IN THE MATTER OF THE SECURITIES ACT,
R.S.O., 1990, C.s. 5 AS AMENDED
IN THE MATTER OF PATRICK GOUVEIA, ANDREW PETERS,
RONALD PERRYMAN AND PAUL VICKERY
SETTLEMENT AGREEMENT BETWEEN STAFF OF THE
ONTARIO SECURITIES COMMISSION AND RONALD PERRYMAN
1. By Notice of Hearing dated June 2, 2004, the Ontario Securities Commission announced that it proposed to hold a hearing to consider whether pursuant to section 127 and section 127.1 of the Securities Act, R.S.O. 1990, C. S. 5, as amended (the Act), it is in the public interest to make an order that:
(a) the respondents cease trading securities permanently or for such period as the Commission may order;
(b) the exemptions contained in Ontario securities law do not apply to the respondents permanently or for such period as the Commission may order;
(c) the respondents resign any positions they hold as a director or officer of any issuer permanently or for such period as the Commission may order;
(d) the respondents be prohibited from acting as a director or officer of any issuer permanently or for such period as the Commission may order;
(e) the respondents be reprimanded;
(f) the respondents pay the costs of Staff’s investigation and this proceeding; and
(g) such other order as the Commission may deem appropriate.
II. JOINT SETTLEMENT RECOMMENDATION
2. Staff recommend settlement of the proceeding initiated against the respondent, Ronald Perryman, by the Notice of Hearing dated June 2, 2004 in accordance with the terms and conditions contained in paragraph 27 of this Agreement. Perryman agrees to the settlement on the basis of the facts agreed to as provided in Part III and consents to the making of an order in the form attached as Schedule A to this agreement on the basis of the facts contained in this Agreement.
3. Staff and Perryman agree that the facts and submissions set out in the Settlement Agreement are solely for the purposes of this Agreement, for the settlement of this matter and as a basis for the undertakings contained in the Agreement.
4. Staff and Perryman agree that this Agreement is without prejudice to either Perryman or Staff in any other proceeding brought by the Commission under the Act or any civil or other proceedings which may be brought in respect of the events referred to herein by any other person.
5. Atlas Cold Storage Income Trust (Atlas) is an open-ended, limited purpose trust established under the laws of Ontario with its head office in Toronto.
6. Atlas, through its wholly owned subsidiary, Atlas Cold Storage Holdings Inc. (Holdings), and through the wholly owned subsidiaries of Holdings, operates a Canadian and US based network of public refrigerated warehouse facilities, a transportation business, and a retail management business.
7. Atlas is a reporting issuer in Ontario. In August 2000, its units were listed and posted for trading on the Toronto Stock Exchange (TSX). Pursuant to Ontario securities law, it is obliged to file interim and audited annual financial statements with the Commission.
8. Atlas is administered by the Board of Directors of Holdings pursuant to an administration agreement between Atlas and Holdings. The earnings of Holdings and its subsidiaries flow to Atlas and Atlas pays distributable cash to unit holders quarterly as approved by the Board of Trustees of Atlas on the advice of the Board of Directors of Holdings. The payment of distributions for each of the first three quarters is equalized. The distribution is adjusted for Q4 to reflect annual earnings.
9. Since Atlas has been listed and its units traded publicly, it has grown significantly throughacquisitions and expansions. On July 30, 2001, it acquired cold storage facilities in Calgary and Vancouver. On March 20, 2002, it purchased a portion of the assets of TCT Logistics (TCT), a trucking firm in receivership. On October 1, 2002, it purchased the assets of Coolstor Warehousing Services. On October 22, 2002, it acquired a majority of the assets of CSI. As part of the CSI acquisition, Atlas purchased the management contracts of four retail contract operations. Atlas also increased its existing capacity by expanding various existing facilities.
10. These acquisitions and expansions were accomplished through equity and debt financing. Since 2000, Atlas raised more than $356 million through five successive equity issues. On July 9, 2001, Atlas, Holdings, and its direct subsidiaries entered into credit facilities with a syndicate of Canadian and US banks. On October 22, 2002, Atlas renegotiated its Lending Agreement with the bank syndicate to increase the maximum availability of funding from approximately $191 million to approximately $306 million.
11. On March 20, 2002, Atlas purchased a portion of the assets of TCT, and used the assets to expand its Canadian transportation business through a newly incorporated, wholly owned subsidiary, Atlas Supply Chain Services Limited (Supply Chain).
12. Pursuant to theLending Agreement with the banks, Supply Chain was classified as an “unrestricted subsidiary.” This meant that Holdings could invest no more than $10 million in equity and lend no more than $500,000 to Supply Chain.
