ALBERTA SECURITIES COMMISSION SETTLEMENT AGREEMENT AND UNDERTAKING

Transcription

1 ALBERTA SECURITIES COMMISSION SETTLEMENT AGREEMENT AND UNDERTAKING Citation: Re MacKenzie, 2016 ABASC 161 Date: Docket: ENF Securities Act, R.S.A. 2000, c. S-4, as amended (Act Matthew Cory MacKenzie Agreed Facts Introduction 1. Staff of the Alberta Securities Commission (Staff and Commission, respectively conducted an investigation into the periodic disclosure by Poseidon Concepts Corp. (Poseidon regarding its business and affairs, to determine if Alberta securities laws had been breached. 2. The investigation confirmed, and Matthew Cory MacKenzie (MacKenzie admits that he breached those sections of the Act referred to in this Settlement Agreement and Undertaking (Agreement, and that in so doing he acted contrary to the public interest. 3. Solely for securities regulatory purposes in Alberta, and elsewhere in Canada, and as the basis for the settlement and undertakings referred to in paragraph 37, MacKenzie agrees to the facts and consequences set out in this Agreement. 4. Terms used in this Agreement have the same meaning as provided in the Alberta securities laws, a defined term in the Act. Parties 5. MacKenzie is an Alberta resident. He was the Chief Financial Officer of Poseidon from November 1, 2011, to December 27, He was one of the persons responsible for reviewing Poseidon s periodic disclosure, including interim and annual financial statements and applicable Management Discussion and Analysis (MD&A. 6. MacKenzie was also responsible for executing certificates on behalf of Poseidon, affirming that: 6.1 he had established and maintained disclosure controls and procedures (DC&P and internal controls over financial reporting (ICFR;

2 2 6.2 he had designed, or caused to be designed under his supervision, DC&P and ICFR; 6.3 he had evaluated, or caused to be evaluated under his supervision, the effectiveness of DC&P and ICFR at the financial year end; 6.4 based on his knowledge, having exercised reasonable diligence, that the interim and annual filings did not contain any untrue statement of a material fact, or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made; and 6.5 based on his knowledge, having exercised reasonable diligence, that the interim financial reports and annual financial statements fairly presented in all material respects the financial condition, financial performance, and cash flows of Poseidon. 7. MacKenzie, Poseidon, Lyle Dennis Michaluk (Michaluk, Clifford Leroy Wiebe (Wiebe, and Joseph Kostelecky (Kostelecky are all respondents to a Notice of Hearing filed by Staff of the Commission on February 6, Poseidon is an Alberta corporation, with its head office in Calgary. Poseidon commenced independent operations in November, 2011, following a corporate reorganization of Open Range Energy Corp. (Open Range. At all material times it was a reporting issuer and its securities were listed for trading on the Toronto Stock Exchange. Its securities were also quoted on the Over-The-Counter Market in the U.S.A. (US and in Frankfurt, Germany. 9. Kostelecky commenced employment with Open Range in late He was a senior VP of Poseidon until May 2012, when he was appointed Executive VP. At all material times, Kostelecky was responsible for sales and operations for Poseidon s wholly-owned subsidiary in the US. 10. On April 9, 2013, Poseidon (and related entities was granted creditor protection by the Court of Queen s Bench of Alberta through the Companies Creditors Arrangement Act. Poseidon has, effectively, ceased carrying on business. Circumstances Poseidon s Business 11. Poseidon s business involved the construction and rental of storage tanks for fluid handling in the oil and gas industry in Canada and the US. Along with its Calgary office, it had offices in the US in Denver, Colorado and Dickinson, North Dakota. 12. Poseidon s tank rental business existed prior to the reorganization. Poseidon recognized tank rental revenue from two types of customer arrangements, day-to-day and long-term. Long-term arrangements (Contracts were primarily used in the US market. By design, Contracts were to provide customers with assured access to tanks at a specific price for a

