INTHE MATTER OF
R.S.O.1990, c. S.5, AS AMENDED
INTHE MATTER OF
1.By Notice of Hearing dated December 17, 2001 (the "Notice ofHearing"), the Ontario Securities Commission (the "Commission")announced that it proposed to hold a hearing to consider whether,pursuant to sections 127(1) and 127.1 of the Securities Act,R.S.O. 1990, c. S.5, as amended (the "Act"), it is in the publicinterest for the Commission:
(a) to make an order approving the proposed settlement enteredinto between Staff of the Commission ("Staff") and the respondent,Gordon Scott Paterson ("Paterson") of this proceeding, whichapproval will be sought jointly by Staff and Paterson;
(b) to make an order that the respondent Paterson be reprimanded;and
(c) to make an order that the respondent Paterson pay coststo the Commission.
II.JOINT SETTLEMENT RECOMMENDATION
2.Staff agrees to recommend settlement of the proceeding initiatedin respect of the respondent Paterson by the Notice of Hearingin accordance with the terms and conditions set out below. Patersonconsents to the making of an order against him in the form attachedas Schedule "A" on the basis of the facts set out below.
III.STATEMENT OF FACTS
3.Solely for the purpose of this proceeding, Paterson agrees withthe facts as set out in this Part III.
4.The conduct of Paterson that is the subject matter of this SettlementAgreement occurred prior to February 2001 (the "Material Time").
5.Yorkton is registered as, among other things, a broker and investmentdealer under the Act and is a member of, among other things,the Toronto Stock Exchange (the "TSE") and the Investment DealersAssociation of Canada (the "IDA"). Yorkton is an employee-ownedfirm with over 600 employees. Yorkton is a wholly-owned subsidiaryof Yorkton Financial Inc. ("Yorkton Financial").
6.Paterson was registered as a trading officer and the Chairmanand Chief Executive Officer of Yorkton since October 1998, andPresident of Yorkton from May 20, 1997 to October 1, 1998. Duringthe Material Time, Paterson owned approximately 15% of YorktonFinancial. Paterson was registered as a trading officer withthe title of Executive Vice-President and Director from May16, 1995 to May 20, 1997.
7.Piergiorgio Donnini ("Donnini") was Yorkton's Head Institutionaland Liability Trader, except for the period from September 1998to April 1999, as indicated herein. Donnini's employment withYorkton was terminated in April 2001. From November 14, 1995to April 5, 2001, Donnini was registered as a sales representativewith Yorkton, with the exception from September, 1998 to April,1999 when Donnini was not employed with Yorkton.
8.Alkarim Jivraj ("Jivraj") has been employed with Yorkton asan investment banker since 1996.
9.GTR Group Inc. ("GTR") was the continuing company formed throughthe reverse take-over (the "RTO") by Games Trader Inc. ("GTI")of the listed "shell" then known as Xencet Investments Inc.("Xencet") in October 1998 and the concurrent exchange of securitieswith shareholders of 1308129 Ontario Inc. ("1308129"). EffectiveSeptember 5, 2001, GTR changed its name to Mad Catz InteractiveInc. During the Material Time GTR was a reporting issuer inBritish Columbia, Alberta and Ontario and its common shareswere listed and posted for trading on the TSE under the symbolGTR.
10.During the Material Time GTR carried on business through twooperating subsidiaries. Through the first of those subsidiaries(which carried on business under the name "Games Trader"), GTRwas a supplier of video games to mass merchant and specialtyretailers in the United States and Canada, with its principalbusiness activity being the sourcing, refurbishing, repackagingand distribution of previously played video game software. Throughthe second of those subsidiaries, GTR designed, developed, manufactured(through third parties) and marketed interactive video gamecontrol devices and accessories.
11.GTI was, until it was taken public through the RTO, a closely-heldcompany that carried on the business later operated under the"Games Trader" name.
1.Investments by Yorkton Group in GTI
12.In March 1997, Capital Canada Limited ("CCL") made a presentationto representatives of Yorkton concerning an opportunity to participatein the acquisition and financing of GTI. In this presentation,CCL expressed the view that individuals at Yorkton should acquireshares in GTI as a sign of their good faith.
13.In response to this presentation, ultimately Yorkton acquired250,000 common shares, representing approximately 6% of theoutstanding common shares of GTI. Yorkton then transferred thoseshares to the various persons and entities including PatstarInc., a corporation owned by Paterson (collectively, the "YorktonGroup"). Patstar Inc. purchased 25,000 of these common sharesfor $25,000.
2.Yorkton/Paterson Relationship with Xencet
14.Xencet was incorporated in 1993 as a "junior capital pool" underthe name Patch Ventures Inc. ("Patch") at the initiative of,among others, Paterson. In 1994, Patch acquired all of the issuedand outstanding shares of Legacy Manufacturing Corporation pursuantto a reverse take-over, following which the name of the companywas changed to Legacy Storage Systems International Inc. ("Legacy").In 1995, Paterson joined the board of directors of Legacy andits shares were listed and posted for trading on the TSE. Patersonhas since 1995 also been a shareholder of Legacy and its successorcompanies.
15.Since 1995, Yorkton has regularly acted as underwriter and financialadvisor for Xencet and its predecessor companies and was alsoa security holder. In particular, Yorkton was the lead underwriterin respect of two special warrant offerings of Legacy completedin May 1995 and December 1995, and the lead underwriter in respectof the unit offering of Legacy completed in March 1996. Yorktonalso acted as financial advisor to Legacy in connection withthe acquisition by Legacy of shares and assets of Rexon Inc.,completed in March 1996. Legacy subsequently changed its nameto Tecmar Technologies International Inc. in December 1996.In January 1998, its name again was changed to Xencet InvestmentsInc. ("Xencet") in connection with the proposed sale of thelast of its operating businesses. Paterson remained on the boardof Xencet (and its predecessor companies as of August 1995)until his resignation from the board on September 30, 1998.
