the Commission to permit a distribution out of a control block or, alternatively, because no prospectus had been filed to qualify a distribution out of acontrol block.
IV. TERMS OF SETTLEMENT
The respondent agrees to the following terms of settlement:
Any exemptions contained in Ontario securities law, including the exemptions contained in sections 35, 72, 73 and 93 of the Securities Act (the "Act"), do not,,for a period of three years from July 16, 1997 apply to the respondent acting directly or indirectly through another person or company or through any person orcompany acting on his behalf provided, however, that he may trade in certain securities for his own account or for the account of his registered retirementsavings plan or registered retirement income fund (as defined in the Income Tax Act (Canada)) or for the account of First Foundation Financial Services Inc. if:
(a) the securities are units of a mutual fund or are securities referred to in clauses 1, 2 or 10 of subsection 35(2) of the Act; or
(b) in the case of securities other than those referred to in (a),
(i) the securities are listed and posted for trading on the Toronto Stock Exchange;
(ii) neither he nor any associate (as defined in the Act) is an insider, partner or promoter of the issuer of the securities; and
(iii) he does not own directly, or indirectly through another person or company or through any person or company acting on his behalf, more than one percent(1%) of the outstanding securities of the class or series of the class in question;
provided, however, that nothing herein shall prohibit the respondent from acting as an officer or director of a reporting issuer or prohibit any such reportingissuer from availing itself of any such exemptions where the respondent is not a promoter of such reporting issuer, or is not directly or indirectly the recipient oftreasury securities of such reporting issuer, or any other securities of the reporting issuer not acquired through an agent who is a registered dealer.
The respondent hereby consents to an order of the Commission incorporating the provisions of Part IV above in the form annexed hereto as Schedule "A".
VI. STAFF COMMITMENT
If this settlement agreement is approved by the Commission, Staff will not initiate any complaint to the Commission or request the Commission to hold a hearingor issue any order against the respondent in respect of any conduct or alleged conduct of the respondent in relation to the facts set out in Part III of thissettlement agreement other than as set out herein.
VII. PROCEDURE FOR APPROVAL OF SETTLEMENT
(a) The approval of the settlement as set out in this settlement agreement shall be sought at a public hearing of the Commission to be scheduled on such date asagreed to by Staff and the respondent, in accordance with the procedures described herein and such further procedures which may be agreed upon between therespondent and staff.
(b) Staff and the respondent agree that if this settlement agreement is approved by the Commission, it will constitute the entirety of the evidence to be submittedrespecting the respondent in this matter, and the respondent agrees to waive his rights to a full hearing and appeal of the matter under the Act.
(c) If this settlement is approved by the Commission, the respondent will not make further statements that are inconsistent with this settlement agreement.
(d) If, for any reason whatsoever, the settlement is not approved by the Commission or the order set forth in Schedule "A" is not made by the Commission byNovember 13, 1997, or such other date agreed to by staff and the respondent:
(i) Staff and the respondent will each be entitled to proceed to a hearing in respect of the matters described herein, unaffected by this settlement agreement or thesettlement negotiations;
(ii) the terms of this settlement agreement will not be raised in any other proceeding or disclosed to any person except with the written consent of the respondentand the Staff or as may be otherwise required by law; and
(iii) the respondent further agrees that he will not raise in any proceeding this settlement agreement or the negotiation or process of approval thereof as the basisfor any attack on the Commission's jurisdiction, alleged bias, appearance of bias, alleged unfairness or any other challenge that may otherwise be available.
(e) If, prior to the approval of this settlement agreement by the Commission, there are new facts or issues of substantial concern, in the view of Staff, regardingthe facts set out in Part III of this settlement agreement, Staff will be at liberty to withdraw from this Settlement Agreement. Notice of such intention will beprovided to the respondent in writing. In the event of such notice being given, the provisions of subparagraph VII(d) above will apply as if this settlementagreement had not been approved in accordance with the procedures set out herein.
(f) If this proceeding against the respondent is settled hereby, should hearings proceed against others in any related proceedings, the respondent will cooperateand be available to give evidence at such hearings.
VIII. DISCLOSURE OF SETTLEMENT AGREEMENT
(a) The terms of this settlement agreement will be treated as confidential by all parties hereto until approved by the Commission, and forever if, for any reasonwhatsoever, this settlement agreement is not approved by the Commission.
(b) Any obligations as to confidentiality shall terminate upon the approval of this settlement by the Commission.
IX. EXECUTION OF SETTLEMENT AGREEMENT
(a) The respondent acknowledges and declares that:
(i) he is voluntarily executing this agreement without threat of prejudice or promise of benefit;
(ii) he has been advised fully and fairly of his right to legal counsel;
(iii) he has been given the opportunity to obtain and has obtained whatever legal or other advice he deemed necessary before executing this agreement; and
(iv) he is not under any disability.
(b) This settlement agreement may be signed in one or more counterparts which shall constitute a binding agreement.
November 12th, 1997.
SIGNED IN THE PRESENCE OF: