IN THE MATTER OF THE SECURITIES ACT,
R.S.O. 1990, c. S.5 AS AMENDED
- AND -
IN THE MATTER OF
FIRESTAR CAPITAL MANAGEMENT CORP., KAMPOSSE FINANCIAL CORP.,
FIRESTAR INVESTMENT MANAGEMENT GROUP INC., MICHAEL CIAVARELLA
AND MICHAEL MITTON
SETTLEMENT AGREEMENT BETWEEN
MICHAEL MITTON and
STAFF OF THE ONTARIO SECURITIES COMMISSION
PART I - INTRODUCTION
1. By Notice of Hearing dated December 7, 2011, the Commission announced that it proposed to hold a hearing to consider whether, pursuant to section 127 of the Securities Act, R.S.O. 1990, c. S.5 (the “Act”), it is in the public interest for the Commission to make an order approving the settlement agreement entered into between Staff of the Commission and Michael Mitton (the “Respondent”).
PART II – JOINT SETTLEMENT RECOMMENDATION
2. Staff agree to recommend settlement of the proceeding initiated by the Notice of Hearing dated December 21, 2004 against the Respondent (the “Proceeding”) in accordance with the terms and conditions set out below. The Respondent consents to the making of an order in the form attached as Schedule “A”, based on the facts set out below. The facts giving rise to the proceedings occurred from approximately July of 2004 until December of 2004 (the “Material Time”).
PART III - AGREED FACTS
3. On March 22, 2007 before Justice Then of Superior Court of Justice (Ontario), the Respondent pled guilty to one count of fraud on the public market contrary to s.380(2) of the Criminal Code of Canada and one count of laundering proceeds of crime contrary to s.462.31 of the Criminal Code of Canada.
4. The transcript underlying the March 22, 2007 pleas of guilty and the agreed facts is attached hereto as Exhibit “A”.
5. The Respondent is an individual who resides in British Columbia and/or Ontario. Prior to this matter, the Respondent had been convicted of at least 103 counts of fraud, many of which have involved securities fraud. He is currently subject to a 20 year cease trade order in British Columbia.
6. Kamposse Financial Corp. (“Kamposse”) is a corporation incorporated in Ontario with its head office in Richmond Hill, Ontario.
7. Michael Ciavarella (“Ciavarella”) was an officer and director of Firestar Capital Management Corp. (“Firestar Capital”).
8. Pender International Inc. (“Pender”) is a company incorporated in Ontario with its head office in Thornhill, Ontario. Pender traded on the National Association of Securities Dealers Over the Counter Bulletin Board.
9. Pender had the same address and phone number as Kamposse.
10. Armistice Resources Ltd. (“Armistice”) is a corporation incorporated in Ontario with its head office in Ontario.
11. In July of 2004, Pender completed a private placement of $1.6 million U.S. at $0.50 U.S. per share. By press release dated October 27, 2004, Pender announced that those funds were used to acquire IMM Investments Inc. (“IMM”), a private company, which became a wholly owned subsidiary of Pender. IMM owns approximately 30% of Armistice with rights to purchase up to 55%.
12. Pender acquired IMM from KJ Holding Inc. (“KJ Holding”), an Ontario corporation. As a result of the acquisition, KJ Holding acquired 36.5% of Pender’s issued and outstanding common stock. KJ Holding is wholly owned by the father of K. J.
13. The only asset of Armistice and Pender was a mine in northern Ontario near Kirkland Lake. The mine is currently flooded with water. The financial statements of Armistice for the three month period ending September 30, 2004 reveal a deficit of $29,598,630.
14. By press release dated October 27, 2004, Pender announced that it would be engaging Atlas Dewatering to dewater the mine, and it was expected that the dewatering would be completed in 4-6 weeks.
15. Pender did not release any further information about efforts to dewater the mine.
16. The only other substantive press release during the period June to November 2004 was the announcement that Pender, on October 25, 2004, had appointed Ciavarella as President and Director of Pender, and had appointed a new Board of Directors.
(b) The Accounts
17. Firestar Capital maintained accounts at HSBC Securities (Canada) Inc. (“HSBC Securities”) and HSBC Bank Canada (“HSBC Bank”). Ciavarella had trading authority over the Firestar Capital account at HSBC Securities. Ciavarella was the only principal of the Firestar Capital account at HSBC Bank and K. J. also had signing authorization over the account.
18. Ciavarella maintained accounts in his own name at HSBC Securities, Desjardins Securities Inc. (“Desjardins”) and TD Waterhouse Canada Inc. (“TD Waterhouse”).
19. Kamposse maintained accounts at HSBC Bank, RBC Dominion Securities Inc. (“RBC DS”) and CIBC World Markets. Ciavarella referred Kamposse to RBC DS. K. L. and G. J. were the principals of the Kamposse account at HSBC Bank. K. L. and G. J. had trading authority over the Kamposse account at RBC DS. K. L., Ciavarella and G. J. had trading authority over the account at CIBC World Markets.