16.Upon completion of the sale of the last of Xencet's operatingbusinesses, in mid-February 1998, Xencet had no significantoperations. It held cash and cash equivalents in excess of $7.5million. Its only other asset was a listing on the TSE. To preservethis listing, the TSE required that Xencet enter into a legallybinding agreement by August 18, 1998 to acquire an operatingbusiness that, if completed, would result in Xencet meetingthe original listing requirements of the TSE. Failing that,the shares of Xencet would be de-listed. This was publicly announcedby Xencet. The board of directors of Xencet asked Paterson andother firms and individuals to search out business opportunities.
17.In mid-March 1998, notwithstanding that Xencet had no apparentneed or use for additional cash, Paterson proposed to the twoother directors of Xencet a transaction pursuant to which Patersonand certain other investors identified by him would acquirefor $0.65 per unit approximately 1,150,000 units. Each unitwas to consist of one common share in the capital of Xencetand one common share purchase warrant exercisable for $0.70per share for a period of two years from the date of issue.On March 31, 1998, the closing price of the common shares ofXencet on the TSE was $0.70 per share. The board of directorsfirst approved the Private Placement on March 27, 1998 withPaterson abstaining. The TSE approved the issuance of up to50% of the Private Placement to Paterson.
18.The proposed private placement was announced by Xencet on April30, 1998 (the "Xencet Private Placement"). The Xencet PrivatePlacement closed in late May 1998 at which time 460,000 unitswere issued to Yorkton in trust for Paterson, and 690,000 unitswere issued to two Yorkton institutional clients.
19.Xencet's press release of April 30, 1998 did not disclose theidentity of the subscribers to the Xencet Private Placement.Note 3 to the consolidated interim financial statements attachedto the Press Release stated that Xencet had determined to undertakea private placement in part to a related party, but did notdisclose the identity of the related party. Certain Yorktonpersonnel assisting with the RTO were not made aware that Patersonhad participated in the Xencet Private Placement until suchdisclosure was made in the Xencet Information Circular datedAugust 26, 1998 in connection with the RTO. Paterson signedhis subscription agreement in relation to the Xencet PrivatePlacement on May 21, 1998 and filed his insider report on September16, 1998, reporting his acquisition of 460,000 units of Xenceteffective on May 22, 1998.
3.The RTO - Role of Yorkton's Officers and Investment Bankers
20.In March 1998, Paterson committed the services of certain Yorktonemployees to the board of Xencet. In particular, Paterson committedemployees of Yorkton to review possible merger or RTO candidatesand to report the results of the review to the Xencet Board.As a director of Xencet, Paterson was informed of all businessopportunities presented to the Xencet board, and the developmentof any proposed transaction. Although Paterson committed theservices of certain Yorkton employees to help search out proposedbusiness opportunities, Paterson did not cause Yorkton to enterinto an engagement agreement with Xencet. Xencet was not placedon the grey list (also referred to as a watch list) in March1998. Yorkton did not place Xencet on its grey list until August13, 1998.
21.Through 1997 and into early 1998, representatives of GTI metwith Yorkton's Vice-President and Director of Investment Bankingfor the Media, Entertainment & Leisure Group and other Yorktonemployees, other than Paterson, on various occasions to discussthe timing of an initial public offering of GTI and the company'sfinancing requirements. As described below, in March 1998 andthe months that followed Yorkton senior officers and investmentbankers, other than Paterson, were acting as financial advisorsto GTI.
22.On or about April 16, 1998, certain Yorkton senior officersand employees met with the President of GTI for a general businessupdate on GTI. Yorkton's Vice-President and Director of InvestmentBanking for the Media, Entertainment & Leisure Group arrangedfor the GTI President to meet Paterson for the first time andgive a presentation to Paterson on or about April 24, 1998.
23.After that presentation, Paterson advised representatives ofGTI that it was Yorkton's view that, given GTI's recent operatingresults and financial condition, an initial public offeringwas not likely to be successfully completed until 1999 or later.Paterson indicated that he was aware, however, of a TSE-listedcompany that was looking for merger or acquisition candidatesand that he would take the information provided by GTI and considerwhether there could be a deal between GTI and that listed company.Shortly after this meeting, discussions ensued concerning apossible transaction, and the identity of Xencet was disclosedto GTI.
24.During April and May 1998, GTI was in discussions with Movies& Games 4 Sale, L.P. ("M4S"), a Dallas-based private limitedpartnership engaged in the same type of business as GTI, withrespect to the possible combination of the businesses of GTIand M4S.
25.Paterson introduced GTI to the Board of Directors of Xenceton or about May 5, 1998.
26.In early May, 1998, Paterson, on behalf of Xencet and a representativeof GTI, negotiated the proposed share exchange ratio in respectof the three businesses, such that Xencet, GTI and M4S wereagreed to be valued as one-third interests of the proposed businesscombination, on a going forward basis for the purpose of furthernegotiations towards a definitive agreement on the RTO. Thiswas prior to the first meeting between the GTI President andthe Xencet President on May 13, 1998, which meeting was foran introductory purpose. The share exchange ratio agreed toby the parties was not publicly available.