(c) Officers of Atlas
13. Patrick Gouveia was a Director and the President and Chief Executive Officer of Holdings. He held, through various private entities, significant unit holding in Atlas. As CEO, Gouveia was responsible for all aspects of the operations of Atlas, Holdings and its subsidiaries.
14. Andrew Peters was a Director and Executive Vice-President and Chief Financial Officer of Holdings. Peters has since passed away.
15. Perryman was the Vice-President of Finance of Holdings. As VP Finance, Perryman reported directly to Peters and was responsible, under Peters, for the financial affairs of Atlas, Holdings and its subsidiaries. Perryman’s responsibilities included the preparation and public filing of Atlas’ interim and audited annual financial statements.
(d) Course of conduct
16. Perryman, in his capacity as Vice President of Finance, demonstrated a lack of due diligence that contributed, in part,to the presentation of an improved picture of the financial performance of Atlas for the period including the financial years 2001, 2002, and the first two reporting periods of 2003. This course of conduct ultimately resulted in improved earnings for Atlas and a failure to disclose a breach of a lending covenant. More specifically, Atlas employees, at the direction of the CEO & CFO, capitalized expenses that were later found to be inappropriate capitalizations. There was also a breach of a covenant in the Lending Agreement, which pertained to Supply Chain, that was not disclosed.
(e) Inappropriate Capitalization of Expenses
17. Between January 1, 2001 and June 30, 2003, Atlas’ accounting staff presented the CEO with actual financial results in anticipation of end of quarter reporting. These results were routinely lower than the targets the CEO had established for the quarters. When the CEO received the results, he was routinely dissatisfied and instructed accounting staff to find more earnings. With his knowledge, accounting staff conducted a detailed review of whether all the expenditures that could be capitalized had indeed been fully capitalized. The review of expenditures was approved by the CEO and CFO and resulted in additional capitalized expenditures which improved Atlas’ quarterly and annual earnings. In his capacity as VP Finance, Perryman was involved in overseeing the capitalization of costs and relied upon qualified accounting personnel to ensure capitalizations were appropriate.Some of these costs were subsequently restated. While Perryman only authorized the capitalization of expenses which he believed were in accordance with generally accepted accounting principles (GAAP), he does acknowledge that some of these capitalized expenses were subsequently reaudited and reversed. He acknowledges that some ofthese expenses were inappropriately capitalized and accordingly admits that he failed in his due diligence obligation as VP Finance.
(f) Failure to Disclose Breach of Covenant in Lending Agreement
18. Supply Chain commenced operations in March 2002. It was not profitable. In order to continue operations it relied on funds from Holdings. By May 31, 2002, Holdings breached its covenants to its lenders by advancing funds in excess of the investment and loan limits. Holdings sought to cure the breach of the lending covenant through a proposed sale leaseback transaction. Reciprocal payments of funds between Supply and Holdings at the end of Q2 and Q3 2002 and Q1 2003 were to be used as an intermediate step prior to executing a sale leaseback agreement between Holdings and Supply Chain at the end of Q4 2002. The reciprocal payments of funds were designed to bring Holdings into technical compliance with its lending covenants at quarter-end, pending the execution of the sale leaseback transaction at year-end. The reciprocal payment of funds led to an inaccurate representation of Supply Chain’s financial position.
19. During Q2 and Q3 2002, Holdings breached the covenants of its Lending Agreement by advancing funds to Supply Chain in excess of the investment and loan limit. In an attempt to cure the breach of the lending covenant, Atlas devised a plan where Holdings and Supply Chain would enter into a sale leaseback agreement at the end of Q2 and Q3. Peters instructed Holdings staff to wait for the Year-end to finalize this transaction. Perryman reviewed the Lending Agreement and satisfied himself that a sale leaseback transaction was permissible under the terms of the Lending Agreement.
20. Supply Chain, in Q2 & Q3 2002, paid funds to Holdings sufficient to purportedly put it in compliance with the Lending Agreement. Upon receipt of the payment from Supply Chain, Holdings repaid the same amounts to Supply Chain, usually the next day, which resulted in Holdings again contravening the Lending Agreement. Perryman was aware that Holdings had advanced funds to Supply Chain in contravention of the Lending Agreement and was aware that reciprocal payments had been made between Holdings and Supply Chain. He was told by Peters, however, that the quarter-end reciprocal payments had been disclosed to the banks who were aware of the breaches of the Lending Agreement. Peters also told Perryman that Holdings’ lenders were aware of the subsequent sale leaseback agreement that was to be put in place to cure the loan contravention. Peters signed the Q3 2002 cheques, thus giving Perryman additional comfort vis-à-vis the legitimacy of the transaction. Perryman acknowledges, however, that he failed in his due diligence obligation to ensure that the status of the lending covenant was accurately stated when preparing certificates of compliance for Atlas’ lenders.
