ALBERTA SECURITIES COMMISSION

DECISION

(Merits)

2008 ABASC 363 (*)

Citation: Workum and Hennig, Re, 2008 ABASC 363 Date: 20080607

Theodor Hennig, Peter Jay (or J.) Workum, Cheshire Capital Inc., Lexington Capital Corp., Strategic Investments Fund and Ashland Holdings Corp.

Panel: Glenda A. Campbell, QC Jerry A. Bennis, FCA Stephen R. Murison

Appearing: D. Young, A. Neapole and C. Anderson for Commission Staff

J. Groia and K. Richard for Peter Workum

J. James

for Theodor Hennig

Hearing Dates: 22 and 23 December 2003; 1, 2, 3, 4 and 7

June, 6, 7, 8, 12, 14, 15, 18, 19 and 21 October,

and 3, 4, 5, 8, 9, 15, 17, 18 and 19 November

2004; 8 and 9 September 2005; 1, 2, 3, 4, 10

and 11 May, 31 October and 3, 6 and 7

November 2006; and 8 January 2007

Decision: 7 June 2008

2918474.1

THE HEARING
BACKGROUND
Table of Contents
2008 ABASC 363 (*)
PART ONE INTRODUCTION
1. The Respondents
  1. Workum
  2. Hennig
  3. Corporate Respondents
2. PPI
  1. The Company and its Business
  2. Directors and Management
  3. Subsidiaries and Significant Shareholders
  4. PPI's Auditors
3. Other Entities
  1. ASCOOP
  2. Azterra
  3. Cofima
  4. Commcept
  5. Creative Classics
  6. EnerGCorp
  7. IIC
  8. LynChris
  9. Mandolin
  10. Newmex
  11. Orion
  12. PE Holdings
  13. SPIDA
  14. Swiss Plastering
  15. Triad
  16. Willow Creek
PRELIMINARY AND EVIDENTIARY CONSIDERATIONS
1. Misnamed Corporate Respondent
2. Standard of Proof
3. Credibility of Certain Witnesses
  1. Olnick
  2. Mackenzie
  3. Schöni
  4. Foscolos
  5. Charlton
4. Reliability of Documentary Evidence
  1. Contention of the Individual Respondents
  2. PPI-Sourced Documentary Evidence
  3. Conclusion on Documentary Evidence
  4. Documentary Evidence from Olnick
    
    i
  5. Staff-Prepared Summaries
5. Scope of Investigation Not Unfair
6. Witnesses Potentially Opposed in Interest
7. Expert Testimony
  1. Commission Chief Accountant as Expert
    2008 ABASC 363 (*)
  2. Expert Evidence Relating to Securities Trading
8. Relevance of "Hindsight" or Subsequent Developments
9. Sharing of Office Premises
10. Adverse Inference against Individual Respondents

PART TWO

THE FINANCIAL DISCLOSURE ALLEGATIONS

FINANCIAL DISCLOSURE ALLEGATIONS SUMMARIZED
POSITIONS OF THE PARTIES
1. Position of Staff
2. Position of the Individual Respondents
3. Findings On Financial Disclosure Allegations Summarized
FINANCIAL DISCLOSURE ISSUES
FACTS CONCERNING FINANCIAL DISCLOSURE
1. Overview
  1. Summary of Pertinent Financial Disclosure
    1. General Presentation
    2. Summary Table
    3. Newmex Transaction and PPI's 1998 Financial Statements
    4. Orion Transaction and PPI's 1999 Financial Statements
    5. Azterra Transaction and PPI's 2000 Financial Statements
  2. Subsequent PPI Financial Statements
2. The Newmex Transaction
  1. Summary Description
  2. Newmex Transaction Announced
  3. Elements of the Newmex Transaction
    1. Documents Relevant to Newmex/ASCOOP Transaction
    2. Terms of Newmex/ASCOOP Transaction
    3. Documents Relevant to Newmex/LynChris Transaction
    4. Background to Newmex/LynChris Transaction
    5. Terms of Newmex/LynChris Transaction
  4. Further Developments Preceding Filing of 1998 Financial Statements
    1. Newmex Shares Transferred to ASCOOP and SPIDA
    2. Exchange Requirements and PPI Responses
      1. The Exchange's November 1998 Letter
      2. Second LynChris Addendum
      3. PPI Undertaking to ASCOOP and SPIDA
    3. KPMG's Newmex Opinion
      
      ii
    4. Security for the LynChris Promissory Note
    5. Information Provided to Auditor
  5. PPI's 1998 Financial Statement Presentation of the Newmex Transaction
  6. Effect of Sale on Newmex
    2008 ABASC 363 (*)
  7. Escrow and Funding Obligations
  8. 1999: Addressing LynChris's Concerns
    1. Nature of Concerns
    2. Concerns Addressed
      1. Escrow Expenditures
      2. Security for LynChris Promissory Note
      3. Inducement Shares to Faithfull
      4. Interest and Income Tax
  9. PPI Reacquires Newmex Shares from LynChris
  10. PPI Reacquires Newmex Shares from ASCOOP and SPIDA
3. The Orion Transaction
  1. Summary Description
  2. Elements of the Orion Transaction
    1. Relevant Documents
    2. Background to the Orion Transaction
    3. Two Summary Term Sheets
    4. Orion Shareholders' Meeting
    5. Street Was Paid
    6. KPMG's Orion Opinion
    7. Orion Purchase Agreement
    8. Orion Promissory Note
    9. Orion's Capacity to Satisfy Orion Promissory Note
    10. Security for Orion Promissory Note: Orion Guarantee
  3. Exchange Concerns
  4. Orion CTO
  5. Hudson Client Risk Assessment
  6. PPI's 1999 Financial Statement Presentation of the Orion Transaction
  7. Orion's Accounting for the Orion Transaction
  8. Contingencies Remaining after PPI Filed 1999 Financial Statements
  9. Efforts to Sort Out the Orion Transaction
    1. Testimony of Foscolos
    2. Testimony of Charlton
  10. August 2001: Orion Amendment Agreement
  11. Demand for Payment
  12. Outcome of the Orion Transaction
4. The Azterra Transaction
  1. Summary Description
  2. Elements of the Azterra Transaction
    1. Relevant Documents
    2. Background and Context of the Azterra Transaction
      
      iii
    3. Azterra Letter Agreement
    4. Azterra Transaction Announced
    5. PPI Deals with Azterra Debts
    6. Consideration for Willow Creek and Creative Classics
      1. Azterra Shares
        2008 ABASC 363 (*)
      2. Azterra Promissory Notes
    7. Security for Azterra/Creative Classics Promissory Note
    8. First Azterra Amendment
    9. Effect on Willow Creek and Creative Classics
  3. Azterra Share Trading Halted
  4. Hudson Client Risk Assessment
  5. PPI's 2000 Financial Statement Presentation of the Azterra Transaction
  6. Azterra's Accounting for the Azterra Transaction
  7. Valuation Shortfall
  8. Other Contingencies Remaining after PPI Filed 2000 Financial Statements
  9. Further Agreements and Amendments
    1. Formal Azterra Agreement
    2. Second Azterra Amendment
    3. Azterra Demand
  10. Outcome of the Azterra Transaction
5. ASC and OSC 2001 Staff Inquiries and PPI's Responses
  1. ASC Staff and OSC Staff Concerns
  2. PPI's Responses
    1. Newmex Transaction
    2. Orion Transaction
    3. Azterra Transaction
  3. Auditor's Response
6. August 2001 Changes to the Orion and Azterra Transactions
7. Subsequent PPI Financial Statement Disclosure
  1. 2001 Restatements
  2. Hudson Withdraws Audit Opinions
  3. 2002 Financial Statements
8. PPI Take-over Bids
FINANCIAL DISCLOSURE ALLEGATIONS: ANALYSIS
1. Issues
2. GAAP and Alberta Securities Laws
  1. GAAP
    1. Relevance of GAAP
    2. Exercise of Judgment
    3. Relevant Handbook Provisions and Abstracts
    4. Timeliness Not a Compelling Explanation
  2. Misrepresentation in Financial Statements
3. Preliminary Matters Considered
  1. Use of "Hindsight" in our Analysis; New Management Motivations
    
    iv
    1. General
    2. The Post-Year-End/Pre-Filing Interval
    3. Other After-Arising Information Not Relevant
      1. Hudson Withdrawal of Audit Opinions
      2. 2002 Information
        2008 ABASC 363 (*)
  2. No Estoppel
  3. Perfection Not the Test
  4. Auditors and Auditing Standards Not at Issue
4. Motivation for the Transactions
  1. Evidence Concerning Motivation
  2. Conclusions on Motivation
5. Did PPI's 1998 Financial Statements Fairly Represent the Newmex Transaction?
  1. Substance of the Transaction – Bona Fides at Issue
  2. Discussion
    1. BuyBack Arrangements
      1. Importance of the BuyBack Arrangements
      2. Faithfull's Understanding of the LynChris Position
      3. Revised Agreements
      4. BuyBack Arrangements Remained in Place
      5. Retail Return Analogy
    2. Newmex Escrow Conditions
    3. Indicia of Ownership
      1. Economic Risk and Reward
      2. Voting Rights
      3. Management and Control
    4. Effective Date
    5. PPI's 2000 Reacquisition of the Newmex Shares
    6. No Difficult Judgment Required
  3. Newmex Gain Was Material
  4. Findings on Newmex Transaction and PPI's 1998 Disclosure
6. Did PPI's 1999 and 2000 Financial Statements Fairly Represent the Orion and Azterra Transactions?
  1. Nature of the Transactions
  2. Too Many Contingencies
  3. Orion Promissory Note
  4. Azterra's Financial Straits Not Determinative
  5. Azterra Promissory Notes
  6. Orion and Azterra Obligations and Guarantees; Ultimate Payment
    1. Collectability
    2. Anomalies in Cofima Guarantees
    3. Cofima's Ability to Pay
    4. Deceptions Multiplied
    5. Triad
    6. August 2001 Events
    7. Role of ASCOOP
      
      v
    8. Conclusion on Obligations, Guarantees and Ultimate Payments Summarized
  7. Practical Consequences of the Transactions
    1. Orion Transaction
    2. Azterra Transaction
      2008 ABASC 363 (*)
  8. Corroboration from Accounting Evidence
  9. Gains Were Material
  10. Timing and Character of the Eventual Payments to PPI
    1. Timing Was Material
    2. Nature of ASCOOP Payments
  11. Findings on Orion and Azterra Transaction Disclosure
    1. 1999 and 2000 Financial Statements Not GAAP-
      Compliant
    2. Contrary to the Public Interest
7. Misrepresentations in Other PPI Disclosure
8. Individual Respondents' Responsibility
  1. Allegations Levelled against Individual Respondents
  2. Certain Potential Defences Not Applicable or Not Persuasive
    1. No Unfairness from Changed Relationship with PPI
    2. No Improper Piercing of "Separate Corporate Personality"
    3. "Absolute Liability" and "Business Judgment Rule" Not at Issue
    4. "Due Diligence" Not at Issue
  3. Roles and Conduct of the Individual Respondents
  4. Workum
    1. Workum's Activities and Role
    2. Workum Was Closely Involved
    3. Conclusion on Workum's Responsibility
  5. Hennig
CONCLUSION ON FINANCIAL DISCLOSURE ALLEGATIONS

PART THREE UNDISCLOSED FINANCIAL BENEFITS
1. ALLEGATION
  1. Positions of the Parties
    1. Position of Staff
    2. Position of the Respondents
  2. Substance of Allegation and Task of Panel
2. ISSUES
3. FINANCIAL BENEFITS RECEIVED BY INDIVIDUAL RESPONDENTS?
  1. The Evidence
  2. The Offshore Companies – Background
    1. Strategic
    2. Cheshire
    3. Lexington
      
      vi
    4. Ashland
    5. Mandolin
  3. PPI Payments to Offshore Companies
    1. Schöni's Evidence Concerning Cofima and Commcept Commissions
      2008 ABASC 363 (*)
    2. Payment-Generating Transactions
      1. Proposed Harris Agreements
      2. 1998 Debt Offering
      3. April 1998 Private Placement
      4. Newmex Transaction
      5. 1999 Private Placements
        June/July 1999
        August 1999
        October 1999
        1999 Commissions Paid
      6. 2000 Private Placements
        February 2000
        May 2000
        August 2000
        2000 Commissions Paid
      7. March 2001 Private Placement
    3. Consequences of the Surveyed Transactions
  4. Financial Benefits Received by Individual Respondents
    1. Core Offshore Companies and Core Trading Accounts –
      Control and Direction
      1. General
      2. The Evidence
        Schöni/Wick and Bucher Letters and Purported Lines of Credit
        Supposed Origin of Core Offshore Companies
        Supposed Origin of Core Trading Accounts
        Cofima's Financial Statements
        Ownership of the Core Offshore Companies
        Schöni's Recollection of Specific Transactions
        Other Indicators
        Conclusion on Evidence of Ownership
      3. Trading Activity
        Introduction
        Trading Instructions
        Brokerage Statements
      4. Transactions without Involvement or Knowledge of Cofima, Schöni and Wick
        Strategic
        Cheshire
        Lexington
        Summary
      5. Third Party Understandings
        
        vii
      6. Conclusions – Control and Direction
    2. Core Offshore Companies – Payments to or for the Individual Respondents
      1. Purported Loan Arrangement
      2. Payments Made
        2008 ABASC 363 (*)
        Comment on Certain Evidence
        Payments by Strategic
        Cheshire
        Lexington
      3. Conclusions on Payments from Core Offshore Companies
    3. Ashland
      1. Control and Direction
        Source of Payments to Ashland
        Direction and Accounting of Payments from Ashland
      2. Payments Made
      3. Conclusions on Ashland Trading Account
    4. Mandolin
      1. Receipt of Commissions
      2. Payments from Mandolin Offshore Bank Account
        Payments to the Four Trading Accounts
        Payments to Third Parties
      3. Conclusions on Mandolin Offshore Bank Account
    5. Recordkeeping
    6. Conclusions on Financial Benefits
4. DISCLOSURE OBLIGATION, BREACH AND RESPONSIBILITY
  1. Disclosure Made
  2. Disclosure Obligation
  3. Requisite Disclosure Was Not Made
  4. Responsibility
PART FOUR
MARKET MANIPULATION ALLEGATION
1. OVERVIEW OF THE ALLEGATION
2. POSITIONS OF THE PARTIES
  1. Position of Staff
  2. Position of the Respondents
  3. No Adverse Inference
3. THE EVIDENCE
  1. Documentary Evidence
  2. Witness Evidence
    1. Olnick
    2. Horgan
  3. Evidence Relied On
4. BACKGROUND
5. TRADING IN NEWMEX SHARES
  
  viii
  1. Historical Newmex Trading
  2. Olnick's Trading
    1. February Trading
      1. Data
      2. Trading after February Period
        2008 ABASC 363 (*)
      3. Observations on February Period and After
    2. September Trading
      1. Data
      2. Trading after September Period
      3. Observations on September Period and After
6. ISSUES
7. ANALYSIS
  1. The Law
    1. General Principles
    2. Application to Present Case
  2. Was an Artificial Price Created?
    1. Manipulative Trading Techniques
    2. Analysis of Trading Data in Context of Manipulative Techniques
      1. Market Domination
      2. Wash Trades or Match Orders
      3. Closing Trades and "High Closes"
      4. Upticks
      5. Uneconomic Purchasing
      6. Aggregation of Indications
    3. Expert Evidence
    4. Other Developments
    5. No Concerns from Other Trading Overseers
    6. Motive for Olnick's Trading
      1. Market-Making As Motive
        Market-Making Activities
        Analysis
      2. Motive Alleged by Staff – the Newmex Transaction
        Circumstantial Evidence
        The Newmex Transaction
        Reacquisition from LynChris
        Reacquisition from ASCOOP and SPIDA
      3. Conclusion on Motive
    7. Responsibility
      1. Core Offshore Companies
      2. Individual Respondents
    8. Conduct Contrary to the Public Interest
PART FIVE INSIDER TRADE REPORTING
1. THE ALLEGATION
  
  ix
2. POSITIONS OF THE PARTIES
  1. Position of Staff
  2. Position of the Individual Respondents
    1. Position of Workum
    2. Position of Hennig
      2008 ABASC 363 (*)
3. ANALYSIS
  1. The Law
  2. Workum's and Hennig's Trade Reporting Obligations
  3. Relationship of Individual Respondents to the Four Trading Accounts
  4. Insider Reporting Requirement Triggered
4. CONCLUSIONS
  1. Contravention of Alberta Securities Laws
PART SIX MISREPRESENTATIONS TO STAFF
1. THE ALLEGATIONS
2. POSITIONS OF THE PARTIES
  1. Position of Staff
  2. Position of the Respondents
    1. Position of Workum
    2. Position of Hennig
3. ANALYSIS
  1. Preliminary Matters
    1. Essence of the Misrepresentation Allegations: Untruthfulness
    2. Misrepresentation Allegations Not Unfair
    3. Section 194(1)(a) of the Act Not Relevant
    4. Definition of "Misrepresentation" Not Applicable
    5. Knowledge Requirement
    6. Conclusion on Preliminary Matters
  2. Specific Communications
4. CONCLUSIONS ON MISREPRESENTATION ALLEGATIONS
PART SEVEN CLOSING
1. SUMMARY OF FINDINGS
  1. Financial Disclosure
  2. Undisclosed Financial Benefit
  3. Market Manipulation
  4. Insider Trade Reporting
  5. Misrepresentations to Staff
  6. Concluding Remarks
2. SECOND PART OF PROCEEDING
x
PART ONE INTRODUCTION
1. THE HEARING

2008 ABASC 363 (*)

This proceeding originated in allegations made by staff ("Staff") of the Alberta Securities Commission (the "Commission") against Proprietary Industries Inc. ("PPI"), Theodor Hennig ("Hennig"), Peter Jay (or J.) Workum ("Workum"), Cheshire Capital Inc. ("Cheshire"), Lexington Capital Corp. ("Lexington", the corrected name of this respondent, as discussed below), Strategic Investments Fund ("Strategic") and Ashland Holdings Corp. ("Ashland"). We sometimes refer to Workum and Hennig as the "Individual Respondents", and to Strategic, Cheshire, Lexington and Ashland as the "Corporate Respondents".
The allegations were set out in two notices of hearing (the "Notices of Hearing"), both of which were amended on 19 September 2003. In the first such amended notice of hearing (the "First Notice of Hearing", which named PPI, Workum and Hennig as respondents), Staff alleged improprieties in the financial statements of PPI for its financial years ended 30 September 1998, 1999 and 2000 (the "1998 Financial Statements", "1999 Financial Statements" and "2000 Financial Statements", respectively), misrepresentations through further use of that financial statement information, and misrepresentations to Staff. The other amended notice of hearing (the "Second Notice of Hearing", which named as respondents Workum, Hennig, Strategic, Cheshire, Lexington and Ashland) alleged "Secret Commissions", "Market Manipulation", failures to file reports of insider trades, and misrepresentations to Staff. The allegations in the Notices of Hearing pertained to the period from October 1995 through August 2002, when the Individual Respondents left (or had already left) PPI (the "Relevant Period").
A hearing into the merits of Staff's allegations (the "Hearing") began on 22 December 2003. At the start of the Hearing, Staff advised that they were no longer pursuing their allegations in the First Notice of Hearing against PPI. The style of cause of this decision reflects that the Hearing continued in respect of the other respondents –the Individual Respondents and the Corporate Respondents (collectively, the "Respondents").
Workum was represented at the Hearing by legal counsel. Hennig was represented by legal counsel for part of the Hearing only, then represented himself. Staff, too, were represented by legal counsel. For simplicity, we generally make no distinction between positions expressed by an Individual Respondent directly or through his counsel; in the latter case, we often refer to the position simply as that of the respective Individual Respondent (or, as appropriate, as that of both Individual Respondents). Similarly, we refer to positions expressed by Staff through counsel for Staff simply as positions of
Staff. The Corporate Respondents were not represented and did not appear at the Hearing, and therefore took no position on any of the allegations.

2008 ABASC 363 (*)
The Hearing was lengthy and punctuated by several interlocutory motions. Over the course of 38 hearing days we heard from 24 witnesses. Neither Individual Respondent testified. A large volume of documentary and oral evidence was adduced, and we received written and oral submissions from Staff and the Individual Respondents.
Our decision on the merits of the allegations, and our reasons, follow. Our conclusions are summarized as follows:
- the Individual Respondents contravened Alberta securities laws, or acted contrary to the public interest, or both:
  - through their involvement in and responsibility for:
    - the issuance of PPI's 1998, 1999 and 2000 Financial Statements that were not prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and contained misrepresentations; and
    - related misrepresentations in other PPI disclosure;
  - through their involvement in and responsibility for PPI's failure to disclose the Individual Respondents' receipt of financial benefits from commission payments made by PPI;
  - by engaging in a course of conduct that, directly or indirectly, created or might have resulted in an artificial price for securities of Newmex Minerals Inc. ("Newmex");
  - by failing to file required insider trade reports; and
  - by making misrepresentations to Staff; and
- Strategic and Cheshire contravened the Securities Act, R.S.A. 2000, c. S-4 and its predecessor in force until 1 January 2002 (the "Act") and acted contrary to the public interest by engaging in a course of conduct that, directly or indirectly, created or might have resulted in an artificial price for securities of Newmex.
We make no findings on the allegations against Lexington or Ashland.
This proceeding will now move to a second phase to determine whether it is in the public interest to make any orders against any of the Individual Respondents, Strategic or Cheshire.

2008 ABASC 363 (*)
1. BACKGROUND
  1. The Respondents
    1. Workum
Workum was a founding director of PPI and remained a director until his departure in August 2002. He was also PPI's president and chief executive officer ("CEO") from 1993 until August 2002. Workum was the principal directing mind of PPI throughout the Relevant Period. He was apparently a Calgary resident during the Relevant Period.
Hennig is a chartered accountant. He resided in Calgary. From 1993 until August 2002, Hennig was PPI's chief financial officer ("CFO"), secretary and treasurer. Hennig was also a director of PPI from December 2001 until August 2002.
The Corporate Respondents were all apparently incorporated offshore. Their names appeared in connection with financial transactions involving PPI, and they held securities and maintained securities trading accounts. However, the nature and purpose of their activities, and the identities of those who controlled or directed the Corporate Respondents or had interests in them and their assets, were the subject of dispute between Staff and the Individual Respondents. These disputes were central to some of Staff's allegations, and we have made findings on those points where appropriate.
1. PPI
  1. The Company and its Business
PPI was incorporated in Alberta on 8 July 1993 as 572571 Alberta Ltd. Its name changed in August 1993 to Proprietary Energy Industries Inc. and then, in June 2000, to Proprietary Industries Inc. We refer to the company under any of its names as "PPI". PPI's head office was in Calgary. During the Relevant Period, PPI (directly or through its subsidiary EnerGCorp, Inc. ("EnerGCorp")) also maintained a United States ("US") office in the vicinity of Phoenix, Arizona.
PPI's financial year ended on 30 September of each year during the Relevant Period.
PPI was organized as a junior capital pool ("JCP") company under a forerunner to the capital pool company program. PPI became a reporting issuer in Alberta on 16 December 1993 by filing and receiving a receipt for a final prospectus for its initial public offering of common shares ("PPI Shares"). Beginning on 29 December 1993, PPI
2008 ABASC 363 (*)
Shares were listed on the Alberta Stock Exchange (later the Canadian Venture Exchange, predecessor to today's TSX Venture Exchange; for simplicity we refer to it in this decision as the "Exchange"). Obtaining regulatory approval for its JCP "major transaction" (an acquisition of oil and gas interests) in March 1994, PPI sought further opportunities in the oil and gas industry. At the time of its major transaction PPI also completed a private placement of securities to a Swiss institution, the Pensionskasse der ASCOOP ("ASCOOP"), beginning or deepening a relationship with that entity. In 2001 PPI described its business strategy as follows:

. . . to incubate and develop profitable businesses in its areas of interest, being natural resources, merchant banking and real estate. Its goal is to ultimately carry on its businesses through separate public companies, with [PPI] emerging as the parent holding company and operating primarily as a merchant bank.
In April 1999 PPI moved its listing to the Toronto Stock Exchange (the "TSE"). Beginning in December 2000, PPI Shares were included in the TSE 300 Composite Index.
In 2001 PPI gained eligibility to use the short-form prospectus distribution system. In that connection, PPI prepared its (revised) initial annual information form, dated 12 February 2001 and identified as being for its 2000 financial year (the "2000 AIF"), which it filed on the SEDAR electronic disclosure filing system on 26 February 2001.
The founding directors of PPI were Workum, Andrew Mackenzie ("Mackenzie"), Robert McPherson ("McPherson") and Douglas Street ("Street"). Its initial management team consisted of Workum, Hennig and, as vice-president, operations, Timothy Hamilton ("Hamilton").
The PPI board of directors grew. At various times during the Relevant Period, PPI directors included: Workum; Hennig; Rolf Brunner (who was apparently a partner of a Swiss entity, CommCept Ltd. (also spelled Commcept; we refer to it as "Commcept")); Hans Buser ("Buser", who was apparently a vice-president of ATAG Ernst & Young in Switzerland and was apparently also associated with ASCOOP and with the SPIDA Ausgleichskasse ("SPIDA")); Jean-Claude Düby (also sometimes spelled Dueby; we refer to him as "Düby"), who was apparently the president of ASCOOP; Donald Holmstrom; Peter Joss (who was apparently the vice-chairman of ASCOOP); Conrad Kathol; Mackenzie; McPherson; Charles Raymond; Edward Sampson; Grant Sardachuk; Street; Peter White; and Christian Zimmermann (who was apparently a partner and vice-president of Commcept).
Workum and Hennig took leaves of absence from their management positions in July 2002 and stood aside from deliberations of PPI's board of directors after that time. They resigned or were dismissed from all their positions with PPI later that summer. We refer to the PPI management team that replaced them as "New Management".

2008 ABASC 363 (*)
PPI held interests (directly or indirectly, including through EnerGCorp) in several companies, businesses and properties. PPI financed its operations to a large extent by raising money through sales (private placements) of PPI Shares. ASCOOP (to which PPI had issued shares to acquire EnerGCorp) was a frequent and significant investor in these private placements. As a result, ASCOOP's shareholding in PPI was significant enough to render it and PPI "related parties" for accounting purposes.
During the Relevant Period, PPI's financial statements were audited by the firm identified variously as "Hudson & Company", "Hudson & Company Chartered Accountants" and "Hudson & Co., Hodges Scott"; for simplicity, we refer to the firm as "Hudson". Hudson was appointed auditor of PPI commencing for PPI's 1998 financial year.
Hudson replaced as PPI's auditor James Forbes ("Forbes"). Forbes apparently retained a senior role in the PPI audit for PPI's 1998, 1999 and 2000 financial years, including taking charge of the majority of the "field work" under a contractual arrangement with Hudson, eventually joining Hudson formally as a manager. Forbes worked from an office in PPI's Calgary premises.
Hudson was replaced as PPI's auditor by Mintz & Partners LLP ("Mintz") for PPI's 2002 financial year.
1. Other Entities
  1. ASCOOP
ASCOOP appeared to have been a Swiss pension fund. ASCOOP was a significant investor in PPI – one of its largest shareholders and a frequent subscriber to PPI private placements.
As noted, PPI director Düby was an ASCOOP principal and PPI director Buser was apparently associated with ASCOOP.
The Azterra Corporation ("Azterra") was formed in approximately 1996 to take advantage of real estate opportunities in the Phoenix area. Its founders included several Albertans. One of them, Azterra CEO Patrick Fitzsimonds ("Fitzsimonds"), testified in the Hearing. Fitzsimonds stated that Azterra acquired a listing on the Exchange through
2008 ABASC 363 (*)
a reverse take-over. Azterra owned a subsidiary, Azterra Equities, Inc. ("AEI"), which in turn apparently owned a number of other US subsidiaries. Azterra had developed a real estate project (operated through a limited partnership and referred to in some of the evidence as the "Polo Club", an abbreviated version of a longer formal name), which by 2000 Fitzsimonds thought was worth over US$21 million.
According to Fitzsimonds, by 2000 – approximately the time that Azterra became involved with PPI – Azterra's financial position was dire: it had no cash and was "in deep trouble".
Cofima Finanz AG ("Cofima") was apparently a Swiss financial intermediary that brought together – for a fee – businesses seeking finance and clients with money to invest. Cofima's chairman, Gilbert Schöni (also spelled Schoeni; we refer to him as "Schöni"), testified that he founded Cofima in approximately 1990 and left the company "towards 2002". Pedro Wick ("Wick"), a friend of Schöni, joined Cofima in the mid-1990s as a 50% partner. Schöni sold his 50% interest in Cofima to Wick in 2000 or 2001. Cofima was involved in several PPI private placements.
Commcept was apparently a Swiss entity engaged in financial intermediation and strategy. It, too, brought together – for a fee – businesses seeking funds and investors with money to invest. Commcept was involved in some PPI private placements.
At one time Workum apparently worked as a consultant for Commcept. Workum described himself, in his curriculum vitae as at 20 November 2001, as a "Contract business analyst and equity underwriting consultant" for Commcept from "1997 to present", which was not inconsistent with an unsigned copy of a 23 October 1997 letter in evidence, addressed to Workum from Commcept, the subject line of which read "Re: Employment Contract" and which contemplated his beginning "Strategic Planning and Operations Analyst" work for Commcept not later than 1 December 1997.
The Creative Classics Company Inc. ("Creative Classics") was a housebuilder in Arizona. It was a subsidiary of EnerGCorp and, therefore, an indirect subsidiary of PPI.
EnerGCorp, as noted, was an Arizona-based subsidiary of PPI. Among other things it owned several subsidiaries with US businesses, which were thus indirect subsidiaries of PPI. Workum spent a good deal of his time working from EnerGCorp's office.
There was little information about the organization, form or structure of the International Investment Club ("IIC"). It did, however, maintain a bank account with a chartered bank in Calgary, for which Hennig apparently had sole signing authority (the "IIC Bank Account").
LynChris Holdings Inc. ("LynChris") was a private corporation that held investments for a Calgary businessman, Ron Faithfull ("Faithfull"). Faithfull was its president.
Mandolin Inc. ("Mandolin") was another offshore-incorporated company. The locus of its ownership and control was in dispute. Certain money and financial transactions passing through accounts of Mandolin were at issue in this proceeding.
PPI described Newmex as the vehicle through which PPI conducted its mining activities. PPI apparently acquired majority ownership of Newmex (at the time named Kilo Gold Mines Ltd. ("Kilo")) in exchange for a mining property, in a transaction announced in April 1998. The consideration received by PPI included common shares of Newmex ("Newmex Shares") and an option (the "PPI Newmex Option") to acquire 475 875 additional Newmex Shares at an exercise price of $1.00 per share. A copy of a 22 April 1998 "Stock Option Agreement" between Newmex and PPI, which appeared to govern the PPI Newmex Option, specified that the option "shall" be exercised by 22 April 2000, although Newmex's management information circular for a 29 June 1998 shareholders' meeting (the "Newmex 1998 Circular") indicated that the option would expire on 1 April 2003. Newmex Shares were listed on the Exchange. Most of PPI's Newmex Shares were subject to a performance escrow, with the shares releasable as money was spent on the transferred mining property or if its value reached a specified threshold.
According to the Newmex 1998 Circular, the company had four directors: Workum (a director since 1995 and also president of the company); Hennig (a director since 1995 and also vice-president, finance); and two other longer-serving directors. Workum and Hennig were the sole executive officers and received consulting fees from Newmex through a private corporation (for Workum) and a professional corporation (for Hennig). Newmex operated, during the Relevant Period, from PPI's Calgary premises.
Orion Resource Corporation ("Orion") was formed in approximately 1997 as a JCP company. It ventured into the oil and gas business, without apparent success. In 1999 it had US oil and gas assets and associated indebtedness.

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Street, a founding director of PPI, was also a founder of Orion and (personally or through another private company) its principal shareholder before the events discussed below. His wife was also an Orion director. We refer to Street, his wife and Street's private company together as the "Street Group". Orion's auditor was Forbes. Orion, and Street, operated from PPI's Calgary premises.
Proprietary Energy Holdings Inc. ("PE Holdings") was a company of which Workum was the president and Hennig the secretary.
SPIDA was apparently a Swiss entity with access to, or control and direction over, a fund of money. It was associated with ASCOOP in certain transactions involving PPI.
Swiss Plastering and Interiors, Inc. ("Swiss Plastering") was a private company based in Phoenix, Arizona. It provided plastering services to builders of new homes, and manufactured a plaster product sold in British Columbia ("BC") and the western US. It was a subsidiary of EnerGCorp and, therefore, an indirect subsidiary of PPI.
We know little about Gruppo Triad FFC, S.P.A. ("Triad") other than that it appeared to have been an entity based in Panama. Schöni identified himself to Ryan King ("King"), a PPI staff member, as Triad's president. Documentary evidence identified Wick as Triad's general agent and official representative. Triad executed documents purportedly bolstering certain security granted by Cofima in support of obligations incurred by Orion and Azterra.
Willow Creek Homes Inc. ("Willow Creek") was a PPI subsidiary that manufactured modular homes from a facility in Alberta.
1. PRELIMINARY AND EVIDENTIARY CONSIDERATIONS
1. Misnamed Corporate Respondent
Counsel for Workum correctly pointed out that the Second Notice of Hearing named Lexington Capital Ltd., not Lexington Capital Corp., as a Respondent in this proceeding. This inaccuracy apparently resulted from a mistake that was made when the
company opened its securities trading account with a brokerage firm in June 2000. The account-opening documentation was completed in the name of Lexington Capital Ltd., which incorrect name was apparently used until it was corrected on the account's transfer to a different brokerage firm in 2001.

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Although the Second Notice of Hearing incorrectly named Lexington Capital Ltd. as a Respondent and some of the allegations therein referred to the company by that name, we perceived no confusion on the part of any party or witness that the activities undertaken in Lexington's securities trading account (whether or not in the correct name) were those under scrutiny in this proceeding.
The Individual Respondents did not raise the issue of the incorrect naming of that Corporate Respondent until their written argument at the conclusion of the Hearing. Staff in their written reply advised that, because they were not seeking any sanction against Lexington, they did not apply to amend the style of cause of the Second Notice of Hearing and further, given that there was no misunderstanding or prejudice regarding the identity of Lexington, they saw no issue.
We agree. We discern no prejudice to any party or witness as a result of the misnaming of Lexington in the style of cause of the Second Notice of Hearing. For accuracy, we identify this Respondent as Lexington Capital Corp. in the style of cause of this decision and refer to it simply as "Lexington".
1. Standard of Proof
Workum suggested in closing argument that a standard of proof higher than the civil standard might be called for in this proceeding, and urged the panel to consider applying the criminal law standard of proof beyond a reasonable doubt.
We disagree. The law is clear as to the applicable standard. In Commission administrative enforcement proceedings Staff have the burden of proving their allegations on the "balance of probabilities" civil standard.
However, we are mindful that, in a Commission proceeding such as this, respondents against whom a panel sustains some or all of Staff's allegations may face serious consequences, such as constraints on the respondents' future ability to participate in the Alberta capital market, associated effects on the manner in which they earn their livelihood, and exposure to monetary sanctions and costs orders. Consequently, the principle of fairness requires the panel's careful scrutiny of the evidence in deciding whether allegations have been proved to the applicable standard. That is, before reaching a conclusion of fact, we require clear and convincing proof based on cogent evidence (see Re Ironside, 2006 ABASC 1930 at paras. 90-93).
Here, therefore – in the face of the serious allegations against the Respondents and the potentially serious consequences for them – we have taken this particular care in our assessment of the evidence in applying the balance of probabilities standard.

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1. Credibility of Certain Witnesses
An essential part of the task of a decision-making panel in an administrative proceeding such as this is to assess the credibility of witness testimony. Credibility was an important issue in the Hearing. We set out here some of our observations about certain witnesses.
1. Olnick
Glenn Olnick ("Olnick") was a securities salesperson or broker in Vancouver. He worked for several securities dealer firms in Vancouver. From at least 1995, Olnick was employed by McDermid St. Lawrence Chisholm Ltd. and its successors McDermid St. Lawrence Securities Ltd., Goepel McDermid Inc. and Raymond James Ltd.; for simplicity we refer to this firm, in its various incarnations, as "McDermid". In 2001 Olnick moved to Haywood Securities Inc. ("Haywood") and remained there until his resignation in 2002. We refer to McDermid and Haywood together as the "Brokerage Firm". Olnick handled securities trading and money for accounts of the Corporate Respondents, which accounts apparently moved with Olnick. Olnick dealt at various times directly with each of the Respondents.
In the course of their investigation, Staff identified Olnick as a person who had relevant knowledge. In August 2002 Olnick reached an understanding with Staff that, in return for his cooperation in the investigation, Staff would not initiate enforcement proceedings against him. A 14 August 2002 letter from Staff to Olnick's counsel documented Staff's position as follows:

. . . Staff is not in a position to make any representations with respect to the Crown, the Investment Dealers Association, or any other securities commission, and as such we cannot assure you that other proceedings will not be commenced against Mr. Olnick. However, Staff can advise you that, should Mr. Olnick be forthright, candid, and honest in his examination and in assisting our investigation, Staff will advise these bodies of Mr. Olnick's assistance and of his cooperation.

You should be aware that if we obtain any information which would indicate that Mr. Olnick has not been forthright, candid and honest with Staff in his examination or otherwise, Staff will revisit the issue as to its decision not to take proceedings as against Mr. Olnick.

In addition to the above, we confirm your advice that Mr. Olnick will resign from [Haywood], withdraw his membership from the IDA [Investment Dealers Association] and undertake not to seek membership in the IDA or act in any professional capacity in the Canadian capital markets.
Olnick duly resigned from Haywood and withdrew from membership in the Investment Dealers Association. He is no longer registered to trade securities in any Canadian jurisdiction.

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Olnick testified in the Hearing as a witness for Staff, and he was the source of some documentary evidence tendered by Staff. Staff clearly considered him an important witness. The Individual Respondents, however, strenuously challenged Olnick's motivations, his credibility as a witness and the reliability of the documentary evidence prepared by or obtained through him.
We found Olnick a thoroughly unsatisfactory witness. His claimed failures of recollection went beyond what could reasonably be ascribed to mere lapse of time. He was anything but "forthright, candid and honest" before us. He deliberately avoided answering questions put to him and, when he did answer, frequently did so in a manner that was difficult to believe and, in our view, was designed to obfuscate or mislead. Indeed, he himself admitted that some of his testimony was untruthful – he lied, and admitted to having lied, while testifying under oath in the Hearing.
Olnick was such a difficult and devious witness that we were unable to determine – and considered it inappropriate to try to guess – when he was testifying truthfully and when not. Although we rejected Workum's August 2006 application to have the allegations in the Second Notice of Hearing dismissed (our ruling is cited as Re Workum, 2006 ABASC 1737) – a non-suit application predicated in large measure on claimed deficiencies in Olnick's evidence that Workum contended left Staff with not even a prima facie case in respect of those allegations – we ultimately agreed with the Individual Respondents that Olnick was too unreliable a witness for us to use any of his testimony.
In the result, we assigned no weight to Olnick's testimony and (as discussed in more detail below) we approached documentary evidence prepared by or obtained through him with utmost caution.
Given Olnick's lack of honesty during the Hearing, Staff may have reason to consider whether the understanding they reached with Olnick in August 2002 remains effective. However, that was not a matter for this panel to address, nor germane to our consideration of the issues before us.
1. Mackenzie
Mackenzie was a director of PPI from July 1993 to the spring of 1999. He worked in the PPI office, apparently as an employee, from the fall of 1998 until June 2001. We found him to be a credible witness. It appeared to us that when he joined PPI he was young, rather naïve and eager to please. As such, he was possibly not as alive to questionable business practices as he might have become later or in other circumstances.
Thus, although his recollections from the Relevant Period were not always precise and some of his own actions on behalf of PPI may have been questionable, we believed his testimony.

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1. Schöni
Schöni testified by video link from Germany. This proved an acceptable means of eliciting oral evidence in the circumstances. He appeared fluent in English. We had no difficulty hearing his testimony or observing his demeanour, and thus we were able to form conclusions as to his credibility.
Schöni struck us as somewhat glib. He appeared to have few qualms about murky business arrangements, backdated documents and opaque, even deceptive, business disclosure. Some of his testimony was evasive and some we simply did not believe.
However, having considered Schöni's testimony with care and caution, we did not reject all of it. We note throughout this decision occasions when we rejected or accepted his evidence.
1. Foscolos
We heard testimony from Elias Foscolos ("Foscolos"), a financial analyst who left a brokerage firm to work briefly at PPI, from May to July or August 2001. There, Foscolos worked with, among others, PPI staff members Michael Charlton ("Charlton") and King.
Foscolos's tenure at PPI ended, along with Charlton's and King's, when Workum fired them, apparently for looking at business opportunities that should have been PPI's. There seemed reason to believe that Workum had grounds for his suspicions. Despite his dismissal having apparently been the subject of litigation, Foscolos did not acknowledge in the Hearing that his firing was such, nor that Workum might have had reason to be suspicious of him and his colleagues. Foscolos evinced in his testimony a distinct lack of regard for Workum and some of what he observed of PPI's business conduct.
Conscious of these factors, we assessed Foscolos's credibility with care. We concluded that he was, although not neutral toward Workum, a credible witness. We believed his testimony concerning what he observed at PPI.
1. Charlton
Charlton, a financial analyst who worked briefly at PPI in the summer of 2001, was a rather voluble and colourful witness. He appeared highly confident but was not, in our view, highly sophisticated or always scrupulous about details. While claiming a solid understanding of the difficulties PPI faced with one of the transactions that was the
subject of Staff's allegations, some of his references to legal and regulatory requirements were vague or confused. He appeared to have functioned in a rather junior position at PPI, meaning that much of what he described he had learned only at second hand; much of his testimony was thus hearsay.

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As mentioned, Charlton was fired from PPI, along with Foscolos and King, in July or August 2001. Although Charlton said that he thought they were dismissed for "not believing in [Workum] and his ability to raise money", as noted, there seemed reason to believe that Workum had grounds for his suspicions that they had been looking at business opportunities that should have been PPI's. After his dismissal, Charlton sent some somewhat questionable communications, seemingly designed to unsettle, to Workum, Hennig or others at PPI.
Given all of this, we assessed Charlton's credibility carefully. Ultimately we believed his testimony. First, his descriptions of activity and circumstances at PPI at the time were consistent with other evidence. Second, Charlton's lack of sophistication, and his seeming fascination with what some of his colleagues were saying at the office –coupled with the spontaneity and vividness of his recollections – made his testimony as to the atmosphere at PPI believable.
1. Reliability of Documentary Evidence
  1. Contention of the Individual Respondents
Counsel for Workum urged that some of the documentary evidence be treated with caution because of what, he claimed, was "spoliation of documents" – that is, alleged alteration or other tampering.
Specifically, the Individual Respondents urged caution in our treatment of documents originating with those whose interests, they suggested, were adverse to theirs. This appeared to relate primarily to material obtained by Staff from Olnick or from PPI under New Management.
PPI under New Management had severed relations with the Individual Respondents. However, although the Individual Respondents alluded to improper motivations on the part of New Management, its conduct was not in issue and we make no such findings. We discuss Olnick-sourced documents separately below.
Some of the documentary evidence was obtained from PPI after the Individual Respondents' departure, directly or through persons then or formerly associated with PPI. Some of this material was apparently from paper and electronic files maintained at PPI or by its lawyers. Some was obtained from PPI by a Staff investigator in December 2002 in the form of a computer disc that the investigator was told contained a copy of the contents (some saved and some supposedly deleted) of the hard drive of the PPI computer
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used by Hennig that PPI itself had copied earlier that year after Hennig's departure ("Hennig's Computer Data"). Other information was obtained by Staff in the form of a computer disc from King, whom the Staff investigator understood had obtained the information in order to do some work at home for Workum. Additional documentation was obtained from Glenn McCowan ("McCowan"), who became PPI's CFO after Hennig's departure.
Workum suggested the possibility that documentary evidence obtained from PPI and PPI-related sources, particularly that originating or produced in electronic form, might have been tampered with or was in some other manner "spoliated" and was therefore unreliable.
We heard testimony from Shawn Railey ("Railey"), a technology consultant in Phoenix and a friend of Workum. Railey had advised PPI and some of its affiliates about computer services from 2000 to approximately September 2002. He continued at the date of his testimony to do work for Creative Classics, then headed by Workum, and ran a website that appeared to be used for both his own business and that of Swiss Plastering.
In March 2003 (after the Relevant Period) Railey was approached by Workum, who (Railey said) had problems accessing his e-mail account. Railey said that he detected "an unauthorized access" to Workum's e-mail account – specifically, evidence of activity at times when Workum's computer was "not plugged in, and he was not logged on" to the e-mail service. Such access, said Railey, could enable an intruder to read Workum's e-mail, create new e-mails and attachments, and delete others.
Railey was also engaged in October 2005 to review a computer disc containing files from Hennig's Computer Data. Railey said that he observed "irregularities", in that the name of the person identified as having created a document was different from the name recorded for the person who last saved it, but the creation and saving times were less than one minute apart. He concluded that these "attributes within the documents [on the disc] that provide us an audit trail had intentionally been altered". He acknowledged that some of these attributes might, however, change as a result of a software or computer replacement or upgrade.
Railey was not aware of any actual alterations to the documents included in Hennig's Computer Data.
Foscolos testified to having been told by fellow PPI employee King that it was possible – that King had done it – to manipulate a facsimile machine so that it would give an incorrect impression as to the source or timing of an incoming document. There was, however, no evidence of such tampering with facsimiles before us.
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McCowan testified as to work he did to update PPI's financial disclosure and provide information and documents for use in various proceedings, included this Hearing. He retrieved documentation from PPI's files and from EnerGCorp's office. He did not purport to have been the originator of the retrieved documents. He did not attest to the circumstances in which material that predated his tenure at PPI originated, nor (apart from describing how and from where he retrieved the material) did he attest to the manner in which others had held or handled the material before it came to him. There was no evidence of any such material having been tampered with.
We did hear of one instance in which a document was admittedly falsified. Mackenzie testified to copying Hennig's signature onto a version of a promissory note; he later made Hennig aware of this and Hennig, although not "pleased", apparently did not object. With this single exception (falsification of a signature in a newly created document, not alteration of an existing document), there was no evidence that any PPI-sourced document before us had been altered or otherwise tampered with.
Documentary evidence from sources unrelated to PPI or Olnick did not appear to have been similarly challenged by the Individual Respondents and there was no evidence of alteration of or tampering with that material.
We recognize the potential for document tampering. Computer files can be altered; apparently so can aspects of facsimile transmission reports. Paper documents can be falsified. Further, those with custody of documents may have interests divergent from those of a respondent in an enforcement hearing.
In this case, no witness was in a position to attest that all of the documentation in evidence was pristine. That was not surprising; such an attestation might be difficult for any person to make in respect of material involving any company, or any matter, of any size or complexity. The mere absence of such attestation here did not cast into doubt the reliability of the documentary evidence.
It therefore fell on those who claimed alteration of or tampering with documentary evidence – the Individual Respondents – to make a convincing case for spoliation. This they failed to do.
There was, as will be seen, considerable evidence of documents being concocted and clear evidence of backdating of documents on a large scale. However, in every case (except possibly for Olnick-sourced documents which we discuss below) these activities seem to have been done to further the transactions or positions put forward by PPI, Workum or Hennig – not to undermine the Individual Respondents' defences in the Hearing.
All of the circumstances dictated a degree of caution in our consideration of evidence that may have passed through the hands of third parties. That is so in any proceeding. An administrative panel such as this is cognizant of, and accustomed to, such responsibility.

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In short, this panel was alive to the importance of considering the reliability of the documentary evidence before us, taking into account such factors as the presence or absence of signatures and the assurance or otherwise concerning its prior custody. We treated all of the documentary evidence with due caution. This led us in some cases to discount the reliability and persuasiveness of certain documents. We did not, however, conclude that any of the documentary evidence (apart from that whose source was Olnick, which we address next) had been altered or tampered with as contended by the Individual Respondents.
Olnick was the source of two types of documentary evidence: documents that he prepared; and documents prepared by others but obtained by Staff through Olnick.
There was clear evidence throughout the Hearing (including Olnick's own testimony) that Olnick would falsify information at will. This was a concern more obviously with documents in the first category – those he had prepared. However, such was our concern about Olnick that we treated with utmost caution all Olnick-sourced documents. Ultimately, we determined to assign no weight to any documentary evidence prepared by or obtained through Olnick unless – and then only to the extent that – it was corroborated by other evidence that we considered reliable (for example, statements prepared by a bank or the Brokerage Firm).
A distinct third category of documentary evidence pertained to Olnick's activities but was neither prepared by him nor obtained through him. For example, some data in evidence concerning securities trading was obtained from the Exchange. Thus, this material did not present the same risk of having been compromised by Olnick's actions. We dealt with this third category of material in the same manner as other documentary evidence of which Olnick was not the source.
Staff tendered into evidence some tables, charts and graphic representations that summarized their understanding of certain transactions and relationships that they considered pertinent to their case. Given its nature, we assigned no evidentiary weight to this material but instead regarded it as additional submissions.
1. Scope of Investigation Not Unfair
The Individual Respondents pointed out that not everyone involved in the transactions and events at the heart of Staff's case had been questioned or named as a
respondent. The suggestion apparently was that this was unfair to one or other, or both, of the Individual Respondents. If that was the Individual Respondents' position, it was incorrect.

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Staff not having extended allegations to others than the named Respondents is, in our view, irrelevant to our assessment of the merits of the allegations before us. Moreover, an enforcement hearing such as this is not an inquiry into the scope or adequacy of Staff's investigation. Staff are not obliged to investigate, question or name as a respondent everyone whose name comes to their attention. That said, since Staff bear the burden of proving their allegations, they are unlikely to be assisted in that effort by a faulty or partial investigation.
1. Witnesses Potentially Opposed in Interest
The Individual Respondents pointed out that some individuals cooperated with Staff – to the extent of providing documentary evidence or testifying for Staff –apparently (this was clearly the case with Olnick) on the understanding that they themselves might otherwise become the subject of investigation and possible enforcement action. The Individual Respondents also drew to the panel's attention indications that some sources of information used by Staff, and some witnesses for Staff, had differences of their own with the Individual Respondents (in the case of some such witnesses, this was obvious from their testimony).
In considering and assessing the evidence, a panel properly takes into account evident or supposed hostility of an information source or witness toward a respondent, other possible motivations of an information source or witness, or indications that a witness might have participated in questionable activity or for some other reason have an incentive to cooperate with Staff in a hearing. These factors do not preclude a panel from accepting the evidence from such information sources or witnesses. Nor do these factors in themselves demonstrate that the evidence is untrustworthy. These factors can, however, be relevant and important in a panel's assessment of the reliability of evidence and the weight that should be assigned to it.
We recognized this and took such factors into account in our consideration of the evidence in this Hearing. We considered the evidence with care and, where warranted, an appropriate degree of scepticism, as noted below.
1. Expert Testimony
  1. Commission Chief Accountant as Expert
We heard testimony from Fred Snell ("Snell"), the Chief Accountant of the Commission. He was qualified as an expert in the application to financial statements of GAAP and the Handbook of the Canadian Institute of Chartered Accountants (the "Handbook" and the "CICA", respectively). As such – this is what makes an "expert"
witness different from any other – Snell was able to provide his opinion in those areas, not only factual evidence.

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While there was no challenge to Snell's expertise, counsel for Workum and for Hennig argued against Snell's qualification as an expert witness on the ground that his function with the Commission put him in "an inherent conflict of interest" that might give rise to an appearance – not the reality – of partiality.
We rejected that argument. We consider that a true appreciation of the Chief Accountant's actual function alleviates any concern of perceived partiality. That function is to provide professional advice within his area of expertise to users within and without the Commission. On occasion, enforcement staff may be the recipients of such advice; that does not convert the Chief Accountant into a prosecutor.
There are further factors of note. The Individual Respondents had and exercised full right to cross-examine Snell, and to make submissions as to the weight we ought to assign to Snell's evidence. They could also have chosen to bring in an expert witness of their own. It was clear that the Individual Respondents were fully cognizant of these rights, given their representation at the time by experienced legal counsel and their stated intention to consult with an individual whom they considered to have expertise in areas similar to Snell's, in respect of such expert evidence as Snell might give. Finally, it is the panel – not an expert witness (or any other) – who makes findings in a proceeding such as this. The panel is not bound to accept all or any of an expert's opinions as determinative. The Individual Respondents' professed concerns on this point were, in our view, unfounded.
The Individual Respondents also indicated that they had not been apprised by Staff that Snell might be offered as an expert witness and, indeed, were told the opposite before the Hearing. This we were told only after the conclusion of Snell's examination-in-chief. It did not alter our view as to Snell's qualification as an expert. We granted the Individual Respondents time to digest this development and to prepare themselves to challenge Snell's expert evidence. We discern no prejudice to their ability to defend against the allegations.
Snell's opinion evidence centred on fundamental principles and on the narrower topic of gain recognition. Neither subject area, as it related to the allegations and evidence before us, was particularly technical or obscure. We were fully capable of conducting our own analysis and reaching our own conclusions independent of expert evidence. Accordingly, although we refer in our decision to some of Snell's expert testimony, it was not determinative of the issues before us. We found that his expert testimony tended more to confirm our own conclusions than to present or illuminate new and unknown principles.
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Some of Snell's testimony was factual and in the nature of what might be elicited from any non-expert witness, rather than expert-style opinion evidence. To the extent that Snell commented on matters arising from or in the course of Staff's compliance review of PPI or subsequent investigation, we considered his testimony as that of a member of Staff and dealt with it as non-expert evidence.
Workum called as an expert witness Michael Horgan ("Horgan"). We accepted that Horgan was qualified to give opinion evidence relating to the securities industry generally and, more specifically, in the areas of compliance and trading of securities.
A panel is not bound to accept every opinion expressed by an expert witness. The purpose of expert evidence is, rather, to assist a panel in reaching its own conclusions, for example by elucidating abstruse areas of practice or professional knowledge that might not otherwise be apparent.
Horgan's expert evidence was proffered in response to Staff's allegations of what the Second Notice of Hearing referred to as market manipulation. We advised the parties during the Hearing that we would determine the weight, if any, to be attached to his opinion evidence once we had heard it in its totality. Despite having qualified Horgan as an expert witness, his testimony led us to question whether he had the necessary depth of expertise in trading techniques and their effects on market prices of publicly traded securities. We therefore approached his testimony cautiously.
In the result, as discussed below, once we had heard and considered all of his evidence, we found portions of it useful but, over all, it was not persuasive on the issues to which it was directed.
1. Relevance of "Hindsight" or Subsequent Developments
There were some suggestions by the Individual Respondents that we might improperly use "hindsight" or subsequent developments to reach conclusions as to the appropriateness of earlier actions. This seemed to be directed at the allegations relating to financial statement disclosure, where (as discussed below) the core issue was whether the disclosure made was fairly representative of the facts, or of the Individual Respondents' state of knowledge, or both, either at the time when the disclosure was made or as at the earlier effective date of the disclosure so made. More specifically, the financial statements in issue were filed, in three succeeding years, during the month of February for PPI's financial year ended on the preceding 30 September. We were presented with evidence not only about what occurred prior to the respective year-end dates, but also about what occurred during the post-year-end/pre-filing intervals as well as after the relevant financial statements had been filed.
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We discuss this issue in more detail below. We concur with the proposition that, in assessing a person's conduct or state of knowledge at time "x", it would be unfair to rely on facts and knowledge that came into existence only at subsequent time "y". However, that proposition does not preclude consideration of after-arising facts, events and actions. Those can assist in illuminating and explaining the reality as at the earlier time, and in proving or disproving the validity of a party's claimed understanding of that reality as at the earlier time.
The test is whether evidence of after-arising facts, events and actions does or does not assist in determining the true state of affairs at the earlier time. We were mindful of this essential focus, and (as discussed below) accepted some evidence of after-arising information but rejected or assigned no weight to other such evidence according to whether its use would be consistent with this proper focus.
1. Sharing of Office Premises
The evidence was that auditor Forbes, valuator CST Financial Services Inc. ("CST"), the Street Group, Newmex and Orion all operated out of the same premises as PPI.
In itself there is nothing objectionable about sharing office space, but such close and continuous proximity may affect both the perception, and possibly the reality, of interactions. We do not doubt that there would have been a certain amount of daily interaction among these individuals and companies, beyond what would occur were they located apart from one another.
This is not the sort of arrangement one would expect of an independent auditor and a public company client. Something similar might be said about an independent valuator.
That said, proximity by itself tells little or nothing about whether or what sort of influence or control might in fact be exercised by one neighbour (business person or company) over another. It does not disprove professional or business independence. Moreover, there was evidence that auditor Forbes and valuator CST did not accede to everything their common client PPI wanted from them.
We therefore drew no conclusion from the sharing of office space.
1. Adverse Inference against Individual Respondents
Staff submitted that we should draw an "adverse inference" from the fact that neither Workum nor Hennig testified in the Hearing – that is, had they testified, their testimony would have been unfavourable to their respective positions. Staff contended that such an adverse inference is open to the panel because Staff have established a prima facie case for their allegations.
The Individual Respondents vigorously protested the drawing of such an adverse inference.

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Given our findings below that all of the allegations against the Individual Respondents were proved to the applicable standard based on clear, convincing and cogent evidence presented in the Hearing, we need not address this point.