3 3 defined period of time. In such a long-term scenario, Poseidon believed that customers were obligated to pay Poseidon whether or not they took delivery of or used the tanks. 13. Kostelecky personally negotiated most of the Contracts with Poseidon's US customers. Some Contracts were negotiated by Poseidon's US sales staff under the supervision of Kostelecky. 14. The Contracts were sometimes documented in the form of a Master Service Agreement, Tank Rental Agreement, Lease Term Sheet and/or Field Ticket. Payment terms were sometimes not formalized, and deals were made with customers for different and varied billing conditions. Poseidon s Financials 15. MacKenzie participated with other senior management in regular meetings to consider and discuss the financial condition, financial performance, and cash flows of Poseidon, including meetings specifically designed for the preparation and finalization of quarterly and annual financial statements. 16. On March 22, 2012, Poseidon filed with the Commission its audited consolidated financial statements for the year ended On May 9, 2012, Poseidon filed with the Commission its unaudited interim condensed consolidated financial statements for the three-month periods ended March 31, 2012, and 2011, reporting revenue of $52,129,000. Of that 1 st quarter revenue, approximately 80% was generated in the US, and the remaining 20% in Canada. Accounts receivable as at March 31, 2012, was $83,018,000. These and the other quarterly statements were reviewed by Poseidon's auditors. 18. On August 8, 2012, Poseidon filed with the Commission its unaudited interim condensed consolidated financial statements for the three and six months ended June 30, 2012, and 2011, reporting revenue of $54,875,000 for the 2 nd quarter and $107,004,000 for the 1 st and 2 nd quarters. Of that 2 nd quarter revenue, approximately 94% was generated in the US and 6% in Canada. Accounts receivable as at June 30, 2012, was $118,641, On November 14, 2012, Poseidon filed with the Commission its unaudited interim condensed consolidated financial statements for the three and nine months ended September 30, 2012, and 2011 (Q3 Financial Statements, reporting revenue of $41,116,000 for the 3 rd quarter and $148,120,000 for the first three quarters. Approximately 84% of the 3 rd quarter revenue was generated in the U.S., and 16% in Canada. Accounts receivable as at September 30, 2012, was $125,516, Revenue recognized by Poseidon from the Contracts represented 60% or more of its total revenue in fiscal For the interim statements described above, MacKenzie, along with Poseidon s other certifying officer, Michaluk, certified that:

4 he was responsible at Poseidon for establishing and maintaining DC&P and ICFR; 21.2 he designed ICFR, or caused it to be designed under his supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Poseidon s GAAP; 21.3 based on his knowledge, having exercised reasonable diligence, the interim filings did not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that was necessary to make a statement not misleading in light of the circumstances under which it was made; and 21.4 based on his knowledge, having exercised reasonable diligence, the interim financial reports fairly presented in all material respects the financial condition, financial performance, and cash flows of Poseidon. Poseidon s Accounts Receivable 22. In the first quarter and second quarters of 2012, MacKenzie, among other management, became increasingly concerned with Poseidon s aging accounts receivable. To address this, and to handle the explosive growth of the business in the US, senior management hired an internal legal counsel, invoicing clerk, additional accounting staff (primarily in the US, an internal controls specialist, and an operations controller (OC. The goals were to assist in the collection of outstanding accounts receivable and to improve the invoicing and field ticket processes. 23. Beginning in September 2012, and through to the completion of the Q3 Financial Statements, MacKenzie participated in discussions with senior management, members of Poseidon's board of directors and audit committee, and Poseidon's auditors, regarding its US accounts receivable. 24. By October 2012, an accounts receivable spreadsheet prepared by the OC showed approximately $100 million in US accounts receivable, including approximately $70 million related to Contracts. Concerns were expressed by the OC during this time regarding collectability of these accounts. Senior management were repeatedly given written and verbal assurances by Kostelecky that the US accounts receivable were collectable. 25. Senior management discussed with Poseidon s board of directors, audit committee and auditors immediately prior to the completion and filing of the Q3 Financial Statements a bad debt expense for some of the accounts receivable. Ultimately, Poseidon recorded a bad debt expense of $9.5 million in the Q3 Financial Statements. 26. Following the release of its Q3 Financial Statements, Poseidon continued to focus on collections and on December 27, 2012 Poseidon announced that it had established a special committee of the board of directors to review and address, among other things, Poseidon's accounts receivable.

