IN THE MATTER OF THE CANADIAN VENTURE EXCHANGE INC. (formerly the Vancouver Stock Exchange Bylaw 5 - Discipline) AND

Transcription

1 IN THE MATTER OF THE CANADIAN VENTURE EXCHANGE INC. (formerly the Vancouver Stock Exchange Bylaw 5 - Discipline) AND JACOB JACKIE ALTER, (RESPONDENT) AND WOLVERTON SECURITIES INC. (RESPONDENT) HEARING COMMITTEE: Stephen D. Gill (Chairman) John Eymann (Member) Ian Todd (Member) COUNSEL: Gordon R. Johnson Appearing for the Exchange H. Rod Anderson Appearing for Jacob Jackie Alter Robert S. Anderson Appearing for Wolverton Securities Inc. HEARING DATES: January 10 to 14, 17 and 18, 2000 DECISION

2 Page 2 INTRODUCTION 1. The Citation herein alleges in Count 1 that the Respondents should have been suspicious that a group of clients were acting as unregistered dealers in securities, and they participated in 23 off VCT transactions of shares of a listed company (Trellis); and Count 2 alleges that the Respondents participated in and facilitated a transaction in shares of Trellis from Treasury, that were not paid for, and protected themselves by requiring a guarantee and by holding proceeds of the sale. Count 3 alleges that the Respondent Wolverton failed to advise the Exchange that it had become a defendant in certain legal proceedings as required by the Rules. At the commencement of the hearings, the Respondents applied for an Order quashing the Citation, which application was heard January 10 to 12. On January 12 this Panel dismissed the application, and gave written Reasons dated February 10, In those Reasons, the Panel described the merger of the VSE and the Alberta Stock Exchange (ASE) and the commencement of operations of the new Canadian Venture Exchange Inc. (CDNX). We will not repeat that analysis here, but suffice to say the CDNX Rules and By-laws provide for the continuation of these proceedings, initiated by the VSE, in Rule E The Panel is indebted to Counsel for their thorough and comprehensive submissions in respect to the issues raised by the Citation. THE CITATION 3. On June 14, 1999 the Vancouver Stock Exchange (the "Exchange") issued a Citation (Exhibit 1) to Jacob Jackie Alter ("Alter") and Wolverton Securities Inc. ("Wolverton Securities") as follows: "WHEREAS it is alleged that the Respondent Jacob Jackie Alter ("Alter"), while a registered representative and an approved person employed by Wolverton Securities Inc. committed infractions as defined by Exchange By-law 5.01 as follows: AND WHEREAS it is alleged that the Respondent Wolverton Securities Inc. ("Wolverton") while a member of the Vancouver Stock Exchange committed infractions as defined by Exchange By-law 5.01 as follows:

3 Page 3 1. In or about October of 1994 and continuing through December of 1994, Alter and Wolverton became aware of circumstances which made or should have made Alter and Wolverton suspicious that a group of clients were acting as unregistered dealers in the Securities of Exchange listed Trellis Technologies Corp. ("Trellis"). Despite having this information, and contrary to Rule C.1.08 or, in the alternative, By-law 5.01(2) (formerly 5.01(b)), in or about the period October 31, 1994 through December 21, 1994 Alter and Wolverton participated in 23 off VCT transactions of Trellis shares. 2. In or about September and October of 1995 Alter and Wolverton participated in and facilitated a transaction under which there was a significant likelihood that Trellis would issue shares from Treasury without payment. Alter and Wolverton protected themselves by requiring Trellis to guarantee payment to Wolverton and by holding the proceeds of the share distribution in the Trellis account at Wolverton. Those proceeds were not available to Trellis. These actions of Wolverton and Alter left Trellis, the Exchange and the public at risk. Alter and Wolverton thereby violated Rule F.2.01 or, in the alternative, By-law 5.01(2) (formerly 5.01(b)). 3. In or about November of 1995 Wolverton failed to provide the Secretary of the Membership Committee of notice within five days of Wolverton becoming a defendant in civil legal proceedings No. C with respect to the business conduct of Wolverton and Alter. Wolverton thereby violated Rule D.1.09." 4. At the commencement of the hearings, Counsel for Wolverton Securities admitted the allegations in Count number 3 as proven, and the Panel so finds. It was agreed that evidence and submissions with respect to penalty would be received following the Panel decision on counts 1 and 2. FACTS 1994 Events 5. At all material times Wolverton Securities was a member of the Exchange; Brent Wolverton is the President and has held that position since 1991, and has been a director since at least 1991.

4 Page 4 6. Mr. Alter became a registered representative (broker) with Wolverton Securities in 1980 and has been with the company since that date. He was a branch manager for a period of time in the 1980 s. Between December, 1989 and September, 1993 Mr. Alter, as an employee of Wolverton Securities opened accounts for various clients, including the following: (1) an account for Mr. Revel Murphy ("Murphy"), December 12, 1989; (2) an account for Deyong Management, April 12, 1990; (3) an account for Mr. Sakwinder Narwal ("Narwal"), September 17, 1991; (4) an account for Mr. Nanuk Warman ("Warman"), June 15, 1992; (5) an account for Mr. Michael Skerry ("Skerry"), June 17, 1992; (6) an account for Mr. Robert (Bob) Jenkins ("Jenkins"), September 15, On a new client application form of Mr. Narwal (Ex. 10, tab 6) prepared and signed by Alter, Mr. Alter s noted comment is "client told about hazard in trading penny stocks". 8. Further, on September 29, 1994 Mr. Alter opened 2 new accounts for Perry C. Stone. 9. Mr. Alter testified that in the fall of 1994 he did not know anything about an Exchange listed company Trellis Technologies Corp. ("Trellis"). He stated that in September, 1994 there was a meeting in the offices of Wolverton Securities attended by Narwal and Mr. Elroy Fimrite ("Fimrite") which was arranged by Mr. Narwal, whom he had known for 3 years, possibly longer. He knew that Mr. Narwal ran a company called SIU Financial and that Mr. Narwal and SIU were in the investor relations business, raising financing and working capital, public relations, and promoting. He agreed Mr. Narwal was a promoter.

