R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF
1. By Notice of Hearing dated July 4, 1995, (the "Notice of Hearing"), the Ontario SecuritiesCommission (the "Commission"), announced that it proposed to hold a hearing to considerwhether, pursuant to section 127 of the Securities Act, R.S.O. 1990, c. S.5, as amended,(the "Act"), in the opinion of the Commission it is in the public interest to order that anyexemptions contained in Ontario securities law do not apply to John Dzambazov("Dzambazov") and others permanently or for such period as is specified in the Order.
II JOINT SETTLEMENT RECOMMENDATION
2. The Staff of the Commission ("Staff") agree to recommend the settlement of theproceedings initiated in respect of Dzambazov by the Notice of Hearing in accordance withthe terms and conditions set out herein after. Dzambazov agrees to the settlement on thebasis of the facts agreed to as hereinafter provided and consents to the making of an orderagainst him in the form attached as Schedule "A" on the basis of the facts set out below.
3. Staff and Dzambazov agree that the settlement agreement, including the attached Schedule"A", will be released to the public only if and when the settlement is approved by theCommission.
III STATEMENT OF FACTS
4. Dzambazov agrees with the facts set out in this Part III.
(ii) Factual Background
5. Megalode Corporation ("Megalode") was at all material times a reporting issuer and itsshares traded on the over-the-counter market and were quoted on the Canadian DealingNetwork Inc. ("CDN").
6. On July 28, 1994, Megalode advised the Office of the Chief Accountant of theCommission that possible financial irregularities and misstatements in the May 31, 1993audited financial statements and the February 28, 1994 third quarter interim financialstatements had been discovered by its auditors during the course of the audit of theMay 31, 1994 financial statements. Megalode disclosed this in a July 29, 1994 newsrelease.
7. Trading in Megalode shares was halted pending completion of the auditors' review andappropriate disclosure to the public. Trading remained halted until a cease trade orderdated November 4, 1994 was made for failure to file audited annual financial statements.The cease trade order remains in effect.
Reverse Takeover Transaction
8. On January 28, 1993, 1016279 Ontario Limited ("279") and 1016280 Ontario Limited("280") were incorporated for the purpose of a reverse takeover of Megalode. Dzambazovwas the president, secretary and treasurer of both 279 and 280. Dzambazov owned all ofthe shares of 279 and 279 owned all of the shares of 280. 279 was set up to be the vendorof 280 and to acquire control of Megalode.
9. Norman Maxwell ('Maxwell") was vice-president of Megalode from December 15, 1992to June 14, 1994 and was a director from April 15, 1993 to June 14, 1994.
10. David Conforzi ("Conforzi") became president and a director of Megalode on November2, 1992 and remained president and a director at all material times.
11. Antonino Candido ("Candido") was a director, secretary and treasurer of 279 from March17, 1993 to July 1994. Candido had a consulting agreement with Megalode fromNovember 1992 to August 24, 1993.
12. On February 2, 1993, Megalode, 279 and Dzambazov executed a share purchaseAgreement (the "Agreement").
13. The Agreement provided for Megalode to acquire all of the outstanding shares of 280 byissuing 6,024,096 common shares of Megalode to 279 valued at .083 cents per share fora total value of $500,000. In Clause 3.10 of the Agreement, Dzambazov and 279represented that 280 had not commenced active business and that the total assets of 280consisted of $500,000 and the non-exclusive right to distribute "Tracker" software inCanada.
14. Attached to the Agreement was a balance sheet for 280 signed by Dzambazov which statedthat 280 had total assets of $500,000.
15. On February 3, 1993, the Directors of Megalode approved the Share Purchase Agreement.Counsel to Megalode advised that prior to closing the $500,000 cash held by 279 had tobe properly verified through bank confirmation.
16. On February 4, 1993, the approval of the Agreement by the Board of Directors ofMegalode was announced. The press release indicated that 280 had a $500,000 cash asset.On February 11, 1993, an information circular was sent to the shareholders seeking theirapproval of the Agreement. The Information Circular stated that 280 had a $500,000 assetand that the acquisition would provide Megalode with significant working capital. Aninformation booklet attached as Schedule "B" to the Information Circular reiterated that280 had $500,000 in assets and included 280's balance sheet signed by Dzambazov statingthat 280 had $500,000 in assets.
17. On March 8, 1993, the shareholders of Megalode approved the Agreement.
18. On March 15, 1993, a meeting was held to close the Agreement transaction. At thatmeeting, Dzambazov signed the "bring down certificate" which brought forward all therepresentations and warranties from the agreement including the representations andwarranties contained in Clause 3.10 of the agreement that 280 had $500,000 in assets.