5 5 27. On February 14, 2013, Poseidon announced that its first, second, and third quarter 2012 unaudited interim condensed consolidated financial statements (collectively, Financial Statements would be restated, and that investors should no longer rely on them or the related MD&A. Poseidon and its then financial advisors had determined, primarily related to the Contracts, that: 27.1 approximately $95 million to $106 million of Poseidon s $148.1 million in revenue for the nine months ended September 30, 2012, should not have been recorded as revenue in the Financial Statements; and 27.2 approximately $94 million to $102 million of Poseidon s $125.5 million in accounts receivable as at September 30, 2012, should not have been recorded as accounts receivable in the Financial Statements. 28. MacKenzie admits, for the reasons above, that the Q3 Financial Statements were not prepared in accordance with Canadian Generally Accepted Accounting Principles applicable to publicly accountable enterprises (GAAP. 29. MacKenzie further admits that certain statements he certified in the certificates he executed for Poseidon s first, second, and third quarter interim filings, were false or misleading: 29.1 the Q3 Financial Statements did not fairly present in all material respects the financial condition, financial performance, and cash flows of Poseidon as of the date of and for the periods presented in those filings; 29.2 the first, second, and third quarter interim filings, omitted to state a material fact required to be stated or that was necessary to make the statement not misleading that internal controls over the revenue cycle were lacking; and 29.3 there was a lack of segregation of duties and compensating controls in the design of ICFR, especially with respect to Kostelecky. Admitted Breaches of Alberta securities laws (Admitted Breaches 30. Based on the Agreed Facts, MacKenzie admits: 30.1 he authorized, permitted, or acquiesced in the breach by Poseidon of its periodic disclosure reporting obligation to file an interim financial report for the third quarter of 2012 prepared in accordance with GAAP; 30.2 he breached section 5.1 of National Instrument Certification of Disclosure in Issuers Annual and Interim Filings (NI , by executing and filing an interim certificate for the third quarter of 2012 that wrongly affirmed the Q3 Financial Statements fairly presented in all material respects the financial condition, financial performance, and cash flows of Poseidon;

6 he breached 5.1 of NI by executing and filing interim certificates for the first, second, and third quarters of 2012 that wrongly affirmed he had designed ICFR, or caused it to be designed under his supervision, that would provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Poseidon s GAAP; and 30.4 his conduct, described above, was contrary to the public interest. Circumstances Relevant to Settlement 31. Poseidon had the same DC&P and ICFR in place for Canada and the US. The problems experienced by Poseidon related to the US operations and to the Contracts. 32. MacKenzie relied on Kostelecky and Poseidon s US accounting and operations groups to follow the revenue cycle signed agreement and/or field ticket, defined terms, and invoice. 33. MacKenzie states that at no time did he deliberately or intentionally intend to contravene Alberta securities laws. 34. This Agreement is critical to the resolution of the civil claims in Canada and the US against Poseidon and its directors, officers and employees. 35. MacKenzie has not been previously sanctioned by the Commission and cooperated with Staff during the investigation. 36. This Agreement has saved the Commission the time and expense associated with a contested hearing under the Act. Settlement and Undertakings 37. Based on the Agreed Facts and Admitted Breaches, MacKenzie agrees and undertakes to the Executive Director of the Commission to: 37.1 pay to the Commission the amount of $150,000, for settlement and investigation and legal costs incurred by Staff; and 37.2 resign all positions he may have as a director or officer of a reporting issuer and to refrain for a period of 7 years from becoming or acting as a director or officer, or both, of a reporting issuer. Administration 38. MacKenzie acknowledges that he received independent legal advice and that he has voluntarily made the admissions and undertakings in this Agreement. 39. MacKenzie acknowledges and agree that the Commission may enforce this Agreement in the Court of Queen s Bench or in any other court of competent jurisdiction.

7 7 40. MacKenzie waives any right existing under the Act, or otherwise, to a hearing, review, judicial review or appeal of this matter. 41. Execution and fulfillment of the terms of this Agreement by MacKenzie resolves all issues involving MacKenzie relating to the conduct described above, and Staff will take no further steps against him arising from these facts. 42. This Agreement may be executed in counterpart. Signed by Matthew Cory MacKenzie at Calgary, Alberta this 24 day of March 2016, in the presence of: Susan G. Leniczek WITNESS NAME Original Signed By SIGNATURE Original Signed By Matthew Cory MacKenzie ALBERTA SECURITIES COMMISSION Calgary, Alberta, 15 June 2016 Original Signed By Cynthia J. Campbell, Director, Enforcement for David C. Linder, Q.C., Executive Director