5 Page Narwal asked Alter if he could use the boardroom at Wolverton Securities and Alter agreed as Narwal was a good client. Alter hoped the meeting might result in him obtaining new clients. He testified he did not attend the meeting. 11. Subsequently, Alter opened 2 accounts for Fimrite on November 17, 1994 (Ex. 10/96, 97, 104, 105). The new client application form indicates Fimrite was a senior officer or director of a company whose shares were traded on an Exchange or in the OTC Markets ("TIS"). "TIS" was Tellis. 12. By letter dated October 26, 1994 on the stationery of SIU Communications, Narwal instructed Alter to transfer 28,000 Trellis shares to the account of Bob Jenkins against payment of $2,410 to Jenkins account. Alter confirmed those instructions (internally) on October 27 and by journal entry of October 31 the shares were transferred. 13. By letter faxed November 2, 1994 from Mr. H.A. (Sandy) McCandless of the law firm of McCandless Morrison & Verdicchio to Jack Alter at Wolverton Securities, McCandless set forth the answers to 4 questions with respect to 1,247,000 free trading shares of Trellis in 2 accounts of Perry Stone, and 200,000 shares of Trellis in "Perry Stone s personal account" and giving instructions with respect to the transfer of some of those shares, and the status of the accounts. 1,030,000 shares of Trellis from the 2 captioned accounts of Stone to be transferred to "Lyons Cawkell, in trust". A cheque in the amount of $24,000 made payable to the "Primal Group" was to be delivered to the McCandless firm. The instructions were subject to receiving a letter from the law firm of Lyons Cawkell, permitting the dealings with the 2 Stone accounts. The letter states that pursuant to a request from Alter, Perry Stone had countersigned and confirmed the instructions (Ex. 10/7). By a letter dated November 3, 1994 from Donald A. Lyons of Lyons Cawkell, Barristers and Solicitors, to Jack Alter at Wolverton Securities, Lyons instructed Alter to open a brokerage account in the name of the Partnership in trust for certain Trellis securities owned by Elite Capital (VCC) Ltd. ("Elite"). Enclosed with the letter was 1,350,000 shares of Trellis registered in the name of Elite

6 Page 6 together with enabling resolutions and a power of attorney. It confirms that they are entitled to receive 1,030,000 Trellis shares from Stone, presently in 2 accounts and confirms the "settlement reached between our client and Mr. Perry Stone as communicated in the revised McCandless Morrison & Verdicchio (lawyers) correspondence of November 3, 1994." 14. The Lyons Cawkell letter further went on to direct the transfer of 500,000 shares to the account of Bob Jenkins against payment of $75,000 (net of commission), and the remaining 530,000 shares should be transferred to the Lyons Cawkell account. They state the forgoing transactions will result in 1,880,000 shares being on deposit in their account, and Mr. Lyons letter concludes: "Our client is now offering for sale, a further 1,500,000 shares of Trellis which may be delivered against payment of $225,000 (1,500,000 x $0.15) net of commission, provided that sales of such shares have been made to your clients and in traunches of not less than 500,000 each. Should you have any questions, please contact the writer." 15. The new client application form for the Lyons Cawkell account dated November 3/94 was signed by Alter. Under the registered rep s (RR s) comments it states "selling only". 16. Mr. Alter testified that he was aware that a million shares of Trellis had been transferred by Elite to Perry Stone, and that the letter from Lyons Cawkell was arising from and related to the discussions between Mr. Fimrite and Mr. Narwal. Mr. Alter testified that he thought that Stone had a private deal with Elite, which he failed to perform on, and for that reason he was returning the shares. 17. Alter carried out the instructions to transfer the shares from Stone to Lyons Cawkell and the shares were journaled from one account to the other. 18. Mr. Alter admitted that he caused the journal entries to move the 500,000 shares from Lyons Cawkell to the Jenkins account.

7 Page When Warman opened his account in June, 1992 he was a grill cook employed at the Keg. By 1994, according to Alter, Warman was becoming an accountant and working at KPMG. 20. By letter faxed November 4, 1994 Don Lyons of Lyons Cawkell instructed Alter to transfer 250,000 Trellis shares to the Wolverton Securities account of Warman (Ex. 10/29). Alter carried these instructions out by an internal account transfer (Ex. 10/28). This was not a deposit against payment, and was done by journal entry. 21. On November 4/94 on the stationery of SIU Communications, Warman instructed Alter to transfer 200,000 shares of Trellis to Mike Skerry s account at Wolverton Securities in exchange for $23,900 from Skerry (Ex. 10/34). Alter carried out these instructions by journal entry (Ex. 10/35). 22. On November 4, 1994 on the stationery of SIU Communications, Warman instructed Alter to transfer 110,000 Trellis shares to Narwal s account against payment of $15,000 (Ex. 10/39). This was carried out by journal entry on Alter s instructions (Ex. 10/40). 23. By memo dated November 4/94 Warman instructed Alter to transfer 50,000 shares of Trellis from his account to Revel Murphy s account. Alter carried out this transaction by journal entry (Ex. 10/43). 24. Mr. Alter denied that he believed that a group of people including Warman and Narwal were undertaking transactions to perform an investor relations function to promote the shares of Trellis. 25. Mr. Alter acknowledged that he was aware of the Rules of the Exchange, and that he understood that in the instance of private transactions between sophisticated investors it was acceptable to do these types of journal entries, so long as they were isolated instances. Mr. Alter stated that the purpose of the transactions was to finance Trellis. He said that in his opinion the persons involved were all sophisticated investors.