19. On June 16, 1993, 279 opened an account at Midland Walwyn over which Maxwell andDzambazov had authority to trade. The first transaction in this account was the depositon June 22, 1993 of 6,024,096 shares of Megalode which were the shares issued to effectthe reverse takeover and purchase of 280 in exchange for the $500,000 cash asset of 280.
May 31, 1993 Audited Financial Statements
20. In October 1993 an external audit was conducted of Megalode's May 31, 1993 financialstatements. The audit was conducted by Bruce Wright ("Wright") of T.H. Bernholtz &Co. Ltd. Wright requested proof from Conforzi and Maxwell of the existence of $500,000represented to have been received by Megalode for the acquisition of 280. Megalodeissued a cheque on October 7, 1993 signed by Conforzi and Maxwell to Midland Walwynwhich was used to purchase $500,000 in Canada Bonds for the account of 279. The fundsto make this purchase had been received by Megalode from subscribers to a $4.5 millionspecial warrants offering.
21. Candido and Dzambazov signed Statutory Declarations dated October 20, 1993 stating thatthey held the $500,000 in bonds for 280 from the date of the takeover of 280 by Megalodein March 1993 until August 24, 1993. The bond serial numbers described in the StatutoryDeclarations were those of the bonds purchased by Megalode with the cheque datedOctober 7, 1993 and signed by Conforzi and Maxwell. The bonds purchased October 7,1993 were not held by Dzambazov and Candido since the March 1993 date of the takeoverof 280. The Statutory Declarations were, therefore, false to the knowledge ofDzambazov.
22. At the suggestion of Wright, Candido deposited the bonds in the bank account of 280 andprovided Wright with proof of the deposit and his signing authority. Satisfied by physicalinspection of the bonds, the Statutory Declarations and the deposit of the funds into 280'sbank account, Wright signed the audit report for the May 31, 1993 financial statements.The financial statements included the $500,000 in bonds as assets received by Megalodefor the acquisition of 280.
23. The financial statements were approved by the Directors at the October 27, 1993 Boardof Directors meeting. The inclusion of the $500,000 in bonds in the financial statementsmaterially misstated the financial statements. The financial statements for the period endedMay 31, 1993 were untrue in a material respect.
February 28, 1994 Financial Statements
24. An audit of December 31, 1993 financial statements of Megalode was conducted byanother audit firm, Deloitte & Touche in connection with a prospectus which Megalodewas planning to prepare. These financial statements were not filed with the Commissionand were not generally disclosed to the public as Megalode did not file a prospectus.
25. Tim Leonard ("Leonard") of Deloitte & Touche made inquiries about the disbursementsof $514,000 to Midland Walwyn on October 7, 1993. A new set of bonds in the amountsof $500,000 were purchased in February 1994 and were shown to the auditors. Thesebonds were represented to the auditors as being the bonds which were purchased inOctober 1993.
26. The $500,000 asset was carried forward into the financial statements for the nine monthsended February 28, 1994. These financial statements were disseminated to the public overthe news wire on April 29, 1994. The inclusion of the $500,000 in bonds materiallymisstated the financial statements. The financial statements for the period ended February28, 1994 were untrue in a material respect.
27. In June 1994, Maxwell resigned and transferred voting control over the 6,024,096 sharesto Brian Usher-Jones ("Usher-Jones"). Usher-Jones instructed Leonard to investigate whathappened to the $4.5 million which had been raised in October of 1993. Leonard thendiscovered that two sets of bonds existed: one set of bonds had been bought in October1993 and used to convince Wright in his audit for the period ending May 31, 1993 that280 had $500,000 in cash as of the closing of the reverse takeover on March 15, 1993.The second set of bonds had been purchased in February 1994 and used to replace theOctober 1993 bonds to convince Leonard that 280 had retained the assets throughout forthe purposes of the financial statements for the period ending December 31, 1993 and theunaudited statements for the nine months ending February 28, 1994. Leonard concludedthat the financial statements of May 31, 1993, December 31, 1993 and February 28, 1994had overstated assets by $500,000 and that the 6,024,096 shares of Megalode issued to 279should not have been issued because there was no consideration received by Megalode forthese shares.
28. On July 29, 1994, Megalode disseminated a press release over the wire service announcingmisstatements in the financial statements for the period ended May 31, 1993 and for thenine months ended February 28, 1994.