PART TWO
THE FINANCIAL DISCLOSURE ALLEGATIONS
1. FINANCIAL DISCLOSURE ALLEGATIONS SUMMARIZED
Staff's allegations of improper financial statement disclosure for PPI's 1998, 1999 and 2000 financial years centred on PPI's recording of gains that it attributed to three sets of transactions (or purported transactions):
- sales by PPI of Newmex Shares to three buyers (collectively, the "Newmex Transaction"), for which PPI reported a gain of almost $3.9 million for its 1998 financial year;
- the sale to Orion of PPI's interest in Swiss Plastering, for which PPI reported a gain of approximately $6.3 million for its 1999 financial year (the "Orion Transaction"); and
- the sale to Azterra of PPI's interests in Willow Creek and Creative Classics, for which PPI reported aggregate gains of over $5.6 million for its 2000 financial year (the "Azterra Transaction").
  1. POSITIONS OF THE PARTIES
    1. Position of Staff
Staff took the position that: the Newmex, Orion and Azterra Transactions were not bona fide transactions; the transactions did not generate the gains as and when reported by PPI; and PPI's reporting of such gains in its 1998, 1999 and 2000 Financial Statements was not in accordance with GAAP and involved misrepresentations. Staff contended that subsequent use of those financial statements in other PPI disclosure also involved misrepresentations. Staff argued that the issuance of financial statements not prepared in accordance with GAAP contravened Alberta securities laws. Staff further submitted that this was contrary to the public interest, and that the associated misrepresentations would have constituted an offence under the Act and were, as such, contrary to the public interest. Staff also argued that Workum and Hennig bore responsibility for all of this.
We refer to this series of allegations collectively as the "Financial Disclosure Allegations".
1. Position of the Individual Respondents
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The Individual Respondents' position was, broadly, that the Newmex, Orion and Azterra Transactions were bona fide, consistent with PPI's strategy of realigning various business lines into separate publicly-traded companies, done in the belief that the transactions would be completed, and (in the case of the Newmex Transaction, where this had been claimed by Staff) not put into effect as a merely temporary arrangement. They claimed to have relied appropriately on an independent auditor (Hudson) and on another accounting firm that had been consulted ("KPMG"). The Individual Respondents urged that they not be held responsible for any of the failings of such third parties.
The Individual Respondents took the position that (with one exception) there was nothing improper in PPI recognizing gains on the Newmex, Orion and Azterra Transactions as and when it did. Hennig characterized PPI's financial disclosure of the transactions as aggressive yet nonetheless "GAAP compliant". The exception was the LynChris portion of the Newmex Transaction; Workum argued that, as soon as it was shown to have been flawed, PPI corrected its financial statements (the restatements appeared in its financial statements for its financial year ended on 30 September 2001 (the "2001 Financial Statements")) to reverse the associated gain. In any case, Workum claimed that Staff had closed their inquiry into the Newmex Transaction.
The Individual Respondents criticized what they perceived on the part of Staff to be improper use of hindsight to judge the Individual Respondents' past conduct, and reliance on information or opinions of unreliable or hostile (or both) third parties. In Hennig's words, testimony in the Hearing came largely from individuals who "had an axe to grind" against Workum and himself, were concerned with self-preservation, or were merely peripheral to the activities at issue in this proceeding. The Individual Respondents suggested that this applied to evidence derived from PPI's New Management and, particularly, to Olnick; Hennig referred to Olnick having proffered "extremely damaging, untruthful, contradictory" information.
Workum characterized Staff's Financial Disclosure Allegations as having been made against PPI, not the Individual Respondents. This case, he said, raised important issues concerning a CEO's accountability in the event that his company's financial statements are found not to be GAAP-compliant.
Workum characterized himself as a busy and aggressive businessman who "would generally provide strategic advice from 30,000 feet guiding [PPI's] direction and driving [its] business development activities", such that "he could not be involved in everything all the time". His "management strategy was to rely on various qualified
. . . employees, advisors and outside experts". He argued that the other directors of PPI
had no less knowledge of what was happening than he and Hennig had. It would thus, Workum suggested, be inappropriate to "pierce the corporate veil" and attribute to him (and Hennig) any wrongs done by PPI. In perhaps a similar vein, Workum suggested that it was unfair that he (and Hennig) be asked to mount PPI's defence on its behalf.

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Hennig also contended that, although he signed many documents (specifically, responses to Staff inquiries), his responses were drafted, reviewed, edited and "signed off" by many others. (Hennig's submissions took the form, in part, of a recitation of the history of PPI and his involvement with it. Some of this could have been construed as evidence being tendered in the guise of argument, and rejected as such. However, recognizing that by that stage of the Hearing Hennig was no longer represented by counsel, we treated these remarks as submissions, not evidence.) He further submitted that he was not at all involved in some other documents and arrangements seemingly important to Staff's case. In addition, Hennig argued that PPI disclosure had been closely vetted by Staff when PPI sought eligibility to use the short-form prospectus distribution system, and passed. He suggested that problems began only when the target of a takeover bid by PPI, Ventra Group Inc. ("Ventra"; the take-over bid we refer to as the "Ventra Bid") "somehow . . . managed to make the financial statements an issue". He claimed that the issue grew until PPI found itself "in a catch-22 situation", accused of reporting transactions that had not closed but being unable to close them owing to regulatory roadblocks. He suggested a persistent and unreasonable animus against PPI on the part of Staff.
As to various oddities in the dating, or even the whereabouts, of documents, Hennig stated that it is common practice to document a transaction after the terms are agreed and make that earlier date the effective date, and that losing or misplacing documents is not unusual.
In short, the Individual Respondents took the position that they had properly carried out their duties as directors and officers of PPI and properly relied on PPI's external accountants and auditor. Hennig appeared to suggest that a fairer understanding of PPI, its business, and his and Workum's activities and objectives would shed a very different light on events from that alleged by Staff or indicated by evidence they presented.
1. Findings On Financial Disclosure Allegations Summarized
For reasons discussed below, we conclude that:
- PPI's 1998, 1999 and 2000 Financial Statements were not prepared in accordance with GAAP contrary to Alberta securities laws and the public interest, and contained misrepresentations contrary to the public interest;
- further misrepresentations were made when the improper financial statement disclosure was repeated in other PPI disclosure, contrary to the public interest; and
  
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- Workum and Hennig each bore responsibility for the foregoing.
  1. FINANCIAL DISCLOSURE ISSUES
The allegations concerning PPI's financial disclosure presented several issues for determination, which can be grouped as follows:
- Were PPI's 1998, 1999 and 2000 Financial Statements not prepared in accordance with GAAP? Did they contain misrepresentations? If either or both were found, was the financial disclosure contrary to Alberta securities laws or the public interest, or both?
- Did PPI make other disclosure concerning the Newmex, Orion and Azterra Transactions in a manner that involved misrepresentation? If so, was this contrary to the public interest?
- If there was conduct contrary to Alberta securities laws or to the public interest, or both, were either (or both) of the Individual Respondents responsible?
  1. FACTS CONCERNING FINANCIAL DISCLOSURE
    1. Overview
We provide here a brief overview of PPI's disclosure, and issues surrounding its disclosure, of the Newmex, Orion and Azterra Transactions.
1. Summary of Pertinent Financial Disclosure
  1. General Presentation
PPI took the position (initially – its position changed in part later) that the Newmex Transaction amounted to a disposition by it, in its 1998 financial year, of the Newmex Shares purportedly sold in that transaction. PPI reported the purported disposition in its financial statements for that year. The consequence for PPI's reported financial results for 1998 was markedly favourable for PPI.
The same applied for PPI's 1999 financial year in respect of the Orion Transaction and for PPI's 2000 financial year in respect of the Azterra Transaction.

The following table summarizes key information presented by PPI in its financial statements for its financial years ended in 1997, 1998, 1999 and 2000 (before later restatements); the numbers presented have been rounded from the originals.

All numbers approximate	1997 (pre-transactions)	1998	1999	2000
Gain on sale of businesses/mining properties	-- nil --	$3 900 000	$6 300 000	$5 600 000
Earnings before income taxes and minority interest	$500 000	$4 000 000	$7 100 000	$11 000 000
Net earnings	$600 000	$3 000 000	$6 600 000	$9 500 000
Earnings per share
(fully diluted)	$ 0.05	$ 0.20	$ 0.35/36	$ 0.31
			[discrepancy
			between 1999 and
			2000 Financial
			Statements]
Retained earnings	$1 023 153	$4 000 934	$10 293 954	$17 309 308

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Newmex Transaction and PPI's 1998 Financial Statements

As seen in the above table, PPI's reported earnings before income taxes and minority interest (for simplicity we will refer to this category as "pre-tax earnings") for 1998 were derived almost entirely from a "Gain on sale of mining properties" of approximately $3.9 million, attributed to the Newmex Transaction. The effects reached the "bottom line": PPI reported sharp increases in net earnings, earnings per share and retained earnings for 1998 as compared to 1997.
The Newmex Transaction had two principal parts – sales by PPI of Newmex Shares: (i) to ASCOOP and SPIDA (the "Newmex/ASCOOP Transaction"); and (ii) to LynChris (the "Newmex/LynChris Transaction"). ASCOOP and SPIDA paid cash for their Newmex Shares. LynChris issued PPI a promissory note (the "LynChris Promissory Note"). Documentation of the various elements of the Newmex Transaction was not entirely consistent or, possibly, complete. There were indications that not all of the usual incidents of ownership passed with the Newmex Shares, and also of impediments to their sale in the first place. There were further indications that the purchases could be – and were possibly intended to be – reversed in future, and that there was never any real expectation that LynChris would have to pay PPI any money for its Newmex Shares.
During 2000 PPI reacquired all of its purportedly sold Newmex Shares from these three buyers.
Most (almost 89%) of PPI's reported 1999 pre-tax earnings stemmed from an approximate $6.3 million "Gain on sale of businesses", attributed to the disposition of PPI's indirectly-held subsidiary Swiss Plastering to Orion. This again had positive bottom-line implications for PPI's 1999 net earnings, earnings per share and retained earnings.
EnerGCorp was to receive shares and a promissory note from Orion (the "Orion Promissory Note"). Orion's ability to satisfy its obligations under this promissory note was at issue. Documentation of the Orion Transaction was not complete or always consistent, and there were difficulties in closing the transaction; it apparently never did close. Security for the promissory note was purportedly arranged. PPI eventually (in 2001) demanded and received payment.
The majority of PPI's reported 2000 pre-tax earnings again stemmed from a "Gain on sale of businesses" attributed to its sale, to Azterra, of direct and indirect PPI subsidiaries Willow Creek and Creative Classics. Among other aspects of the Azterra Transaction, PPI and its subsidiary EnerGCorp were to receive shares and promissory notes from Azterra. Here again, Azterra's ability to satisfy its promissory note obligations was at issue. Azterra itself did not record its purchases of Willow Creek and Creative Classics as having occurred in 2000. Documentation of the Azterra Transaction was inconsistent and incomplete, and it apparently never did fully close. Security for one of the Azterra promissory notes was purportedly arranged. PPI eventually (again, in 2001) demanded and received payment.
1. Subsequent PPI Financial Statements
PPI's 2001 Financial Statements restated prior years' results including changes from its previous reporting of the Newmex, Orion and Azterra Transactions. By the time PPI filed its financial statements for its 2002 financial year (the "2002 Financial Statements"), New Management was in charge. Hudson was no longer PPI's auditor and the new auditor, Mintz, issued a notably limited audit opinion. The 2002 Financial Statements extensively restated PPI's results reported for the 1998, 1999 and 2000 financial years, largely or wholly reversing the gains (and other associated financial results) initially reported by PPI for those years in respect of the three transactions discussed.
1. The Newmex Transaction
  1. Summary Description
In the summer of 1998 PPI owned 4 282 875 Newmex Shares, the majority of those outstanding. Of those Newmex Shares, 1 700 000 were subject to a "hold period" (which we infer meant a prohibition on a further trade absent an available legal
exemption) that would apparently expire on 5 May 1999. The remaining 2 582 875 of PPI's Newmex Shares were subject to escrow.

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As noted, the Newmex Transaction had two principal parts – the Newmex/ASCOOP Transaction involved the sale (or purported sale) of 750 000 of PPI's non-escrowed Newmex Shares to each of ASCOOP and SPIDA (and a further 200 000 Newmex Shares being paid as a commission), and the Newmex/LynChris Transaction involved the sale (or purported sale) of all of PPI's escrowed Newmex Shares to LynChris.
PPI treated these sales as having taken place in its 1998 financial year, which ended on 30 September 1998.
Newmex issued a news release on 16 October 1998 (the "October 1998 PPI/Newmex News Release") announcing that:

[Newmex's] major shareholder [PPI] has completed the disposition of all of its 4,282,875 shares of Newmex for gross proceeds of $4,282,875 comprised of $1.5 million in cash and a promissory note for $2,582,875 . . . [to] two Swiss Pension Funds, ASCOOP and SPIDA, . . . and a private Canadian company [LynChris]. . . . This transaction was effective September 30, 1998. These new investors have the ability to fund the planned capital projects Newmex has budgeted for the coming year.
The documentation relating to the Newmex Transaction was extensive and complicated. The following documents, which we define and discuss below, related to the Newmex/ASCOOP Transaction:
- ASCOOP/SPIDA Discussion Drafts;
- Longer Newmex/ASCOOP Terms Agreement; and
- Shorter Newmex/ASCOOP Terms Agreement.
The terms of the Newmex/ASCOOP Transaction were set out in a one-page agreement headed "Terms" and dated 8 September 1998. Two versions of this agreement were in evidence. Both versions were executed for PPI by the Individual Respondents. Because one version contained eight, and the other seven, numbered clauses, we refer to them respectively as the "Longer Newmex/ASCOOP Terms Agreement" and the "Shorter Newmex/ASCOOP Terms Agreement".
The Longer Newmex/ASCOOP Terms Agreement was executed by PPI, ASCOOP and SPIDA. It bore facsimile transmission notations indicating that it had been
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sent on 11 September 1998 from PPI and received the next day by Commcept. The Shorter Newmex/ASCOOP Terms Agreement was also executed by PPI, ASCOOP and SPIDA in counterpart. Facsimile transmission notations on the copies in evidence showed that the copy executed by SPIDA was sent from PPI on "01/04/99", and that executed by ASCOOP was sent from ATAG Ernst & Young on "23-DEZ-98".
Both the Longer and Shorter Newmex/ASCOOP Terms Agreements specified an effective date of 9 September 1998 and described a sale of 750 000 Newmex Shares to each of ASCOOP and SPIDA for $750 000 ($1.5 million in total), with a commission payable in the amount of 1.0% "of the total proceeds of the private placement [sic]". The Longer Newmex/ASCOOP Terms Agreement stated that the commission was payable to Buser at ATAG Ernst & Young; the Shorter Newmex/ASCOOP Terms Agreement omitted Buser's name.
Clause 6 of the two versions, in each case dealing with "Consideration", differed. The Longer Newmex/ASCOOP Terms Agreement included the following explanation that was absent from the Shorter Newmex/ASCOOP Terms Agreement (these and some other documents in evidence were printed entirely or in part in upper case type, without any apparent intention to emphasize the texts; for ease of reading, we present extracts from such documents in a more readable format):

The shares would be sold for a 10.0% discount to the market price which for purposes of this agreement shall be defined as Cdn$ 1.11. In consequence the [Newmex Shares] would be sold for Cdn$ 1.00 each which represents PPI's original purchase price for the shares. . . .
The most obvious difference between the two versions was clause 8 of the Longer Newmex/ASCOOP Terms Agreement, which had no counterpart in the Shorter Newmex/ASCOOP Terms Agreement. We reproduce this provision in its entirety:

8. Conditions subsequent: PPI would have the option to re-purchase the [Newmex Shares] for the market price at the time of the transaction plus 0.8333% premium to be paid for each month the option is outstanding for the first 24 months immediately following the transaction. After 24 months ASCOOP and SPIDA would have the right to sell the shares back to PPI based on the same formula given only PPI's receipt of 45 days written notice regarding ASCOOP's and SPIDA's desire to sell the shares. In addition ASCOOP and SPIDA agree to vote the [Newmex Shares] in concert with PPI for the duration of this agreement, the shares of which [sic] shall be transferred within escrow [sic].
The documentation relating to the Newmex/LynChris Transaction included the following, which we discuss below:
- LynChris Agreement;
- LynChris Commission Agreement;
- First LynChris Addendum;
- LynChris Promissory Note;
- Newmex Escrow Agreement;
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- Second LynChris Addendum;
- Newmex/LynChris Security Agreement;
- Third LynChris Addendum; and
- Newmex/LynChris Repurchase Agreement.
LynChris was, as mentioned, a private corporation of which Faithfull was president.
Although Faithfull's conduct in connection with the dealings between PPI and LynChris fell short of what we would expect of an experienced businessman, we conclude that he was prompted initially by a wish to be helpful to a respected acquaintance (Hennig), motivated by the hope of some financial benefit and comforted by his relationship with, and confidence in, Hennig. Faithfull indicated in testimony that he was not knowledgeable about mining companies generally and "knew very little about [Newmex] in particular". He testified that this sort of investment was not typical for LynChris, and proceeding without a good deal more in the way of due diligence was "a major departure from the way I did business", but he "entered into this agreement primarily as a result of my relationship with [Hennig] stemming back from the years [1993 to 1996] where he was my tax [adviser] and accountant". Irrespective of the impetus for his involvement, we found Faithfull to be a credible witness.
In June 1998 LynChris and possibly two members of Faithfull's family (the names were similar but spelled slightly differently) acquired PPI Shares in a transaction not here in issue. Faithfull next heard from Hennig "on or about" 30 September 1998: Hennig approached him and asked whether Faithfull would consider purchasing Newmex Shares. According to Faithfull, Hennig described Newmex Shares as having "upside potential" and outlined proposed terms of a $2.6 million transaction, including "an addendum that was to accompany the purchase and sale agreement".
Hennig presented Faithfull with two draft agreements, on which Faithfull sought the advice of a lawyer. Hennig joined Faithfull in the meeting with Faithfull's lawyer. Despite receiving some unsettling advice at that meeting (discussed below), within a few days of 30 September 1998 Faithfull signed (on behalf of LynChris) a one-page agreement with PPI (the "LynChris Agreement").
LynChris Agreement
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The LynChris Agreement called for LynChris to purchase PPI's escrowed Newmex Shares from PPI at a price of $1 per share or a total of $2 582 875, effective on 30 September 1998. The purchase price (plus 7% interest) was to be satisfied by the LynChris Promissory Note under which payment would be due two years later. Clause 4 of the agreement stated that PPI "will be solely responsible to pay a commission of 200,000 shares of Newmex to [Cheshire] with regards to this transaction". The agreement was "subject to shareholder, regulatory and Board of Director's [sic] approval".
Faithfull's understanding of the 30 September 1998 effective date for the transaction was that "it was [PPI's] year end day, and they wanted to book the transaction during that -- prior to their year end".

LynChris Commission Agreement
Although it was Hennig who brought Faithfull and LynChris to the table, a "commission" was inexplicably payable to Cheshire. This commission was the subject of a separate agreement (the "LynChris Commission Agreement") between PPI and Cheshire bearing a 1 August 1998 effective date. The copy of the fully-executed agreement in evidence stated that it was signed on 1 September 1998; we note that this would have predated the LynChris Agreement to which it related.

First LynChris Addendum
Faithfull and Hennig also signed a second agreement between LynChris and PPI, which we refer to as the "First LynChris Addendum" and reproduce here:

PURCHASE & SALE AGREEMENT - ADDENDUM

THIS AGREEMENT made effective September 30, 1998 (the "Effective Date")

. . .

Further to the Purchase and Sale Agreement entered into between [PPI] and LynChris dated September 30, 1998, [PPI] and LynChris hereby agree to the following additional terms;
1. LynChris may at any time satisfy its principal and interest obligations under this agreement by returning the [Newmex Shares] to [PPI]., [sic]
2. LynChris will receive 40,000 [PPI Shares] as a commission upon the successful completion of this transaction.
3. [PPI] can at any time request the payment of the promissory note by return of the Newmex [Shares].
4. LynChris will at no time be responsible for any cash or other outlays with respect to its ownership of the Newmex [Shares].
5. LynChris will agree to vote its Newmex [Shares] in accordance with [PPI's] directions during the term of this agreement.
6. [PPI] will indemnify LynChris for any costs incurred as a result of its participation in this agreement.
  
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As Faithfull described it, the First LynChris Addendum both provided some protection "on my downside" by giving LynChris the opportunity "to return the shares . . . and have the note cancelled" and "provided [PPI] with the opportunity to buy back those shares if they so chose".
At the meeting with his lawyer, Faithfull was advised that the First LynChris Addendum was an illegal agreement. According to Faithfull, Hennig responded that five different lawyers might come to five different opinions and that he, Hennig, had a legal opinion that the proposed transaction was legal. Citing pressures of time, Hennig urged Faithfull to sign the LynChris Agreement and the First LynChris Addendum and, if Hennig "received an opinion that the addendum was illegal, then we would destroy the . . . addendum, and proceed without it". Faithfull was persuaded, and the two agreements were signed. However, a few days later Hennig told Faithfull that Hennig:

. . . had received another opinion stating that the addendum was an illegal document and he instructed me to cancel and destroy my copy, which I did, and he assured me that he was doing likewise.
This development, said Faithfull, left him feeling "a little bit deflated . . . because then I was somewhat naked on this transaction" and compelled to "rely on my relationship with [Hennig] as to [eventually] selling these shares".

LynChris Promissory Note
The LynChris Promissory Note was executed by Faithfull and purportedly "made on September 30, 1998". It stated that LynChris would pay PPI $2 582 875 plus 7% interest "on or before September 30, 2000". We note that it did not specify by whom, or how, a particular payment date or dates might be selected.

Newmex Escrow Agreement
The terms of the escrow governing the Newmex Shares to be bought by LynChris were set out in an agreement (the "Newmex Escrow Agreement") dated as of
22 April 1998. A performance escrow arrangement, it barred "any transfer, hypothecation or alienation" of any of the shares, while they remained in escrow, "without the written consent of the [Exchange]"; with such consent, shares could be transferred within escrow, with the transferee inheriting the escrow restrictions. Newmex Shares could be released from escrow in as few as three annual tranches to the extent that qualifying expenditures were made in respect of the mining properties, or if it were demonstrated to the Exchange that the properties had reached a specified value. Newmex Shares not released from escrow within five years – by 22 April 2003 – "shall be cancelled forthwith".
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The First LynChris Addendum stated that LynChris would "at no time be responsible for any cash or other outlays" and would be indemnified for any costs incurred. Faithfull's testimony made clear that his understanding of his deal with PPI was that LynChris would not have to make any outlays and that he never intended to. This understanding extended to the expenditures called for under the Newmex Escrow Agreement as a condition of the release from escrow of LynChris's Newmex Shares. Faithfull understood from a discussion with Hennig that this funding "wasn't a requirement of LynChris, that the funding would all be provided by ASCOOP and SPIDA".
On 27 October 1998 PPI instructed the transfer agent for Newmex Shares to issue replacement share certificates for 1 700 000 of PPI's Newmex Shares: 750 000 to be registered in each of the names of ASCOOP and SPIDA and 200 000 in the name of Cheshire. The instructions included a request to "legend" the replacement certificates "to keep the hold period in tact [sic]". This was apparently done.
PPI communicated with the Exchange about the Newmex Transaction in November 1998, perhaps to obtain consent to the transfer within escrow of the Newmex Shares to be sold to LynChris. The Exchange had concerns. On 17 November 1998 it wrote to Hennig (the "November 1998 Exchange Letter") setting out several requirements to be met by the end of that month, failing which "trading in the shares of Newmex will be halted pending a change in control". Among the Exchange's demands were: confirmation as to Faithfull's awareness of the escrow release and cancellation terms and Newmex's mining properties; his plans for funding their development; information about the "finders [sic] fee" to Cheshire and "the relationship of [its] beneficiaries to [PPI], Newmex and [Faithfull]"; a "[r]evised agreement with [Faithfull] to indicate that the transfer within escrow will not occur until the promissory notes [sic] have been repaid"; and a "[r]evised agreement with [ASCOOP] and [SPIDA] whereby the premium associated with the put and call options is deleted . . . [and] the finders [sic] fee to Ernest and Young [sic] will be deleted".
The Exchange's demands prompted some interesting responses, to which we now turn.
Faithfull testified that Hennig drafted, for Faithfull's signature, a letter responding to certain of the Exchange's demands. Faithfull signed and sent this letter on 4 December 1998, along with several enclosures. Among these was a copy of a new
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agreement (the "Second LynChris Addendum") between LynChris and PPI, bearing the same title and 30 September 1998 effective date as the First LynChris Addendum. Apparently a direct response to an Exchange requirement, the Second LynChris Addendum contained only one provision, specifying that "[t]he transfer of the shares within escrow will not take place until such time as the promissory note is paid in full".
A copy of a PPI facsimile transmission note in evidence indicated that on 15 December 1998 Hennig communicated to Buser at ATAG Ernst & Young as follows:

I am writing to request your assistance. The [Exchange] has once again reared its ugly head re the Newmex share sale to SPIDA and ASCOOP I have drafted the attached
revised agreement to reflect the requested changes and hope that you can persuade ASCOOP and SPIDA to sign. We will of course honour the terms of our original agreement. I understand that the $15,000 has been sent. Let me know if it has not been received.
Counsel for Hennig indicated that Hennig had stated under oath (in what we assume was an investigative interview – Hennig did not testify in the Hearing) that by "honour[ing] the terms of [the] original agreement" he was referring to the transaction price, not the option provision included in the Longer Newmex/ASCOOP Terms Agreement. We did not find that explanation credible, as discussed below.
Also in evidence was an unsigned copy of a 16 December 1998 letter from Hennig to SPIDA. This document, according to a Staff investigator, was printed from Hennig's Computer Data. The content of the letter was consistent with the facsimile transmission note to Buser just described:

We are writing to confirm [PPI's] intention to honour the initial Term Sheet dated September 8, 1998 between [PPI], ASCOOP and SPIDA. The revised Term Sheet is required by the [Exchange] and we appreciate your understanding in executing same.
A note to the Exchange from Hennig (identified as sending for Newmex) on 18 December 1998 said that it was accompanied by a copy of "the commission agreement between [PPI] and [Cheshire]" and that "[t]he revised ASCOOP and SPIDA agreements should be available by the end of December".
As mentioned, the Shorter Newmex/ASCOOP Terms Agreement, although bearing the same 8 September 1998 date as the Longer Newmex/ASCOOP Terms Agreement, appeared from facsimile transmission notations to have been executed by ASCOOP and SPIDA in December 1998 and January 1999. The most obvious difference between the Shorter and Longer Newmex/ASCOOP Terms Agreements was the removal of the clause dealing with what the November 1998 Exchange Letter referred to as "put and call options".
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It is clear from the evidence that the Longer Newmex/ASCOOP Terms Agreement was the "initial Term Sheet" that PPI undertook to honour among the parties to it, and that the Shorter Newmex/ASCOOP Terms Agreement was the "revised Term Sheet" prepared and signed (despite its 8 September 1998 document date and 9 September 1998 effective date) only in or after December 1998 in response to the Exchange's concerns and requirements.
We are in no doubt that the change was a cosmetic one, made to reassure the Exchange, not to change the actual arrangement among PPI, ASCOOP and SPIDA. We find no ambiguity in Hennig's words (quoted above) that PPI "will of course honour the terms of" their initial agreement. We conclude that the three parties to the arrangement considered themselves – in accordance with the plain meaning of Hennig's undertaking –still governed by the Longer Newmex/ASCOOP Terms Agreement notwithstanding their execution of the later, shorter variant.
In approximately November 1998 PPI sought KPMG's opinion on the Newmex Transaction:

. . . I am writing to request a letter from KPMG confirming that our proposed accounting treatment of the transaction in question is in accordance with GAAP. The relevant facts upon which your opinion should be based are as follows:

. . .
- PPI sold all of its [Newmex Shares] on September 30, 1998 for proceeds of $1 per share,
- The sale was to three parties, two of which acquired the 1.5 million free trading shares for cash and the third acquired the escrow shares for a promissory note due at the end of two years. . . .
- The third party has more than enough financial resources to pay out the promissory note at maturity and could pledge sufficient security to satisfy any accounting or regulatory requirements.
  
  [PPI] would like to recognize the entire gain on sale of approximately $4 million in its financial statements for its fiscal year ended September 30, 1998. Due to the material size of this transaction to our overall profit, our Board of Directors has requested that we provide them with a second opinion . . . .
KPMG prepared a favourable response in draft form, which Hennig marked up to correct or elaborate on certain factual assumptions. KPMG issued its formal opinion in a letter dated 25 November 1998 (the "Newmex Opinion"). This letter set out background facts or assumptions, including the following:

[PPI] is proposing to sell:
- 750,000 free-trading Newmex shares to a related company for $750,000 cash;
- 750,000 free-trading Newmex shares to a 2nd unrelated company for $750,000 cash;
  
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  and
- 2,300,000 escrowed Newmex shares to a 3rd unrelated private company in exchange for a $2,300,000 interest-bearing note due in two years.
  
  . . .
  
  The private company issuing the note has specifically agreed:
- it will honour its obligation, even if the acquired shares are not released from escrow; and
- to provide [PPI] with a security interest in the shares and a specific security interest in other financial or operating assets with a realizable value to [PPI] of up to 50% of the balance due but not less than 20% of the balance due at any time.
The Newmex Opinion concluded:

It is our view that [PPI] should recognize the gain in its income for the cash portion of the share sale.

Assuming the private company issuing the note has specifically agreed to honour its obligation even if the acquired shares are not released from escrow and, [sic] has sufficient financial and operating assets (other than the shares of Newmex) to permit it to pledge securities to at least a value of 20% of the balance due, [PPI] can recognize the gain in its income for the note-portion of the share sale.
The conclusion reached by KPMG was clearly based on the factual assumptions provided to it by PPI and Hennig, the key ones being set out in the Newmex Opinion and quoted above. Given those assumptions, Snell had no criticism of KPMG's conclusions.
However, consideration of the Newmex Opinion makes clear that the assumptions on which it was based were significantly different from what the parties to the Newmex Transaction had agreed:
- It expressly referred, not once but twice, to the private company issuing a note having "specifically agreed" to "honour its obligation" "even if the acquired shares are not released from escrow" and contemplated the private company's pledging, as security, assets with a value of at least "20% of the balance due" on the note. While the LynChris Promissory Note included a
  commitment to provide security, LynChris did not satisfy that commitment (as discussed below). Given the Newmex Opinion's emphasis on the provision of security, we doubt that KPMG assumed that the commitment would be made but not satisfied.
  
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- It was silent as to any arrangement for the return of the Newmex Shares to PPI; any constraint on the buyers' ability to vote the Newmex Shares; or any side arrangement or understanding as to how the conditions of the Newmex Escrow Agreement would be satisfied. These were, however, aspects of the Newmex/ASCOOP Transaction, the Newmex/LynChris Transaction, or both.
The author of the Newmex Opinion, Philip Scherman ("Scherman"), testified. He confirmed that the factual assumptions in the Newmex Opinion were obtained from Hennig and did not reflect any independent factual knowledge on the part of KPMG. For example, KPMG was not aware of any arrangement for PPI to buy back the Newmex Shares and its opinion did not address that. "We were simply relying on the facts given to us by PPI", he said. KPMG, after all, was asked to provide an accounting opinion based on assumed facts, not to conduct a review or audit. Concerning the concluding paragraphs of the letter (quoted above) dealing with the debt obligation of the "private company" purchaser, Scherman said:

Well, it's critical that, for gain recognition, that there be certainty, a high degree of certainty that, that the note will be paid.
Clearly, the facts determine the appropriateness of PPI's reporting of the Newmex Transaction. KPMG did not opine, in the Newmex Opinion, as to the accuracy of the facts therein assumed; it merely set out its opinion as to certain consequences were those assumed facts to be true. The Newmex Opinion was therefore not – and in our view it could not reasonably be read as – a warranty of the correctness, under GAAP, of PPI's accounting for the Newmex Transaction in its 1998 Financial Statements.
Late in January 1999 PPI's 1998 Financial Statements were apparently being finalized. In connection with that work, certain assurances were sought. As Hennig explained in a note to Faithfull dated 29 January 1999:

In order for GAAP to allow us to book the gain on the escrowed shares, LynChris has to prove that it has at least 20% of the note amount as security for the transaction. This security can be placed at your lawyers and held in trust for you. As previously discussed, there will be no exposure to you or LynChris other than the Newmex shares.
This note was apparently accompanied by:
. . . a confirmation letter that our auditors require for the Newmex transaction. The only 'new' item contained therein relates to the security . . . .

2008 ABASC 363 (*)
The copy of the LynChris Promissory Note in evidence included a corresponding commitment:

[LynChris] hereby agrees to pledge security with its counsel as may be required to satisfy regulatory bodies. Such security will not exceed 20% of the gross value of the face amount of this note.
Faithfull indicated in testimony that he signed the LynChris Promissory Note some time after 30 September 1998. He was puzzled at the quoted references to a pledge, since his recollection was that this topic arose only late in January 1999 in connection with the request from PPI's auditor. He confirmed that, although LynChris had sufficient assets to "make good on" its obligation if required, he had rejected the idea of pledging security and neither he nor LynChris did so.
Hennig seems to have accepted this, and (as discussed below) made other arrangements. On 1 February 1999 Faithfull, for LynChris, wrote to Hennig at PPI. Faithfull's letter indicated that the requested confirmation letter to PPI's auditor was enclosed; requested LynChris's PPI Shares (presumably the PPI Shares to be provided to him as an inducement or commission pursuant to the First LynChris Addendum); and stated:

Per our telephone conversation, it is understood that arrangement will be made for a third party to place the required security with [PPI's] legal counsel.
The audit confirmation letter bore Faithfull's signature as president of LynChris and the date "Jan. 31/99". It confirmed:

. . . the following information as at September 30th, 1998. Note Payable to:
[PPI]: $ 2,582,875

Interest Rate: 7%

Due Date: September 30, 2000

Security: 2,582,875 shares of [Newmex]

Liquid assets valued at $ 520,000 in trust with counsel
The "security" just described apparently referred to the Newmex Shares that LynChris obtained from PPI and unspecified "Liquid assets" that Hennig was going to
arrange (Faithfull's 1 February 1999 letter used the future tense) with an unidentified third party.

2008 ABASC 363 (*)
Hennig instructed a law firm, by letter dated 11 February 1999, to "draft a short agreement" indicating that the lawyers would hold in trust for PPI 133 334 PPI Shares that, according to the letter, "LynChris has provided". The lawyers responded with a letter agreement dated 18 February 1999, also executed by PPI and LynChris (the "Newmex/LynChris Security Agreement"), specifying that the security took the form of one certificate for 50 000 PPI Shares registered to Hennig and another for 83 334 PPI Shares registered to Street. Street had provided his share certificate as security for the payment of office rent and testified that he was unaware of PPI's supplying his PPI Shares "as security in another transaction". None of this security had been "provided" by LynChris, as Hennig's instructions to the lawyers said. Faithfull testified: "I never understood what that meant and I thought it was a typo. They [the pledged securities] didn't belong to LynChris".
A Hudson representative testified that he believed that the Individual Respondents consciously decided to withhold information from Hudson. The other evidence supported this view. For example, Forbes testified that, when he questioned aspects (the BuyBack Arrangements, defined and discussed below) of the Longer Newmex/ASCOOP Terms Agreement, Hennig showed him the shorter version with that provision removed, and he (Forbes) and Hudson based the audit opinion on that version. Forbes had also not been presented with the First LynChris Addendum, a document which he rightly noted (when it was presented to him during the Hearing) removed from LynChris all risk in the Newmex Transaction and was, as such, "in substance, just . . . against the original transaction that we relied upon".
PPI filed its 1998 Financial Statements on 19 February 1999. The balance sheet indicated that it had been "Approved on behalf of the Board" by Workum and Mackenzie. The 1998 Financial Statements were accompanied by an auditor's report dated 4 January 1999 in which Hudson stated:

In our opinion, these financial statements present fairly, in all material respects, the financial position of the company as at September 30, 1998 and the results of its operations and the changes in its financial position for the year then ended in accordance with generally accepted accounting principles.

The table below summarizes certain line items from PPI's 1998 Financial Statements:

Income Statement 1998 1997

Gain on sale of mining properties	$ 3 878 486	--
Revenue	20 256 931	$ 15 979 255
Expenses	16 245 901	15 483 706
Pre-tax earnings	$ 4 011 030	$ 495 549
Net earnings	$ 2 977 781	$ 635 186
Fully diluted earnings per share	$ 0.20	$ 0.05

2008 ABASC 363 (*)

Balance Sheet

Notes receivable	$ 3 570 594	$ 562 735
Retained earnings	$ 4 000 934	$ 1 023 153
Total assets (also Total liabilities and equity)	$ 38 619 767	$ 32 608 045

PPI's second largest single revenue item for 1998 was the "Gain on sale of mining properties" (the only larger item, largely offset by a corresponding expense, was "Construction"). While not stated explicitly, this gain on sale was triggered by the Newmex Transaction. As readily seen from the table, it was equal to almost the full amount (96.7%) of PPI's pre-tax earnings for the year. But for this reported gain, PPI's 1998 pre-tax earnings would have been $132 544, a 73% decline from the 1997 figure rather than the eight-fold increase actually reported. The effects reached the bottom line, contributing to a four-fold increase in earnings per share.
This gain and other aspects of the Newmex Transaction also affected PPI's year-end 1998 balance sheet. The LynChris Promissory Note ("secured by [Newmex Shares] and marketable securities", according to Note 5 to the 1998 Financial Statements) accounted for most of the increase in notes receivable from 1997. The four-fold increase in reported retained earnings over the period could be ascribed to the Newmex Transaction reported gain.
The reported "Gain on sale of mining properties" thus had, by any standard, a significant positive effect on PPI's reported bottom line financial results for 1998. We find below that it was "material" as that term is used in the Act.
Under the Newmex Transaction, ownership of Newmex purportedly passed from PPI to ASCOOP, SPIDA and (with the largest proportion) LynChris. PPI purportedly ceased to be a shareholder, although it retained its PPI Newmex Option.
The consequence of this change for Newmex was notable for its invisibility: nothing seemed to have changed. Newmex continued to operate out of PPI's premises. The Individual Respondents remained on Newmex's board of directors. None of the purported three new owners obtained, or seems to have sought, board representation. The information circular for Newmex's June 1999 annual general meeting (the "Newmex
1999 Circular") identified the Individual Respondents as two of the three nominees for election to the board of directors for the coming year, and Forbes as management's nominee for Newmex auditor.

2008 ABASC 363 (*)
PPI itself said the following in two take-over bid circulars it issued on 12 March 1999 (we discuss these further, below):

In a transaction that closed September 30, 1998, [PPI] sold all of its shares in Newmex for gross proceeds of $4,082,875. [PPI] received $1.5 million in cash and the balance in the form of a two year interest bearing promissory note. As a condition of the sale, the common management shared by Newmex and [PPI] has remained unchanged.
The Newmex 1999 Circular identified LynChris, ASCOOP and SPIDA as the three entities with beneficial direct or indirect ownership of more than 10% of the Newmex Shares. The initial arrangements, as discussed, called for PPI to continue to vote the shares purportedly sold to those entities. Even after the initial arrangements were supposedly changed (the Shorter Newmex/ASCOOP Terms Agreement omitting the voting provision, and the First LynChris Addendum with a similar provision supposedly having been discarded), there was no evidence that the new shareholders ever made their own voting decisions in respect of Newmex. Faithfull, for LynChris, suggested that he would defer to PPI because he knew little about mining or Newmex's business.
The First LynChris Addendum stated that LynChris would "at no time be responsible for any cash or other outlays" but would be indemnified for any costs incurred. This was broad wording and, it appeared, so intended. Coupled with another provision discussed earlier, it made clear that LynChris would never have to pay money to PPI for the Newmex Shares – the LynChris Promissory Note could be settled simply by handing the Newmex Shares back to PPI.
The arrangement so enunciated extended to something that Hennig and Faithfull might not even have considered when they signed the First LynChris Addendum: the requirement under the Newmex Escrow Agreement that specified amounts be expended on Newmex's mining properties as a condition precedent to the release from escrow of the escrowed Newmex Shares. Faithfull's testimony made clear that he understood that LynChris would not have to make any outlays. His understanding extended to the Newmex Escrow Agreement, the terms of which he apparently learned of only some months after first signing onto the Newmex/LynChris Transaction. Faithfull clearly communicated concerns about the agreement to Hennig, and understood from a discussion with Hennig that this escrow funding "wasn't a requirement of LynChris, that the funding would all be provided by ASCOOP and SPIDA". He testified that "there was a clear understanding between myself and [Hennig] that LynChris would not participate in any further funding in the development of the Newmex projects" and he expressed the
same understanding (including ASCOOP's and SPIDA's assuming the funding burden) in a 4 December 1998 letter to the Exchange which, he said, had been drafted by Hennig.

2008 ABASC 363 (*)
The consequence, while true to the plain meaning of the First LynChris Addendum, was somewhat extraordinary: the supposed new controlling shareholder of Newmex was relieved of any of the burden of funding its new acquisition in the manner contemplated by the Newmex Escrow Agreement and obviously (from the November 1998 Exchange Letter) expected by the Exchange. Instead, PPI, the supposed vendor, arranged for other purported buyers of Newmex Shares (ASCOOP and SPIDA) to assume this burden for LynChris's benefit (not ASCOOP's or SPIDA's).
As noted, the purported abandonment of the First LynChris Addendum left LynChris theoretically exposed to unplanned risks, ameliorated however by Hennig's assurances to Faithfull that their original deal would nevertheless be honoured.
As time passed, and new information, requirements and changes were mooted, Faithfull's concerns grew. He communicated his concerns to Hennig, both before and after PPI filed its 1998 Financial Statements.
Faithfull testified that he did not actually see the Newmex Escrow Agreement
- which governed LynChris's Newmex Shares – until February 1999. He did not like what he saw: "I started to appreciate that this was not a very good deal". The Exchange's expectation that LynChris would fund Newmex's mining activities, and the possibility that escrowed Newmex Shares could be cancelled – both consistent with the terms of the Newmex Escrow Agreement – were troubling to Faithfull.
Faithfull was concerned that some of what was promised in the deal had yet to materialize – notably, his (or LynChris's) entitlement, under the First LynChris Addendum, to receive 40 000 PPI Shares as a commission or inducement for the original agreement to buy Newmex Shares.
Faithfull also became worried about income tax consequences of the Newmex/LynChris Transaction relating to the LynChris Promissory Note. He apparently had not expected LynChris to have to make cash payments of interest, but he was concerned that a failure to do so would expose LynChris to income tax liability for a deemed forgiveness of debt. Faithfull pressed the issue of what he believed to have been a commitment that PPI would indemnify LynChris for potential tax exposure were LynChris to return the Newmex Shares to PPI in satisfaction of the LynChris Promissory Note and "essentially the forgiveness of the . . . 7 percent interest". Faithfull said that he mentioned it more than once and "he [Hennig] made reference that the addendum was dead".
A common theme of these concerns was that LynChris and Faithfull were being asked to provide more, and incur more risk, than Faithfull originally anticipated.

2008 ABASC 363 (*)
Hennig endeavoured to address Faithfull's concerns over the ensuing months.
1. Escrow Expenditures
As mentioned, Faithfull was reassured to understand, from a conversation with Hennig, that ASCOOP and SPIDA, not LynChris, would fund the mining expenditures needed for LynChris's Newmex Shares to be released from escrow.
1. Security for LynChris Promissory Note
As discussed, Hennig and PPI, not LynChris, posted security for the LynChris Promissory Note.
1. Inducement Shares to Faithfull
Faithfull testified to conversations with Hennig about various commitments in the First LynChris Addendum, including LynChris's entitlement to 40 000 PPI Shares as an "inducement". Faithfull said that Hennig "was quick to point out that the addendum was dead and no longer valid but that he would honour that commitment". It seems he did so. In respect of the inducement shares, on "6/7/99" Hennig instructed Olnick, at the Brokerage Firm, to provide "from Cheshire" a share certificate for 40 000 PPI Shares in Faithfull's name. Faithfull received the share certificate, dated 27 August 1999.
1. Interest and Income Tax
On 11 March 1999 Faithfull wrote to Hennig concerning a meeting between them earlier that day which had "helped place my mind at ease on most issues". Faithfull sought written confirmation that LynChris would be indemnified for some $90 000 of income tax liability per year, "as a result of the interest forgivable [sic] note", for "a taxable benefit of 7% per annum on the $2.6 million note". Faithfull stated in this letter:

It is my understanding that our agreement(s) with [PPI] indemnify LynChris for all expenses associated with the Newmex transaction and as such [PPI] will reimburse LynChris for these taxes.

. . .

This ongoing expense should provide [PPI] with some incentive to unwind the Newmex transaction sooner rather than later.
This income tax issue remained unsettled. Faithfull testified that the question of LynChris actually paying interest to PPI arose when PPI's auditor began expressing
concern. Faithfull himself seemed not to have foreseen, before that, that LynChris would actually have to make any such outlays.

2008 ABASC 363 (*)
In December 1999, Hennig and Faithfull resolved the matter. A single-page document in evidence set out handwritten calculations. The document bore a December 1999 date (the copy was insufficiently clear for us to be certain as to the specific date). The writer of the calculations was not identified but the initials "TH" (matching Hennig's) appear in the top right-hand corner. Titled "LynChris Accrued Int Calc.", the calculations set out the amount of interest – $255 888 – that would accrue over the course of one year and 152 days, at the rate of 7%, on $2 582 875. Although not identified as such, these data matched precisely the terms of LynChris's obligation under the LynChris Promissory Note for the period from 30 September 1998 through 29 February 2000.
The handwritten calculations also recorded a "Net Int cost" of $143 297.34 and divided that by 0.67 to arrive at $213 876.62. In larger writing on the same page appeared the amount $214 948.12.
A Staff member produced her own calculation, also suggesting that a payment to LynChris of $213 876.62, if treated for income tax purposes as a capital gain and assuming an income tax rate of 44% and a capital gains inclusion rate of 2/3 (0.67), would leave LynChris with an after-tax gain of over $151 000 – $7,842.14 more than the assumed after-tax cost of its payment of the interest (calculated as above) on the LynChris Promissory Note. The numbers did not quite match, but they conveyed what we found to be a plausible explanation for the handwritten calculations: an effort to compute the amounts of mutual payments between PPI and LynChris that would avoid the latter incurring a net cash cost.
Faithfull wrote Hennig on 10 December 1999 to discuss yet another "proposed addendum" to the LynChris Agreement that he had received. Faithfull's letter expressed general agreement to the proposal but claimed an extra "$2400 to compensate LynChris for out of pocket interest income" and queried whether a second additional addendum might be appropriate for the interval 30 September 1999 to 29 February 2000; "Under this scenario LynChris and PPI would exchange cheques, etc. for the balances on Feb 29th/00". Faithfull testified that his 10 December 1999 letter referred to a new draft agreement between LynChris and PPI (the "Third LynChris Addendum"), bearing the same title and 30 September 1998 effective date as the first two, and referring like the others to the original LynChris Agreement. Faithfull said that the Third LynChris Addendum:

. . . was drafted by [Hennig] or others within [PPI]. I think my involvement in it would have been communication or conversations or perhaps even faxes to [Hennig] asking to be kept whole.
2008 ABASC 363 (*)
The Third LynChris Addendum was apparently signed on 14 December 1999 by Faithfull for LynChris, and by the Individual Respondents for PPI. It specified that LynChris would pay PPI 7% interest on the LynChris Promissory Note for the first year (presumably, the 12 months to 30 September 1999) by 17 December 1999. Further, LynChris would pay, by 29 February 2000, what appeared to be interest at the same rate for the 152-day period from 30 September 1999 to 29 February 2000. LynChris's total interest commitment under this portion of the agreement would be $255 888.11. In addition, the Third LynChris Addendum stated:
1. On exchange of the Promissory Note for the 2,582,875 shares of Newmex, [PPI] will pay LynChris a premium of $213,876.62 which will offset the $255,888.11 interest on an after-tax basis.
2. The transaction described in 3 above will be completed as early in the year 2000 as possible after [PPI's] audit is complete, but no later than February 29, 2000.
Clause 3 confirmed the purpose, suggested by Staff, of the earlier handwritten calculations. Asked about the timing specified in clause 4, Faithfull stated:

It was my understanding that [PPI] did not want to recognize the repurchase transaction in their fiscal year ending September 30th, 1999.
The arrangement reflected in the Third LynChris Addendum was fulfilled on 29 February 2000, as discussed below. Faithfull testified that LynChris was made whole because the tax issue "went away . . . when LynChris paid the interest, but LynChris did recover the interest that it had paid". In any event, he said, "Certainly the way the whole transaction was -- was finalized, it certainly resembled the addendum".
In apparent furtherance of what was contemplated in the Third LynChris Addendum, Hennig sent the following note to Workum on 28 February 2000:

Hi Peter, attached is the LynChris agreement. It shows a premium of $213,876.62 being roughly 8.28% [which] was arrived at by tax-effecting the interest he paid. The agreement's effective date is February 29, 2000.
In evidence was a copy of an executed single-page agreement (the "Newmex/LynChris Repurchase Agreement") between PPI and LynChris. This agreement called for PPI to purchase from LynChris 2 582 875 Newmex Shares for consideration of $2 796 751.62, payable partly in cash on closing ($213 876.62, the amount mentioned in clause 3 of the Third LynChris Addendum quoted above) and the balance by "Assumption of Promissory Note". The transaction was to close on 9 March 2000 but with a 29 February 2000 effective date.
PPI wrote the lawyers holding the PPI Shares purportedly pledged to support the LynChris Promissory Note to advise that the note "is no longer in effect and the
shares pledged as collateral should be released to [PPI]" (not, we note, to LynChris). That letter was dated 1 March 2000.

2008 ABASC 363 (*)
A letter from Hennig to LynChris dated 8 March 2000, referring to "the conclusion of the Newmex transaction tomorrow", said:

I [Hennig] will have a cheque for $213,876.62 for LynChris and expect to receive your cheque in the amount of $75,086.86 for the interest due.

I will also require a letter from LynChris addressed to [the lawyers holding the pledged PPI Shares], authorizing the immediate release of the shares held as collateral to me.
In total, LynChris would thus receive from PPI – in exchange for the Newmex Shares and its interest payment – $213 876.62 to offset its tax-effected interest cost and
$2 582 875 ($1.00 per share) for the Newmex Shares themselves.
In a 9 March 2000 letter that Faithfull said was drafted by Hennig, Faithfull instructed the lawyers to release the PPI Shares (which had supposedly been lodged by LynChris as security for the LynChris Promissory Note) to Hennig (not to LynChris or, indeed, to PPI), explaining (as directed by Hennig) that:

[PPI] has entered into an agreement with LynChris to acquire the Newmex escrowed shares in exchange for cash and the assumption of the Promissory Note and accordingly, the security for the Note is no longer required.
On 15 March 2000 PPI announced its acquisition of 2 582 875 escrowed Newmex Shares "for a total consideration of $2,796,752 equal to approximately $1.08 per share". PPI's news release did not name LynChris and did not explain the computation of the reacquisition consideration, as discussed above. In particular, it did not mention that the parties had agreed to offsetting cash payments (only PPI's payment being included in the disclosed consideration), which accounted for the difference between the $1.08 approximate price per Newmex Share mentioned in the news release and the portion of the total consideration in fact allocated to the Newmex Shares themselves, equating to $1.00 per share.
On 6 November 2000 PPI and Newmex each issued news releases announcing that PPI had acquired 1.5 million Newmex Shares, half each from ASCOOP and SPIDA. There was no new agreement in evidence governing this acquisition, nor evidence of new negotiations among PPI, ASCOOP and SPIDA leading up to the reacquisition.
Neither news release disclosed the date of this reacquisition. However, PPI later explained what had happened in its 2000 AIF:
In March 2000 [PPI] . . . reacquired the 2,582,875 [Newmex Shares] which were the subject of the [LynChris Promissory Note]. Effective September 30, 2000, [PPI] reacquired, for cash consideration of $1.8 million, 1,500,000 of the Newmex [Shares] previously sold . . . .

2008 ABASC 363 (*)
The reacquisition price was 20% above the original September 1998 price. Given that two years elapsed between the effective dates of the original sale and this repurchase, this premium amounted to a return for ASCOOP and SPIDA at a rate (not compounded) of 10% for each of the two years, or 8.333% for each of the 24 months since the stated effective date of the original transaction.1 It will be recalled that this monthly premium, and 24-month interval, corresponded precisely to what was contemplated by clause 8 of the Longer Newmex/ASCOOP Terms Agreement.
We think this no coincidence. We find that it represented the culmination of the original deal.
1. The Orion Transaction
  1. Summary Description
The Orion Transaction was not a simple arrangement; it involved several parties and several steps. At its core was the sale of Swiss Plastering (owned by PPI subsidiary EnerGCorp) to Orion. In exchange for its shares in Swiss Plastering ("Swiss Plastering Shares"), EnerGCorp was to receive shares in Orion ("Orion Shares") and a promissory note.
Orion was at the time controlled by PPI director Street. In conjunction with –or in preparation for – this transaction, the Street Group was to sell a large block of Orion Shares to an individual, Leo Berezan ("Berezan"); Orion was to shed its oil and gas assets and associated liabilities to become what Street termed "a clean shell a public shell";
and Workum and Hennig were to be nominated to Orion's board of directors. At the end of the day, according to Street, EnerGCorp (PPI) and Berezan together would control 90% or more of Orion, and Street would receive $50 000.
PPI characterized the sale of Swiss Plastering in the Orion Transaction as follows, in Note 4 to its 1999 Financial Statements:

1On this point counsel for Workum appeared to have been under a misapprehension, suggesting in closing submissions that the return promised ASCOOP and SPIDA in the Longer Newmex/ASCOOP Terms Agreement would have required a repurchase price of $1.33, not $1.20. This, we suspect, was based on a misreading of the original terms. Clause 6 of the Longer Newmex/ASCOOP Terms Agreement indicated that the original sale price of $1.00 per Newmex Share was considered to be a 10% discount to the market price, defined for that purpose as "Cdn$ 1.11". Were $1.11 the original transaction price, an 8.333% monthly return for 24 months would indeed require a repurchase price of $1.33 per share as counsel suggested. However, $1.11 was merely a deemed or "defined" market price. The original purchase price was discounted from that defined price, and set at $1.00 per share. A repurchase at $1.20 per share, 24 months later, thus generated the promised monthly rate of return.
1. DISPOSITION
  2008 ABASC 363 (*)
  On September 30, 1999 [PPI] entered into a purchase and sale agreement whereby all of its shares of [Swiss Plastering] were acquired by [Orion] for $7,982,656. As consideration, Orion will issue 966,500 common shares with a deemed value of $1.00 per share (book value of $98,262) and provide a secured promissory note for $7,016,156 (see note 6). [PPI] has recognized a gain on sale for the proportionate monetary consideration received. The effective date of this sale is September 30, 1999 and is subject to the completion of a formal purchase and sale agreement as well as shareholder, regulatory, and Board of Directors' approval. [PPI] will own 48% of the issued and outstanding shares of Orion upon completion of this transaction.
PPI recorded a gain on the Orion Transaction in its 1999 Financial Statements. The issue here is whether this was a properly recorded gain in PPI's 1999 financial year, or a result not in accordance with GAAP and a misrepresentation.
Documentation relating to the Orion Transaction included the following, which we discuss below:
- First Orion Term Sheet;
- Second Orion Term Sheet;
- Orion Purchase Agreement;
- Orion Promissory Note (Long and Short versions);
- Orion Guarantee;
- Orion Guarantee Addendum; and
- Orion Amendment Agreement.
We were assisted in understanding the Orion Transaction, and the circumstances in which it was negotiated and handled, by the testimony of Street and Mackenzie, who each served as a director of PPI and whose testimony we found credible. When trying to sort out the transaction after it encountered regulatory difficulties, Mackenzie gained an understanding of the purposes of the transaction and some of its complexities.
Street testified that PPI was considering moving various of its businesses "into their own little public companies". Because Orion was a public company with US assets, Street (as a director of both Orion and PPI and controlling shareholder of the former) volunteered Orion as a potentially suitable vehicle – a US-focused counterpart of Newmex, he suggested – for assuming ownership of US businesses of PPI.
2008 ABASC 363 (*)
PPI and Orion negotiated a transaction in which PPI would sell Orion a PPI operating subsidiary or division. One intention expressed from early in the process was that PPI be able to recognize a gain on the transaction. Attention was not at first focused on Swiss Plastering as the subject of such a sale (a different PPI subsidiary was named in early documents) but it came to be the target. It was not clear whether this was originally conceived as a permanent transaction; reference (noted below) to a future "rollback" suggested otherwise.
Concerning Berezan's involvement, Street testified that he never met this individual. Mackenzie understood that, for PPI to be able to record a gain on the sale of Swiss Plastering, PPI had to give up control, meaning that it could not end up controlling (or appearing to control) more than one-half of Orion's equity. Perhaps the Street Group's Orion holdings were considered too close, or too visibly close, to PPI's (Street being at the time a PPI director) not to be counted for that purpose, hence the desirability of a percentage of Orion Shares ending up with Berezan, whom Mackenzie understood to be another "friendly party who could purchase the shares who wouldn't do anything . . . against our interest" and "would act in concert" with PPI. Mackenzie understood that Berezan had been "found" through Olnick; Olnick told Mackenzie that, if he ever needed a signature from Berezan, "just send it to me, and he'll sign it, we'll get it back to you right away".
As to Orion's disposition of its oil and gas interests, Mackenzie confirmed Street's testimony that the purpose was to give PPI a "clean shell". According to Mackenzie, though, "[i]t really was a mess in that the clean shell was never clean". He said that the Exchange's view was that a shareholders' meeting apparently required for Orion to dispose of the oil and gas assets "never happened", which left those assets "in a bit of a limbo".
PPI issued summary term sheets in late 1998 and early 1999. The first was dated 23 November 1998 (the "First Orion Term Sheet"). It described a transaction with two individuals, Street and Berezan, to be effective on 1 January 1999 ("subject to the joint execution of a formal agreement" and "all subject to director, shareholder and regulatory approval as required") and to close on 28 January 1999. The First Orion Term Sheet was signed by Workum (for PPI) and Street.
The First Orion Term Sheet called for Street to sell to Berezan 3 million Orion Shares to which he had "access" in consideration for $10 000 and 10 000 PPI Shares, and for PPI's "candidates" to be appointed to Orion's "board and management". The connection between those provisions was not apparent. We reproduce here two other provisions of the First Orion Term Sheet:
2008 ABASC 363 (*)
6.) The terms pursuant to which [PPI] shall exchange it's [sic] wholly owned private mobile home park operating subsidiary, Western Canadian Properties 'WCP' or other operating subsidiary at managements [sic] sole election for common shares in [Orion] shall be subject to [PPI] recognizing the desired profit upon the disposition of [PPI's] subsidiary and the receipt of an independent appraisal of the value of the division acceptable to the parties hereto.

. . .