8 Page Mr. Alter testified that the Stone, McCandless, Lyons Cawkell instructions were part of a transaction whereby Mr. Narwal, representing a group of sophisticated investors, decided to take down this block of stock, and these transactions were a disbursement of that block of stock. He stated however that he did not attend the meeting between Narwal and Fimrite, and the Lyons Cawkell letter of November 3 did not give instructions with respect to transactions involving Narwal or Warman. 27. With respect to the Warman tomurphy 50,000 share transaction, Alter admitted that he didn t know if Murphy had paid Warman for the shares, made no effort to find out, and did not know the purpose of the transaction. 28. By letter faxed November 8/94 Donald Lyons of Lyons Cawkell instructed Alter to transfer 500,000 Trellis shares to Narwal against payment of $75,000 (Ex. 10/47). Alter carried this out by journal entry (Ex. 10/49). Narwal confirmed the instructions to pay out $75,000 (Ex. 10/48). 29. By letter dated November 8/94 Donald A. Lyons of Lyons Cawkell instructed Alter to transfer 250,000 Trellis shares to Warman; there was no stipulation for payment. Alter carried out these instructions by journal entry. 30. On November 9/94 on SIU Communications stationery, Warman instructed Alter to transfer 50,000 Trellis shares to Mike Skerry s account; there was no stipulation for payment. Alter carried out these instructions by journal entry (Ex. 10/56 and 57). Mr. Alter stated that he did not know the purpose of the transaction involving Mr. Skerry. 31. On November 10/94 on SIU Communications stationery, Warman instructed Alter to transfer 25,000 Trellis shares to Narwal s account; there was no instructions re payment and Alter carried out these instructions by journal entry (Ex. 10/60 and 61).

9 Page Mr. Alter admitted that he knew that significant amounts of stock were collected in the Lyons Cawkell account, it was then distributed to Warman and Narwal, who then distributed it to other individuals. However he said these transactions did not lead Alter to think that Warman and Narwal were acting as dealers in the shares. 33. On instructions on November 10, 1994 by journal entry Alter transferred 500,000 Trellis shares from Lyons Cawkell to Narwal against payment of $75, By letter dated November 18/94 Don Lyons of Lyons Cawkell instructed Alter to transfer 880,000 shares to the account of Warman; there was no instruction for payment for these shares, and it was done by journal entry (Ex. 10/68, 69, 70, 71). 35. By memo dated November 17/94 on the stationery of SIU Communications, Warman instructed Alter to transfer 200,000 shares of Trellis to Narwal s account, and to transfer 100,000 shares of Trellis to SIU Financial Corp. s account; there was no indication of payment, and Alter carried out the instructions by journal entry on November 18 (Ex. 10/72, 73, 75). 36. The new client application form for SIU Financial Corp., dated November 16/94 was signed by Alter; Narwal was shown as the President of SIU Financial. 37. By further memo dated November 17/94 on the stationery of SIU Communications Warman instructed Alter to transfer 100,000 shares of Trellis to Skerry s account; there was no indication of payment and Alter carried this out by journal entry (Ex. 10/83, 84, 85). 38. By further memo dated November 17/94 on SIU stationery, Warman instructed Alter to transfer 70,000 shares of Trellis to Deyong Management; there was no indication of payment and Alter carried out these instructions by journal entry (Ex. 10/86, 87, 91).

10 Page On November 17/94 Fimrite completed a new client application form, signed by Alter, and it indicated that he deposited 1,500,000 Trellis shares (Ex. 10/96, 97). 40. On the same date he opened a second account, and it indicated he deposited 1,000,000 shares of Trellis into the account (Ex. 10/104, 105). 41. By memo dated November 28/94 on SIU Communications stationery, Fimrite instructed Alter to transfer 730,000 Trellis shares to Narwal against payment of $75,000. Fimrite notes the shares will not be available until after December 8 (Ex. 10/99). Alter authorized this transfer by journal entry on December 8/94 (Ex. 10/98). 42. By instructions dated November 17, 1994 Fimrite authorized Alter to transfer 470,000 shares of Trellis to Warman on December 8, upon release of restriction on the said shares; Alter carried out these instructions by journal entry and there is no indication of payment (Ex. 10/92, 93). 43. The instructions from Fimrite for the 470,000 shares and 730,000 shares were carried out by Alter on December 14/ On December 14/94 Alter carried out instructions from Fimrite to transfer 1,000,000 shares of Trellis to Narwal; this was effected by journal entry (Ex. 10/102, 103). 45. On December 9/94 on the stationery of SIU Communications, Narwal instructed Alter to issue a cheque for $150,000 to Fimrite and an additional cheque for $50,000 to Trellis, from Narwal s accounts. 46. By memo dated December 13/94 on the stationery of SIU Communications, Warman instructed Alter to accept an IMM from Bob Jenkins (at Canaccord) for 50,000 shares of Trellis against payment of $12,000. These instructions were implemented by journal entry (Ex. 10/107, 108).