21. During Q4 2003, Holdings continued to contravene the loan limits of the Lending Agreement. At the end of Q4, Holdings sought to bring Supply Chain into compliance with the Lending Agreement by entering into a sale leaseback agreement with Supply Chain. According to the terms of the purported sale leaseback, Supply Chain sold its vehicles to Holdings. Holdings then leased the vehicles back to Supply Chain. The funds supposedly paid for the vehicles of Supply Chain brought Holdings into compliance with the loan limits of the Lending Agreement. In fact, no written sale leaseback agreement was signed between Holdings and Supply Chain. No transfer documentation for the vehicles was prepared. No lease payments were made by Supply Chain to Holdings. Perryman believed that the sale leaseback was designed to cure the breach of the Lending Agreement and was advised, by Peters, that Holdings’ lenders were aware of the transaction. Perryman acknowledges, however, that he failed in his due diligence obligation to ensure that the sale leaseback was in fact properly documented and fully executed...
22. During Q1 2003, Holdings continued to breach the covenants of the Lending Agreement by exceeding the investment and loan limits to Supply Chain. At the end of Q1 2003, in an attempt to rectify the continued breach of the Lending Agreement, Supply Chain paid to Holdings sufficient funds to put it in purported compliance with the Lending Agreement. The following day Holdings repaid the funds to Supply Chain. Perryman signed the cheques that constituted the reciprocal payments between Supply Chain and Holdings. Peters had advised Perryman that he discussed this issue with the Bank in Q1 2003 and the Bank had agreed to make Supply Chain a Restricted Subsidiary. Based on this understanding, Peters also instructed Perryman to continue to cure the breach of the Lending Agreement by way of reciprocal payments. Supply Chain became a Restricted Subsidiary of Holdings in Q2 2003. However, by engaging in the reciprocal payments and preparing the Lending Agreement compliance certificates, Perryman acknowledges that he failed in his due diligence obligation to ensure that the status of the lending covenant was accurately stated for Atlas’ lenders.
(g) Filing of Materially Misleading Financial Statements
23. At the end of each reporting period and at the end of each financial year, Atlas accounting staff prepared the consolidated financial statements for Atlas. The inappropriate capitalization of expenses resulted in the understatement of expenses and the overstatement of earnings in the financial statements of 2001, 2002 and first two reporting periods of 2003. The failure to disclose the breach of the Lending Agreement led to an inaccurate representation of Supply Chain’s financial position. The consolidated financial statements, therefore, were materially misleading. These misleading financial statements were presented to the audit committee and the Board of Atlas for approval. The misleading financial statements were then filed with the Commission.
(e) Restatement of Financial Statements
24. As a result of misstatements in the financial statements, on January 30, 2004, Atlas had to amend and restate its financial statements for the periods including 2001, 2002, and the first two reportings periods of 2003. Earnings for these reporting periods were overstated and had to be amended and restated materially lower. The inappropriate capitalization of expenses contributed materially to the lower restatement of earnings for the relevant reporting periods.
25. In September 2003, the funding advances from Holdings to Supply Chain in contravention of the covenants of the Lending Agreement were revealed to the Board of Holdings. As a result of the continuing losses of Supply Chain, the Board initated a review of Supply Chain to determine whether Atlas should remain in this business. On September 19, 2003, Atlas announced that it would discontinue a portion of the business of Supply Chain. On December 1, 2003, Atlas announced that it was discontinuing the remainder of the business operated by Supply Chain.
IV. CONDUCT CONTRARY TO ONTARIO SECURITIES LAW AND CONTRARY TO THE PUBLIC INTEREST
26. Perryman acknowledges that the conduct described in Part III was conduct contrary to Ontario securities law and contrary to the public interest in connection with the filing of the materially misleading financial statements for Atlas for the financial years ending December 31, 2001, December 31, 2002 and for the first and second financial reporting periods in 2003.
V. TERMS OF SETTLEMENT
27. Perryman agrees to the following terms of settlement:
(a) Perrymanagrees to resign all positions as an officer or director of any issuer;
(b) Perryman agrees not to become or act as a director or officer of any issuer for ten years;
(c) Perryman agrees to be reprimanded; and
(d) Perryman agrees to pay the sum of $20,000 in respect of the costs of the investigation and hearing in this matter.