8.) Conditions subsequent: The shares of [Orion] shall be subject to a rollback upon the completion of this transaction[.]
The First Orion Term Sheet was followed by another (the "Second Orion Term Sheet"), dated 18 February 1999. It is not entirely clear what became of the First Orion Term Sheet but the parties to it seem to have considered that it still had some force, inasmuch as they amended it in August 2001 (as discussed below).
The Second Orion Term Sheet described a similar arrangement but with some notable changes. Although in appearance very similar to the First Orion Term Sheet, it purported to have been issued by Berezan, not PPI. PPI was not named as a party.
Other significant differences included the closing date (26 March 1999), monetary consideration to Street of $50 000 rather than $10 000, and a different named "operating subsidiary" – Swiss Plastering – that PPI was to "vend" to Orion. The Second Orion Term Sheet was subject to the same approval conditions as mentioned for the First Orion Term Sheet, and to execution of a formal agreement. Clauses 6 and 8 of the Second Orion Term Sheet were very similar to the corresponding provisions of the First Orion Term Sheet but for the substitution of Swiss Plastering.
On 12 February 1999 Orion convened a meeting of shareholders to be held on 25 March 1999 and prepared an information circular (the "Orion Circular"), which was filed on SEDAR on 23 March 1999. Among the matters to be put to a vote were: the appointment of new directors (Street's wife and two others were to retire; Street, another continuing director, Workum and Hennig were nominated); a share consolidation; the transfer of "all of [Orion's] oil and gas assets to holders of [its] debt . . . in consideration for the cancellation . . . of the debt outstanding"; the purchase of Swiss Plastering; and a name change by Orion to Swiss Plastering or some other name determined by the Orion directors.
The Orion Circular described Swiss Plastering. The Orion Circular did not disclose the purchase price as such, but Orion shareholders were asked to approve the issuance of 4 million Orion Shares (the notice of the meeting referred to only 1 million shares) "or such number as is authorized by the [Exchange]" at a "deemed price (post consolidation) of $1.00 per share".
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In an undated news release filed on 29 March 1999 (the "March 1999 Orion News Release"), Orion announced that all of the resolutions put forward at the meeting –apparently it was held, contrary to Mackenzie's understanding – were unanimously approved. However, the efficacy or sufficiency of this supposed shareholder approval would later be called into question, as discussed below.
Street confirmed that he received a cheque in payment of the $50 000 he was to receive for his part in the Orion Transaction. He did not recall the details.
The First and Second Orion Term Sheets did not specify the quantum of consideration that PPI was to receive for selling its "operating subsidiary" to Orion, and neither mentioned a promissory note. Clause 6 of each term sheet appeared to leave those details to PPI's satisfaction that it could "recogniz[e] the desired profit". As noted, though, the Orion Circular described a simple share exchange – Swiss Plastering Shares for Orion Shares.
Mackenzie testified as to his understanding that the Orion Transaction was reworked to include non-share consideration from Orion (cash or a promissory note) to bolster PPI's ability to record a gain. This was consistent with professional advice obtained by PPI, to which we now turn.
Hennig wrote to KPMG on 17 June 1999 to seek advice concerning "a non-monetary transaction and related gain" involving Swiss Plastering. Scherman, responding for KPMG, identified problems with the proposal he was asked to consider, noting that the "[t]ransaction cannot result in gain as it is non-monetary and there is no culmination of the earning process (i.e. [here, PPI] received an equivalent non-monetary interest in the same line of business)".
This view having apparently been relayed to Hennig, KPMG was asked about a different proposal that included consideration from Orion in the form of both shares and a promissory note. In a 31 August 1999 letter, Hennig indicated that PPI "intends to book a gain on sale of approximately $7 million . . . for its fiscal year ended September 30, 1999". KPMG prepared a draft opinion dated 15 September 1999. After comment and input from Hennig (apparently on 20 and 21 September 1999) KPMG revised and issued its formal opinion (the "Orion Opinion").
The Orion Opinion set out KPMG's conclusion that PPI "can recognize a pretax gain of $7.2 million . . . at the date of the [Swiss Plastering] share sale". Before reaching that conclusion the Orion Opinion set out some "Background" assumptions and some intermediate conclusions:
In an arm's-length transaction, [PPI] proposes to sell its shares of [Swiss Plastering] for 49% of the issued voting shares of [Orion] and a $7.2 million secured, interest-bearing note from [Orion]. [Orion] is an unrelated junior capital pool company [Orion] will
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guarantee the payment of the note by having a substantial, independent financial institution issue a letter of credit or equivalent financial instrument to [PPI] for the full amount due.

Following the transaction, [PPI] will own 49% of the voting shares of [Orion]. However, it will not have the continuing power to determine strategic operating, investing and financing policies ; nor does [PPI] have the ability to elect the majority of the board
of directors . . . .

Conclusion
It is our view that [PPI] is not dependent on the future performance of the [Swiss Plastering] assets to realize $7.2 million cash in the future; collection of the note has been assured by the letter of credit or equivalent financial instrument from the substantial, independent financial institution. . . .
Scherman, the author of the Orion Opinion, confirmed the obvious in his testimony: the assumed facts were important to the conclusions expressed in the Orion Opinion. Specifically, "[i]t was important in that [PPI] would not still be managing the [Swiss Plastering] assets" after the Orion Transaction, and that "payment of the note would be assured by a letter of guarantee". On the latter point, we infer that the concern was that there actually be an assurance of payment, not merely a "letter of guarantee" saying so.
Like the Newmex Opinion, the Orion Opinion expressed an opinion as to the application of GAAP to assumed facts about the Orion Transaction. KPMG was given those facts by PPI and Hennig. KPMG was not opining as to the veracity of these factual assumptions and therefore the Orion Opinion did not warrant the correctness of PPI's financial statement disclosure of the Orion Transaction.
At some point, a new but still conditional agreement was prepared for Orion's purchase of Swiss Plastering. This agreement (the "Orion Purchase Agreement") among Orion (signed for by Street as president), PPI (signed for by Workum) and EnerGCorp (also signed for by Workum) bore a 30 September 1999 effective date and was to close "as soon as possible" thereafter. It was "subject to the completion of a formal purchase and sale agreement as well as shareholder, regulatory and Board of Directors' approval".
Street indicated that the Orion Purchase Agreement was a response to the accounting concerns (already mentioned) about PPI's ability to recognize a capital gain were it to retain control of Swiss Plastering. Street was persuaded that changing the terms – so that, among other things, PPI and Berezan would no longer have control of
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Orion – would make for "a better deal for PPI" and "still a good deal for the Orion shareholders". This was not an insubstantial change; Street said that "the whole nature of the deal would change". He justified having signed the agreement as Orion president, even though Workum replaced him in that post in March 1999, on the basis that the agreement was to have effect as of 1 January 1999.
The Orion Purchase Agreement was more specific than the Second Orion Term Sheet as to the terms of the transaction. Swiss Plastering was to be sold to Orion (which would assume the Swiss Plastering name) for a price of $8 160 000 "or other amount as determined by an independent valuation approved by the [Exchange]". No date was specified for the final determination of this price. Without such certainty, as Snell noted in his testimony, "it would be difficult to know what amount to book [for accounting purposes] because you don't know the . . . purchase price".
The price was to be satisfied by the issuance of 966 500 Orion Shares valued at
$1 each and the Orion Promissory Note ("a secured 2 year promissory note for
$7,193,500 bearing interest at a rate of 10% per annum"). The agreement was "subject to the appointment . . . to Orion's Board and Executive as President, Vice-President Operations and Vice-President-Finance respectively" of Workum, another individual who apparently operated Swiss Plastering, and Hennig. Unlike in the First and Second Orion Term Sheets, no "rollback" of Orion Shares was mentioned.
There was puzzling evidence about the terms and, indeed, the very existence of the Orion Promissory Note. More than one version of such a document was in evidence.
One version (the "Long Orion Promissory Note") was in the principal amount of "Cdn$7,016,156" (not the $7 193 500 specified in the Orion Purchase Agreement) and "Due" on 5 October 2001. This version, which contained two paragraphs of text, stated that the principal amount plus interest at 10% per annum was payable in monthly instalments to EnerGCorp. Signed (in counterpart) by three Orion directors including Workum, the document identified Orion as the "Borrower" and stated that "the Borrower has executed this promissory note this 29th day of September, 1999".
A second version (the "Short Orion Promissory Note") was executed for Orion only by Hennig as its "Vice President, Finance". The principal amount of this note was US$5 219 643 and the interest rate was, again, 10% per annum. Payments were to be made annually; no "Due" date was specified. This version of the Orion Promissory Note contained only one paragraph and named PPI, not EnerGCorp, as payee. The document was dated 30 September 1999 and did not otherwise indicate an execution date.
Mackenzie recalled having prepared an Orion Promissory Note, possibly in the late summer or fall of 2000, because someone (perhaps, he thought, the Exchange) had
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asked to see it but no copy could be found. He said that he prepared the note based on a template and on the terms of the purchase and sale agreement he consulted. Mackenzie doubted that he had drafted the Long Orion Promissory Note because he did not remember a second paragraph. He also recalled preparing a second version of the note after having been asked by EnerGCorp in "early spring of 2001" to send EnerGCorp a copy of the Orion Promissory Note in a specified principal amount and currency different from that of the first note he had drafted. Mackenzie thought that the purchase and sale agreement he consulted referred to Canadian dollars and, therefore, so did his first Orion Promissory Note, but the note requested by EnerGCorp was to reflect US dollars. Mackenzie therefore prepared a revised version of the note he had prepared some months earlier, with the currency and amount changed. He admitted to copying Hennig's signature onto this newly created Short Orion Promissory Note because Hennig was unavailable to sign it. Mackenzie testified that, although Hennig apparently soon became aware of this subterfuge, he (Hennig) had not been a party to it.
In the course of correspondence (discussed below) between Staff and PPI in August 2001, Hennig responded as follows to Staff's request for a copy of the executed Orion Promissory Note and questions about the US-dollar Short Orion Promissory Note:
1. EXECUTED ORION PROMISSORY NOTE: We are obtaining a copy . . . from our office in [Arizona] and should be able to provide it to the Commission on or before September 4, 2001.
2. ORION USD PROMISSORY NOTE: The referred to Note is simply the U.S. dollar predecessor to the $7,016,156 CDN dollar note referred to . . . above. Given that Orion was acquiring a U.S. based business, the original thought was to have the consideration (ie Note) be denominated in US dollars, however this was subsequently changed largely due to exchange rate risk concerns. The original of the US dollar note has been destroyed leaving the Canadian dollar note as the only valid version.
The existence of strikingly different versions of the Orion Promissory Note –supposedly evidencing the same indebtedness and a key element of the Orion Transaction
- called into question: (i) when it (or they) were first executed; (ii) what version was intended or thought to prevail and, therefore, what terms applied; and (iii) whether the selected terms had been or were likely to be satisfied. For example, were payments to be made monthly or annually, and to EnerGCorp or to PPI?
  1. Orion's Capacity to Satisfy Orion Promissory Note
Whichever of the alternative versions of the Orion Promissory Note would be considered the operative one, it called for Orion to make sizeable payments of interest (10% of the principal amount, payable in Canadian or US dollars, monthly or annually, depending on the version of the note) and to pay the principal amount on maturity.
The parties took different positions as to Orion's ability to satisfy those obligations. Counsel for Hennig suggested that sufficient funds could be generated from the Swiss Plastering business being acquired by Orion.

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A Staff member, however, noted that, while Swiss Plastering had sizeable revenues and gross profit in 2000, neither its income from operations nor its pre-tax net income for that year would have covered such interest expense and the supposed new owner (Orion) would have been driven into a loss position. Staff also questioned Orion's ability to pay the principal amount of the Orion Promissory Note when due.
Street gave credence to Staff's concerns. He testified that Orion could not, in September 1999, have paid over US$5 million or C$7 million (the principal amount) even as owner of Swiss Plastering. He suggested that "the development of that asset" might enable it to pay in future. However, his real assumption had apparently been that the debt would be converted to equity, producing an outcome "along the lines of the original deal that was written, . . . an all-stock deal" – a deal rejected and reworked because of the accounting concerns that it might not enable PPI to record a gain on the Orion Transaction.
Staff contended that Orion's financial capacity – alone or taking into account the assumed contribution of Swiss Plastering – cast such doubt on its ability to satisfy the Orion Promissory Note that this in turn argued against PPI's recognition of a gain on the Orion Transaction. This was confirmed by Snell: "if the note can't be repaid, you don't get your gain".
1. Security for Orion Promissory Note: Orion Guarantee
In evidence was a loan guarantee agreement bearing the date 29 September 1999 and addressed to EnerGCorp (identified as the "Lender"). It was executed by Cofima as guarantor (both Schöni and Wick signed). This document (the "Orion Guarantee") referred to an attached promissory note. Attached to one copy of the Orion Guarantee in evidence was an unsigned copy of the Long Orion Promissory Note.
The Orion Guarantee began with the following recitals:

. . .
1. Pursuant to the terms of a Promissory Note dated September 29, 1999, [Orion] (the 'Borrower') is indebted to the Lender;
2. As security for the full amount of the indebtedness (Cdn$7,016,156., [sic] + interest of 10% per annum), [Cofima] (the 'Guarantor') has agreed to guarantee to the Lender payment of the Indebtedness. . . .
It defined "Indebtedness" to mean:
. . . all debts, obligations, interest, and liabilities, present or future, direct or indirect, absolute or contingent, matured or not, at any time owing by the Borrower to the Lender under the Promissory Note . . .

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Cofima's liability was, however, limited to the amount (and interest) mentioned in the recitals, and the effectiveness of the guarantee was subject to payment of a
$240 000 guarantee fee by 15 December 1999. The Orion Guarantee was set to be released no later than 29 October 2001.
It is not certain precisely when the Orion Guarantee was signed, but one copy in evidence bore the facsimile transmission notations "13-Dez-99 Mo 21:27 Cofima Finanz AG". Schöni confirmed that Cofima signed the Orion Guarantee on or about 9 December 1999 and that it was backdated to 29 September 1999. We therefore accept that it was executed no later than 13 December 1999.
Staff expressed doubt as to Cofima's ability to satisfy its obligation under the Orion Guarantee, were it to be called. That doubt was well-founded.
Schöni, one of the principals of Cofima during the Relevant Period, confirmed that Cofima did not have the means to satisfy its potential obligation under the Orion Guarantee (or under the similar guarantee, discussed below, for the Azterra Transaction; we refer to this "Azterra Guarantee" and the Orion Guarantee together as the "Cofima Guarantees"). He said that this was discussed with ASCOOP and, he was quite sure, with Workum – and he assumed that Hennig was also aware of this. Schöni said that both Individual Respondents knew that Cofima would need the help of a third party like ASCOOP were the Cofima Guarantees to be called. Schöni said that Workum had in fact first spoken to ASCOOP and, he believed, with Commcept, before approaching Cofima about the guarantees. Schöni testified that at the time Cofima signed the Cofima Guarantees – when it knew it could not itself fulfil the obligations it was taking on – "we knew that ASCOOP would be around" if the guarantees were to be called. Schöni characterized the situation at the time not as an assurance of backing but as "a big chance that ASCOOP would help us out". Workum, he said, was aware of this; "[h]e was involved in all discussions". Moreover:

[Workum] told us that [the] guarantees will not be called on. This was not ASCOOP who told us that. [Workum] told us that it's not going to be called on, yes.
Schöni testified that, at the same time as Cofima signed the Orion Guarantee, Cofima and EnerGCorp executed a similarly backdated document identified as an addendum (the "Orion Guarantee Addendum"). This short but, in our view, extraordinary document included these key provisions:
1. [EnerGCorp] will not under any terms demand payment of the [Orion Promissory Note] from [Cofima] during or subsequent to the term of the [Orion Promissory Note].
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2. [EnerGCorp] will pay [Cofima] a one.time [sic] fee of 3.0% of the principal amount only of the [Orion Promissory Note] at execution of this agreement.. [sic] For greater clarity . . . Cdn$240,000 [the fee] will be paid within 7 days of execution of this agreement. . . .
3. [EnerGCorp] will indemnify [Cofima] for any costs incurred as a result of its participation in this agreement.
4. The Parties hereto agree to execute whatever other documentation may be required by the Regulatory Authorities in order to consider the [Orion Guarantee] and this [Orion Guarantee Addendum] binding and efficacious under GAAP (Generally Accepted Accounting Principles) and the law.
Schöni testified that this agreement "was presented [by Workum, he thought] and it was consistent with what we've agreed on [with Workum], so, yes, we didn't question it".
The Orion Guarantee Addendum relieved the purported guarantor (Cofima) of any potential obligation under the Orion Guarantee and left the risk of default on the underlying Orion Promissory Note on the creditor – and the supposed beneficiary of the Orion Guarantee – EnerGCorp.
According to PPI – responding to Staff inquiries in the summer of 2001 –Cofima "re-insured" the Orion Guarantee (and the Azterra Guarantee, as discussed below):

. . . with an affiliated company [Triad] at the time of execution. These entities share common management, directors and shareholders and the latest available balance sheet of [Triad] shows net assets in excess of USD$3 billion. . . .
A letter dated 29 September 1999 on Triad letterhead, signed by Wick, was sent to PPI (the "Triad Confirmation Letter"). It stated that Triad was "endorsing, reinsuring and acting as co-guarantor" of the Orion Guarantee.
However, material obtained by Staff from PPI correspondence files suggested that Triad came into the picture a good deal later than the supposed "time of execution" of the Orion Guarantee (on or before 13 December 1999). In an e-mail exchange between Schöni and PPI's King on 19 and 20 July 2001, King sought Schöni's assistance in signing documentation for "the transfer of [Cofima] loan guarantees to Triad". Schöni responded that Triad "was only backing Cofima on this transaction", that he was also president of Triad, and that the relevant documents should be sent for his signature to Switzerland. Schöni did not dispute the content of these July 2001 e-mails on the subject with PPI's King.
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The copy of the Triad Confirmation Letter was accompanied by a Cofima facsimile transmission sheet from Schöni to Hennig; both bear facsimile transmission notations indicating transmission on 27 July 2001. Schöni himself conceded that the Triad Confirmation Letter had been backdated. Given all the evidence, we do not believe that Triad's supposed backing for the Orion Guarantee arose as early as September 1999. We conclude that this happened only in July 2001.
Schöni's recollections about Triad and his own connection with Triad were rather vague. He indicated that Wick was a representative of Triad, that Wick dealt often with a major Triad shareholder, that Wick kept Triad letterhead in the Cofima office, and that Schöni "was named president" of Triad. However, Schöni also said that he "never was brought up to speed" about Triad.
The March 1999 Orion News Release (mentioned above) noted that the Swiss Plastering purchase would be a "reverse take over" as defined by the Exchange. The Exchange shared this view. On 1 November 1999 the Exchange wrote to PPI advising that Orion appeared to have breached the condition of its listing that required prior Exchange consent to material changes including a change of control. The Exchange also required Orion to file a formal "Reverse Takeover Application" including considerable supporting information and a draft meeting circular and news release. By clear implication, a new shareholders' meeting and shareholder vote would be required; the shareholder approval obtained (or at least announced) in March 1999 did not suffice. The letter concluded with the advice that trading in Orion Shares "will remain halted until . . . we have approved" the transaction.
Little progress was apparently made in addressing Exchange concerns over the succeeding months. On 26 October 2000 the Exchange wrote to PPI to advise that, unless outstanding items were dealt with in "the next two weeks", the matter would "be withdrawn". On 8 November 2000 (more than one year after the Orion Transaction had, according to PPI, triggered a gain) new PPI lawyers wrote to the Exchange advising that they "have been retained to assist in the completion of the reorganization of [Orion]". The letter also noted that PPI "is currently undertaking a valuation of Swiss Plastering to up date [sic] the information previously given to you".
PPI did indeed commission from CST a valuation of Swiss Plastering. Two valuations were in evidence, one as at 31 March 1999 (prepared in June 1999) and another as at 30 September 2000 (prepared in February 2001). It was not clear that the Exchange ever accepted those or any other valuation.
On 4 February 2000 the Commission issued an order (the "Orion CTO") that trading cease in respect of securities of Orion, citing a failure by Orion to file and send to securityholders interim financial statements for the period ended 30 September 1999.
Hudson, as part of its audit planning, compiled "Inherent Risk Questionnaires" setting out observations about a particular client and highlighting areas of potential concern for that audit. The questionnaire for PPI's 1999 audit, apparently completed by Forbes for Hudson, included the following entries (pre-printed questions, with the handwritten responses shown in italics):

MANAGEMENT ENVIRONMENT

. . .
. . .

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YES Mgmt is extremely bottom line/Profit, EPS [earnings per share]
conscious
. . .

ACCOUNTING MATTERS

13. Are there special problems relating to accounting principles or methods of application?

. . .

YES Client leans heavily towards aggressive accounting policies to enhance profit

. . .
1. Are there problems relating to particular transactions, balances or accounting entries?
  
  YES Swiss Plastering Sale
  1. PPI's 1999 Financial Statement Presentation of the Orion Transaction
PPI filed its financial statements for the year ended 30 September 1999 (with comparative information for the prior year) on 17 February 2000. Düby and Workum approved the balance sheet on behalf of PPI's board of directors. The 1999 Financial
Statements were accompanied by an unqualified audit report of Hudson dated 21 January 2000.

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The table below summarizes certain line items from PPI's 1999 Financial Statements:

Income Statement 1999 1998

Gain on sale of businesses	$ 6 263 594	$ 3 878 486
Revenues	30 328 370	20 256 931
Expenses	$ 23 242 598	$ 16 245 901
Pre-tax earnings	7 085 772	4 011 030
Net earnings	$ 6 628 943	$ 2 977 781
Earnings per share (fully diluted)	$ 0.36	$ 0.20

Balance Sheet

Notes receivable	$ 13 784 626	$ 3 570 594
Retained earnings	10 293 954	4 000 934
Total assets (also Total liabilities and equity)	$ 57 272 900	$ 38 619 767

The revenue item that was described in 1998 as "Gain on sale of mining properties" was renamed in the 1999 Financial Statements (for both 1998 and 1999) "Gain on sale of businesses". The amount so recorded rose from $3 878 486 for 1998 to
$6 263 594 for 1999 and represented the second-largest reported revenue item for 1999 (only "Construction" at $20 888 438 was higher and largely offset by construction expense). This reported gain was equal to 88.4% of reported 1999 pre-tax earnings. But for this reported gain, 1999 pre-tax earnings would have been $822 178, a 79.5% decline from the amount recorded for 1998 (taking into account the reported 1998 gain on the Newmex Transaction) rather than the 76.7% increase reported.
Turning to the balance sheet, PPI's total reported assets, and aggregated liabilities and shareholders' equity, as at year-end 1999 were $57 272 900, an increase of approximately $18.7 million from year-end 1998. The largest single change over the period among reported asset items was a $10.2 million increase in "Notes receivable", from $3 570 594 at year-end 1998 to $13 784 626 one year later. PPI's reported 1999 net earnings increase prompted a 2.6-times increase in retained earnings, from $4 000 934 at the beginning of its 1999 financial year to $10 293 954 at year-end. (The proportionate increase would have been much larger had 1998 results not included the Newmex Transaction.)
PPI's reported earnings per share approximately doubled, from $0.21 ("Basic") and $0.20 ("Fully diluted") for 1998 to $0.42 ("Basic") and $0.36 ("Fully diluted") for 1999.
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The notes to the 1999 Financial Statements included disclosure of the Orion Transaction, specifically the sale of Swiss Plastering to Orion (Note 4 was quoted above). Note 6 to the 1999 Financial Statements discussed "Notes Receivable". Twelve separate items were described. "Notes receivable" from LynChris and Newmex were described in similar terms to what appeared in the 1998 Financial Statements, the year-end 1999 reported amounts being, respectively, $2 763 676 (up $180 801, or 7%, from the 1998 amount of $2 582 875), and $475 875, unchanged from 1998. The largest new items discussed in this Note 6 were, in descending order of magnitude:

Note receivable from [Orion] with interest at 10% per annum secured by [Swiss Plastering Shares] and secured by a loan guarantee provided by an independent financial institution, due September 30, 2001 $7,016,156

Advances to [Swiss Plastering] non-interest bearing with no fixed terms of repayment.
[$]1,315,366

Advances to [Newmex] non interest bearing with no fixed terms of repayment.
[$]1,051,428
Orion's financial year ended on 31 March. The financial statements for its 1999 financial year ("Orion's 1999 Financial Statements") – accompanied by a 23 August 1999 report of Orion's auditor (Forbes) – were filed on SEDAR on 6 October 1999. These financial statements confirmed Street's testimony that Orion had neither the assets nor cash flow to pay the Orion Promissory Note. They also showed that Orion did not account for the Orion Transaction in the body of Orion's 1999 Financial Statements, but instead discussed it as a "Subsequent Event" in the notes to the financial statements.
Orion filed financial statements for the year to 30 September 2000 ("Orion's 2000 Financial Statements"; it appears that Orion had changed its year-end to that date) on SEDAR on 16 March 2001. These were accompanied by "comparative" statements for the six-month period ended 30 September 1999 and a report of its new auditor –Hudson – dated 25 January 2001. Orion management, by this time, included Workum and Hennig; Workum was one of the director signatories to Orion's 2000 Financial Statements.
Orion's 2000 Financial Statements reported the Swiss Plastering acquisition as having taken place in Orion's 1999 financial year. Orion's 2000 Financial Statements allocated approximately $6.5 million of the $7 354 431 purchase price for Swiss Plastering to goodwill, an asset.
Note 7 to Orion's 2000 Financial Statements discussed the Orion Transaction, including the associated $7 016 156 debt, as follows:
The [Orion Promissory Note] . . . is secured by [Swiss Plastering Shares] and by a loan guarantee provided by an independent financial institution. Although this note is due on September 30, 2001, management anticipates that either the maturity date will be extended under similar terms or that new financing and/or new equity arrangements will be made to satisfy this note receivable.

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Snell testified that this comment caused him concern in that it suggested a lack of intention by Orion to satisfy the stated obligations under the Orion Promissory Note and that, from PPI's perspective, "a realization of the cash is just pushed off into some unknown time in the future". KPMG had a similar concern when this Note 7 came to its attention in June 2001: it called into question one of the basic assumptions underlying its Orion Opinion. KPMG also discerned potential significance in the fact that Cofima, provider of the Orion Guarantee, "was not a large [the excerpt from Note 7 quoted above used the word "independent"] financial institution as described in the notes"; the result could be "some question about the quality of the guarantee".
Street testified that he considered that Orion's directors approved the Orion Purchase Agreement (which Street, although no longer holding the position, signed as Orion's president). However, Orion never held another shareholders' meeting after March 1999. Accordingly, the shareholders never approved the transaction terms set out in the Orion Purchase Agreement, nor gave the approval to the reverse take-over as required by the Exchange.
Street believed that he had done his part in handing his company over for use in the Orion Transaction, and was not responsible for further steps to complete the transaction. However, he said that he offered to help Mackenzie in the latter's efforts to conclude the transaction.
Through 2000 and well into 2001, conditions to the closing of the Orion Transaction remained unfulfilled. PPI itself noted in its 2000 AIF that "[t]he completion of the [Orion Transaction] . . . is subject to receipt of shareholder and regulatory approvals". In a 20 June 2001 letter to Staff and the Ontario Securities Commission (the "OSC"; we refer to this letter as the "June 2001 Hennig/ASC/OSC Letter"), Hennig indicated that "only . . . shareholder and regulatory approvals" remained outstanding, and that an information circular was in preparation for submission "by month end" for regulatory approval and for an annual general meeting "to be held some time before September 30, 2001". PPI, said Hennig, believed that shareholder approval would be given because "if the shareholders vote against . . . , they will be left holding virtually worthless common shares in insolvent companies". As to regulatory approval, he said that "management is confident, based on prior experience, that such approval will be forthcoming".
In fact, shareholder and Exchange approval never were obtained.
We heard testimony of Foscolos, who (as mentioned) worked at PPI from May to July or August 2001. He was recruited to work on "corporate development", initially in connection with PPI's Ventra Bid. Foscolos said that his work evolved into trying to address regulatory concerns – "trying to get the Securities Commissions essentially off the back of [PPI] so the [Ventra] deal could close or continue". He worked on this task with, among others, fellow PPI employees Charlton and King, and with Mackenzie, Hennig and Workum.
With Mackenzie about to leave PPI in June 2001, Foscolos was assigned to sort out issues with the Orion Transaction: "to attempt to close that -- in my view, close that transaction". Foscolos testified that he did not consider that this transaction had yet closed by that time, and expressed that view to Workum and Hennig after the three left a meeting with Staff and others on 4 July 2001. Workum's and Hennig's position on Staff's concerns, he said, was "if they [Workum and Hennig] were just persistent, it would all blow over". By that time, Foscolos stated, he had come to the view that PPI "was generally in a mess", and regretted what he had gotten into.
Foscolos testified to looking, and asking, for documentation of the Orion Transaction. Accustomed from past experience to closing books containing detailed transactional documentation, he found nothing like that for the Orion Transaction; documents he did find "were not particularly detailed". He said that he talked about this with Mackenzie and Cheryl Lebeuf ("Lebeuf", who performed clerical and administrative functions at PPI and served as its corporate secretary during and after the Individual Respondents' tenures at the company) and with PPI and Orion director Street, but not with Workum or Hennig. Shown three signed documents – the Orion Purchase Agreement and the Short and Long Orion Promissory Notes – Foscolos did not recall having seen any of them while he was at PPI.
While Foscolos acknowledged that the fact he might not have seen a document did not prove that it did not exist, he also stated:

Well, on the face of it, you could be correct, but when someone has charged you to close a transaction and you ask for documents and you can't find them because they're withholding them -- withholding them or haven't been found, I would be perplexed, but it's possible [that the documents existed].
Foscolos learned in mid-July 2001 (he thought from Workum) that Triad had entered the picture as assignee of the Orion Guarantee. He did not consider that this development added much credibility to the Orion Transaction.
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Foscolos said that he knew from conversations with King that the latter was engaged at the time in dealings with Cofima, "essentially trying to clean up the paperwork on these transactions [Cofima Guarantees] or recreating them. I don't know, but he was just trying to get things signed basically". Foscolos said that he participated at some point in mid-July in a discussion with one or both of Workum and Hennig in which he (Foscolos) expressed the view that if Workum and Hennig believed the Cofima Guarantees to be real, "it's very simple . . . , call them, get the cash, and everything's all settled and over with".
We believe what Foscolos said about the environment at PPI in the summer of 2001 and his access to documents relating to the Orion Transaction. We believe that he had not, while at PPI, seen executed copies of the Orion Purchase Agreement or Orion Promissory Note. Given his assignment to sort out the Orion Transaction, we think that these would have been among the first documents given to him. His evidence indicated, at the very least, that the Orion Transaction was in a highly uncertain and confused state at the time. We also believe that Foscolos testified truthfully to his understanding of what King was working on in connection with the Cofima Guarantees; to his own reaction to news of Triad's involvement; and thus to the timing of Triad's involvement.
Charlton joined PPI in June 2001, shortly after Foscolos. Charlton said that his first assigned task – not really what he had been hired for – was to work with Mackenzie on resolving issues relating to the Orion and Azterra Transactions. He said that, after an overnight review of the files he was given, he told Mackenzie that the transactions were not completed, the PPI financial statement disclosure of them was therefore incorrect, and the financial statements must be restated. Charlton testified that Mackenzie rejected this advice, saying that Workum "wants it done this way" and they must therefore complete the transactions.
Charlton testified that there was no closing book to consult, "no clear documentations [sic] or avenues to follow". He said that, despite asking "everybody" (including Workum and Hennig) for documents, he saw no Orion Promissory Note, no Azterra promissory note and no Cofima Guarantees. According to Charlton, Workum said that he (Charlton) did not need to see the documents, and Hennig "pretty much referred [sic] to [Workum]". Charlton also testified to pursuing the point with former PPI auditor Forbes:

. . . I asked him point blank, have you ever seen these things, after a week and a half or two weeks of hunting for them, you know, I asked them the question on the record, off the record, I don't care, tell me if they exist, am I looking for something. He said he hadn't seen them. I kind of questioned, well, you signed off on them. He said, well, you know, I believed what [Hennig] had said.
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Charlton said that Forbes, while friendly, seemed agitated by this discussion and that, the next day, Workum instructed Charlton not to speak further with Forbes, only with Workum. Overwhelmed by his task, Charlton "handed off the Azterra file" and focused on the Orion Transaction. A significant problem was valuation: bridging a gap between what he described as a $98 000 value for Swiss Plastering and the $7.9 million transaction price. As to completing the Orion Transaction, Charlton said: "My conclusion was the same as it was the second day there. It's impossible. You can't complete it." Charlton said that he expressed this view to Workum.
Charlton also testified that the status of the elusive Orion and Azterra promissory notes was a frequent topic of conversation with his colleagues at PPI – "a daily joke":

. . . they're not in existence. Nobody at the firm had seen them. In fact, at one point it became very clear [King] was redrafting notes. It was his mandate, one of the managers.

. . .

It was very clear, we had gone into a management meeting, we came out of the management meeting, and [King's] mandate, and this was just prior to us leaving, was to draft up the [promissory] notes for Orion and Azterra, which contradicted everything that [Workum] was saying.
Hennig correctly pointed out that Hudson had sent to the OSC, on the very day Charlton joined PPI, some of the Orion-related documents that Charlton said he was never shown and whose elusive nature was the butt of office jokes. Charlton adhered to his testimony that he had not seen the documents, and that they were not included in the Orion and Azterra files he was given to work with. As to the office joking, Charlton conceded that the conversations may have been limited to himself, Foscolos and King.
Asked about the Cofima Guarantees, Charlton continued his testimony:

. . . out of one of the last management meetings I was in, [King] was asked to assign the Cofima guarantee to try it out of Panama, and he was to draft that.

. . .

[Workum] had come into -- into the meeting, basically said that Cofima was not going to honour the note, they weren't going to pay it at September but not to worry, we're going to assign it to the Triad group out of Panama, and [King], draft it up.

. . .

. . . one of the first things we started to do was Cofima had came [sic] out and [Mackenzie] and I were discussing it. Cofima had said from pretty much my second day there they were not going to honour the guarantee, however, given their personal relationship with [Workum], they would be willing to advance $7 million if they got $7
million worth of F warrants [described by Charlton as "basically. . . a new security that gave them options on PPI stock"].

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Charlton described the reaction to King's new task of drafting the assignment of the Cofima Guarantees to Triad: "I think just about everybody in the room was shocked and disbelieved [sic]. We're in a mass load of trouble here".
Charlton did not work on the Newmex Transaction directly but "I was always told to refer to it because it was the original". Charlton elaborated (although he acknowledged that he did not recall Workum or Hennig describing it this way):

Well, the way the transaction was to work was just before year end, you do this little shell game of assets, book a gain, prop up the financials, and you look like a star. Newmex was reported to be a non-issue with the Commission. It went through, it was cleared, everything worked out, nobody had an issue. That was the model, per se, for Azterra and Orion.
Charlton testified that Foscolos, who had recruited him to PPI, "was extremely concerned about the notes and the guarantees", "distressed" as a professional about what was being said to Staff (Charlton used the word "lie"), and "very apologetic" about involving Charlton.
As noted, we assessed Charlton's credibility carefully, but we did not reject his testimony.
Apparently in recognition of the lack of progress in concluding the Orion Transaction (despite the distinctly rosier picture conveyed by Hennig to Staff), the terms of the Orion Transaction were significantly altered in August 2001. In a document dated 23 August 2001 and purportedly "agreed to and accepted" on the same date (although the copy in evidence bore facsimile transmission notations of dates later that month) by PPI, EnerGCorp, Berezan and each member of the Street Group (the "Orion Amendment Agreement"), the signatories waived, confirmed, terminated or supplemented various provisions of each of the First and Second Orion Term Sheets and the Orion Purchase Agreement. Among conditions waived were those requiring shareholder and regulatory approval, specifically including the Exchange's approval of an independent valuation of Swiss Plastering. The sale price for Swiss Plastering was confirmed to have been
$8 160 000. The condition that the Swiss Plastering sale be formally documented was stated to have been met, and closing or completion of the sale was shifted to "as soon as possible" after 23 August 2001, although its 30 September 1999 effective date remained unchanged.
In a letter (the "Orion Demand") dated concurrently with the Orion Amendment Agreement, PPI and EnerGCorp (Workum signed for both) wrote to Cofima and Orion demanding payment of the Orion Promissory Note and of the "Indebtedness" under the Orion Guarantee. Such payment was demanded by 28 September 2001. PPI made a similar demand (the "Azterra Demand") under the Azterra Guarantee, as discussed in more detail below. The Orion Demand did not specify the amount due but did specify (erroneously transposing numbers) that the sale price for Swiss Plastering had been $1 860 000. Unexplained was what default had prompted such a peremptory communication or, indeed, the triggering of the Orion Guarantee. Nor was any reference made in the Orion Demand to the Orion Amendment Agreement of (purportedly) the same date.
The Orion Demand included space for Cofima and Orion to indicate their agreement and acceptance. Schöni signed for Cofima. The copy of the Orion Demand in evidence does not show execution for Orion.
PPI informed Staff on 2 October 2001 that it (possibly meaning its subsidiary EnerGCorp) had received from Cofima the payment demanded under the Orion Demand, which PPI quantified as $7 016 156 in principal and $1 403 231 in interest.
Schöni conceded that Cofima never did any due diligence beyond getting assurances from PPI and ASCOOP before signing the Cofima Guarantees and the Orion Guarantee Addendum:

. . . I mean, ASCOOP is one of the big pension funds of Switzerland, and being a major shareholder -- big shareholder of PPI, having board seats, if these people tell us, Yes, we would like you to do that, we think it's a good thing to do that, I mean, I don't think that we are -- that we should have done more due diligence at the time than, than we did.
In the event, when the Cofima Guarantees were called, Cofima agreed to the Orion and Azterra Demands evidently without investigating whether the underlying debts really were in default. ASCOOP funded the required payments totalling almost $15 million. However, ASCOOP apparently demanded various securities in exchange, plus interest payments (a document confirming such an arrangement was in evidence), and ended up (according to Schöni) with Swiss Plastering Shares and shares in Creative Classics.
By the summer of 2002 (if not long before) it was apparently clear to the Individual Respondents that the Orion Transaction would never be completed. In evidence was a draft letter from PPI to Street, dated 11 June 2002 and sent by Hennig for
Workum's comments and sign-off, referring to "the failure of the Orion-Swiss Plastering Transaction to close" and asking Street for the return of the $50 000 he had been paid.

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McCowan testified to his belief that Workum was still, at the time of the Hearing, running Swiss Plastering from Arizona.
1. The Azterra Transaction
  1. Summary Description
The Azterra Transaction was another transaction for which PPI reported a gain in its financial statements, in this case for its 2000 financial year. Although a complicated transaction, its essence can be distilled to three key parts: (i) Azterra was to convey the Polo Club project to PPI's subsidiary EnerGCorp; (ii) Azterra would be recapitalized through a share consolidation, with PPI assuming the burden of existing Azterra debt and injecting additional money in return for an Azterra promissory note; and
1. Azterra would buy from PPI and EnerGCorp their respective subsidiaries Willow Creek and Creative Classics. The consideration payable for the third part of the transaction (the most relevant to this proceeding) was to consist of shares in Azterra ("Azterra Shares") and promissory notes.
PPI characterized the sale of Willow Creek and Creative Classics in the Azterra Transaction as follows, in Note 5 to its 2000 Financial Statements:
1. SALE OF BUSINESS
  On June 30, 2000 [PPI] entered into a purchase and sale agreement whereby all of its shares of [Creative Classics] and [Willow Creek] were acquired by [Azterra] for
  $7,250,000. As consideration [Azterra] will issue common shares with a deemed value of $1,080,000 (book value of $132,312) and provide a secured promissory note for
  $6,162,187. [PPI] has recognized a gain on sale for the proportionate monetary consideration received. [PPI] will own 48% of the issued and outstanding shares of [Azterra] upon completion of this transaction.
  1. Elements of the Azterra Transaction
    1. Relevant Documents
Documentation relating to the Azterra Transaction included the following, which we discuss below:
- Azterra Letter Agreement;
- Azterra/Creative Classics Promissory Note;
- Azterra Guarantee;
- First Azterra Amendment;
- Formal Azterra Agreement;
- Second Azterra Amendment; and
- Azterra Demand.
Azterra, as mentioned, focused on real estate projects in the Phoenix area. As noted, the Polo Club was valuable, but Azterra itself was, by 2000, in deep financial trouble. It was looking for a suitor.

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Through mutual contacts, Workum and PPI came into the picture. Negotiations began for PPI to acquire Azterra, apparently through another reverse takeover. Azterra's CEO Fitzsimonds understood that Workum wished to make Azterra the publicly-listed vehicle for PPI's real estate portfolio, and to increase the company's (it was unclear whether the reference was to PPI or its proposed real estate subsidiary) "position [to] somewhere in the vicinity of $100 million worth of value". Fitzsimonds also understood Workum to be quite interested in acquiring the Polo Club project.
The Azterra directors – prominent Alberta businessmen among them – were apparently impressed with PPI and Workum, and saw the proposed deal as a great fit for both companies. Some Azterra directors later joined the PPI board.
Negotiations proceeded quite quickly, culminating on 29 June 2000 in a letter of intent (the "Azterra Letter Agreement"), which was accepted by Azterra the next day. Fitzsimonds said that Azterra's directors were anxious to move the deal forward but much remained to be done, including obtaining approval from shareholders and the Exchange. A 7% commission would be payable on the transaction, either to Lexington or to Strategic (there seemed to have been some confusion) even though, according to Fitzsimonds, only PPI and Azterra were involved in the negotiations.
Despite its financial straits, Azterra was its own company. It had independently-minded directors and officers; an auditor different from PPI's; and independent legal counsel throughout its dealings with PPI. Azterra's independent stance would be apparent as time went on, in its response to the developing Azterra Transaction.
The Azterra Letter Agreement stated that it was "intended to be a binding Letter of Intent". It began by setting aside the terms of a prior letter agreement apparently entered into by the parties in March 2000 and not germane to this proceeding. In outline, the relevant portions of the Azterra Letter Agreement called for:
- PPI to sell its shares in Willow Creek to Azterra for 2 484 000 Azterra Shares (or one-eighth that number after a contemplated 8-for-1 consolidation) and a promissory note for C$425 480, due on 30 June 2010 and bearing 8% interest;
- EnerGCorp to sell its shares in Creative Classics to Azterra for 33 516 000 Azterra Shares (calculated before the contemplated consolidation) and a
  C$5 744 520 promissory note on terms similar to those of the note described above;
  
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- EnerGCorp to buy from Azterra its subsidiary AEI, which operated the Polo Club project for US$3 235 000;
- PPI to assume and settle all claims of creditors of Azterra and AEI, releases to be obtained from the creditors;
- PPI to lend Azterra US$553 000 in exchange for yet another Azterra promissory note secured by Azterra's shares in AEI (an unsigned copy of this note – not the others – was appended to the Azterra Letter Agreement); and
- PPI, "for investment banking advisory services provided to PPI, [to pay Strategic] a fee equal to 7.0% of the gross value of the shares of [Willow Creek and Creative Classics]".
Closing, which "in no event shall be later than March 31, 2001", was subject to several pages of conditions including completion of "formal purchase and sale agreements", various conditions as to title and similar matters, due diligence by Azterra and PPI, and "all applicable governmental, regulatory, shareholder, board of directors and contractual approvals . . . including . . . the approval of [the Exchange] and [the TSE]".
Azterra's lawyer, John Taylor ("Taylor"), testified that some urgency was attached – apparently by PPI – to finalizing and signing something by 30 June 2000. He said that he was told by Fitzsimonds (without explanation) that it "needed to be signed by the end of the quarter".
The various steps contemplated by the Azterra Letter Agreement were obviously not all easily or quickly concluded. Taylor was unequivocal that they had not closed by the end of June 2000, although parts of them – those relating to refinancing Azterra and relieving it of pre-existing debts – closed soon after. The transfers of Willow Creek, Creative Classics and AEI remained outstanding.
Taylor made a note to file on 15 June 2000 following a day of meetings with his clients (principals of Azterra) and Workum. Taylor was clearly concerned that both Workum and his clients underestimated the work and time needed to bring to fruition the deal then under discussion. He reminded his clients (so that they would not over-commit to Workum) of the need to properly document the proposed reverse take-over and to obtain approvals from Azterra shareholders (for some fundamental changes to their company and its assets) and from the Exchange.
On 6 July 2000 Azterra issued a lengthy news release announcing that it had entered into the "binding letter of intent" and describing key elements of the Azterra Transaction. The release also referred to the assignment of Azterra and AEI debts to PPI, which was "scheduled to close" the next day. Finally, it mentioned the proposed consolidation of Azterra Shares, and indicated that the company would seek shareholder approval for both the share consolidation and the Willow Creek and Creative Classics purchases.
This Azterra news release concluded with the following caution:

Such transactions cannot close until the required shareholder approval is obtained. There can be no assurance that the transactions will be completed as proposed or at all.
On the same date PPI issued its own news release titled "Proprietary Sings [sic] Letter of Intent With the Azterra Corporation", which stated:

Completion of the transactions above is subject to a number of conditions, including but not limited to, satisfactory outcome of due diligence, and [Exchange] and shareholder approval.
Shortly after the Azterra Letter Agreement was signed, PPI provided approximately $3.3 million to satisfy, or to enable Azterra to satisfy, various of its debts. Fitzsimonds confirmed in testimony that he took this as evidence of "good faith and then some" of PPI's intention to conclude the Azterra Transaction as a whole.
PPI and EnerGCorp were to receive Azterra Shares in part payment for their respective subsidiaries, Willow Creek and Creative Classics. It was not clear whether Azterra ever issued the shares; Staff thought not.
The two promissory notes that Azterra was to provide to PPI and EnerGCorp for the purchase of Willow Creek and Creative Classics, respectively, would prove elusive. They had not been issued by the time Azterra's law firm withdrew from the Azterra file late in August 2001. PPI director Mackenzie said that Workum instructed him to have "someone at Azterra" sign such notes but those he approached would not do so. Both he and Taylor ascribed this reluctance to the fact that the deal had not closed.
Former Azterra director Harry Hunter ("Hunter") elaborated on this reluctance to sign the two promissory notes. Before the Azterra directors would sign, "we had to have a valuation of the two companies and we had to have shareholder approval". He
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confirmed that these Azterra promissory notes were still not signed when he left the company on 26 August 2001. Hunter understood that Workum had been endeavouring to convince one of the other Azterra directors to persuade his colleagues that shareholder approval was unnecessary and that they should go ahead and sign. Hunter testified that Azterra "had no means" to satisfy its obligations under such promissory notes and had not, by the time of his departure, made any arrangements for a guarantee of such obligations. Hunter surmised that, once PPI took control, it would eventually end up converting the note into Azterra equity.
However, PPI replied to Staff inquiries by a letter dated 30 August 2001 which enclosed, among other things, a copy of "the requested Azterra Promissory Note". This promissory note, signed for Azterra by Fitzsimonds, was dated 30 June 2000 and called for payment by Azterra, to EnerGCorp, of $5 744 520 plus 8% interest, the interest to be paid annually and the principal amount to be "due June 30, 2010". This corresponded to the purchase price specified for Creative Classics in the Azterra Letter Agreement, and we therefore refer to the document as the "Azterra/Creative Classics Promissory Note". It was not clear whether Azterra – by Fitzsimonds or anyone else – ever signed a promissory note for Azterra's agreed purchase of Willow Creek.
Fitzsimonds testified that he signed the Azterra/Creative Classics Promissory Note over the objections of some of his fellow directors and against the advice of Azterra's lawyer (the latter also considering execution of the note premature at the time since closing had yet to occur). Fitzsimonds said that he agreed to sign it, partly at the urging of Azterra director Donald Seaman ("Seaman"), whom Fitzsimonds viewed as a mentor and who, Fitzsimonds said, believed that Workum would follow through and recapitalize Azterra. The resignations of the directors other than Fitzsimonds were announced in an Azterra news release dated 31 August 2001. This news release in our view gives a good indication of when the Azterra/Creative Classics Promissory Note was actually signed.
Fitzsimonds, when asked during the Hearing whether Azterra could have satisfied an obligation on the scale of the Azterra/Creative Classics Promissory Note at the end of June 2000, was unequivocal: "Absolutely not".
Although PPI's assumption of Azterra's pre-existing debts undoubtedly improved Azterra's otherwise dire financial position, there was no evidence that Azterra had sources apart from Willow Creek and Creative Classics from which it could satisfy the debt it was to take on with their acquisition. Staff representatives testified that their calculations indicated that Willow Creek and Creative Classics did not generate cash flow sufficient to cover the amount of interest that Azterra would have to pay to PPI and EnerGCorp.
The Azterra Guarantee (bearing the date 30 June 2000) was in evidence. It was addressed to EnerGCorp (identified as the "Lender") and executed for Cofima by Schöni and Wick. Fitzsimonds testified that this was not something that Azterra had negotiated with Cofima and he was not aware that Cofima had provided a guarantee.

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The Azterra Guarantee was very similar to the Orion Guarantee. It referred to an Azterra promissory note also dated 30 June 2000 that was supposedly attached as a schedule (none was attached to the copy in evidence). It provided for Cofima to guarantee the full amount of the indebtedness of "Azterra Development Corporation" (Azterra's correct name was "The Azterra Corporation") to EnerGCorp under that promissory note. The debt guaranteed was specified as $5 744 520 plus interest of 10% per annum (not the 8% specified in the Azterra Letter Agreement and the Azterra/Creative Classics Promissory Note but, we note, the same rate as Orion was to pay under the Orion Promissory Note). The Azterra Guarantee was subject to payment of a $172 328 guarantee fee by 30 September 2000, and the guarantee would be released not later than 30 July 2002.
Staff had similar doubts about Cofima's ability to satisfy the Azterra Guarantee as they had regarding the Orion Guarantee. These doubts were apparently intensified by the combination of the two contingent liabilities.
Cofima's position was described by Schöni, in testimony discussed above in connection with the Orion Guarantee. He testified that similar arrangements were made for both guarantees, and that Cofima was to receive $173 000 as a fee for the Azterra Guarantee.
As discussed above in connection with the Orion Transaction, Schöni confirmed that Cofima did not have the means to satisfy its potential obligations under the Cofima Guarantees, that Workum was aware of this, and that Workum told Cofima "that [the] guarantees will not be called on". It was not clear whether any document similar to the Orion Guarantee Addendum (in which the supposed beneficiary of the guarantee essentially undertook to indemnify the guarantor, Cofima) existed in connection with the Azterra Guarantee.
PPI told Staff in August 2001 (in connection with its responses to Staff concerning the Orion Transaction) that Triad backed Cofima on the Azterra Guarantee, from its inception. It was not clear from the evidence when the Azterra Guarantee was actually signed. However, as discussed above in connection with the Orion Transaction, the evidence leads us to conclude that Triad's involvement began around July 2001 – a good deal later than the June 2000 date on the Azterra Guarantee.
The terms of the Azterra Guarantee were difficult to reconcile with the terms of the Azterra/Creative Classics Promissory Note. Already mentioned were the different
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names of the debtor and the different interest rates. The "release" date for the Azterra Guarantee also meant that it would expire some eight years before the Azterra/Creative Classics Promissory Note was due. This would seem to suggest that the Azterra Guarantee would be enforceable only in respect of any default on interest accrued and payable up to July 2002. Staff apparently questioned the release date and were told in response that "the two years that was in the guarantee . . . was a typo and it should have been ten years". That information was in itself puzzling, as a Staff member testified:

We thought it was curious that an independent financial institution would sign an agreement with a typo of that magnitude . . . [and] that a company that would rely on that guarantee would accept a document with that kind of a typo that . . . could seriously impede its ability to demand on the guarantee.
As will be seen, the legal consequences of that "typo" were not tested, as PPI successfully made demand under the Azterra Guarantee before the stated release date.
In the same way that there was no evidence of a promissory note for Azterra's purchase of Willow Creek, so there was no evidence of any guarantee of that obligation.
The parties to the Azterra Letter Agreement amended it by a document (the "First Azterra Amendment") dated 29 December 2000 – still in Azterra's 2000 financial year but in PPI's 2001 financial year (although some two months before PPI issued its 2000 Financial Statements). The First Azterra Amendment essentially deferred until not later than 30 September 2001 the date for closing the portions of the Azterra Transaction relevant here, and provided that the parties' obligations would terminate if closing did not occur by 1 November 2001.

(i) Effect on Willow Creek and Creative Classics
Mackenzie testified that he worked on the Azterra Transaction for PPI from June 2000 until he left PPI one year later. He understood that one of the principal purposes of the transaction was to enable PPI to be able to record a gain in its financial statements. He also understood that, to do so, PPI must cede control of the companies disposed of, meaning in the simplest terms that PPI could not hold a majority interest in their buyer, Azterra. A transaction summary prepared by Mackenzie indicated that PPI (including EnerGCorp) was to end up with 49.3% ownership of Azterra, and Azterra's pre-transaction Azterra shareholders would hold the remaining 50.7%.
Despite these voting percentages, Mackenzie testified that there was no real change in the operation of Willow Creek and Creative Classics. Mackenzie understood that Workum "was president of both companies, anyway"; "ultimately [Workum] still would have -- would have controlled or managed the companies"; and Workum "certainly would have had a position with Azterra". Mackenzie's transaction summary
noted that the "Post-transaction board" would include Workum and "Post-transaction management" would include Workum and Hennig.
The Exchange halted trading in Azterra Shares in September 2000 – before PPI's 2000 year-end and several months before PPI released its 2000 Financial Statements – out of concern that the Azterra Transaction constituted a change of business or reverse take-over.
We do not know if trading ever resumed, but Staff and Fitzsimonds thought not. Snell indicated that the trading halt would affect the liquidity of part of the consideration (Azterra Shares) that EnerGCorp and PPI were to receive in the Azterra Transaction, suggesting that this would be a further factor to consider in weighing disclosure of a related gain.
Hudson compiled another Inherent Risk Questionnaire concerning PPI in preparation for the 2000 audit. It included comments similar to those mentioned above in connection with the 1999 audit and, in response to a question about potential problem transactions, the comment "YES - large gains on disposal of subsidiary corps".
PPI filed its financial statements for the year ended 30 September 2000 (with comparative information for the prior year) on 19 February 2001. Workum and Düby signed the balance sheet. The 2000 Financial Statements were accompanied by an unqualified audit report of Hudson dated 12 February 2001.
The accompanying "Management's Report", signed by Workum and Hennig, stated:

All information in this Annual Report is the responsibility of Management.

. . .

The Audit Committee of [PPI's] Board of Directors has reviewed the financial statements with Management and [Hudson]. The financial statements have been approved by the Board of Directors on the recommendation of the Audit Committee.

The following table summarizes certain line items from PPI's 2000 Financial Statements:

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Income Statement 2000 1999

Gain on sale of businesses	$ 5 612 779	$ 6 263 594
Revenues	32 064 967	30 328 370
Expenses	$ 21 025 658	$ 23 242 598
Pre-tax earnings	11 039 309	7 085 772
Net Earnings	$ 9 524 063	$ 6 628 943
Earnings per share (fully diluted) Balance Sheet	$ 0.31	$ 0.35 [reported as $0.36 in the 1999 Financial Statements]
Notes receivable	$ 37 866 170	$ 13 784 626
Retained earnings	17 309 308	10 293 954
Total assets (and Total liabilities and equity)	$227 673 667	$ 57 272 900

The reported "Gain on sale of businesses" (the second-largest income item) amounted to half (50.8%) of reported 2000 pre-tax earnings. Without this gain, these pre-tax earnings would have been $5 426 530, a drop of 23.4% from the comparative figure reported for 1999 rather than the 55.8% increase actually reported.
PPI's balance sheet showed dramatic asset growth from year-end 1999 to 2000
- a four-fold increase from $57 272 900 to $227 673 667. With its 2000 reported net earnings (and after deducting dividends and a premium on redemption of prepared shares), PPI's reported retained earnings rose by two-thirds from $10 293 954 at the beginning of the 2000 financial year to $17 309 308 at year-end. Without the gains on the Newmex and Orion Transactions reported in 1998 and 1999, the opening retained earnings would have been much smaller and the 2000 increase proportionately even larger.
PPI's reported earnings per share dropped somewhat (by 14.6% from $0.41 to
$0.35 "Basic", and by 11.4% from $0.35 to $0.31 fully diluted), apparently owing to issuances of securities during the year.
The notes to the 2000 Financial Statements included disclosure of the Azterra Transaction, specifically the sale of Willow Creek and Creative Classics to Azterra (Note
5 was quoted above). Note 7 to the 2000 Financial Statements discussed "Notes Receivable", with 21 separate items mentioned for 2000. The "Advances" to Newmex reported in the 1999 Financial Statements ($1 051 428) were apparently eliminated by year-end 2000, while the "Advances to Swiss Plastering & Interiors" had risen from
$1 315 366 at year-end 1999 to $1 558 927 one year later. The "Note receivable from Orion Resource Corporation" had increased in quantum and the associated description was modified slightly from the corresponding note in 1999. That item, and certain of the new items included in the 2000 note, read as follows:
Note receivable from [Orion] in US dollars ($5,219,643) with accrued interest at 10% per annum secured by [Swiss Plastering Shares] and secured by a loan guarantee provided by an independent financial institution, due September 30, 2001 $7,847,732

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Advances to [Azterra], non-interest bearing with no fixed terms of repayment and unsecured. [$]4,493,632

Advances to [Orion], non-interest bearing with no fixed terms of repayment and unsecured. [$]266,194

Advances to [Creative Classics], in US dollars ($361,052) non-interest bearing with no fixed terms of repayment and unsecured. [$]542,841

. . .

Note receivable from [Azterra] with interest at 8% per annum secured by shares of [Willow Creek] and secured by a loan guarantee provided by an independent financial institution, due June 30, 2010. [$]425,480

. . .

