IN THE MATTER OF THE VANCOUVER STOCK EXCHANGE (THE "EXCHANGE") BY-LAW 5 - DISCIPLINE AND SCOTT MADDAUGH WILLIS, RESPONDENT

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1 IN THE MATTER OF THE VANCOUVER STOCK EXCHANGE (THE "EXCHANGE") BY-LAW 5 - DISCIPLINE AND SCOTT MADDAUGH WILLIS, RESPONDENT Hearing Committee: G.R. Schmitt, Q.C., Chairman David B. Elliott, Member John E. Gigliotti, Member DECISION: The Heanng Committee held a hearing into the citation made against Scott Maddaugh Willis ("Willis") at the Prince of Wales Room, Hyatt Regency Hotel, 655 Burrard Street, Vancouver, on June l, Mr. Gordon R. Johnson appeared as counsel for the Exchange. Neither Willis nor anyone representing him appeared at the Hearing. Willis had been served with a copy of the citation on May 16, 1995; the ori_nal affidavit of service being filed as Exhibit 2 at the Hearing. Mr. Johnson referred to Exchange By-law 5.19, which states: 5.19 Service of Citation and Appearance 1. The copy of the citation, together with any demand for information shall be served on the respondent. 2. The respondent shall serve the President with written notice within five business days after being served with the citation that he intends to appear and be heard at the hearing. 3. Failure on the part of a respondent to comply with clause (2) shall mean he accepts the allegations as being proven. C XGRS\23290\OI3\HEARING.DOC

2 -2- Willis did not comply with clause (2). While there is an argument that the effect of By-law 5.19 is that failure to respond to the service of a copy of the citation amounts to a "guilty plea" and no evidence needs to be presented, that interpretation is questionable and counsel for the Exchange elected to present evidence to prove the allegations in the citation. To this end Mr. Johnson called two witnesses, Robert R. Wilson ("Wilson"), who gave his testimony over the telephone and Bob Verhelst ('_v'erhelst"), of the Exchange Investigations Services who testified before the Panel. Calling a witness to testify "over the teiephone" is an unusual procedure. The Hearing Committee is not bound by the legal or technical rules of evidence. (By-law 5.20(12)). Counsel for the Exchange referred the Panel to a case, Re Holoboffand Alberta Securities Commission (1991), 80 D.L.R. (4th) 603, decided by the Alberta Court of Appeal and a decision of a Hearing Committee of the Alberta Stock Exchange, Re Windle in which the use of evidence taken over the phone was found to be appropriate. One can readily imagine problems that could arise - for example, considering the credibility of a witness who appeared in person as against that of a witness who testified over the telephone. The Panel in considering the evidence given by Wilson over the telephone after he was sworn has exercised some caution. In addition to the evidence referred to, counsel for the Exchange submitted eight sets of documents which are as follows: 1. Fax documents sent between Scott Willis and Ed Mirosh, President of Omar Technologies Inc., negotiating a loan proposal. C NG RS\23290\013NHEARI_G.DOC

3 -3-2. The New Client Application Form for Bob R. Wilson, Client RSP Account Application, Notice of Transfer of R.R.S.P. property and Home Buyers Plan Withdrawal Application for Robert Wilson. 3. A letter dated September 5, 1990 authorizing Scott Willis to issue a cheque in the amount of $18,960 to Omar Technologies Inc. when 200,000 shares of Omar Technologies were deposited into his account. 4. Wolverton Securities Ltd. Share delivery receipt form dated September 12, 1990, in which 200,000 shares of Omar are received into Robert Wilson's account in exchange for cash. 5. The monthly statements of Robert R. Wilson from September to December, 1990 and April, The December, 1990, bank statement of Dan Lawrence showing a debit of $37,920 from a cheque issued to Omar Technologies Inc. (Lawrence was not able to provide copies of the original cheque.) The cheque issued represented Dan Lawrence and Robert Bentley's portion to the loan to Omar. Lawrence hand delivered the cheque to Wolverton to the attention of Scott Willis. 7. A response from Wolverton dated December 10, 1993, advising they had no record of 600,000 shares of Omar Technologies Inc. being received by Wolverton. Wolverton did have a receipt for 200,000 shares of Omar Technologies Inc. 8. A response dated March 14, 1994 advising that neither Dan Lawrence or Robert Bentley had accounts at Wolverton. THE ALLEGATIONS IN THE CITATION: While the transaction underlying the allegations in the citation is somewhat complicated, the allegations are fairly simple: Clause 1 of the citation alleges that in September, 1990, as collateral security for loans of $21, respectively to Omar Technologies Inc. ("Omar") by "If and "B" (identified by Wilson in his evidence as Dan Lawrence and Robert Bentley), and Wilson. Omar was to provide each lender with 200,000 shares of Omar as collateral. C \GRS\23290\0_3\}_. _v(ing. D OC