27.On June 3, 1998, Xencet issued a press release announcing thatit had entered into negotiations with unnamed parties, thatdiscussions were at a preliminary stage, and that there wasno assurance that the acquisition would be completed.
28.On or about June 12, 1998, it was determined that the proposedmerger/RTO with M4S as a party to the transaction would notproceed, but that GTI and Xencet would continue RTO negotiations.
29.On or about June 16, 1998, Paterson, on behalf of Xencet, andrepresentatives of GTI reached an agreement in respect of theshare exchange ratio for the proposed RTO of GTI and Xencet.The parties agreed to a 50/50 share exchange ratio. The shareexchange ratio agreed to by the parties was not publicly announcedat this time. The parties continued to take further steps towardsa definitive agreement on the RTO. On Friday, June 19, 1998,Xencet and GTI also entered into a confidentiality agreement,and began to exchange information under that agreement on Monday,June 22, 1998.
30.In order to proceed with the proposed RTO, GTI also approachedthe shareholders of GTI and requested that the original shareholders(which included Patstar Inc.) purchase shares from the founderof GTI. On June 30, 1998, Paterson and two Yorkton senior officerspurchased common shares of GTI. Paterson, through Patstar Inc.,purchased 55,627 shares of GTI.
31.On July 31, 1998, Xencet and GTI entered into an acquisitionagreement (the "Acquisition Agreement"), as amended and restatedon August 20, 1998, providing for the acquisition of all theissued and outstanding common shares of GTI, pursuant to securitiesexchange agreements to be entered into with the holders of GTIcommon shares in exchange for units of Xencet comprised of commonshares and a fractional number of common share purchase warrants,subject to approval by the shareholders of Xencet and otherconditions, including successful completion of an equity financing.
32.The share ratio agreed to by Xencet and GTI, as reflected inthe Acquisition Agreement, was as follows:
"On the terms and subject to the conditions set out herein andin the Securities Exchange Agreement, the transactions contemplatedby this Agreement shall be effected by the implementation ofthe following steps on the Closing Date:
(a) Xencet shall acquire all of the GTI Securities from theGTI Securityholders in exchange for an aggregate of:
(i) 10,300,000 Xencet Common Shares: and
(ii) 1,000,000 Xencet Series A Warrants;
(b) Peter Kozicz shall receive options to purchase 514,884 commonshares of Xencet exercisable until April 7, 2000 for the KoziczOptions held by him, it being the intent that the options tobe granted to Peter Kozicz will be granted at the market priceof the common shares of Xencet, as agreed to with the TSE, andthat the accrued gain in the Kozicz Options, being the excessof the exercise price per share of the options to be grantedby Xencet to Peter Kozicz over $0.4017 (the "Excess Amount")will be treated as a pre-payment of a portion of the exerciseprice per share payable under such options equal to the ExcessAmount per share of the options to be granted to Peter Kozicz,so that Peter Kozicz is in the same economic position as ifhe continued to hold the Kozicz Options, and the TSE shall haveapproved the issuance of such options on the foregoing termson or before August 12, 1998."
The Acquisition Agreement and the terms contained therein werenot then publicly available.
33.In mid-1998, Jivraj became aware that several senior Yorktonofficers had recently purchased shares in GTI.
34.In mid-1998, Jivraj approached Paterson and proposed that Patersonsell to him common shares in GTI. Paterson agreed to sell aportion of his position in GTI.
35.On August 19, 1998, Jivraj, purchased 2,217 common shares ofGTI from Patstar Inc. for $1,441.05.
36.The RTO transaction was publicly announced by Xencet on August26, 1998, which announcement included disclosure of the shareexchange ratio agreed to by Xencet and GTI, as reflected inthe Acquisition Agreement, as amended and restated on August20, 1998. The transaction was subject to approval by Xencetshareholders. The information circular dated August 26, 1998sent to Xencet shareholders disclosed information related toPaterson's holdings in and involvement with Xencet and GTI underthe heading "Conflict of Interest". The RTO was completed byOctober 30, 1998, and the name of the company was changed toGTR as of November 11, 1998. Following the RTO, the common sharesof Xencet/GTR traded on the TSE at prices substantially abovethe price at which the units were sold to Paterson and the twoYorkton institutional clients, pursuant to the Xencet PrivatePlacement, and substantially above the price of the GTI sharespurchased by Paterson and other Yorkton employees in the summerof 1998.
KASTENCHASE APPLIED RESEARCH LIMITED
37.Kasten Chase Applied Research Limited ("KCA") is a corporationincorporated under the Business Corporations Act (Ontario).KCA develops and applies technology to provide secure remoteaccess to computer networks. KCA was a privately held companyup until 1994 at which time Yorkton structured the reverse takeover by KCA of the reporting issuer known as Dysis Corp. KCAis a reporting issuer in British Columbia, Alberta, Saskatchewan,Manitoba, Ontario and Quebec. The common shares of KCA are listedand posted for trading on the TSE under the symbol KCA. Since1994 Yorkton has acted as underwriter in respect of severalfinancings and private placements for KCA.
1.First KCA Special Warrant Financing
38.In early February 2000, Yorkton and KCA engaged in discussionsabout a possible financing of KCA. On February 10, 2000, KCAsought "price protection" from the TSE for an offering of specialwarrants based on the $1.37 closing price of its common shareson February 9, 2000.