Note receivable from [Azterra] with interest at 8% per annum. Secured by shares of [Creative Classics] and secured by a loan guarantee provided by an independent financial institution. Due June 30, 2010. [$]5,895,083
Azterra took a different accounting approach to the Azterra Transaction than did PPI. Azterra filed its audited financial statements for its financial year ended on 31 December 2000, accompanied by an 18 April 2001 report of its auditor ("Azterra's 2000 Financial Statements") on SEDAR on 18 May 2001. In an approach similar to that taken by Orion in Orion's 1999 Financial Statements, Azterra disclosed the Willow Creek and Creative Classics purchases not in the body of the financial statements but rather in Note 17 to its financial statements, headed "Pending Transactions". This Note concluded:

The above transactions have not closed as they are subject to several conditions of closing that have not yet been met, including, but not limited to, the completion of formal purchase and sale agreements, satisfactory due diligence reviews, and each of the parties obtaining appropriate regulatory and shareholder approvals for the transactions.
Similar disclosure appeared again in Azterra's unaudited quarterly financial statements for the period ended 31 March 2001, which were filed on SEDAR on 6 June 2001.
Fitzsimonds recalled discussions with Azterra's auditor and lawyers about this disclosure: "Well, we had to reflect the transaction accurately as we knew it to be . . . we had to represent the transaction factually".
This disclosure, and PPI's different approach, were the subject of discussion with PPI, according to Fitzsimonds:

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There were -- the request from [PPI] was that we would reflect the transaction in our financial statements as completed, consistent with the representations that they had made within their statements. That request came to me, more aggressively to [Azterra director Seaman], and more aggressively again to [another Azterra director, Peter McCombs]
Fitzsimonds stated that the request predated the finalization of Azterra's 2000 Financial Statements. It came, he said, from Workum; he did not recall Hennig having been involved in the discussions.
Note 7 to Azterra's 2000 Financial Statements also discussed Azterra's preexisting debts that PPI was to assume as part of the Azterra Transaction. The Note stated that the debts were assigned to PPI "Effective June 29, 2000 and pursuant to a letter of intent" (with a cross-reference to the "Pending Transactions" note discussed above) and that "PPI has subsequently settled these assigned debts . . . [and] the debtholders have signed a release discharging [Azterra]".
Counsel for Workum, questioning former PPI auditor Forbes, noted this disclosure by Azterra and suggested that it indicated a view consistent with what PPI disclosed as to the state of the Azterra Transaction. However, Forbes responded that Azterra had merely indicated that the pending transaction was "in the works".
In our view, the multi-step Azterra Transaction was expected to occur in stages, with only the debt assignment to close immediately. The disclosure in Azterra's 2000 Financial Statements concerning that early step fell far short of confirmation that Azterra believed that its purchases of Willow Creek and Creative Classics had advanced to a point at which the sellers, PPI and EnerGCorp, had reportable gains. Indeed, the evidence highlighted how very differently PPI and Azterra approached their financial statement disclosure obligations in respect of the same transaction.
Workum assigned Mackenzie the task of moving the Azterra Transaction forward. Correspondence, facsimile transmission notes and e-mails in evidence show the difficult task he faced. A primary difficulty lay in the fact that the Exchange had requested a valuation of Creative Classics to support PPI's accounting. That valuation, however, was proving elusive. PPI obtained a valuation from CST but the value it ascribed fell short of what PPI needed. As Mackenzie put it in a note to company lawyers on 12 February 2001:
In brief, the valuation comes in about $2.5 million short of the $6.75 million required. Unfortunately, [PPI] has already booked a gain on this transaction based on the higher value, so simply accepting the lesser value is not an option.

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On 12 February 2001 Mackenzie also wrote to Workum and an individual at EnerGCorp setting out difficulties in obtaining the desired valuation from CST. Mackenzie noted there that PPI's lawyer:

. . . confirmed that the [E]xchange will want to see a valuation . . . [G]iven that the [E]xchange is already aware that another valuation [CST's] exists, any major increases will likely be viewed with some skepticism.
Mackenzie testified that Workum instructed him to obtain a satisfactory valuation – "keep finding valuators until we find someone who agrees with [Workum's] assessment". Mackenzie mentioned three valuations and a number of appraisals having been obtained, none apparently providing the desired result. It appears that effort was made to ensure that every possible asset was taken into account, and that favourable appraisals were considered. However, CST was apparently not prepared to accept one of the proffered appraisals because it lacked faith in the appraiser (according to a Mackenzie note dated 29 March 2001). Mackenzie seems to have despaired of coming up with support for the Azterra Transaction as already recorded in the 2000 Financial Statements.
Hennig, too, was aware of the valuation difficulties. Mackenzie testified that both Hennig and Workum were present at a meeting with CST. The following handwritten note appears on a list of properties and property values:

Peter - we need $6 million USD in value from appraisers for the [Azterra] deal to work. Please confirm that these are all the properties

Theo
Mackenzie stated that by late March 2001 "I was providing weekly or biweekly updates to [Workum]" which, in context, would have related to the Azterra Transaction. In an undated typewritten note to Workum (Mackenzie confirmed in testimony that the "Peter" to whom this note was addressed was Workum), Mackenzie noted some then-current obstacles, one being CST's inability to come up with a valuation opinion for Creative Classics that could support "the $5.5 million [gain] that has been booked" by PPI. "Best Case" courses of action that Mackenzie suggested to Workum included Azterra directors agreeing to pay a $2.4 million premium over what Creative Classics was apparently worth (according to CST) or somehow either "pushing this deal through the [E]xchange" or (which seems to amount to the same thing) having the Exchange waive its requirement for a supporting valuation. "Realistic Case" options he identified included EnerGCorp somehow taking a $2.4 million loss on its part of the Azterra Transaction as the cost of concluding the transaction.
As Mackenzie put it in testimony, "I think the deal had been done And
then, I guess, after the fact, we needed the documentation to support [it], and we had some trouble getting it." He also stated:

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But as far as, I guess, what was behind it, really, were these, these three transactions: I guess Newmex, Orion, Azterra, which weren't cash transactions. I mean, we booked profits on them, but it wasn't a cash profit.
In the June 2001 Hennig/ASC/OSC Letter, Hennig stated in respect of the Orion and Azterra Transactions that "only . . . shareholder and regulatory approvals" remained outstanding, and that information circulars for "annual general meetings to be held some time before September 30, 2001" were in preparation for submission "by month end" for regulatory approval. PPI, said Hennig, believed that shareholder approval would be given because "[i]f the shareholders vote against . . . , they will be left holding virtually worthless common shares in insolvent companies". As to regulatory approval, he said that "management is confident, based on prior experience, that such approval will be forthcoming".
Azterra's lawyer Taylor was less sanguine. He participated in the drafting of the note disclosure in Azterra's 2000 Financial Statements emphasizing the contingent nature of the transaction. He recalled in testimony a considerable amount of work yet to be done in the fall of 2000, including finalizing documents, obtaining valuations, and obtaining shareholder and Exchange approvals; much of that was clearly still outstanding when PPI prepared and released its 2000 Financial Statements, and after. Taylor recalled difficulty with Azterra being able to satisfy minimum listing requirements and a discussion in July or August 2001 about PPI or EnerGCorp injecting cash into Creative Classics, for preferred shares, to boost its value to assist in meeting that listing requirement. In respect of Exchange approval, Azterra was seeking to persuade a securities dealer to act as its sponsor. Taylor testified that, as late as August 2001, Azterra had yet to obtain shareholder approval and its chosen sponsor "didn't believe we were ready to go to the Exchange" with its sponsorship of Azterra.
The contemplated formal share purchase agreement was not signed until August 2001, as discussed below.
Counsel for Workum elicited from Fitzsimonds acknowledgements that Azterra had no other viable option but to go ahead with its deal with PPI, and that the hurdles faced in completing the Azterra Transaction were external regulatory issues (he included in this the valuation of the companies Azterra was to buy) and, to an extent, unforeseen.
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Whatever the parties' hopes and heartfelt commitment eventually to conclude their deal, they had not done so in PPI's 2000 financial year – they were not even close by the time the 2000 Financial Statements were filed in February 2001, and they never in fact managed to bring much of it to a close. Azterra itself recognized this in its financial statements. The real problem here was that PPI ignored this reality.
PPI, EnerGCorp and Azterra eventually (some time in August 2001, likely on or about its 3 August 2001 stated effective date) signed a detailed 40-page formal share purchase agreement prepared by PPI's and Azterra's lawyers for the Azterra Transaction (the "Formal Azterra Agreement").
The Formal Azterra Agreement, signed more than one year after the Azterra Letter Agreement and almost one year after PPI's 2000 financial year-end, specified that closing would occur not later than 31 October 2001. Azterra was to buy Willow Creek for $500 000, payable by issuing to PPI 310 500 Azterra Shares and a $425 480 promissory note paying 8% simple interest and due on 30 June 2010. Azterra was to buy Creative Classics for $6 749 980, payable by issuing to EnerGCorp 4 189 500 Azterra Shares and a $5 744 520 promissory note also paying 8% and due on 30 June 2010. EnerGCorp was also to buy AEI for the cancellation of a US$3 235 000 Azterra debt to PPI, and PPI would buy $1 million of new Azterra preferred shares. These transactions would be subject to due diligence and "all corporate, legal and regulatory proceedings, approvals and consents . . . reasonably considered necessary" by one party or the other including, specifically, the consent of the Exchange and approval by Azterra shareholders.
Within weeks of signing the Formal Azterra Agreement, PPI, EnerGCorp and Azterra signed a new letter agreement dated 27 August 2001 (the "Second Azterra Amendment"). Workum sent a draft of this document to Azterra's lawyer on 27 August 2001, characterizing it as "an appropriate solution" to resolving "the many difficulties we are experiencing with respect to the proposed sale of [Creative Classics] and [Willow Creek]" and asking the lawyer to review and comment on the draft document by noon the same day.
Citing Azterra's inability "to meet the continued listing requirements of [the Exchange]", the signatories to the Second Azterra Amendment agreed to an extensive list of "waivers, amendments and confirmations" affecting the Azterra Letter Agreement, the First Azterra Amendment and the Formal Azterra Agreement, "in order to complete the transaction forthwith". More specifically: the requirements for regulatory and shareholder approval and the 31 March 2001 outside closing date set out in the Azterra
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Letter Agreement were waived and Azterra could substitute a promissory note for the shares it was supposed to deliver to PPI; the First Azterra Amendment was revised (somewhat inexplicably, but perhaps because such action had been taken after the Formal Azterra Agreement was signed earlier in August 2001) to move the trigger date for PPI to begin enforcing Azterra debts back from 30 September 2001 to 30 July 2001 (roughly one month before the date of the Second Azterra Amendment); and the requirements under the Formal Azterra Agreement for regulatory approvals and consents (including, specifically, Exchange consent) were waived.
Taylor objected strenuously to Azterra signing the Second Azterra Amendment. He suggested that the waivers of shareholder approvals would contravene corporate law. He was also concerned that Exchange approval had not been obtained. So strongly did he feel about his concerns that, given what on 28 August 2001 appeared to be Azterra's intention to proceed to sign the document, his law firm withdrew from the file and ceased to act for Azterra "effective immediately". Azterra, in the person of Fitzsimonds, signed nonetheless. (As mentioned, other Azterra directors resigned around this time.)
Before the Second Azterra Amendment was apparently prepared and signed, PPI and EnerGCorp sent the Azterra Demand dated 23 August 2001 (the same date as that of the similar Orion Demand) to Cofima and Azterra, demanding payment, by 28 September 2001, of "the loan of $5,744,520, plus interest at the rate of 8% per annum . . . made by [EnerGCorp] to [Azterra] . . . evidenced by a Promissory Note dated June 30, 2000". The Azterra Demand supposedly related to the Azterra Guarantee of the Azterra/Creative Classics Promissory Note described above (the different interest rate and date, and the "loan" wording, were not explained). Also not explained was PPI's demand for early payment (September 2001 being almost nine years earlier than the due date of the Azterra/Creative Classics Promissory Note), nor the fact that the demand was apparently made under the Azterra Guarantee without evidence of a default by the principal debtor. Interestingly, the evidence was that the Azterra/Creative Classics Promissory Note had not even been signed by the date of the Azterra Demand.
EnerGCorp, or PPI, received the payment demanded. As was the case with the Orion Demand, the evidence was (and the Individual Respondents did not dispute) that ASCOOP provided the money. The evidence was clear that Cofima had not expected to have to, and could not by itself, satisfy the Azterra Demand.
On 7 December 2001 the Commission ordered that trading in securities of Azterra cease by reason of its failure to file and send to securityholders its interim financial statements for the quarters ended 30 June and 30 September 2001.
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It appears that the Azterra Transaction never did close. Specifically, in the case of Willow Creek, if its sale advanced at all, it was apparently halted or the Willow Creek shares were surrendered back to PPI for non-payment of Azterra's related debt. It was less clear what transpired with Creative Classics; McCowan testified to his understanding that it was still being run by Workum (who of course had since left PPI) at the time of the Hearing.
1. ASC and OSC 2001 Staff Inquiries and PPI's Responses
  1. ASC Staff and OSC Staff Concerns
As early as January 2001 – after the 1998 and 1999 Financial Statements were filed but before the filing of the 2000 Financial Statements – Staff had posed questions (whether to PPI or to Orion is unclear) about the Orion Transaction. On behalf of Orion, Hennig (as its vice-president, finance) wrote to Staff in March and April 2001 defending PPI's accounting treatment of the Orion Transaction and noting that "[i]n any event, the [Orion Promissory Note] is guaranteed by an independent financial institution".
PPI again came to Staff's attention in or about May 2001 (after PPI's 2000 Financial Statements were filed) when Ventra challenged aspects of the Ventra Bid. Ventra's challenge was made to one or both of this Commission and the OSC. A Staff member wrote to PPI (to Hennig's attention) on 22 June 2001, indicating Staff's preliminary view that the Newmex Transaction had been recorded incorrectly in PPI's 1998 Financial Statements and should instead "reflect the substance of the transaction, not the form"; questioning why the Orion and Azterra Transactions were recognized in PPI's 1999 and 2000 Financial Statements (respectively) rather than being disclosed in the notes to those statements as "pending" transactions; and seeking further information.
PPI (Hennig) responded in writing on 29 June 2001. In respect of the Newmex Transaction, PPI inferred that the basis of Staff's concerns lay in "hindsight", specifically the fact that "the shares were repurchased [from ASCOOP and SPIDA] two years after the sale". PPI pointed to a favourable opinion obtained from KPMG and an earlier thorough and (the letter implied) favourable review of the transaction by another Staff member, and commented that with "in excess of $10 million of working capital" at the time, it "does not make a lot of business sense" for PPI to have structured "a three party sales transaction to borrow $1.5 million, which we did not require".
Concerning the Orion Transaction, the PPI response letter acknowledged timing delays in completing the transaction but attributed some of them to "time spent attempting to meet evolving [Commission and Exchange] questions and changing regulations"; noted that "an independent financial institution provided a guarantee . . . supporting the note receivable" and would not have done so "if the
guarantor had not been satisfied that the transaction was substantially complete"; denied that the lack of Exchange approval made the agreement non-binding; and noted that the Orion CTO was not in place on 30 September 1999.

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Concerning the Azterra Transaction, PPI stated that "shareholder & regulatory approvals . . . are imminent" and "[t]he note [presumably the Azterra/Creative Classics Promissory Note] received as partial consideration . . . is guaranteed by an independent financial institution", which guarantee "would not have been forthcoming if the guarantor had not been satisfied that the transaction was not [sic] substantially complete".
Hudson responded to questions posed by the OSC in a 4 June 2001 letter, dealing with the Orion and Azterra Transactions. Concerning the former, Hudson stated that "[t]he justification for recognizing the sale of [Swiss Plastering] to Orion is based on our judgement that the transaction was substantially completed as at the date of recognition", and cited the following supporting factors:
- Performance occurred as evidenced by a firm and binding agreement dated September 30, 1999 signed by Orion and EnerGCorp . . .
- The [PPI] and Orion boards both approved the transaction.
- There was no significant risk of the transaction not closing.
- Consideration had been substantially paid or guaranteed therefore collection was assured.
- Consideration had been determined and was not subject to any adjustments based on earnings or performance.
Hudson cited identical factors concerning the Azterra Transaction, but for substituting the name "Azterra" for "Orion" and referring to a "firm and binding agreement dated June 30, 2000".
Hudson followed that letter with a lengthier one dated 13 June 2001 accompanied by, among other things, copies of a "Promissory Note dated September 30, 1999" and "the Loan Guarantee Agreement dated September 29, 1999" for the Orion Transaction, and a "Promissory Note dated July 10, 2000" and "the Loan Guarantee Agreement dated June 30, 2000" for the Azterra Transaction. No copy of that attached promissory note was in evidence but the date mentioned corresponded to the date of the US$533 000 note that was issued as part of the refinancing of Azterra (as noted, that occurred soon after the Azterra Letter Agreement was signed). We believe that this is what Hudson provided.
1. August 2001 Changes to the Orion and Azterra Transactions
By late August 2001 PPI took matters in a somewhat new direction. In a 28 August 2001 letter to Staff, citing "the difficulties we have been experiencing in
completing the Orion and Azterra transactions to the satisfaction of the [Commission] and [Exchange]", Hennig, for PPI, wrote Staff that "the parties have entered into the following agreements" – the Orion Demand, the Orion Amendment Agreement, the Azterra Demand and the Second Azterra Amendment, each discussed above.

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In our view, the very fact that such significant amendments were made to the Orion and Azterra Transactions – transactions already "substantially completed", as Hudson had told Staff – casts doubt not only on the true extent of completion (then and earlier, during PPI's 1999 and 2000 financial years) but also on the substance of what was originally agreed.
Puzzling aspects of the Orion and Azterra Demands were discussed above. These included the fact that ASCOOP, not Orion, Azterra or the supposed guarantor Cofima, was the source of some $14 million that PPI received pursuant to the Orion and Azterra Demands. In a 2 October 2001 letter to Staff, PPI said that its receipt of that payment "ultimately confirms the validity and value" of those instruments and, therefore, the correctness of PPI's accounting for the Orion and Azterra Transactions.
1. Subsequent PPI Financial Statement Disclosure
  1. 2001 Restatements
PPI filed its 2001 Financial Statements, with comparative information for the prior year and an audit report from Hudson dated 15 February 2002, on 19 February 2002. These filings presented PPI's sales of Swiss Plastering (the Orion Transaction) and Creative Classics (part of the Azterra Transaction) as having been completed only in PPI's 2001 financial year "as cash consideration relating to these transactions was received during the year"– and triggering $11.2 million in gains for that year. PPI restated its 1998, 1999 and 2000 Financial Statements, backing out the gains on the Newmex/LynChris, Orion and Azterra Transactions respectively reported in the originally-filed financial statements for those years. Note 23 to the 2001 Financial Statements explained the restatements as follows:

September 30, 1998
A net gain of $1,900,000 on a portion of the sale of certain mining company shares [Newmex Shares] has been reversed based on information obtained during 2001.

September 30, 1999
A net gain of $6,264,000 on the sale of a subsidiary, [Swiss Plastering] has been reversed and recorded as a deferred gain of $6,264,000 in the September 30, 2000 financial statements. A gain of $6,264,000 was recorded in the current year when the full cash consideration relating to this transaction was received.

September 30, 2000
A net gain of $ 5,203,000 on the sale of two subsidiaries, [Creative Classics] and [Willow Creek], has been reversed and recorded as a deferred gain of $ 5,613,000 in the September 30, 2000 financial statements. A gain of $4,956,000 was recorded in the
current year where the cash consideration resulting from one of these transactions was received.

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Note 20 to the 2001 Financial Statements also disclosed that in December 2001 PPI "reacquired [Willow Creek] in exchange for the promissory note due from [Azterra]".
A Hudson representative testified about the 2001 revision to the previously-reported results of the Newmex/LynChris Transaction. While he initially seemed to attribute this to Staff action, specifically the initial issuance of the First Notice of Hearing, it became clear that what prompted the change was in fact Hudson's realization of certain facts surrounding the transaction, notably the source of the security placed for repayment of the LynChris Promissory Note:

. . . our view is because LynChris had never really had anything at risk at all, it was not a bona fide transaction. It was just a loan, if you like, but it was not a bona fide transaction.
Hudson communicated its new view to KPMG, to whom the source of the security apparently also came as news. According to the Hudson representative, KPMG agreed with Hudson's view.
Hudson prepared a 15 February 2002 memorandum to the PPI directors' audit committee describing, among other things, the change concerning the Newmex Transaction and the reason. This memorandum included the following comment:

Our audit resulted in our recommending several adjustments to management. Generally, these adjustments would result in a reduction to earnings and were usually met with resistance by management. We did not feel that the recommended adjustments were unreasonable and would not suggest an adjustment unless we were quite certain of the validity.
A month later, a further Hudson report to the audit committee and PPI management listed many concerns, including:
- Significant lack of knowledge of client's staff on nature of the client's business. On numerous occasions staff, especially those in senior positions, did not know about basic aspects of the Company's operations. There is very little communication coming down from top management.
  
  . . .
- There is significant effort expended in managing companies the company no longer has control of or a significant investment in (examples are Swiss Plastering and Creative Classics).
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While the change in Hudson's view in respect of its audit of PPI for 2001 and the frustration evident in Hudson's reports to the PPI audit committee post-dated both the Newmex Transaction and PPI's 1998, 1999 and 2000 Financial Statements, Hudson's new and tougher stance originated in the facts surrounding the relevant transactions. It seems clear that Hudson was not originally informed as to the reality of what it considered a key aspect of the Newmex/LynChris Transaction (the security for the LynChris Promissory Note). Once so informed, Hudson's view of that transaction and its proper reporting changed markedly, but Hudson's urgings to correct this met with "resistance by management". Moreover, Hudson observed in the course of its 2001 audit a company very tightly controlled by its "top management". Here, "top management" was clearly the Individual Respondents.
Taking note of this evidence does not amount to using hindsight. It constitutes corroboration, by some of the very people supposedly relied upon by the Individual Respondents, of other evidence concerning the relevant transactions and circumstances at the time, and of the tight control the Individual Respondents wielded at PPI.
Hudson took the unusual step, on 20 September 2002, of withdrawing its audit opinions for PPI's 1998, 1999, 2000 and 2001 financial years. A Hudson representative testified that this decision was prompted by information originating with Olnick and forwarded to Hudson by Staff.
This withdrawal by Hudson of its earlier audit opinions was not the basis of our conclusions on PPI's 1998, 1999 and 2000 financial disclosure (discussed below), so the reasons for and merits of Hudson's decision were of little or no relevance.
PPI's 2002 Financial Statements (with comparative information for 2001), were filed on 27 May 2003 and accompanied by a report of the new auditor, Mintz. By this time, Workum and Hennig had left PPI and New Management were at the helm.
The Mintz audit report was unusual and limited. It expressed an unqualified audit opinion only on PPI's 30 September 2002 balance sheet. As to the remainder of the 2002 Financial Statements, Mintz stated that "we are unable to express an opinion whether the [income and cash flow statements] for the year ended September 30, 2002 are presented fairly in accordance with [GAAP]". They attributed this in part to Hudson's withdrawal of its prior years' audit opinions.
The comparative 2001 information included in the 2002 Financial Statements was extensively restated. The unaudited restated comparative income statement for 2001 now reported a net loss of some $20 million. The net loss deepened to almost $82 million in 2002, according to the unaudited income statement for that year. The
unaudited restated balance sheet as at 30 September 2001 recorded negative retained earnings (a "deficit") of over $32 million, compared to the $7.4 million reported before the restatement. The 2002 audited balance sheet showed the deficit ballooning to $114 million by the end of that year.

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This was a striking contrast to the picture painted for earlier years – even after the partial restatements made with the 2001 Financial Statements.
The 2002 Financial Statements recorded the $14 million received by PPI pursuant to the Orion and Azterra Demands not as a gain but rather, in effect, as a gift ("contributed surplus") to PPI, apparently on the basis that the source of the money so paid (ASCOOP) was a related party of PPI.
Notes to the 2002 Financial Statements: expressed opinions concerning the relationship between Workum and certain of the Corporate Respondents; described various litigation then in progress; and commented at some length on the Newmex, Orion and Azterra Transactions. These notes reflected the opinions of New Management and did not of course elaborate on the evidentiary basis for the opinions. In any event, the 2002 Financial Statements were not at issue. They were not the subject of the Financial Disclosure Allegations and we did not rely on them to reach our conclusions on the issues before us.
1. PPI Take-over Bids
PPI made several bids to acquire securities of other issuers during the Relevant Period. Some of these were securities exchange take-over bids: the consideration that PPI was offering to holders of the target securities was or included PPI Shares.
Canadian securities laws require that the information provided to target securityholders by the bidder (here, PPI) in a securities exchange take-over bid include extensive information about the bidder, its business and its financial position and results. This is because, unlike the case of a pure cash bid, target securityholders are being asked not only to dispose of their securities in the target issuer, but also in essence to make a new investment decision about the bidder and the securities it is offering in payment.
We reviewed four PPI take-over bid circulars (the "TOB Circulars") issued between 12 March 1999 and 14 May 2001. Each TOB Circular included the then-most-recent PPI annual financial statements (verbatim – although copies of two 12 March 1999 TOB Circulars in evidence were truncated, they identified, we presume accurately, the attachments – or by incorporating the financial statements by reference); described PPI, its business and financial position and results, and discussed the Newmex, Orion and Azterra Transactions (as applicable at the respective times), in some cases expressly reiterating claims to the purported associated gains recorded in the financial statements.
Each TOB Circular was approved and signed by Workum and Hennig, who thereby certified (to use the wording from one circular; the others were to similar effect) that the document:

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. . . contains no untrue statement of a material fact and does not omit to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it is made.
1. FINANCIAL DISCLOSURE ALLEGATIONS: ANALYSIS
  1. Issues
The essential question for determination in respect of the Newmex, Orion and Azterra Transactions was whether they were, in fact, transactions properly reportable as sales – and resulting gains – in PPI's 1998, 1999 and 2000 financial years.
Staff argued, in essence, that the transactions were too tentative or conditional
- and, at least in the case of the Newmex Transaction, too artificial – to justify reporting associated gains in the 1998, 1999 and 2000 Financial Statements.
Alberta securities laws required that PPI's financial statements be prepared in accordance with GAAP; filing statements that failed that test would thus be a contravention of Alberta securities laws. Further, making misrepresentations in financial statements and other disclosure might constitute conduct contrary to the public interest.
Considering the relevant principles of GAAP discussed below, and the similarity between the concepts of "materiality" in the Act and under GAAP, we can recast slightly the fundamental issues for determination as follows:
1. Did PPI's financial statement disclosure concerning the Newmex, Orion and Azterra Transactions fairly present, in all material respects, its financial results and position for its 1998, 1999 and 2000 financial years?
2. Did PPI's 1998, 1999 and 2000 Financial Statements contain misrepresentations?
1. GAAP and Alberta Securities Laws
We now turn to the applicable law and standards relevant to the determination of these issues.
1. GAAP
  1. Relevance of GAAP
It is important to understand the role of GAAP under Alberta securities laws. Financial statements of reporting issuers such as PPI must be prepared in accordance with
GAAP. Section 144(1) of what are now known as the Alberta Securities Commission Rules (General), as it applied from 1998 to 2001, stated:

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The financial statements permitted or required by the Act or this Regulation [changed in 2000 to refer to "Rules"] shall be prepared in accordance with
1. generally accepted accounting principles, and
2. any applicable provision of the Act or this Regulation [changed to "these Rules"].
The primary source of GAAP is the Handbook. This is a lengthy and detailed tome, containing both prescriptive declarations and explanation or guidance, supplemented from time to time by additional commentary in the form of "Abstracts" of the CICA's Emerging Issues Committee (the "EIC"). We set out below portions of the Handbook and Abstracts most relevant to this proceeding.
Focusing, in isolation, on specific Handbook comments addressed to particular circumstances may on occasion leave the observer in some doubt as to how the specific direction accords with the broader purposes of accounting and financial reporting. Where that occurs, the problem in our view lies in the approach, rather than with GAAP or the Handbook.
We consider that the objective of financial reporting is well expressed in the familiar words of the prescribed form of auditor's report, to the effect that the financial statements on which the auditor is expressing an opinion "present fairly, in all material respects, the financial position of the [entity being reported on] as at [financial year-end date] and the results of its operations and the changes in its financial position for the year then ended in accordance with [GAAP]". Much of accounting is, although specialized, aimed at commonsense results: communication, to users, of information useful to them. Occasionally, difficult or esoteric issues arise, and the Handbook may prescribe or encourage a particular approach from an array of possible accounting or disclosure alternatives. In some such cases the non-specialist may have difficulty discerning why a particular approach is favoured. However, all involved with financial statements –preparers and users included – should always bear in mind the broader objective just stated: fair presentation, in all material respects, of the state of an issuer's financial position and results of operations.
The Handbook concept of "materiality" reflects a similar focus on the users of financial statements, including investors. Paragraph 1000.17 included this comment:

An item of information, or an aggregate of items, is material if it is probable that its omission or misstatement would influence or change a decision.
Viewed in that light, the purpose of the Handbook (and, more broadly, of GAAP) is not dissimilar to the purpose of the Act's prohibition of misrepresentations in documents required to be filed, discussed below.

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Counsel for Workum pointed to areas of accounting in which judgment is called for and professional unanimity not required or, perhaps, expected. Snell concurred that professional judgment is required in most, if not all, circumstances. He acknowledged that different accountants might have different tolerances, and that aggressive accounting need not be unlawful, suggesting that it might become so only if it sacrificed "fair presentation".
This was undoubtedly correct, and unsurprising. Judgment is often exercised, and the judgment calls may be difficult or quite simple. It does not, however, mean that financial reporting and GAAP are merely unbounded fields in which no value judgment is to be preferred over any other. Were this the case, there would be little point either to the accounting profession or to financial statements. But this is not the case. Accounting rules – GAAP – do have meaning, and they do enable a distinction to be made between right and wrong.
Section 1000 of the Handbook, titled "financial statement concepts", was in force in 1998, 1999 and 2000 (and, as Snell testified, remained in force thereafter apart from the deletion of paragraphs 1000.59 to 1000.61 in 2003). Paragraph 1000.15 expressed the "objective of financial statements" (of which notes "are an integral part" –paragraph 1000.04) as follows:

. . . to communicate information that is useful to investors, members, contributors, creditors and other users ("users") in making their resource allocation decisions and/or assessing management stewardship. Consequently, financial statements provide information about:
1. an entity's economic resources, obligations and equity/net assets;
2. changes in an entity's economic resources, obligations and equity/net assets; and
3. the economic performance of the entity.
The Handbook recognizes that financial disclosure is not without cost, and thus gives attention to "materiality". Paragraph 1000.17 (already mentioned) discussed this concept as follows:

MATERIALITY
Users are interested in information that may affect their decision making. Materiality is the term used to describe the significance of financial statement information to decision makers. An item of information, or an aggregate of items, is material if it is probable that its omission or misstatement would influence or change a decision. Materiality is a matter of professional judgment in the particular circumstances.
Paragraph 1000.21 of the Handbook discussed "reliability":

Reliability
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For the information provided in financial statements to be useful, it must be reliable. Information is reliable when it is in agreement with the actual underlying transactions and events, the agreement is capable of independent verification and the information is reasonably free from error and bias. Reliability is achieved through representational faithfulness, verifiability and neutrality. Neutrality is affected by the use of conservatism in making judgments under conditions of uncertainty.
. . .
. . . When uncertainty exists, estimates of a conservative nature attempt to ensure that assets, revenues and gains are not overstated and, conversely, that liabilities, expenses and losses are not understated . . . .
The Handbook's discussion of the basic elements of financial statements –assets, liabilities and equity or net assets – included (at paragraph 1000.34) the following comments on liabilities:

Liabilities do not have to be legally enforceable provided that they otherwise meet the definition of liabilities; they can be based on equitable or constructive obligations. An equitable obligation is a duty based on ethical or moral considerations. A constructive obligation is one that can be inferred from the facts in a particular situation as opposed to a contractually based obligation.
The Handbook also discussed the meaning and certain criteria and principles of "recognition" – that is, including an item in the statements (as distinct from the notes) forming part of an entity's financial statements (see paragraphs 1000.41 and 1000.42). Principles of recognition included the following:
- . . . for items involving obtaining or giving up future economic benefits, it is probable that such benefits will be obtained or given up. [paragraph 1000.44]
- Revenues are generally recognized when performance is achieved and reasonable assurance regarding measurement and collectability of the consideration exists. [paragraph 1000.47]
- Gains are generally recognized when realized. [paragraph 1000.49]
Snell testified that "realization", for purposes of the last of the quoted Handbook paragraphs, generally occurs:
. . . when they're converted into something capable of use; in other words, generally people think of realization when something turns into cash.

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Until 2003, section 1000 of the Handbook included additional discussion at paragraphs 1000.59 to 1000.61, including the following comments:

. . . generally accepted accounting principles comprise the Accounting Recommendations in the Handbook and, when a matter is not covered by a Recommendation, other accounting principles that either:
1. are generally accepted by virtue of their use in similar circumstances by a significant number of entities in Canada; or
2. are consistent with the Recommendations in the Handbook and are developed through the exercise of professional judgment, . . . and the application of the concepts described in this Section. In exercising professional judgment,
. . . reference would be made to:
. . .
1. Abstracts of Issues Discussed by the CICA Emerging Issues Committee;
. . .
. . .

In those rare circumstances where following a Handbook Recommendation would result in misleading financial statements, generally accepted accounting principles encompass appropriate alternative principles. When assessing whether a departure from Handbook Recommendations is appropriate, consideration would be given to:
1. the objective of the Handbook Recommendation . . . ;
2. how the entity's circumstances differ from those of other entities which follow the Handbook Recommendation . . .
Section 1500 of the Handbook was also in force in 1998, 1999 and 2000. Titled "general standards of financial statement presentation", the discussion in section 1500 included the following:

Notes to financial statements . . . have the same significance as if the information or explanations were set forth in the body of the statements themselves. They should not, however, be used as a substitute for proper accounting treatment . . . .

Any information required for fair presentation of financial position, results of operations, or cash flows, should be presented in the financial statements including notes to such statements [original italics]
Section 3840 of the Handbook, commencing at paragraph 3840.18, dealt with measurement of a transaction "in the normal course of operations":

A monetary related party transaction, or a non-monetary related party transaction that represents the culmination of the earnings process, should be measured at the exchange amount when it is in the normal course of operations. [paragraph 3840.18; original italics];
The exchange amount reflects the actual amount of the consideration given for the item transferred . . . [paragraph 3840.19]

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Examples of transactions in the normal course of operations are: the sale or purchase of an inventory item, . . . and recurring investing activities by an investment company. Matters to be taken into account when determining whether the operations are normal include: type and scope of operations, characteristics of the industry, operating policies of the enterprise, nature of products and services, and the environment in which the enterprise operates. [paragraph 3840.20]

. . .

Whether or not a transaction is in the normal course of operations is a question of fact. A related party transaction is presumed not to be in the normal course of operations when it is not of a type that is usually, frequently or regularly undertaken by the enterprise for the purpose of generating revenue. This presumption can be rebutted only by persuasive evidence to the contrary. [paragraph 3840.22]

Examples of transactions not in the normal course of operations are: the sale or purchase of capital assets, settlement of debts, and the issue or redemption of an enterprise's capital. [paragraph 3840.23]

. . .

A monetary related party transaction, or a non-monetary related party transaction that represents the culmination of the earnings process, that is not in the normal course of operations, should be measured at the exchange amount when both of the following criteria are satisfied:
(a) the change in the ownership interests in the item transferred or the benefit of a service provided is substantive; [paragraph 3840.26; original italics]
Section 3400 of the Handbook dealt with the timing of financial statement recognition of revenue:

RECOGNITION
. . .

In a transaction involving the sale of goods [as distinguished from services], performance should be regarded as having been achieved when the following conditions have been fulfilled:
1. the seller of the goods has transferred to the buyer the significant risks and rewards of ownership, in that all significant acts have been completed and the seller retains no continuing managerial involvement in, or effective control of, the goods transferred to a degree usually associated with ownership; and
2. reasonable assurance exists regarding the measurement of the consideration that will be derived from the sale of goods, and the extent to which goods may be returned. [paragraph 3400.07; original italics]
. . .
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Revenue from a transaction involving the sale of goods would be recognized when the seller has transferred to the buyer the significant risks and rewards of ownership of the goods sold. If the seller retains significant risks of ownership, it is normally inappropriate to recognize the transaction as a sale. Examples of a significant risk of ownership being retained by a seller are: . . . when the purchaser has the right to rescind the transaction; . . . [paragraph 3400.10]

Assessing when the risks and rewards of ownership are transferred to the buyer with sufficient certainty requires an examination of the circumstances of the transaction. In most cases, revenue is recognized on passing of possession of the goods The
passing of legal title may occur at a different time from the passing of possession or of the risks and rewards of ownership. [paragraph 3400.11]

The following considerations are relevant in deciding whether significant risks and rewards of ownership have been transferred to the buyer:
1. whether any significant acts of performance remain to be completed; and
2. whether the seller retains any continuing managerial involvement in, or effective control of, the goods transferred to a degree usually associated with ownership. [paragraph 3400.12]
. . .

Effects of uncertainties
Recognition of revenue requires that the revenue is measurable and that ultimate collection is reasonably assured. When there is reasonable assurance of ultimate collection, revenue is recognized even though cash receipts are deferred. When there is uncertainty as to ultimate collection, it may be appropriate to recognize revenue only as cash is received. [paragraph 3400.16]

. . .

PRESENTATION AND DISCLOSURE
The amount of revenue recognized during the period should be disclosed in the income statement. [paragraph 3400.19; original italics]

The amount of revenue generated by an enterprise during the period is an important indicator of the level of the enterprise's activity. This information assists the users of financial statements in assessing the enterprise's performance. [paragraph 3400.20]
Certain EIC Abstracts were referred to in testimony. The first, "EIC-79", was titled "Gain Recognition in Arms-Length [sic] and Related Party Transactions when the Consideration Received Includes a Claim on the Assets Sold". Issued on 22 January 1997, EIC-79 stated that it:

. . . should be applied to:
1. Arm's-length transactions entered into after January 22, 1997; [and]
2. Related party transactions entered into after September 26, 1997.
As such, EIC-79 would be applicable (if relevant) to the Newmex, Orion and Azterra Transactions.

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EIC-79 discussed the scenario of a sale of:

. . . assets not held for sale in the normal course of business. . . [for which the] consideration the seller receives includes a note (or other financial instrument) issued by the purchaser to be settled in cash. In collecting the amounts due under the note, the seller has recourse effectively only against the assets sold . . . under the terms of the note or when the purchaser is an entity with no significant assets other than those acquired in the transaction.
If the transaction is made at arm's length, or if the sale is a related party transaction in which "the exchange amount of the transaction exceeds the carrying amount of the assets sold in the seller's financial statements", EIC-79 stated:

. . . the seller should recognize the gain on the sale in its income only to the extent that the gain is realized. The gain is considered to be realized when:
1. there is a substantial commitment by the purchaser demonstrating its intent to honour its obligations under the note; and
2. the seller has reasonable assurance of collecting [sic] the note.
There is a substantial commitment demonstrating its intent to honour its obligations when the purchaser has made a commitment with a fair value of not less than 15% of the purchase price . . . .

The seller's assurance of collecting [sic] the note depends on the purchaser's ability to honour its obligations, as well as on its intent.

. . .

The seller would recognize a gain in income when the conditions for realization described above are first satisfied, whether at the date of the sale or subsequently. If the criteria are not satisfied at the sale date, the seller would defer the gain.
A second Abstract cited, "EIC-119", titled "The Date of Acquisition in a Business Combination" and issued on 11 May 2001, stated that it should be applied to business combinations after that date. We do not rely on EIC-119 because it post-dated PPI's 1998, 1999 and 2000 Financial Statements.

(d) Timeliness Not a Compelling Explanation
Counsel for Workum suggested in his cross-examination of a Staff member that the accounting principle of conservatism might have to be balanced with the objective of providing timely disclosure. There was also a suggestion that conservatism
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and representational faithfulness could be at odds. Counsel pointed to paragraph 1000.24 of the Handbook, which acknowledged circumstances in which relevance might have to be balanced against reliability, as a matter of professional judgment. As we understood counsel's suggestion, although passage of time might enable an accountant or auditor to better assess the status of a transaction (as conditions are satisfied and contingencies are resolved), delaying reporting for that reason would not serve investors or satisfy regulatory requirements. Conversely, timely disclosure that is made or required before all information becomes available should not subject those making the disclosure to unfair exposure.
In the abstract, the suggestions were not persuasive. More concretely, we considered the circumstances. At issue here were financial statements prepared and filed months after the end of the financial years in which PPI claimed to have made profitable dispositions which, we conclude, were far too contingent – and in some cases not really intended as dispositions at all – to be recorded for the applicable financial years. Pressing urgency of disclosure was not the problem, it was the fundamental mismatch between reality and presentation.
In any event, as the Staff member noted, GAAP does recognize and make provision for disclosure of emerging circumstances, in the notes to financial statements. In short, nothing in GAAP or Alberta securities laws compelled PPI or its accountants to force prematurely into the body of PPI's 1998, 1999 and 2000 Financial Statements transactions such as those here in issue.

2. Misrepresentation in Financial Statements
Alberta securities laws establish a regulatory regime designed to protect Alberta investors and foster a fair and efficient Alberta capital market, and confidence in that market. The Commission is charged with administering Alberta securities laws in light of those objectives.
Alberta securities laws set out an extensive body of requirements and restrictions that apply to those who participate in the Alberta capital market. However, Alberta securities laws focus on the public interest, and the Commission's mandate is thus above all to serve the public interest. To that end, the Commission is empowered to make a variety of orders, if it considers it to be in the public interest to do so, when there is a contravention of Alberta securities laws or conduct contrary to the public interest, or both.
A contravention of Alberta securities laws will very often (for obvious reasons) involve conduct contrary to the public interest. However, that is not inevitably the case. Similarly, conduct need not contravene a specific provision of Alberta securities laws for it to be contrary to the public interest (see, for example, Re Dobler, 2004 ABASC 927 at para. 242).
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In support of their contention that the alleged misrepresentations were contrary to the public interest, Staff pointed to section 194(1)(a) of the Act. The relevant portions of section 194 (section 161 for most of the Relevant Period), as it read during the Relevant Period, stated:

Any person or company that does one or more of the following commits an offence:

. . .

(b) makes a misrepresentation in any document required to be filed or furnished under this Act or the regulations [changed to "under the Alberta securities laws" in June 2000].
The Act defined a "misrepresentation" as follows (section 1(ii); section 1(m) before 2002):
1. an untrue statement of a material fact, or
2. an omission to state a material fact that is required to be stated, or
3. an omission to state a material fact that is necessary to be stated in order for a statement not to be misleading;
The term "material fact" was defined in section 1(gg) (section 1(l) before 2002) as follows:

"material fact" when used in relation to securities issued or proposed to be issued means a fact that significantly affects or would reasonably be expected to have a significant effect on the market price or value of the securities;
We agree that the drafters of the Act, and section 194 in particular, attached importance to the offences therein defined, to the extent that they made provision for them to be prosecuted and punished in a court. It is reasonable to assume that the drafters considered such conduct to warrant such a response because it is contrary to the public interest. However, although an assessment of the public interest can be assisted by the existence of a statutory provision or prohibition, that is not a necessity.
Thus, the public interest is not determined by whether conduct has been expressed to be an offence, but rather by a panel's application of its knowledge and understanding of the capital market and the purposes of Alberta securities laws to the facts before it in a given situation.
That is the approach we took in respect of the allegations of misrepresentation in PPI's 1998, 1999 and 2000 Financial Statements and elsewhere.
1. Preliminary Matters Considered
  1. Use of "Hindsight" in our Analysis; New Management Motivations
    1. General
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The Individual Respondents suggested that it would be improper to judge their conduct, and PPI's financial reporting, in and for PPI's 1998, 1999 and 2000 financial years by applying, in hindsight, information (for example, concerning PPI's repurchase of Newmex Shares from LynChris, ASCOOP and SPIDA) that was unknown at the time the original financial disclosure was made. The Individual Respondents also, as we understood their position, challenged the credibility of PPI's New Management and, by extension, the opinions of New Management expressed in the notes to the 2002 Financial Statements.
The Individual Respondents are correct that hindsight should not be used to judge past conduct. The question before us is not whether the original financial statements gave an accurate portrayal of how events eventually unfolded in subsequent periods. Rather, the issue is whether the disclosure, at the respective times and in the circumstances in which it was made, misstated or omitted information that was (or ought reasonably to have been) known at the time, such that at the respective times the disclosure amounted to misrepresentation. In other words, the appropriate analysis puts us today, to the extent possible, in the shoes of the Individual Respondents at the time, with the knowledge they had or should have had at the time.
The appropriateness of PPI's financial statement disclosure for its 1998, 1999 and 2000 financial years turns, obviously, on the state of affairs – the company's financial position and results of operations – as at, and for its financial year ended on, 30 September in each of those years. This does not at all mean that after-arising information is irrelevant.
We discern nothing inappropriate in company management taking into account, in preparing financial statements, information coming to their attention in the interval between the end of a financial period reported on and the conclusion of the financial statement preparation process, to the extent that the information assists in understanding the state of affairs during the financial period. Indeed, given the importance that GAAP ascribes to faithful representation of reality, we think management would be remiss were it to ignore information that assists in achieving that objective. (To the same end, information arriving during that post-period interval that does not go to the state of reality during the period reported on, but rather to subsequent events, can and should also be considered and may warrant disclosure in a note to the financial statements.) We understood Snell's testimony to confirm this reasoning. Given our view that such post-period information can be relevant to, and used in, the preparation of financial statements, we conclude that it can also properly be used by a
third party to assess, after the fact, whether the financial statements were prepared in accordance with GAAP.

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Indeed, we think it would be inappropriate to release financial statements containing information which, however accurate as at the end of the period reported on, has in the intervening period become misleading. This can work two ways: information from this post-period interval might buttress, or it might contradict, inferences drawn during the reporting period. In either case, it would in our view be inappropriate to disregard such intervening information.
Similarly, some of the information entered into evidence in the Hearing assisted us in learning what Workum and Hennig would have, or should have, known in 1998, 1999, 2000 or early 2001 when the events reported were supposed to have happened or the financial statements themselves were prepared, signed and filed. This is not "hindsight", but the compilation of evidence as to what the facts were at the relevant time.
In our analysis we therefore considered not only the circumstances prevailing at the end of PPI's 1998, 1999 and 2000 financial years, but also circumstances or information that arose after those year-ends but before the date the corresponding financial statements were finalized and issued. We found nothing arising in those intervals that in our view strengthened the position taken by PPI in those financial statements and that might therefore make the disclosure not misleading. If anything, the circumstances arising in those post-period intervals tended to amplify the contingent, or artificial, nature of the Newmex, Orion and Azterra Transactions and underline the inappropriateness of how PPI presented them.
Other types of after-arising information we found irrelevant because it did not assist us in assessing the circumstances, and appropriate conduct, at the earlier times in issue.
1. Hudson Withdrawal of Audit Opinions
Thus, for example, Hudson's decision to withdraw its earlier audit opinions on PPI's 1998, 1999 and 2000 Financial Statements – while in our view correct given that we find those financial statements to have been misleading – did not assist us in reaching our conclusion.
1. 2002 Information
McCowan testified as to his work at PPI after the departure of the Individual Respondents, including certain conclusions he reached about the Newmex, Orion and Azterra Transactions. Although we found him credible, we assigned no weight to his
conclusions because our task was to reach our own conclusions as to circumstances during the Relevant Period, based on the evidence, not on the conclusions of others.

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For similar reasons, as discussed, the 2002 Financial Statements – reflecting, as was natural, the views of New Management – did not assist us in assessing the facts as they stood during the Relevant Period. We cannot and will not substitute New Management's analysis for our own. For these reasons, we assigned no weight to the 2002 Financial Statements or the opinions of New Management (including opinions concerning relationships between or among Workum, Hennig and various entities) or their descriptions of various claims and contingencies.
We touch briefly on a point raised, obliquely, by counsel for Workum during cross-examination of a Staff member, and more directly by PPI in some of its correspondence with Staff in evidence. Staff had apparently reviewed and not objected to some of the impugned PPI disclosure – including, for example, the 1998 Financial Statements and 2000 AIF – before the more intensive review that culminated in this proceeding. Counsel also noted that Staff had, at one point after that more intensive review had begun, indicated that they would not pursue further PPI's accounting treatment of the Newmex Transaction.
None of this was determinative of any of the issues in this proceeding. As new information comes to light, Staff are free to reassess earlier conclusions on a reporting issuer's disclosure. Nothing precludes Staff from pursuing concerns arising from that later process or, indeed, taking enforcement action as a result. If some sort of estoppel were being suggested, the suggestion was without merit.
The Individual Respondents contended (citing Re YBM Magnex International Inc. (2003), 26 O.S.C.B. 5285 at para. 90) that materiality is not to be judged against the standard of perfection or using hindsight. That is so. Neither GAAP nor Alberta securities laws necessarily demand perfect accuracy in every detail of a financial statement.
As discussed, what is required is a fair depiction of the financial position and results of the entity being reported on, measured by what would reasonably be considered, at the time, material to an investor or prospective investor. This demands prudence, diligence, honesty and fairness on the part of those responsible for financial statements.
The issues before us do not turn on the sufficiency or otherwise of Hudson's work as auditor, nor indeed on whether it adhered to generally accepted auditing
standards in reaching the conclusions expressed in its audit opinions that accompanied PPI's 1998, 1999 and 2000 Financial Statements. Hudson was not a respondent in this proceeding.

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The financial disclosure issues before us turned on PPI's financial statements themselves, not the associated audit reports. The responsibility for financial statements rests with the entity being reported on, its management, the audit committee of its board of directors and the board of directors as a whole.
That said, some observations are in order. Hudson played a role – a disappointing one – in enabling or facilitating PPI's improper financial disclosure.
An audit is a process of testing. The auditor should be able to rely with some confidence on the information presented by management of the entity under audit; an auditor is not ordinarily expected to see and test everything. We concluded above that Hudson was not fully informed, at the time, about certain facts such as the security behind the LynChris Promissory Note. We do not doubt that there were other examples in which Hudson had been misled by omission – in particular, omissions on the part of the Individual Respondents to give Hudson a fair depiction of relevant facts. Even so, we discern indications that Hudson was not quite as probing as called for in the circumstances. Some of the key documentation for material PPI transactions was sparse, contradictory or simply absent. We wonder why this did not attract more of Hudson's attention, particularly since (as noted) it had, in its own pre-audit planning, identified some transactions, and some tendencies of its client and the client's senior management, that seemingly called for particular attention or caution.
None of this relieves the Individual Respondents of their culpability or responsibility. It is, however, our hope that what occurred at PPI will be instructive to auditors generally of the need for caution and, at times, scepticism, in the performance of their vital gatekeeping role.
1. Motivation for the Transactions
PPI's motivation for the Newmex, Orion and Azterra Transactions was relevant to assessing whether they were bona fide transactions. Some of the evidence relating to motivation also assisted in our determination of how to account for a transaction, if bona fide.
1. Evidence Concerning Motivation
Several perspectives – some contradictory – were presented in the course of the Hearing.
Addressing the "conglomerate discount"
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Counsel for Hennig, cross-examining Mackenzie, suggested that PPI, as a sort of mini-conglomerate, was not easily understood by financial analysts and, therefore, had not been fairly valued. There was evidence that thought was given to spinning out various of PPI's lines of business into more focused entities to shed what is sometimes thought to be a conglomerate discount. This, counsel for Hennig suggested, was the primary motivator, with the ability to book gains on the transactions merely a "happy by-product".

"Real business purposes"
Mackenzie agreed that the Orion and Azterra Transactions "had very real business purposes to them". He confirmed that the Newmex Transaction was under discussion in the summer of 1998 and agreed with the contention of counsel for Hennig that it "was not a last-minute September 30, 1998, type of deal".

Reacquisition of Newmex Shares
There was scant evidence of a motivation – bona fide or otherwise – for PPI's supposed decision (if indeed it were a new decision) to reacquire in 2000 the Newmex Shares it purportedly sold in 1998. Hennig told Staff in a 28 August 2001 letter that "[a] subsequent change of business direction resulted in a repurchase of those shares". We found no evidence to support that assertion.

Newmex "wasn't going too far"
However, Mackenzie had understood Newmex to be "kind of a bright spot", about which Workum "was quite excited . . . There was some potential". Mackenzie therefore expressed surprise or concern when he learned of the sale or proposed sale of Newmex, but was given comfort that Newmex "perhaps . . . wasn't going too far. They were selling it to friendly parties perhaps, and, at some point, there was a chance that we may, may wind up owning it again". Although unsure which of the Individual Respondents said this, he was clear that it was one of them.
We note that PPI retained the PPI Newmex Option (an option to purchase 475 875 Newmex Shares – far fewer than it purportedly sold in the Newmex Transaction). The existence of the PPI Newmex Option would not, in our view, account for the comment that Newmex "wasn't going too far".

Newmex Transaction: August 1998 ASCOOP/SPIDA Discussion Drafts
Successive drafts of a discussion document (the "ASCOOP/SPIDA Discussion Drafts"), referring to an August 1998 proposal, suggest one possible motive for PPI's promotion of the Newmex Transaction. The documents, all on PPI letterhead, were addressed to individuals apparently associated with ASCOOP and headed "Re: August 27, 1998 proposals discussed between ASCOOP and PPI".
The third draft of the document began:

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We have encountered setbacks in our convertible note financing as a product of the current equity markets downturn. In consequence, various methods of providing liquidity to PPI as needed to continue our current operations, capital projects and Euro-note financing were discussed on August 27, 1998. The effective date for these transactions would be as soon as possible but in any event not later than September 15, 1998. Terms to be generally in accord with the following:
There followed several numbered points, the first being:

1). To convert PPI's equity holdings in our independent public mining subsidiary, ([Newmex]), into cash, through the sale of a portion of these share holdings to ASCOOP and possibly SPIDA. The initial purchase would involve CH [presumably, in context, a reference to Swiss – CH – francs or "CHF"] 750,000. For the [Newmex] shares from each of ASCOOP and possibly SPIDA. The shares would be sold for a 10.0% discount to the market price as of the time of the transaction. Subsequent to the transaction PPI would have the option to re-purchase the shares for the market price at the time of the transaction plus 0.8333% premium to be paid for each month the option is outstanding for the first 24 months immediately following the transaction. After 24 months ASCOOP would have the right to sell the shares back to PPI based on the same formula or into the market given a 90 day right of first refusal first being offered to PPI.
The document also included the following comment:

We propose the above mentioned transactions to ensure that the substantial advances made in expediting our strategic plan are not lost due to short term market fluctuations and our resulting inability to raise money.
These ASCOOP/SPIDA Discussion Drafts indicated to us several things. First, not merely the notion of a sale of Newmex Shares to ASCOOP and SPIDA, but some key terms of such a transaction, were discussed as early as August 1998. Second, at least one motivation for the transaction was to address an apparent liquidity squeeze which PPI attributed to a downturn in equity markets and the apparent failure of a financing effort. Third, PPI had not given up on Newmex but sought to monetize some of its holding to tide PPI over a temporary difficult patch. Fourth, nothing in the ASCOOP/SPIDA Discussion Drafts indicated a desire, or intent, to truly dispose of Newmex: arrangements for PPI to buy back the shares sold ("BuyBack Arrangements") were an express term of the proposed transaction, with a built-in profit for ASCOOP at the annual equivalent of 10% for so long as the buyback option remained unexercised.

Newmex/LynChris Transaction: importance of booking a gain
Hennig told Faithfull that the Newmex/LynChris Transaction would enable PPI to report a gain for its 1998 financial year. Other evidence indicates that this had been PPI's objective for some time. Forbes, PPI's former auditor, wrote to KPMG, apparently in June 1998, concerning "your advice on the accounting treatment of a sale of
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assets for a note and shares". The topic was PPI's April 1998 sale of mining properties to Newmex (Kilo, at the time). The document referred to accounting rules relating to "a non-monetary transaction/exchange" and inquired, on behalf of Forbes and Hennig, "what steps if any can be taken before September 30, 1998 to allow the entire gain to be recognized?"
KPMG prepared what appears to have been a draft response to Forbes dated 9 July 1998. Its author concluded:

I do not believe the described transaction would qualify as a . . . non-monetary transaction/exchange that would result in [PPI] reflecting a gain.

. . . Newmex's ability to pay the note appears to be dependent on the value of the preproduction mining assets in Newmex and/or the infusion of capital by [PPI] on the exercise of a warrant. As a result, I do not view the described transaction as an exchange that represents the culmination of the earnings process for [PPI].

. . .

. . . the preproduction mining assets sold [by PPI] and the business conducted by Newmex (preproduction mining) are the same.
Handwritten on the copy of this draft document – by whom we do not know –was this notation:

Theo/ Pls ensure we can register this gain. We will do a tax loss Co deal if it renders us taxable. Must be done by year-end.
/[illegible]
On 18 August 1998 Forbes met with Workum. Forbes wrote a 20 August 1998 memorandum to Workum "Re: Newmex", in which Forbes followed up the meeting with comments on seven options that, he testified, had been presented by Workum. Citing but dismissing three options, the memorandum went on to discuss four others. Among those, "Option 4 - Status Quo", involved an "accounting treatment [that] is not in accordance with [GAAP] and would result in a qualified audit opinion". Forbes stated:

This gain can not [sic] be included in your June 30, 1998 financial statements if I am to be associated with them in conjunction with your TSE listing application.
"Option 6 - Transfer of Properties to a Related Party for Monetary Consideration" would apparently permit recognition of a gain in certain circumstances, including a substantive change in ownership which "is presumed . . . when a transaction results in unrelated parties having acquired or given up at least 20% of the total equity ownership interests in the item unless persuasive evidence exists to the contrary". However, Forbes commented:
A gain recognized under the above circumstance where NEWMEX disposes of the properties may not be, as I understand it, your primary objective, i.e., I sense you would rather not have NEWMEX give up the properties.

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"Option 7 - Transfer of Newmex Shares to a Related Party for Monetary Consideration" might, in Forbes' view, "be the most desirable option for you" but would be "extremely complicated from an accounting perspective".
Draft minutes of a 25 August 1998 PPI directors' meeting included the following as item 16:

Vote on [Newmex] gain transaction
Move to approve subject to written approval by KPMG or similar one.
A handwritten comment on this item stated:

Management proposed that a sale/merger transaction be structured which would allow PPI to recognize 100% of the gain triggered on the mining property sale to [Newmex] in exchange for shares. The original advice received was flawed necessitating alternative measures
- 9 voted for 1 abstention
Another note written on or affixed to the beginning of the draft minutes, in different handwriting, stated:

THEO
Please check #16 on minutes for Aug 25 BOD - I couldn't read you handwritting [sic] Thanks
[illegible name]
We conclude from this that the handwritten description of the approved transaction was Hennig's.
These developments seem to have been followed shortly by the August 1998 discussions with ASCOOP, already described, and discussions in the next month with Faithfull.

