IN THE MATTER OF THE SECURITIES ACT,
R.S.O. 1990, c.S. 5, as amended
IN THE MATTER OF
JACK BANKS a.k.a. JACQUES BENQUESUS
and LARRY WELTMAN
STATEMENT OF ALLEGATIONS
Staff of the Ontario Securities Commission make the following allegations:
1. Jack Banks ("Banks") and Larry Weltman ("Weltman") were, at all material times, directors of Laser Friendly Inc. ("the Company"). Banks was also Chairman of the Company’s board of directors, and was president and a principal shareholder of the Company. Weltman was executive vice president and chief financial officer of the Company. Banks and Weltman were the principal members of the Company’s management.
2. The Company, subsequently known as Gaming Lottery Corporation, GLC Limited and ultimately GalaxiWorld.com Limited, was a diversified gaming company that manufactured and supplied products to the lottery, parimutuel, bingo and charitable gaming industry.
3. Shares of the Company traded on the Toronto Stock Exchange ("the TSE") from August 1993 to July 1998.
The Roll Program
4. In November 1994 the Company’s board of directors (including Banks and Weltman) resolved that the Company would participate in a program ("the Roll Program") described in the resolution as follows:
- WHEREAS the Corporation intends to enter into a series of transactions whereby one or more offshore entities (individually a "Subscriber" and collectively, the "Subscribers") will enter into subscription agreements (the "Subscription Agreements") with the Corporation pursuant to which the Subscribers will subscribe for up to an aggregate of 30,000,000 common shares of the Corporation (the "Shares") at a subscription price of U.S.$4.00 per Share;
AND WHEREAS pursuant to the Subscription Agreements the Subscribers shall not be obligated to pay the subscription price until the expiry of one year following the date of the Subscription Agreement;
AND WHEREAS the Corporation intends to conditionally allot and issue the Shares and to deposit a share certificate or certificates representing the Shares to be issued with an escrow agent (the "Escrow Agent") for safekeeping;
AND WHEREAS the obligations of a Subscriber under a Subscription Agreement shall be secured by the issuance of a debenture (the "Debenture") of the Subscriber in favour of the Corporation in the principal amount equal to the subscription price for the Shares and bearing interest at the rate of 3% per annum (initially) calculated and payable monthly and granting the holder thereof a floating charge over the assets of the Subscriber;
AND WHEREAS the Subscriber is entitled to prepay all or part of the principal amount of the Debenture on any interest payment date and upon receipt of any such principal payment, interest will cease on the portion of the principal paid;
AND WHEREAS upon receipt by the Escrow Agent of the full principal amount of the Debenture, plus accrued an [sic] unpaid interest, the Corporation shall be entitled either (i) to accept the subscription for the Shares upon the approval of the holders of a majority of the outstanding voting securities of the Corporation and all regulatory authorities, including The Toronto Stock Exchange, or (ii) to reject such subscription for the Shares upon the approval of the Board of Directors of the Corporation;
AND WHEREAS pursuant to the Debenture, during each 90 day period during which the Debenture is outstanding, if there is a rise or fall in the market value of the Shares of more than 25% from the original subscription price therefor, at the option of the Corporation, either the number of Shares subscribed for or the subscription price per Share and the principal and interest payments under the Debenture shall be correspondingly adjusted by the Corporation such that either the aggregate market value of the Shares subscribed for shall be equal to the original subscription price therefor or the new aggregate subscription price shall reflect the new market price per Share;
AND WHEREAS the Subscription Agreement and the conditional allotment and issue of Shares pursuant thereto are exempt from the registration and prospectus requirements pursuant to Regulation S of the United States Securities Act of 1933 and securities legislation in Canada;
5. The Company gave formal notice to the TSE of a possible material change in the affairs of the Company. The Company reported that it intended to enter into the Roll Program, pursuant to which 15 million shares of the Company would be authorized for issue, and that any share certificates would be delivered to an escrow agent.
6. In deciding that the Company would participate in the Roll Program, Banks and Weltman knew that, while the Company intended to issue share certificates, the Company did not intend to actually issue any shares. In November and December of 1994 the Company entered into subscription agreements (providing for the issue of certificates) for 45 million shares. The weighted average number of outstanding shares for the year ended January 31, 1995 was approximately 17 million.
Issuance of Shares to Helix Capital Corporation and Delta West Management Trust
7. Pursuant to the November 1994 resolution, the Company entered into subscription agreements with each of Helix Capital Corporation ("Helix") and Delta West Management Trust ("Delta West"). In each case:
- (a) the agreement purported to represent a subscription for 15 million shares of the Company at a price of US$4 per share;
(b) the subscriber issued a debenture in favour of the Company in the amount of US$60 million, payable one year from the date of the agreement;
(c) the subscriber promised to pay interest of 3% per year to the Company on the principal amount of the debenture;
(d) the Company instructed its transfer agent to issue share certificates in the name of Helix or Delta West;
(e) the share certificates bore a legend indicating that there were certain transfer restrictions pursuant to Regulation S of the U.S. Securities Act of 1933 ("Regulation S"); and
(f) the share certificates appeared to represent "fully paid and non-assessable common shares", and did not bear any endorsement to indicate that the shares were not fully paid or that they were subject to an agreement.
