Securities Law & Instruments

IN THE MATTER OF

THE SECURITIES ACT

R.S.O. 1990, c. S.5, as amended

AND

IN THE MATTER OF

LARRY H. WELTMAN

 

ORDER

WHEREAS on March 30, 2001, the OntarioSecurities Commission (the "Commission") issued aNotice of Hearing pursuant to sections 127 of the SecuritiesAct, R.S.O. 1990 c. S.5, as amended (the "Act")in respect of Larry Weltman ("Weltman");

AND WHEREAS Weltman entered into a settlementagreement dated January 8, 2003, (the "Settlement Agreement")in which he agreed to a proposed settlement of the proceeding,subject to the approval of the Commission;

AND UPON reviewing the Settlement Agreementand the Statement of Allegations of Staff of the Commission("Staff"), and upon hearing submissions from Weltmanand from Staff;

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 January8, 2003, attached to this Order, is hereby approved;

(2) pursuant to paragraph 2 of subsection127(1) of the Act, Weltman will cease trading in securitiespermanently, effective the date of this Order;

(3) pursuant to paragraph 6 of subsection127(1) of the Act, Weltman is reprimanded by the Commission;

(4) pursuant to paragraph 7 of subsection127(1) of the Act, Weltman will resign any position he holdsas an officer and/or director of any issuer;

(5) pursuant to paragraph 8 of subsection127(1) of the Act, Weltman is permanently prohibited frombecoming or acting as an officer and/or director of anyissuer, effective the date of this Order;

(6) On or before February 3, 2003, Weltmanwill make a payment of $30,000 to the Commission in respectof a portion of the Commission's costs with respect to thismatter.

January 8, 2003.

"Howard Wetston"                    "RobertDavis"

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c. S. 5, as amended

AND

IN THE MATTER OF

LARRY WELTMAN

 

SETTLEMENT AGREEMENT

I. INTRODUCTION

1. By Notice of Hearing dated March 30, 2001(the "Notice of Hearing"), the Ontario SecuritiesCommission (the "Commission") announced that itproposed to hold a hearing to consider whether, pursuant tosection 127 of the Securities Act, R.S.O. 1990, c.S.5, as amended (the "Act"), it is in the publicinterest for the Commission to make an order:

(a) that trading in securities by LarryWeltman ("Weltman") cease permanently or for suchperiod as may be specified in the order:

(b) to reprimand Weltman;

(c) that Weltman resign any positions asa director or officer of an issuer;

(d) to prohibit Weltman from becoming oracting as director or officer of any issuer; and

(e) such further and other order as theCommission may deem appropriate.

II. JOINT SETTLEMENT RECOMMENDATION

2. Staff of the Commission ("Staff")agree to recommend settlement of the proceeding initiatedin respect of the respondent Weltman by the Notice of Hearingin accordance with the terms and conditions set out below.Weltman agrees to the settlement on the basis of the factsagreed to as provided in Part III and consents to the makingof an Order against him in the form attached as Schedule "A"on the basis of the facts set out in Part III.

III. FACTS

3. Larry Weltman is an individual residingin Ontario and was at all material times, a director of LaserFriendly Inc. ("the Company"). Weltman was executivevice president and chief financial officer of the Company.Weltman was also a principal member of the Company's management.

4. The Company, subsequently known as GamingLottery Corporation, GLC Limited and ultimately GalaxiWorld.comLimited, was a diversified gaming company that manufacturedand supplied products to the lottery, parimutuel, bingo andcharitable gaming industry.