29. On August 8, 1994, Maxwell, Candido and Dzambazov met with an undercover policeofficer to attempt to arrange for a bond to prove the $500,000 asset. At this meetingDzambazov confirmed that no $500,000 asset had ever existed.
30. The conduct of Dzambazov described in paragraphs 8 through 29 was conduct contrary tothe public interest and violated paragraph 122(1)(b) of the Act.
IV TERMS OF SETTLEMENT
31. Dzambazov agrees to the following terms of settlement:
(a) pursuant to clause 2 of subsection 127(1) of the Act, Dzambazov will be prohibitedfrom trading in securities for a period of 6 years from the date of the TemporaryOrder made against him on January 15, 1996 except that Dzambazov will bepermitted to trade for his personal account in mutual fund securities and securitiesdescribed in clauses 1 and 2 of subsection 35(2) of the Act;
(b) pursuant to clause 7 of subsection 127(1) of the Act, Dzambazov will resign fromall positions he currently holds as a director or officer of a reporting issuer;
(c) pursuant to clause 8 of section 127(1) of the Act, Dzambazov will be prohibitedfrom becoming or acting as a director or officer of a reporting issuer for a periodof 6 years from the date of the Commission's Order arising from this SettlementAgreement; and
(d) pursuant to clause 6 of subsection 127(1) of the Act, Dzambazov will bereprimanded.
32. Dzambazov hereby consents to an order of the Commission incorporating the provisionsof Part IV above in the form of an order annexed hereto as Schedule "A".
VI STAFF COMMITMENT
33. If this Settlement Agreement is approved by the Commission, Staff will not initiate anycomplaint to the Commission or request the Commission to hold a hearing or issue anyorder in respect of any conduct or alleged conduct of Dzambazov in relation to the factsset out in Part III of this Settlement Agreement.
VII PROCEDURE FOR APPROVAL OF SETTLEMENT
34. The approval of the settlement as set out in the Settlement Agreement shall be sought ata public hearing before the Commission scheduled for such date as agreed to by Staff andDzambazov, in accordance with the procedures described herein and such furtherprocedures which may be agreed upon between Dzambazov and the Staff.
35. Staff and Dzambazov agree that if the Settlement Agreement is approved by theCommission, it will constitute the entirety of the evidence to be submitted respectingDzambazov in this matter other than the evidence that has been submitted at the hearingto date and Dzambazov agrees to waive his right to a full hearing and appeal of this matterunder the Act.
36. Staff and Dzambazov agree that if the Settlement Agreement is approved by theCommission, they will not make further statements that are inconsistent with theSettlement Agreement.
37. If, for any reason whatsoever, the settlement is not approved by the Commission, or theorder set forth in Schedule "A" is not made by the Commission:
(a) Staff and Dzambazov will each be entitled to proceed to a hearing of the allegationsin the Notice of Hearing and related Statement of Allegations unaffected by theSettlement Agreement or the settlement negotiations;
(b) The terms of the Settlement Agreement will not be raised in any other proceedingor disclosed to any person except with the written consent of Dzambazov and Staffor as may be otherwise required by law; and
(c) Dzambazov further agrees that he will not raise in any proceeding the SettlementAgreement or the negotiation or process of approval thereof as a basis for anyattack on the Commission's jurisdiction, alleged bias, appearance of bias, allegedunfairness or any other challenge that may otherwise be available.
38. If, prior to the approval of this Settlement Agreement by the Commission, there are newfacts or issues of substantial concern, in the view of Staff, regarding the facts set out inPart III of the Settlement Agreement, Staff will be at liberty to withdraw from theSettlement Agreement. Notice of such intention will be provided to Dzambazov inwriting. In the event of such notice being given, the provisions of paragraph 37 in thispart will apply as if the Settlement Agreement had not been approved in accordance withthe procedures set out herein.
VIII DISCLOSURE OF SETTLEMENT AGREEMENT
39. The terms of the Settlement Agreement will be treated as confidential by both partieshereto until approved by the Commission and forever if for any reason whatsoever, theSettlement Agreement is not approved by the Commission.
40. Any obligation as to confidentiality shall terminate upon the approval of this SettlementAgreement by the Commission.
IX EXECUTION OF SETTLEMENT AGREEMENT
41. This Settlement Agreement may be signed in one or more counterparts which shallconstitute a binding agreement and a facsimile copy of any signature shall be as effectiveas an original signature.
DATED this 12th day of April, 2000.
SIGNED IN THE PRESENCE OF:
"JOHN DZAMBAZOV""MICHAEL WATSON"
Director of Enforcement on Behalf of Staff of the Ontario Securities Commission