11 Page By memo dated December 13/94 on the stationery of SIU Communications, Warman instructed Alter to accept an IMM from Bob Jenkins (Yorkton) account for 40,000 shares of Trellis against payment of $8,000 (Cdn); these instructions were carried out by journal entry (Ex. 10/109). 48. Alter testified that with respect to the aforesaid transactions done by journal entry, Wolverton Securities did not receive any form of compensation for those journal entry transactions. 49. Alter admitted that he did not know why Lyons Cawkell didn t sell the Trellis shares through the normal facilities of the market. 50. With respect to the journal entry transactions of October, November and December of 1994, Mr. Alter testified that he did not play any part in determining how much stock, at what price would be exchanged between the parties, nor did he give any of the individuals advice as to whether or not they should enter into those transactions. 51. With respect to the instructions for the journal entry transactions, Mr. Alter testified that upon receipt of instructions from one party, he required matching instructions from the party on the other side of the transaction, and upon receipt of those two instructions he would prepare the requisition for the journal entry, and then submit it to compliance at Wolverton Securities. Mr. Alter testified that he and compliance would review the accounts prior to approving the transaction, and that at no time did anyone in compliance refuse to execute the transactions Events 52. Brent Wolverton testified that at some point 2 or 3 years prior to the fall of 1995, the VSE approved a transaction called a "conditional trade". He described this as a transaction which is sanctioned by the VSE, and occurs when two parties want to do a trade on the floor of the Exchange, but the purchasing party does not have sufficient equity to guarantee that they are going to be able

12 Page 12 to settle that trade, and the vendor or seller is agreeable to allowing that transaction to be reversed in the case that the purchaser is unable to make a settlement. The trade is conditional on the purchaser making a settlement. He testified that the broker is not actually giving any credit but the vendor is guaranteeing the buyer. He called it a vendor take back credit. He testified that their practice was to ask the buyer and the seller to both sign an agreement that the trade is going to take place, and it s going to be conditional, and that they sometimes indicate this on the ticket. Although the trade occurs on VCT, there currently is nothing to indicate its conditional nature to anyone not privy to the arrangement between the parties and the broker. 53. In August 1995, Transcon Bau Gmbh ( Transcon ) of Hanover, Germany, through Alter opened an account with Wolverton Securities. The person authorized to give instructions was Friedrich K. Gruehl ( Gruehl ) whose title was "G.M". Gruehl also guaranteed the account. 54. Mr. Alter testified that he was introduced to Mr. Gruehl by Mr. Fimrite and the account was opened as a result of that introduction. From discussions with Fimrite and Gruehl, Alter understood that they were going to enter into some type of transaction which would secure financing for Trellis. 55. Mr. Alter testified that Mr. Gruehl introduced him to Mr. Nelson Skalbania, and on September 6, 1995, an account was opened for Great Wall Trading Inc. ( Great Wall ) by Mr. Alter, and the documentation shows that Skalbania was authorized to give instructions, and guaranteed the account. 56. By an Agreement dated September 14, 1995 addressed to Wolverton Securities, and signed by Great Wall and Transcon on September 16, 1995 and with respect to Trellis Technology Corporation/Vescan Equities Inc., Transcon and Great Wall authorized Wolverton Securities to hold the proceeds of the sale of 3,350,000 shares of Trellis and 775,000 shares of Vescan Equities Inc. ("Vescan") until the accounts purchased in the securities have settled the trades either by payment or by the sale of securities. This was described as a "conditional trade" Agreement, which was prepared by Brent Wolverton, and also provided:

13 Page 13 This is also our irrevocable authorization, that should the Purchasers fail to settle all or part of the purchase by settlement date or a date so determined by Wolverton Securities Ltd., or should Wolverton Securities Ltd. feel at all uncomfortable with their position, for Wolverton Securities Ltd. to journal a sufficient amount of the proceeds of the sale of the securities to the Purchasers accounts to cover the debit resulting from the purchase of those securities and to transfer the shares of Trellis Technology Corporation and/or Vescan Equities Inc. in the Purchasers accounts to the seller s account in proportion with the transferred proceeds. This arrangement is meant to act as a guarantee of the Purchasers by the seller of the securities. (Ex. 10/124, 125) Mr. Alter described this as a Cross Guarantee Agreement and was aware of events that led up to it. 57. On September 19/95 Trellis itself opened an account with Wolverton Securities, through Mr. Alter, and Mr. Fimrite, the President, was authorized to give instructions. Mr. Fimrite also guaranteed the Trellis corporate account. 58. By letter dated September 19, 1995, Donald Lyons of the Lyons Cawkell firm wrote to Wolverton Securities to the attention of Mr. Alter enclosing share certificate number 137 representing 1,000,000 shares of Trellis, registered to Wolverton Securities Ltd., and stated the shares are deposited as per instructions received from Elite. A notation on the letter states Elite is preparing a letter which will be faxed to Wolverton confirming instructions. On September 20, Elite faxed to Alter a letter dated September 19, wherein Elite confirmed it had exercised 1,000,000 share purchase warrants of Trellis, and instructed Wolverton Securities to deposit the certificate to the account of Transcon. 59. Wolverton Securities and Alter received other instructions with respect to Trellis shares at this time. By letter dated September 20, 1995 addressed to Wolverton Securities Limited attention Jack Alter, Trellis confirmed that share certificate number 137 representing 1,000,000 shares issued to Wolverton Securities Limited on behalf of Elite are to be deposited to Transcon against payment