VI. STAFF COMMITMENT
28. If this Settlement Agreement is approved by the Commission, Staff will not initiate or continue any other proceeding under the Act against Perryman based on the facts as set out in Part III of this Agreement.
29. This Settlement Agreement constitutes full answer to the allegations contained in the Notice of Hearing and Statement of Allegations.
VII. PROCEDURE FOR APPROVAL OF SETTLEMENT
30. Approval of the Settlement Agreement shall be sought at a hearing of the Commission scheduled for September 19, 2006 at 9:30.
31. Counsel for Staff and counsel for Perryman may refer to any part or all of this Settlement Agreement at the Settlement Hearing. Staff and Perryman agree that this Settlement Agreement will constitute the entirety of the evidence to be submitted at the Settlement Hearing.
32. If this Settlement Agreement is approved by the Commission, Perryman agrees to waive his rights under the Act to a full hearing, judicial review or appeal of the matter.
33. Whether or not the Settlement Agreement is approved by the Commission, Perryman agrees that he will not, in any proceeding, refer to or rely on this Settlement Agreement, the settlement discussions and negotiations or the process of approval of the Settlement Agreement as the basis of any attack on the Commission’s jurisdiction, alleged bias or appearance of bias, alleged unfairness or any other remedies or challenges that may otherwise be available.
34. If, for any reason whatsoever, this Settlement Agreement is not approved by 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 discussions and negotiations between Staff and Perryman leading up to its presentation at the Settlement Hearing, shall be without prejudice to Staff or Perryman; and
(b) except as set out in paragraph 35 ,Staff and Perryman shall be entitled to all available proceedings, remedies and challenges, including proceeding to a hearing of the allegations in the Notice of Hearing and Statement of Allegations of Staff, unaffected by this Settlement Agreement or the settlement discussions and negotiations.
VIII. DISCLOSURE OF AGREEMENT
35. Except as required by its terms, this Settlement Agreement will be treated as confidential by the Commission, and forever if, for any reason whatsoever, this Settlement Agreement is not approved by the Commission, except with the written consent of Staff and Perryman or as may be required by law.
36. Any obligations of confidentiality attaching to this Settlement Agreement shall terminate upon approval of this settlement by the Commission.
37. Staff and Perryman agree that if this Settlement Agreement is approved by the Commission, they will not make any public statement inconsistent with this Settlement Agreement, testimonial or otherwise.
IX. EXECUTION OF SETTLEMENT AGREEMENT
38. This Settlement Agreement may be signed in one or more counterparts which together shall form a binding agreement.
39. A facsimile copy of any signature shall be as effective as an original signature.
DATED AT TORONTO this “15” day of September, 2006.
DATED AT TORONTO this “15” day of September, 2006.
Director of Enforcement
IN THE MATTER OF THE SECURITIES ACT
R.S.O. 1990, c.S.5, AS AMENDED
IN THE MATTER OF PATRICK GOUVEIA, ANDREW PETERS,
RONALD PERRYMAN AND PAUL VICKERY
WHEREAS on June 2, 2004, the Ontario Securities Commission issued a Notice of Hearing pursuant to s. 127 and s. 127(1) of the Securities Act, R.S.O. 1990, c.S.5, as amended, (“the Act”) in respect of the respondents Patrick Gouveia, Andrew Peters, Ronald Perryman, and Paul Vickery;
AND WHEREAS the respondent Ronald Perryman (“Perryman”) entered into a Settlement Agreement with Staff of the Commission dated September 15, 2006, in which he agreed to a proposed settlement of the proceeding commenced by the Notice of Hearing subject to the approval of the Commission;
AND UPON receiving the Settlement Agreement and the Notice of Hearing and upon hearing submissions of Staff and counsel for Perryman;
AND WHEREAS the Commission is of the opinion that it is the public interest to make this order;
IT IS ORDERED THAT:
1. the Settlement Agreement attached to this order as Schedule “A” is approved;
2. pursuant to clause 7 of s. 127(1) of the Act, the respondent, Perryman, is to resign all positions as a director of officer of any issuer;
3. pursuant to clause 8 of s. 127(1) of the Act, the respondent, Perryman, is prohibited from becoming or acting as a director or officer of any issuer for ten years;
4. pursuant to clause 6 s. 127(1) of the Act, the respondent, Perryman, is reprimanded; and
5. pursuant to s. 127.1 of the Act, the respondent, Perryman, pay costs of $20,000.
DATED at Toronto, this day of , 2006.