Orion Transaction restructured to book a gain
Mackenzie testified that the Orion Transaction was originally contemplated as an exchange of shares until he prompted a change such that the much larger part of the consideration to be paid by Orion would take the form of a promissory note. Mackenzie explained why he suggested the change:

Consistent with what we found with the Newmex [T]ransaction, it started out in much the same way, a straight equity deal, until we received advice from the auditors that we
wouldn't be able to book a gain if we persisted that way. So consistent with my understanding that we also wanted to be able to book the gain on the Orion deal, we need[ed] to structure it this way.

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Mackenzie agreed with the suggestion of counsel for Hennig that booking a gain "may have been one of the goals, but the real driving purpose for doing the deal was to give Swiss Plastering its own public vehicle so that its value could be recognized". Mackenzie added, though, that "we clearly weren't going to do the deal if it was a straight equity deal and we couldn't book the gain".
Mackenzie acknowledged that, in an investigative interview by Staff, he opined that it would have been "realistic and reasonable to expect" that Orion, having acquired Swiss Plastering, would be able to pay its resulting debt, although he seemed to base this in part on an assumption that the company would grow after the transaction.
Mackenzie also agreed with the suggestion of counsel for Hennig, concerning the accounting treatment of the Orion Transaction, that:

. . . the ultimate advice that you understand that was received from [Hudson] was that, given the level of commitment that both boards and apparently shareholders had given to the deal [among other things] that they could properly go ahead and reflect that gain in their [PPI's] 1999 financial statements . . . .

Azterra Transaction
Mackenzie testified that Azterra and PPI were arm's length parties and that, notwithstanding the difficulty PPI later encountered in coming up with valuations to support the transaction price, both PPI and Azterra "supported the price". He did not appear to doubt that Workum might have believed the US properties to have greater value. Mackenzie testified that PPI assumed ownership and management of the Polo Club property from Azterra, as contemplated in connection with the Azterra Transaction. He understood, however, that PPI held a security interest in the Polo Club that it could seize even if Azterra had not agreed to the larger transaction. Mackenzie also said that Fitzsimonds, Azterra's CEO, assumed day-to-day operational management or control of Creative Classics. Fitzsimonds testified to a division of responsibilities:

Well, there was no question in my mind that management of Creative [Classics] and Willow Creek was always in the hands of [Workum].

. . .

My role in the exercise was at the project level. . . .
This was consistent with Mackenzie's understanding of the ultimate intention:
. . . it was understood that . . . ultimately [Workum] still would have . . . controlled or managed [Creative Classics and Willow Creek].
1. Conclusions on Motivation
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We conclude from the ASCOOP/SPIDA Discussion Drafts that in the late summer of 1998 PPI needed cash and hoped that ASCOOP and perhaps SPIDA would be willing to assist by providing CHF750 000 each, by 15 September 1998, cast as a purchase of Newmex Shares but on terms that assured ASCOOP and SPIDA not only of no loss, but also of a 10%-per-annum return, and assured PPI of the ability to get the Newmex Shares in two years. This was consistent with what became the Newmex/ASCOOP Transaction. The idea might be viewed more in the nature of a loan rather than a sale.
In contrast to the Newmex/ASCOOP Transaction, the Newmex/LynChris Transaction was not consistent with what was described in the ASCOOP/SPIDA Discussion Drafts. The Newmex/LynChris Transaction involved no up-front cash payment, so PPI's short-term liquidity problems could not have been the motivation. That said, the indications in the ASCOOP/SPIDA Discussion Drafts that PPI was not really prepared to let Newmex go, despite a purported disposition, were consistent with the structuring of the Newmex/LynChris Transaction. That, however, was more of a constraint than a motivation for the Newmex/LynChris Transaction.
The Orion and Azterra Transactions appeared more consistent than the Newmex Transaction with the notion of spinning different lines of business out into separate publicly traded PPI subsidiaries.
We therefore accept that PPI had some plausible, bona fide business motivations for most of the transactions at issue here (the Newmex/LynChris Transaction was an exception; we discern no plausible bona fide business motivation for it). The Newmex/ASCOOP Transaction would provide PPI with funds from friendly parties in the face of a liquidity squeeze. The Orion and Azterra Transactions might address the feared conglomerate discount.
However, the evidence persuades us that these were not the primary motivations for any of the transactions at issue, and certainly not for the manner in which they were ultimately structured. The Individual Respondents were not seriously interested in PPI divesting control over the subsidiaries and it did not do so.
This persuades us that, whatever the reality of PPI's need for short-term liquidity (in which the Newmex/ASCOOP Transaction could assist), accounting –recording a gain on Newmex – was from the outset a driving motivator (not merely a "happy by-product") for both parts of the Newmex Transaction and, indeed, the only apparent motivation for the Newmex/LynChris Transaction.
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Although the Orion Transaction might have been consistent with, and possibly motivated in part by, the business idea of moving various PPI business lines into separate exchange-listed vehicles, this did not explain the structure of the Orion Transaction. The evidence persuades us that accounting, not business, was again the driving force. It dictated the conversion of a share exchange into a transaction involving a promissory note. Mackenzie's testimony, while superficially supporting the idea that the new structure was economically rational, in our view really demonstrated how little serious consideration was given to the substance of the revised deal, apart from presenting the elements supposedly needed to support the desired accounting. Our view of the Azterra Transaction is similar.
In short, we conclude that what principally drove each of the transactions at issue was PPI's wish to report sizeable gains in its 1998, 1999 and 2000 financial years. With that end in view, PPI was willing to structure, restructure, paper and revise the transactions as often as seemed necessary to support the desired accounting – so long as nothing done undermined PPI's (and the Individual Respondents') continued de facto control over the various subsidiaries purportedly sold.
Our conclusions on motivation are not determinative of the allegations. However, as noted, some of the evidence relevant to motivation is relevant to determining the propriety of PPI's financial disclosure. We now discuss this issue.
1. Did PPI's 1998 Financial Statements Fairly Represent the Newmex Transaction?
  1. Substance of the Transaction – Bona Fides at Issue
We reviewed the evidence to assess both the substance of the Newmex Transaction and questions of timing. Staff contended – the Individual Respondents did not concede – that the Newmex Transaction was not bona fide but rather the purported sales of Newmex Shares to ASCOOP, SPIDA and LynChris were essentially shams. For the reasons given below, we conclude that, in substance, the arrangements lacked essential elements of a sale, rendering the question of timing (of recognition of a sale) moot.
We attached considerable importance to the BuyBack Arrangements associated with the Newmex Transaction – arrangements whereby the parties would restore themselves to their pre-transaction positions by having PPI buy back the Newmex Shares it purportedly sold to ASCOOP, SPIDA and LynChris. We examined whether such arrangements existed and, if they did, to what extent they diminished or negated the transfer of risks and benefits that would generally accompany a sale of shares.
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The arrangements initially agreed to by the parties to the Newmex Transaction, evidenced by executed agreements, clearly contained BuyBack Arrangements. Their effect, in our view, would have been largely to eliminate the financial risk to the purported buyers (apart, perhaps, from the risk of PPI failing to fulfil its obligations) of entering into the Newmex Transaction.
Under the Longer Newmex/ASCOOP Terms Agreement (clause 8 specifically)
- although money initially changed hands – the purported seller (PPI) had the right to require the return of the Newmex Shares. After 24 months, the purported buyers (ASCOOP and SPIDA) were given the right to compel PPI to take back the Newmex Shares for "the market price at the time of the transaction" (in context, the time of the original purported sale, as made clear by the words "the option is outstanding for the first 24 months immediately following the transaction"). Thus, this BuyBack Arrangement gave both sides to the purported sale the right to be restored to their original pre-transaction positions – but with ASCOOP and SPIDA entitled also to a 10%-per-annum premium or profit.
For LynChris, no money was actually to change hands at the outset. The price for LynChris's purported purchase of Newmex Shares was to be evidenced by a promissory note which, according to the First LynChris Addendum, could be satisfied as to both principal and interest by LynChris handing the Newmex Shares back to PPI. This was a BuyBack Arrangement in a different guise. Again, both sides to the purported sale had the right to be restored to their original pre-transaction position (but with LynChris or Faithfull retaining an inducement in the form of PPI Shares).
We are aware that one party or the other to a purchase and sale transaction might on occasion hedge some risky aspect of the transaction by granting or buying some sort of option. We are aware that closing consideration on a transaction not infrequently includes a promissory note rather than cash, and that sometimes such notes end up being satisfied in kind rather than in cash. However, in the Newmex/ASCOOP and Newmex/LynChris Transactions these terms went to the very heart of the arrangements. Here, PPI, as purported vendor of Newmex Shares, retained from the outset – by explicit agreement with the supposed purchasers, access to the Newmex Shares purportedly sold (and, as discussed below, PPI retained key indicia of ownership).
The terms of these BuyBack Arrangements, and their centrality to the initial agreements, in our view cast into grave doubt the legitimacy and validity of the purported share sales. If the BuyBack Arrangements indeed governed the parties, we believe that the Newmex/ASCOOP and Newmex/LynChris Transactions each fell short of a "sale" of Newmex Shares on which PPI earned a profit. We conclude that what the parties agreed to was not indicative of or consistent with a true disposition of PPI's position as an owner
of the Newmex Shares, but was more in the nature of a loan arrangement. For PPI to claim otherwise would have been misleading.
We had no evidence as to ASCOOP's or SPIDA's understanding of the Newmex/ASCOOP Transaction. We did hear from the purported buyer in the other portion of the Newmex Transaction. Faithfull said he had not understood that the Newmex Shares to be conveyed in the Newmex/LynChris Transaction were merely being parked with him. However, he made clear in his testimony that the purported LynChris purchase would be unwound "sooner rather than later" and LynChris would be made whole.
We conclude that this was, indeed, an accurately described and essential part of their deal from the outset. When the unwinding was put into effect in early 2000, this in Faithfull's mind was the consummation of their original understanding; it had nothing to do with any "change in business direction" as Hennig had told Staff.
As noted, the initial contractual arrangements for the Newmex Transaction were substantially altered relatively soon after they were executed – Hennig successfully prevailed on Faithfull to proceed without the First LynChris Addendum, and on ASCOOP and SPIDA to sign the Shorter Newmex/ASCOOP Terms Agreement.
With these changes, on the surface at least, the BuyBack Arrangements vanished. However, we are convinced that the surface appearance did not reflect reality. The evidence as to events and actions both prior to and after the changes were made to the original arrangements persuades us that the parties, among themselves, continued to operate as though the original arrangements were in place.
In the case of the Newmex/ASCOOP Transaction, this is fully consistent (and any other approach inconsistent) with Hennig's note to Buser, set out in a facsimile transmission sheet on 15 December 1998: "We will of course honour the terms of our original agreement". We concluded earlier that this clearly related to the Longer Newmex/ASCOOP Terms Agreement, despite Hennig's contrary assertions. We conclude that the advent of the Shorter Newmex/ASCOOP Terms Agreement was meant only to deceive the Exchange into believing that certain of its demands were being satisfied.
We reach a similar conclusion concerning the supposed abandonment of the First LynChris Addendum. PPI and Faithfull continued to operate in accordance with the terms of the First LynChris Addendum. Hennig made some express commitments to that effect, Faithfull relied on them, and at the end of the day PPI followed through. This
reinforces our conclusion that the abandonment of the First LynChris Addendum was only superficial.
Therefore, as among the parties to each of the two parts of the Newmex Transaction, we believe that the purported changes were intended to be merely cosmetic and treated as such. We find that, despite the purported changes, the Newmex/ASCOOP Transactions continued to be governed by the terms of the Longer Newmex/ASCOOP Terms Agreement and the Newmex/LynChris Transaction continued to be governed by the terms of the First LynChris Addendum.
It follows, and we also find, that the original BuyBack Arrangements remained in place as part of both parts of the Newmex Transaction.
In the course of his cross-examination of Snell, counsel for Workum raised an interesting point centring on the nature of PPI's business. He cited the example of a retail business that sells goods, and records their sale, even though it may later accept some of the sold products as returns and repay the purchase price. The suggestion, as we understood it, was that even if there were BuyBack Arrangements in respect of the Newmex/LynChris Transaction (and, by extension, the Newmex/ASCOOP Transaction), why should PPI not be able to record the sale in the same fashion as the retailer in the example by booking a sale (and resulting profit) of a product that it might later have to buy back?
Snell noted that sales and returns occur in the ordinary course of a retailer's business but counsel for Workum suggested that something similar might be said for PPI's sale of a subsidiary, particularly given PPI's structure as a sort of mini-conglomerate and its propensity for deal-making.
This reasoning was not persuasive, because PPI and an ordinary retailer would have different expectations. The reputable retailer would not book a profit that materially affected its aggregate financial picture, on a sale that it never seriously meant to be a sale, or that it knew was not likely to remain a sale (that is, where the repurchase was expected or, indeed, agreed to in advance, as distinct from a mere possibility). That, in essence, describes what we have found to be the true terms of the Newmex/LynChris Transaction, and we discern no valid reason for PPI to have booked a profit on it or, for similar reasons, the Newmex/ASCOOP Transaction.
The Newmex Shares that were the subject of the Newmex/LynChris Transaction were governed by the Newmex Escrow Agreement. Even if the shares could be transferred to LynChris in escrow, getting them released from escrow was not assured.
But the initial transfer itself was not even permitted without Exchange approval. This regulatory approval was neither immediate nor assured. Indeed, efforts at obtaining Exchange consent involved a good deal of manoeuvring, some of it opaque and even misleading:

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- LynChris had no intention of funding the mining expenditures called for by the terms of the Newmex Escrow Agreement. The matter was resolved by Hennig's assurance to Faithfull that ASCOOP would bear that burden.
- The Exchange wanted proof that LynChris had posted security for its debt. LynChris refused, and this requirement was finessed by the unusual arrangement discussed above.
Even these steps did not take place until well into PPI's 1999 financial year, after a gain on the transaction was recorded in the 1998 Financial Statements.
Escrow was, in our view, from the outset a serious and potentially fatal impediment to the Newmex/LynChris Transaction. We conclude that this was known to the parties – certainly to PPI and to the Individual Respondents – by the time PPI filed its 1998 Financial Statements.
We now discuss several indicia of share ownership and the extent to which they were, or were not, affected by the Newmex Transaction. In some cases the BuyBack Arrangements were relevant to our conclusions on these points. We conclude that key indicia of a change of share ownership – of a true sale – simply were not part of the Newmex Transaction.
1. Economic Risk and Reward
  ASCOOP and SPIDA
Clause 8 of the Longer Newmex/ASCOOP Terms Agreement provided for the return of the Newmex Shares to PPI, at the instance of either buyers or seller, at a specified price.
Counsel for Workum pointed out that, even had there been BuyBack Arrangements between PPI and ASCOOP and SPIDA in respect of the Newmex/ASCOOP Transaction (this was not admitted), it would not mean that ASCOOP and SPIDA were at no risk in the transaction. Counsel cited the hypothetical example of a PPI bankruptcy. Were that to occur, ASCOOP and SPIDA might not be able to enforce BuyBack Arrangements, and would be left holding Newmex Shares.
This was not persuasive. The point, in our view, was not that the purported buyers in the Newmex Transaction assumed no risk, but rather that they did not assume
the usual risks and rewards of ownership and that none of the parties intended that they do so or, by the time PPI reported the transaction in PPI's 1998 Financial Statements, actually did so.

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LynChris
The arrangement between LynChris and PPI was even clearer in principle than that with ASCOOP and SPIDA: LynChris was to be left whole. It was, as Faithfull described it, "virtually a no-lose situation" for LynChris.
PPI's right at any time to call for payment of the LynChris Promissory Note by the return of the Newmex Shares would seem to have markedly diminished LynChris's imagined ability to profit from a market price increase. Conversely, being able to settle its debt simply by handing back the Newmex Shares meant that LynChris had little at stake in Newmex – it had committed little or nothing to the Newmex/LynChris Transaction and would not be harmed were it to unravel. It was in this way more like a loan arrangement than an outright sale.
Contrary to express references in the LynChris Promissory Note, LynChris posted no security for repayment of that note on 30 September 1998 or, indeed, at any time thereafter. It was essentially a case of PPI posting security for its own receivable. PPI thus backed one of its assets with another (the backing, indeed, taking the form of shares in its own capital). As Snell rightly put it, this "seemed unusual". We think it also absurd, and explicable only as an effort to mislead the Exchange.
The Newmex/LynChris Transaction exhibited additional features pertinent to a consideration of economic risk and reward. The LynChris Promissory Note contemplated the payment of interest, but Faithfull was careful to ensure that an arrangement was made (crossing cash payments between LynChris and PPI) that would see LynChris fully compensated by PPI both for cash interest paid (taking into account income tax).
In addition, the terms of escrow governing the Newmex Shares purportedly transferred in the Newmex/LynChris Transaction required that Newmex incur mining expenditures before the shares could be released from escrow. We saw that Faithfull was reassured that someone else – ASCOOP and SPIDA – would bear the burden of funding such expenditures. This, we believe, was a significant departure from what would be expected to occur in a genuine sale of Newmex Shares, in escrow, from PPI to LynChris. Hennig's reassurance relieved LynChris of a potentially large financial burden (or the risk of its purportedly purchased Newmex Shares never being released from escrow or, indeed, simply being cancelled), and shifted the cost to others (ASCOOP and SPIDA) with whom LynChris was not even entering into any contractual relationship. This, in our view, was inconsistent with a genuine sale by PPI. Even viewing this aspect of the arrangement in isolation, we consider that it called into serious doubt the character of the
purported transaction as a "sale" and we consider that reporting it as such was misleading.

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In short, LynChris was relieved of several basic financial obligations or commitments that would have been expected to be borne by a true buyer of escrowed Newmex Shares paying by promissory note. These circumstances, in our view, further and sharply distinguished the Newmex/LynChris Transaction from a true sale.

Economic Risk and Reward – Summary
In both the Newmex/ASCOOP and Newmex/LynChris Transactions, the purported seller (PPI) retained the risk of a decline in the market price of Newmex Shares, as well as the potential to profit from a market price increase. In the case of the Newmex/LynChris Transaction, other natural economic burdens that would have been expected to be assumed by LynChris in a true sale did not, in fact, pass to LynChris.
Basic economic indicia of share ownership thus did not pass to the purported buyers in the Newmex Transaction.
1. Voting Rights
Under the Longer Newmex/ASCOOP Terms Agreement and the First LynChris Addendum – both of which we found governed the respective parts of the Newmex Transaction – the purported buyers of the Newmex Shares essentially forfeited a basic right of common share ownership, by committing to vote the Newmex Shares at PPI's direction. This left an important incident of share ownership with the purported seller.
1. Management and Control
The evidence made clear that PPI, in the person of Workum (and, to a lesser extent, Hennig), retained managerial control over Newmex throughout the period when PPI had supposedly sold all its Newmex Shares. While it is not unusual for the buyer of a company to retain the target's existing management, we find it distinctly odd – from the perspective of either buyer or seller – for the purported buyers to retain, at the helm of their new acquisition, individuals who continue simultaneously, and apparently indefinitely, as the seller's management. That, though, describes what happened in the Newmex Transaction. This reflected neither typical business practice nor a real intention on the part of PPI to shed itself of Newmex, or of the purported buyers to assume control. We think this inconsistent with a true sale.
In our view (confirmed by Snell), control, or evidence of how control of a company is exercised, can be relevant to an assessment of the appropriate accounting treatment of a purchase transaction.
The evidence as to the actual dates on which events occurred was not always clear. It was clear, however, that several documents pertinent to the Newmex Transaction were drafted and signed over a prolonged period subsequent to 30 September 1998. Many of them – even some that purported to change dramatically the original documented deal – specified that retroactive effective date.
It is clear that the Newmex/LynChris Transaction was not consummated by PPI's 1998 financial year-end: the Newmex Shares were not transferred and the LynChris Promissory Note was not executed and delivered until after 30 September 1998. Moreover, in respect of both LynChris's portion and that of ASCOOP and SPIDA, the actual terms of the arrangement evolved, at least on paper – including the purported abandonment of signed agreements and the execution of new, different ones –significantly during the interval between 30 September 1998 and the February 1999 filing of PPI's 1998 Financial Statements.
For the reasons discussed, we concluded that the arrangements for the Newmex/ASCOOP and Newmex/LynChris Transactions as initially documented set out the real expectations and agreement of the respective parties thereto. The subsequent changes, we concluded, were cosmetic and misleading, designed at most to present an appearance which (if not tested) might satisfy concerns of the Exchange and accounting advice. Backdating documents to 30 September 1998 to present the appearance of transactions significantly different from what had actually been agreed by that date did not change the circumstances as of that effective date, nor PPI's and the Individual Respondents' knowledge at the time it was preparing the 1998 Financial Statements.
We discussed above PPI's reacquisition of the Newmex Shares from LynChris (effective on 29 February 2000) and from ASCOOP and SPIDA (effective on 30 September 2000).
The terms of the reacquisitions were consistent with the BuyBack Arrangements. They thus lent credence to the other evidence that the terms of the Longer Newmex/ASCOOP Terms Agreement and the First LynChris Addendum governed the two parts of the Newmex Transaction throughout. As such, they reinforced the obvious conclusion: these reacquisitions were the culmination of the original arrangements, and therefore those original arrangements did not involve true sales of Newmex Shares by PPI. We so find.
From this, it follows that the essential premise of PPI's reported gain on the sale of Newmex Shares – that there was a sale – was incorrect.
The Individual Respondents pointed to the complexity of GAAP and the need for the exercise of judgment, to suggest that what they had done was just that, and they should not be criticized for the result.

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As noted, the application of GAAP does indeed often require the exercise of judgment. Doing so in respect of the Newmex Transaction was, in our view, not difficult. We do not believe that a reasonable observer with knowledge of the actual arrangements between PPI and, variously, ASCOOP, SPIDA, LynChris and Faithfull could reasonably have concluded that, as at 30 September 1998, PPI had truly disposed of and realized a gain on its Newmex Shares. The facts simply were not there.
No subtle professional accounting judgment was needed to recognize this. The complexity of GAAP or the difficulties it may present in other circumstances do not assist the Individual Respondents here.
The gain that PPI reported on the Newmex Transaction for 1998 meant the difference between little or no net income for the year, and net income of millions of dollars. We believe that the difference in outcomes could reasonably have been expected to alter investors' understanding of PPI's financial position at the end of its 1998 financial year and its financial and business performance for the year (and possibly its prospects for the future) – and by extension, their assessment of PPI as a business and the value of its shares.
We therefore find that the gain PPI reported for its 1998 financial year in respect of its purported disposition of Newmex Shares was material.
While some or all of the elements and circumstances of the Newmex Transaction discussed might, in isolation, be capable of rational business explanation, we consider the convergence of the factors inconsistent with a genuine change of control of Newmex, but consistent with an expectation that PPI either retained, or would resume, ownership of Newmex.
We find that the Newmex Transaction was nothing more than an arrangement made by PPI with friendly parties, during a difficult period in the capital market, to raise some cash (the Newmex/ASCOOP Transaction) and (for both parts of the Newmex Transaction) report a sizeable gain from the temporary, nominal surrender of shares of a strategically important PPI subsidiary (Newmex). It was done in a way that would have no practical consequences for Newmex, would not diminish PPI's influence over it, and would expose the friendly purported buyers to no risk. The whole arrangement would be
unwound, likely in approximately two years, with each party restored to its original position and the friendly purported buyers modestly compensated for their assistance.

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Although Faithfull denied that it was a "parking" exercise, we conclude that this was an apt description. Given that the purported buyers were entitled to some reward for their participation, it might also be described as a "pawn" arrangement.
Whatever label is applied, these were not true purchases and sales of Newmex Shares and they should not have been presented as such in PPI's 1998 Financial Statements. The transaction did not trigger a real gain for PPI and it was wrong to suggest that it did.
The 1998 Financial Statement presentation of the Newmex Transaction miscast what had happened and omitted information that would have affected a reader's understanding. We find that the 1998 Financial Statements were not prepared in accordance with GAAP and therefore contravened Alberta securities laws. That disclosure also involved misstatements and omissions of material facts and, as such, we find that it contained misrepresentations.
The 1998 Financial Statements were capable of misleading – and, we are in no doubt, they were intended to mislead – readers as to the financial state of PPI. We therefore find that PPI's filing of its 1998 Financial Statements, not having been prepared in accordance with GAAP and containing misrepresentations, were also contrary to the public interest.
1. Did PPI's 1999 and 2000 Financial Statements Fairly Represent the Orion and Azterra Transactions?
  1. Nature of the Transactions
In much of the discussion that follows we deal with the Orion and Azterra Transactions together. This is because in concept and structure they were in many respects similar. Both involved PPI (directly or through EnerGCorp) agreeing to transfer the shares of subsidiaries to other public companies, in return for shares and promissory notes of the buyers. The deals were to be structured so that PPI could persuade its auditor to bless its recording of substantial gains on the dispositions of the subsidiaries in successive financial years.
The Orion and Azterra Transactions differed in important respects from the Newmex Transaction. The Orion and Azterra Transactions did not appear to be temporary, reversible or simply spurious transactions as we consider the Newmex Transaction to have been; there was, notably, no evidence of BuyBack Arrangements as part of the Orion Transaction (at least, once early references to a "rollback" were superseded) or the Azterra Transaction.
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However, the actual execution of the Orion and Azterra Transactions proved difficult and was not always executed smoothly or at all. Many conditions and contingencies affected both transactions. A great deal had to be done to complete the transactions; some never did happen. Much that was done to this end was done badly –numerous instances of puzzling, inconsistent or simply missing documentation have been cited. As PPI began to face increasing regulatory scrutiny and questioning, its responses included significant changes to the transactions, new (and in turn often puzzling or inconsistent) documentation, and what seems to have been increasingly desperate efforts to add plausibility to transactions that in reality seemed ever less likely to close.
It was against this backdrop that PPI reported substantial gains on the Orion and Azterra Transactions in its 1999 and 2000 financial years.
The terms of the Orion and Azterra Transactions – at least until the dramatic amendments made in August 2001 – were highly conditional. There is nothing necessarily unusual or improper about this, and many of the conditions were obvious ones. The initial agreements contemplated, and were subject to, the preparation and execution of final documentation. Approvals of shareholders and the Exchange were required for what were, after all, relatively significant transactions. Some valuations were needed. Closing, and bringing the transactions truly into effect, was clearly going to take time, even if all went well.
For example, the Azterra Letter Agreement was not written as a final, definite or complete transaction, but rather as a "binding letter of intent". Asked what this meant, Azterra's lawyer Taylor testified that "[i]t's very typical to have a letter of intent that's binding with the expectation that the parties will work towards finalizing or settling the outstanding issues". We think that a fair comment. Such a document commits its adherents to work in good faith toward an enunciated goal; it does not, however, demonstrate that the goal has been achieved.
It follows, and we find, that the Orion and Azterra Transactions merited disclosure by PPI in its 1999 and 2000 financial years, but not as "done deals". They simply had not, by those respective year-ends, advanced anywhere near the point at which it was reasonable to tell investors that PPI had realized gains on the transactions. Far more reflective of reality – and therefore far more appropriate – was to do what, for example, was done in Azterra's 2000 Financial Statements: discuss the transactions in a note to financial statements as "Pending" and include in that discussion a caution as to the still-contingent nature of the transaction.
In short, apart from any other problems with the Orion and Azterra Transactions, PPI's 1999 and 2000 Financial Statement disclosure was premature and misleading.
We now consider some of the other problems and relevant considerations.
We discussed above the differences between versions of the Orion Promissory Note in evidence – monthly versus annual payments, different named payees and different currencies. The evidence called into question not only when any of the versions was executed, but also which version was to prevail, and therefore what exactly the terms of the Orion Transaction were and when they were determined.
This and much other evidence also exemplified a cavalier approach at PPI to both legal documents and dealings with regulators. Documenting such a key element of a significant transaction correctly (or at all) was apparently considered of trivial importance unless and until someone – auditor or regulator – began asking questions. At that point the response seemed to be a combination of obfuscation or delay coupled with, when needed, some rapid drafting and backdating to make the questions go away. Considering what we learned from the evidence about some of the individuals involved, we regard what transpired in connection with the Orion Promissory Note and Hennig's communications to Staff on that topic (we quoted above from a 21 August 2001 letter to Staff) reflective of the prevailing – and disturbing – atmosphere and ethos at PPI under the leadership of Workum and Hennig.
Azterra was in dire financial straits in 2000 and 2001 and had no viable alternative to the Azterra Transaction. PPI had something invested in the transaction, too, having advanced some $3.3 million toward settling Azterra debts. There was, thus, reason to expect that Azterra shareholders would be supportive and that the parties to the Azterra Transaction would work seriously toward closing it. Its then-president characterized the regulatory difficulties with completing the transaction (presumably Exchange approval) as, to some extent, unforeseen.
There was no dispute about this. It does not, however, address the issue before us. In particular, it does not demonstrate that a sale had proceeded to the point that it was appropriate for PPI to record a resulting gain on the Azterra Transaction in its 2000 financial year.
Azterra was to provide PPI and EnerGCorp with one promissory note apiece for the purchases of Willow Creek and Creative Classics. The tormented history of one of them, the Azterra/Creative Classics Promissory Note, was discussed above. It materialized only in August 2001. That alone, in our view, was a strong indication that PPI was premature in reporting a gain on the Azterra Transaction as it did for 2000.
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An enduring mystery is the second promissory note, for the Willow Creek part of the Azterra Transaction. It is not clear that it was ever issued. Yet its absence seemed not to have troubled PPI even when it went to such effort to obtain the Azterra/Creative Classics Promissory Note. We think that this missing promissory note casts doubt not only on PPI's accounting for the Azterra Transaction but also on the substance of the transaction itself.

Orion and Azterra Obligations and Guarantees; Ultimate Payment [611] A good deal of the evidence, and our discussion above, related to Orion's and Azterra's respective abilities to satisfy the debt obligations they took on in the Orion and Azterra Transactions, and to the related Cofima Guarantees.
1. Collectability
  1. As noted, Staff contended that Orion's capacity to satisfy its financial obligations under the Orion Transaction was relevant to assessing the appropriateness of PPI's recognition of a gain on it. The same contention applied to Azterra and the Azterra Transaction. Staff argued that Orion's and Azterra's financial capacities did not support gain recognition.
  2. Counsel for Workum suggested in his cross-examination of Forbes that issues surrounding the Cofima Guarantees – or guarantees generally – while pertinent to the question of collectability, were not relevant to assessing the legitimacy of a transaction (or, we inferred, to its reporting). We disagree with that suggestion.
  3. PPI reported that it had profited from the Orion and Azterra Transactions. It did so long before it received any cash; it based its disclosure on promises to pay. It follows that the nature and strength of the arrangements for that payment were relevant not only to PPI's chances of ultimately collecting its money, but also to an assessment of its initial characterization and reporting of the transactions. The prospect of "collectability" was indeed relevant from the outset. Although this was confirmed by Snell's testimony, we consider this is a matter of common sense that does not demand special accounting or audit expertise.
  4. It was, therefore, relevant to consider the backing supposedly put in place for Orion's and Azterra's obligations – the Cofima Guarantees. An "appropriate guarantee" (as Snell put it in testimony) could significantly affect the prospects that a debt will be paid, and consequently the propriety of the creditor's – PPI's – reporting of a gain on the transaction giving rise to the debt.
  5. Despite suggestions to the contrary – some of them predicated on assumptions either that Workum would grow the transferred businesses (Swiss Plastering, Willow Creek and Creative Classics) so they could fund the required payments, or that the new debt would be converted to equity before coming due – it was clear from the evidence
    that Orion's and Azterra's respective abilities to satisfy the debt obligations they took on in the Orion and Azterra Transactions were far from assured.
    
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  6. We conclude that this alone (even if the transactions were less contingent than in fact they were) would have made it misleading and improper for PPI to have recorded gains on the transactions as it did in its 1999 and 2000 Financial Statements, without either some clear offsetting disclosure of the risk of uncollectability or something that gave PPI appropriate assurance of collectability.
2. Anomalies in Cofima Guarantees
  1. We discussed above some of the oddities and anomalies in the Cofima Guarantees, including mismatches with the obligations supposedly being guaranteed. We need not reiterate them; it suffices to note that we think that, if the Cofima Guarantees were indeed seriously meant to support PPI's position as creditor in the Orion and Azterra Transactions, these anomalies alone should reasonably have prompted some concern, questions and perhaps remedial action.
  2. A related fact – the puzzling absence of an Azterra promissory note for the Willow Creek purchase, or of any guarantee of that obligation – would similarly, in our view, have prompted concern and action were any of this seriously meant.
  3. We believe that these anomalies undermine the legitimacy of PPI's 1999 and 2000 Financial Statement disclosure of the Orion and Azterra Transactions.
  4. We draw the obvious conclusion: PPI was not careful about these matters because it was not genuinely concerned that its financial disclosure match the reality of the transactions. It did what it believed was necessary with promissory notes and guarantees to persuade others – auditor or regulators – to let PPI's financial disclosure stand, not because the documents otherwise mattered to PPI.
3. Cofima's Ability to Pay
  1. PPI touted Cofima as an independent financial institution, and the Cofima Guarantees as solid indicia of collectability. Staff were concerned that Cofima might itself be unable to satisfy its obligations under the Orion Guarantee (and, by extension, the Azterra Guarantee also).
  2. Staff's concern was well-founded, as Schöni confirmed. Cofima could not have satisfied either of the Cofima Guarantees were they to be called on, and we so find.
  3. Schöni said that Workum (and, he thought, Hennig) knew that Cofima could not satisfy the Cofima Guarantees. Workum told Cofima that the Cofima Guarantees would not be called on. Cofima and EnerGCorp also entered into the Orion Guarantee Addendum, under which (as mentioned) the supposed beneficiary of the guarantee
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    (EnerGCorp) agreed not to call on the guarantee and to indemnify the supposed guarantor. EnerGCorp (that is, PPI) thus promised, in essence, to forego the benefit of a guarantee. There was not a similar agreement in evidence for the Azterra Guarantee, but Schöni's testimony as to the general nature of the arrangements and understandings suggested that the same general understanding applied to both Cofima Guarantees.
  4. Cofima's involvement added nothing of substance to the Orion and Azterra/Creative Classics Promissory Notes. Schöni's testimony made clear that the Cofima Guarantees were designed as little more than window-dressing, intended to give an appearance of solidity where none existed. We find that the Cofima Guarantees were shams.
4. Deceptions Multiplied
  1. A related, and particularly disturbing, element was the Orion Guarantee Addendum. As discussed, it gutted the Orion Guarantee of any value to the supposed beneficiary. Clause 4 of the Orion Guarantee Addendum (reproduced in its entirety, above) called on the parties to "execute whatever other documentation may be required by the Regulatory Authorities in order to consider [sic] the [Orion Guarantee and Orion Guarantee Addendum] binding and efficacious under [GAAP] and the law". Given all the evidence, we conclude that the Orion Guarantee Addendum was intended to give a positive impression (were it ever to be seen by a third party) indicative of the signatories' willingness to add yet further steps, if forced – but then only to sustain a façade of GAAP compliance for the Orion Transaction. As such, it layered deceit upon deception.
5. Triad
  1. The evidence confirmed – and we find – that Triad's purported backing of the Cofima Guarantees arose only in July 2001 – long after the Cofima Guarantees came into existence. We further find from the evidence that the impetus for this development was Staff's concern about Cofima's ability to pay on the Cofima Guarantees, conveyed by Staff to PPI in the summer of 2001.
  2. Timing apart, we do not consider that Triad's involvement added any substance to the Cofima Guarantees or the Orion and Azterra/Creative Classics Promissory Notes. We know next to nothing about Triad; perhaps it could have paid on the guarantees if called on. However, Schöni's testimony – which we accepted – was that Cofima never expected the guarantees to be called on, and it had the additional written assurance of the Orion Guarantee Addendum. If Cofima did not expect the guarantees to be called on, surely Triad (represented by Cofima's own principals Schöni and Wick) did not expect it either. Everyone was clearly operating on the assurance from Workum that they would not have to pay out on the guarantees – in effect, that they were merely for show.
  3. Triad's involvement was, we conclude, merely more window-dressing and deception.
6. August 2001 Events
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  1. The Orion Demand, Orion Amendment Agreement, Azterra Demand and Second Azterra Amendment invited more questions than they answered. What of the anomalies (to state it mildly) in some of the documents? What defaults had preceded the demands? Counsel for Hennig suggested that both Orion and Azterra had in fact defaulted on interest payments, but the anomalies in the documents made that less than clear and, in any event, there was no evidence that the defaulting debtors Orion and Azterra (if such they were) had previously been notified of their default. In the absence of a demonstrated default, why would demand be made on a guarantor (Cofima) simultaneously with the principal debtors (Orion and Azterra)? What entitled PPI (or EnerGCorp) to demand early payment of the principal amounts of the relevant promissory notes, and what prompted Cofima to agree to the demands? Assuming the demands were enforceable, where was Triad, whose backing was supposedly important? Why did ASCOOP pay? What of the concurrent, and dramatic, amendments to the Orion and Azterra Transactions that supposedly set those transactions back on track – why go to that effort (if seriously intended) if the money was soon to be in hand anyway?
  2. We do not believe that those documents, and those steps, genuinely represented an evolution of substantially complete transactions or the bona fide exercise of business judgment. Nor do we believe that the timing was coincidental.
  3. PPI acted in this dramatic fashion at a time (late August 2001) when its efforts to sort out and complete the Orion and Azterra Transactions were reaching dead-ends, and months of discussions between PPI and Staff seemed no nearer to resolution.
  4. Hennig stated to Staff in a letter of 2 October 2001 that PPI's receipt of the
    $14 million paid by ASCOOP (in fact, Hennig failed to mention ASCOOP as the source of the money, instead telling Staff only that the money came from Cofima) "ultimately confirms the validity and value" of Orion and Azterra promissory notes and, therefore, the correctness of PPI's accounting for the Orion and Azterra Transactions. It did nothing of the sort.
  5. We do not believe that the Orion and Azterra Demands (and the resulting
    $14 million payment from ASCOOP) were a genuine culmination of the Orion and Azterra Transactions as originally conceived, documented and recorded by PPI in its prior years' financial statements. As stated, in assessing the appropriateness of that prior financial disclosure, the key consideration is the situation as it stood in the relevant financial years and when the relevant financial statements were prepared. The September 2001 $14 million payment did nothing to buttress the proposition that the original transactions were viable and sufficiently advanced to justify the recording of the gains in 1999 and 2000.
7. Role of ASCOOP
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  1. ASCOOP's role and its relationships with various entities (in particular, with PPI and Cofima) were debated during the Hearing. The important factor here, in our view, was less whether ASCOOP dealt with Cofima at arm's length than whether ASCOOP did so with PPI. We consider a factual assessment of the relationship between PPI and ASCOOP (not limited to the technical concept of "related party") relevant to our assessment of the original transactions and the appropriate accounting.
  2. The evidence shows ASCOOP to have been a notably accommodating ally of PPI and Workum, specifically in its continuing willingness to send money in PPI's direction. Given ASCOOP's significant PPI shareholding, its representation on PPI's board, its close and continuing contact with Workum (apparent, and not disputed, even apart from Schöni's testimony) and its status as an important source of money for PPI, we conclude that ASCOOP did not deal at arm's length with PPI. We are in no doubt that ASCOOP acted in concert with PPI in several respects, notably by making payment in response to the puzzling and apparently premature Orion and Azterra Demands.
  3. Despite its evident willingness to accommodate Workum and PPI, ASCOOP appeared to draw some sort of line with the Cofima Guarantees – first declining to provide guarantees itself and then apparently being somewhat reluctant to give Schöni a firm promise that it would pay up if the Cofima Guarantees were called on. Nonetheless, when PPI ultimately issued the Orion and Azterra Demands, ASCOOP was there to pay (although evidently demanding, and receiving, compensation in the form of securities in return).
  4. ASCOOP's concerted action with PPI and Workum was not itself obviously contrary to Alberta securities laws or the public interest. However, the fact that ultimate payment in response to the Orion and Azterra Demands came from ASCOOP, this friend of PPI, not only did not lend credibility to the sham Cofima Guarantees but, to the contrary, deepened the shadow over them (and over Triad's supposed backing, which seems to have had no substance at all), over the original collectability of the amounts owed to PPI by Orion and Azterra, and hence over PPI's financial reporting of the Orion and Azterra Transactions. Looking at the situation at the time PPI filed its 1999 and 2000 Financial Statements, the later advent of ASCOOP (not previously identified as a prospective saviour) and its $14 million payment was in our view not reasonably foreseeable and therefore not relevant to assessing the collectability of the amounts owed by Orion and Azterra. We so find.
8. Conclusion on Obligations, Guarantees and Ultimate Payments Summarized
  1. To summarize our conclusions on this topic, PPI did not, in its 1999 and 2000 financial years (respectively), have reasonable assurance that Orion and Azterra could, by themselves, satisfy their respective obligations under the Orion and Azterra Transactions.
    The Cofima Guarantees were mere window-dressing. Triad's involvement came much later and was merely more window-dressing. ASCOOP could (and did, ultimately) pay, but this was not a reasonably foreseeable element of the Orion and Azterra Transactions in 1999 and 2000.
    
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  2. We conclude that the Cofima Guarantees and all that surrounded them were a piece of theatre – smoke and mirrors, not substance. They did not justify PPI's 1999 and 2000 Financial Statement disclosure of the Orion and Azterra Transactions. Nor, we conclude, did PPI's ultimate receipt of payment in response to the Orion and Azterra Demands.
Practical Consequences of the Transactions
1. Orion Transaction
  1. The evidence did not indicate any real change in the manner in which Swiss Plastering operated or was managed, despite its supposed sale to Orion. There was a change at Orion in that Workum apparently replaced Street as its president in March 1999. This change in Orion management did not in our view demonstrate that the Orion Transaction had closed or reached the point at which PPI could properly recognize a gain on the transaction. If anything, the circumstances argued against the proposition that PPI was truly disposing of Swiss Plastering – the essential premise for its recognition of a gain on disposition.
2. Azterra Transaction
  1. Similarly, the evidence showed little change in the operation and management of Willow Creek and Creative Classics attributable to the Azterra Transaction. Mackenzie testified to concern that de jure control be seen to change (attention was given to reducing PPI's post-transaction ownership to below 50%) but there was a clear understanding that de facto control would remain with PPI and that Workum would remain in charge – as evidently he did.
  2. In our view, the facts argued against the proposition that PPI was truly disposing of Willow Creek and Creative Classics – the essential premise for its recognition of a gain on the Azterra Transaction.
Corroboration from Accounting Evidence
1. The Individual Respondents suggested that GAAP allowed for differences of opinion, and that one party interpreting GAAP in one way in the context of a particular fact situation did not necessarily mean that another party reaching a different conclusion was failing to follow GAAP. In the abstract we do not doubt that GAAP, like most other guides to dealing with a range of fact situations, has gaps or ambiguities in respect of which different people might legitimately reach different conclusions. Here, though, we are considering facts, not abstractions. We do not believe that the basic GAAP principles
  mentioned above, when applied to the facts of the Orion and Azterra Transactions, genuinely permit materially different conclusions.
  
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2. Snell's testimony confirmed our view. He said that, in his expert opinion, GAAP did not allow two different conclusions to be drawn as to whether PPI had a recognizable and reportable gain on the Orion Transaction in its 1999 financial year. His view, clearly, was that PPI could not record such a gain for 1999 in accordance with GAAP. Nor, he indicated, was this conclusion altered by PPI's eventual (September 2001) receipt of payment in response to the Orion Demand.
3. Snell applied similar reasoning to the Azterra Transaction: Azterra's doubtful ability to satisfy the debt it would take on in acquiring Willow Creek and Creative Classics, and Cofima's doubtful ability to satisfy the Azterra Guarantee, were relevant to assessing whether PPI could, under GAAP, report a gain on the Azterra Transaction. His expert opinion was that the gain should not have been recognized.
4. Scherman, a representative of KPMG, confirmed that PPI's eventual receipt of the $14 million payment in response to the Orion and Azterra Demands was not determinative of the correctness of PPI's accounting in prior years; "You have to look at the facts". Asked "if the guarantees do come to cash, the impediment to issuing [a favourable accounting] opinion disappears", Scherman responded, "I would disagree with that".
5. KPMG was evidently not asked to assist PPI in developing the Azterra Transaction, but it was engaged in the summer of 2001 to assist PPI in responding to questions from Staff. KPMG's view, based on the information discussed at a meeting with PPI and Staff representatives, was set out in Scherman's typed notes of a 4 July 2001 meeting with PPI and Staff representatives. Scherman noted that, while PPI might have a defensible position with respect to its accounting for the Newmex Transaction (depending on the facts and the absence of any BuyBack Arrangements), it needed to better articulate its position on the Orion Transaction, and it "had a weak position on the Azterra [T]ransaction – the other party has not acknowledged that it has the risks and rewards of ownership; in fact, they've reported otherwise!". Scherman testified that these views were conveyed orally to PPI.
6. We did not assign much weight to this Scherman note, having little evidence as to what information Scherman actually had at the time. However, it both confirmed some of our own conclusions reached on other evidence, and suggested that by July 2001 PPI had heard from KPMG that PPI's recognition of a gain on the Azterra Transaction was difficult to support.
7. KPMG determined, based on the facts as it came to understand them in October 2001, that it could not then support PPI's accounting for the Orion and Azterra
  Transactions, because (as an internal memorandum dated 16 October 2001 expressed it) "the two transactions . . . may not meet the GAAP requirements for recognition until the final deals were concluded in 2001".
  
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8. Counsel for Workum pointed to Commission publications indicating that related-party transactions, and the timing of revenue recognition, were of recurring concern to Staff in their review of disclosure by securities issuers. The suggestion was, perhaps, that the topic is an arcane and difficult one that causes trouble for many market participants.
9. Be that as it may, we think it no explanation, and certainly no justification, for what transpired here. As noted, the application of GAAP often requires the exercise of judgment. However, as we said above in respect of the Newmex Transaction, we do not consider that the exercise of judgment required in respect of the Orion and Azterra Transactions was particularly difficult. We do not believe that a reasonable observer with knowledge of the facts as we have found them would conclude that, as at 30 September 1999 and 2000 respectively, PPI had truly disposed of and realized a gain on (respectively): (i) Swiss Plastering; or (ii) Willow Creek and Creative Classics. (Even had there been true uncertainty on this point – we do not believe there was – we note that the Handbook, at paragraph 1000.21(d) (quoted above) urges conservatism "to ensure that assets, revenues and gains are not overstated".)
10. Here again, we conclude that no subtle professional accounting judgment was needed to arrive at the correct conclusion. The supposed complexity of GAAP or the difficulties other issuers may sometimes face in applying GAAP to their facts do not assist the Individual Respondents.
Gains Were Material
1. The $6.3 million "Gain on sale of businesses" reported by PPI in its 1999 Financial Statements – attributed to the Orion Transaction and amounting, as noted, to 88.4% of PPI's reported pre-tax earnings for the year – was significant. We believe that PPI's reported 1999 results could reasonably have been expected to alter investors' understanding of PPI's financial position at the end of its 1999 financial year and its financial and business performance for the year (and possibly its prospects for the future)
  - and by extension, their assessment of PPI as a business and the value of its shares. We find that this reporting was material.
2. The $5.6 million "Gain on sale of businesses" reported by PPI in its 2000 Financial Statements attributed to the Azterra Transaction – amounting, as noted, to half of PPI's reported pre-tax earnings for the year – was also significant. Again, we believe that PPI's reported 2000 results could reasonably have been expected to alter investors' understanding of PPI's financial position at the end of its 2000 financial year and its financial and business performance for the year (and possibly its prospects for the future)
  - and by extension, their assessment of PPI as a business and the value of its shares. We therefore find that this reporting, too, was material.
Timing and Character of the Eventual Payments to PPI
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1. As has been seen, PPI restated prior years results with its 2001 Financial Statements, including shifting its recognition of gains on the Orion and Azterra Transactions to 2001, coinciding with (and premised on) the receipt of payment in response to the Orion and Azterra Demands. In the 2002 Financial Statements, PPI (then under New Management) recharacterized the gains as contributed surplus. We discuss the issues of the timing and characterization of the payment, and any effect they might have on our views as to PPI's 1999 and 2000 Financial Statements.
  1. Timing Was Material
2. There was some suggestion that the mere shifting of reported gains from 1999 and 2000 into 2001 did not reflect any serious disclosure error. The implicit suggestion seemed to be that, looking at PPI from the perspective of 2001, it would not have appeared much different irrespective of when the Orion and Azterra Transactions were recorded, so no real harm was done.
3. We disagree. Disclosure by public companies serves, among other things, to assist investors in making investment decisions. They do so on the basis of the information available at the time. Their decisions have consequences for them, sometimes quite immediate ones. It follows that timing errors in disclosure can have significant implications and serious consequences, even if after a period of time the error is reversed or corrected. The subsequent adjustment does not erase what happened during the interval – when investors were exposed to and may (foreseeably) have acted in reliance on incorrect information.
4. As discussed, the effect of PPI's reporting was to show a sequence of large and growing annual net earnings in 1998, 1999 and 2000. This could have indicated to a reasonable investor that PPI was operating profitably and with increasing success in those years. This, of course, was not true. Backing out the misstated results of the Orion and Azterra Transactions for 1999 and 2000 would have left PPI showing much-diminished net earnings (or losses) for those years and thus have conveyed a very different impression of its results, its then-current financial position and, quite likely, its prospects. An investor considering such information as the basis for an investment at the time could reasonably be expected to reach different conclusions and, possibly, to make a different decision. The investor so acting, at the time, in the face of the financial disclosure actually made by PPI in its 1999 and 2000 Financial Statements would have been misled. It is no answer to that investor to say that the misreported 1999 and 2000 profits did show up later, in 2001.
5. In short, we find that, even if the only impropriety in PPI's disclosure of the Orion and Azterra Transactions lay in the timing of the reported gains, that difference would have been material. The disclosure in the 1999 and 2000 Financial Statements was misleading, and subsequent adjustments did not alter that fact.
  
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  (b) Nature of ASCOOP Payments
6. There was debate during the Hearing about how the $14 million received by PPI from ASCOOP in response to the Orion and Azterra Demands ought to be recorded. As mentioned, PPI's 2002 Financial Statements recorded not a gain but, instead, a contribution to surplus, apparently on the basis that the payer (ASCOOP) was a "related party".
7. In our view, a contribution to surplus can reasonably be expected to convey a significantly different message to a knowledgeable investor than a gain or operating profit of the same amount. This is because a contribution to surplus is less obviously linked to the issuer's business activities, and therefore possibly gives less information about the state or prospects of the business.
8. However, it is unnecessary for us to reach a conclusion as to how PPI should have reported the ASCOOP payments. The Financial Disclosure Allegations we are addressing in this context related to PPI's disclosure for its 1999 and 2000 financial years. We have concluded that the ASCOOP payments were not a reasonably foreseeable element of the Orion and Azterra Transactions in PPI's 1999 and 2000 financial years, and their correct characterization for the 2001 financial year is therefore irrelevant to the task before us.
Findings on Orion and Azterra Transaction Disclosure
1. 1999 and 2000 Financial Statements Not GAAP-Compliant [664] We have found that the gains reported by PPI in its 1999 and 2000 Financial Statements in respect of the Orion and Azterra Transactions, respectively – and the timing of that reporting – were material.
  1. The evidence persuades us – and we find – that the Orion Transaction was so unformed, conditional and contingent at the end of PPI's 1999 financial year that for PPI to report the transaction as having triggered a material gain in that year was misleading. Similarly, we are persuaded – and we find – that the Azterra Transaction was so unformed, conditional and contingent at the end of PPI's 2000 financial year that for PPI to report the transaction as having triggered a material gain in that year was also misleading.
  2. As noted, neither the Orion nor the Azterra Transaction evidently produced a real change in the management and operation of the subject companies (Workum remained in charge of Swiss Plastering, Willow Creek and Creative Classics), a factor
    arguing against the premise that PPI was truly disposing of those companies. However, we do not go so far as to conclude (as we did in respect of the Newmex Transaction) that the Orion and Azterra Transactions were, in concept and from the outset, essentially shams.
    
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  3. That said, the convolutions that the Orion and Azterra Transactions underwent between their initiation and September 2001 further, in our view, underscore the inappropriateness of PPI's original financial statement disclosure. That so many changes were necessary – and so many of them after PPI had already reported gains on the transactions – enhanced neither the credibility of the key players nor the plausibility of the relevant agreements and arrangements.
  4. A further important factor militating against PPI's financial disclosure was the doubtful prospect, at the time, that Orion and Azterra could satisfy their financial obligations to PPI incurred in the Orion and Azterra Transactions. The evidence persuades us – and we find – that neither Orion nor Azterra could reasonably have been considered to have been in a position, at the end of PPI's 1999 or 2000 financial year respectively, to fulfil those obligations. Accordingly, PPI could not justifiably recognize a gain on either the Orion Transaction or the Azterra Transaction without other assurance of collectability. We have found that the Cofima Guarantees were shams; they did not assist.
  5. We discussed the events of August 2001, including the Orion and Azterra Demands culminating in the $14 million payment from ASCOOP. We consider PPI's actions in August 2001 a somewhat desperate effort to divert Staff attention and deflect associated consequences. Clearly the Individual Respondents had come by then to recognize that their charade was nearing its end: there was no prospect of concluding the transactions as designed, and the unravelling of the financial disclosure edifice they had constructed was imminent. Their August 2001 actions were, in our view, simply a last-ditch effort at salvaging the situation with a fistful of cash (supposedly showing that PPI had been right all along) and some brisk papering over of the gaping holes in the Orion and Azterra Transactions.
  6. We concluded that the $14 million ASCOOP payment was not a foreseeable element of the original transactions and it did not, therefore, support the original disclosure.
  7. In short, despite the drama associated with the Cofima Guarantees and the Orion and Azterra Demands, they did not add assurance, for PPI's 1999 and 2000 financial years respectively, to PPI's prospects of collecting from Orion and Azterra. They therefore did not justify PPI's disclosure of material gains on the Orion and Azterra Transactions in its 1999 and 2000 Financial Statements.
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  8. We conclude that PPI's 1999 Financial Statements did not fairly represent the Orion Transaction, and its 2000 Financial Statements did not fairly represent the Azterra Transaction. We find that these financial statements were not prepared in accordance with GAAP and they were therefore contrary to Alberta securities laws. These financial statements also involved misstatements and omissions of material facts and, as such, we find that they contained misrepresentations.
2. Contrary to the Public Interest
  1. PPI's 1999 and 2000 Financial Statements were capable of misleading – and we are in no doubt that they were intended to mislead – readers as to the financial state of PPI. This could have affected investment decisions of those who relied on the improper financial statements. This was clearly inconsistent with the very purpose of financial statements and the disclosure requirements of Alberta securities laws.
  2. We therefore find that PPI's filing of its 1999 and 2000 Financial Statements, not having been prepared in accordance with GAAP and containing misrepresentations, was also contrary to the public interest.