14 Page 14 to Trellis account at Wolverton Securities of $250,000. They also confirmed that this disposal did not constitute a sale from their control block. The letter was signed by Mr. Fimrite (Ex. 10/137). 60. By further identical letter dated September 20, Trellis referred to share certificate number 138 representing 1,000,000 Trellis shares, issued to Wolverton Securities on behalf of Elite, again to be deposited to the Transcon account against payment of $250,000. A further identical letter dated September 21 with reference to share certificate number 140 representing 1,350,000 Trellis shares, issued to Wolverton Securities Limited on behalf of Elite, be deposited to the Transcon account against payment of $337, On September 21/95 share certificate 137 was received at Wolverton from Lyons Cawkell, on September 22 share certificates 138 and 139 were received from Lyons Cawkell; all were deposited to the Transcon account. 62. Mr. Alter testified that it was very rare for letters addressed to his attention at Wolverton Securities not to reach him; however he could not recall receiving the three DAP letters from Trellis. He testified that the Trellis shares would never have been deposited to Transcon unless Transcon could make the required payments. 63. Mr. Alter testified that his understanding of the Elite-Transcon transaction, and the depositing of the shares into Transcon s account, was that Mr. Gruehl was going to create cash which would create a financing for Trellis by selling the Trellis shares to Mr. Skalbania/Great Wall. 64. On September 21 and 22 the 3,350,000 Trellis shares were credited to the Transcon account. On October 2, $837,500 was deposited into the Trellis account from Transcon. Mr. Alter testified this did not reflect Transcon paying Trellis for the shares. He testified that Mr. Gruehl requested as a sign of "good faith" that Wolverton Securities transfer the funds, that were allocated for a future financing of Trellis, to the Trellis account. Further, at that point in time Trellis accepted the funds, and guaranteed the existing debt of Skalbania/Great Wall.

15 Page With reference to the Cross Guarantee Agreement dated September 14, 1995, Mr. Alter testified that a Mr. Klein who was named as a party, did not participate, and the total transaction was done between Transcon and Great Wall. Transcon received the shares to sell them to finance, or refinance, Trellis. Transcon sold the shares to Great Wall and a debit was created in Great Wall s account; however Great Wall didn t pay. He testified that essentially Great Wall effectively borrowed money from Wolverton Securities and that money was placed in the account of Transcon. 66. On September 26, 1995, Trellis faxed instructions to Wolverton Securities to the attention Mr. Alter as follows: "Re: Corporate Refinancing We confirm herewith that pursuant to current corporate refinancing and pursuant to the assignment of the Guatemalean oil concession option negotiated by Great Wall Trading Inc. that we consent to restriction of our account in the aggregate amount $837,500 in guarantee of the account of Great Wall Trading Inc. # We understand that this guarantee and restriction on funds will be released pro rata with reductions in the debt owing by Great Wall Trading Inc." The letter is signed by Mr. Fimrite (Ex. 12). This letter from Trellis was obtained at the request of Brent Wolverton. 67. On September 29, 1995, Trellis executed a Wolverton Securities form of guarantee of Transcon. The guarantee was requested by Wolverton Securities because Transcon wanted to transfer the funds to Trellis as a sign of good faith in their future financing. In order for Wolverton Securities to transfer the funds, because of the cross guarantee that was in place between Transcon and Great Wall, Wolverton Securities would not release the funds from Transcon to Trellis unless Trellis agreed to assume the responsibility of the guarantee. 68. Mr. Alter agreed that Great Wall did not pay, and the trades were all reversed. Whatever securities were in the Great Wall account were returned to the Transcon account and the funds that

16 Page 16 were in the Trellis account went to pay the Great Wall debt. Mr. Alter agreed that if the purpose of the transaction was to raise financing for Trellis, that failed, and Trellis never got any financing because Great Wall/Skalbania failed to fulfill their part of the Agreement. He agreed the bottom line was that Trellis at that time got nothing. 69. Mr. Alter agreed that at the material time he was the broker and person in charge of these transactions. 70. Mr. Alter testified that when the certificates for the 3,350,000 shares were received, he believed they were "paid for" certificates, because they were in Wolverton s name and they had all the appropriate documentation. 71. With respect to Transcon paying financing money into Trellis, Mr. Alter testified: "Q So but if the point was here s my point. At some time in the future these shares were supposed to result in Transcon paying financing money into Trellis. Wouldn t that lead you to believe that Transcon was receiving the shares with an obligation to pay for them? A No. Q Did you believe, then, that Transcon was receiving the shares and would later pay some money to Trellis just as a gift? A No. Q Well, the some $800,000 that Transcon did pay to Trellis, for what reason did you think that money was paid? A Well, I believed at the time that, knowing that Transcon was a friend of Fimrite and Trellis, they were associates, my belief was that Transcon had a means of selling the shares to another group or individual, whatever, and that he would then have the funds put into a financing of Trellis and for that he would get a finder s fee." 72. With respect to the transfer of $837,500 from Transcon to Trellis on October 2, Mr. Alter testified that the transfer of funds was simply a sign of good faith by Mr. Gruehl to Trellis that he would create the financing.

17 Page Mr. Alter agreed that when he was interviewed by Exchange staff (with counsel present) in May 1998, that he stated the $837,500 transferred from the Transcon account to the Trellis account was for the exercise of the Trellis warrants. 74. Mr. Alter testified that around mid-november of 1995, after the reversal of the transactions pursuant to the cross guarantee, the President of Trellis, Mr. Fimrite, came to his office. Fimrite was highly upset, and told Alter that the shares that were delivered to Wolverton Securities were from Treasury, and hadn t been paid for, and the funds transferred were intended to pay for those shares. Alter states this was the first he d heard of this. 75. Mr. Alter testified that Wolverton Securities requested the Trellis guarantee of the Transcon account, and a letter from Trellis of September 26/95 because Transcon, as a sign of good faith, asked Wolverton to transfer the funds to Trellis account because Transcon had committed to a financing in Trellis. Wolverton would only transfer the funds if Trellis would guarantee the debt that existed, and Trellis agreed to do that by providing the letter of September 26, and the Wolverton guarantee. 76. It was put to Mr. Alter that the Panel collectively had never encountered a "good faith payment" in respect of a transaction, especially not one involving $837,500. Mr. Alter admitted he too had never encountered such a transaction and that it was unique in his experience. 77. With respect to the three deposit against payment letters from Trellis in September, 1995, Mr. Brent Wolverton testified that given the amount of money involved, that it would be brought to his attention, and the credit department s attention, and they would determine whether it was possible to do the DAP. He stated: "If the money was available or if the client was in good standing to the degree that we were willing to forward or stand for the money, then we would receive in the stock and make the cheque or the credit available.

