IN THE MATTER OF
THE SECURITIES ACT
R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF
(Subsection 127(1) and section127.1)
WHEREAS on May 12, 2003, the OntarioSecurities Commission (the "Commission") issued aNotice of Hearing pursuant to section 127 of the SecuritiesAct, R.S.O. 1990, c. S.5, as amended (the "Act")respecting Robert Davies ("Davies");
AND WHEREAS Davies entered into a SettlementAgreement executed July 20 and 21, 2003 (the "SettlementAgreement") in which he agreed to a proposed settlementof the proceedings subject to the approval of the Commission;
AND UPON reviewing the Settlement Agreementand the Statement of Allegations of Staff of the Commissionand upon hearing submissions from counsel for Davies and fromStaff of the Commission;
AND WHEREAS the Commission is of theopinion that it is in the public interest to make this Orderpursuant to subsection 127(1) and section 127.1 of the Act;
IT IS ORDERED THAT:
1. the attached Settlement Agreement is approved;
2. pursuant to subsection 127(1), paragraph2, trading in any securities by Davies cease for ten yearscommencing on the date of this Order except that, after threeyears, Davies is permitted to trade securities through a registereddealer for his personal account and the account of his registeredretirement savings plan (as defined in the Income Tax Act(Canada));
3. pursuant to subsection 127(1), paragraph8, Davies is prohibited from becoming or acting as a directoror officer of any issuer for ten years;
4. pursuant to subsection 127(1), paragraph6, Davies is reprimanded; and
5. pursuant to section 127.1, Davies pay coststo the Commission in the amount of $2,000.
July 21, 2003.
IN THE MATTER OF
THE SECURITIES ACT
R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF
SETTLEMENT AGREEMENT BETWEEN
STAFF OF THE ONTARIO SECURITIESCOMMISSION
AND ROBERT DAVIES
1. By Notice of Hearing, the Ontario SecuritiesCommission (the "Commission") announced that itproposed to hold a hearing to consider a settlement enteredinto between Staff of the Commission ("Staff") andthe respondent Robert Davies ("Davies").
II. JOINT SETTLEMENT RECOMMENDATION
2. Staff agrees to recommend settlement ofthe proceeding respecting Davies initiated by the Notice ofHearing in accordance with the terms and conditions set outbelow. Davies consents to the making of an order against himin the form attached as Schedule "A" based on thefacts set out in Part III of this Settlement Agreement.
III. STATEMENT OF FACTS
3. Solely for the purposes of this proceeding,and of any other proceeding commenced by a securities regulatoryagency, Staff and Davies agree with the facts set out in paragraphs4 through 24 of this Settlement Agreement.
(a) Saxton Investment Ltd.
4. Saxton Investment Ltd. ("Saxton")was incorporated on January 13, 1995. Allan Eizenga ("Eizenga")was Saxton's registered director. Saxton and Eizenga establishednumerous offering corporations, as listed below (the "OfferingCorporations").The Saxton Trading Corp.The Saxton Export Corp.The Saxton Export (II) Corp.The Saxton Export (III) Corp.The Saxton Export (IV) Corp.The Saxton Export (V) Corp.The Saxton Export (VI) Corp.The Saxton Export (VII) Corp.The Saxton Export (VIII) Corp.The Saxton Export (IX) Corp.The Saxton Export (X) Corp.The Saxton Export (XI) Corp.The Saxton Export (XII) Corp.The Saxton Export (XIII) Corp.The Saxton Export (XIV) Corp.The Saxton Export (XV) Corp.The Saxton Export (XVI) Corp.The Saxton Export (XVII) Corp.The Saxton Export (XVIII) Corp.The Saxton Export (XIX) Corp.The Saxton Export (XX) Corp.The Saxton Export (XXI) Corp.The Saxton Export (XXII) Corp.The Saxton Export (XXIII) Corp.The Saxton Export (XXIV) Corp.The Saxton Export (XXV) Corp.The Saxton Export (XXVI) Corp.The Saxton Export (XXVII) Corp.The Saxton Export (XXVIII) Corp.The Saxton Export (XXIX) Corp.The Saxton Export (XXX) Corp.The Saxton Export (XXXI) Corp.The Saxton Export (XXXII) Corp.The Saxton Export (XXXIII) Corp.The Saxton Export (XXXIV) Corp.The Saxton Export (XXXV) Corp.The Saxton Export (XXXVI) Corp.The Saxton Export (XXXVII) Corp.The Saxton Export (XXXVIII) Corp.
5. Saxton and the Offering Corporations representedto the public that they were investing in businesses in Cubaand other Caribbean companies.
6. On or about October 7, 1998, the Courtappointed KPMG Inc. ("KPMG") as the custodian ofSaxton's assets. In early 1999, KPMG reported that the OfferingCorporations had raised approximately $37 million from investors.All funds invested in the Offering Corporations had been transferredto Saxton. At that time, KPMG held the view that the valueof the Saxton assets, at its highest (as reported by relatedcompanies), was approximately $5.5 million.