Misrepresentations in Other PPI Disclosure
1. As discussed, PPI announced the completion of the Newmex Transaction in the October 1998 PPI/Newmex News Release. We have found that this was not a true disposition of PPI's Newmex Shares. The news release was therefore inaccurate and misleading. This news release contained misrepresentations, compounding the inaccurate 1998 Financial Statement disclosure of the Newmex Transaction.
2. In the four TOB Circulars, PPI also made inaccurate disclosure of some or all of the Newmex, Orion and Azterra Transactions, incorporating its 1998, 1999 and 2000 Financial Statements, as applicable. PPI used this information – which included disclosure that we have found to have been contrary to GAAP and Alberta securities laws, and to have contained misrepresentations – to persuade the securityholders of the take-over bid targets of the merits of the respective bids and, more particularly, of the PPI securities being offered to them. We conclude that the information so conveyed was material because it was highly important to making an informed decision concerning the bids. PPI's repetition of its improper financial disclosure for the purpose of inducing target securityholders to accept PPI securities in the mentioned take-over bids amounted, in our view, to separate, additional misrepresentations. We note that this was done in the face of Workum's and Hennig's certifications that the TOB Circulars did not make or omit information amounting to a misrepresentation.
3. The manner in which, and the purpose for which, these additional misrepresentations were made were clearly incompatible with the protection of investors and (in the case of the TOB Circulars) the fairness of the take-over bid process. As such, we find that these additional misrepresentations were also contrary to the public interest.
Individual Respondents' Responsibility
1. Allegations Levelled against Individual Respondents
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  1. We concluded that PPI's financial disclosure was, as alleged, contrary to Alberta securities laws and contrary to the public interest. PPI, however, is no longer a respondent in this proceeding. The issue to be resolved here is whether either (or both) of the Individual Respondents bore responsibility for the improper financial disclosure.
  2. We analyze below the roles respectively played by Workum and Hennig, and our findings as to the responsibility of each of the Individual Respondents. First, though, we discuss certain contentions or possible defences raised in the Hearing that might have had application to both Workum and Hennig, but which in our view were either inapplicable or unpersuasive.
2. Certain Potential Defences Not Applicable or Not Persuasive
  1. No Unfairness from Changed Relationship with PPI
    1. Counsel for Workum suggested that it was unfair that Workum and Hennig were in the position of having to mount a defence for PPI, from which they had parted company, which was now adverse to their interests, and which was no longer a respondent in this proceeding.
    2. PPI's status in this proceeding is irrelevant. The suggestion that Workum and Hennig (or, indeed, any respondent in any proceeding) suffers an unfairness by remaining subject to allegations after a fellow respondent leaves the proceeding for any reason is, in our view, without merit.
    3. Moreover, Workum and Hennig were not defending PPI. The Financial Disclosure Allegations, although obviously pertaining to disclosure of PPI, were levelled at the Individual Respondents. Staff must prove that the Individual Respondents bore responsibility for the contraventions we have found. That distinguishes the Individual Respondents' position from that of PPI.
  2. No Improper Piercing of "Separate Corporate Personality" [683] Counsel for Workum contended that imposing liability on Workum (and Hennig) for any wrongful financial statement disclosure of PPI would "pierce a separate corporate personality and impose personal liability". He claimed that Workum and Hennig were not liable, as they had committed no tortious acts or acts separate from any committed by PPI (using the reasoning from Montreal Trust Co. of Canada v. ScotiaMcLeod Inc. (1995), 129 D.L.R. (4th) 711 (Ont. C.A.); leave to appeal to S.C.C. refused [1996] S.C.C.A. No. 40). Counsel for Workum also noted that Workum and Hennig had a "due diligence" defence available to them, such that their actions relating to the impugned financial statements were protected if they took all reasonable care and had no knowledge that those financial statements contained misrepresentations.
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    1. These principles do not help the Individual Respondents in the circumstances here. As noted elsewhere in these reasons, it is clear on all the evidence that the Individual Respondents not only knew of the misrepresentations in PPI's 1998, 1999 and 2000 Financial Statements, but orchestrated those misrepresentations by ensuring that gains on the Newmex, Orion and Azterra Transactions were reported to suit Workum's and Hennig's own objectives rather than according to GAAP.
  3. "Absolute Liability" and "Business Judgment Rule" Not at Issue
    1. A suggestion by counsel for Workum notwithstanding, this is not an instance of "absolute liability" imposed on directors and officers solely by virtue of their office. Such offices do impose responsibilities, but in assessing the fulfilment of those responsibilities we look to actual conduct and circumstances.
    2. Nor was the "business judgment rule" applicable here. Under that rule, a court or adjudicator does not question a business decision if made within a range of reasonableness. The rule does not excuse anyone from compliance with disclosure laws or permit misrepresentations of reality to the investing public (see Kerr v. Danier Leather Inc., 2007 SCC 44 at paras. 52-58). Jurisprudence cited by Workum – YBM Magnex; Re Cartaway Resources Corp. (2000), 9 A.S.C.S. 3092; Re Standard Trustco Ltd. (1992), 15
      O.S.C.B. 4322; and Maple Leaf Foods Inc. v. Schneider Corp. (1998), 42 O.R. (3d) 177 (C.A.) – does not, as he suggested, insulate a director who is also CEO (and a highly engaged one at that) from responsibility for the sort of fundamental (these were, we stress, not obscure, mere technical breaches) and systematic misuse of financial statements evident at PPI under Workum's leadership during the Relevant Period.
    3. The disclosure improprieties found in this case were not ambiguous, nor the result of business choices made from an array of reasonable alternatives. This was an unambiguous case of deception. It was an affront to the principles of GAAP and the disclosure regime under Alberta securities laws. The Individual Respondents are not shielded by the business judgment rule.
  4. "Due Diligence" Not at Issue
    1. Counsel for Workum contended that the Individual Respondents exercised due diligence in connection with the preparation of PPI's 1998, 1999 and 2000 Financial Statements, suggesting that they had thus fulfilled their responsibilities. Based on the evidence, the contention is untenable.
    2. Testimony of a Hudson representative indicated that Hudson relied in many instances on factual representations from PPI management, specifically Workum. Whether Hudson went too far in such reliance was not at issue here.
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    3. The notion of due diligence applied to the present circumstances conjures an image of Workum and Hennig reviewing and satisfying themselves as to the accuracy of proposed PPI disclosure, and questioning their staff, auditor or others as to the correctness of assumptions and analyses reflected in the disclosure. The image ignores or obscures that Workum and Hennig were themselves the source – or the withholders – of much of the information on which outside experts (Hudson and KPMG, notably) based their work. One or other, or both, of the Individual Respondents may have pushed Hudson into delivering desired opinions; they certainly allowed Hudson to operate on the basis of partial or misleading information. KPMG's opinions were based on assumptions, the accuracy (or otherwise) of which was best known to the Individual Respondents. In the circumstances the Individual Respondents could hardly then argue plausibly that they relied on the work of these outside experts. We conclude that the Individual Respondents' conduct did not amount to the sort of "due diligence" that might demonstrate the fulfilment of their respective responsibilities.
    4. We also do not accept Workum's contention that either the Individual Respondents or PPI's auditor Hudson relied on KPMG to a degree that would either disprove the Financial Disclosure Allegations or relieve the Individual Respondents of responsibility for disclosure failures. As noted, the evidence showed clearly that KPMG was asked to advise or opine about GAAP treatment of certain fact scenarios, and did so. However, the Individual Respondents knew both that KPMG's opinions were based on assumed facts, and that those assumed facts departed significantly from reality. It follows – and we conclude that the Individual Respondents knew – that they therefore could not rely on the KPMG opinions. The fault for that rests not with KPMG but rather with the providers of those supposed facts, and on those who purported to act on the advice of KPMG despite being in a position to know that the assumptions specified by the latter did not match reality. The fault thus rests with each of Workum and Hennig.
3. Roles and Conduct of the Individual Respondents
  1. We do not consider that the Individual Respondents or PPI (which acted largely through its CEO and CFO, the Individual Respondents) relied on Hudson to an extent that would absolve any of them of responsibility for the improper disclosure of the Newmex, Orion and Azterra Transactions.
  2. We begin by noting a basic but important fact: financial statements are the responsibility of the issuer and its management and directors. Auditors review and comment on an issuer's financial statements, but the financial statements remain the responsibility of the issuer. An "audit" is a process of testing the issuer's work and the audit opinion is a comment based on such testing. It certainly does not lift responsibility for financial statements from the issuer or its management and directors.
  3. In any event, the evidence does not support a suggestion that Workum and Hennig – who bore heavy financial reporting responsibilities at PPI during the Relevant
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    Period – were unsophisticated in business matters, unfamiliar with the importance of financial disclosure, or unaware of or overwhelmed by their financial statement responsibilities. Nor, we find, were they overawed by their auditor. The evidence indicates that neither Workum nor Hennig was shy about making his own decisions or challenging the views of others, including outside professionals. Testimony from individuals working on Hudson's PPI audits attested to an atypical "resistance" by top management to matters thought important by the auditor.
  4. The Individual Respondents knew the reality of the Newmex, Orion and Azterra Transactions – they designed them and, as time went on, they refined or revised them. They knew what was really happening and what was not, and they therefore knew that in none of the transactions had PPI truly realized a profit on a genuine disposition, as and when it was recorded. This by itself, in our view, suffices for us to conclude – as we do – that Workum and Hennig each knew that PPI's financial disclosure materially misrepresented PPI's financial position and results of operations.
  5. Moreover, we conclude that Hennig, as a chartered accountant, knew that PPI's reported results were contrary to the purpose of GAAP and the Handbook's objective of fair presentation and the underlying concept of "representational faithfulness".
  6. Workum, not being a chartered accountant, was likely unfamiliar with the details of accounting practice and may indeed never have read the Handbook. We would be disinclined to attribute to Workum responsibility for contravention of a particularly technical requirement of GAAP. The contraventions here, though, were not mere technicalities. We find nothing so obscure or esoteric in the notions of fair presentation or representational faithfulness that it would surprise or confuse a non-accountant who had even a passing acquaintance with financial information. Workum would have been acquainted with the typical form of auditor's report that refers explicitly to fair presentation of an issuer's financial position and results of operations. We conclude that he knew that the financial statements at issue here could not be said to have been prepared in accordance with GAAP.
  7. We accepted Forbes' testimony that the Individual Respondents apparently withheld information from Hudson – for example, Hudson based its audit on the Shorter Newmex/ASCOOP Terms Agreement, when the Individual Respondents knew that the Longer Newmex/ASCOOP Terms Agreement actually governed.
  8. We do not accept that anyone in a senior management position with a public company could reasonably consider it proper to withhold information from the company's auditor. We believe that Workum and Hennig apprehended that a more fully informed auditor would not give a favourable opinion on the financial statements at issue.
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  9. Hudson clearly was not given a complete picture of what was really happening. The Individual Respondents did not ensure that Hudson was fully informed about aspects of the transactions that might call into question the appropriateness of PPI's reporting. Moreover, they allowed Hudson to operate on the basis of an understanding of the facts that the Individual Respondents knew did not reflect reality. We find that they misled Hudson, certainly by omission.
4. Workum
  1. Workum's Activities and Role
    1. We did not have the benefit of testimony from Workum. The evidence, however, suffices for us to draw some conclusions about his operating style at PPI during the Relevant Period. We believe that he was concerned that investor or capital market expectations of himself and PPI might be difficult to satisfy, particularly in the apparently less favourable economic climate developing in or about 1998. Both corporate and personal reputations may have been on the line, and Workum seemed to have an expensive lifestyle to sustain.
    2. The evidence indicates that Workum determined that PPI's image of profit and growth had to be sustained, whether or not it had any substance, and nothing –commercial reality, accounting and legal constraints, or regulatory challenges – would be allowed to interfere. In this, Workum was fortunate in the apparently generous and sustained support of some of his Swiss contacts. Schöni, for example, even years later when he testified, obviously retained a considerable regard for Workum's abilities. ASCOOP, Cofima and others seemed willing, during the Relevant Period, to lend PPI and Workum a hand with arrangements and documents – often backdated, sometimes misleading or wholly spurious – to help bolster PPI's story. PPI, and Workum, would duck and weave as necessary, until the house of cards finally tumbled and Workum was ousted from PPI in 2002.
  2. Workum Was Closely Involved
    1. The correspondence in evidence concerning PPI's 1998, 1999 and 2000 Financial Statements, to the extent addressed by or to one of the Individual Respondents, appeared for the most part to have been addressed by or to Hennig rather than Workum. This, however, does not prove that Workum was unaware of, or bore no responsibility for, the deficiencies in the financial statement disclosure of those transactions.
    2. We considered the evidence as to his general approach to management at PPI. Hunter, the Azterra director, met Workum before the Azterra Letter Agreement was signed, and was encouraged to join the PPI board of directors. He testified that he declined, having attended PPI board meetings (apparently as an invited guest):
      . . . frankly, I just didn't like the way it operated. It was a -- it was a one-man show. Peter Workum did all the talking and seemed to make all the decisions, so it wasn't -- it wasn't a properly functioning board, in my view.
      
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    3. Street confirmed that Workum's management style was "[v]ery hands-on. Peter was in charge of everything". Mackenzie used identical words, describing Workum as "very hands on", Hennig "maybe not quite as much so". Mackenzie was clear that "the person [he was] dealing with [concerning the Orion Transaction] was primarily [Workum]" and, although Workum was apparently at EnerGCorp's Arizona office during much of that time, "if anything came up, [Workum] would have to make decisions on how to proceed". The same appeared to be true of Mackenzie's work on the Azterra Transaction; Mackenzie testified that the information Hudson obtained from PPI about that transaction would have come from himself and Workum.
    4. Lebeuf confirmed that PPI annual reports (including, we inferred, financial statements) were prepared by Hennig, Workum, the auditor and the controller. She said that Workum was away from PPI's Calgary office for much of the year, travelling a great deal. He spent roughly a third of his time in Phoenix dealing with PPI's US business and almost as much time elsewhere, notably Switzerland. Hennig, by contrast, stayed in PPI's Calgary office but for rare board meetings in Phoenix and some trips to Edmonton and other Alberta properties. Nonetheless, Lebeuf said that it was Workum who "called the shots" in the Calgary office; although Hennig might give instructions in Workum's absence, she believed that "any instructions would probably come from [Workum] to [Hennig] and then down".
    5. Others had a similar impression of Workum. For example, Fitzsimonds, a principal of Azterra who stayed on for a time after its purported purchase of Willow Creek and Creative Classics, said:
      
      Well, [Workum] was a very aggressive individual, and it was never a question in my mind that the money and the control of the company was in [his] hands [T]here was
      no question that [Workum] was still controlling the companies.
    6. We are in no doubt that Workum was aware, fully in charge – and thus responsible – for PPI's actions in developing and executing (to the extent it managed to do so) the Newmex, Orion and Azterra Transactions.
    7. There was also abundant documentary evidence of Workum having been involved in, or made aware of, developments and difficulties, and of his efforts at addressing the latter.
    8. We believe that Workum was aware of the disconnect between the realities of the three transactions and PPI's desired – and actual – recording of them.
  3. Conclusion on Workum's Responsibility
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    1. We conclude that Workum knew about the Newmex, Orion and Azterra Transactions, including their conditional or contingent nature and the difficulties encountered in moving them forward, the BuyBack Arrangements relating to the Newmex Transaction, PPI's financial statement disclosure of these transactions for its 1998, 1999 and 2000 financial years, and the misleading nature of that disclosure.
    2. We reach this conclusion on the basis of several factors.
    3. First, Workum was a director and senior officer – the most senior officer – of PPI. In our view, Workum's positions in PPI imposed on him a significant obligation to understand PPI's business, important transactions and obstacles to completing such transactions. Also by virtue of his positions, we consider that Workum bore a high degree of responsibility for ensuring that PPI properly disclosed material information –including, specifically, disclosure in financial statements – to the investing public, regulators and others.
    4. Second, Workum signed PPI's balance sheets for the three financial years in question. In so doing he indicated that he had read, and approved, the financial statements of which the balance sheets formed part, on behalf of the PPI board of directors. The financial statements disclosed the Newmex, Orion and Azterra Transactions in the inappropriate ways discussed above. Workum, by his signature, took direct responsibility for that disclosure.
    5. Third, Workum was highly involved in all three transactions and their reporting. We are in no doubt that Workum was PPI's guiding mind. Even though Hennig apparently had the most obvious and continuing involvement in devising and trying to sort out the three transactions and PPI's disclosure of them, Workum was aware of what was going on, and why. The evidence is clear that Workum was instrumental in the structuring and reporting of the Newmex, Orion and Azterra Transactions.
    6. We are convinced that Workum wanted PPI to disclose a sizeable gain for 1998, and to repeat the performance in the two succeeding years, for reasons unconnected to any actual profitable results attributable to the Newmex, Swiss Plastering, Creative Classics or Willow Creek ventures. Further, Workum initiated and fervently promoted all that occurred, including the structuring of doubtful transactions and dodgy documentation meant to give a gloss of plausibility to the disclosed financial results.
    7. We accept that Workum was neither a professional accountant nor otherwise trained in accounting. We do not doubt that he was willing to, and did, defer to some extent to his colleague Hennig who was a chartered accountant. But the evidence is clear that Workum sought results and his deference to accounting rules was limited. In those instances (regrettably too few) where accountants, PPI staff or other participants in
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      various of the transactions raised objections, Workum did not accede and admit that the supposed financial results were incorrect, but rather insisted that steps be taken to get around the objections. Workum only partially (and rather late) conceded to reality with the issuance of PPI's 2001 Financial Statements, prepared when Hudson was better informed as to the facts and which partially restated some of the early financial disclosure here at issue.
    8. We heard from both Mackenzie and Forbes that Workum directed that PPI financial statements be consistent with GAAP. An admirable sentiment, if truly directed at the principles and purposes of GAAP (and absence of misrepresentation) discussed earlier. Despite Mackenzie's and Forbes' statements, though, we are convinced that this was not a priority. All the evidence persuades us that, if indeed Workum had pronounced a GAAP-friendly credo, the real goal was simply to get a clean audit report and, as such, apparent blessing of PPI's financial disclosure.
    9. The evidence persuades us that Workum not only ought to have known, but did know, that PPI's financial disclosure concerning the three transactions at issue was misleading and inconsistent with the objectives – under GAAP and Alberta securities laws – of fair presentation.
    10. For the reasons given, we conclude that Workum bore a full measure of responsibility for PPI's improper disclosure relating to the Newmex, Orion and Azterra Transactions in its 1998, 1999 and 2000 Financial Statements and other documents, and the associated contravention of Alberta securities laws and conduct contrary to the public interest. We therefore find that Workum himself contravened Alberta securities laws and acted contrary to the public interest. The Financial Disclosure Allegations against him are proved.
5. Hennig

Hennig did not testify. However, we were able to draw some conclusions about his conduct and attitudes from the evidence.
The evidence was replete with demonstrations that Hennig was intimately involved in the design and execution of the Newmex Transaction. He was a senior officer of PPI – indeed, its CFO. He was also a PPI director during part of the Relevant Period. The evidence was clear that he had direct responsibility, both ex officio and as a matter of practice, over PPI's financial statement disclosure. He was, moreover, himself a chartered accountant who had, not many years before, had his own practice. He obviously had exposure to the Handbook and the basic principles and objectives of financial statement disclosure under GAAP.
It appears from the evidence that Hennig may, to a considerable extent, have acted in concert with, and indeed at the direction of, his superior, Workum. We noted
above Lebeuf's statement that it was Workum who "called the shots" and her belief that "any instructions would probably come from [Workum] to [Hennig] and then down". This indicates – and we accept – that Hennig did not bear exclusive responsibility for the disclosure deficiencies, but it does not diminish his own responsibility.

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As a director, Hennig was responsible for serving the company and its shareholders. As a corporate officer, Hennig bore responsibilities to his company and its directors. As CFO, Hennig had significant responsibilities pertaining directly to PPI's financial disclosure. A CFO is assuredly not meant to act as a mere cipher for the CEO or anyone else, but must ensure the soundness of a company's financial controls and financial disclosure.
We noted that Workum was PPI's guiding mind; Hennig was a subordinate. His role may have been more one of response than of instigation. When Workum wanted something, Hennig would come up with strategies, tactics or schemes to try to achieve the desired result. Hennig clearly seemed to have reconciled himself, by the Relevant Period, to doing what he could to accede to Workum's wishes and demands in matters such as PPI's public financial disclosure.
That said, Hennig's role was not passive. We believe that Hennig shared Workum's objective of presenting in PPI's financial statements a picture much more favourable than reality. Hennig played an active, central part in structuring and disclosing the Newmex, Orion and Azterra Transactions. For example, although Mackenzie stated that Workum was at the forefront of the Orion and Azterra Transactions, Mackenzie was also clear that Hennig was involved at various points and that Mackenzie kept nothing from Hennig. In the face of mounting obstacles to their shared objectives, Hennig occasionally did seem to tell Workum that some aspect or other of their plans was not going to work, but Hennig would then actively participate in the effort to try to devise patches that might help sustain the façade.
In sum, Hennig was the individual most directly responsible for PPI's woefully inadequate and misleading financial disclosure. In fact – and this we consider an aggravating factor – he used his accounting background to buttress the false portrayals and to persuade PPI's auditor to accept the Individual Respondents' desired accounting outcomes.
The evidence leaves us in no doubt that Hennig (like Workum) not only ought to have known, but did know, that PPI's financial disclosure concerning the three transactions at issue was misleading and inconsistent with the objectives – under GAAP and Alberta securities laws – of fair presentation.
Hennig's involvement in this series of transactions and PPI's misleading disclosure of them – and in trying to paper (and patch the holes in) the transactions as
they changed – took Hennig far from where he should have been as a public company officer and director, and as a professional. Hennig disregarded or deliberately evaded the informational purposes of financial statements and, with them, the most basic principles of GAAP. His actions in these matters were deceptive and dishonourable.

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For the reasons given, we conclude that Hennig, too, bore a full measure of responsibility for PPI's improper disclosure relating to the Newmex, Orion and Azterra Transactions in its 1998, 1999 and 2000 Financial Statements and other documents, and the associated contravention of Alberta securities laws and conduct contrary to the public interest. We therefore find that Hennig himself contravened Alberta securities laws and acted contrary to the public interest. The Financial Disclosure Allegations against him are also proved.
1. CONCLUSION ON FINANCIAL DISCLOSURE ALLEGATIONS
In summary, we have found that PPI's 1998, 1999 and 1999 Financial Statements, in their reporting of gains on the Newmex, Orion and Azterra Transactions respectively, were not prepared in accordance with GAAP. This was contrary to Alberta securities laws and the public interest. We have also found that the disclosure contained misrepresentations, contrary to the public interest. Further, we have found that further misrepresentations were made when the improper financial statement disclosure was repeated in other PPI disclosure, contrary to the public interest.
We have concluded that Workum and Hennig each bore responsibility for this, and we therefore found that they each contravened Alberta securities laws and acted contrary to the public interest. The Financial Disclosure Allegations were thus proved.

PART THREE UNDISCLOSED FINANCIAL BENEFITS
1. ALLEGATION
  1. Positions of the Parties
    1. Position of Staff
Staff alleged in the Second Notice of Hearing that the Individual Respondents "received, directly or indirectly, substantial fees or monies", which Staff referred to as "Secret Commissions", on PPI private placements and other PPI transactions. (Staff did not pursue a particular of this allegation relating to an entity named Hippocampus Corporate Development AG.)
As we understand the allegation as pursued (we refer to it as the "Undisclosed Financial Benefits Allegation"), Staff attacked not so much the alleged payments as their purported concealment. Staff acknowledged that there is no specific prohibition under the Act on the payment or receipt of commissions. However, Staff contended that the Individual Respondents secretly conspired to divert to accounts of offshore companies –
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the Corporate Respondents (Strategic, Cheshire, Lexington and Ashland) and Mandolin (we refer to these five companies collectively as the "Offshore Companies") – payments in the form of commissions paid by PPI. Staff claimed that the Individual Respondents had control and direction over the Offshore Companies and used the money for personal expenditures and purchases of securities, without requisite public disclosure. Most offensive, Staff submitted, was that, while payments were being made and used in this manner, public disclosure indicated that the Individual Respondents were receiving little (in the case of Hennig) or no (in the case of Workum) compensation from PPI. Staff submitted that, as a result, the Individual Respondents had engaged in serious misconduct contrary to the public interest.
Staff rejected the Individual Respondents' suggestion that Staff's position that the purported secret commissions reached the Individual Respondents through their control and direction over bank and securities trading accounts of the Offshore Companies was novel. Staff maintained that their position was consistent with the allegations set out in the Second Notice of Hearing. Staff suggested that control and direction are indicia of beneficial ownership.
As noted, the Corporate Respondents took no part in the Hearing and thus expressed no position on the Undisclosed Financial Benefits Allegation.
The Individual Respondents disputed Staff's position. We gathered from his submissions that Workum's position (shared by Hennig) was that the findings to be made by the panel are limited strictly to the particulars of the allegations as expressly set out in the Second Notice of Hearing. From that apparent premise, the Individual Respondents contended that Staff had, on several grounds, failed to prove the Undisclosed Financial Benefits Allegation.
First, Workum noted that the Second Notice of Hearing did not allege a specific contravention of the Act regarding the alleged "receipt and use" of "secret" commissions and that Staff were contending that the alleged activities amounted to "conduct contrary to the public interest". Workum said that there is no obligation under Alberta securities laws or otherwise requiring a director of a public company to disclose borrowings from a third party. He also said that the Commission had not previously advised market participants that a failure by a director of a public company to disclose borrowings from a third party was unacceptable conduct and subject to sanction. The Individual Respondents suggested that, in these circumstances, it would be unfair and improper for the panel to make a finding against them of "conduct contrary to the public interest".
Second, the Individual Respondents noted that the Second Notice of Hearing alleged that they beneficially owned the Corporate Respondents and further that the
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particulars of the Undisclosed Financial Benefits Allegation referred to Workum having "owned and controlled" three of the Corporate Respondents – Strategic, Cheshire and Lexington (the "Core Offshore Companies") – but that Staff, after having heard all the evidence, retreated from the ownership aspect of the Undisclosed Financial Benefits Allegation and substituted a new theory that the purported secret commissions reached the Individual Respondents through their control and direction over bank and securities trading accounts of all five of the Offshore Companies. It would be unfair, the Individual Respondents suggested, for the panel to make findings on this claimed new theory rather than on what had been explicitly set out in the Second Notice of Hearing.
The Individual Respondents did not dispute that commissions paid by PPI were directed to accounts of Strategic, Cheshire, Ashland and Mandolin and were at least to be directed to an account of Lexington. However, they disclaimed ownership of the Core Offshore Companies. They further asserted that Staff failed to prove ownership of Ashland and Mandolin and to provide reliable evidence as to who instructed the disbursement of money from accounts of those two companies (Staff's only evidence having been elicited from Olnick, whose evidence could not be believed). While Workum admitted to borrowing money from the Core Offshore Companies, he claimed to have done so with the permission of the beneficial owners of the companies (purportedly Cofima or its principals Schöni and Wick). In any case, the Individual Respondents suggested that, in the absence of proof that they "owned" the Offshore Companies, they could not be said to have "received" any commissions paid to the companies, and therefore the Undisclosed Financial Benefits Allegation could not be sustained.
The Individual Respondents also contended that there was no untoward secrecy about the commissions.
1. Substance of Allegation and Task of Panel
The Commission has a broad public interest authority, which it must exercise in furtherance of its overarching mandate to protect investors from unfair, improper or fraudulent practices, and to foster a fair and efficient capital market and investor confidence in that market. The purpose of a hearing under sections 198 and 199 of the Act is to determine, if allegations of misconduct are proved, whether the public interest warrants the issuance of any protective or preventative sanctions.
A securities regulatory authority such as the Commission is given wide latitude in forming its opinion as to the public interest in matters relating to the activities undertaken by participants in the capital market. The Commission is thus able to exercise its public interest jurisdiction even absent a specific contravention of Alberta securities laws (see Re Canadian Tire Corp. (1987), 10 O.S.C.B. 857, aff'd (1987), 59 O.R. (2d) 79 (Div. Ct.), leave refused (1987), 35 B.L.R. xx (Ont. C.A.)).
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In regulatory proceedings such as this the principles of natural justice and procedural fairness require that respondents be given a fair hearing, including the right to know the allegations against them and make full answer and defence to those allegations. This is not dissimilar to principles that govern criminal proceedings. That said, this is not a criminal proceeding. Decisions of this and other securities regulatory authorities have made clear that the allegations set out in a notice of a regulatory enforcement hearing are not to be treated as criminal charges set out in a criminal information or indictment because such an approach could inappropriately restrict or confine the regulator's public interest jurisdiction. As this Commission stated in Re Ironside, (2003) ABSECCOM ENF-#1362950v1 at para. 5:

In determining whether it is appropriate to issue orders in the public interest, the principles of natural justice require that respondents be provided with sufficient particulars to inform them of the allegations made against them, and to know the case they have to meet. The particulars themselves should not be confused with the case and the allegations. As stated by the [OSC] in the YBM Magnex case, it would be inappropriate, given the Commission's public interest jurisdiction, to treat notices of hearing and statements of allegations as a criminal information or indictment. In a hearing of this nature, particulars do not bind staff to formal proof, as in a criminal case.
The Undisclosed Financial Benefits Allegation, as particularized, did not specify where the alleged disclosure obligation rested, or where it was breached. However, we believe that readers of the allegation – including the Individual Respondents – would not reasonably have had any difficulty in understanding that the allegation concerned alleged financial benefits that made their way to the Individual Respondents from commissions paid by PPI but were not properly disclosed in information PPI provided to the investing public. The allegation, reasonably and fairly understood, focused on two points: (i) financial benefits to the Individual Respondents; and (ii) nondisclosure thereof.
The particulars of the Undisclosed Financial Benefits Allegation claimed commission payments to the Offshore Companies and relationships among the Individual Respondents and the Offshore Companies – variously described as beneficial ownership of the Corporate Respondents by the Individual Respondents, ownership and control of the Core Offshore Companies by Workum, and use of and access to a bank account of Mandolin by the Individual Respondents. We believe that readers of the Second Notice of Hearing – including the Individual Respondents – would not reasonably have been surprised at Staff's pressing their allegation in respect of evidence purportedly demonstrating that undisclosed financial benefits in the form of commission payments flowed to the Individual Respondents through their control and direction over assets or accounts of the Offshore Companies. Nor do we believe that a reasonable reader would have been surprised that Staff's concern extended to disclosure not only of PPI's payment of commissions but also of the identity of beneficiaries related to PPI.
In short, we discern nothing in Staff's submissions that suggested they had replaced or supplemented the Undisclosed Financial Benefits Allegation set out in the Second Notice of Hearing with some new theory that would come as a surprise to any reasonable reader of the Second Notice of Hearing.

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Thus, we consider Staff's submissions on the allegation to be wholly consistent with the reasonably and fairly understood substance and focus of the allegation. We believe that the Individual Respondents could not have been, and indeed were not, surprised. They had ample opportunity to call evidence and cross-examine witnesses on the issue of ownership, and they did so. For example, the Individual Respondents called Schöni to address issues concerning the Core Offshore Companies and conducted an extensive cross-examination of Olnick, Staff's principal witness on the Offshore Companies. We discern no unfairness to the Individual Respondents in this regard.
1. ISSUES
This allegation raises the following issues for determination:
- Did either or both of the Individual Respondents benefit personally from commission payments made by PPI?
- If neither of the Individual Respondents is found to have benefited personally from such payments, this allegation must be dismissed. If either or both of them is or are found to have benefited personally, then was a disclosure obligation triggered under Alberta securities laws?
- If no such disclosure obligation was triggered, then this allegation must be dismissed. If there was such an obligation, was it breached contrary to the public interest? If so, who was responsible?
As we find below, the evidence confirmed, consistent with the Individual Respondents' acknowledgements, that PPI made commission payments to the Offshore Companies. While the Individual Respondents disputed their ownership of and control and direction over the securities trading accounts of Strategic, Cheshire, Lexington and Ashland and the offshore bank account of Mandolin, we find that the Individual Respondents did exercise such control and direction. We also find that the Individual Respondents, through their control and direction over the accounts, benefited personally from the money paid to those accounts. We reject Workum's contention that he had merely borrowed the money from those accounts and thus had no obligation to disclose his receipt of that money.
For the reasons discussed below, we find that PPI was obliged by Alberta securities laws to disclose to the investing public that the Individual Respondents received such financial benefits from PPI, but that PPI failed to do so. We further find
that the Individual Respondents were responsible for PPI's failure to make the requisite disclosure. We conclude that the conduct of the Individual Respondents in this regard was contrary to the public interest.

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1. FINANCIAL BENEFITS RECEIVED BY INDIVIDUAL RESPONDENTS?
  1. The Evidence
In assessing the merits of this allegation we looked to testimony (primarily that of Schöni) and to various documentary evidence, including:
- excerpts from transcripts of a "Cross-examination on affidavit" of Cofima's principal Schöni ("Schöni's Examination") conducted in December 2005 in connection with a different proceeding in the Court of Queen's Bench of Alberta;
- excerpts from transcripts of a July 2002 Staff investigative interview of Hennig ("Hennig's Interview");
- corporate records of the Core Offshore Companies;
- Brokerage Firm account-opening documentation for the Offshore Companies;
- brokerage account records for the Corporate Respondents;
- Olnick's records (including written communications to and from the Individual Respondents and others) of transactions he carried out in the Offshore Companies' accounts;
- a collection of documents that appeared to be a monthly accounting of assets held by the Offshore Companies and IIC, for the most part headed "SCA 2000", found by PPI employee McCowan in EnerGCorp's office in Arizona (the "SCA 2000 Documents");
- PPI records, including accounting information and records relating to private placements; and
- bank records of accounts in the names of PPI, IIC and Mandolin.
We did not rely on Olnick's testimony. Nor did we rely on any document prepared by him or provided by him to Staff except, as discussed above, to the extent that it was corroborated by other evidence that we considered reliable. Unless otherwise
noted, we are satisfied as to the reliability of the testimony and documents referred to below.
1. The Offshore Companies – Background
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We found the corporate records of the Core Offshore Companies and the history of the respective securities trading and bank accounts of the Offshore Companies helpful in understanding how and when these companies came into existence. However, this documentation identified nominees or agents but did not reveal the true or beneficial ownership of, or control and direction over, the Offshore Companies.
1. Strategic
The evidence as to Strategic's origins was incomplete. By 1995 Strategic (some documents in evidence referred to Strategic as "SIF") had opened a securities trading account with McDermid (the "Strategic Trading Account"). A corporate resolution provided to McDermid by Strategic, purportedly passed at a meeting of the directors of Strategic on 14 September 1995, named three individuals – Zennie Morris, "Agent and Administrator"; Keith Burant, "Agent"; and Mark O'Donoghue, "Agent" – as the persons authorized to carry out all activities in connection with the Strategic Trading Account.
The first recorded transaction in the Strategic Trading Account was the deposit of $102 000 on 6 October 1995. The Strategic Trading Account was active buying and selling securities of Solid Resources Ltd. ("Solid") from that date until 29 February 1996 when the account's assets were transferred to an account at Wolverton Securities Limited ("Wolverton"). Evidence before us included a 25 February 1996 letter from Hennig to Olnick authorizing the transfer. In March and April 1996 the Strategic Trading Account had a balance of $5.26. During May 1996 the Strategic Trading Account began buying and selling PPI Shares. On each of 7 and 9 May 1996 100 000 PPI Shares were deposited into the account. PPI Shares were the only securities traded in the Strategic Trading Account from May 1996 until December 1996 when the account again began trading Solid securities. Trading in other securities soon followed.
Documentation provided to the Exchange in September 1996 suggested that George Lastiwka ("Lastiwka") was in some position of authority with Strategic, although no documentation identified that position. A purchase and sale agreement made effective 30 April 1996 between Kilo (later Newmex) and Strategic provided for Kilo to transfer Kilo common shares to Strategic as consideration for Kilo's purchase of Strategic's 25% interest in certain mining properties and for arranging for an exchange of interests in certain mining properties between Kilo and PPI. Hennig executed the agreement on behalf of Kilo; Lastiwka (in an unknown capacity) executed it on behalf of Strategic. In connection with this transaction, Lastiwka sent a 12 September 1996 letter to the Exchange stating that:
[T]o the best of my knowledge, [Strategic] is currently and was at the relevant time dealing with [Kilo] at arms-length [sic].

I trust that this is the information you require to allow the [Kilo] shares to be issued to Strategic as a commission on the transaction.

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As discussed earlier, Kilo became Newmex and the Individual Respondents were directors of both Kilo (or Newmex) and PPI. It appeared that Strategic received Kilo shares (or Newmex Shares) as part of a commission purportedly earned for arranging for the exchange of properties between Kilo and PPI, even though Kilo and PPI had common directors – the Individual Respondents.
In November 1997 Strategic completed a new client application form or "NCAF" (the "Strategic 1997 NCAF") for McDermid indicating that there had been a change in Strategic's directors and address. The contact information given for Strategic was an address in Belize. The Strategic 1997 NCAF indicated that the Strategic Trading Account was a cash account, not a discretionary or managed account; that is, it was an account over which the broker did not have authority to make trading decisions without the client's instructions. McDermid was provided with a corporate resolution of Strategic that authorized the opening of the account. According to that resolution, Lionel Welch ("Welch", identified as the "Director/Secretary" and "President") was now the person authorized to carry out all activities in connection with the account. A letter on Strategic letterhead sent to McDermid dated 31 October 1997 and signed by Strategic's "Authorized Signatory", Welch, advised that he was the beneficial owner of the Strategic Trading Account. We were not persuaded by the bald assertions in those documents. We conclude on a preponderance of the evidence that Welch was merely a nominal director and officer with no control or direction over the activity in the Strategic Trading Account (Welch later became involved with Cheshire, as set out below). Any documentation signed by him for the Strategic Trading Account appeared to have been signed at the direction of others.
In November 2001 the Strategic Trading Account was transferred to Haywood, following Olnick to his new place of employment, and a corporate client application form (a "Haywood NCAF") was completed (the "Strategic 2001 NCAF"). The Strategic 2001 NCAF indicated that the principal of Strategic was now Shirlet Williams ("Williams", a secretary in Belize identified as "President/Secretary"), and the contact information changed from Belize to the Turks and Caicos Islands address also given for Cheshire in November 2001. The Strategic 2001 NCAF stated that no person other than Williams had trading authorization over or a financial interest in the Strategic Trading Account and that it was a cash account, not a discretionary or managed account. We received no documentation that evidenced the change in officer from Welch to Williams. As with Welch, we conclude on a preponderance of the evidence that Williams was merely a nominal officer with no control or direction over the activity in the Strategic Trading
Account. Any documentation signed by her for the Strategic Trading Account appeared to have been signed at the direction of others.

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Olnick was the registered representative responsible for the Strategic Trading Account from its initial opening with the Brokerage Firm until it was frozen by the Commission in 2002.
1. Cheshire
Cheshire (some documents in evidence referred to Cheshire as "CCI") was incorporated in the Turks and Caicos Islands in September 1997.
That month or the next, Cheshire opened a securities trading account with McDermid (the "Cheshire Trading Account"). In connection with the opening of that account, an NCAF was completed (the "Cheshire 1997 NCAF"). The contact information given for Cheshire was an address in the Turks and Caicos Islands. The Cheshire 1997 NCAF indicated that the Cheshire Trading Account was a cash account, not a discretionary or managed account. The account opening documentation included a corporate resolution of Cheshire that authorized the opening of the account and named Mavis Smith (identified as "Director/Secretary/President") as the person authorized to carry out all activities in connection with the account. A letter to McDermid dated 30 September 1997 on Cheshire letterhead and signed by Cheshire's "Authorized Signatory", Mavis Smith, stated that she was the beneficial owner of the Cheshire Trading Account. We were not persuaded by the bald assertions in those documents. We conclude, on a preponderance of the evidence, that Mavis Smith was merely a nominal director and officer with no control or direction over the activity in the Cheshire Trading Account. Any documentation signed by her for the Cheshire Trading Account appeared to have been signed at the direction of others.
The Cheshire 1997 NCAF indicated that the account had been referred by Ken Finkelstein ("Finkelstein"). Finkelstein was a BC lawyer who, according to Schöni, had been retained to facilitate the incorporation of the Core Offshore Companies; Schöni testified that the incorporation of Cheshire "was done by [Workum] and [Olnick]". The Cheshire 1997 NCAF noted that there was "Deposit" by "PPI" of "Stock to be transferred in".
In November 2001 the Cheshire Trading Account was transferred to Haywood, and a Haywood NCAF was completed (the "Cheshire 2001 NCAF") indicating that the principal of Cheshire was now Welch (identified as "President-Secretary-Director") although the contact information was an address in the Turks and Caicos Islands. The Cheshire 2001 NCAF stated that no person other than Welch had trading authorization over or a financial interest in the Cheshire Trading Account and that it was a cash account, not a discretionary or managed account. We received no documentation that evidenced the change in director from Mavis Smith to Welch. As noted above, Welch
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was also merely a nominal director and officer of Strategic from 1997 until the Strategic Trading Account was transferred to Haywood in 2001. As with Mavis Smith, we conclude on a preponderance of the evidence that Welch was merely a nominal director and officer with no control or direction over the activity in the Cheshire Trading Account. Any documentation signed by him for the Cheshire Trading Account appeared to have been signed at the direction of others.
Olnick was the registered representative responsible for the Cheshire Trading Account from its initial opening with the Brokerage Firm until the account was frozen by the Commission in 2002.
1. Lexington
Lexington was the last created of the Core Offshore Companies. A certificate of incorporation stated that Lexington was incorporated in Belize in May 2000.
In June 2000, Lexington opened a securities trading account with McDermid (the "Lexington Trading Account"), at which time an NCAF was completed (the "Lexington 2000 NCAF"). The Lexington 2000 NCAF stated that the Lexington Trading Account was a cash account, not a discretionary or managed account. The telephone and facsimile numbers given for Lexington were the same as those given for Strategic in November 1997 and November 2001; the contact information given for Lexington was an address in Belize.
A corporate resolution of Lexington dated 19 May 2000 provided to McDermid authorized the opening of the Lexington Trading Account and named Daisy Gabb ("Gabb", a secretary identified as "Director-Secretary-President") as the person authorized to carry out all activities in connection with the account. A 19 May 2000 letter to McDermid on Lexington letterhead signed by Gabb as "Authorized Signatory" advised that she was the beneficial owner of the Lexington Trading Account. We were not persuaded by the bald assertions in those documents. We conclude on a preponderance of the evidence that Gabb was merely a nominal director and officer with no control or direction over the activity in the Lexington Trading Account. Any documentation signed by her for the Lexington Trading Account appeared to have been signed at the direction of others.
In November 2001 the Lexington Trading Account was transferred to Haywood and a Haywood NCAF was completed (the "Lexington 2001 NCAF"). The Lexington 2001 NCAF indicated that the principal of Lexington was Daisy Dawson, formerly named Gabb ("Dawson", a manager in Belize identified as "President/Secretary"). The contact information remained the same as that given in the Lexington 2000 NCAF. The Lexington 2001 NCAF stated that no person other than Dawson had trading authorization over or a financial interest in the Lexington Trading Account and that it was a cash account, not a discretionary or managed account. Again,
we conclude on a preponderance of the evidence that Dawson remained merely a nominal officer with no control or direction over the activity in the Lexington Trading Account. Any documentation signed by her for the Lexington Trading Account appeared to have been signed at the direction of others.

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Olnick was the registered representative responsible for the Lexington Trading Account from its initial opening with the Brokerage Firm until the account was frozen by the Commission in 2002.
1. Ashland
Ashland (some documents in evidence referred to Ashland as "AHC") was apparently incorporated in the Turks and Caicos Islands. There were no incorporating documents in evidence before us.
By July 1999 Ashland had opened a securities trading account with McDermid (the "Ashland Trading Account"). A letter to McDermid on Ashland letterhead dated 3 May 1999 and signed by Eric Smith, as "Authorized Signatory", presumably in connection with the opening of the Ashland Trading Account, advised that he was the beneficial owner of the account. We were not persuaded by the bald assertions. We conclude on a preponderance of the evidence that Eric Smith was merely a nominal principal with no control or direction over the activity in the Ashland Trading Account. Any documentation signed by him for the Ashland Trading Account appeared to have been signed at the direction of others.
In November 2001, as was the case with the Strategic Trading Account, the Cheshire Trading Account and the Lexington Trading Account (we refer to these three trading accounts collectively as the "Core Trading Accounts"), the Ashland Trading Account was transferred to Haywood and a Haywood NCAF was completed (the "Ashland NCAF"). The Ashland NCAF indicated that the principal of Ashland was now Dawson (identified as "President/Secretary"), the same Dawson involved with Lexington. The contact information given for Ashland was the Turks and Caicos Islands address also given for Strategic and Cheshire in November 2001, although Dawson was apparently a resident of Belize. The Ashland NCAF stated that no person other than Dawson had trading authorization over or a financial interest in the Ashland Trading Account and that it was a cash account, not a discretionary or managed account. Once again, we conclude on a preponderance of the evidence that Dawson was merely a nominal officer with no control or direction over the activity in the Ashland Trading Account. Any documentation signed by her for the Ashland Trading Account appeared to have been signed at the direction of others.
Olnick and, briefly, his son-in-law John Kutzschan ("Kutzschan") were the registered representatives responsible for the Ashland Trading Account from its initial
opening with the Brokerage Firm until the account was frozen by the Commission in 2002.
1. Mandolin
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Although Mandolin was not named as a respondent in this proceeding, it was involved in many of the transactions under scrutiny in the Hearing.
Olnick was the registered representative for the securities trading account that Mandolin maintained at the Brokerage Firm (the "Mandolin Trading Account"). An NCAF submitted to McDermid in May 1993 for the Mandolin Trading Account (the "Mandolin 1993 NCAF") indicated a change of directors and gave an address in England as contact information. The Mandolin 1993 NCAF stated that the Mandolin Trading Account was a cash account, not a discretionary or managed account. A corporate resolution of Mandolin authorizing the opening of the Mandolin Trading Account named Welch (identified as president and secretary) – the same Welch involved with Strategic and Cheshire – as the person authorized to carry out all activities in connection with the account. A letter to McDermid on Mandolin letterhead, dated 20 August 1999 and signed by Welch, advised of his resignation from Mandolin and noted that Eric Smith had been appointed as "director-secretary-president" and was "now the sole beneficial shareholder of [Mandolin]".
In November 2001, as was the case with the Core Trading Accounts, the Mandolin Trading Account was transferred to Haywood and a Haywood NCAF was completed (the "Mandolin 2001 NCAF"). The Mandolin 2001 NCAF indicated that the principal of Mandolin was Eric Smith (identified as "President/Secretary"). The contact information given for Mandolin was an address in the Bahamas, although Eric Smith was apparently a resident of the Turks and Caicos Islands. The Mandolin 2001 NCAF stated that no person other than Eric Smith had trading authorization over or a financial interest in the Mandolin Trading Account and that it was a cash account, not a discretionary or managed account.
Olnick testified that Workum did not direct trading of securities in the Mandolin Trading Account. He also testified that Dennis Sutton ("Sutton") was the beneficial owner of the Mandolin Trading Account. This may or may not have been the case; we are unable to rely on Olnick's testimony.
In the absence of any other evidence about the ownership of, or control and direction over, the Mandolin Trading Account, we make no findings concerning Workum's or Hennig's involvement with the Mandolin Trading Account or concerning that account generally.
Documentation established that from at least July 2000 Olnick handled transactions in an account in the name of Mandolin maintained at a bank in the Turks and
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Caicos Islands (the "Mandolin Offshore Bank Account"). Olnick testified that Sutton was the beneficial owner of the Mandolin Offshore Bank Account. Again, this may or may not have been the case; we are unable to rely on Olnick's testimony. However, there was clear, convincing and cogent evidence concerning the Individual Respondents' involvement with the Mandolin Offshore Bank Account, as we discuss below.
1. PPI Payments to Offshore Companies
PPI raised several millions of dollars during the Relevant Period through private placements of PPI Shares, largely to investors in Switzerland or elsewhere in Europe. Cofima and Commcept each acted as intermediaries in some of this capital-raising activity. These sales were the source of most of the commissions here at issue. As noted in connection with the Financial Disclosure Allegations, PPI also paid a commission to Cheshire, one of the Core Offshore Companies, in connection with the Newmex/LynChris Transaction.
The Individual Respondents did not dispute – indeed, they acknowledged –that PPI made commission payments to Strategic, Cheshire, Ashland and Mandolin and were at least to make such payments to Lexington.

Schöni's Evidence Concerning Cofima and Commcept Commissions [784] Schöni first met Workum at the offices of Commcept in about 1989. (Schöni worked for Commcept before forming Cofima, and Workum, as noted, had apparently contracted to work for Commcept as a consultant). Schöni and Workum were later reintroduced by the CFO of ASCOOP.
1. Schöni told us that after that reintroduction he approached Workum for assistance in recouping an investment made by (or for) Cofima clients in Harris Exploration Inc. ("Harris"), a US oil and gas company (the "Harris Investors"). Workum apparently undertook to assist in resolving certain unspecified problems with Harris, and in return Schöni and Cofima would assist Workum's company PPI in raising capital. Thus began Cofima's business relationship with PPI. Cheshire played a part in these early dealings, as discussed below.
2. Schöni explained that PPI paid a standard commission of 10% on private placements arranged through Cofima. Cofima would invoice PPI for 8%. PPI was to pay the remaining 2% commission into one or other of the brokerage accounts of the Core Offshore Companies, supposedly for the benefit of the Harris Investors. Invoices in evidence for 8% commissions payable to Cofima were consistent with Schöni's testimony.
3. In 2000 Commcept replaced Cofima in these European capital-raising efforts. According to Schöni, there was no relationship between Cofima and Commcept, and Cofima played no part in Commcept's capital-raising activities for PPI. However, he
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  indicated that Cofima's arrangement with PPI gave Cofima "find protection" in relation to the clients it had introduced to PPI. Consistent with this part of their arrangement, and because Cofima and Commcept had clients in common, Schöni told us that Workum and PPI agreed to pay Cofima 3% of any money raised for PPI by Commcept from shared Cofima/Commcept clients (with, presumably, a corresponding reduction in the commission retained by Commcept). One exception – "a special situation" – was Cofima client ASCOOP: sometimes Cofima was to get a commission when ASCOOP invested in PPI through Commcept, but sometimes not. It seems that this was decided case by case between Workum and ASCOOP, generally without Cofima's involvement.
4. According to Schöni, Cofima and PPI agreed that PPI would pay these 3% Cofima commissions to one or other of the Core Offshore Companies. It seems, from Schöni's testimony, that it was left to Workum to choose which of the Core Offshore Companies was to receive any such 2% or 3% commission payable and Schöni and Wick, who trusted Workum, relied on Workum to keep them informed. Schöni said that he did not know whether the commissions were actually paid (or to which of the Core Offshore Companies), but he trusted Workum.

Payment-Generating Transactions

We next examine several specific transactions and the associated commission arrangements contemplated and executed.
1. Proposed Harris Agreements
Schöni described to us his early dealings with Workum and PPI. These apparently began and a business relationship between Cofima and PPI coalesced in the late 1990s (1998 or 1999, he thought).
In 1997 there was contemplation of a direct involvement by PPI with Harris, Cofima's troubled US investment. In evidence was an unexecuted "Conditional Share Exchange Agreement" dated 22 November 1997 (the "1997 Harris Agreement") calling for PPI to exchange PPI Shares for shares in Harris. The 1997 Harris Agreement stated that Cheshire was the "agent and financial advisor" and that it was to receive an "8.0% agency fee" payable in PPI Shares on closing. The 1997 Harris Agreement further stated that Cofima had undertaken to use its best efforts to raise a minimum of US$10 million and a maximum of US$40 million for PPI. The signatories of the 1997 Harris Agreement were to be Schöni on behalf of both Harris and Cofima, and Workum on behalf of PPI. Cheshire was not shown as a proposed signatory.
It seems that in June 1998 the parties to the 1997 Harris Agreement contemplated a different agreement (the "1998 Harris Agreement"), to take effect on 1 December 1997, under which PPI would sell certain oil and gas properties to Harris in exchange for Harris common shares and warrants. Cheshire was to receive an "agency fee" of 8%, payable in PPI Shares.
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Neither of these proposed agreements with Harris was apparently completed. There was no indication as to who Cheshire's principals were or what Cheshire actually did. The draft agreements are, however, the earliest indications we had of PPI involvement with Cofima and Cheshire. We conclude that PPI and Cofima began their business relationship in late 1997.
1. 1998 Debt Offering
A 28 January 1998 term sheet contemplated an offering of PPI debt to be sold by Cofima and another agent (the "1998 Debt Offering"). In addition to an 8% commission to the sellers, PPI was to pay Cheshire – identified as "financial advisor" – a "2.0% cash fee plus 3.0 % of the total issue", payable in PPI Shares.
It is unclear whether the 1998 Debt Offering was completed; PPI's 1998 Financial Statements did not record debt of the same description.
1. April 1998 Private Placement
On 7 April 1998 PPI announced a proposed private placement (the "April 1998 Private Placement"). An agreement bearing the date April 1998 provided for Cofima to be paid a consulting or finder's fee of 10% of the gross proceeds. The April 1998 Private Placement closed successfully: $1 million was raised from six purchasers, among them Cheshire (266 000 PPI Shares for a total cost of $665 000).
On 30 June 1998 Hennig instructed PPI's transfer agent to issue 266 000 PPI Shares to Cheshire. On 26 August 1998 these PPI Shares were deposited into the Cheshire Trading Account, as evidenced by the account records.
Cheshire Trading Account records showed that on 19 June 1998 $250 000 was paid from it to an account at a Canadian chartered bank, which was PPI's bank ("PPI's Bank"). PPI's general ledger recorded the receipt of $250 000 on 19 June 1998 for "100000 shrs".
Cheshire Trading Account records showed $215 000 paid from it to PPI's Bank on 7 July 1998 by "WT1037". Records of the Strategic Trading Account showed
$100 000 paid from it to PPI's Bank on 7 July 1998 by "WT1037". PPI's general ledger recorded the receipt of $315 000 on 7 July 1998 for "126,000 shrs".
Strategic was not named as a purchaser in the April 1998 Private Placement, and it did not appear that it received PPI Shares at that time. In the circumstances, we conclude that Strategic and Cheshire together paid $565 000 – $100 000 short of the total purchase price of $665 000 – for Cheshire's purchase of 266 000 PPI Shares.
PPI indicated, in a listing application to the TSE, that Cofima had received
$100 000 in connection with the April 1998 Private Placement – consistent with the commission it was to have earned. We found no record of a PPI payment to Cofima of
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$100 000 at this time. We think it plausible that Cofima's commission was in fact paid by PPI's issuing to Cheshire more PPI Shares – the missing $100 000 worth – than those for which Strategic and Cheshire paid. This would be consistent both with the idea that Cheshire would take commissions in PPI Shares (as contemplated in the 1997 and 1998 Harris Agreements and the 1998 Debt Offering) and with Schöni's testimony that some Cofima commissions would actually be paid to one or other of the Core Offshore Companies.
1. Newmex Transaction
The Newmex Transaction, discussed in connection with the Financial Disclosure Allegations, generated a commission for Cheshire. In connection with one part of that transaction (the Newmex/LynChris Transaction), PPI and Cheshire signed the LynChris Commission Agreement. Under this agreement, Cheshire was to receive 200 000 Newmex Shares as a commission if it arranged for a buyer for 2 582 875 of PPI's Newmex Shares. In it, Cheshire confirmed that it dealt at arm's length with PPI and with LynChris and its principal, Faithfull. Workum signed the agreement for PPI; Mavis Smith (a nominal director and officer of Cheshire) signed for Cheshire.
As described above, the Newmex/LynChris Transaction was instigated by Hennig, who arranged for LynChris to buy the mentioned Newmex Shares. When asked why Cheshire received a commission, Faithfull replied:

To my knowledge, [Cheshire] had absolutely no involvement with LynChris and PPI. In fact, I asked that question of [Hennig] as to why [Cheshire] was even mentioned in the purchase and sale agreement.

. . .

[Hennig] indicated to me that [Cheshire] was the agent on the transaction involving ASCOOP and SPIDA and that they weren't adequate -- [Cheshire] wasn't adequately compensated on that transaction and this was a way of providing them with additional compensation.
The Longer and Shorter Newmex/ASCOOP Terms Agreements among PPI, ASCOOP and SPIDA both stated that a commission of 1% of the total proceeds on the Newmex/ASCOOP Transaction would be payable to ATAG Ernst & Young (Buser was expressly named in the longer version of the agreement). No mention was made of a commission to Cheshire. The Exchange refused to approve PPI's paying any commission to ATAG Ernst & Young. PPI does not appear to have mentioned to the Exchange that Cheshire would (and did) receive "additional compensation" on the Newmex/LynChris
Transaction partly to "adequately compensat[e]" it for the Newmex/ASCOOP Transaction.

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In any event, on 27 October 1998 Hennig instructed PPI's transfer agent to split a certificate for Newmex Shares registered to PPI and to register 200 000 of those Newmex Shares to Cheshire. The Cheshire Trading Account records showed the deposit of 200 000 Newmex Shares on 1 December 1998.
1. 1999 Private Placements
  1. June/July 1999
On 24 June 1999 PPI announced that it had completed a sale of PPI Shares and share purchase warrants for gross proceeds of $4 375 000 (the "June 1999 Private Placement"). The purchasers were three Cofima clients, among them SPIDA and another institution that we refer to by the initials "BLPK". An unsigned draft agreement between PPI and Cofima dated 21 April 1999 provided for Cofima to be paid a consulting or finder's fee equal to 10% of the gross proceeds received by PPI from the then-proposed private placement. The notice of proposed private placement that PPI filed with the Exchange (Hennig signed and certified it) disclosed that Cofima was to be paid a commission or finder's fee of "10% of funds raised".
Schöni on behalf of Cofima sent two invoices for Cofima's consulting fees on the June 1999 Private Placement to the attention of Workum at PPI. The invoices totalled
$350 000, or 8% (not 10%), of the gross proceeds raised.
In June the invoiced amounts were paid directly to Cofima by or on behalf of PPI, leaving unpaid $87 500 of the 10% commission. In evidence was a document included in the SCA 2000 Documents, which appeared to be a one-page accounting of money owing to "PJW" and "TH" (the Individual Respondents' initials), split 75%/25% in favour of PJW, mostly for commissions for PPI private placements (the "Workum/Hennig Fee Split Accounting"). One entry in this document stated: "Jul 99 placement fee ($87,500)". This corresponded to the commission balance mentioned above. A four-page internal reconciliation apparently prepared by or at least on behalf of Hennig in February and March 2000, found by McCowan in PPI's files (the "Internal Reconciliation"), indicated that the balance of the 10% commission payable in connection with the June 1999 Private Placement was to be paid to Ashland but for some reason unknown to us calculated that balance as $77 000, rather than $87 500. On 2 July 1999 PPI issued a cheque for $77 000 payable to Ashland, which bore the notation "Commission Balance" and had Hennig as one of the signatories. On 6 July 1999 this cheque was deposited into the Ashland Trading Account, as evidenced by the account records.
In August 1999 PPI completed a sale of PPI Shares and share purchase warrants for gross proceeds of $2 100 000 (the "August 1999 Private Placement"). The purchasers were two Cofima clients: one client paid $1 750 000; the other client (through ASCOOP) paid $350 000.
On 8 August 1999 Schöni on behalf of Cofima sent an invoice to the attention of Workum at PPI for the $168 000 (8%) commission owing to it on the August 1999 Private Placement. The invoice noted that Cofima had received 10 000 PPI Shares at a price of $3 per share for a total credit of $30 000. The balance of the $168 000 owing –
$138 000 – was apparently paid by EnerGCorp. While it was not clear that the additional 2% in commission was paid, it may have been included in other payments, described as commissions, totalling $339 000, made to Strategic, Cheshire and Ashland, as discussed below.
On 19 October 1999 PPI completed a sale of PPI Shares and share purchase warrants for gross proceeds of $4 900 000 (the "October 1999 Private Placement"). The purchasers were two Cofima clients: BLPK paid $3.5 million; the other paid $1.4 million. The 10% commission owing from the sales totalled $490 000.
In October 1999 PPI made two deposits – $36 000 and $15 000 – into the Ashland Trading Account. A page of the Internal Reconciliation titled "Commission Reconciliation - 1999" bearing the date "2/24/00" noted that $36 000 and $15 000 had been paid to Ashland. The Ashland Trading Account records confirmed deposits of these amounts in October 1999.
On 9 November 1999 Schöni, on behalf of Cofima, sent an invoice to the attention of Workum at PPI for the $392 000 (8%) commission owing on the October 1999 Private Placement. The invoice stated that a commission of $112 000 (8%) was owing for the $1.4 million paid by the bank client and a commission of $280 000 (8%) was owing for the $3.5 million paid by BLPK, less $100 000 already paid on 28 October 1999, for a total commission owing of $292 000. The $100 000 noted as already paid was apparently paid by EnerGCorp, and on 16 November 1999 EnerGCorp paid the balance of the $292 000 owing to Cofima.
On 9 November 1999 PPI paid an aggregate of $339 000 to certain of the Offshore Companies, as confirmed (date and amount) by the respective account records:
$23 200 to the Strategic Trading Account; $105 500 to the Cheshire Trading Account; and $210 300 to the Ashland Trading Account. These payments were, according to the Internal Reconciliation, part of the commissions owing in connection with the 1999 private placements.
Thus, in 1999 it appears that PPI paid at least $467 000 ($77 000, $36 000,
$15 000 and $339 000) in commissions to three of the Offshore Companies.

