IN THE MATTER OF
THE SECURITIES ACT
R.S.O., 1990, c. S.5, AS AMENDED
IN THE MATTER OF
FOUNDATION EQUITY CORPORATION
WHEREAS on September 27, 2002, the OntarioSecurities Commission (the "Commission") issued aNotice of Hearing pursuant to section 127 of the SecuritiesAct (the "Act"), in respect of Foundation EquityCorporation ("Foundation");
AND WHEREAS Foundation entered into asettlement agreement dated September 30, 2002 (the "SettlementAgreement") in which it agreed to a proposed settlementof the proceeding, subject to the approval of the Commission;
AND UPON reviewing the Settlement Agreementand the Statement of Allegations of Staff of the Commission,and upon hearing submissions of counsel for Staff and Foundation;
AND WHEREAS the Commission is of theopinion that it is in the public interest to make this Order;
IT IS HEREBY ORDERED THAT:
(1) the Settlement Agreement, dated September30, 2002, attached to this Order, is approved as amended bythe parties as set out in 2(b) below;
(2) pursuant to clause 4 of subsection 127(1)of the Act, Foundation shall institute the following changesto its practices and procedures effective as of the date ofthis Order:
(a) Foundation will retain and instructcounsel in Ontario to effect all filings required to bemade by Foundation with the TSE, the Commission, or anyother securities regulatory body in Ontario;
(b) Foundation will complete and deliver,on an annual basis within two weeks of the anniversary ofthe date of this Order, an up-to-date "Know Your Client"form to all brokers through which it effects trades througha recognized exchange in Ontario and to the Ontario counselretained by Foundation in accordance with (a) above. Foundationwill also deliver a schedule listing, by issuer, all ofFoundation's shareholdings and identifying those issuersin which Foundation owns or controls more than 20% of theoutstanding voting securities of the issuer, or no longerowns or controls more than 20% of the outstanding votingsecurities of the issuer, within ten days of Foundationacquiring or ceasing to hold more than 20% of the outstandingvoting securities of the issuer.
(c) commencing 6 months after the date ofthis Order, at least one director of Foundation at any giventime will have completed and passed the Partners, Directorsand Officers course of the Canadian Securities Institute.
(3) pursuant to clause 6 of subsection 127(1)of the Act, Foundation is reprimanded; and
(4) pursuant to section 127.1 of the Act,Foundation shall pay $2000 in satisfaction of the Commission'scosts of its investigation and this settlement hearing.
October 7, 2002.
"H. Lorne Morphy" "RobertL. Shirriff" "HaroldP. Hands"
IN THE MATTER OF
THE SECURITIES ACT
R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF
FOUNDATION EQUITY CORPORATION
1. By Notice of Hearing dated September 27,2002 (the "Notice of Hearing"), the Ontario SecuritiesCommission (the "Commission") announced that itproposed to hold a hearing to consider whether, pursuant tosections 127(1) and 127.1 of the Securities Act, R.S.O.1990, c. S.5, as amended (the "Act"), it is in thepublic interest for the Commission to make an order that theRespondent submit to a review of its practices and proceduresand institute such changes as may be ordered by the Commission,be reprimanded, and pay the Commission's costs of its investigationand hearing into this matter.
II. JOINT SETTLEMENT RECOMMENDATION
2. Staff of the Commission ("Staff")agree to recommend settlement of the proceeding initiatedin respect of the Respondent by the Notice of Hearing in accordancewith the terms and conditions set out in this settlement agreement(the "Settlement Agreement"). The Respondent consentsto the making of an order against it in the form attachedas Schedule "A" on the basis of the facts set outbelow in Part III.
III. AGREED STATEMENT OF FACTS
3. The Respondent agrees, for the purposesof this proceeding, with the following facts:
4. The Respondent, Foundation Equity Corporation("Foundation") is a private company which was incorporatedpursuant to the laws of Alberta on May 24, 1990. Foundationis a venture capital company which invests in other companies.Currently, its shareholders consist of approximately 20 individuals,each of whom has contributed varying amounts of capital. Foundationhas a trading account at CIBC Wood Gundy Inc. ("WoodGundy").
5. At the material time, Kerry Brown ("Brown"),who resides in St. Albert, Alberta, was a shareholder in Foundationand its President, CEO and Chairman.
6. Global Thermoelectric Inc. ("GLE")is a company which was initially incorporated, under a differentname, in Alberta in 1975 and is currently situated in Calgary.GLE's primary line of business is designing and manufacturingfuel cells intended to supplement or replace gasoline engines.At the material time, Brown was a director of GLE, in additionto being an officer and director of Foundation.
7. GLE was one of the ventures in which Foundationinvested. As of the close of business on April 15, 1999, Foundationowned 6,019,151 (or 37%) of the 16,173,184 common shares ofGLE then issued and outstanding.