5. Shares of the Company traded on the TorontoStock Exchange ("the TSE") from August 1993 to July1998.

The Roll Program

6. In November 1994 the Company's board ofdirectors (including Weltman) resolved that the Company wouldparticipate in a program ("the Roll Program") describedin the resolution as follows:

WHEREAS the Corporation intendsto enter into a series of transactions whereby one or moreoffshore entities (individually a "Subscriber" andcollectively, the "Subscribers") will enter intosubscription agreements (the "Subscription Agreements")with the Corporation pursuant to which the Subscribers willsubscribe for up to an aggregate of 30,000,000 common sharesof the Corporation (the "Shares") at a subscriptionprice of U.S.$4.00 per Share;

AND WHEREAS pursuant to the SubscriptionAgreements the Subscribers shall not be obligated to pay thesubscription price until the expiry of one year followingthe date of the Subscription Agreement;

AND WHEREAS the Corporation intendsto conditionally allot and issue the Shares and to deposita share certificate or certificates representing the Sharesto be issued with an escrow agent (the "Escrow Agent")for safekeeping;

AND WHEREAS the obligations of aSubscriber under a Subscription Agreement shall be securedby the issuance of a debenture (the "Debenture")of the Subscriber in favour of the Corporation in the principalamount equal to the subscription price for the Shares andbearing interest at the rate of 3% per annum (initially) calculatedand payable monthly and granting the holder thereof a floatingcharge over the assets of the Subscriber;

AND WHEREAS the Subscriber is entitledto prepay all or part of the principal amount of the Debentureon any interest payment date and upon receipt of any suchprincipal payment, interest will cease on the portion of theprincipal paid;

AND WHEREAS upon receipt by theEscrow Agent of the full principal amount of the Debenture,plus accrued an [sic] unpaid interest, the Corporation shallbe entitled either (i) to accept the subscription for theShares upon the approval of the holders of a majority of theoutstanding voting securities of the Corporation and all regulatoryauthorities, including The Toronto Stock Exchange, or (ii)to reject such subscription for the Shares upon the approvalof 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 Sharesof more than 25% from the original subscription price therefor,at the option of the Corporation, either the number of Sharessubscribed for or the subscription price per Share and theprincipal and interest payments under the Debenture shallbe correspondingly adjusted by the Corporation such that eitherthe aggregate market value of the Shares subscribed for shallbe equal to the original subscription price therefor or thenew aggregate subscription price shall reflect the new marketprice per Share;

AND WHEREAS the Subscription Agreementand the conditional allotment and issue of Shares pursuantthereto are exempt from the registration and prospectus requirementspursuant to Regulation S of the United States Securities Actof 1933 and securities legislation in Canada;

7. The Company gave formal notice to the TSEof a possible material change in the affairs of the Company.The Company reported that it intended to enter into the RollProgram, pursuant to which 15 million shares of the Companywould be authorized for issue, and that any share certificateswould be delivered to an escrow agent.

8. In deciding that the Company would participatein the Roll Program, Weltman knew that, while the Companyintended to issue share certificates, the Company did notintend to actually issue any shares. In November and Decemberof 1994 the Company entered into subscription agreements (providingfor the issue of certificates) for 45 million shares. Theweighted average number of outstanding shares for the yearended January 31, 1995 was approximately 17 million.

Issuance of Shares to Helix Capital Corporationand Delta West Management Trust

9. Pursuant to the November 1994 resolution,the Company entered into subscription agreements with eachof Helix Capital Corporation ("Helix") and DeltaWest Management Trust ("Delta West"). In each case:

(a) the agreement purported to representa subscription for 15 million shares of the Company at aprice of US$4 per share;

(b) the subscriber issued a debenture infavour of the Company in the amount of US$60 million, payableone year from the date of the agreement;

(c) the subscriber promised to pay interestof 3% per year to the Company on the principal amount ofthe debenture;

(d) the Company instructed its transferagent to issue share certificates in the name of Helix orDelta West;

(e) the Helix share certificates bore thefollowing legend:

The shares represented by this certificatehave not been registered under the United States SecuritiesAct of 1933 (the "Act"), have no voting rightsand are being transferred pursuant to an exemption underRegulation S. Until November 15, 1995 no shares of the stockmay be offered, sold or transferred. Offers, sales or transfersin the United States or to a United States person (as definedin Regulation S promulgated under the Act) or for the accountand benefit of a United States person are not permitted,except as provided in said Regulation S unless the sharesare registered under the Act or with the prior consent ofLaser Friendly Inc. pursuant to an application from exemptionfrom such registration under the Act.