39.On February 11, 2000, KCA executed an engagement agreement withYorkton under which KCA proposed to raise $5 million by issuing4 million special warrants priced at $1.25 each (referred toas the "SWI"). Pursuant to subsections 619(a) and (b) and 622of the TSE Company Manual, special warrants exchangeable intolisted common shares may be issued at a discount to the closingprice of the common shares on the TSE on the day before thedate on which price protection is sought. Each special warrantwas to entitle the holder to acquire one common share of KCAand one warrant to acquire one-half of one common share at anexercise price equal to $1.75 per common share.
40.Pursuant to the engagement agreement, Yorkton was entitled toreceive an underwriter's commission equal to 8% of the grossproceeds of the offering (or $400,000 in cash commission) andcompensation options to acquire 400,000 units at an exerciseprice of $1.37 per unit. Each unit was to be exchangeable forone common share of KCA and one warrant to acquire one-halfof one common share at an exercise price equal to $1.75 percommon share. Yorkton did not own freely tradeable shares ofKCA at this time.
41.The arrangements between Yorkton and KCA set out in the engagementagreement were confirmed in an underwriting agreement datedFebruary 24, 2000. The financing closed on February 24, 2000.
2.Subscriptions For First KCA Special Warrants
42.During the pre-marketing of SWI, Yorkton's institutional clientsexpressed a greater demand for the purchase of SWI units thanthe proposed 4 million units. These clients were prepared topurchase close to 6.5 million KCA units.
43.Accordingly, on February 11, 2000, Yorkton received sufficientorders to purchase the special warrants that resulted in theoffering being oversubscribed.
3. Yorkton's Borrowing and Short Sales(1) in KCA Common Shares
44.Commencing on or about February 15, 2000, with the knowledgeand approval of Paterson, Donnini began executing short salesof common shares of KCA for Yorkton's own account.
45.On or about February 17, 2000, Donnini, on behalf of Yorkton,began to borrow KCA common shares from various registered dealers.Between February 15, 2000 and February 28, 2000, Yorkton soldshort for its own account approximately 355,000 common sharesof KCA. These transactions were transparent to the market asDonnini traded from Yorkton's inventory account.
46.The short sales carried out prior to February 29, 2000, wereeffected as part of a strategy to lock in Yorkton's profitsin relation to compensation options and special warrants fromSWI, which could not be freely traded.
4.Second KCA Special Warrant Financing Proposal
47.On February 29, 2000, Paterson presented a financing proposalto the Chief Financial Officer of KCA. Paterson then informedDonnini on February 29, 2000 that the proposed second KCA financingwas a $10 million special warrant offering at $6.75 per specialwarrant, and was to have a structure similar to the SWI financing.The information provided by Paterson to Donnini was not publiclyavailable. Paterson did not instruct or direct Donnini to ceasehis short selling of KCA common shares on February 29, 2000.Paterson did not inform Yorkton's compliance department thatKCA be placed on the grey list commencing on February 29, 2000.
48.Following receipt of information from Paterson, as describedabove, Donnini traded in common shares of KCA for Yorkton'saccount through jitney (2) trades.By the close of business on February 29, 2000, Donnini had soldshort for Yorkton's account 579,000 common shares of KCA.
49.On the morning of March 1, 2000, the CFO of KCA continued tonegotiate by telephone the terms of the special warrant offeringwith Paterson who was in Montreal, and by mid-day, KCA had reachedan agreement in principle with Yorkton in relation to the followingterms of the second warrant financing (subject to board approvalof KCA and negotiation of the engagement letter with Yorkton):
the pricing of the special warrants II offering;
the size of the special warrants II offering (including thecommon share purchase warrants and the exercise period and exerciseprice of the warrants);
the Commission to be paid to Yorkton in respect of the specialwarrants II offering, and the number, exercise price and exerciseperiod of the compensation warrants to be issued to Yorktonin respect of the underwriting.
50.On March 1, 2000 KCA sought price protection from the TSE foran offering of special warrants at $6.75 per special warrantbased on the $6.90 closing price of KCA's common shares on February29, 2000.
51.At the close of the day on March 1, 2000, the board of directorsof KCA approved the second special warrant financing.
52.On March 1, 2000, Yorkton sold short for its own account a further440,200 common shares of KCA, of which over 400,000 shares werejitneyed through another investment dealer, which had the effectof concealing Yorkton's involvement in the trade. Paterson didnot take steps to restrict Donnini's trading in KCA common shareson February 29, 2000 or March 1, 2000. All of the short salesfrom February 29 and March 1 were made at prices in excess ofthe $6.75 price for the KCA SW2 warrants. By the close of tradingon the TSE on March 1, 2000, Yorkton had sold short approximately1,375,000 common shares of KCA.
53.Yorkton's "bought deal" committee approved Yorkton's participationin the second special warrants financing at about 8:00 a.m.on March 2, 2000. KCA and Yorkton then executed an engagementagreement pursuant to which KCA agreed to raise, and Yorktonagreed to underwrite, $10 million by issuing 1.483 million specialwarrants priced at $6.75 each. Each special warrant was to entitlethe holder to acquire one common share of KCA and one warrantto acquire one-half of one common share at an exercise priceequal to $7.75 per common share.
54.Pursuant to the engagement agreement, Yorkton was entitled toreceive an underwriter's commission equal to 8% of the grossproceeds of the offering and compensation options to acquire148,399 units at an exercise price of $6.90 per unit. Each unitwas to be exchangeable for one common share of KCA and one warrantto acquire one-half of one common share at an exercise priceequal to $7.75 per common share.
55.After Yorkton's "bought deal" committee approved the financing,KCA was placed on Yorkton's "restricted list", which was distributedby e-mail shortly before markets opened on March 2, 2000.
