Proceedings

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IN THE MATTER OF THE SECURITIES ACT

R.S.O. 1990, c.S.5, AS AMENDED


AND


IN THE MATTER OF PATRICK GOUVEIA, ANDREW PETERS,

RONALD PERRYMAN AND PAUL VICKERY



STATEMENT OF ALLEGATIONS

OF STAFF OF THE ONTARIO SECURITIES COMMISSION

Staff of the Ontario Securities Commission allege that:

Background

1. Atlas Cold Storage Income Trust (Atlas) is an open-ended, limited purpose trust established under the laws of Ontario with its head office in Toronto.

2. Atlas, through its wholly owned subsidiary, Atlas Cold Storage Holdings Inc. (Holdings), and through the wholly owned subsidiaries of Holdings, operates a Canadian and US based network of public refrigerated warehouse facilities, a transportation business, and a retail management business.

3. Atlas is a reporting issuer in Ontario. In August 2000, its units were listed and posted for trading on the Toronto Stock Exchange (TSX). Pursuant to Ontario securities law, it is obliged to file interim and audited annual financial statements with the Commission.

4. Atlas is administered by the Board of Directors of Holdings pursuant to an administration agreement between Atlas and Holdings. The earnings of Holdings and its subsidiaries flow to Atlas and Atlas pays distributable cash to unit holders quarterly as approved by the Board of Trustees of Atlas on the advice of the Board of Directors of Holdings. The payment of distributions for each of the first three quarters is equalized. The distribution is adjusted for Q4 to reflect annual earnings.

5. Since Atlas has been listed and its units traded publicly, it has grown by acquisitions and expansions. On July 30, 2001, it acquired cold storage facilities in Calgary and Vancouver. On March 20, 2002, it purchased a portion of the assets of TCT Logistics, (TCT), a trucking firm in receivership. On October 1, 2002, it purchased the assets of CoolStor Warehousing Services. On October 22, 2002, it acquired a majority of the assets of CSI. As part of the CSI acquisition, Atlas purchased the management contracts of four retail contract operations. Atlas also increased its existing capacity by expanding various existing facilities.

6. These acquisitions and expansions were accomplished through equity and debt financing. Since 2000, Atlas raised more than $356 million through five successive equity issues. On July 9, 2001, Atlas, Holdings, and its direct subsidiaries entered into credit facilities with a syndicate of Canadian and US banks. On October 22, 2002, these facilities were renegotiated to increase the maximum availability of funding from approximately $191 million to approximately $306 million.

7. On March 20, 2002, Atlas acquired a portion of the assets of TCT, and used the assets to expand its Canadian transportation business through a newly incorporated, wholly owned subsidiary, Atlas Supply Chain Services Limited (Supply Chain).

8. Pursuant to the lending agreement with the banks, Supply Chain was classified as an "unrestricted subsidiary". This meant that Holdings could invest no more than $10 million in equity and lend no more than $500,000 to Supply Chain.

Respondents

9. Patrick Gouveia was a Director and the President and Chief Executive Officer of Holdings. He holds approximately 8.1% of the units of Atlas. As CEO, Gouveia was responsible for all aspects of the operations of Atlas, Holdings and its subsidiaries. As part of his executive compensation, he received a bonus which included "restricted phantom" units. These units were issued by Atlas to certain employees which entitled the recipient to receive a cash payment. These units vested after three years from the date of granting at which time the units could be redeemed for cash calculated as the aggregate of the then market value of the Atlas units plus the cash distributions paid over the intervening years.

10. Andrew Peters was a Director and Executive Vice-President and Chief Financial Officer of Holdings. He indirectly held Atlas units. As Executive VP and CFO, Peters was responsible for all of the financial affairs of Atlas, Holdings and its subsidiaries. As part of his compensation package, he received bonus payments which included "restricted phantom" units.

11. Ronald Perryman was the Vice-President of Finance of Holdings. As VP Finance, Perryman was responsible for the financial affairs of Atlas, Holdings and its subsidiaries. His responsibilities included the preparation and public filing of Atlas' interim and audited annual financial statements.

12. Paul Vickery was the Corporate Controller of Holdings from August 2000 to approximately June 2001. As Corporate Controller, he was responsible for the accounting of the financial affairs of Atlas, Holdings and its subsidiaries. In June 2001, he became the Director of Business Controls. Although no longer the Corporate Controller, he remained involved in accounting for Atlas, Holdings and its subsidiaries. In March 2002, he became the interim VP of Supply Chain and held that position until June 2002. As the interim VP, he was responsible for the financial affairs of Supply Chain.