Reporting Issuer Status of GLE
8. GLE became a reporting issuer in Albertaon August 3, 1994 and obtained a listing on the Alberta StockExchange on September 30, 1996.
9. GLE became a reporting issuer in Ontarioon October 8, 1998, the date on which GLE obtained a listingon the Toronto Stock Exchange ("TSE").
10. In addition to Alberta and Ontario, GLEalso has reporting issuer status in British Columbia and Manitoba.
Improper Distribution from Control Block
11. Between October 8, 1998, the date on whichGLE obtained reporting issuer status in Ontario, and April7, 1999, the shares of GLE traded on the TSE at prices rangingfrom $.86 to $1.20.
12. On April 8, 1999, GLE issued a press releasein which it announced that "it has achieved record poweroutput in the first test of a new proprietary design solidoxide fuel cell".
13. On Friday, April 16, 1999, the openingprice of GLE shares on the TSE was $3.60. At approximately10:44 a.m., trading in the shares of GLE was halted at therequest of GLE pending a further announcement. At approximately11:20 a.m., GLE issued a news release announcing a major contract.At approximately 12:30 p.m., trading in the shares of GLEresumed at a price of $9 per share. Over the remainder ofApril 16, 1999, the shares of GLE traded as high as $16 pershare and closed the day at a price of $10.70 per share.
14. On the morning of Friday, April 16, 1999,Brown, on behalf of Foundation's board of directors, instructedFoundation's broker at the Edmonton branch office of WoodGundy to sell one million shares of GLE from Foundation'saccount. The Edmonton office relayed the order to Wood Gundy'soffice in Toronto, which placed the order with its retailblock desk. The retail block desk in Toronto began placingthe shares for sale after trading resumed at 12:30 p.m. Theentire block of one million GLE shares was sold on April 16,1999 at an average price of $11.83 per share.
15. On Monday, April 19, 1999, Brown instructedFoundation's broker at the Edmonton office of Wood Gundy tosell an additional one million shares of GLE from the accountof Foundation at an average price of $10.42. The retail blockdesk in Toronto began placing the shares for sale at approximately9:50 a.m. A total of 226,200 shares of GLE were sold thatday before Brown gave instructions to cancel the order atapproximately 3:00 p.m.
16. Brown states that he cancelled the orderbecause, during the course of the day on Monday, April 19,1999, he learned, as a result of discussions with a representativeof Sprott Securities in Toronto with whom he was dealing,that Foundation should have filed a Form 23 with the Commissionprior to selling its shares of GLE. Brown states that uponbeing so advised, he immediately contacted Foundation's counsel,Parlee McLaws located in Edmonton, Alberta, which subsequentlyresulted in Brown instructing Wood Gundy to cancel the orderhe had given earlier that morning to sell additional sharesof GLE.
17. By way of letter dated April 20, 1999,transmitted by fax on that date, Foundation filed a Form 23("Notice of Intention to Sell") with the Commission,as contemplated by section 72(7) of the Act. The Form 23 wassigned by Brown and filed on behalf of Foundation by its counsel,Parlee McLaws. The Form 23 and attached covering letter acknowledgedthat 1,226,000 shares of GLE had already been sold by Foundationon April 16 and 19, 1999.
18. Item #2 of Form 23 under the Act requiredFoundation to certify the "Date issuer became a reportingissuer:". Although Form 23 is promulgated pursuant tothe (Ontario) Act and is required to be filed only by reportingissuers in Ontario, Item #2 does not specifically state thejurisdiction in respect of which that information is required.The Form 23 filed by Foundation incorrectly stated that: "GlobalThermoelectric Inc. became a reporting issuer on August 3,1994"- the date on which GLE became a reporting issuerin Alberta. As set out above, GLE did not become a reportingissuer in Ontario until October 8, 1998.
19. Brown states that he understood Item #2on Form 23 to refer to the date on which GLE firstbecame a reporting issuer in Alberta, as distinct from thedate on which GLE became a reporting issuer in Ontario. Brownstates that he relied upon Parlee McLaws, Foundation's corporatecounsel, to prepare the Form 23.
20. Under cover of a separate letter datedApril 20, 1999, Foundation filed a second Form 23 with theCommission in respect of the proposed sale on or about April30, 1999 of a further two million shares of GLE through thefacilities of the TSE. Thereafter, Brown states that Foundationsought further clarification of its position, as a resultof which Foundation advised the Commission on or about July12, 1999 that it did not intend to pursue its plans to sellthe additional two million shares of GLE.