The Delta West certificates bore the followinglegend:

The shares represented by this certificatehave not been registered under the United States SecuritiesAct of 1933 (the "Act"), have no voting rightsand are "restricted securities" as that term isdefined in Rule 144 under the Act. The shares may not beoffered for sale, sold or otherwise transferred except pursuantto an effective registration statement under the Act orpursuant to an exemption from registration under the Act,the availability of which is to be established to the satisfactionof Laser Friendly Inc.

(f) the share certificates appeared to represent"fully paid and non-assessable common shares",and did not bear any endorsement to indicate that the shareswere not fully paid or that they were subject to an agreement.

10. The Company authorized delivery of sharecertificates representing 15 million shares registered inthe name of Helix (the "Helix Certificates") toHelix's lawyer with no escrow agreement in place. Instead,the Company accepted Helix's agreement that it would ensurethat any share certificates provided pursuant to the RollProgram would be held in trust by Helix's lawyer or a reputablefinancial institution and that, if the certificates were tobe delivered elsewhere, Helix would notify the Company inwriting immediately as to the location of the safekeepingaccount.

11. Several days later, Helix advised theCompany that one of the share certificates delivered to Helixhad been placed "in a Program", but Helix did notprovide the written notice of the location of the certificateas it had agreed to do.

12. The Company also authorized delivery ofshare certificates representing 15 million shares registeredin the name of Delta West to Delta West's lawyer. The Companyasked Delta West to undertake not to release the share certificatesdelivered to it and to provide a form of escrow agreement.Delta West's lawyer committed to hold the share certificatesin trust and not to release them without the Company's priorwritten approval. Delta West did not provide a form of escrowagreement.

13. In December 1994, pursuant to a separateresolution signed by the board of directors (including Weltman),the Company entered into a second subscription agreement withDelta West, representing a further 15 million shares. Thisagreement was in the same form as the other agreements exceptthe interest rate was increased to 10%. The further sharecertificates issued in the name of Delta West purported torepresent "fully paid and non assessable" sharesof the Company and bore the following legend:

The shares represented by this certificatehave not been registered under the United States SecuritiesAct of 1933 (the "Act"), have no voting rights andare being transferred pursuant to an exemption under RegulationS. Until December 5, 1995 no shares of the stock may be offered,sold or transferred. Offers, sales or transfers in the UnitedStates or to a United States person (as defined in RegulationS promulgated under the Act) or for the account and benefitof a United States person are not permitted, except as providedin said Regulation S unless the shares are registered underthe Act or with the prior consent of the company pursuantto an applicable exemption from registration under the Act.

14. The additional certificates were delivereddirectly to Delta West without any agreement to provide fortheir safekeeping. Delta West completed part of the transferportion of the share certificates on the same day as the certificateswere delivered to it.

15. Despite the Company's representation tothe TSE that it would deliver any Roll Program share certificatesto an escrow agent, the Company did not advise the TSE thatshare certificates were delivered to counsel for Helix andDelta West in circumstances where an escrow agreement wasnot in place, or that the additional certificates were delivereddirectly to Delta West. The Company also did not notify theTSE that it had entered into further agreements relating to"subscriptions" for a further 30 million shares.

16. Delta West later advised the Company thatthe first certificates had been delivered to the wrong depository.Even though delivery of the certificates to anyone constituteda breach of the promise made by Delta West to the Companynot to release the certificates, Delta West asked the Companyto provide replacement certificates.

17. The Company obtained an undertaking fromDelta West that it would return the original certificatesand in reliance upon that undertaking, the Company instructedits transfer agent to issue replacement certificates representinga further 15 million shares. The Company delivered the replacementcertificates as instructed by Delta West without securingthe return of the original certificates.