20. All of the above accounts (which will be referred to collectively as the “Accounts”) are related to each other and/or related to insiders of Pender.
(c) Trading in Pender
21. In July of 2004, Pender was trading at approximately $0.08 U.S. per share. Prior to October 14, 2004, there had been no trading in the shares of Pender for some time. On October 14, 2004, the shares opened at $0.30 U.S. and closed at the same price on a volume of 12,000 shares traded. Over the next 35 trading days, the shares traded as high as $11.35 U.S. on a volume of over 2 million shares trading. This represents an increase in price of the shares of Pender of 3,783%.
22. During the Material Time, none of the news releases issued by Pender were intended to cause the dramatic increase in the price and volume of Pender shares traded. Even if the news releases did have a marginal effect on the price, Pender did not release any news after October 28, 2004. There is therefore nothing to explain the rise in the share price after that date.
23. The increase in the share price of Pender was artificial and was caused by trading that was arranged between the Accounts and orchestrated by the Respondent.
24. This was achieved by the Respondent and others conspiring to acquire all or almost all of the free-trading shares of Pender which would then enable them to trade those shares in a circular pattern at ever increasing volume and prices.
25. This type of trading activity, known as a “pump and dump”, artificially inflated the Pender share with the intention of defrauding unsuspecting investors.
26. In the summer of 2004, the Respondent orchestrated the purchase of shares of Pender by K. J. and others through a complex series of transactions using funds from private investors.
27. K. J. used about $900,000 to purchase almost all of the then outstanding shares of Pender and IMM used approximately $2,000,000 to purchase a 14.4% interest in Armistice. IMM and its interest in Armistice were subsequently vended to Pender in exchange for Pender shares. The Respondent was not involved in the gathering of these funds and did not have direct knowledge of the particulars of these investments.
28. As a result, K. J. and others acquired control over almost all of the free-trading shares in Pender, Pender acquired a 14.4% interest in Armistice and the private investors acquired shares in Pender.
29. However, the Respondent was aware that $890,000 was used to purchase almost all of the outstanding shares of Pender and approximately $2,000,000 was used to purchase a 14.4% interest in Armistice. This interest in Armistice was subsequently assigned to Pender in exchange for Pender shares.
30. As a result, the Respondent and others acquired control over almost all of the free-trading shares in Pender, Pender acquired a 14.4% interest in Armistice and the private investors acquired shares in Pender.
31. In the middle of October of 2004, having acquired almost all of the free-trading shares of Pender, the Respondent and his associates orchestrated the trading in Pender shares thus manipulating the share price of Pender. Towards the end of 2004, the Respondent also caused false and misleading information about Pender to be released to the public which affected the market price of Pender shares and created a risk of deprivation of those who had acquired Pender shares.
32. This circular trading in Pender shares was conducted by the Respondent using certain of the Accounts over which the Respondent had legal authority or through other accounts held by nominee account holders whom the Respondent directed or controlled. Given the Respondent’s notoriety, none of the Accounts were in his name.
33. The trading was conducted by the Respondent at ever increasing prices and volumes in order to artificially inflate the Pender share price and distorted the normal market forces as they related to the trading of Pender shares. The sophisticated trading in which the Respondent engaged in is indicative of a pump and dump scheme.
34. Over the following weeks, the price of Pender shares rose from $0.30 U.S. per share to approximately $11.35 U.S. per share on November 18, 2004.
35. Given concerns regarding the Accounts, the brokerage firms where the Accounts were located commenced internal investigations and discovered that the principal purchases of the Pender shares were also the principal sellers. As a result, these brokerages froze the accounts used by the Respondent and others on suspicion that the share price of Pender had been manipulated.
36. In November of 2004, the HSBC Bank had an outstanding debt of about $2,600,000 U.S. due to the purchase of Pender shares in accounts controlled by the Respondent and Ciavarella that had not been settled. This debt was never settled and the HSBC Bank did not sell the Pender shares into the public market as this would further perpetuate the fraud on the market. As a result, the HSBC Bank incurred a loss of at least $2,625,000 U.S. It has subsequently obtained a default judgment against Ciavarella for its losses.
37. On November 18, 2004, the Accounts largely stopped trading shares of Pender. When the Accounts stopped trading the shares of Pender, the share price of Pender dropped dramatically, causing losses to investors.
38. By the end of December 2004, the price had dropped to $6.00 U.S. and by the end of February 2005 the share price had fallen to $0.34 U.S.
39. On December 10, 2004, the Commission issued directions freezing certain accounts and issued temporary cease trade orders preventing the Respondent, Ciavarella and others from trading shares of Pender.