The Relevant Provisions of the Act
21. Clause (c) of section 1(1) of the Actdefines a "distribution", where used in relationto trading in securities, to mean:
(c) a trade in previously issued securitiesof an issuer from the holdings of any person, company orcombination of persons or companies holding a sufficientnumber of any securities of that issuer to affect materiallythe control of that issuer, but any holding of any person,company or combination of persons or companies holding morethan 20% of the outstanding voting securities of an issuershall, in the absence of evidence to the contrary, be deemedto affect materially the control of that issuer.
22. Section 53(1) of the Act provides that:
(1) No person or company shall trade ina security on his, her or its own account or on behalf ofany other person or company where such trade would be adistribution of such security, unless a preliminary prospectusand a prospectus have been filed and receipts therefor obtainedfrom the Director.
23. Section 72(7) of the Act provides an exemptionfrom the prospectus requirements of section 53 of the Actwith respect to a "distribution" within the meaningof clause (c) of the definition of "distribution"in subsection 1(1) of the Act if (emphasis added),
(b) the issuer of the security is a reportingissuer and has been a reporting issuer for at least 18months and is not in default of any requirement of thisAct or the regulations and the seller, unless exempted bythe regulations,
(i) files with the Commission and anystock exchange recognized by the Commission for this purposeon which the securities are listed at least seven daysand not more than 14 days prior to the first trade madeto carry out the distribution,
(A) a notice of intention to sellin the form prescribed by the regulations [Form 23]disclosing particulars of the control position knownto the seller, the number of securities to be sold andthe method of distribution, and
(B) a declaration signed by each selleras at a date not more than 24 hours prior to filingand prepared and executed in accordance with the regulations.
24. On April 16, 1999, the first date on whichFoundation sold shares of GLE, Foundation owned 37% of theissued and outstanding shares of GLE and therefore was ina position to affect materially the control of GLE withinthe meaning of clause (c) of section 1(1) of the Act. Thesale of shares from Foundation's "control block"in GLE therefore constituted a "distribution" asthat term is defined in the Act.
25. As a result, Foundation was not permittedto sell its shares of GLE unless it had first: (i) compliedwith the prospectus requirements of section 53 of the Act;or (ii) qualified for and relied upon an exemption specifiedunder the Act, such as the exemption provided for in section72(7) of the Act; or (iii) presented evidence to the Commissionestablishing that the sale from Foundation's control blockwas not a "distribution" within the meaning of clause(c) of section 1(1) of the Act; or (iv) applied for and obtainedan exemption order from the Commission.
26. The Form 23 "Notice of Intentionto Sell" filed by Foundation after it had already soldapproximately 1.2 million shares of GLE from its control blockwas invalid for two reasons:
(i) Foundation did not qualify for the exemptionunder section 72(7) of the Act in the first place sinceGLE, the issuer of the securities which were the subjectof the sale, had not been a reporting issuer in Ontariofor at least 18 months. At the time of Foundation's saleof the GLE shares on April 16 and 19, 1999, GLE had onlybeen a reporting in Ontario for approximately six months(since October 8, 1998).
(ii) even assuming that Foundation qualifiedfor the exemption under section 72(7) of the Act, whichit did not, Foundation failed to comply with the timingrequirements prescribed under section 72(7) of the Act,which requires a Form 23 to be filed "at least sevendays, and not more than 14 days" in advance of thefirst trade commencing the distribution.
27. Foundation's sale of its shares of GLEtherefore constituted an unlawful distribution which resultedin approximately 1.2 million shares of GLE being sold throughthe TSE without notice to the market that the 1.2 millionshares were in fact from a control block.
28. By engaging in the conduct set out above,Foundation admits that it contravened the Act.
Representations by Foundation
29. Brown states that he was not aware thatFoundation's holdings of GLE constituted a "control block"and that, as such, those shares were subject to certain restrictionsunder the Act, including specifically the 18 month hold periodwith respect to their sale through the TSE. Brown also statesthat he was not aware that a Form 23 was required to be filedin respect of sales from a control block. Brown states thathe relied on Foundation's broker, Wood Gundy, to carry outthe sale of the GLE shares in a lawful manner. Brown statesthat he immediately cancelled the outstanding order at WoodGundy once the issue of the control block was brought to hisattention and attempted to rectify the situation by filingthe Form 23.
30. David Arthur Jones ("Jones")was the registered representative in the Edmonton office ofCIBC Wood Gundy responsible for Foundation's account. Joneswas one of the approximately twenty investors in Foundation.
31. By Settlement Agreement, dated March 7,2000, the TSE found that Jones had engaged in conduct unbecomingan Approved Person by acting as the agent for the seller ofshares (Foundation) from a control block through the TSE,contrary to applicable securities laws and the policies ofthe TSE. The TSE found that Jones had failed to exercise sufficientdue diligence to determine whether the sale by Foundationof the GLE sales constituted a sale from a control block.Under the terms of the settlement, Jones paid a fine of $15,000,disgorged the commissions he had earned on the unlawful salesin the amount of $27,589 and paid $3000 in satisfaction ofthe TSE's costs of its investigation.