56.The arrangements between Yorkton and KCA set out in the engagementagreement were formalized in an underwriting agreement datedMarch 15, 2000. The financing closed on March 15, 2000.
57.Yorkton's retail salespersons advised Yorkton's syndicationdepartment that they had received indications of interest fromsophisticated retail clients in purchasing a total of 609,500special warrants. Retail sales were allocated 431,000 of the1.483 million special warrants that were to be distributed.Except for some hedge fund clients, Yorkton's institutionalclients were not interested in purchasing KCA units in the secondwarrant financing. Yorkton purchased, as principal, the remaining650,000 special warrants at a price of $4,387,500, with theresult that fewer special warrants were allocated to sophisticatedretail clients.
58.Book4golf.com Corporation ("Book4golf") has since September22, 1999 been incorporated pursuant to the Canada Business CorporationsAct. Book4golf is the developer and owner of Book4golf.com,an e-commerce Web portal that allows golfers to book tee timesat various types of golf courses over the Internet. Book4golfis a reporting issuer in British Columbia and Ontario. The commonshares of Book4golf are listed and posted for trading on theCanadian Venture Exchange ("CDNX") under the symbol BFG.
Book4golfoff CDNX TRADE
59.Paterson and Yorkton played a major role in the affairs of SomervilleCapital Inc. ("Somerville"), a junior capital pool ("JCP") company,and they continued to play a major role after the RTO transactionthat transformed the JCP into Book4golf. Yorkton acted as underwriterand financial advisor. Paterson and other Yorkton employeeswere shareholders and Paterson publicly supported Book4golf.Yorkton provided research coverage on Book4golf and the Directorof Research reported directly to Paterson. Yorkton was the dominanttrading member firm in Book4golf shares.
60.On January 24, 2000, Book4golf opened at a price of $17.30,reached a high of $18.05 and a low of $14.00, and closed at$15.85. The following day Book4golf opened at a price of $17.00.
61.On January 24, 2000, a U.S. client of Yorkton's Chicago officewished to sell 100,000 shares of Book4golf. The Chicago officerelayed the information to Donnini, the Head of InstitutionalTrading in Yorkton's Toronto office. Donnini approached Patersonand together they decided to offer a bid price of $13.75 pershare, a 25¢ discount to the lowest transaction price on thatdate. Of the 100,000 Book4golf shares, Donnini purchased 25,000Book4golf shares in his personal account and Paterson purchasedthe remaining 75,000 Book4golf shares through the account ofhis personal holding company.
62.Donnini did not report the 100,000 sale of the Book4golf sharesto CDNX. The transactions were only recorded on the books andrecords of Yorkton on January 25, 2000 "as of January 24, 2000".The size and nature of this transaction would have depressedthe market price of Book4golf if it had been placed throughthe facilities of the CDNX.
63.Donnini reported directly to Paterson.
64.Paterson actively traded Book4golf shares on January 24, 2000prior to buying the 75,000 Book4golf shares.
65.From January 26, 2000 to February 18, 2000, Paterson sold 75,000shares of Book4golf at prices ranging from $16.00 to $23.25.On a "last in, first out" basis, he made a pre-tax profit ofover $400,000.
66.The position of Paterson in Book4golf is stated in the Book4golfprospectus dated December 21, 2000 as follows:
Mr. Paterson has invested an aggregate amount of $3,120,590in cash, directly and indirectly through his spouse, a familytrust, an RRSP and a personal holding corporation, in CommonShares and Common Share purchase warrants of the Company. Basedon the closing market price of the Common shares as at December20, 2000, Mr. Paterson has aggregate realized and unrealizedlosses (before income taxes) of $1,048,110 in respect of allof his direct and indirect investments in Book4golf.com includingproceeds from all dispositions.
67.Donnini and Yorkton were sanctioned by the CDNX for failingto report the transaction involving the 100,000 shares of Book4golf.The settlement agreement was approved on June 4, 2001 by theDisciplinary Hearing Panel of CDNX.
1.Establishment of Storage One
68.Storage One Inc. ("Storage One") was incorporated under theBusiness Corporations Act (Ontario) as Storage Express Inc.on October 18, 1993 as a subsidiary of Tecmar Technologies Incorporated("Tecmar"). Storage Express Inc. changed its name to StorageOne effective November 10, 1993 and to EcomPark Inc. effectiveMay 19, 1999.
69.Tecmar was a wholly owned subsidiary of Tecmar TechnologiesInternational Inc. As noted above in paragraph 15, Tecmar TechnologiesInternational Inc. was formerly Legacy Storage Systems InternationalInc. Paterson was a shareholder of Legacy Storage Systems InternationalInc. (and the successor companies, including Xencet) from 1995to date, and a director of Legacy Systems International Inc.(and its successor companies) from 1995 until his resignationfrom the Xencet board on September 30, 1998.
70.Storage One did not carry on active business until April 14,1997, when it acquired certain inventory, fixed assets, prepaidexpenses and goodwill of the computer storage hardware businesscarried on by Tecmar. On the advice of Paterson to the boardof Tecmar Technologies International Inc., Storage One becamea separate company in April, 1997.
71.Effective August, 1997, Storage One became a reporting issuerin British Columbia, Alberta and Ontario. Effective October,1997, the common shares of Storage One were listed and postedfor trading on the Alberta Stock Exchange (as it then was) underthe symbol SOJ.
2.August 18, 1997 Prospectus
72.Pursuant to a prospectus dated August 18, 1997, Storage Onemade an initial public offering (the August "IPO") by whichit raised $800,000 by offering 3,200,000 units consisting ofa common share and common share purchase warrant. The same prospectusqualified for distribution common shares and warrants issuableupon the exercise of special warrants issued in April 1997 forproceeds of $2,893,500. These investments were described inthe prospectus as speculative and involving a high degree ofrisk.