18 Page 18 In the case where the client wasn t in good standing or the cash wasn t available we would reject the stock." Mr. Wolverton also agreed that they might hold onto the stock while they obtained instructions from the clients. 78. With respect to whether he saw the three Trellis DAP letters, Mr. Wolverton testified that he could not recall seeing them, and that he was "fairly certain" that he didn t see them at that time. ANALYSIS Onus of Proof 79. Rule E requires the Panel to make its findings of fact on the balance of probabilities. The Panel accepts that a high standard of proof, within the civil standard of proof on a balance of probabilities, is required in respect of the allegations in the Citation: Re Aatra Resources Ltd. (1993), 3 CCLS 51 at 73. Count 1 - Off VTC Trades 80. Count 1 of the Citation is as follows: "1. In or about October of 1994 and continuing through December of 1994, Alter and Wolverton became aware of circumstances which made or should have made Alter and Wolverton suspicious that a group of clients were acting as unregistered dealers in the Securities of Exchange listed Trellis Technologies Corp. ("Trellis"). Despite having this information, and contrary to Rule C.1.08 or, in the alternative, By-law 5.01(2) (formerly 5.01(b)), in or about the period October 31, 1994 through December 21, 1994 Alter and Wolverton participated in 23 off VCT transactions of Trellis shares." 81. Exchange By-law 5.01 refers to "infractions" meaning:

19 Page 19 (1) A contravention of any By-law, Rule or Regulation of the Exchange; or (2) Any conduct, proceeding or method of business not expressly provided for in the By-laws, Rules or Regulations which is unbecoming or inconsistent with just and equitable principles of trade or detrimental to the interests of the Exchange or the public. (emphasis added) 82. Exchange Rule A.1.31 defines trade as "a contract for the purchase and sale of a security". Exchange Rule C.1.08: "Trading to be executed on VCT No member or any other approved person shall trade or participate in any trade in any listed security, whether acting as principal or agent, unless the trade is made on VCT during a trading session except as follows: 1. subject to Policy Statement CRO4, but not requiring prior approval of the Exchange: a. a trade to correct an error in a client s order,..." 83. Policy Statement CRO4 ("CRO4") is headed "Policy Statement Regarding Customer-Directed Deliveries and Other Isolated Transactions Which Are Not Trades For Purposes of Rule C.1.08." 84. Paragraph 1 of CRO4 deals with deliveries between accounts of the same client, and paragraph 3 deals with permitted "off the floor" transactions. Paragraph 2 is as follows: 2. Inter-Client Deliveries Based on Matching Instructions from the Clients The V.S.E. does not consider a Member or Approved Person to be "participating in a trade" when the instructions of a client are carried out to deliver securities against payment to the account of another client of the firm who has issued matching instructions. But, Members should also note:

20 Page It is improper for an Approved Person to assist a client in arranging such off the floor transactions. The facts must conform to the presumption that persons requesting such transfers have met privately and agreed to a transaction, and the Member is simply being directed to move the securities and cash which are being held by the Member on a custodial basis. Members would not normally issue a contract in respect of such transfers. 2. Such inter-client transfers are appropriate only in isolated instances and there must be no implication of unregistered dealing in shares by clients. Persons who are not registered as brokers or dealers under the Securities Act, are not permitted to deal actively in securities transactions, except through a Member or other registrant. Off the floor transactions directed by persons who are identified as insiders or promoters of listed companies, are of a particular concern in this regard. 3. Such transfers (whether against payment or free ) are barred to Members or Approved Persons, as such persons are not permitted to deal in listed securities, other than through the Exchange, unless the shares are issued by the company as part of a financing conducted under the Rules of the V.S.E., or there is a basis for seeking specific approval of the transaction under V.S.E. Rule C.1.08(7), or the Exchange has made and publicized a general exemption provision." 85. The Exchange has proven 23 transactions conducted by Alter and Wolverton Securities, which could have been conducted through the facilities of VCT, but instead were transacted by journal entry. The issue simply is whether these transactions, or some of them, qualify for the exclusion in Policy Statement CRO At the time these transactions occurred, Mr. Alter was a very experienced registered representative. He had been in the business since 1980, and he had been a manager. Of the 23 transactions between October 31, 1994 and December 21, 1994, only 8 were from one client to another client, for delivery against payment. Of the remaining transactions, none were on the basis of delivery against payment except the final 2, which were not transactions from one client account of the firm to another client account of the firm. 87. In our view, from all the evidence presented, we believe that Mr. Alter, and Wolverton Securities, knew that Fimrite was the President of Trellis, and that Narwal and Warman were associated or affiliated with SIU Communications Corp., a known promoter. We are satisfied that