32. By Settlement Agreement, dated December18, 1999, with the Alberta Securities Commission, Foundationand Brown jointly agreed to pay an administrative penaltyof $28,000, as well as $2000 in satisfaction of the ASC'scosts of its investigation.
IV. TERMS OF SETTLEMENT
33. Foundation agrees to the following termsof settlement:
(a) effective from the date the settlementis approved, Foundation will retain and instruct counselin Ontario to effect all filings required to be made byFoundation with the TSE, the Commission, or any other securitiesregulatory body in Ontario;
(b) effective from the date the settlementis approved, Foundation will complete and deliver, on anannual basis within two weeks of the anniversary of theapproval of this settlement, an up-to-date "Know YourClient" form to all brokers through which it effectstrades through a recognized exchange in Ontario and to allOntario counsel retained by Foundation in accordance with(a) above. Foundation will prepare and attach a scheduleto this "Know Your Client" form listing, by issuer,all of Foundation's shareholdings and identifying thoseissuers in which Foundation owns or controls more than 20%of the outstanding voting securities of the issuer;
(c) commencing 6 months from the date thesettlement is approved and continuing thereafter, Foundationagrees that at least one of its directors at any given timewill have completed and passed the Partners, Directors andOfficers course of the Canadian Securities Institute;
(d) Foundation will be reprimanded;
(e) Foundation will pay $2000 in satisfactionof the costs of the Commission's investigation and hearingin this matter.
V. PROCEDURE FOR APPROVAL OF SETTLEMENT
34. Staff and Foundation shall seek approvalof the Settlement Agreement at a public hearing of the Commission(the "Hearing") scheduled for such date as may beagreed to by Staff and Foundation, in accordance with theprocedures described in this Settlement Agreement.
35. Staff and Foundation may refer to anypart, or all, of the Settlement Agreement at the Hearing.Staff and Foundation agree that the Settlement Agreement willconstitute the entirety of the evidence to be submitted atthe Hearing.
VI. COMMITMENTS BY STAFF AND FOUNDATION
36. If the Settlement Agreement is approvedby the Commission, then Staff will not:
i) initiate any complaint to the Commissionconcerning Foundation;
ii) request that the Commission hold a hearingor issue any other order against Foundation; or
iii) initiate any other proceeding againstFoundation;
in relation to the facts set out in Part IIIof the Settlement Agreement.
37. If the Settlement Agreement is approvedby the Commission, then Foundation agrees to waive its rightto a full hearing, judicial review and appeal of this matterunder the Act.
38. If the Settlement Agreement is approvedby the Commission, then neither Staff nor Foundation willmake any public statement inconsistent with the SettlementAgreement.
39. If, at the conclusion of the settlementhearing, and for any reason whatsoever, the Settlement Agreementis not approved by the Commission, or an order in the formattached as Schedule "A" is not made by the Commission,then:
(a) the Settlement Agreement, includingall discussions and negotiations leading up to its presentationat the settlement hearing, and all negotiations betweenStaff and counsel for Foundation concerning the matter ofthe sanctions proposed for Foundation, shall be withoutprejudice to Staff and to Foundation. Staff and Foundationwill be entitled to all available proceedings, remediesand challenges, including proceeding to a hearing of theallegations in the Notice of Hearing and Statement of Allegations,unaffected by the Settlement Agreement and the settlementnegotiations;
(b) the terms of the Settlement Agreementwill not be referred to in any subsequent proceeding, ordisclosed to any person, except with the written consentof Staff and Foundation, or as may be required by law; and
(c) Foundation agrees that it will not,in any proceeding, refer to or rely upon the SettlementAgreement or the negotiation or process of approval of theSettlement Agreement as the basis for any attack on theCommission's jurisdiction, alleged bias, appearance of bias,alleged unfairness or any other remedies or challenges thatmay otherwise be available.
VII. DISCLOSURE OF AGREEMENT
40. Staff and Foundation may refer to anypart or all of the Settlement Agreement in the course of theHearing. Otherwise, the Settlement Agreement and its termsshall be treated as confidential by Staff and Foundation untilapproved by the Commission, and forever if, for any reasonwhatsoever, the Settlement Agreement is not approved by theCommission, except with the written consent of both Staffand Foundation or as may be required by law.
41. Any obligations of confidentiality concerningthe terms of the Settlement Agreement shall terminate uponapproval of the Settlement Agreement by the Commission.
III. EXECUTION OF AGREEMENT
42. The Settlement Agreement may be signedin one or more counterparts which together shall constitutea binding agreement. A facsimile copy of any signature shallbe as effective as an original signature.
September 30, 2002.