40. Although all of the Accounts traded and/or funded the purchase of Pender stock, the main purchasing account was the Firestar Capital account at HSBC Securities and the main selling account was the Kamposse account at RBC DS. Funds from Kamposse were transferred to the Firestar Capital account at HSBC Securities in order to finance the purchase of Pender shares.
41. As at September 30, 2004, the Kamposse account at RBC DS contained 318,000 shares of Pender with a market value of $26,087.61 CDN. During October and November of 2004, those shares were sold and total funds of $953,378 U.S. and $1,603,000 CDN were withdrawn from the account.
42. In November of 2004, the Firestar Capital account at HSBC Securities purchased 392,000 shares of Pender, of which it sold 17,500, at a net cost of $3,557,343.37 U.S. It also deposited 200,000 shares of Pender into the same account. Four cheques totalling $2,324,000 U.S. that were deposited to the Firestar Capital account at HSBC Securities to pay for the purchases of the Pender shares were subsequently returned unpaid. As at November 30, 2004, the Firestar Capital U.S. dollar account at HSBC was in a debit position of $2,822,700.75 U.S., which was offset by a credit position in the Firestar Capital CDN dollar account of $293,590 CDN.
(d) The Involvement of the Respondent
43. The Respondent was permitted to provide trading instructions for the Firestar Capital account at HSBC Securities. The Respondent was present when the Kamposse account at RBC DS was opened. The Respondent claimed that the Kamposse account at HSBC Bank was his account.
44. The Firestar Capital account was funded, in part, with cheques drawn on the account of Kamposse at HSBC Bank. The Respondent was involved in the movement of funds from other sources into the Firestar Capital account but did not place his own funds into that account.
45. When dealing with the Firestar Capital account at HSBC Securities and the Kamposse account at RBC DS, the Respondent took steps to conceal his true identity, including using the alias “Michael Douglas”.
46. Profits from the RBC DS account were deposited into Kamposse’s bank account. Several payments were made from Kamposse’s bank account to J. M., wife of the Respondent.
PART IV - CONDUCT CONTRARY TO THE PUBLIC INTEREST
47. The above conduct of the Respondent was contrary to Ontario securities law and contrary to the public interest in that, during the material time, trading in the shares of Pender was dominated by trading that was orchestrated by the Respondent and was arranged between the Accounts in a way that created a misleading appearance of trading activity and artificially increased the share price of Pender.
PART V - MITIGATING FACTORS
48. The Respondent pled guilty to the charges under the Criminal Code of Canada and has not contested Staff’s allegations. On March 22, 2007, the Respondent was sentenced in the Superior Court of Justice (Ontario) to a period of incarceration for seven years in relation to the criminal charges.
PART VI - TERMS OF SETTLEMENT
49. The Respondent agrees to the following terms of settlement, to be set out in an order by the Commission pursuant to subsections 37(1) and 127(1) of the Act, as follows:
- pursuant to clause 2 of subsection 127(1) of the Act, trading in any securities by the Respondent cease permanently from the date of the approval of this Settlement Agreement;
- pursuant to clause 2.1 of section 127(1) of the Act, the acquisition of any securities by the Respondent is prohibited permanently from the date of the approval of the Settlement Agreement;
- pursuant to clause 3 of subsection 127(1), any exemptions contained in Ontario securities law do not apply to the Respondent permanently from the date of the approval of the Settlement Agreement;
- pursuant to clauses 7, 8.1 and 8.3 of subsection 127(1), that the Respondent resign any position he may hold as an officer or director of any public corporation, private corporation, registrant or investment fund manager;
- pursuant to clauses 8 and 8.4 of subsection 127(1), that the Respondent be prohibited permanently from becoming or acting as a director or officer of any public corporation, reporting issuer or investment fund manager from the date of the approval of the Settlement Agreement;
- pursuant to clause 8.5 of subsection 127(1), that the Respondent be prohibited permanently from becoming or acting as a registrant, as an investment fund manager or as a promoter from the date of the approval of this Settlement Agreement; and
- pursuant to subsection 37(1), the Respondent cease permanently, from the date of the approval of the Settlement Agreement, to telephone from within Ontario to any residence within or outside Ontario for the purpose of trading in any security or any class of securities.
PART VII - STAFF COMMITMENT
50. If this Settlement Agreement is approved by the Commission, Staff will not initiate any other proceeding under the Act against the Respondent in relation to the facts set out in Part III herein, subject to the provisions of paragraph 51 below.
51. If this Settlement Agreement is approved by the Commission, and at any subsequent time the Respondent fails to honour the terms of the Settlement Agreement, Staff reserve the right to bring proceedings under Ontario securities law against the Respondent based on, but not limited to, the facts set out in Part III herein as well as the breach of the Settlement Agreement.