Overview of Staff's Allegations

13. Staff allege that:

(a) on or about April 5, 2002, Gouveia, Peters, Perryman, and Vickery, violated Ontario securities law in connection with the filing of the annual financial statements of Atlas, required to be filed under Ontario securities law, for the financial year ending December 31, 2001, that, in a material respect and at the time and in light of the circumstances under which it was made, was misleading or untrue or did not state a fact that was required to be stated or that was necessary to make the statement not misleading by understating expenses, by inappropriately capitalizing expenses and recording expenses in 2002 which should properly have been recorded in 2001, thereby overstating net income and distributable cash;

(b) on or about April 5, 2002, Gouveia, Peters, Perryman, and Vickery, being a director or officer of Atlas Cold Storage Income Trust, did authorize, permit or acquiesce in the commission of the offence that Atlas Cold Storage Income Trust did make a statement in its annual financial statement for the financial year ending December 31, 2001, required to be filed under Ontario securities law, that, in a material respect and at the time and in light of the circumstances under which it was made, was misleading or untrue or did not state a fact that was required to be stated or that was necessary to make the statement not misleading by understating expenses, by inappropriately capitalizing expenses and recording expenses in 2002 which should properly been recorded in 2001, thereby overstating net income and distributable cash;

(c) on or about March 17, 2003, Gouveia, Peters, Perryman, and Vickery violated Ontario securities law in connection with the filing of annual financial statements of Atlas, required to be filed under Ontario securities law, for the financial year ending December 31, 2002, that, in a material respect and at the time and in light of the circumstances under which it was made, was misleading or untrue or did not state a fact that was required to be stated or that was necessary to make the statement not misleading by understating expenses, by inappropriately capitalizing expenses and accounting for a refund under an asset purchase agreement as a reduction of expenses, thereby overstating net income and distributable cash, and by failing to disclose a breach of a covenant in Atlas' lending agreement.

(d) on or about March 17, 2003, Gouveia, Peters, Perryman, and Vickery, being a director or officer of Atlas Cold Storage Income Trust did authorize, permit or acquiesce in the commission of the offence that Atlas Cold Storage Income Trust did make a statement in its annual financial statement for the financial year ending December 31, 2002, required to be filed under Ontario securities law, that in a material respect and at the time and in light of the circumstances under which it was made, was misleading or untrue or did not state a fact that was required to be stated or that was necessary to make the statement not misleading by understating expenses, by inappropriately capitalizing expenses and accounting for a refund under an asset purchase agreement as an reduction of expenses thereby overstating net income and distributable cash, and by failing to disclose a breach of a covenant in the Trust's lending agreement;

(e) on or about May 27, 2003, Gouveia, Peters and Perryman violated Ontario securities law in connection with the filing of the interim financial statements of Atlas, required to be filed under Ontario securities law, for the first reporting period for the financial year 2003, that, in a material respect and at the time and in light of the circumstances under which it was made, was misleading or untrue or did not state a fact that was required to be stated or that was necessary to make the statement not misleading by understating expenses, by inappropriately capitalizing expenses, thereby overstated net income and distributable cash and by failing to disclose a breach of a covenant in Atlas' lending agreement;

(f) on or about May 27, 2003, Gouveia, Peters and Perryman, being a director or officer of Atlas Cold Storage Income Trust did authorize, permit or acquiesce in the commission of the offence that Atlas Cold Storage Income Trust did make a statement in its interim financial statements for the first reporting period for the financial year 2003, required to be filed under Ontario securities law, that, in a material respect and at the time and in light of the circumstances under which it was made, was misleading or untrue or did not state a fact that was required to be stated or that it was necessary to make the statement not misleading by understating expenses, by inappropriately capitalizing expenses, thereby overstating net income and distributable cash and by failing to disclose a breach of a covenant in the Trust's lending agreement;

(g) on or about August 29, 2003, Gouveia, Peters, and Perryman violated Ontario securities law in connection with the filing of the interim financial statements of Atlas for the second reporting period of the financial year 2003, that, in a material respect and at the time and in light of the circumstances under which they were made, were misleading or untrue or did not state a fact that was required to be stated or that was necessary to make the statement not misleading by understating expenses, by inappropriately capitalizing expenses, and thereby overstating net income and distributable cash; and