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1. 2000 Private Placements
  1. February 2000
On 29 February 2000 PPI completed a sale of PPI Shares and share purchase warrants for gross proceeds of $4 025 000 (the "February 2000 Private Placement"). One of the two purchasers was ASCOOP (it paid $3 500 000).
On 17 January 2000 PPI paid $402 500 – 10% of the gross proceeds – as follows: $202 500 was deposited into the Strategic Trading Account; $100 000 was deposited into the Cheshire Trading Account; and $100 000 was deposited into the Ashland Trading Account. These deposits were consistent with notations on a page of the Internal Reconciliation titled "Commission Reconciliation-2000" bearing the date "2/24/00" and were confirmed (dates and amounts) by the respective account records.
In May 2000 PPI completed a sale of PPI Shares and share purchase warrants, through Commcept, for gross proceeds of $39 375 000 (the "May 2000 Private Placement"). Different versions of a term sheet in evidence all called for an "investment banking fee" for Commcept, with all but one calling for half of it to be paid to Cheshire. Although the fully-executed copy of the finalized term sheet in evidence referred to a 6% fee, shareholder consent forms signed by a number of PPI directors indicated that 10% was to be paid.
Indeed, commissions totalling $3 937 500 (10%) were paid by PPI as follows:
$1 181 250 (3%) to Commcept by PPI cheque dated 16 May 2000, which bore the
notation "39,375,000 x 3% = 1,181,250 Commission"; and $2 756 250 (7%) to the Mandolin Offshore Bank Account by wire on 30 June 2000. The Mandolin Offshore Bank Account records showed payment of $2 756 250 on 4 July from PPI. Both the news release and material change report issued by PPI announcing the financing stated that the sale of the PPI units had been made through Commcept. No mention was made of Mandolin, although it clearly received commission money from the May 2000 Private Placement.
Olnick prepared a spreadsheet ("Olnick's Mandolin Spreadsheet") recording payments into and out of the Mandolin Offshore Bank Account. According to Olnick's Mandolin Spreadsheet, on 4 July 2000 a total of $250 000 was wired from the Mandolin Offshore Bank Account to the Strategic, Cheshire and Ashland Trading Accounts:
$100 000 for Strategic; $100 000 for Cheshire; and $50 000 for Ashland. The respective account records confirmed deposits in these amounts less transaction costs.
On 24 July and 23 August 2000, respectively, Olnick instructed that $400 000 and $300 000 be wired from the Mandolin Offshore Bank Account to the Lexington Trading Account. The Lexington Trading Account records confirmed deposits in these amounts less transaction costs.

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One of the SCA 2000 Documents headed "Mandolin Inc" provided confirmation, as follows:

Nil		Beg Bal
2,756,250		[Commcept] 7% Commission *$39.375MM
(100,000)		Transfer to [Cheshire]
(100,000)		Transfer to [Strategic]
(50,000)		Transfer to Ashland
(400,000)		Transfer to [Lexington]
(520,000)		Transfer to THPC re [Hennig] shares
(300,000)		Transfer to [Lexington]
1,286,250		Est Aug 31-00 Bal b/4 interest income
	(iii)	August 2000

In August 2000 PPI completed a sale of PPI Shares and share purchase warrants to the Tiroler Sparkasse ("Tiroler") for gross proceeds of $3 500 000 (the "August 2000 Private Placement").
On 3 August 2000 PPI paid $350 000 into the Ashland Trading Account, and the account records confirmed a deposit of that amount on that date. This payment (10% of the gross proceeds of the August 2000 Private Placement) was clearly related to that placement.
Olnick recorded this payment in a reconciliation of transactions he prepared for the Ashland Trading Account ("Olnick's Ashland Accounting"), noting also a payment from the same account to ASCOOP, on 8 September 2000, of $150 000 described as a "Fee". The latter payment accorded with facsimile instructions from Hennig to Olnick on 7 September 2000 and an 8 September 2000 withdrawal noted in the Ashland Trading Account records. These payments were also consistent with an entry in the Workum/Hennig Fee Split Accounting: "Tyroler [sic] Sparkasse placement fee (350,000-150,000 ASCOOP)".
Documentation showed that late in September 2000 Tiroler notified Hennig that Tiroler was expecting to receive a commission of $150 000 in connection with the August 2000 Private Placement, and that in November 2000 PPI paid a further commission of $150 000 to Tiroler.
(iv) 2000 Commissions Paid
In 2000 it appears that PPI paid at least $3 508 750 ($202 500, $100 000,
$100 000, $2 756 250 and $350 000) in commissions to four of the Offshore Companies.

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1. March 2001 Private Placement
PPI and Commcept began negotiating a sale of PPI securities in October 2000. A term sheet dated 1 October 2000 contemplated an offering of PPI Shares and share purchase warrants for which Commcept would earn a "10.0% investment banking fee", of which 50% was to be paid to Lexington. A notice of the proposed private placement sent to the TSE (PPI had by that date moved its listing to the TSE) on 26 February 2001 stated that Commcept would be paid a cash commission of 10% of the aggregate gross proceeds; no mention was made of any commission payable to Lexington.
On 27 March 2001 PPI completed a sale of PPI Shares to Commcept for gross proceeds of $23 460 000 (the "March 2001 Private Placement"). The same day, Hennig wrote to the TSE enclosing PPI's written undertaking that "no commission or other fees will be paid by [PPI], directly or indirectly to [Commcept] . . . until such time that the shares to which such commissions or fees relate are no longer held by [Commcept]".
In April 2001 PPI wired $1 173 000 – equal to 5% of the gross proceeds of the March 2001 Private Placement – to the Mandolin Offshore Bank Account. On 2 April 2001 Hennig had written the receiving bank advising that "the $1,173,000 wire transfer to your bank relates to a commission earned on a $23.48 million private placement closed by [PPI] on March 27th 2001". One of the two sets of wiring instructions found by McCowan in PPI's files bore the handwritten notation "6,000,000 sh @ $3.91 x 5% comm. Lexington Capital Corp.", to the left of which was written "$1,173,000".
August 2001 correspondence between PPI and Commcept showed that Commcept expected, and was awaiting, a 5% (not 10%) commission on the March 2001 Private Placement. Workum acknowledged this and Commcept was paid its $1 173 000.
There was no evidence that the TSE was told that half of the 10% fee or commission purportedly payable to Commcept would instead be paid to Lexington or Mandolin.

Consequences of the Surveyed Transactions

The foregoing, although not a complete enumeration of all transactions giving rise to PPI commission payments, gives a representative flavour of what occurred. Some observations can be made.
First, a considerable amount of money and securities moved from PPI to the Offshore Companies as commission payments. As a result of the surveyed transactions
alone, the following Offshore Companies received money and securities from PPI as follows (before deducting any payment out):
- Strategic $225 700
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  ($23 200 and $202 500)
- Cheshire $205 500 and 200 000 Newmex Shares
  ($105 500 and $100 000)
- Ashland $788 300
  ($77 000, $36 000, $15 000, $210 300, $100 000 and $350 000)
- Mandolin $3 929 250
($2 756 250 and $1 173 000)
As a result, PPI paid a total (excluding securities) of at least $5 148 750 to the Offshore Companies. Some of that money was initially deposited to the Mandolin Offshore Bank Account and then, often almost immediately, paid out to another of the Offshore Companies.
Second, although documentation relating to some of the surveyed transactions made references to agency or investment banking fees or commissions tied to transaction proceeds, and Cheshire was referred to in some instances as an "agent" or "financial advisor", there was no evidence as to what services any of the Offshore Companies had actually rendered for the money they received from PPI. In one case (the Newmex/LynChris Transaction) the evidence was that Cheshire had done nothing and was not even involved.
Third, some of PPI's reporting to the Exchange and the TSE concerning commissions paid was inaccurate and, we conclude, deliberately so.
Fourth, Mandolin's role seemed to differ from that of the other Offshore Companies. While PPI paid commissions to the Mandolin Offshore Bank Account, it appeared that Mandolin was at times acting as an intermediary, in that some of the money so received was then paid to one or other of the Core Trading Accounts and the Ashland Trading Account (we refer to these four trading accounts collectively as the "Four Trading Accounts"). Most of the money in the Lexington Trading Account apparently came from the Mandolin Offshore Bank Account.
1. Financial Benefits Received by Individual Respondents
As established by the evidence, and consistent with the Individual Respondents' acknowledgements, the Offshore Companies received commissions, directly or indirectly, from the sale of PPI and related company securities. The Individual Respondents denied ownership of the Offshore Companies and their assets. While we do not know with certainty who technically owned the Offshore Companies and their assets, the evidence, as discussed below, proved clearly, convincingly and cogently that the
Individual Respondents had, and exercised, control and direction over the Four Trading Accounts and the Mandolin Offshore Bank Account and enjoyed financial benefits funded by commission payments from PPI.

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1. Core Offshore Companies and Core Trading Accounts – Control and Direction
  1. General
The position of the Individual Respondents was that the Undisclosed Financial Benefits Allegation turned on ownership of the Offshore Companies and that the allegation must fail because they did not own any of the Offshore Companies. They contended that beneficial ownership of the Core Offshore Companies and the Core Trading Accounts rested with Schöni and Wick, initially through Cofima.
Support for their position came primarily from correspondence from Schöni and Wick and from Schöni's testimony. Schöni claimed that he and Wick were the beneficial owners of the Core Offshore Companies, initially through Cofima.
The evidence as to ownership of the Core Offshore Companies and the Core Trading Accounts was inconclusive. However, the evidence as a whole led us to conclude that it was the Individual Respondents, not Cofima or Schöni and Wick, who had, and exercised, control and direction over the Core Trading Accounts and benefited from them.
In support of the Individual Respondents' position, Staff received a letter dated 11 June 2002, bearing misspelled Cheshire letterhead with a Turks and Caicos Islands address and signed by Schöni (the "Schöni Letter"). The Schöni Letter stated that Cheshire "is an arm's length third party from [PPI]", that Schöni is "the beneficial owner of Cheshire", and that Workum, Hennig and PPI "do not have any direct or indirect interest in Cheshire". Accompanying the letter was an unsigned document titled "Line of Credit Agreement" dated as of 6 October 1997 between Cheshire and Workum. This document stated that Workum was entitled to borrow from Cheshire up to $3 million "or any such other amount as may be set out" by the parties. The borrowing would bear interest at a named Canadian chartered bank's prime rate plus 3% per annum and would be repayable on demand. Contact information included e-mail addresses for Workum and Schöni – a surprisingly advanced feature for a 1997 agreement. The document contained odd wording including the following: "The provisions, if any, shall be incorporated into this Agreement and form part hereof".
Staff also received a letter dated 13 June 2002, similar in content to the Schöni Letter but signed by Wick as "Beneficial Owner" and bearing Strategic letterhead with
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the same Turks and Caicos Islands address as that provided for Cheshire (the "Wick Letter"). It stated that "Strategic is at arm's length to [PPI]" and "has invested in [PPI] and some of its subsidiary companies" and that Workum, Hennig and PPI "do not have any direct or indirect interest in Strategic". (We refer to the Schöni Letter and the Wick Letter together as the "Schöni/Wick Letters".) The Wick Letter was accompanied by an unsigned "Line of Credit Agreement" identical in content to that between Cheshire and Workum except that it referred to Strategic and Wick and was dated as of 8 September 1995 – well before Cofima, Schöni and Wick began their business relationship with Workum and PPI in late 1997. There was not in evidence a similar letter identifying Wick as the beneficial owner of Lexington, nor a similar line of credit agreement referring to Lexington and Wick.
Staff also received from Peter Bucher ("Bucher") two similar letters, unsigned, both dated 13 June 2002 and prepared for signature by Bucher as "Beneficial Owner", one on Lexington letterhead showing a Belize address and the other on Strategic letterhead showing a Turks and Caicos Islands address (the "Bucher Letters"). The first began: "We understand that the [Commission] is inquiring about [Lexington]." Somewhat like the Schöni/Wick Letters, it stated that Workum, Hennig and PPI "are all at arm's length to Strategic [presumably meant to refer to Lexington]" and that Workum, Hennig and PPI "do not have any direct or indirect interest in [Lexington] and that Lexington is at arm's length to [PPI]." The second letter was identical to the first except for its references to Strategic, rather than Lexington. The copies of the first letter in evidence bore a handwritten note from "Glenn" to "Peter" – presumably, a note from Olnick to Bucher – asking Bucher to sign and courier the letters "back to us". The same copies of the first letter in evidence also seemed to have had attached Olnick's Haywood business card. Accompanying the Bucher Letters was another identical unsigned "Line of Credit Agreement", but for references to Lexington and Bucher and being dated as of 20 June 2000. There was not in evidence a similar line of credit agreement referring to Strategic and Bucher. (We refer to the "Lines of Credit Agreements" accompanying the Schöni/Wick Letters as the "Schöni/Wick Purported Lines of Credit" and those, together with that sent to Bucher, as the "Purported Lines of Credit".) Bucher refused to sign the Bucher Letters, advising Staff that, contrary to the Bucher Letters, he was not the beneficial owner of Lexington or Strategic.
Lebeuf testified that Workum had asked her to prepare some letters from the Core Offshore Companies. She did so. Shown the Schöni/Wick Letters and the first of the Bucher Letters, Lebeuf thought that they looked like ones she was asked by Workum to prepare, although she did not think she was asked to type the names of the signatories. She assumed that the letters were being prepared for "business associates" of Workum. We find that Workum instructed the preparation of the Schöni/Wick Letters and the Bucher Letters.
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Asked by Staff about the Bucher letter concerning Lexington and the associated "Line of Credit Agreement", Schöni told us that Bucher was very angry to receive these documents from Olnick. Schöni's understanding was that Olnick had simply made a mistake. The Bucher Letters would have been a most surprising mistake because, as Schöni told us, "it was always clear that [Olnick] knew that these offshore companies [Strategic, Cheshire and Lexington] belonged to us".
Schöni's explanation on this point was not credible. We do not believe that Olnick, who had managed the Core Trading Accounts for years, and had (according to Schöni) arranged for the Core Offshore Companies' incorporation, would have made such an elementary mistake as to misidentify the beneficial owner of Lexington (or Strategic). We believe that Olnick simply followed the instructions of Workum, who had obviously believed, wrongly as it turned out, that Bucher would be willing to assist him in his attempts to satisfy Staff's inquiries. We so find.
Neither the Schöni/Wick Letters nor the botched Bucher Letters (nor the unsupported assertions they contain) were persuasive. Their sloppiness (the misspelled letterhead and the unexplained reference to Strategic in the letter about Lexington) undermined their apparent objective. Originating with Workum, as we found, they pointed more to the centrality of Workum's role with, than to the Individual Respondents' claimed independence from, the Core Offshore Companies. They also amounted to a concerted but slapdash effort to mislead Staff on that point.
As discussed below, we are similarly not persuaded by the Purported Lines of Credit.
The Schöni/Wick Letters, the Bucher Letters and the Purported Lines of Credit did not establish the beneficial ownership of any of the Core Offshore Companies or the Core Trading Accounts by Cofima, Schöni or Wick. Rather, they had a contrary effect. We find that those documents were contrived by Workum with a view to deceiving Staff.
Schöni told us that Olnick arranged for the incorporation of the Core Offshore Companies through Finkelstein, and that the incorporation of Cheshire "was done by [Workum] and [Olnick]". According to Schöni, none of Cofima, Schöni or Wick had the incorporation documents for the Core Offshore Companies, and Cofima never had certificates evidencing ownership of the shares of the Core Offshore Companies. In Schöni's Examination, Schöni asserted that, although he never spoke directly to Finkelstein, he and Wick had selected the names "Strategic", "Cheshire" and "Lexington". Schöni retreated from that assertion before us, saying that Olnick proposed the names "Strategic" and "Lexington" and he and Wick "didn't care, that these names were mentioned and we agreed".
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Responding to questions posed by Staff, Schöni twice agreed that Strategic was created after Cheshire. However, as noted above, Strategic was incorporated at least two years prior to Cheshire and there was evidence of activity by PPI, through the Individual Respondents, in the Strategic Trading Account from October 1995, considerably before Cofima, Schöni and Wick began their business relationship with PPI. In short, Schöni and Wick could not have been involved in Strategic's incorporation or in selecting the name "Strategic" and we find that they were not so involved.
Lebeuf gave some evidence on the origin of Cheshire. She knew little about Cheshire, but found in PPI's files documents relating to the incorporation of Cheshire in September 1997 and bank account opening documentation for Cheshire bearing the date October 1997. Copies of these documents were introduced into evidence. Included with that documentation was an envelope with a mailing address label from the Finkelstein law firm to the bank in question and the following handwritten note to "Peter" from "Ken" (we are satisfied that "Peter" and "Ken" refer to Workum and Finkelstein respectively):

Please call me once you have reviewed the documents. I will assist with completion. I expect to be in Calgary during the week of Oct. 20. Should you care to meet.
This documentation convinces us that Workum was involved in setting up Cheshire.
Schöni proffered an account of how Cofima came to use the Core Trading Accounts. As mentioned, in 1997 Schöni had sought Workum's assistance in recouping losses suffered by the Harris Investors. According to Schöni, when it became clear that the Harris Investors had lost their investment, Schöni and Workum decided to set aside and use a portion of the commissions that Cofima would earn from raising money for PPI to compensate the Harris Investors. Schöni told us that the typical commission arrangement "according to the agreement we had" was that, if Cofima were entitled to a commission, it "would invoice for 8 percent and the offshore companies would get the remaining 2 percent". It seems from Schöni's testimony that 2% of any 10% commission payable by PPI to Cofima (or any 3% Cofima commission payable for money raised for PPI by Commcept from shared Cofima/Commcept clients) would be paid by PPI to one of the Core Trading Accounts directly. As to which of the Core Trading Accounts, the choice was apparently left to Workum – "initially it was Cheshire . . . but . . . as [Workum] knew what the intention was, he made the decision or could make the decision", which Schöni agreed was "part of [Workum's] role in managing the offshore accounts".
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According to Schöni, the Core Trading Accounts (with emphasis on the Cheshire Trading Account) were intended to be used to collect commissions to fund some possible compensation for the Harris Investors who had suffered losses in an investment apparently unrelated to PPI and the Individual Respondents. Schöni told us that offshore companies were the means used to accomplish this purpose, apparently (the explanation was not clear) to avoid Swiss taxation or tax problems arising from fluctuating values. Schöni said that initially there was just one offshore account – the Cheshire Trading Account – but, because Workum was doing so well, "we [apparently Schöni and Wick] decided to add two other companies just to split up the money which was earned in there to give us more flexibility down the road"; they might use one company, Cheshire, to compensate the Harris Investors, and the other two companies (Strategic and Lexington) for Cofima's, or Schöni's and Wick's, benefit.
It was Schöni's testimony that Cofima was not legally obliged to compensate the Harris Investors – any compensation of them would have been voluntary, a matter of moral obligation. He said that he and Wick (and also, on many occasions, Workum) discussed refunding money to the Harris Investors. Whatever moral obligation Cofima through Schöni and Wick may have felt toward the Harris Investors, the high-minded notion of compensation (if ever truly contemplated) was clearly abandoned, as none was ever paid.
Schöni's account of the Core Trading Accounts' origins was convoluted, strikingly vague and, we conclude, implausible.
In evidence, attached as an exhibit to an affidavit of Schöni dated 29 September 2005, were audited financial statements for Cofima's financial years ended 31 December 1998, 1999, 2000 and 2001, each accompanied by a one-page list of other securities apparently owned by Cofima at the respective year-end. Included in this list for each of the four years were the names of each of the Core Offshore Companies, the shares of each reportedly owned 100% by Cofima and with a value of zero recorded for each. This was surprising in several respects; for example, Lexington was not created until 2000 and,. in 1999, Strategic and Cheshire had aggregate assets of some $750 000. Schöni explained, with respect to Lexington, that the Cofima bookkeeper, having been instructed by Wick – apparently in 2001 – to include Strategic and Lexington, "obviously made a mistake and was of the opinion that she had to correct that backwards to the time where Cheshire came in". Schöni did not regard this as tampering with already-audited financial statements, characterizing these lists as merely "a recalculation which helps to prepare the financial statements".
In July 2001 Hennig had asked Schöni to send him a copy of Cofima's 2000 audited annual financial statements to assist him in answering Staff questions. The page
that recorded 100% ownership of the Core Offshore Companies was not included with the audited financial statements sent to Hennig and then on to Staff.

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Schöni explained that the Core Offshore Companies were not identified in Cofima's financial statements proper – specifically, that the page on which the Core Offshore Companies appeared as 100%-owned assets of Cofima was "not a page which is included in the financial statement[s]" but was simply kept in the bookkeeper's files in Cofima's office – because the information on that page was merely supportive of the financial statements in the same fashion, he analogized, as would be a restaurant bill. Schöni told us that he believed Cofima's auditor would have reviewed that page but, because the Core Offshore Companies had (or were shown as having) zero value (it was unclear why companies with substantial value had no value), the auditor would not have verified Cofima's ownership.
We believe that the lists recording Cofima's 100% ownership of the Core Offshore Companies postdated the actual financial statements and were thus not the subject of the accompanying audit opinions. Further, they contained obvious valuation errors concerning the Core Offshore Companies. Instead of establishing or supporting Cofima's, or Schöni's and Wick's, claimed beneficial ownership of the Core Offshore Companies, the lists had a contrary effect. We find that they, too, were contrived with a view to deceive.
The opacity of the evidence as to actual ownership of the Core Offshore Companies deepened with Schöni's testimony.
Whereas Cofima recorded in 2001 the Core Offshore Companies as 100% owned by it, Schöni and Wick wrote the Schöni/Wick Letters to Staff in mid-2002 attesting to their respective personal sole beneficial ownership of two of the Core Offshore Companies – Strategic and Cheshire. The Schöni/Wick Letters made no mention of their or Cofima's purported ownership of Lexington – presumably because it was expected that Bucher would claim its beneficial ownership (which he refused to do). At the Hearing we heard a somewhat different explanation of ownership.
According to Schöni, until June 2002 the Core Offshore Companies were "in the books of Cofima", but beneficially owned by him and Wick, as the shareholders of Cofima. Schöni told us that the Core Offshore Companies were first specifically attributed to him and Wick because Olnick, in June 2002:

. . . ask[ed] us to put an individual name behind the beneficial owners. And . . . as well,
. . . Cofima was owned entirely by [Wick] and former [sic], as well, by me, . . . so it doesn't make a big difference. In fact, it makes no difference.
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Schöni told us initially that he thought he was the beneficial owner of Strategic and that Wick, as "the major shareholder of Cofima", was the beneficial owner of Cheshire and Lexington as of June 2002. Later, after Schöni's memory had been refreshed by counsel for Workum, he claimed to recollect that his company was Cheshire and that Wick's companies were Strategic and Lexington. We found his confused and varying testimony not credible. In particular we did not believe that a person who truly owned a company, with such substantial assets and cash flows, would forget that or confuse it with someone else's company. Nor were we persuaded by his even vaguer suggestion that the three companies were collectively his and Wick's.
Adding to the tangled tale was Schöni's sale in 2000 or 2001 of his 50% ownership interest in Cofima to Wick, Wick thereby becoming the sole owner of Cofima. When asked why he believed in June 2002 that he was still the beneficial owner of Cheshire, Schöni explained:

[T]his doesn't make this big difference. Legally Cofima is a separate entity, but being the shareholder of Cofima, basically [Wick] could do what he decided to do.

. . .

Made sense that I would be the beneficial owner of Cheshire, as we decided that this company would be used to compensate the Harris [Investors].

. . .

. . . I wanted to make sure that this is going to happen.
We did not believe Schöni's evidence as to his, Wick's or Cofima's purported ownership of the Core Offshore Companies. To the contrary, Schöni's evidence suggested that his, Wick's and Cofima's connection to the Core Offshore Companies was, at most, peripheral and his efforts at persuading Staff and the panel otherwise misleading.
When shown a March 2000 term sheet from the May 2000 Private Placement, which specified that half of a "6.0% investment banking fee" was to be paid to Cheshire, Schöni testified that he did not have a particular memory of that transaction because he was not "involved in any negotiations with [Commcept] as to what fee Cheshire would receive for [Commcept's] efforts". However, from Schöni's testimony we understood that Cofima expected a commission on Commcept's participation in some PPI private placements. It seems that the commission generally would be triggered if the ultimate client for the PPI securities were a Cofima client. Apparently none of Cofima, Schöni or Wick had direct involvement with any private placement of PPI securities through Commcept, and they relied on the Individual Respondents to pay any commissions to which Cofima would be entitled.
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It seems from Schöni's testimony that Cofima invoiced for 8% (not the full 10%) of the commission payable to it because Schöni's expectation was that PPI (through the Individual Respondents) would pay the other 2% commission to one or other of the Core Offshore Companies – no separate invoice for the 2% was apparently provided to PPI by Cofima or any of the Core Offshore Companies. He also confirmed that neither he nor Cofima (or Wick) was provided with any formal accounting of the activity in the Core Trading Accounts.
Schöni ascribed his lack of knowledge about transactions involving the Core Trading Accounts to Wick having been in charge of administrative matters for Cofima, and to "a relationship of trust" with PPI and its principals, in particular Workum – "we didn't go and check on each transaction". It is exceedingly difficult to reconcile Schöni's and Wick's disengagement from and their lack of knowledge of transactions carried out in the Core Trading Accounts with their claims of beneficial ownership.
Although Schöni appeared before us in the Hearing, he not did not claim to do so in any capacity on behalf of any of the Core Offshore Companies – companies named as Respondents in this proceeding but which, as noted, remained unrepresented and took no part in the Hearing and no position on any of the allegations against them. Were Schöni indeed the beneficial owner of one or more of the Core Offshore Companies, his not having made use of this opportunity to represent that company or companies in the Hearing would have been puzzling.
Haywood apparently did not consider Cofima, Schöni or Wick the owners of the Core Trading Accounts. When Schöni sought in the summer of 2002 to have the contents of the Core Trading Accounts transferred to Switzerland, Haywood declined –apparently because Cofima, Schöni and Wick were not named in Haywood's records as having any authority over the accounts.
We also note that, after the Core Trading Accounts (which apparently then held and continue to hold substantial assets) were frozen by a Commission order relating to its investigation of the Respondents (not directed at Cofima, Schöni or Wick), Cofima, Schöni and Wick apparently took little or no action to assert their ownership of the Core Trading Accounts as might have been expected of true owners.
In our view, these facts further cast doubt on the ownership claims to the Core Offshore Companies and the Core Trading Accounts by Cofima, Schöni and Wick.
The only evidence of Cofima's, Schöni's or Wick's ownership of the Core Offshore Companies and the Core Trading Accounts was their assertions to that effect. Those were not persuasive. We found that such documentary evidence as there was (the
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Schöni/Wick Letters, and the asset lists added after the fact to Cofima's financial statements) were contrived to deceive. Cofima, Schöni and Wick did not act as owners of the Core Trading Accounts. They did not have the knowledge we would expect of owners. There was no evidence that any of them instructed payments to and from the Core Trading Accounts.
We believe that the Individual Respondents enlisted Schöni and Wick (they were unsuccessful with Bucher) to assist in concealing from Staff the Individual Respondents' relationship with the Core Trading Accounts.
The evidence as a whole was insufficient for us to determine who actually, beneficially or otherwise, owned the Core Offshore Companies and the Core Trading Accounts. As discussed below, such a determination is not necessary to reach a conclusion on the Undisclosed Financial Benefits Allegation.
Having noted above evidence of Schöni's and Wick's disengagement from and lack of knowledge of transactions in the Core Trading Accounts, we now turn to evidence that others were more engaged and knowledgeable.
As we understood Schöni's testimony, Schöni and Wick had control over and management of the trading to be conducted in the Core Trading Accounts, which they delegated to Workum. In that regard, they instructed Workum to buy and sell only securities of PPI or PPI-related companies in the Core Trading Accounts. It was within those parameters that Workum was to make investment decisions with the money in those accounts. Schöni also said that Workum had the authority to deposit and withdraw money to and from the Core Trading Accounts, but Workum kept Schöni and Wick informed and Workum "knew what the intention was".
The documentary evidence clearly establishes that the Individual Respondents instructed Olnick on transfers of securities to and from the Core Trading Accounts. Schöni understood that Workum had enlisted Olnick to carry out Workum's trading instructions in the Core Trading Accounts. Schöni told us that, although he and Wick dealt directly with Olnick from time to time, it was Workum who mostly dealt directly with Olnick and instructed trading in the Core Trading Accounts. Schöni indicated that he and Wick had discussions with Olnick about Workum's authority over the Core Trading Accounts. Schöni did not suggest that Hennig had been given the same trading instructions as Workum or that Schöni and Wick had authorized Olnick to accept instructions from Hennig with respect to transactions conducted in the Core Trading Accounts. From these discussions with Workum, Schöni understood that Hennig was aware of what was happening with the Core Offshore Companies.
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Despite Schöni's contention that he and Wick had instructed Workum to buy and sell only securities of PPI or PPI-related companies in the Core Trading Accounts, securities of other issuers were also bought and sold. We infer that the permitted category referred to PPI, PPI subsidiaries and possibly other companies over which PPI exercised control or managerial influence.
From late 1997, the Strategic Trading Account traded in securities including those of Norex Exploration Services Inc., Plexus Energy Ltd., Prism Petroleum Ltd. ("Prism"), Reliance Energy Inc. and Triangulum Corp. The Cheshire Trading Account traded in securities including those of Phoenix Capital Inc., Prism, Real Resources Inc. and Ventra. The Lexington Trading Account traded in securities including those of Golden Phoenix MNLS Inc., United Industrial SVCS and Ventra. PPI financial statements in evidence and the 2000 AIF did not record all of these traded companies as PPI subsidiaries or subject to PPI control or managerial influence (as mentioned, PPI launched a take-over bid for Ventra, but the bid was apparently rebuffed).
Thus, there was trading in the Core Trading Accounts that was outside the parameters purportedly given to Workum by Schöni and Wick. This is inconsistent with the claimed Cofima, Schöni or Wick ownership, but consistent with the Individual Respondents' having control and direction over the Core Trading Accounts.
Schöni said that neither he nor Cofima (nor, apparently, Wick) received the monthly brokerage statements for the Core Trading Accounts from Olnick; they were apparently sent to Workum, who Schöni said provided periodic verbal updates to Schöni and Wick when Workum was in Switzerland.
Mackenzie testified that he saw the monthly brokerage statements for the Strategic and Cheshire Trading Accounts in PPI's office. Mackenzie related to us an incident in the fall of 1998 when Hennig gave him about a year's worth of statements for the Strategic and Cheshire Trading Accounts and asked him to put the data into a spreadsheet to check for errors and ensure they balanced. Mackenzie testified that Hennig appeared anxious for him to complete this task because:

I understood that there really shouldn't be any connection between [PPI] and those accounts.

. . .

[Hennig] had told me that he would have preferred to have them at home, but it was a year's worth of statements, and they needed to be -- needed to be balanced, and just to get them done as soon as we can and get them out of the office.
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We accept Mackenzie's evidence on this point. A spreadsheet relating to the Cheshire Trading Account for the period November 1997 to July 1999 was included in Hennig's Computer Data. Mackenzie said that he had put together this spreadsheet in the fall of 1998 (Hennig or someone on his behalf must have augmented it for the period after that).
Other documentation in evidence also pointed to Hennig's or Workum's receipt of the monthly brokerage statements for the Core Trading Accounts. The SCA 2000 Documents, which were prepared by someone at PPI during the Individual Respondents' tenure at PPI, could not have been prepared without using the monthly brokerage statements for the Core Trading Accounts.
This evidence demonstrates that the Individual Respondents, not Cofima, Schöni and Wick, acted in a manner indicative of control and direction over the Core Trading Accounts.
There were many transactions involving the Individual Respondents and the Core Trading Accounts that were effected without the involvement, or even the knowledge, of Cofima, Schöni or Wick. Schöni could not explain the transactions or their lack of involvement or knowledge. Two of the accounts had been opened, and at least one of them was being used by the Individual Respondents, before Cofima's business relationship with PPI began in late 1997. We discuss some of these transactions.
1. Strategic
  1996 and 1997 Trades
As noted, on 25 February 1996 Hennig sent written authorization to Olnick to transfer the contents of the Strategic Trading Account to Wolverton. In that letter Hennig thanked Olnick for his handling of this account and asked him to call Hennig if Olnick had any questions regarding this transfer. The Strategic Trading Account records confirmed that Olnick followed Hennig's transfer instruction. On 7 May 1996 100 000 PPI Shares were deposited into the Strategic Trading Account. The same day, Hennig, as "Agent" for Strategic, authorized Olnick to transfer 6000 PPI Shares from the Strategic Trading Account to another account. The Strategic Trading Account records showed that 6000 PPI Shares were transferred on 7 May 1996. On 6 October 1997 Hennig, as "Agent" for Strategic, sent Olnick written authorization to transfer 10 000 PPI Shares from the Strategic Trading Account to another account. The Strategic Trading Account records showed that 10 000 PPI Shares were transferred on 6 October 1997.
On 17 November 1997 Workum, in a handwritten facsimile on Commcept letterhead and signed by him, instructed Olnick to transfer "2 x 100,000 share[s] PPI Certs registered in S.I.F. with P.A. by courier to Commcept". The facsimile was copied
to Hennig. The Strategic Trading Account records showed that 100 000 PPI Shares were transferred on 17 November 1997.

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Some or all of these four securities transactions occurred before Cofima, Schöni and Wick began their business relationship with PPI and Workum, and there was no indication that Cofima, Schöni or Wick was aware of these transactions.

1996 Loan and 1997 Proposal
A document found in Hudson's files titled "Servicing Agreement and Collection Instructions" dated 17 August 1996 in connection with a loan made by Strategic included the handwritten notation "Peter J. Workum, President of Strategic Inv. Fund". The address given for Strategic in accompanying documentation was the EnerGCorp address in Arizona. Among the material McCowan found in PPI's and EnerGCorp's files after Workum's departure in 2002 was a document dated 5 June 1997 on Strategic letterhead, showing a Turks and Caicos Islands address but a "702" (Nevada USA) telephone area code. This seemed to be a proposal for some sort of consulting arrangement between Workum and Commcept. Interestingly, the closing salutation (typewritten but without evidence of a signature) read: "Regards; Peter J. Workum". This evidence establishes a connection between Workum and Strategic in Strategic's early years – 1996 and 1997 – apparently without the involvement or knowledge of Cofima, Schöni or Wick.

1998 Share Transfer
On 2 March 1998 Welch, as "Director" of Strategic, purportedly sent a written request that Olnick transfer 10 000 PPI Shares to Workum's wife. The Strategic Trading Account records showed that 10 000 PPI Shares were transferred on 4 March 1998. There was no evidence that Cofima, Schöni or Wick were involved with or knew of the transfer of these securities from the Strategic Trading Account.

1999 Commission Split
A handwritten document titled "Money Raised Summary", dated "Jan 5/99" and bearing the initials "TH" (apparently written by Hennig), indicated that, from proceeds of $607 500 raised from a sale of PPI Shares to Bucher's clients, a commission of $67 500 was split – "PJW/SIF" (Strategic) receiving $33 750 and Bucher receiving
$33 750. This was evidence of a connection between Strategic and Workum, apparently without the involvement or knowledge of Cofima, Schöni or Wick.

1999 AVLS Loan
Further evidence of a connection between Strategic and Workum, also apparently without the involvement or knowledge of Cofima, Schöni or Wick, was found in a loan transaction between Strategic and Automatic Vehicle Location Systems Ltd. ("AVLS"). Strategic agreed to lend $50 000 to AVLS, evidenced by a demand promissory note made in favour of Strategic. A facsimile from AVLS dated 25 February
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1999 to its solicitors referred to "Promissory Note - Peter Workum (Strategic Investment Fund)". That same date, the principal of AVLS, Tom Lockhart ("Lockhart"), sent a facsimile to the attention of Olnick providing payment instructions and enclosing the signed promissory note in favour of Strategic. Again on that date, Olnick sent a facsimile to Lockhart advising him that, once he had signed and returned the documentation,
$50 000 would be forwarded. The Strategic Trading Account records showed a payment of $50 000 on 2 March 1999 to Lockhart's bank, which payment was also confirmed by AVLS on that date. A follow-up facsimile dated 1 March 1999 from Lockhart to AVLS's solicitors (referring to "My fax of 25 February 1999, Promissory Note to Strategic Investment Fund (Peter Workum)") advised:

Peter Workum has confirmed that he wishes to convert the entire amount of this note (C$ 50,000.00) into Class A Common Shares at $ 0.05 per share as per the current offering.
In the same facsimile, Lockhart requested the lawyer to "effect the conversion as soon as possible". On 2 March 1999 Lockhart sent a facsimile to Olnick with the reference "Copies of Correspondence" and advised: "Here are copies of the 2 faxes I've sent to [our solicitors]. Earlier errors have been corrected." The revised versions in evidence deleted the references to Workum or replaced them by references to Strategic.

Azterra Transaction
In 2000, when PPI and Azterra were negotiating the Azterra Transaction, Azterra's lawyer, Taylor, queried the "commission" to be paid by PPI to Strategic. Taylor testified that he sought clarification on the matter because he was concerned that one of Azterra's directors might participate in the commission, a matter that in his opinion would affect the disclosure to and approval sought from Azterra shareholders. He also was uncertain as to how the commission would be calculated based on the language proposed. He testified that he was reassured on the former account, and indeed told (although apparently never directly by Workum who avoided answering Taylor's question) that it would be Workum, who would benefit from the commission. Taylor was adamant that the topic was discussed in Workum's presence.
A near-to-final draft of the Azterra Letter Agreement between PPI and Azterra was prepared and circulated but instructions from Workum regarding the commission issue were still awaited.
When finalized, Azterra Letter Agreement stated under the heading "Expenses":

. . . for investment banking advisory services provided to PPI, PPI will be paying [Strategic] a fee equal to 7.0% of the gross value of the shares of [Willow Creek and Creative Classics]. The Parties further acknowledge that insiders of [Azterra] or its subsidiaries have an interest in [Strategic].
The last line of this clause contained a typographical error: read in context, it was clearly meant to say that Azterra insiders had "no interest" in Strategic, resolving Taylor's concern.

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Taylor acknowledged in testimony that he did not know what "7% of the gross value of the shares" of the companies being sold amounted to, and that he, as a lawyer, would have "prefer[red] to have some certainty" on the point, but he explained that since his clients were neither paying nor receiving the commission it was not really their issue. In our opinion, it is somewhat surprising that PPI, also a public company responsible to its shareholders, did not insist on more certainty about an obligation it was assuming.
Work on the Azterra Transaction continued long after the Azterra Letter Agreement was signed. Taylor made notes of a call he had with a PPI lawyer in October 2000 to deal with an information booklet being drafted for Azterra shareholders. One issue discussed was recorded in Taylor's notes as follows:

p8 Workum corp. to get $?
- Strategic Inv'ts
This comment related to the following paragraph from the draft information booklet:
- Ltd. [bullet in original], a corporation controlled by [Workum], president of [PPI] and a nominee to the board of directors of Azterra if the Transactions and Consolidation is [sic] approved at the [contemplated shareholders'] Meeting, earned a $ [bullet in original] (U.S.) commission if the Transactions close. No present officers or directors of Azterra, and no person or corporation known to Azterra, will earn a fee or commission upon the closing of the Transactions other than that of  [bullet in original]. [[Fitzsimonds], please confirm the accuracy of the information above] [Emphasis in original.]
According to Taylor, the paragraph remained substantially the same as drafting progressed, although the name of the entity receiving the commission "changed over time", from Strategic to Lexington and back to Strategic (while Lexington may not have been mentioned in any drafts, it was considered as a commission recipient). For example, another set of Taylor's notes, from November 2000, summarized points made in discussion with his client's representative Fitzsimonds; the elusive terms of the commission apparently came up again, Taylor noting:

- paid/to Lexington Capital - get info from [PPI's Mackenzie]
- Peter's co $ [illegible] 10% of [purchase] price for both
Taylor said that this information came to him from Fitzsimonds, who directed him to PPI's Mackenzie for further information. Taylor said that he was told by
Fitzsimonds that Lexington was Workum's company. Taylor recalled that the 10% commission was to be based on the purchase price for both Willow Creek and Creative Classics.

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The last draft of the information booklet in evidence included the following:

Strategic Investments Fund, an arm's length corporation to Azterra and to [PPI] will earn a $507,500 (Cdn.) (7% of the gross deemed value of [Willow Creek] and Creative Classics) commission if the Transactions close. No present officers or directors of Azterra, and no person or corporation known to Azterra, will earn a fee or commission upon the closing of the Transactions.
Taylor said that, while the information booklet never was finalized, he believed that the last draft of it named the entity to receive a commission as Strategic. In short, Taylor's evidence was that Workum was to receive a commission on the completion of the Azterra Transaction, through one of what he understood to be Workum's companies –Strategic or Lexington – or otherwise.
We found Taylor's testimony and the notes and draft documents in evidence persuasive as to the genuine state of knowledge and belief of the parties to the Azterra Transaction as it took shape. We are in no doubt that Taylor sought to describe truthfully, for Azterra shareholders, the facts about the commission to be paid on the Azterra Transaction, and used the information he was given by Fitzsimonds – who was negotiating with PPI and Workum – and by PPI's representatives and lawyers. As Taylor explained: "I felt I made reasonable inquiries, and I was told on a number of occasions that the information was accurate". We also believe that Taylor's primary concern was that there be no undisclosed commission flowing to anyone on the Azterra side; whether or how PPI insiders might benefit was not a problem from his perspective.
As to what PPI and any of its insiders' involvement might have been, we accept that Taylor drafted the documents according to the information he was given by PPI's representatives and lawyers, directly or through Fitzsimonds. Taylor did not have a clear recollection of everything that was said on this topic. This was not surprising given the lapse of time and the fact that this was, after all, a somewhat peripheral concern to him (once he satisfied himself that his own clients were not taking a commission). We did find reliable Taylor's notes taken at the time. In short, Taylor's evidence on this point was, in our view, neutral, factual and highly credible.
Counsel for Workum drew Taylor's attention to an intermediate draft of the information booklet dated January 2001 in which the proposed commission (recipient still "bulleted") was crossed out in pen, leaving merely the comment that present Azterra officers and directors would not receive a commission. Counsel for Workum then suggested that as of January 2001 Taylor understood that neither Workum nor a company controlled by Workum would be receiving a commission. Taylor responded to the
contrary, that he still believed that Workum would be receiving a commission but he, Taylor, had been told to make the deletion (a deletion which would not, presumably, constitute an untruth from his perspective, given that the important issue for disclosure to Azterra shareholders was that their officers and directors were not taking a commission).

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We do note that the last draft of the information booklet in evidence retained the seemingly carefully-worded statement on this point that none of Azterra's "present officers or directors" would earn the commission – wording that made no commitment as to the proposed future officer and director, Workum. We draw no particular conclusion from this wording. We rely instead on Taylor's recollections of what he was told when the commission issue was of importance to him. He testified that he was given to understand that Workum would take the commission, through Strategic, Lexington or otherwise.
In our view, the evidence is clear that the key parties on both sides of the Azterra Transaction understood, and agreed, that Workum was to take a commission on the Azterra Transaction and likely would do so through a company he controlled – either Strategic or Lexington.
Taylor also told us that he had not personally dealt with anyone who represented that they were from Strategic. Taylor further testified that he had no direct dealings with Cofima in this transaction. Fitzsimonds, a director and officer of Azterra, testified that he and other Azterra directors negotiated with Workum on the Azterra Transaction and that he did not know who Strategic was at the time or why it was receiving a 7% commission, apart from what was said in the Azterra Letter Agreement. He told us that he did not meet with representatives of Strategic in this transaction and that no one other than PPI and Azterra, in his presence, had been involved in negotiating the Azterra Transaction. Fitzsimonds also recalled that Lexington might have been "initially substituted for" Strategic, but he did not know who Lexington was.
Schöni said that Cofima initially had nothing to do with the Azterra Transaction. Soon after, it appears that the topic of the Azterra Guarantee came up. For providing that guarantee, Cofima was to – and apparently did – receive a fee of $173 000. Schöni said that Strategic had no business and no employees. It appears at the time to have been a holding company, not a provider of investment banking advisory services.
Further evidence suggesting that Workum (through Strategic, Lexington or otherwise) was to be paid a commission on the Azterra Transaction was recorded in the Workum/Hennig Fee Split Accounting, one of the SCA 2000 Documents. One entry in this document recorded a 75%/25% commission split in favour of Workum, in the following amounts: $380 438 under "PJW" and $126 813 under "TH", with the notation "TAC [Azterra] fee". The amounts recorded totalled $507 250, which closely
approximated the commission that would have been owed for the Azterra Transaction, had it closed.

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The foregoing makes clear that any involvement by Strategic or Lexington in the Azterra Transaction was at the instance of Workum and apparently without the involvement or knowledge of Cofima, Schöni or Wick (until the discussions about the Azterra Guarantee).

2001 Share Transfer
In another transaction on 10 January 2001 Lebeuf sent Olnick a letter enclosing a share certificate for 4000 PPI Shares registered in the name of Strategic, explaining that it was a replacement share certificate for one that had been lost. On 14 February 2001 a letter purportedly from Williams, as "President" of Strategic, instructed Olnick to transfer 4000 PPI Shares into the name of an employee in the EnerGCorp Arizona office and send the share certificate to the employee in Arizona. The Strategic Trading Account records showed that 4000 PPI Shares were received on 17 January 2001 and transferred on 23 February 2001. Yet again, Cofima, Schöni and Wick were uninvolved and apparently unaware of these activities that, we note, did not involve the payment of a commission for a transaction in which Cofima had participated.
1. Cheshire
As discussed above, PPI issued 200 000 Newmex Shares to Cheshire as a commission purportedly earned from the completion of the sale of Newmex Shares to LynChris, even though the evidence clearly established that Hennig had found LynChris as the buyer. On 6 July 1999 Hennig instructed Olnick to provide a share certificate for 40 000 PPI Shares "from Cheshire" in Faithfull's name. This was the commission or inducement contemplated as part of the Newmex/LynChris Transaction. The Cheshire Trading Account records showed a transfer of the 40 000 PPI Shares, which Faithfull received. Schöni testified that he (and apparently Cofima and Wick) had no involvement with and knew nothing about the Newmex/LynChris Transaction.
In our view one of the more telling facts about this transaction was that Hennig was apparently able to direct how securities held by the Cheshire Trading Account were to be handled, including directing that they be sent to third parties, consistent with his (or Workum's) exercising control and direction over the account.
1. Lexington
  Hamilton Settlement Agreement
PPI entered into a settlement agreement dated 10 June 2000 (the "Hamilton Settlement Agreement") with Hamilton (PPI's former vice-president, operations) to resolve a dispute involving stock options. The Hamilton Settlement Agreement required PPI to issue to Hamilton 155 000 PPI Shares (the "Hamilton PPI Shares") at $0.10 per share for a total purchase price of $15 500. PPI agreed to make arrangements for "a third
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party" to buy back the Hamilton PPI Shares at a price of $3.35 per share for total proceeds of $519 250. On 12 June 2000 PPI's lawyer wrote to Hamilton's lawyer confirming these arrangements (stating that "a private individual" would purchase the Hamilton PPI Shares). Hamilton's lawyer responded, affirming that "[PPI] and/or Peter Workum agrees" to purchase the Hamilton PPI Shares. On 29 June 2000 PPI's lawyer wrote to Workum informing him: "The [TSE] has advised that they will require your name and confirmation that no financial assistance is being provided, either directly or indirectly, to you by [PPI] in connection with this purchase".
On 29 June 2000 PPI issued a $520 000 cheque (signed by Workum and another PPI employee) to Hennig's professional corporation – Theodor Hennig Professional Corp. ("THPC") – with the notation "loan". On 30 June 2000 THPC purchased a bank draft payable to PPI's law firm for $519 250 in accordance with the Hamilton Settlement Agreement. On 9 August 2000 Olnick directed (we conclude on either Workum's or Hennig's instructions) that $520 000 be paid from the Mandolin Offshore Bank Account to the Calgary bank account of THPC. Hennig then used this money to repay the "loan" to PPI. A letter to Olnick signed by Hennig and dated 18 July 2000 confirmed that the "arms-length [sic] purchaser of the [Hamilton PPI Shares] registered to Mr. Hamilton was [Lexington]". In a memorandum to file dated 6 November 2002, Lebeuf noted that she had been advised by Olnick that the Hamilton PPI Shares sent to him by PPI on 10 July 2000 (after being repurchased from Hamilton) were deposited into the Lexington Trading Account on 19 July 2000. The Lexington Trading Account records showed a deposit of 155 000 PPI Shares on that date.
Thus, money from the Mandolin Offshore Bank Account (funded by commissions paid on PPI private placements), not the Lexington Trading Account, was used by the Individual Respondents to pay for the Hamilton PPI Shares that were then deposited into the Lexington Trading Account, ostensibly because it was the "arms-length [sic] purchaser".
We viewed this transaction as evidence of the Individual Respondents' involvement with Lexington without the involvement or knowledge of Cofima, Schöni or Wick (as well as evidence of the Individual Respondents' control and direction over the Mandolin Offshore Bank Account ). The Hamilton Settlement Agreement had nothing to do with Cofima, Schöni or Wick. There was no evidence that Cofima, Schöni or Wick knew that Lexington, as the purchaser, had received the Hamilton PPI Shares. Schöni said that he had never heard of Mandolin. We conclude that, as documented in correspondence between lawyers involved in the Hamilton Settlement Agreement, it was Workum or PPI who purchased the Hamilton PPI Shares through Lexington.

Sulphur Transaction
In October 2000 PPI proposed to buy the majority of the shares of Sulphur Corporation of Canada Ltd. ("Sulphur") and to advance it money to fund construction of
a sulphur terminal in BC. Lexington was to join PPI in this endeavour. According to Sulphur's then-president, Rod MacKenzie:

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[T]he original proposal that [Workum] advanced to me was 80 percent for [PPI] and 5 percent for a company that he controlled and identified as [Lexington]. I told him that I thought that was too aggressive a percentage after discussing matters with other minority shareholders, and ultimately, we agreed that [PPI] would hold 70 percent and that Lexington would take 5 percent.
This proposal, outlined in a term sheet dated 1 October 2000, named as offerors PPI and Lexington (it defined the latter as "Lex") and set out "equity purchaser: PPI as to 70.0% and Lex as to 5.0%". The offer was signed by Workum as president of PPI and signed and accepted by Rod MacKenzie.
As the transaction progressed, lengthier and more formal agreements were executed, one between PPI and Sulphur, another between Sulphur and Lexington. Copies in evidence showed Hennig having signed for PPI and Gabb (whom we earlier found to have been a nominal director and officer), as president, for Lexington. In November 2000 PPI paid for Lexington's share of the purchase price. Documents from Hudson's working paper files in connection with its audit of PPI's 2001 Financial Statements recorded a $66 000 account receivable by Lexington for "funds advanced to Lexington to purchase Sulphur shares". There was no mention in any of these documents of interest owing on this account receivable.
Rod MacKenzie testified in the Hearing that he dealt in the Sulphur negotiations exclusively with Workum, although he met Hennig and other PPI representatives after some six negotiating sessions with Workum. Rod MacKenzie said that he understood Lexington to have been controlled by Workum. He did not know who Gabb was and testified that the agreement between Sulphur and Lexington did not bear her signature at the time he signed it in a lawyer's office. When asked who was representing Lexington during the negotiations with Workum, Rod MacKenzie said:

. . . he [Workum] told me that he was not remunerated as the president of [PPI]; in other words, not drawing a salary, but that he was authorized by the board to, as he put it, carve a piece of the deal for himself.

He identified the company as being Lexington, or as he called it, Lex . . .
Rod MacKenzie said that he asked Workum to obtain written confirmation of this from the PPI board. Although Rod MacKenzie stated that Workum agreed to provide such written confirmation, none was ever given.
We also heard testimony from a Calgary realtor who was responsible for introducing the Sulphur opportunity to Workum. He testified that he was present at a
meeting during which Workum told him and Rod MacKenzie that Lexington was a financial adviser "that would take a 5-percent piece of the [Sulphur] deal". Workum also told them that PPI was aware of Workum's involvement with Lexington.

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Relations between PPI and Sulphur, or at least between Workum on the one hand and Rod MacKenzie on the other, deteriorated. Project costs climbed, Sulphur was not keeping bill payments current, and PPI was reluctant, or slow, or both, to provide the necessary money. Litigation ensued; the sulphur terminal project was halted and Rod Mackenzie left Sulphur in 2002 after some 12 years as its president.
It was clear from Rod MacKenzie's testimony that he regretted how things ended, and it seems likely that he had some animus toward Workum. That said, we found Rod MacKenzie's factual testimony on the matters relevant to this proceeding to be credible. His recollections concerning Lexington, in particular, went to facts –recollected conversations and representations – and we believed them. His descriptions of Workum's behaviour in matters that Rod MacKenzie suggested helped precipitate the failure of the sulphur terminal project were, in our view, more in the nature of opinions, more susceptible of bias and, in any event, irrelevant, so we disregarded them.
Once again, the evidence was clear that Lexington's involvement in this transaction was at the direction of Workum and had nothing to do with Lexington's purported beneficial owners, Cofima or Schöni and Wick. As Schöni told us, although he had heard of Sulphur, this was not a transaction that involved him or Cofima (or apparently Wick). We viewed this transaction as evidence that Workum had control and direction over Lexington, which received Sulphur common shares paid for by PPI.

Azterra Transaction
As earlier discussed, Lexington was also considered a possible recipient of the commission payable in connection with the Azterra Transaction. As noted above, any involvement by Lexington in the Azterra Transaction was at the instance of Workum and without the involvement or knowledge of Cofima, Schöni or Wick.
1. Summary
The evidence is clear that the Core Offshore Companies and the Core Trading Accounts engaged in transactions that appeared to have had nothing to do with Cofima, Schöni or Wick and that, in some instances, predated their involvement with PPI and the Individual Respondents.
Equally clear was the direct, active involvement of the Individual Respondents in initiating and directing many financial and securities trading transactions involving the Core Offshore Companies and the Core Trading Accounts.
We find from this evidence that the Individual Respondents' use of the Core Offshore Companies and the Core Trading Accounts demonstrated the Individual Respondents' exercise of control and direction over them.

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There was evidence of the understanding of third parties that the Individual Respondents profited from PPI commission payments, and that the Individual Respondents' were connected to Cheshire and Lexington. This evidence was impressionistic – some of it in the nature of common office gossip – and was therefore not determinative. It was however, illuminating and corroborative of other more cogent evidence.
We discussed the testimony of Rod MacKenzie, former president of Sulphur, and his understanding that Workum was to "carve a piece of" the contemplated transaction between PPI and Sulphur through Lexington.
Another individual came to a similar understanding in connection with the Azterra Transaction. Hunter, a former Azterra director, had met Workum on several occasions and also attended certain PPI directors' meetings in 2000 and 2001. Hunter testified as to his understanding of the relationship between Workum and Lexington (which at one point was possibly to take a commission on the Azterra Transaction), referring to the October 2000 PPI directors' meeting ("PPI's October 2000 Meeting") at which he was present in person:

. . . I don't recall exactly what was said, but the gist of it was that it -- as I recall, was that [Lexington] was an offshore company, and Peter Workum let us believe that that's how he got paid, because in previous statements, he, he seemed to be proud of the fact that he took no salary, no wages from PPI, but he was -- he certainly inferred [sic] through what he said and his body language at that . . . meeting that that was how he got paid, was through his commissions. And there always seemed to be a commission on every deal that was done by PPI.
The sparse minutes of PPI's October 2000 Meeting did not record information confirming this testimony. However, this was the meeting at which PPI's board of directors approved the company's purchase of 70% of Sulphur. We think it logical that Lexington and its 5% stake in Sulphur were discussed at the same time.
A similar question arose at a later PPI directors' meeting in which Hunter participated by telephone. According to the minutes of that meeting, in the course of a discussion about a new PPI private placement another director (who had been absent from PPI's October 2000 Meeting) asked, "Who is Lexington Capital?", to which Workum's recorded reply was, "Yes, allocate proceeds to a company, while at arm's length, one that is friendly to our efforts". Workum's recorded avoidance of the question neither confirms nor disproves the substance of Hunter's understanding – which we
believe to be genuinely held – that Workum benefited from commissions paid to Lexington.

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Counsel for Workum refreshed Hunter's memory as to another discussion on the topic of commissions during PPI's October 2000 Meeting . Hunter said that his impression from that discussion was that half of the commission was to go to Workum and half to one or more of PPI's Swiss directors. Hunter also stated that, in a conversation to which Hunter thought other directors were privy, Workum said something to the effect that "that was how he [Workum] got paid". In a subsequent discussion between Hunter and his fellow Azterra director Peter McCombs they "realize[d] now how Peter Workum got compensated". Hunter rejected the suggestion of counsel for Workum that Workum had in fact been describing an arrangement under which Workum might "borrow" or in some other fashion "have access" to commission money.
Street, who had been a founding director of PPI along with Workum, testified that he, Street, knew nothing about Cheshire, although he was aware that it was receiving commissions. Street stated that he once asked, in relation to Cheshire, whether "the Swiss" knew who was getting the commissions:

And I was told, Yes, they did. And I said, Who -- I believe I asked at one point who was getting the commissions, and they said, Well, it's offshore companies. And I said, Well, do the Swiss know who is getting it? And I was told, Yes, they did.
Street was aware that Lexington was an offshore company, but he never knew who was behind it. He testified that he was not aware of any arrangement or understanding between Workum and Cheshire or Lexington.
Charlton, who as mentioned worked briefly at PPI, testified as to whether he had heard of Cheshire:

. . . I can't remember if it's Cheshire or Lexington. Both [Workum] and [Hennig] had, like, kind of offshore companies, and it was a pretty much ongoing joke.

. . .

[Workum] never drew a salary. [Hennig's] salary was kind of by way of a consulting agreement. It was -- it was reported around the office that how they got paid was on commissions of financings.
Asked who reported this, Charlton answered:

. . . pick someone. I mean, everyone.

. . .
[I]t was highly irregular, but it wasn't like you were hiding anything. I mean, Cheshire Capital and Lexington was [sic] known names in the firm.