73.As described in the prospectus under the heading "Managementof Storage", each of the four managers of Storage One identifiedin the prospectus had held management positions with Tecmaror with its computer storage hardware business before that businesswas acquired by Storage One. Under the heading "Risk Factors",the prospectus stated that Storage One was substantially dependenton the services of a few key personnel, including three of thefour managers identified in the prospectus. The prospectus disclosedno concerns about the quality or abilities of management.
74.The financing agreement dated April 14, 1997 between StorageOne and Yorkton relating to the offering of the special warrantsof Storage One (the "April Private Placement"), required StorageOne to deposit into a segregated bank account the majority ofthe proceeds of that financing and the net proceeds of the saleof units later issued under the prospectus. These funds couldbe released only with the consent of two Yorkton nominees.
75.In connection with the April Private Placement, in Paterson'sview these restrictions were required because Paterson had concernsin relation to management's use of funds, and management's abilityto manage its cash. Paterson assumed the lead role in respectof Yorkton's underwriting of the April Private Placement andpurchased $150,000 of special warrants.
76.These restrictions remained in place at the time of the AugustIPO, and are disclosed in the prospectus as follows:
"Pursuant to the Underwriting Agreement, the Corporation agreedto deposit the net proceeds from the offering of Special Warrantsin excess of $1,700,000, as well as the net proceeds from thisOffering and from the exercise of the Warrants, the New Warrantsand the Compensation Options into a segregated bank accountof the Subsidiary that requires two signing officers, both ofwhom are nominees of Yorkton. As long as any funds remain inthis bank account of the Subsidiary, the Corporation has alsoagreed: (i) other than certain existing liens, not to createor permit any lien, claim, security interest or other encumbrancewhatsoever against or in respect of the Subsidiary; (ii) toensure a majority of the board of directors of the Subsidiaryare nominees of Yorkton; and (iii) to ensure the Subsidiarydoes not conduct any active business without the consent ofYorkton. The purpose of the funds deposited to the bank accountof the Subsidiary is to identify and pursue future acquisitionand expansion opportunities".
77.Paterson's knowledge, information and belief in respect of themanagement of Storage One, giving rise to the imposition andcontinuation of these restrictions, was not disclosed in theStorage One prospectus.
3.Paterson's Views About Management
78.In the course of a voluntary interview by staff of the CDNXheld on June 6, 2000, Paterson stated that in 1997 he had seriousconcerns about management of Storage One and about management'suse of funds when employed by Tecmar. Paterson told the CDNXthat the restrictions on the proceeds of the 1997 financingswere adopted for this reason. Paterson did not share these viewswith the Yorkton prospectus due diligence team.
79.Paterson's views concerning management of Storage One were conveyedto CDNX as follows:
"We like to have people, particularly if we have any concernsabout management, and in that case, we did, we like to havepeople from time to time that are there, that can keep the peopleinvolved in the file up to speed and, you know, highlight particularthings that are going the wrong way";
"I mean, our biggest concern with these guys, Killins and Sjaholm,nice guys, honest guys. Meanwhile, good plan, but it failedmiserably in the previous company and we had raised, as a firm,66 million dollars for the predecessor company, and it was humiliatingfor us, because it had virtually all been lost and the stockhad been rolled back one for ten, and so this was kind of alast lifeblood";
"We weren't going to let those guys squander the money likethey'd squandered the 66 million";
"You guys have blown up the previous company and.";
"These guys had presented a business plan. We liked a lot, theprospects of what Storage One could do as a potential. We wereconcerned about the guys, and so we raised more money for themand did the public offering, and if they blew through the money,we weren't going to let them blow it all and take the thingto zero";
"It was only in place because these guys had failed miserablybefore and we weren't prepared to let those two managers, ifthey failed again, use that money and squander it further".
CONDUCTCONTRARY TO THE PUBLIC INTEREST
GTI and Xencet RTO
80.Paterson's conduct in relation to the GTI and Xencet RTO wascontrary to the public interest by reason of the following:
(a) Paterson played multiple roles as a director and shareholderof Xencet, as a shareholder of GTI, and as a registrant andPresident of Yorkton;
(b) Paterson initiated a private placement by Xencet in advanceof the transaction required to meet the TSE listing requirementswhen Xencet had no apparent need for additional cash;
(c) Paterson caused the private placement, which was not underwrittenby Yorkton, to be made available only to Paterson and two institutionalclients and not to other Yorkton clients;
(d) Paterson closed the purchase of units of Xencet on May 22,1998, having knowledge of undisclosed information in respectof the proposed RTO;
(e) Paterson purchased common shares of GTI on June 30, 1998,having knowledge of undisclosed information in respect of theproposed RTO;
(f) Paterson sold GTI shares to Jivraj on or about August 19,1998 where, by reason of the foregoing, Paterson should nothave done so. Paterson should have directed Jivraj not to purchaseshares in GTI from Yorkton or any other person.
81.Paterson's conduct in relation to the second KCA financing wasconduct contrary to the public interest by reason of the following:
(a) Paterson provided to Donnini undisclosed information inrelation to the price and size of the proposed KCA second financingon February 29, 2000, and failed to direct or instruct Donninito cease trading in KCA common shares commencing on February29, 2000. Paterson further failed to notify Yorkton's compliancedepartment that KCA be placed on the grey list commencing onFebruary 29, 2000, having regard to the status of the negotiationsbetween Yorkton and KCA in relation to the proposed KCA secondfinancing.