21 Page 21 Mr. Alter learned either at the time of the September board room meeting, or very soon thereafter, of the arrangements involving the return of the Trellis shares by Stone, and the sale of those shares to the promoters, even if the consideration wasn t disclosed, and the sale by the promoters, and their associates, to members of the public. Mr. Alter admitted that the purpose of the transactions was to finance Trellis, that is to purchase a block of stock privately from Trellis or Elite. Mr. Narwal made an agreement with Mr. Fimrite (Trellis) to take the block that Stone had previously owned, and to sell the stock to the public. The letter of November 3/94 from Donald Lyons of Lyons Cawkell to Mr. Alter and Wolverton Securities opens a brokerage account with Wolverton, and states "It will be a trust account specifically for sale of certain securities of Elite Capital (VCC) Ltd. which they presently own in Trellis Technologies Corp. This account will operate for no other purpose." 88. Further, the Lyons Cawkell letter states that their client (Elite) is "now offering for sale" a further 1,500,000 shares of Trellis at $0.15 in traunches of not less than 500,000 shares each. 89. From the documentary evidence adduced we note the following summary of both of Mr. Warman s accounts at Wolverton Securities for the months of November and December, 1994: 1. Trellis shares received by way of journal: 2,390, Trellis shares disposed of by way of journal: 1,205, Trellis shares received "in only": 50, Trellis shares bought from market: 2,113, Trellis shares sold to market: 2,285,500 At all material times Alter was Warman s registered representative.

22 Page Similarly, a summary of both of Mr. Narwal s trading accounts for the months of October, November and December, 1994 is follows: a Trellis shares received by way of journal: 3,065, Trellis shares disposed of by way of journal: nil 2. Trellis shares received "in only": 150, Trellis shares bought: 100, Trellis shares sold to market: 3,085,000 At all material times, Alter was Mr. Narwal s registered representative. 91. The following exchanges occurred during the cross-examination of Mr. Alter: "Q So if I understand it right, what was happening was the block of stock was going firstly or it was firstly collected or there were groups there were amounts of the stock that were collected in the Lyons Cawkell account then it was distributed to Mr. Warman and Mr. Narwal and then it was further distributed to other individuals. Is that what was going on? A Yes. Q Didn t that lead you to think that Mr. Warman and Mr. Narwal were acting as dealers in the shares? A Q A No. Well, they were buying the shares and they were reselling the shares as they were receiving the shares and they were passing them on in some way. Isn t that exactly what it means? Well, no, they weren t they weren t selling the shares. They were just passing them on and somebody else was paying for them. THE CHAIRMAN: Who? 1. The individuals that received the shares. MR. JOHNSON: Q And who was getting the money?

23 Page 23 A Q A Q A Q A Lyons Cawkell, I would assume. But you didn t know? Well, no, some quite a majority of the cheques were made payable to Lyons Cawkell, so it was a pattern established. So did you think from what based on what you ve just told me, it sounds like you thought Lyons Cawkell was the owner of the shares or was The trustee. representative they were the trustee, and that Mr. Narwal and Mr. Warman were arranging for buyers and were receiving possession of the shares temporarily, is that right? Yes." "Q Your evidence for the other transactions was that Lyons Cawkell was a trustee? A Correct. Q And that certain shares would go to Narwal and Warman? A Yes. Q And they would find buyers? That was the purpose? A Private purchasers. Q And the overall purpose was to raise financing for Trellis? A Yes. Q So these shares that were being distributed out, if I can call it that way, and I m not trying to be technical they weren t free? The idea was that they would they were being sold? There was money that was either directly or indirectly to change hands in return for the shares? A Yes." 91. It is also clear on the evidence that Mr. Alter could not journal entry these transactions on his own; he could make the request but the documentation was checked by compliance, and Wolverton Securities knew that the journal entry transactions were occurring, and approved them. 92. We are of the view that Mr. Alter and Wolverton Securities were aware of the distribution of the Trellis shares, and of an arrangement between Mr. Fimrite, the President of Trellis, and Mr. Narwal. In our view these 23 journal entry transactions were not isolated transactions, or isolated instances. Further, from the whole of the evidence, there existed a clear implication of unregistered dealing in shares by clients. There was a scheme to raise financing for Trellis through the sale of Trellis shares owned by Elite. Alter, and Wolverton Securities, facilitated the scheme by the off VCT journal transactions.

24 Page In summary, we find on the whole of the evidence, that Count 1 of the Citation has been proven against the Respondents both as to Rule C.1.08 and By-law 5.01(2). Count Count 2 of the Citation is as follows: 2. In or about September and October of 1995 Alter and Wolverton participated in and facilitated a transaction under which there was a significant likelihood that Trellis would issue shares from Treasury without payment. Alter and Wolverton protected themselves by requiring Trellis to guarantee payment to Wolverton and by holding the proceeds of the share distribution in the Trellis account at Wolverton. Those proceeds were not available to Trellis. These actions of Wolverton and Alter left Trellis, the Exchange and the public at risk. Alter and Wolverton thereby violated Rule F.2.01 or, in the alternative, By-law 5.01(2) (formerly 5.01(b)). 95. Exchange Rule F.2.01 provides: "Business Practice A member shall at all times adhere to the principles of good business practices in the conduct of his business affairs." 96. The evidence establishes that in September 1995, Mr. Alter, Mr. Wolverton, and Wolverton Securities were aware of and involved with all the parties, namely, Trellis and Mr. Fimrite; Lyons Cawkell acting for Elite; Great Wall and Mr. Skalbania; and Transcon and Mr. Gruehl. Brent Wolverton testified that Wolverton Securities did not want to receive share certificates registered in their name, and went to some lengths to clarify or confirm matters when that occurred. 97. On September 14/95 Brent Wolverton wrote to Trellis ( Ex. 10/113) on receipt of five certificates representing 2,300,000 shares of Trellis which had been registered in the name Wolverton