4 -4- It is alleged Omar sent Willis shares in street form totaling 600,890. It is alleged that, after delivering certificates for 200,000 shares into Wilson's account at Wolverton Securities Ltd. ("Wolverton"), "[r]ather than opening accounts on their behalf [i.e. on behalf of Lawrence and Bentley] and depositing the remaining shares into those accounts Willis placed the share certificates in his own safety deposit box at the Royal Bank"_ Clause 2 of the citation says that on or about February 28, 1991 when Willis left his employment with Wolverton and left the securities industry, '_he took no steps to ensure that the share certificates of Omar in his safety deposit box were deposited into an account with Wolverton". Clause 3 of the citation, after alleging that the failure of Willis to put the certificates which were collateral for the loans of Lawrence and Bentley into an account with Wolverton when he received them and when he left the industry, amounted to an infraction of By-law 5.01(1) (formerly 5.01(b)) goes on to give specific instances of the problems arising from this viz. (1) when Omar failed to repay the loan and Willis was asked to deliver the collateral shares covering the loans by Lawrence and Bentley he at first refused to do so unless he was paid a sum of money; (2) after being threatened with legal action he did deliver the certificates but when he did so it was found that certificate 588, covering 33,335 shares, which at that time had a value of $2,500 was missing. When subsequently interviewed by an Exchange investigator about the missing shares Willis falsely denied taking the certificate. 1. THE EVIDENCE Wilson testified that in September, 1990 he had been contacted by Willis with respect to a loan of $65,000 to Omar to bear 25% interest and to be secured by 600,000 shares of Omar being put up as collateral. Wilson testified that he told C\GRS\23290X013\HEARINGDOC

5 -5- Willis that he would put up 1/3 of the loan and Dan Lawrence and Robert Bentley of Orlando, Florida would put up 1/3 each. Willis told him that 600,000 sha_es would be put up as collateral. Willis sent him copies of letters setting out the certificates being put up. These letters presumably are the ones dated September 4th and September 6th, 1990 from Mr. Mirosh of Omar to Willis, setting out details of shares totaling 600,890. With respect to the shares put up as collateral for Wilson's portion of the loan, there is a copy of a letter from Wolverton to Wilson dated September 12, 1990 recording receipt of 200,000 shares of Omar as a "cash swap" into Wi]son's account. Wilson had opened an RRSP account with Wolverton. The September, 1990 statement for this account shows the cash swap. In fact, of course, none of the allegations in the citation relate specifically to Mr. Wflson's own account. The transfer of 200,000 shares of Omar in street form into Wilson's account did not amount to a transfer of the shares to Wolverton in trust as collateral. Both the letters of September 4th and September 6th, 1990 referred to above addressed to Willis at Wolverton say that "these shares are to be held in trust by Wolverton Securities as collateral for a loan which has been arranged with investors in a gross amount of $65,000". There is no evidence that any shares were transferred to Wolverton in trust. 0mar defaulted on the loan. The evidence of Wilson indicates there never was any appropriate documentation of the loan (for example, a promissory note) or any documents setting out the terms of the collateral security. Wilson testified that when the loan went into default he was authorized by the other two investors to act on their behalf to collect the money. He was able to dispose of some of the Omar shares which were in his own RRSP account at C \GRS\23290\018\HEARING,DOG

6 -6- Wolverton and the statement of Apkl 30, 1993 on that account shows that on April 29th he exchanged 160,000 Omar shares for 32,000 Pilgrim Resource Corporation shares with a market value of $12,800. Presumably he had already disposed of 40,000 of the Omar shares. In the meantime, he had been trying to get Willis to hand over the other 400,000 shares which were supposed to have been put up as collateral for the benefit of the other two lenders. His evidence is that he made a number of efforts to get Willis to produce the 400,000 shares. At first Willis refused unless he was paid some money, to which he felt he was entitled as "a finder's fee" - presumably money,allegedly owing to him by Omar. In the end, about August, 1993, Willis sent Wilson an envelope which was supposed to contain the rest of the share certificates (beyond the 200,000 shares delivered to Wolverton). When the certificates were checked Wilson discovered certificate 588 for 33,335 shares (listed in the letter of September 4, 1990 referred to above) was missing. At first Willis claimed he knew nothing about the missing certificate. Subsequently the investigator, Verhelst (as he testified) spoke to Willis. The latter said he had never had that certificate in his possession. However, when Verhelst pursued his enquiries, he learned that share certificate 588 had been delivered by Willis to one Frank Evison as collateral for a $2,000 loan. Willis did not repay the loan, so Evison had the shares put into his brother's account and sold so he could collect the money. Verhelst testified that on September 9, 1994 he spoke to Willis again. This time Willis admitted he had taken certificate 588 and used it as collateral security. Verhelst's evidence is that in a telephone conversation he had with Willis on May 26, 1994 the latter confirmed that 200,000 shares had been deposited into Mr. Wflson's RRSP account and the rest of the shares had been put into Willis' safety deposit box. He had no explanation as to why he did not deliver them to Wolverton. He claimed that everybody (i.e. the investors) knew the shares were going to be in G \GRS\23290k013\HEARI]_G,DOG

