Section 144 -- Application for partial revocation of cease trade order -- partial revocation of cease trade order granted to harmonize requirements with requirements in issuer's principal jurisdiction, subject to conditions.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 127, 144.
IN THE MATTER OF
THE SECURITIES ACT
R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF
ZOLOTO RESOURCES LTD.
WHEREAS the Issuer is subject to a cease trade order dated May 19, 2009 made pursuant to subsection 127(1) and subsection 127(5) of the Act ordering that trading in securities of the Issuer cease (the "CTO");
AND WHEREAS Canaccord Financial Inc. (the "Applicant") has made an application to the Ontario Securities Commission (the "Commission") pursuant to section 144 of the Act for a partial revocation of the Cease Trade Order;
AND WHEREAS Applicant has represented to the Commission that:
1. According to the Issuer's SEDAR profile, the Issuer is a corporation governed by the laws of Alberta. Its head office is located in Vancouver, British Columbia.
2. According to a press release issued by the Issuer on January 27, 2010, the Issuer currently has 145,485,300 common shares issued and outstanding.
3. According to the Issuer's SEDAR profile, the Issuer is a reporting issuer in the provinces of British Columbia, Alberta and Ontario.
4. The Issuer's common shares are listed on the TSX Venture Exchange under the symbol 'ZR'. The Issuer's common shares also trade in the United States on an 'over the counter' basis and are quoted on the 'pink sheets' electronic quotation system maintained by Pink OTC Markets Inc. under the symbol 'ZRSCF'.
5. On May 19, 2009, the Commission issued the CTO due to the Issuer's failure to file continuous disclosure materials required by Ontario securities law. The CTO prohibits all trading in and all acquisitions of securities of the Issuer, whether direct or indirect.
6. Similar cease trade orders were also issued against the Issuer by the British Columbia Securities Commission (the "BC CTO") and the Alberta Securities Commission on May 4, 2009 and August 9, 2009, respectively.
7. The BC CTO provides that, notwithstanding that order, a beneficial shareholder of the Issuer who was not, at the date of the BC CTO, an insider or control person of the Issuer, may sell securities of the Issuer acquired prior to the date of the BC CTO if (i) the sale is made through a market outside of Canada, (ii) the sale is made through an investment dealer registered in British Columbia and (iii) the investment dealer maintains a record of the sales made under this provision (the "BC CTO Exemption"). The CTO does not contain an equivalent exemption permitting sales of securities acquired prior to the date of the CTO.
8. Canaccord Genuity Corp. ("CGC") is a corporation governed by the Business Corporations Act (Ontario). It carries on the business of a full-service investment dealer in Canada.
9. CGC is registered as an investment dealer in all provinces and territories of Canada. It is also a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the TSX Venture Exchange, a participating organization of the TSX and an approved participant of the Montreal Exchange.
10. Canaccord Genuity Inc. ("CGI") is a corporation governed by the laws of Delaware. It carries on the business of a broker dealer in the United States.
11. CGI is registered as a broker dealer with the Securities Exchange Commission and is a member of the Financial Industry Regulatory Authority (FINRA).
12. CGC and CGI are both wholly-owned subsidiaries of Canaccord Financial Inc ("CFI"). CFI is a reporting issuer in all provinces and territories of Canada. Its common shares are listed for trading on the Toronto Stock Exchange and AIM, a market operated by the London Stock Exchange.
13. Capital Research and Management Inc. ("Cap Re") is an investment advisor headquartered in California.
14. On April 26, 2010, Cap Re sold 851,200 common shares of the Issuer (the "Transferred Shares") through CGI's San Francisco office in an over the counter trade through the pink sheets in the United States at a price of approximately US$0.01 per share (the "Cap Re Trade").
15. Cap Re sold the Transferred Shares on behalf of two investment funds that it manages -- American Funds Insurances Series Global Small Capitalization Fund, a Maryland corporation (192,900 shares) and SMALLCAP World Fund, Inc., a Massachusetts trust (658,300 shares).
16. The Transferred Shares were acquired by Cap Re on behalf of these funds in 2007 and 2008 (ie., prior to the date of the CTO).
17. The Transferred Shares were sold to three different United States broker dealers -- Knight Equity Markets, LLC., a broker dealer headquartered in New Jersey, Puma Capital, LLC a broker dealer headquartered in New York and Precision Securities LLC, a broker dealer headquartered in San Diego (collectively, the "Purchasing Dealers"). None of the Purchasing Dealers is registered as an investment dealer in Canada.
18. The Purchasing Dealers were not required to, and did not, disclose the identity of the beneficial purchasers of the Transferred Shares to Canaccord Genuity, but at no time, either prior to the Cap Re Trade or subsequently, has Canaccord Genuity had reason to believe that the beneficial purchasers were resident in Canada.