8. The Company authorized delivery of share certificates representing 15 million shares registered in the name of Helix (the "Helix Certificates") to Helix’s lawyer with no escrow agreement in place. Instead, the Company accepted Helix’s agreement that it would ensure that any share certificates provided pursuant to the Roll Program would be held in trust by Helix’s lawyer or a reputable financial institution and that, if the certificates were to be delivered elsewhere, Helix would notify the Company in writing immediately as to the location of the safekeeping account.
9. Several days later, Helix advised the Company that one of the share certificates delivered to Helix had been placed "in a Program", but Helix did not provide the written notice of the location of the certificate as it had agreed to do.
10. The Company also authorized delivery of share certificates representing 15 million shares registered in the name of Delta West to Delta West’s lawyer before an escrow agreement was put in place. The Company asked Delta West to undertake not to release the share certificates delivered to it and to provide a form of escrow agreement. Delta West’s lawyer committed to hold the share certificates in trust and not to release them without the Company’s prior written approval. Delta West did not provide a form of escrow agreement.
11. In December 1994, pursuant to a separate resolution signed by the board of directors (including Banks and Weltman), the Company entered into a second subscription agreement with Delta West, representing a further 15 million shares. This agreement was in the same form as the other agreements except the interest rate was increased to 10%. The further share certificates issued in the name of Delta West purported to represent "fully paid and non assessable" shares of the Company and bore a legend noting transfer restrictions pursuant to Regulation S, but did not bear any marking noting that they had not been paid for or that they were subject to an agreement.
12. The additional certificates were delivered directly to Delta West without any agreement to provide for their safekeeping. Delta West completed part of the transfer portion of the share certificates on the same day as the certificates were delivered to it.
13. Despite the Company’s representation to the TSE that it would deliver any Roll Program share certificates to an escrow agent, the Company did not advise the TSE that share certificates were delivered to counsel for Helix and Delta West in circumstances where an escrow agreement was not in place, or that the additional certificates were delivered directly to Delta West. The Company also did not notify the TSE that it had entered into further agreements relating to "subscriptions" for a further 30 million shares.
14. Delta West later advised the Company that the first certificates had been delivered to the wrong depository. Even though delivery of the certificates to anyone constituted a breach of the promise made by Delta West to the Company not to release the certificates, Delta West asked the Company to provide replacement certificates.
15. The Company asked that Delta West undertake to return the original certificates and in reliance upon that undertaking, the Company instructed its transfer agent to issue replacement certificates representing a further 15 million shares. The Company delivered the replacement certificates as instructed by Delta West without securing control of the original certificates.
16. In March 1995 Bank Leu AG sought to realize upon one of the Helix Certificates, purporting to represent 2.5 million fully paid shares of the Company, which certificate had been pledged to the Bank as security for a substantial loan advanced by the Bank. When the Bank notified the Company of its claim and sought to realize upon its security, the Company advised in response that the shares had not been validly issued because they had not been paid for.
Conduct Contrary to the Public Interest
17. Banks and Weltman knowingly permitted share certificates of the Company to be delivered in circumstances where they knew or ought to have known that the certificates could and would be used to deceive third parties. Banks and Weltman knew that the share certificates purported to represent fully paid shares, when the Company did not receive payment for the shares. They failed to ensure that sufficient controls existed to prevent the share certificates from being used for an improper purpose.
18. Banks and Weltman failed to take immediate steps to cancel and to attempt to retrieve share certificates and agreed to permit such certificates to remain in the possession of others, even after they had received notice that one or more of the share certificates may have been used for an improper purpose.
Other Dispositions to be relied upon by Staff
19. Weltman was named as a respondent in an administrative proceeding brought by the United States Securities and Exchange Commission ("the SEC"). The SEC found that Weltman’s decision to participate in the events described above contributed to the commission of fraud in relation to shares of the Company.
20. In criminal proceedings in the State of New York with respect to a matter unrelated to the Roll Program, Banks and Weltman pled guilty to the commission of a felony, in particular "intentionally engaging in a scheme constituting a systematic ongoing course of conduct with intent to defraud… while engaged in inducing and promoting the issuance, distribution, exchange, sale, negotiations and purchase of" shares of the Company.
21. By engaging in the conduct described above, Banks and Weltman acted in a manner contrary to the public interest.
22. Such further allegations as Staff may advise and the Commission may permit.
Dated at Toronto this 30th day of March, 2001.