(b) Distribution of the Saxton Securities
7. Saxton marketed two investment productsnamely: (i) a "GIC" which was later re-named a "FixedDividend Account"; and (ii) an "Equity DividendAccount". In either case, the investor purchased securitiesin one or more of the Offering Corporations (the "SaxtonSecurities").
8. The Fixed Dividend Account products promisedinvestors either 10.25% annual return for a three year termcompounded or 12% annual return for a five year term compounded.Investors in the Equity Dividend Account were told to expect25% to 30% annual growth in their investment.
9. The concept and plan for the distributionof the Saxton Securities was designed by Eizenga and implementedat his direction between January 1995 and September 1998.The Saxton Securities were distributed in violation of theSecurities Act, R.S.O. 1990, c. S.5 (the "Act").All of the Offering Corporations were incorporated pursuantto the laws of Ontario. Sales of the Saxton Securities constitutedtrades in securities of an issuer that had not been previouslyissued.
10. None of the Offering Corporations fileda preliminary prospectus or prospectus with the Commission.The Offering Corporations purported to rely on the "seedcapital" prospectus exemption under subparagraph 72(1)(p)of the Act. Neither this exemption, nor any other prospectusexemption, was available to them.
(c) Davies' Conduct
11. Davies was a chartered accountant anda certified management accountant. Between October 1996 andDecember 1997, he was employed as Saxton's controller. Davieswas not a Saxton salesperson. Throughout his tenure, Daviesreported directly to, and took direction from, Eizenga.
12. When Davies commenced his employment ascontroller, Saxton did not have the proper accounting controlsin place and had never prepared financial statements. Hisresponsibilities as controller included establishing and maintainingproper internal accounting controls and books of account,preparing financial statements and producing quarterly accountstatements for investors.
13. Davies failed to keep and maintain theproper books and records and failed to ensure that the basicaccounting controls were in place. Among other things:
(a) the general ledger did not reflect alltransactions pertaining to the Saxton operations and wereincomplete for the purposes of preparing financial statementsin accordance with GAAP;
(b) the general ledger was not "closed-off"after the financial year end for the purpose of establishingproper financial statements;
(c) investor funds were not reconciled andcontrolled to the shareholder register and the respectivecompany's financial records;
(d) interest accruing on the Fixed DividendAccounts were not recorded in the books of account;
(e) Saxton's use of funds were not properlyrecorded;
(f) funds generated through investmentsand/or revenue from the Cuban or other Saxton operations,if any, were not reflected in the books of account; and
(g) financial statements were never prepared.
14. Shareholders who invested in a Fixed DividendAccount product received quarterly account statements thatreflected a market value increase in their investment of 10.25%or 12%. The Equity Dividend Account holders' quarterly accountstatements reflected a market value increase of between 25%and 30%.
15. Davies knew that the quarterly accountstatements were unsubstantiated by any accounting or financialdata in Saxton's possession. Among other things, there wasno record of any revenue generation by the Saxton operationsand thus, no ability for Saxton or Davies to establish thenet results of the operations.
16. Along with the historical cost of theSaxton Securities held by each investor, the quarterly accountstatements disclosed an increase in the market value for thequarter and the end of the quarter market value for such Securities.Davies knew that in addition to lacking the financial informationto report any incremental values on the Saxton investments,there was no market for Saxton Securities and thus, no marketvalue could, or should, be attributed to such Securities.
17. By virtue of his knowledge described inparagraph 16 above, Davies was aware that the quarterly accountstatements misrepresented the value of shareholders' investmentsand were misleading to investors and Saxton salespeople.
18. During Davies' tenure, quarterly accountstatements were distributed to investors in December 1996,March 1997, June 1997, September 1997 and December 1997. Ascontroller, Davies had the ultimate responsibility for thepreparation of such statements to investors. At a minimum,he ought to have asserted control over the process when itbecame clear to him that the supporting financial data wasneither available nor forthcoming.
19. Davies knew, or ought reasonably to haveknown, that Saxton salespeople and the Saxton investors reliedupon the quarterly account statements. Davies also knew, orought reasonably to have known, that Saxton management promotedto its salespeople the fact that a chartered accountant wasemployed by the organization as one means to enhance the credibility/legitimacyof the Saxton business. Thus, directly and indirectly, Daviesprovided to salespeople and investors misguided comfort respectingthe nature and quality of the Saxton Securities.
20. Davies failed to exercise the appropriatedue diligence concerning Saxton's activities. Moreover, hecontinued to participate in Saxton after becoming aware thatinvestor funds were being diverted to Eizenga's personal use.
21. Davies never made inquiries of, or requestedassistance from, any professional association or the Commission.
22. Beyond his annual salary of between $52,000and $60,000, Davies did not benefit financially from any ofhis conduct described above.