19. The shares are represented by certificates registered in the name of Cap Re's Canadian custodian, "Roytor & Co." in Toronto, Ontario. Canaccord Genuity believes that the share certificate was registered in the name of a Canadian custodian because, prior to the imposition of the CTO, the primary trading market for the shares was the TSX Venture Exchange.
20. Under the applicable settlement rules in the United States, the Cap Re Trade was required to settle on April 29, 2010. Cap Re was unable to deliver the Transferred Shares to CGI's clearing broker (the "Clearing Broker") on the settlement date because the certificate representing the Transferred Shares contained a legend restricting transfer of the shares in the United States that had to be removed before delivery could occur. Pursuant to the Regulation SHO under the United States Securities and Exchange Act, in these circumstances the selling broker dealer is required to rectify the "fail to deliver" within 35 days of the trade (the "Close Out Date"). With respect to the Cap Re Trade, the Close Out Date was June 3, 2010.
21. Almost all of the time between the date of the Cap Re Trade and the Close Out Date was taken up with obtaining the necessary documentation from the Issuer for the removal of the restrictive legend on the certificate representing the Transferred Shares. That process was not completed until late in the day, Vancouver time, on June 3, 2010 and at that time the certificate was presented for transfer to the Issuer's transfer agent in Vancouver, Computershare Trust Company of Canada ("Computershare").
22. On June 4, 2010, Computershare advised CGI that, in its view, the CTO precludes Computershare from registering a transfer from a registered holder with an address in Ontario. Until Computershare registers the transfer of the Transferred Shares, CGI cannot complete delivery of the Transferred Shares to the Clearing Broker.
23. As a result of the delay in removing the restrictive legend on the certificate representing the Transferred Shares and Computershare's refusal to process the transfer of the Transferred Shares, CGI was unable to deliver the Transferred Shares to the Clearing Broker before the Close Out Date.
24. Since CGI did not deliver the Transferred Shares before the Close Out Date, on June 3, 2010, the Clearing Broker issued a 'buy-in notice' (the "Buy-In Notice"). Under the Buy-In Notice, the Clearing Broker will attempt to complete delivery of the Transferred Shares by buying an equivalent number of shares on the open market and delivering those to the purchaser in lieu of the Transferred Shares. CGI is liable for the cost of these purchases, even if they exceed the price at which the trade was competed.
25. The Clearing Broker purchased 20,000 Issuer common shares in the United States under the Buy-In Notice on June 3, 2010. The Buy-In Notice has been reissued to take effect at 3:00 p.m., Eastern time, on June 7, 2010 but it is possible that the Clearing Broker could invoke the original Buy-In Notice as early as 9:30 am, Eastern time, on that day.
26. The Issuer common shares are very thinly traded over the pink sheets. For example, over the past 30 trading days, excluding the buy-in trade referred to above, only 40,000 shares have traded. To the knowledge of CGI, the last reported offer to sell shares (at very small quantities) was $0.30 per share. Therefore, if the Clearing Broker attempts to execute the Buy-In Notice to purchase the remaining 831,200 Issuer common shares that remain to be delivered in respect of the Cap Re Trade, it would grossly distort the market in the United States for the Issuer's common shares, driving the price to artificially high levels. This would make the buy-in extremely expensive for CGI and would result in 'windfall' profits for sellers, who will effectively be in a position to name their price for the stock.
27. CGI intends to review its internal processes and procedures relating to the execution of the Cap Re Trade and consider implementing additional processes and procedures to ensure that trades in securities of an entity that is a reporting issuer in Canada are not affected by any Canadian cease trade orders. CGI has undertaken to the OSC that it will report the results of its review and any proposed process and procedure changes to the OSC within 60 days of the date of this application.
28. Canaccord Genuity has advised the British Columbia Securities Commission (the "BCSC") of the circumstances giving rise to this application and has provided a copy of this application to the BCSC.
29. The BCSC has advised Canaccord Genuity that the BC CTO does not apply to the Cap Re Trade.
AND WHEREAS considering the Application and the recommendation of the staff of the Commission;
AND WHEREAS the Director being satisfied that to do so would not be prejudicial to the public interest;
IT IS ORDERED, pursuant to section 144 of the Act, that the Cease Trade Order be and is hereby partially revoked solely to permit trades in securities of the Issuer (including, for greater certainty, acts in furtherance of trades in securities of the Issuer) that are necessary for and are in connection with the delivery of the Transferred Shares to the Clearing Broker, provided that:
(a) the beneficial owner of the Transferred Shares was not, as at the date of the Cap Re Trade, an insider or control person of the Issuer;
(b) the Cap Re Trade was made through a market outside of Canada and through CGI, a broker dealer registered with the United States Securities and Exchange Commission;
(c) CGI maintains a record of the details of the sales made under this Order and agrees to make such record available for review on request by the Ontario Securities Commission; and
(d) this Order will terminate on the earlier of (i) completion of the delivery of the Transferred Shares to the Clearing Broker and (ii) 120 days from the date hereof.
DATED at Toronto this 7th day of June, 2010.