82.Having regard to Paterson's multiple roles with Yorkton andBook4golf, and in relation to the purchase by Paterson of 75,000shares of Book4golf on January 24, 2000, Paterson failed toemploy prudent business practices in respect of real or potentialconflicts of interest regarding his personal trading, by reasonof the following:
(a) Paterson, as Donnini's supervisor, is accountable for Donnini'sfailure to have properly reported a transaction from which Patersonpersonally profited;
(b) Paterson knew or ought to have known that the Book4golftransaction had not been reported to the CDNX in light of othertrades in Book4golf that Paterson made on January 24, 2000;and
(c) as the then CEO of Yorkton, Paterson failed to ensure theappearance of fair and equitable trading, having regard to theinvolvement of Paterson and Yorkton in publicly supporting Book4golfand having regard to the profit made by Paterson from this transaction.
83.Paterson's conduct was contrary to the public interest in thathe failed to disclose to the Yorkton due diligence team hisknowledge, information and belief relating to the quality andability of management of Storage One. As a result of this failure,Paterson's knowledge, information and belief relating to thequality and ability of management of Storage One was not disclosedin the Storage One prospectus.
IV.POSITION OF PATERSON
84.In March 2000, Paterson initiated the hiring of Alan M. Schwartzas President of Yorkton Proprietary Assets Management Inc.,a wholly owned subsidiary of Yorkton. In February 2001 Patersonand Yorkton's Executive Committee approved a change of Mr. Schwartz'sduties, and requested that Mr. Schwartz, in his capacity asa director of Yorkton Financial Inc., monitor the regulatory,compliance and legal functions of Yorkton and coordinate Yorkton'sresponse to the ongoing regulatory investigations. Patersonand Yorkton's Executive Committee endorsed a plan for Yorktonto move to adopt best practices in the area of regulatory compliance.Numerous steps have been taken in this regard.
85.Paterson has represented to Staff that he has not sold any sharesof Book4golf since February 18, 2000, except that on December29, 2000 Patstar Inc. sold and Paterson purchased 48,000 Book4golfshares at approximately the same price.
V.TERMS OF SETTLEMENT
86.Paterson agrees to the following terms of settlement:
(a) at the time of approval of this settlement agreement, Patersonwill make a voluntary payment to the Commission in the amountof $1,000,000, such payment to be allocated to such third partiesas the Commission may determine for purposes that will benefitOntario investors. Paterson agrees that he is fully responsiblefor the voluntary payment in the amount of $1,000,000;
(b) that the Commission make an Order pursuant to clause 1 ofsubsection 127(1) of the Act, suspending the registration ofPaterson for a period of two years effective the date of theOrder of the Commission approving this Settlement Agreement;
(c) Paterson agrees that effective the date of the Order ofthe Commission approving this Settlement Agreement, Patersonwill not be an officer or director of a registrant, for a periodof two years from the date of the Commission's Order;
(d) Paterson agrees that effective the date of the Order ofthe Commission approving this Settlement Agreement, Patersonwill not own directly or indirectly any interest in a registrantfor a period of two years from the date of the Commission'sOrder, with the exception of Paterson's current interest inYorkton. Paterson undertakes to take necessary and reasonablesteps to sell all or a portion of his current interest in Yorkton.During the time in which Paterson owns any interest in Yorkton,for the two year period effective from the date of the Orderof the Commission approving this Settlement Agreement, Patersonagrees not to exercise voting rights, control or otherwise influenceor attempt to influence management of Yorkton or the affairsof Yorkton, except as may result from the aforesaid sale ofhis current interest. Paterson further agrees not to purchaseany additional shares of Yorkton for a period of two years fromthe date of the Order of the Commission approving this SettlementAgreement;
(e) that the Commission make an Order pursuant to clause 2 ofsubsection 127(1) of the Act, effective 45 days from the dateof the Order, that Paterson is prohibited from trading in securitiesfor a period of six months, with the exception of any sale byPaterson of Paterson's current interest in Yorkton;
(f) that the Commission make an Order under subsection 127(1)(6)of the Act that Paterson be reprimanded; and
(g) that the Commission make an Order under subsection 127.1(1)(b)of the Act that Paterson make payment to the Commission in theamount of $100,000 in respect of the costs of the Commission'sinvestigation in relation to this proceeding, such payment tobe made at the time of approval of this settlement. Patersonagrees that he is fully responsible for the payment in the amountof $100,000 for costs.
87.Paterson hereby consents to an Order of the Commission incorporatingthe provisions of Part V above in the form of an order attachedas Schedule "A".
88.If this settlement is approved by the Commission, Staff willnot initiate any other proceeding under the Securities Act,R.S.O. 1990, c. S.5 against Paterson respecting the facts setout in Part III of this Settlement Agreement, and any othermatter which has come to the attention of Staff in relationto Staff's investigation of the conduct of Paterson up to thedate of this Settlement Agreement, except in relation to anymatter if Staff concludes that any information provided by Patersonto Staff in relation to Staff's investigation of such matteris not accurate.
89.If Paterson reapplies for registration with the Commission atany time after 2 years from the date of the Order of the Commissionapproving this Settlement Agreement, Staff will not oppose Paterson'sapplication for registration by reason only of the facts setout in this Settlement Agreement and/or the Commission's Orderresulting from this Settlement Agreement.