25 Page 25 Securities. He states that he understands these shares result from the exercise of options or warrants of Trellis by Elite, and (as to 300,000 shares) another individual Mr. Hol. Mr. Wolverton confirms that Trellis is acting on behalf of and in accordance with wishes of Elite, and Mr. Hol, when instructing Wolverton to deposit the shares: as to 1,000,000 shares in the account of Great Wall; 150,000 to the account of Transcon; 150,000 to the account of Elroy Fimrite; and as to 1,000,000 shares to be transferred to Union Securities Ltd. 98. Thus at September 14/95 Wolverton Securities was aware that Elite had exercised options or warrants with Trellis for a significant number of shares (2,000,000) and that Elite was not in a control position. Great Wall, Transcon and Fimrite were clients of Mr. Alter. Elite, through the law firm Lyons Cawkell, was also a client of Mr. Alter, and Mr. Wolverton sent a copy of his September 14 letter to Don Lyons of Lyons Cawkell. 99. By an agreement dated the same date (September 14) signed two days later (September 16), prepared by Mr. Wolverton, Transcon agrees to sell, on a conditional basis, 3,350,000 shares of Trellis and 775,000 shares of Vescan to Great Wall, the principal of whom is Mr. Skalbania. Even though it was a "conditional sale", it was transacted through VCT On September 19/95 Mr. Alter/Wolverton Securities received a letter from Lyons Cawkell enclosing share certificate number 137 representing 1,000,000 shares of Trellis which are registered in the name of Wolverton Securities. Lyons Cawkell instructs Wolverton Securities that the shares are to be dealt with as per instructions from Elite. On September 20 Elite faxes instructions to Mr. Alter confirming it has exercised 1,000,000 share purchase warrants of Trellis, and instructs him to deposit them to Transcon s account. Share certificates number 137, 138, and 140 are received by Wolverton Securities from Lyons Cawkell and on September 21 and 22 and are deposited to the Transcon account However the instructions from Elite and Lyons Cawkell relate only to 1,000,000 Trellis shares and certificate number 137. Where were the instructions with respect to share certificate number 138

26 Page 26 representing 1,000,000 shares of Trellis, and share certificate number 140 representing 1,350,000 shares of Trellis? Further, there is no letter from Brent Wolverton clarifying or confirming instructions re certificates for 3,350,000 shares registered to Wolverton Securities It is admitted that in the files of Wolverton Securities were the three DAP letters from Trellis, the first dated September 20 and referencing share certificate number 137 for 1,000,000 shares, issued to Wolverton Securities Limited, on behalf of Elite, and instructing Mr. Alter that those share certificates be deposited to Transcon s account against payment to Trellis s account of $250,000. Interestingly, this letter confirms that this disposition does not constitute a sale from a control block, which would be significant to the broker Similarly, the further DAP letter dated September 20, 1995 dealing with share certificate number 138 also representing 1,000,000 shares in the name Wolverton, on behalf of Elite, is a deposit against payment of $250,000. A further, identical DAP letter dated September 21 dealing with share certificate number 140 representing 1,350,000 shares issued to Wolverton, on behalf of Elite, are deposited to Transcon against payment to Trellis of $337, In total, share certificates 137, 138 and 140 represent 3,350,000 shares of Trellis which are registered in the name of Wolverton Securities Limited. Wolverton Securities acknowledges that the share certificates were received, but both Mr. Wolverton and Mr. Alter now deny that they saw the three Trellis DAP letters at or about the time of this transaction. In view of what transpired, we do not accept this evidence. In our view Alter and Wolverton Securities knew of and acted on the three DAP letters However, the instructions in the three DAP letters from Trellis are to deposit the shares to the account of Transcon, and great care has been taken to document, on September 14/95, a conditional sale of inter alia, 3,350,000 shares of Trellis from Transcon to Great Wall. Great Wall did not have funds in its account to pay for the 3,350,000 Trellis shares in late September.

27 Page On their face, the three DAP letters from Trellis would appear to be inconsistent or conflicting with the conditional sale and cross guarantee. Unfortunately, we do not have the benefit of testimony from Elroy Fimrite, Nelson Skalbania, Donald Lyons, or Fred Gruehl. It is clear that had the conditional sale completed, and Great Wall made good its obligations, Transcon would have received the appropriate funds and could have paid its obligations to Trellis. However what did happen was that on September 26, Trellis sent a letter by fax to Wolverton Securities making reference to the current corporate refinancing and consented to the restriction of Trellis account in the amount of $837,500 in guarantee of the account of Great Wall. Further, at the request of Brent Wolverton, on September 29 Trellis signed Wolverton s printed form guarantee, guaranteeing the accounts of Transcon From all of the evidence, we infer that between September 21 and September 26, there were further discussions or negotiations in respect of the sale of the 3,350,000 shares, and the Trellis financing, and Trellis agreed to a modification of its DAP instructions, and agreed, in effect, to participate in the conditional sale by delivering its letter of September 26, and signing the guarantee on September 29. Of course this meant that Trellis would not later complain its instructions had not been followed With the circle now complete, in that Trellis, Transcon and Great Wall have all agreed to the conditional sale and conditional payment, Wolverton transferred a credit of $837,500 from Transcon to Trellis. We do not accept the "good faith" transfer of these funds as described by Alter. Unfortunately, Great Wall failed to make good its obligations, and the parties were forced to reverse the transactions We note that Mr. Alter, when he was interviewed by VSE personnel, said that the $837,500 transferred from the Transcon account to the Trellis account was for the exercise of the Trellis warrants.