18. In March 1995 Bank Leu AG sought to realizeupon one of the Helix Certificates, purporting to represent2.5 million fully paid shares of the Company, which certificatehad been pledged to the Bank as security for a substantialloan advanced by the Bank. When the Bank notified the Companyof its claim and sought to realize upon its security, theCompany advised in response that the shares had not been validlyissued because they had not been paid for.

Other Dispositions

19. Weltman was named as a respondent in anadministrative proceeding brought by the United States Securitiesand Exchange Commission ("the SEC"). The SEC foundthat:

The decision of Weltman to participatein the subscription agreements led to millions of shares ofLaser Friendly stock entering the stream of commerce and beingused by the Fraud Defendants in violation of Securities ActSection 17(a), Exchange Act Section 10(b), and Exchange ActRule 10b-5.
...

Based on the above, the Commission findsthat within the meaning of Securities Act Section 8A and ExchangeAct Section 21C the Respondent [Weltman] was a "cause"of violations of Securities Act Section 17(a), Exchange ActSection 10(b), and Exchange Act Rule 10b-5.

20. In criminal proceedings in the State ofNew York with respect to a matter unrelated to the Roll Program,Weltman pled guilty to the commission of a felony, in particular"intentionally engaging in a scheme constituting a systematicongoing course of conduct with intent to defraud... whileengaged in inducing and promoting the issuance, distribution,exchange, sale, negotiations and purchase of" sharesof the Company.

CONDUCT CONTRARY TO THE PUBLIC INTEREST

21. By engaging in the conduct described above,Weltman acted contrary to the public interest, by reason ofthe following:

(a) Weltman knowingly permitted share certificatesof the Company to be delivered in circumstances where heknew or ought to have known that the certificates couldbe used to deceive third parties. Weltman knew that theshare certificates purported to represent fully paid shares,when the Company did not receive payment for the shares.Weltman failed to ensure that sufficient controls existedto prevent the share certificates from being used for animproper purpose.

(b) Weltman failed to take immediate stepsto cancel and to attempt to retrieve share certificatesand agreed to permit such certificates to remain in thepossession of others, even after he had received noticethat one or more of the share certificates may have beenused for an improper purpose.

IV. TERMS OF THE SETTLEMENT

22. Weltman agrees to the following termsof settlement:

(a) pursuant to paragraph 2 of subsection127(1) of the Act, Weltman will cease trading in securitiespermanently, effective the date of the Order of the Commissionapproving the proposed settlement agreement herein;

(b) pursuant to paragraph 6 of subsection127(1) of the Act, Weltman will be reprimanded by the Commission;

(c) pursuant to paragraph 7 of subsection127(1) of the Act, Weltman will resign any position he holdsas an officer and/or director of any issuer;

(d) pursuant to paragraph 8 of subsection127(1) of the Act, Weltman is permanently prohibited frombecoming or acting as an officer and/or director of anyissuer, effective the date of the Order of the Commissionapproving the proposed settlement agreement herein;

(e) Weltman agrees to attend, in person,the hearing before the Commission on date to be determinedby the Secretary to the Commission to consider this proposedsettlement, or such other date as may be agreed to by theparties for the scheduling of the hearing to consider theproposed settlement; and

(f) Upon the approval of this settlement,Weltman will make a payment of $30,000 to the Commissionin respect of a portion of the Commission's costs with respectto this matter.

V. STAFF COMMITMENT

23. If this settlement is approved by theCommission, Staff will not initiate any other proceeding underthe Act against Weltman respecting the facts set out in PartIII of this Settlement Agreement.

VI. PROCEDURE FOR APPROVAL OF SETTLEMENT

24. Approval of the settlement set out inthis Settlement Agreement shall be sought at the public hearing(the "Settlement Hearing") of the Commission scheduledfor such date as is agreed to by Staff and Weltman.

25. Counsel for Staff or for Weltman may referto any part, or all, of this Settlement Agreement at the SettlementHearing. Staff and Weltman agree that this Settlement Agreementwill constitute the entirety of the evidence to be submittedat the Settlement Hearing.