VIII.APPROVAL OF SETTLEMENT
90.Approval of the settlement set out in this Settlement Agreementshall be sought at the public hearing of the Commission scheduledfor December 19, 2001, or such other date as may be agreed toby Staff and Paterson (the "Settlement Hearing").
91.Counsel for Staff or and counsel for Paterson may refer to anypart, or all, of this Settlement Agreement at the SettlementHearing. Staff and Paterson agree that this Settlement Agreementwill constitute the entirety of the evidence to be submittedat the Settlement Hearing.
92.If this settlement is approved by the Commission, Paterson agreesto waive his rights to a full hearing, judicial review or appealof the matter under the Act.
93.Staff and Paterson agree that if this settlement is approvedby the Commission, they will not make any public statement inconsistentwith this Settlement Agreement.
94.If, for any reason whatsoever, this settlement is not approvedby the Commission, or an order in the form attached as Schedule"A" is not made by the Commission;
(a) this Settlement Agreement and its terms, including all discussionsand negotiations between Staff and Paterson leading up to itspresentation at the Settlement Hearing, shall be without prejudiceto Staff and Paterson;
(b) Staff and Paterson shall be entitled to all available proceedings,remedies and challenges, including proceeding to a hearing ofthe allegations in the Notice of Hearing and Statement of Allegationsof Staff, unaffected by this Settlement Agreement or the settlementdiscussions/negotiations;
(c) the terms of this Settlement Agreement will not be referredto in any subsequent proceeding, or disclosed to any personexcept with the written consent of Staff and Paterson , or asmay be required by law; and
(d) Paterson agrees that he will not, in any proceeding, referto or rely upon this Settlement Agreement, the settlement discussions/negotiationsor the process of approval of this Settlement Agreement as thebasis of any attack on the Commission's jurisdiction, allegedbias or appearance of bias, alleged unfairness or any otherremedies or challenges that may otherwise be available.
IX.DISCLOSURE OF AGREEMENT
95.Except as permitted under paragraph 94 above, this SettlementAgreement and its terms will be treated as confidential by Staffand Paterson until approved by the Commission, and forever if,for any reason whatsoever, this settlement is not approved bythe Commission, except with the written consent of Staff andPaterson, or as may be required by law.
96.Any obligations of confidentiality shall terminate upon approvalof this settlement by the Commission.
XI.EXECUTION OF SETTLEMENT AGREEMENT
97.This Settlement Agreement may be signed in one or more counterpartswhich together shall constitute a binding agreement.
98.A facsimile copy of any signature shall be as effective as anoriginal signature.
DATEDthis 17th day of December, 2001.
Witness GORDON SCOTT PATERSON
DATEDthis 17th day of December, 2001. STAFF OF THE
ONTARIO SECURITIES COMMISSION
Director, Enforcement Branch
INTHE MATTER OF
R.S.O.1990, c. S.5, as amended
INTHE MATTER OF
WHEREASon December 17, 2001, the Ontario Securities Commission (the"Commission") issued a Notice of Hearing pursuant to sections127(1) and 127.1 of the Securities Act, R.S.O. 1990 c. S.5,as amended (the "Act") in respect of Gordon Scott Paterson ("Paterson");
ANDWHEREAS Paterson entered into a settlement agreementdated December 17, 2001 (the "Settlement Agreement") in whichhe agreed to a proposed settlement of the proceeding, subjectto the approval of the Commission.
ANDUPON reviewing the Settlement Agreement and the Statementof Allegations of Staff of the Commission ("Staff"), and uponhearing submissions from counsel for Paterson and from Staff;
ANDWHEREAS the Commission is of the opinion that it isin the public interest to make this Order;
ITIS HEREBY ORDERED THAT:
1.the Settlement Agreement dated December 17, 2001, attached tothis Order, is hereby approved;
2.pursuant to clause 1 of subsection 127(1) of the Act, effectivethe date of this Order, the registration of Paterson is suspendedfor a period of two years from the date of this Order;
3.pursuant to clause 2 of subsection 127(1) of the Act, effective45 days from the date of this Order, Paterson is prohibitedfrom trading in securities for a period of six months from thedate of this Order, with the exception of any sale by Patersonof Paterson's current interest in Yorkton;
4.pursuant to subsection 127(1)(6) of the Act, Paterson is herebyreprimanded; and
5.pursuant to subsection 127.1 of the Act, at the time of approvalof this settlement, Paterson is ordered to pay $100,000 to theCommission in respect of a portion of the Commission's costswith respect to this matter.
DATEDat Toronto this 19th day of December, 2001.
1. A short sale is the saleof a security which the seller does not own. This is a speculativepractice done in the belief that the price of a stock is goingto fall and the seller will then be able to cover the sale bybuying it back later at a lower price, thereby making a profiton the transactions. (Source: Canadian Securities Textbook Volume3, September 1998, prepared and published by the Canadian SecuritiesInstitute.) 2. Jitney: The executionand clearing of orders by one member of a stock exchange forthe account of another member. (Source: Canadian SecuritiesTextbook Volume 3, September 1998, prepared and published bythe Canadian Securities Institute.)
1. A short sale is the saleof a security which the seller does not own. This is a speculativepractice done in the belief that the price of a stock is goingto fall and the seller will then be able to cover the sale bybuying it back later at a lower price, thereby making a profiton the transactions. (Source: Canadian Securities Textbook Volume3, September 1998, prepared and published by the Canadian SecuritiesInstitute.)
2. Jitney: The executionand clearing of orders by one member of a stock exchange forthe account of another member. (Source: Canadian SecuritiesTextbook Volume 3, September 1998, prepared and published bythe Canadian Securities Institute.)