(h) on or about August 29, 2003, Gouveia, Peters and Perryman, being a director or officer of Atlas Cold Storage Income Trust did authorize, permit or acquiesce in the commission of the offence that Atlas Cold Storage Income Trust did make a statement in its interim financial statements for the second reporting period of the financial year 2003, required to be filed under Ontario securities law, that, in a material respect and at the time and in light of circumstances under which it was made, was misleading or untrue or did not state a fact that was required to be stated or that was necessary to make the statement not misleading by understating expenses, by inappropriately capitalizing expenses, thereby overstating net income and distributable cash.

Particulars of Allegations

(a) General

14. The respondents engaged in a course of conduct generally intended to present an improperly improved picture of the financial performance of Atlas for the period including the financial years 2001, 2002, and the first two reporting periods of 2003. This course of conduct was designed to improperly enhance Atlas' net earnings and conceal evidence of the extent of the financial loss at Supply Chain. This conduct included, but was not restricted to, the inappropriate capitalization of expenses, not matching expenses to revenue, improperly accounting for a refund under an asset purchase agreement as a reduction of expenses, and the funding of a subsidiary in breach of a covenant in a lending agreement.

(b) Particulars

(i) Inappropriate Capitalization of Expenses

15. Between January 1, 2001 and June 30, 2003, Atlas' accounting staff presented Gouveia with actual financial results in anticipation of end of quarter reporting. These results were routinely lower than the unreasonably high targets Gouveia had established for the quarters. When Gouveia received the results, he was routinely dissatisfied and instructed accounting staff to find more earnings. With his knowledge, accounting staff aggressively reviewed all expenses over $1,000 and reclassified invoices previously classified as expenses as capital expenditures. Many of these capitalizations were not in accordance with GAAP. During this period, Gouveia directed the inappropriate capitalization of expenses to achieve earnings targets with the knowledge of Peters and Perryman. For the financial year ending December 31, 2001, Vickery participated in this process at the direction of Gouveia.

(ii) Not Matching Expenses to Revenue

16. In 2000 and 2001, Atlas lost or damaged product of one of its largest customers. In 2001, the customer made claims to Atlas to be compensated for this lost or damaged product. In January 2002, Gouveia met with representatives of the customer and settled the claim for approximately $950,000.00. Gouveia instructed that the expense not be recognized in the financial year ending December 31, 2001. Instead, he told Vickery to record the expense in 2002. While Vickery was aware expenses were incurred in 2001 and earlier, he took steps to have the expenses recorded in 2002. Peters and Perryman were also aware the expenses were incurred in 2001.

(iii) Improper Accounting for a Refund under an Asset Purchase Agreement as a Reduction of Expenses

17. Pursuant to the terms of the TCT asset purchase agreement which closed on March 20, 2002, Atlas was entitled to a refund for trucks and trailers which could not be located or were not roadworthy. In accordance with the term of the agreement, Holdings rejected numerous vehicles to a value of approximately $600,000.00. On May 1, 2002, a refund in this amount was returned to Holdings. Staff at Holdings delivered the cheque to Perryman. Staff at Holdings explained to Vickery that the cheque was a refund under the terms of the asset purchase agreement. Vickery failed to account for the TCT refund as a reduction of the purchase price. Between November 1, 2002 and January 31, 2003, Gouveia, Peters, and Perryman, approved of accounting for the TCT refund as a reduction of expenses.

(iv) Failure to Disclose Breach of Covenant in Lending Agreement

18. Supply Chain commenced operations in March 2002. It was not profitable. In order to continue operations it relied on funds from Holdings. By May 31, 2002, Holdings breached its covenants to its lenders by advancing funds in excess of the investment and loan limits. The improper advance of funds from Holdings to Supply Chain was concealed by the reciprocal payment of funds between Supply Chain and Holdings at the end of Q2, Q3 2002 and Q1 2003 and a purported sale leaseback agreement between Holdings and Supply Chain at the end of Q4 2002. The improper advances of funds between Holdings and Supply Chain were concealed to prevent disclosure of the extent of the losses of Supply Chain.