26. If this settlement is approved by theCommission, Weltman agrees to waive his right to a full hearing,judicial review or appeal of the matter under the Act.

27. Staff and Weltman agree that if this settlementis approved by the Commission, they will not make any publicstatement inconsistent with this Settlement Agreement.

28. Whether or not the settlement is approvedby the Commission, Weltman agrees that he will not, in anyproceeding, refer to or rely upon this Settlement Agreement,the settlement discussions/negotiations or the process ofapproval of this Settlement Agreement as the basis of anyattack on the Commission's jurisdiction, alleged bias or appearanceof bias, alleged unfairness or any other remedies or challengesthat may otherwise be available.

29. If, for any reason whatsoever, this settlementis not approved by the Commission, or an order in the formattached as Schedule "A" is not made by the Commission;

(a) this Settlement Agreement and its terms,including all discussions and negotiations between Staffand Weltman leading up to its presentation at the SettlementHearing, shall be without prejudice to Staff and Weltman;

(b) except as set out in paragraph 28 above,Staff and Weltman shall be entitled to all available proceedings,remedies and challenges, including proceeding to a hearingof the allegations in the Notice of Hearing and Statementof Allegations of Staff, unaffected by this Settlement Agreementor the settlement discussions/negotiations; and,

(c) the terms of this Settlement Agreementwill not be referred to in any subsequent proceeding, ordisclosed to any person except with the written consentof Staff and Weltman, or as may be required by law.

VII. DISCLOSURE OF AGREEMENT

31. Except as permitted under paragraph 25above, this Settlement Agreement and its terms will be treatedas confidential by Staff and Weltman until approved by theCommission, and forever if, for any reason whatsoever, thissettlement is not approved by the Commission, except withthe written consent of Staff and Weltman, or as may be requiredby law.

32. Any obligations of confidentiality shallterminate upon approval of this settlement by the Commission.

VIII. EXECUTION OF SETTLEMENT AGREEMENT

33. This Settlement Agreement may be signedin one or more counterparts which together shall constitutea binding agreement.

34. A facsimile copy of any signature shallbe as effective as an original signature.

January 8, 2003.

"Larry Weltman"
Larry Weltman

January 8, 2003.

"Michael Watson"
Staff of the Ontario Securities Commission
Per: Melissa Kennedy

 

Schedule "A"

IN THE MATTER OF

THE SECURITIES ACT

R.S.O. 1990, c. S.5, as amended

AND

IN THE MATTER OF

LARRY H. WELTMAN

 

ORDER

WHEREAS on March 30, 2001, the OntarioSecurities Commission (the "Commission") issued aNotice of Hearing pursuant to sections 127 of the SecuritiesAct, R.S.O. 1990 c. S.5, as amended (the "Act")in respect of Larry Weltman ("Weltman");

AND WHEREAS Weltman entered into a settlementagreement dated [insert date] (the "Settlement Agreement")in which he agreed to a proposed settlement of the proceeding,subject to the approval of the Commission;

AND UPON reviewing the Settlement Agreementand the Statement of Allegations of Staff of the Commission("Staff"), and upon hearing submissions from Weltmanand from Staff;

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 [insertdate] attached to this Order, is hereby approved;

(2) pursuant to paragraph 2 of subsection127(1) of the Act, Weltman will cease trading in securitiespermanently, effective the date of this Order;

(3) pursuant to paragraph 6 of subsection127(1) of the Act, Weltman is reprimanded by the Commission;

(4) pursuant to paragraph 7 of subsection127(1) of the Act, Weltman will resign any position he holdsas an officer and/or director of any issuer;

(5) pursuant to paragraph 8 of subsection127(1) of the Act, Weltman is permanently prohibited frombecoming or acting as an officer and/or director of anyissuer, effective the date of this Order;

(6) Weltman will make a payment of $30,000to the Commission in respect of a portion of the Commission'scosts with respect to this matter.

DATED at Toronto this     dayof January, 2003.

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