PART VIII - PROCEDURE FOR APPROVAL OF SETTLEMENT
52. Approval of this Settlement Agreement will be sought at a hearing of the Commission scheduled on a date to be determined by the Secretary to the Commission, or such other date as may be agreed to by Staff and the Respondent for the scheduling of the hearing to consider the Settlement Agreement.
53. Staff and the Respondent agree that this Settlement Agreement will constitute the entirety of the agreed facts to be submitted at the settlement hearing regarding the Respondent’s conduct in this matter, unless the parties agree that further facts should be submitted at the settlement hearing.
54. If this Settlement Agreement is approved by the Commission, the Respondent agrees to waive all rights to a full hearing, judicial review or appeal of this matter under the Act.
55. If this Settlement Agreement is approved by the Commission, neither party will make any public statement that is inconsistent with this Settlement Agreement or inconsistent with any additional agreed facts submitted at the settlement hearing.
56. Whether or not this Settlement Agreement is approved by the Commission, the Respondent agrees that he will not, in any proceeding, refer to or rely upon this Settlement Agreement or the settlement negotiations as the basis of any attack on the Commission's jurisdiction, alleged bias or appearance of bias, alleged unfairness or any other remedies or challenges that may otherwise be available.
PART IX – DISCLOSURE OF SETTLEMENT AGREEMENT
57. If, for any reason whatsoever, this Settlement Agreement is not approved by the Commission or the order attached as Schedule "A" is not made by the Commission:
- this Settlement Agreement and its terms, including all settlement negotiations between Staff and the Respondent leading up to its presentation at the settlement hearing, shall be without prejudice to Staff and the Respondent ; and
- Staff and the Respondent shall be entitled to all available proceedings, remedies and challenges, including proceeding to a hearing on the merits of the allegations in the Notice of Hearing and Statement of Allegations of Staff, unaffected by the Settlement Agreement or the settlement discussions/negotiations.
58. The terms of this Settlement Agreement will be treated as confidential by all parties hereto until approved by the Commission. Any obligations of confidentiality shall terminate upon approval of this Settlement Agreement by the Commission. The terms of the Settlement Agreement will be treated as confidential forever if the Settlement Agreement is not approved for any reason whatsoever by the Commission, except with the written consent of the Respondent and Staff or as may be required by law.
PART IX. - EXECUTION OF SETTLEMENT AGREEMENT
59. This Settlement Agreement may be signed in one or more counterparts which together will constitute a binding agreement.
60. A facsimile copy of any signature will be as effective as an original signature.
Dated this 6th day of December, 2011
" Jacqueleen Mitton"
" Michael Mitton "
Dated this 6th day of December, 2011
STAFF OF THE ONTARIO SECURITIES COMMISSION
Director, Enforcement Branch
IN THE MATTER OF THE SECURITIES ACT,
R.S.O. 1990, c. S.5, AS AMENDED
(Sections 37 and 127(1))
WHEREAS on , the Ontario Securities Commission (the “Commission”) issued a Notice of Hearing pursuant to sections 37 and 127 of the Securities Act, R.S.O. 1990, c. S.5, as amended (the “Act”) in respect of Michael Mitton (“Mitton”);
AND WHEREAS Mitton entered into a Settlement Agreement with Staff of the Commission dated , 2011 (the "Settlement Agreement") in which Mitton agreed to a proposed settlement of the proceeding commenced by the Notice of Hearing, subject to the approval of the Commission;
AND UPON reviewing the Settlement Agreement, the Notice of Hearing, and the Statement of Allegations of Staff of the Commission, and upon hearing submissions from Mitton and from Staff of the Commission;
AND WHEREAS the Commission is of the opinion that it is in the public interest to make this Order;
IT IS HEREBY ORDERED THAT:
- the Settlement Agreement is approved; pursuant to clause 2 of subsection 12 7(1) of the Act, trading in any securities by Mitton cease permanently;
- pursuant to clause 2.1 of section 127(1) of the Act, Mitton is prohibited permanently from the acquisition of any securities;
- pursuant to clause 3 of section 127(1) of the Act, any exemptions contained in Ontario securities law do not apply to Mitton permanently;
- pursuant to clauses 7, 8.1 and 8.3 of subsection 127(1), Mitton resign any position he may hold as an officer or director of an issuer or registrant or investment fund manager;
- pursuant to clauses 8 and 8.4 of subsection 127(1), Mitton be prohibited permanently from becoming or acting as a director or officer of any issuer or investment fund manager;
- pursuant to clause 8.5 of subsection 127(1), Mitton be prohibited permanently from becoming or acting as a registrant, as an investment fund manager or as a promoter; and
- pursuant to subsection 37(1), Mitton cease permanently to telephone from within Ontario to any residence within or outside Ontario for the purpose of trading in any security or any class of securities.
DATED AT TORONTO this day of , 2011