23. Davies' conduct was contrary to Ontariosecurities law and the public interest.
24. Davies co-operated with Staff's investigationrespecting the Saxton Securities.
IV. DAVIES' POSITION
25. Davies takes the position and representsto Staff that:
(a) Any attempts by Davies to address thelack of accounting controls at Saxton were either resisted,or frustrated, by Eizenga;
(b) With reference to paragraphs 15 and18 above, Eizenga represented to him that the financialdata to support the interest accruing on the Fixed DividendAccount products and the growth in the Equity Dividend Accountshares existed in Cuba and would be forwarded to Saxton.This purported financial data, however, never materialised;
(c) With reference to paragraph 20 above,Luke McGee, the Vice-President of Saxton, assured him thatEizenga was paying back in full all investor funds he usedfor personal purposes;
(d) He lacked the experience necessary toresolve the accounting deficiencies present at Saxton; and
(e) In hindsight, he realizes that he wasnaïve and allowed himself to be persuaded and intimidatedby Eizenga and McGee.
V. TERMS OF SETTLEMENT
26. Davies agrees to the following terms ofsettlement:
(a) the making of an order:
(i) approving this settlement;
(ii) that trading in any securities byDavies cease for ten years with the exception that, afterthree years from the date of the approval of this settlement,Davies is permitted to trade securities through a registereddealer for his personal account and the account of hisregistered retirement savings plan (as defined in theIncome Tax Act (Canada));
(iii) that Davies is prohibited from continuing,becoming or acting as a director or officer of any issuerfor ten years;
(iv) reprimanding Davies; and
(v) that Davies will pay costs to theCommission in the amount of $2000.00; and
(b) For ten years, Davies will not participatedirectly in any filings with the Commission required underthe Act;
(c) Over the next two years, Davies willcomplete 15 hours of continuing education provided by theInstitute of Chartered Accountants of Ontario concerningfraud awareness and related topics; and
(d) Within six months prior to becomingan officer or director of any issuer, Davies will successfullycomplete the Partners, Directors, Officers examination.
VI. STAFF COMMITMENT
27. If this settlement is approved by theCommission, Staff will not initiate any other proceeding underthe Act against Davies in relation to the facts set out inPart III of this Settlement Agreement.
VII. APPROVAL OF SETTLEMENT
28. Approval of the settlement set out inthis Settlement Agreement shall be sought at the public hearingof the Commission scheduled for July 21, 2003 or such otherdate as may be agreed to by Staff and Davies (the "SettlementHearing"). Davies will attend in person at the SettlementHearing.
29. Counsel for Staff or Davies may referto any part, or all, of this Settlement Agreement at the SettlementHearing. Staff and Davies agree that this Settlement Agreementwill constitute the entirety of the evidence to be submittedat the Settlement Hearing.
30. If this settlement is approved by theCommission, Davies agrees to waive his rights to a full hearing,judicial review or appeal of the matter under the Act.
31. Staff and Davies agree that if this settlementis approved by the Commission, they will not make any publicstatement inconsistent with this Settlement Agreement.
32. 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 Davies leading up to its presentation at the SettlementHearing, shall be without prejudice to Staff and Davies;
(b) Staff and Davies shall be entitled toall available proceedings, remedies and challenges, includingproceeding to a hearing of the allegations in the Noticeof Hearing and Statement of Allegations of Staff, unaffectedby this Agreement or the settlement discussions/negotiations;
(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 Davies or as may be required by law; and
(d) Davies 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 for anyattack on the Commission's jurisdiction, alleged bias orappearance of bias, alleged unfairness or any other remediesor challenges that may otherwise be available.
VIII. DISCLOSURE OF SETTLEMENT AGREEMENT
33. Except as permitted under paragraph 29above, this Settlement Agreement and its terms will be treatedas confidential by Staff and Davies until approved by theCommission, and forever, if for any reason whatsoever thissettlement is not approved by the Commission, except withthe consent of Staff and Davies, or as may be required bylaw.
34. Any obligations of confidentiality shallterminate upon approval of this settlement by the Commission.
IX. EXECUTION OF SETTLEMENT AGREEMENT
35. This Settlement Agreement may be signedin one or more counterparts which together shall constitutea binding agreement.
36. A facsimile copy of any signature shallbe as effective as an original signature.
July 20, 2003.
July 21, 2003.
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, c. S. 5, as amended
IN THE MATTER OF
UNDERTAKING OF ROBERT DAVIES
Pursuant to a Settlement Agreement between Staffof the Ontario Securities Commission and Robert Davies ("Davies"),approved by the Commission by Order dated July 21, 2003, Daviesundertakes to the Commission that, commencing today, he willnot participate directly in any filings with the Commissionrequired under the Securities Act for ten years.
July 21, 2003.