(1) End of Q2 and Q3 2002 Reciprocal Payments by Supply Chain to Holdings

19. During Q2 and Q3 2002, Holdings breached the covenants of its lending agreements by advancing funds to Supply Chain in excess of the investment and loan limit. In order to conceal the breach of the lending agreements, at the end of Q2 and Q3, Supply Chain paid funds to Holdings sufficient to purportedly put it in compliance with the lending agreement. Upon receipt of the payment from Supply Chain, Holdings repaid the same amount to Supply Chain the next day which resulted in Holdings again contravening the lending agreement. Each of the respondents was aware Holdings had advanced funds to Supply Chain in contravention of the lending agreement and each was aware that reciprocal payments had been made between Holdings and Supply Chain to conceal the breach of the lending agreement.

(2) Purported Sale Leaseback Between Supply Chain and Holdings at the end of Q4 2002

20. During Q4 2001, Holdings continued to contravene the loan limits of the lending agreement. At the end of Q4, Holdings sought to conceal the breach of the covenants by entering into a sale leaseback agreement with Supply Chain. At the time, Supply Chain's vehicles were already secured under a general security agreement with Supply Chain's lender. According to the terms of the purported sale leaseback agreement, Supply Chain sold its vehicles to Holdings. Holdings then leased the vehicles back to Supply Chain. The funds supposedly paid for the vehicles of Supply Chain brought Holdings into compliance with the loan limits of the lending agreement. In fact, no written sale leaseback agreement was signed between Holdings and Supply Chain. No transfer documentation for the vehicles was prepared. No lease payments were made by Supply Chain to Holdings. Gouveia, Peters, and Perryman knew that the breach of the lending agreement was being concealed by the purported sale leaseback agreement between Holdings and Supply Chain.

(3) End of Q1 2003 Reciprocal Payments by Supply Chain to Holdings

21. During Q1 2003, Holdings continued to breach the covenants of its lending agreement by exceeding the investment and loan limits to Supply Chain. At the end of Q1 2003, in order to conceal the continued breach of the lending agreement, Supply Chain paid to Holdings funds sufficient to put it in purported compliance with the lending agreement. The following day Holdings repaid the funds to Supply Chain.

Filing of Materially Misleading Financial Statements

22. At the end of each financial reporting period and at the end of each financial year, Atlas accounting staff prepared the consolidated financial statements for Atlas. The improper accounting of the customer claims of 2001 and the TCT refund, combined with the inappropriate capitalization of expenses, resulted in the understatement of expenses and the overstatement of earnings in the financial statements of 2001, 2002, and the first two reporting periods of 2003. The failure to disclose the breach of the lending agreement concealed the extent of the losses at Supply Chain. The consolidated financial statements, therefore, were materially misleading. These misleading financial statements were presented to the audit committee and the Board of Atlas for approval. The Management Report section of the audited annual financial statements for 2001 and 2002 were signed by Gouveia and Peters and the misleading financial statements were filed with the Commission.

Restatement of Financial Statements and Discontinuance of Business of Supply Chain

23. As a result of the misstatements in the financial statements, on January 30, 2004, Atlas had to amend and restate its financial statements for the periods including 2001, 2002, and the first two reporting periods of 2003. Earnings for these reporting periods were overstated and had to be amended and restated materially lower. The inappropriate capitalization of expenses and the improper accounting for the 2001 customer claims and the TCT refund contributed materially to the lower restatement of earnings for the relevant reporting periods.

24. In September 2003, the funding advances from Holdings to Supply Chain in contravention of the covenants of the lending agreement were revealed to the Board of Holdings. The Board initiated a review of the business of Supply Chain to determine whether Atlas should remain in this business. On September 19, 2003, Atlas announced that it would discontinue a portion of the business of Supply Chain. On December 1, 2003, Atlas announced that it was discontinuing the remainder of the business operated by Supply Chain.

Conduct Contrary to Ontario Securities Law and Conduct Contrary to the Public Interest

25. Staff allege that Gouveia, Peters, Perryman and Vickery engaged in conduct contrary to Ontario securities law and contrary to the public interest in connection with the filing of materially misleading financial statements for Atlas for the financial years ending December 31, 2001 and December 31, 2002. Staff further allege that Gouveia, Peters and Perryman engaged in conduct contrary to Ontario securities law and conduct contrary to the public interest in connection with the filing of materially misleading statements for Atlas for the first and second financial reporting periods in 2003.

26. Staff reserve the right to make such further and other allegations as Staff may advise and the Commission may permit.

DATED at Toronto, this 2nd day of June , 2004.