7 -7- the safety deposit box_ He said the 400,000 shares in the safety deposit box were safe enough. On September 9, 1994 Verhelst spoke to Willis again on the telephone. This time he admitted that he had taken certificate 588 and used it as collateral security. 2. DECISION The evidence presented satisfies the Panel that Wilson, Lawrence and Bentley loaned $65,000 to Omar on the basis that 200,000 shares of Omar would be held by Wolverton in trust for each of the three as collateral security for repayment of the portion of the loan made by each of them. Omar sent street certificates for 600,890 shares on that basis. The evidence is that Willis broke the condition imposed by Omar in two respects: he delivered 200,000 shares to Wolverton, into Wilson's account, without any written agreement between Wolverton, Wilson and Omar as to the basis on which the shares were to be held. That arrangement was satisfactory, presumably to Wilson but it did not satisfy Omar's conditional delivery of the shares. Willis put the remaining certificates in his own safety deposit box. Verhelst testified as to Willis' admission in that regard, as well as Willis' admission that he had used certificate as collateral security for his own debts. Verhelst's investigation confirmed what had happened to certificate 588. Wilson's evidence established that about April, 1993 Willis delivered most of the remaining 400,890 shares to him. Whoever drafted the Citation may possibly have assumed that if Willis had opened accounts for Lawrence and Bentley at Wolverton and deposited the appropriate Omar share certificates (as was done in the case of Wilson) that would have been sufficient. In fact, in the view of the Panel, the obligation on Willis when he received the 600,890 shares was to deliver them in trust to Wolverton as Omar's letters said. Just how Wolverton would have set up such a transaction i.e. whether separate accounts would have been required for the other two lenders and what C \G RS",23290\013\}_EARI]qG DOC

8 -8- documentation would have been required is not known to the Panel. What is known is that 200,000 of the shares were just put into Wilson's account as a cash swap and the other 400,890 shares were put into Willis' safety deposit box. Paragraph 3 of the Citation says: "By f_iling to insure that all of the share certificates of Omar were deposited into an account with Wolverton when he received those share certificates and when he left the securities industry as described in paragraph 1 and 2 above, Willis committed an infraction pursuant to By-law 5.01(1) formerly 5.01(b)." By-law 5.01(b) which was in force in September, 1990 provided: "5.01 'Infraction' in this by-law means: (b) any conduct, proceeding or method of business not expressly provided for in the bylaws, rules or regulations which is unbecoming or inconsistent with just and equitable principles of trade or detrimental to the interest of the Exchange or the pubhc." There is a typographical error in paragraph 3 of the Citation wherein the present equivalent of 5.0 l(b) is said to be 5.01(1). It should be 5.01(2). The Panel finds that when Willis, having secured the certificates covering 600,890 shares of Omar on the express basis that they were to be held in trust for Wolverton Securities as collateral for the loan of $65,000 and failed to dehver any of them in trust to Wolverton (though he did dehver 200,000 to Wolverton to deposit in Wilson's account) was guilty of an infraction of By-law 5.0 l(b), his conduct being detrimental to the interest of the public. C:\GRS\23290\013\HEARING DOG

9 -9- The Panel is prepared to hear submissions as to penalty at a time convenient to counsel and to Willis, if he wishes to appear and to the Panel. DATED this _3 "day of June, 1995 at the City of Vancouver, in the Province of British Columbia. _? I- G.I_. SCHMITT, Q.C., Chairman "1 ] DAVID B. ELLIOTT, Member I" x_,./3//f,..: -._OHN_. GIG_IOTTI, Member C.\GRo\._290,0I3\HEARLNG DOC