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Charlton did not recall the names of Strategic, Ashland, Mandolin or IIC.
After his employment with PPI was terminated in July or August 2001, Charlton sent a letter to Workum dated 31 August 2001 expressing his concerns about PPI's disclosure and financial reporting. In that letter Charlton coyly made references to "comcept" [sic] and "Chesire" [sic] cats. He testified that these references were intentional – to let Workum know that Charlton knew what was going on at PPI was a "commission payment scheme" involving the Individual Respondents and offshore companies, one of which was Cheshire.
Charlton sent a further letter to Workum and other PPI directors dated 10 September 2001, advising of his concerns about PPI's financial statement disclosure. In the letter he stated that PPI's proposed purchase of certain oil and gas properties was "yet another example of a shell game designed to prop up the financials and cash position of [PPI] along with a method to pay commissions to [the Individual Respondents'] benefit". In that same letter, Charlton queried how Workum was being paid, commissions to Workum, the Individual Respondents' relationship to Commcept and whether the Individual Respondents had offshore holding companies and the role of those offshore companies with PPI.
As noted earlier, we assessed Charlton's credibility carefully. We concluded that his depiction of the atmosphere at PPI was credible. We believe Charlton's testimony that there was, during his brief tenure at PPI, a general belief at PPI that the Individual Respondents received commissions on PPI transactions through offshore companies called Cheshire and Lexington.
Common office knowledge, of course, is not fact, and it can be erroneous. Without more, this belief at PPI would be no more than that – a belief. There was, however, sufficient other evidence (discussed above) as to the Individual Respondents' control and direction over the Core Trading Accounts – and additional more concrete evidence (discussed below) concerning financial benefits from those accounts – that the belief was neither unsurprising nor unfounded. Much the same can be said of Rod MacKenzie's and Hunter's impressions.
The evidence taken as a whole leaves us in no doubt that the Individual Respondents, whether or not the owners of the shares of the Core Offshore Companies, had and exercised control and direction over the Core Trading Accounts.
Evidence of the Individual Respondents' involvement with the Core Trading Accounts dates from their inception, except in the case of the Strategic Trading Account, to which Workum was connected from at least 1995.

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As discussed, PPI conveyed money and securities as securities to the Core Trading Accounts. The Individual Respondents in their capacities as senior officers of PPI had responsibility for such payments and, we find from the evidence, in fact directed the payments.
In respect of many of these transactions Cofima, Schöni and Wick had no involvement and no knowledge.
The evidence in support of the assertions that Cofima, or Schöni and Wick, were the owners of the Core Offshore Companies and the Core Trading Accounts was weak and unpersuasive. We did not believe the evidence on this point.
The common denominator in the transactions – both commission payments and payment directions – was the Individual Respondents. All the credible, clear evidence pointed to the Individual Respondents as having and exercising control and direction over the Core Trading Accounts. We so find.
1. Core Offshore Companies – Payments to or for the Individual Respondents
  1. Purported Loan Arrangement
There was, as noted, no dispute that Workum received money from the Core Trading Accounts. The Individual Respondents claimed that these were loans and that the Undisclosed Financial Benefits Allegation was unfounded.
Schöni supported their position. He acknowledged that Workum received money from the Core Offshore Companies, and also characterized this money as loans. As discussed, he described the arrangement between Cofima and PPI under which a portion of PPI commissions for Cofima were paid to the Core Offshore Companies. He also told us that it was "beyond doubt" that Hennig knew about this commission-splitting arrangement and about Workum's loan arrangement with the Core Offshore Companies.
Schöni described the origins of the purported loan arrangement with Workum. He told us that in 1999 or 2000 Workum approached Schöni and Wick about the prospect of Workum borrowing up to $100 000 from the Core Offshore Companies. Schöni said that their response to Workum was "he asked us, we told him it's okay. We didn't have an original arrangement where we said, this is the time, this is the amount, that's the interest". Clearly, Workum had full and free access to the money in the Core Trading Accounts.
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We note that Schöni spoke of these initial discussions with Workum having taken place in 1999 or 2000. Schöni said that Workum would have had no authority from Cofima, Schöni or Wick to draw money on the Cheshire Trading Account, because Workum would not have known of the account. However, the evidence discussed showed that Workum was active in that and others of the Core Trading Accounts well before then.
Schöni described a rather casual arrangement, at the outset and thereafter. Schöni acknowledged that there was no written agreement – "[n]o paper" – governing the loan arrangement. He said there was no need for a written agreement with Workum because:

. . . we did lots of agreement [sic] with [Workum], and we just did it on a handshake. So we were used to not put everything on paper, and that's the way to doing business, which is still pretty common in Switzerland.
Schöni (and Wick) seemed to have little (if any) direct involvement in or oversight of the mechanics of this arrangement or, indeed, as to the funding of the various Core Offshore Companies. As discussed, Schöni told us Workum had discretion over which of the Core Trading Accounts would receive a particular PPI commission payment. As to Workum's access to that money, Schöni stated that he and Wick told Workum "that he can take loans out of any company [the Core Offshore Companies]
. . . he [Workum] had a free hand". Workum "would ask [Olnick] to transfer the money somewhere" and, as we saw, Olnick followed Workum's (or Hennig's) instructions. Schöni also did not know how much money Workum drew under the arrangement; Schöni indicated that he sought no accounting from Workum as to the latter's purported borrowings – Schöni said that he never asked for "precise figures" – but believed Workum would keep a record of the amounts he borrowed. However, Schöni estimated that Workum made use of this arrangement to the extent, at some point, of $1 million to
$1.5 million.
Schöni said that Olnick sent to him and Wick the Schöni/Wick Letters and the accompanying Schöni/Wick Purported Lines of Credit. By way of explanation for this development, Schöni said that Olnick sent the documents to "make his files up to date; to bring his clients' files up to date". Schöni indicated that – even though he said they were never signed – the Schöni/Wick Purported Lines of Credit were consistent with the basic understanding with Workum. However, in reference to the $3 million borrowing limit set out therein, Schöni said that, when the idea of the borrowing arrangement was first raised, "it was not the idea that [Workum] would end up with $3 million".
Schöni said that he did not believe that Workum had paid any interest on his loans from the Core Offshore Companies (although, we note, interest was contemplated in the Schöni/Wick Purported Lines of Credit that supposedly were consistent with their
agreed arrangement), and did not recall whether Workum had provided security for the loans.

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We accept Schöni's evidence that the Schöni/Wick Purported Lines of Credit were prepared and sent to him and Wick for signatures in June 2002. We note that this coincided in time with Workum's efforts to gather (via the Schöni/Wick and Bucher Letters) support, directed to Staff, for the claim that the Core Offshore Companies were at arm's length to PPI and that PPI, Workum and Hennig had no interest in the Core Offshore Companies. We concluded above that the evidence as to Cofima's, Schöni's and Wick's ownership of the Core Offshore Companies and the Core Trading Accounts was weak and unpersuasive, and we did not believe it. We discern no grounds for believing that Schöni or Wick (or Cofima) had any authority to enter into any valid agreement to lend money from the Core Trading Accounts, even were such an arrangement genuinely intended.
We believe that the Purported Lines of Credit were concocted, after the fact –in or shortly before June 2002 – to cast Workum's access to and personal use of money from the Core Trading Accounts in a benign light. The timing of the Purported Lines of Credit – and the conjunction with the Schöni/Wick and Bucher Letters – led us to believe that they were all prompted by the challenges from Staff to various matters involving PPI and the Individual Respondents at the time. We do not believe Schöni's weak explanation that the unsigned Schöni/Wick Purported Lines of Credit (along with that concerning Lexington) were to be used by Olnick to complete his files.
We do not believe that any of the Purported Lines of Credit reflected a genuine agreement or understanding, nor that there was in fact any sort of agreement or understanding (written or verbal) that Workum's access to money in the Core Trading Accounts was merely by way of loans. The effective date mentioned in the Wick Letter concerning Strategic predated any Cofima, Schöni or Wick business relationship with Workum and PPI; this strongly suggested that it (and the other letters) formed part of an unconvincing post facto effort to explain PPI's and the Individual Respondents' activity in the Core Trading Accounts beginning in October 1995 with the Strategic Trading Account.
The timing and circumstances lead us to the inescapable conclusion that Workum concocted the Purported Lines of Credit to mislead Staff.
Schöni made clear – and we believed – that, if and when Workum wanted money, he could look to the Core Trading Accounts and, on his own authority, direct the application of money from one or other (or all) of those accounts for his own purposes, without the need to account to others.
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If Schöni and Wick had any claim at all over the money in the Core Trading Accounts – the evidence did not convince us of this – they did not seem to exercise it. There was no convincing evidence that Workum was obliged, or expected, to pay interest or repay the amounts drawn by him (or at his instance) from the accounts. There was no evidence that he ever paid interest or repaid any of such amounts. Apart from an unsupported suggestion by Schöni that some such claim was the subject of separate litigation, there was no indication that he was ever asked to do so.
For the reasons given, we do not believe that payments from the Core Trading Accounts for Workum's benefit were merely loans. We find that they were not.
We now review, in some detail, examples of the use of money in the Core Trading Accounts. Some of the payments made from the Core Trading Accounts discussed below were made before Cofima's involvement with PPI and before PPI paid the commissions that were put in issue by the Undisclosed Financial Benefits Allegation. We considered these payments further evidence that the Individual Respondents had and exercised control and direction over the Core Trading Accounts. We did not, however, consider those payments to be part of the financial benefit received by the Individual Respondents from commissions paid by PPI to the Core Trading Accounts as alleged by Staff.
1. Comment on Certain Evidence
As mentioned, evidence concerning payments from the Core Trading Accounts came from several sources. Among these were monthly account statements for the Core Trading Accounts prepared by the Brokerage Firm; transaction reconciliations prepared by Olnick for the Core Trading Accounts ("Olnick's Strategic Accounting", "Olnick's Cheshire Accounting" and "Olnick's Lexington Accounting", respectively, or together "Olnick's Accounting"); and invoices, directions to pay and other communications requesting payment (together, "Payment Requests") originating with one or other of the Individual Respondents or third party suppliers of goods and services apparently for the benefit of one or other of the Individual Respondents.
Among the payments to which this evidence referred were payments for aircraft or automotive equipment or related items. There was evidence (including a copy of a 20 November 2001 curriculum vitae for Workum) that Workum led a lifestyle involving, among other things, flying aircraft and racing cars. Given this, it might have been reasonable to deduce that all such payments were made for Workum's benefit. However, we did not so find. We concluded that a payment was made for Workum's benefit only where an indication to that effect (for example, in Olnick's Accounting) was corroborated by other evidence in the form of a Payment Request or a documented history of payments to the relevant third party supplier for the benefit of one or other of the Individual Respondents.
1. Payments by Strategic
  Payments to IIC
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In Hennig's Interview, Hennig explained that IIC was simply a bank account –the IIC Bank Account – for which he was the sole signing authority. He elaborated that he had originally set up the IIC Bank Account when he acted as treasurer for a breakfast club. After he left the club the IIC Bank Account remained in place and, according to Hennig:

[Workum] requested that I do some -- pay some expenses for him, do some transactions with him on a personal client relationship, and so I started using this account to track payments, advances that I had made on [Workum's] behalf . . .
Olnick's Strategic Accounting recorded several payments from the Strategic Trading Account to the IIC Bank Account prior to and during the period in which PPI was paying commissions to the Strategic Trading Account under the Cofima commission-splitting and 3% Commcept commission arrangements discussed above. The Strategic Trading Account records confirmed that the payments were made to the bank at which the IIC Bank Account was maintained. Schöni told us that he did not know anything about payments made to the IIC Bank Account after he and Wick (or Cofima) purportedly became the beneficial owners of the Strategic Trading Account.
There was other evidence of such payments having been made. Staff had issued a notice compelling the bank at which the IIC Bank Account was maintained to produce records relating to a lengthy list of transactions, identified by date and amount. Unfortunately the banking records from which Staff had generated the list did not themselves appear to be in evidence (aside from cancelled cheques written by Hennig) –certainly not in an easily comparable format – but other documentary evidence provided corroboration that at least the following, of those listed transactions, were indeed payments from the Strategic Trading Account to the IIC Bank Account:
- 11 June 1996 $122 500
- 20 February 1997 $ 50 000
- 23 June 1997 $ 98 000
- 20 August 1997 $ 65 000
- 10 September 1997 $100 000
In respect of each of these payments, the corroborative evidence was a written request to Olnick from Hennig, as "Agent for [Strategic]" (not as an officer or director of PPI), to transfer the money from the Strategic Trading Account to the IIC Bank Account.
We find that Hennig directed Olnick to make these payments. However, the above-listed payments to the IIC Bank Account predated the period in which PPI was
paying commissions to the Strategic Trading Account under the Cofima commission-splitting and 3% Commcept commission arrangements. Given that those commissions are the focus of the Undisclosed Financial Benefits Allegation, we cannot conclude that these payments to the IIC Bank Account support the allegation.

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Other payments to the IIC Bank Account, recorded in Olnick's Strategic Accounting, confirmed by the Strategic Trading Account records and made during the period in which the Cofima commission-splitting and 3% Commcept commission arrangements were in effect, were not sufficiently corroborated for us to include them. For these reasons, we do not conclude that payments from the Strategic Trading Account to the IIC Bank Account prove the Undisclosed Financial Benefits Allegation.

Payments to Third Parties
On 20 February 1997 Hennig, as Agent for Strategic, gave Olnick written instructions to wire US$17 504 from the Strategic Trading Account to "Ly-Con". Olnick's Strategic Accounting and the Strategic Trading Account records confirmed that the payment was made by Olnick as instructed by Hennig. This is further evidence of Hennig's control and direction over money in the Strategic Trading Account.
On 4 April 1997 Hennig, as Agent for Strategic, gave Olnick written instructions to forward a cheque for US$5025 to Dave Wolin Incorporated ("Wolin"). Olnick's Strategic Accounting and the Strategic Trading Account records confirmed that on 4 April 1997 $7046.56 (the latter records making clear that this amount was stated in Canadian currency) was paid to Wolin. On 9 March 1998 Workum gave Olnick written instructions to forward US$1500 to Wolin. Olnick's Strategic Accounting and the Strategic Trading Account records confirmed that on 16 April 1998 a payment of US$1500 was made to Wolin. This, too, is further evidence of the Individual Respondents' control and direction over money in the Strategic Trading Account.
On 8 April 1998 Workum gave Olnick written instructions to transfer up to
$10 000 from Workum's personal securities trading account at the Brokerage Firm to Revolution Helicopter Company ("Revolution"). Olnick's Strategic Accounting and the Strategic Trading Account records confirmed that on 13 and 16 April 1998, respectively,
$19 550 (less $10 wiring fee) and $1873 were paid to Revolution from the Strategic Trading Account. We find that Workum directed Olnick to make these further payments totalling $21 413. We accept that the business indicated by the payee's corporate name is consistent with the Olnick's Strategic Accounting attribution of the payments to "Aircraft/Equipment" and that Workum at one time had personally paid Revolution. We therefore conclude that the payments totalling $21 413 were for the benefit of Workum.
In evidence was a direction from Workum to Kutzschan (Olnick's colleague at the Brokerage Firm) to pay money from Workum's personal securities trading account at the Brokerage Firm to B & D Automotive ("B&D"). Olnick made several payments at
Workum's direction from the Strategic Trading Account to B&D. Olnick's Strategic Accounting referred to such payments as being for "Aircraft/Equipment". Olnick's Strategic Accounting and the Strategic Trading Account records confirmed the following such payments to B&D:

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- 20 May 1998 US$5000
- 11 June 1998 US$10 000
- 6 October 1998 US$5000
- 27 January 1999 US$5000
- 10 February 1999 US$5000
- 25 February 1999 US$5000
- 16 April 1999 US$5000
- 25 May 1999 US$5000
Given the history (the payment to B&D from Workum's personal securities trading account, the Payment Requests and the attribution of the payments to "Aircraft/Equipment"), we conclude that Workum directed Olnick to make these payments totalling US$45 000 and that the payments were for the benefit of Workum.
In April 2000 Workum instructed Olnick to pay money from Workum's personal securities trading account at the Brokerage Firm to Gordon Levy Racing ("Levy"). Olnick's Strategic Accounting and the Strategic Trading Account records showed an earlier, 3 March 2000, payment of US$11 690 to Levy, which Olnick's Strategic Accounting attributed to "Aircraft/Equipment". Given the history (the payment to Levy from Workum's personal securities trading account and the attribution of the payments to "Aircraft/Equipment"), we conclude that Workum directed Olnick to make this payment of US$11 690 from the Strategic Trading Account and that the payment was for the benefit of Workum.
On 20 January 1997 and again in March 1998 Workum instructed Olnick to forward money from Workum's personal securities trading account: US$5000 to "Phil De Turck"; and US$10 000 to "Phil De Turck c/o Aero Structures", respectively. Olnick's Strategic Accounting and the Strategic Trading Account records showed a US$10 000 payment from the Strategic Trading Account to "Phil de Turck" or "P de Turck" on 15 September 1998; Olnick's Strategic Accounting attributed this payment to "Aircraft/Equipment". Olnick's Strategic Accounting and the Strategic Trading Account records also showed a further payment from the Strategic Trading Account to "Phil de Turck" on 23 December 1998, but in differing amounts (US$2500 and US$3913.75, respectively; we consider the latter the more reliable given its source). Again, Olnick's Strategic Accounting attributed the 23 December 1998 payment to "Aircraft/Equipment". Given the history, (payments to de Turck from Workum's personal securities trading account and the attribution of the payments to "Aircraft/Equipment"), we conclude that
Workum directed Olnick to make the mentioned payments totalling US$13 913.75 from the Strategic Trading Account and that the payments were for the benefit of Workum.

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In February 1999 Workum instructed Olnick to courier a US$15 500 draft to "Bob Murch". Olnick's Strategic Accounting and the Strategic Trading Account records showed a US$15 500 payment from the Strategic Trading Account to "Bob Murch" or "B Murch" on 10 February 1999. We find that Workum directed Olnick to make this payment. However, it was not apparent that Workum benefited personally.

Payments to PE Holdings
Lebeuf testified that during her tenure at PPI one of her responsibilities was to look after payment of Workum's personal bills. She told us that, to pay his bills, she had access in the first instance to money in the bank account of PE Holdings, which she understood to be Workum's "holding company of some kind". However, when that money was insufficient, Workum advised her to request money from Olnick. This, she said, happened at intervals of from six weeks to four months, in amounts "[t]ypically . . . about $10,000" but as high as $25 000.
Olnick's Strategic Accounting showed that on 20 January and 18 March 1999, respectively, $125 000 and $300 000 were wired to PE Holdings. The Strategic Trading Account records confirmed payments in those amounts on those dates to an account at the bank at which PE Holdings maintained an account.
We believed Lebeuf's testimony. We also accepted the above evidence of PE Holdings being funded from the Strategic Trading Account. Taken together, we consider this a convincing demonstration that money in the Strategic Trading Account was treated by all concerned as being available, on demand, for payment of Workum's personal bills. We therefore find that at least $425 000 was paid from the Strategic Trading Account at Workum's direction and for his benefit.

Summary of Payments from Strategic
The above evidence shows that at least C$446 413 and a further US$70 603.75 were paid from the Strategic Trading Account at the direction of Workum and for his benefit.
1. Cheshire
  Payments to IIC
Olnick's Cheshire Accounting recorded several payments totalling $116 000 from the Cheshire Trading Account to the IIC Bank Account during the period in which PPI was paying commissions to Cheshire. Cheshire Trading Account records confirmed that the payments were made to the bank at which the IIC Bank Account was maintained. However, we did not find sufficient corroboration for us to make findings in respect of these payments.
Payments to Third Parties
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As discussed above in connection with the Strategic Trading Account, the evidence demonstrated a history of payments to de Turck made at Workum's direction and for Workum's benefit. The Cheshire Trading Account records showed that on 7 July 1999 and 9 August 1999, respectively, US$5000 and US$25 000 were paid to "P de Turck" from the Cheshire Trading Account. Olnick's Cheshire Accounting also recorded these payments and attributed them to "Aircraft/Equipment". For the reasons given above, we find that Workum directed Olnick to make these payments totalling US$30 000 and that they were for the benefit of Workum.
Payments were made to another entity apparently associated with de Turck. In evidence was a 22 March 2001 invoice to Workum (not apparently in relation to Cheshire) from Blue Air Inc. ("Blue Air"). That invoice was signed by de Turck and directed that payment be made to Blue Air's account at a particular bank in Colorado. (As discussed below, Workum arranged for payment of that invoice from the Mandolin Offshore Bank Account.) The Cheshire Trading Account records showed that two US$10 000 payments were made, on 10 February 2000 and 12 January 2001, to the same Colorado bank from the Cheshire Trading Account. Olnick's Cheshire Accounting also recorded these payments, stated that they went to Blue Air and attributed them to "Aircraft/Equipment". Given the pattern of payments and the attribution to "Aircraft/Equipment", we find that Workum directed Olnick to make the February 2000 and January 2001 payments totalling US$20 000 from the Cheshire Trading Account for the benefit of Workum.

[1000] As discussed above in connection with the Strategic Trading Account, the evidence demonstrated a history of payments to B&D made at Workum's direction and for Workum's benefit. The Cheshire Trading Account records showed that on 25 November 1998, 15 January 1999 and 7 July 1999, respectively, US$10 000, US$5000 and US$10 000 were paid to B&D from the Cheshire Trading Account. Olnick's Cheshire Accounting also recorded these payments (but with the second mentioned recorded as having been made on 14 January 1999, one day earlier) and attributed them to "Aircraft/Equipment". For the reasons given above, we find that Workum directed Olnick to make these payments totalling US$25 000 and that they were for the benefit of Workum.

[1001] On 7 May 2000 Workum instructed Olnick to transfer money from Workum's personal securities trading account to a Legend Motors Inc. ("Legend") banking account in Calgary. The Cheshire Trading Account records showed that on 16 February 1999 US$3727 was paid to Legend from the Cheshire Trading Account. Olnick's Cheshire Accounting also recorded this payment and attributed it to "Aircraft/Equipment". Given that Workum at one time had personally paid Legend and our acceptance of the

attribution of the earlier payment to "Aircraft/Equipment", we find that Workum directed Olnick to make this US$3727 payment and that it was for the benefit of Workum.

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[1002] Olnick's Cheshire Accounting and the Cheshire Trading Account records showed payments from the Cheshire Trading Account of $57 595, $37 450 and $40 125 in July and August 1999. Olnick's Cheshire Accounting recorded the three payments as having been made to "Aviation.ca Corp" for "Aircraft/Equipment". The Cheshire Trading Account records indicated that two of the payments were made by wire transfer to an Alberta financial institution but one payment was made by cheque to "Aviation.ca Co". Also in evidence was a later (14 April 2000) wire transfer form prepared by Workum and approved by Brokerage Firm compliance personnel which directed the transfer of money from Workum's personal securities trading account to "Aviation.ca Corp" at the Alberta financial institution just mentioned. Taken together, the evidence persuades us, and we find, that Workum directed Olnick to make the three payments totalling $135 170 from the Cheshire Trading Account and that they were for Workum's benefit.

Payments to PE Holdings

[1003] Olnick's Cheshire Accounting showed that on 23 March 2001 $10 000 was wired from that account to PE Holdings. The Cheshire Trading Account records confirmed a payment in that amount on that date to an account at the bank at which PE Holdings maintained an account. For the reasons noted above in connection with payments to PE Holdings from the Strategic Trading Account, we find that Workum directed Olnick to pay $10 000 from the Cheshire Trading Account for the benefit of Workum.

Summary of Payments from Cheshire

[1004] The above evidence shows that at least C$145 170 and a further US$78 727 were paid from the Cheshire Trading Account at the direction of Workum and for his benefit.

Lexington

[1005] Payments from the Lexington Trading Account included the following:

11 September 2000 US$25 000
27 November 2000 US$10 000
30 January 2001 US$10 850
15 February 2001 US$10 000

[1006] Lexington Trading Account records showed that each of these payments was made to the Colorado bank at which Blue Air had received other payments. Olnick's Lexington Accounting recorded these payments as having also been made to Blue Air and attributed them to "Aircraft/Equipment". For the reasons given above, we find that
Workum directed Olnick to make these payments totalling US$55 850 from the Lexington Trading Account for the benefit of Workum.

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1. Ashland
  1. Control and Direction
    [1009] As discussed above, Ashland was apparently another offshore corporation with nominal principals. In argument, Workum denied that he owned Ashland. Hennig denied having any beneficial interest in Ashland and said that he did not know the identity of Ashland's beneficial owners. Hennig said that he believed Olnick had set up Ashland and the Core Offshore Companies through the lawyer Finkelstein. Schöni said that he believed Ashland was "another offshore company" but that none of Cofima, Schöni or Wick had any ownership of Ashland.
    1. Source of Payments to Ashland
      [1010] The evidence was that all the money in the Ashland Trading Account came from PPI.
      
      [1011] The first transaction recorded in the Ashland Trading Account was the deposit of a $77 000 PPI cheque dated 2 July 1999. Hennig was one of two signatories to the PPI cheque. This payment corresponded to the commission on the June 1999 Private Placement, on which Cofima acted for PPI. In evidence was a handwritten document bearing the initials "T.H.". It set out the calculation of a $77 000 "balance due" and included the notation "Per Cofima instructions, balance of commission to be paid to Ashland Holdings Corp.". Schöni was unable to explain why Ashland received a commission for that private placement, as Ashland had not participated in any private placement Cofima had conducted for PPI. Schöni also denied providing the instructions that appeared in the handwritten document just mentioned.
      
      [1012] As mentioned, PPI paid $350 000 into the Ashland Trading Account in August 2000 in connection with the August 2000 Private Placement to Tiroler. Schöni said that Cofima did not assist PPI in this transaction. He said that he could not comment on why Ashland received 10% of the proceeds. No Ashland invoice for this payment was in evidence and there was no evidence of it having been involved in the private placement. PPI also paid to Ashland Trading Account the further commission payments discussed
      above – $36 000; $15 000; $210 300 and $100 000 – in connection with private placements conducted throughout 1999 and 2000. Again, no Ashland invoices for these payments were in evidence and there was no evidence that Ashland had been involved in any of these private placements.
      
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      [1013] As discussed below, the Mandolin Offshore Bank Account paid a total of
      $200 000 to the Ashland Trading Account between June 2000 and July 2001.
      
      [1014] We do not believe that PPI made payments to Ashland (which did not evidently render any service to PPI) blindly, as the Individual Respondents claimed, without any knowledge of who Ashland's principals were. PPI did pay the money, and we believe that it (through its principals, the Individual Respondents) did so with knowledge of – and because it (again, through the Individual Respondents) knew – who Ashland's principals were.
    2. Direction and Accounting of Payments from Ashland [1015] Despite their denial of knowledge about Ashland's ownership, it was the Individual Respondents, primarily Hennig, who instructed Olnick to make payments from the Ashland Trading Account. On 15 November 1999 Hennig instructed Olnick to transfer $42 000 from the Ashland Trading Account to Cofima for a commission on a PPI private placement. The Ashland Trading Account records confirmed that Olnick carried out Hennig's instructions. On 7 September 2000 Hennig instructed Olnick to transfer
      $150 000 from the Ashland Trading Account to ASCOOP's account. The Ashland Trading Account records confirmed that Olnick carried out Hennig's instructions.
      
      [1016] One of the SCA 2000 Documents headed "Ashland Holdings Corp." (the "SCA Ashland Document") was a monthly accounting of assets (money and securities) held in the Ashland Trading Account. The information in the SCA Ashland Document for January 2000 generally corresponded to that in the monthly Brokerage Firm account statements for the Ashland Trading Account. For example, the SCA Ashland Document stated that PPI wired $100 000 to the Ashland Trading Account, for which the Ashland Trading Account records showed a "W/T Received" on 17 January 2000. This corresponded to the commission paid on the February 2000 Private Placement. The SCA Ashland Document noted that $10 000 had been wired to the IIC Bank Account from the Ashland Trading Account, and the Ashland Trading Account records confirmed that on 26 January 2000 the sum of $10 000 was wired to the bank at which the IIC Bank Account was maintained. The SCA Ashland Document also identified securities held in the Ashland Trading Account; that information corresponded closely to the records of the Ashland Trading Account. Apart from confirming various transactions, the very existence of the SCA Ashland Document in PPI files demonstrated that someone at PPI was sufficiently connected to and interested in Ashland – and had access to the Brokerage Firm monthly account statements for the Ashland Trading Account – to maintain an accounting of transactions in that account.
      [1017] The evidence leaves us in no doubt, and we find, that Hennig and possibly also Workum had, and exercised, control and direction over the Ashland Trading Account.
      
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  2. Payments Made
    [1018] We now discuss evidence that makes clear that payments were made from the Ashland Trading Account to or for the benefit of one or other of the Individual Respondents.
    
    Payments to and from the IIC Bank Account
    [1019] We noted earlier Hennig's claim to have used the IIC Bank Account "to track payments, advances that I had made on [Workum's] behalf". This was not a complete description of what went on in the account. In evidence were copies of several cheques written on the IIC Bank Account between 8 January 1998 and 27 June 2001, all signed by Hennig. The majority of these cheques in evidence were payable to Hennig himself; a minority were to PE Holdings or others. All of the cheques written in and after 2000 were payable to Hennig, PE Holdings or for the established benefit of Workum (we discuss a car purchase for Workum below). We conclude, in respect of the cheques to Hennig and PE Holdings, respectively, that payments from the IIC Bank Account were for the benefit of Hennig and Workum.
    
    [1020] As mentioned, $10 000 was transferred from the Ashland Trading Account to the bank at which the IIC Bank Account was maintained on 26 January 2000. Olnick's Ashland Accounting recorded a payment that day in that amount from the Ashland Trading Account to the IIC Bank Account. The SCA Ashland Document confirmed that
    $10 000 had been paid to the IIC Bank Account, which we consider sufficient corroboration that the payment was received in the IIC Bank Account. We find that one or other of the Individual Respondents directed Olnick to make this payment for the benefit of one or other of them.
    
    Payments to PE Holdings
    [1021] Olnick's Ashland Accounting showed that on 9 August 2000 $10 000 was wired to PE Holdings. The Ashland Trading Account records confirmed a payment in that amount on that date to an account at the bank at which PE Holdings maintained an account. For the reasons noted above in connection with payments to PE Holdings from the Strategic and Cheshire Trading Accounts, we find that Workum directed Olnick to pay $10 000 from the Ashland Trading Account for the benefit of Workum.
    
    Payments to Third Parties
    [1022] In evidence was an e-mail to Workum dated 29 June 2001 from John Rippel ("Rippel") of "Alternative Vehicles" providing "wire info" with the handwritten notation "$USD 10,000" on it. The e-mail was sent to Olnick who in turn instructed the transfer of the money from the Mandolin Offshore Bank Account to Rippel's account at a US
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    bank. Olnick's Ashland Accounting recorded an earlier (25 October 2000) payment of US$5000 to Rippel, attributed to "Aircraft/Equipment". The Ashland Trading Account records confirmed that this earlier $5000 payment had been made to the same US bank as named in the later e-mail. Given the pattern of payments and the attribution to "Aircraft/Equipment", we find that Workum directed Olnick to make the US$5000 payment from the Ashland Trading Account for the benefit of Workum.
    
    [1023] A document from "Jason" of 1007805 Ontario Limited ("ONCo") bearing a facsimile transmission date of 30 April 2001 set out wire instructions to a named bank in Ontario. This "Jason" document stated that the invoiced amount "should cover import fee, exhaust install, spinner install @ Cherry Air". Handwritten notations stated "Received $40,000 Nov1/00" and "USD $32 000 As of Apr.30/01". The Jason document was sent to Olnick who in turn instructed the transfer of the money from the Mandolin Offshore Bank Account to ONCo's account at a bank in Ontario. Olnick's Ashland Accounting recorded that, earlier, on 25 October 2000 the sum of US$40 000 was sent to "[ONCo] (Jason Newburg)". The Ashland Trading Account records confirmed that a US$40 000 payment was made from the Ashland Trading Account to the same Ontario bank as named in the Jason document. Given the pattern and apparent purpose of these payments, we find that Workum directed Olnick to make the US$40 000 payment from the Ashland Trading Account for the benefit of Workum.
    
    Summary of Payments from Ashland
    [1024] The above evidence shows that at least C$10 000 and a further US$45 000 were as paid from the Ashland Trading Account at Workum's direction and for his benefit, and at least another C$10 000 was paid therefrom at the direction of one or other of the Individual Respondents for the benefit of one or other of them.
  3. Conclusions on Ashland Trading Account
    [1025] The Individual Respondents not only had responsibility for PPI's payments to the Ashland Trading Account – the source of all the money in that account – by virtue of their positions as senior officers of PPI; we find that they actively directed such payments.
    
    [1026] As was the case with the Core Trading Accounts, the evidence clearly demonstrated that both Individual Respondents directed the use of the money in the Ashland Trading Account: they had and exercised control and direction. Further, they used the money for their benefit.
2. Mandolin
  1. Receipt of Commissions
    [1027] As discussed above, Mandolin was another offshore corporation, apparently with nominal principals.
    [1028] The Individual Respondents argued that there was no evidence that they knew who the beneficial owners of Mandolin were.
    
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    [1029] Olnick prepared a summary of transactions involving the Mandolin Offshore Bank Account and the Mandolin Trading Account from July 2000 to July 2002 ("Olnick's Mandolin Accounting"). This document stated that Olnick had opened the Mandolin Offshore Bank Account in January 1997 as owner with signing authority but that he was not its beneficial owner. It also stated that the account was dormant, having a balance of approximately $3000 until July 2000. It further stated that from July 2000 until July 2002, when the account was closed, it was "used exclusively by Peter Workum".
    
    [1030] The Mandolin Offshore Bank Account records prepared by the bank corroborated Olnick's Mandolin Accounting. The bank records showed a balance of
    $3,460.40 as at 16 July 1999 until 4 July 2000, when PPI deposited $2 756 250 to the account. PPI banking records confirmed this payment to Mandolin. This payment was part of a commission paid by PPI for the May 2000 Private Placement discussed above, for which Commcept acted. On 9 April 2001 PPI paid a further $1 173 000 into the Mandolin Offshore Bank Account, this time in connection with the March 2001 Private Placement, for which Commcept again acted. By letter dated 2 April 2001, Hennig, as CFO of PPI, sent a letter to Mandolin's bank advising that "the $1 173 000 wire transfer to your bank relates to a commission earned on a $23.48 million private placement closed by [PPI]".
    
    [1031] Bank records showed that these two payments were the only payments (apart from interest) into the Mandolin Offshore Bank Account from July 2000 to July 2002. It was not disputed that PPI paid commissions to the Mandolin Offshore Bank Account. There was no evidence as to why PPI did so, and certainly no evidence that Mandolin itself assisted in any PPI private placements or performed any other services for PPI.
    
    [1032] We find on the evidence that PPI made these payments at the direction of one or other of the Individual Respondents.
  2. Payments from Mandolin Offshore Bank Account
    [1033] The Individual Respondents contended that we could not ascertain how money from the Mandolin Offshore Bank Account was used because the only evidence came from the unreliable Olnick. As discussed, we took particular care with documents prepared by Olnick and used them only when we were satisfied as to their reliability.
    1. Payments to the Four Trading Accounts
      [1034] We compared the information in Olnick's Mandolin Spreadsheet (which identified payments made into and out of the Mandolin Offshore Bank Account) to the monthly Brokerage Firm account statements for the Four Trading Accounts and, in several cases, payment directions sent by Olnick to Mandolin's bank. This latter
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      information corroborated that in Olnick's Mandolin Spreadsheet. This evidence showed several payments from the Mandolin Offshore Bank Account to the Four Trading Accounts:
      - $100 000 was paid to the Strategic Trading Account
        o July 2000 $100 000
      - $550 000 was paid to the Cheshire Trading Account
        o July 2000 $100 000
        o April 2001 $200 000
        o May 2001 $100 000
        o June 2001 $150 000
      - $975 000 was paid to the Lexington Trading Account
        o July 2000 $400 000
        o August 2000 $300 000
        o October 2000 $150 000
        o November 2000 $100 000
        o May 2001 $ 25 000
      - $200 000 was paid to the Ashland Trading Account
        o July 2000 $ 50 000
        o June 2001 $100 000
        o June 2001 $ 50 000
        
        [1035] Schöni (who claimed that he and Wick, or Cofima, owned the Core Offshore Companies) said (as mentioned) that he had never heard of Mandolin, and that he had not instructed Workum or Hennig to pay any commission to which Cofima might be entitled to Mandolin. Schöni could not account for the Core Trading Accounts' receipt of payments from Mandolin.
        
        [1036] Some of the money paid to the Four Trading Accounts was later paid out for the benefit of one or both of the Individual Respondents.
    2. Payments to Third Parties
      [1037] On 9 August 2000 Olnick directed a $520 000 transfer from the Mandolin Offshore Bank Account to THPC. As discussed, Hennig used this money to reimburse PPI for its payment made to THPC in connection with the Hamilton Settlement Agreement. We find that Hennig directed Olnick to make this payment; however, it was not apparent that Hennig benefited personally.
      
      [1038] On 4 October 2000 Olnick authorized the transfer of US$50 000 (C$77 418.26) from the Mandolin Offshore Bank Account to EnerGCorp. Corresponding to this payment was an invoice dated 11 September 2000 and addressed to Workum, personally, for a US$50 000 deposit for a "Kit Car". We find that Workum directed Olnick to make this payment of US$50 000 for the benefit of Workum.
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      [1039] On 2 April 2001 Olnick directed Mandolin's bank to make two payments from the Mandolin Offshore Bank Account – one to Blue Air in the amount of US$20 000, the other to a law firm in the US in the amount of US$2500. Accompanying the direction were a Blue Air invoice addressed to Workum personally for US$20 000 and handwritten wire instructions with the request "Pls wire $2,500.00 USD". We find that Workum directed Olnick to make the US$20 000 payment, for his benefit. It was not clear that Workum directed or benefited personally from the US$2500 payment.
      
      [1040] On 10 April 2001 Olnick directed a wire transfer from the Mandolin Offshore Bank Account of US$27 287.08 to Reeves Import Motor Cars ("Reeves"). An e-mail to Workum thanked him for his interest in a Subaru automobile for a race, and provided information as to where to wire that amount to Reeves. The copy of the e-mail in evidence bore handwritten notations including "JohnK/Glen" (Kutzschan's first name is John; Olnick's is Glenn) and "Please Wire $". We find that Workum directed Olnick to make this payment of US$27 287 for the benefit of Workum.
      
      [1041] On 11 October 2000 Olnick directed a wire transfer of $25 000 from the Mandolin Offshore Bank Account to PE Holdings; in evidence was a corresponding facsimile direction sent to Olnick by Lebeuf that stated "Wire Transfer of Cdn. $25,000 –Peter Workum". On 16 April 2001 Olnick directed a wire transfer of $10 000 from the Mandolin Offshore Bank Account to PE Holdings. A corresponding facsimile from Lebeuf – signed by Workum – requested that $10 000 be paid "to the following account re Peter Workum". . For the reasons noted above in connection with payments to PE Holdings from the Strategic, Cheshire and Ashland Trading Accounts, we find that these payments totalling $35 000 were made at Workum's direction and for his benefit.
      
      [1042] On 19 April 2001 Olnick directed a payment of CHF12 500 Swiss francs from the Mandolin Offshore Bank Account to Michael Fuchs. There was a corresponding communication from Martin E. Halter who stated "Reference is made to your phone call of Tuesday this week inquiring about the address for a money transfer of SFR 12 500 from Peter Workum". We find that Workum directed Olnick to make this payment of CHF12 500. However, it is not clear that the payment was for Workum's benefit.
      
      [1043] On 1 May 2001 Olnick directed two wire transfers from the Mandolin Offshore Bank Account – one for US$36 000 to European Rally & Performance Driving School, the other for US$32 000 to ONCo. Given the name of the first-mentioned payee and other evidence (the mentioned curriculum vitae and the communication quoted above concerning a Subaru and race), and the history with ONCo, we find that Workum directed Olnick to make these payments totalling US$68 000 for the benefit of Workum.
      [1044] On 4 July 2001 Olnick directed a wire transfer of US$10 000 from the Mandolin Offshore Bank Account to Rippel (of "Alternative Vehicles") which, as noted,
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      also received payment from the Ashland Trading Account at Workum's direction and for his benefit. A corresponding e-mail to Workum contained information as to where to wire funds to Rippel; the copy of the e-mail in evidence bore the handwritten notation "$USD 10,000". We find that Workum directed Olnick to make this payment of US$10 000 for the benefit of Workum.
      
      [1045] On 9 August 2001 Olnick directed a wire transfer of $40 000 to Bucher. A corresponding facsimile from Bucher to Workum gave wiring instructions. We find that Workum directed Olnick to make this payment but it was not apparent that Workum benefited personally.
      
      [1046] Between September 2000 and June 2001 Hennig sent several facsimiles to Olnick directing wire transfers totalling $860 000 from the Mandolin Offshore Bank Account to the IIC Bank Account. We noted above that all of the cheques in evidence written from the IIC Bank Account in and after 2000 were payable to Hennig, PE Holdings or for the established benefit of Workum, and we concluded that payments from the IIC Bank Account were for the benefit of Hennig and Workum.
      
      [1047] Among the cheques in evidence written on the IIC Bank Account in and after 2000, all signed by Hennig, was one in the amount of $307 000 payable to "Macleod Dixon in Trust"; it bore handwritten notations of a residential address, the word "acquisition" and the name "K Hennig". Another cheque issued during that period from the account was in the amount of $38 112.18 and payable to a Calgary car dealer with the notation "2002 Subaru [-] Peter J. Workum". We find that Hennig directed Olnick to make these payments totalling $860 000 to the IIC Bank Account, and that both Individual Respondents benefited from payments from the account.
  3. Conclusions on Mandolin Offshore Bank Account
    [1048] The documentary evidence confirmed that between July 2000 and July 2002 Olnick acted as an intermediary for the Individual Respondents in their use of the Mandolin Offshore Bank Account. Indeed, there was no evidence that anyone other than Olnick and the Individual Respondents used the account during that time.
    
    [1049] We find that PPI, under the direction of its senior officers, the Individual Respondents, paid commissions of $3 929 250 to the Mandolin Offshore Bank Account. This was the only money (apart from interest) paid into this account between July 2000 and July 2002.
    
    [1050] We further find that the Individual Respondents directed Olnick to make payments from the Mandolin Offshore Bank Account. Excluding the payments made to the Four Trading Accounts, in excess of $1 million was paid from the Mandolin Offshore Bank Account for the benefit of the Individual Respondents.
    [1051] Accordingly, we find that both Individual Respondents had control and direction over the Mandolin Offshore Bank Account, and they exercised this control and direction for their own benefit.
    
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3. Recordkeeping
  [1052] In evidence was considerable documentation, found in different locations and originating with different sources, concerning payments and other transactions in the Four Trading Accounts and the Mandolin Offshore Bank Account. The evidence demonstrated that someone at PPI maintained thorough records of these accounts. Clearly what happened in these accounts was considered important at PPI.
  
  [1053] Although the Individual Respondents attempted to put in doubt the reliability of some of these documents, we concluded (for reasons discussed) that we could accept and (with due caution in some cases, notably Olnick-sourced documents appropriately corroborated) rely on such evidence, and we did so. We discuss some of this evidence here.
  
  [1054] The SCA 2000 Documents found in EnerGCorp's office in Arizona apparently were used to track the money and securities in the Four Trading Accounts, the Mandolin Offshore Bank Account and the IIC Bank Account. One of the SCA 2000 Documents, headed "Aggregate Offshore Assets", was dated 31 August 2000 and set out "Est Value" of cash ($1 830 359) and securities, together totalling $7 933 177. We concluded that these amounts included commissions paid by PPI.
  
  [1055] The SCA 2000 Documents also included the Workum/Hennig Fee Split Accounting. One reference in that document was to a May 2000 "placement fee", with the name Commcept and the amount $2 756 250. (This was the exact amount that was paid by PPI to the Mandolin Offshore Bank Account in respect of the May 2000 Private Placement, equal to 7% of the gross proceeds of that private placement. As mentioned, PPI also paid Commcept a $1 181 250 (3%) commission on that private placement.) Adjacent to this entry in the Workum/Hennig Fee Split Accounting, under columns headed "TH" and "PJW", appeared the amounts, for TH, $689 063 ("25%" was marked next to this entry; the amount was 25% of the payment into the Mandolin Offshore Bank Account) and, for PJW, $2 067 188 (75% of the payment). Other notations on this document included: "SIF/IIC subtotals-to Dec"; "CCI subtotals-to Dec/99"; "AHC subtotal to Dec/99"; and "SC&A subtotal-Jan-Jul". These were clearly references to Strategic, the IIC Bank Account, Cheshire and Ashland.
  
  [1056] As mentioned, a spreadsheet relating to the Cheshire Trading Account for the period November 1997 to July 1999 was included in Hennig's Computer Data.
  [1057] Also in evidence were two pages of handwritten notes bearing the initials "TH" and the date "April 2002" setting out questions about "IIC", "SIF", "A" and "C". These were clearly references to the IIC Bank Account, Strategic, Ashland and Cheshire.
  
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  [1058] An unsigned copy of an "Investment and Profit Sharing Agreement" dated 5 April 2000 between Workum and Hennig (found in Hennig's Computer Data) made reference to the following, all consistent with information in the SCA 2000 Documents:
an ongoing relationship between Workum and Hennig whereby they jointly "invested/shared in various business undertakings";
an allocation of "investments/profits" 75% to Workum and 25% to Hennig;
investments and transactions involving shares of issuers including Orion, Newmex and PPI, and financing fees;
an "SC&A 2000 reconciliation schedule" (clearly a reference to SCA 2000 Documents that discussed Strategic, Cheshire and Ashland);
a schedule (not attached) of cash and shares "owed" to Hennig; and
a proposal that "[Hennig] will be responsible for the monthly record keeping and reporting of the various accounts through which the activity will take place".

[1059] This evidence reinforces our findings that the Individual Respondents had and exercised control and direction over the Four Trading Accounts and the Mandolin Offshore Bank Account and that this was for their benefit. It also provides a compelling explanation for the recordkeeping for those accounts that was in evidence and the presence of the records at PPI, and confirms other indications and evidence that Hennig was responsible for the recordkeeping. This evidence in our view disproves the Individual Respondents' claimed ignorance about the affairs of the Offshore Companies and about the relevant securities trading and bank accounts.

Conclusions on Financial Benefits

[1060] We found, from clear and compelling evidence, that PPI paid money, with the knowledge and at the direction of the Individual Respondents, to the Four Trading Accounts and the Mandolin Offshore Bank Account, and that the Individual Respondents had and exercised control and direction over those accounts and the use of that money.

[1061] This evidence also clearly established that this money was available to the Individual Respondents for their personal use. Each of them took advantage of that

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availability, Workum more than Hennig. Considering only the examples mentioned above, over $2 million passed from PPI to the benefit of the Individual Respondents in this way. We found that the payments made for the benefit of the Individual Respondents from the Core Trading Accounts were not loans. Given the similarity in how payments were directed and effected, and the absence of any contrary evidence, we also conclude that the payments from the Ashland Trading Account and the Mandolin Offshore Bank Account made for the benefit of the individual Respondents were not loans.

[1062] In short, under this arrangement Workum and Hennig each benefited financially from payments made by PPI, most often characterized by PPI as commissions. The Four Trading Accounts and the Mandolin Offshore Bank Account were operated to funnel money from PPI to the Individual Respondents. We discern no other reasonable explanation for the insertion of the Offshore Companies into PPI private placements and other transactions. The accounts were essentially slush funds on which the Individual Respondents were free to draw at will.

[1063] We find that the Individual Respondents arranged in this manner to be financially compensated (albeit somewhat indirectly ) from PPI commissions.

[1064] It was not suggested that this in itself was illegal or improper. Senior officers of public companies often command significant compensation from their employers. The issue for determination is whether these financial benefits to the Individual Respondents were adequately disclosed. We now turn to that issue.

DISCLOSURE OBLIGATION, BREACH AND RESPONSIBILITY

Disclosure Made
[1065] PPI did not keep secret the fact that it was paying commissions on various transactions. There was evidence that PPI directors, exchanges and the public (through, for example, PPI's information circular for its 30 March 2001 shareholders' meeting) were told both that commissions were paid on certain transactions and, in some cases, the names of commission recipients. For example, the Exchange (when PPI Shares were still listed there) was informed that Cofima would receive a commission on at least one financing. The TSE (after the PPI listing had moved there) was informed that Commcept would receive commissions on certain private placements. Nothing in evidence suggested that either exchange was told anything about the Cofima commission-spitting or 3% Commcept commission arrangements, under which commissions would in fact be paid to the Offshore Companies. The Exchange (on which Newmex Shares were listed) was told of the Cheshire commission on the Newmex/LynChris Transaction (and sought information about it).

[1066] There was no evidence of clear disclosure, to anyone, of the Individual Respondents' enjoyment of benefits from PPI commission payments. The Individual Respondents obviously knew about it. Schöni knew. Olnick probably knew (even were
he not told, the flurry of payment instructions he received would have enabled him readily to discern a pattern).

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[1067] We noted that third parties – Azterra director Hunter and Sulphur president Rod MacKenzie – understood that Workum would benefit from commissions paid by PPI to Lexington in connection with specific business transactions, and that Street understood that PPI paid commissions to Cheshire. We also noted "office gossip" mentioned in Charlton's testimony, to the effect that some PPI employees clearly understood – and apparently treated as a topic of humour – that Workum and Hennig were paid through commissions and that Cheshire and Lexington were their companies. As discussed, this sort of impressionistic evidence was not determinative but was corroborative of our findings. That said, while this indicates that such information obviously reached some PPI staff and third parties, the recipients of this information fell within a rather narrow circle and, even then, such information as they had was limited.

[1068] PPI did make public disclosure of its compensation of the Individual Respondents. It disclosed certain stock option grants and exercises in its financial statements, and provided broader disclosure concerning "executive compensation" – for example, in information circulars for its shareholder meetings. In this disclosure, PPI told readers that: (i) Workum received no form of compensation from PPI other than securities under option grants and, in 2001, a payment under a company profit-sharing plan; and (ii) Hennig received a salary and "other compensation" (less than $100 000 per year), securities under option grants and, in 2001, a payment under the profit-sharing plan. No mention was made of the Individual Respondents benefiting from commissions paid by PPI on financings and other transactions.
Disclosure Obligation
[1069] Alberta securities laws require reporting issuers to disclose compensation paid to senior executives and directors, and to discuss in their financial statements stock option grants and exercises (whether involving senior executives or not) and transactions between the issuer and "related parties". These disclosure obligations, like others, are intended to provide information to assist investors in making investment and other decisions (notably, decisions on how to vote at shareholder meetings and decisions on whether or how to respond to a take-over bid). The information just mentioned is potentially important for these purposes. It can, for example, assist an investor in assessing the extent to which those responsible for running a company have their interests aligned with those of its shareholders, and in assessing how the company deals with related parties. The resulting assessments might in turn be factors in the investor's decision whether to make or retain an investment in the company.

[1070] These disclosure obligations are, obviously, not satisfied if disclosure is made only to the reporting issuer's own directors, or to a narrow circle of employees or third parties involved in business negotiations with the issuer. To the contrary, such limited
sharing of information is the sort of "selective disclosure" that is frowned on because it puts the investing public at an informational disadvantage compared to those favoured with generally undisclosed information.

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[1071] In some instances the disclosure obligations are precise and specific and not subject to materiality thresholds. In other instances the disclosure might be required only if material. The distinction is not relevant here because, in our view, the manner and extent of the financial benefits received by the Individual Respondents was material. We reach this conclusion not only because of the aggregate amounts involved (as noted, considering only the examples noted above, at least $2 million changed hands in this way) but also because of what the arrangements might have told the investing public about how PPI was run. We believe that the compensation arrangements could reasonably have been considered highly informative on the question of the alignment (or otherwise) of the interests of the Individual Respondents with the interests of PPI shareholders.

[1072] If a senior officer or director of a reporting issuer profits personally and more-or-less directly from the issuer's sale of its own shares, this could indicate a divergence between that individual's and the shareholders' interests. This is because the sale of shares, while bringing money into the corporate coffers, does so at a potential cost to existing shareholders: their proportionate holdings are diluted and thus, potentially, their proportionate participation in future profits. Shareholders may also find that control of their company shifts, or is consolidated or strengthened, as a result of the sale to a particular investor. An investor in the new share sale may be able to build up a holding at a favourable price. While these outcomes are not necessarily improper, equally they may not always be consistent with the interests or preferences of existing shareholders.

[1073] If senior executives have a pecuniary interest in a share distribution, as posited, they may be influenced – or shareholders might perceive them as being open to influence
- to favour new share distributions to a different extent, or for different reasons, than if they had no such pecuniary interest. They might be more inclined to promote a share sale on less favourable terms – in greater quantity or at a lower price – than if they were not themselves to benefit directly. In our view, such an arrangement creates a clear potential for conflict of interest.
  
  [1074] Much the same can be said about an arrangement under which senior executives have a pecuniary interest in other types of business transactions involving their employer. The potential for conflict of interest in such situations is, if anything, more obvious.
  
  [1075] The potential for conflicts of interest does not inevitably lead to bad decisions made for improper reasons, but we consider that reasonable investors would want to know the facts so as to be able to make their own assessment.
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  [1076] This, we conclude, applies to the compensation arrangements here. The Individual Respondents benefited from commissions that PPI paid in connection with private placements and other transactions. The amounts were significant – between them the Individual Respondents received the benefit of at least $2 million. These were not merely loans. The arrangement – and the quantum of benefits enjoyed by the Individual Respondents under it – should have been disclosed publicly in documents including shareholder meeting information circulars and securities exchange take-over bid circulars issued during the time PPI paid commission money to the accounts of the Offshore Companies for the benefit of one or both of the Individual Respondents.
  
  [1077] The obligation to ensure that this disclosure is made rests, first, on the reporting issuer itself and, second, on the senior officers and directors who bear responsibility for the issuer's corporate disclosure generally. In assessing responsibility for a failure to so disclose, we believe it is reasonable to consider first the individual's (and the company's) actual state of knowledge at the time. If the individual lacked knowledge, the second factor is the nature of that person's duties and access to information and the extent of whatever "due diligence" that person performed. Given such factors, were a CEO or CFO to have known or to have been able to learn with reasonable due diligence of any such pecuniary interest in a commission by themselves or a fellow senior officer, then in our view the result must be direct personal responsibility for any such disclosure failure.
  
  [1078] In sum, PPI was obliged under Alberta securities laws to disclose, in publicly filed documents (meeting information circulars and certain take-over bid circulars), its arrangements for paying commissions to the Offshore Companies for the benefit of one or both of the Individual Respondents. PPI's senior officers bore responsibility for PPI's fulfilment of that disclosure obligation.
Requisite Disclosure Was Not Made
[1079] PPI did not disclose these compensation arrangements in its information circulars for, at least, its 1999, 2000 and 2001 annual shareholders' meetings. (The copies of the TOB Circulars in evidence appeared incomplete and therefore, although the portions in evidence did not disclose this compensation benefit, we could not determine conclusively whether it was omitted from each TOB Circular.) Not only was the necessary disclosure omitted from the mentioned information circulars, but the information concerning executive compensation that was provided conveyed a clear impression that the Individual Respondents toiled for limited compensation largely or (in Workum's case) entirely in the form of stock options and a profit-sharing plan – and thus that their interests were aligned, to a high degree, with those of other PPI shareholders.

[1080] The picture thus painted was at odds with reality. PPI's disclosure concealed not only the actual compensation arrangements enjoyed by the Individual Respondents,
but with it the associated potential for real conflict with the interests of PPI's shareholders. This failure to disclose ran counter to the very purpose of reporting issuer disclosure obligations discussed above. We conclude that this was thus contrary to the public interest.

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Responsibility

[1081] As the most senior officers of PPI, the Individual Respondents were among those charged with responsibility for ensuring that PPI fulfilled its disclosure obligations under Alberta securities laws. As discussed, on this basis alone they bore responsibility generally for PPI's failure to disclose the compensation arrangements at issue.

[1082] More directly, the Individual Respondents – as the orchestrators and beneficiaries of the arrangement – needed to do no due diligence to appreciate the chasm between the disclosure and the reality. We conclude that the Individual Respondents deliberately concealed the arrangement from the public and caused PPI instead to issue inaccurate and materially misleading disclosure.

[1083] Moreover, we conclude that the Individual Respondents also endeavoured to conceal the arrangement – and, indeed, any connection between them and the Offshore Companies, the Four Trading Accounts and the Mandolin Offshore Bank Account – from Staff.

[1084] In all of this, the Individual Respondents behaved in a manner incompatible with the responsibilities of directors and senior officers of a public company. Their conduct was clearly contrary to the public interest. We so find.

[1085] The Undisclosed Financial Benefits Allegation is therefore sustained against both of the Individual Respondents.

PART FOUR

MARKET MANIPULATION ALLEGATION

OVERVIEW OF THE ALLEGATION
[1086] Staff alleged that one or other (or both) of the Individual Respondents, Strategic and Cheshire directly and indirectly traded and purchased Newmex Shares while knowing (or when he or they ought reasonably to have known) that the purchases created or may have resulted in an artificial price for the Newmex Shares, contrary to section 93(b)2 of the Act and contrary to the public interest.

2 In 2000, when the alleged events occurred, section 70.1(b) of the Act as then in force was the counterpart to what is in 2008 section 93(a)(ii). Section 70.1(b) became section 93(b) in 2002 (and remained so during the Hearing). The wording of sections 70.1(b) and 93(b) was identical. In argument the parties referred to section 70.1(b) and 93(b). For simplicity, we refer to the provision as section 93(b).
[1087] The impugned activity (sometimes referred to as "market manipulation", and we will refer to the allegation as the "Market Manipulation Allegation") involved purchases of Newmex Shares effected by Olnick through the Core Trading Accounts on certain days in February and September 2000.

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POSITIONS OF THE PARTIES
The parties agreed that Olnick traded in Newmex Shares in the Core Trading Accounts. The significance of, and the responsibility for, those trades was at issue.
1. Position of Staff
  [1088] Olnick testified that he had received and followed instructions from Workum to move the market price of the Newmex Shares during the period in question. Staff contended that this admission was determinative of the issue. Staff argued that "Olnick had no motivation to lie about his involvement in this market manipulation" and could receive no benefit "by fabricating a story that he manipulated the market for Newmex Shares at Workum's direction". They further contended that the facts of Olnick's trading confirmed the truth of his admission.
  
  [1089] Staff alleged that the Individual Respondents' motive for instructing Olnick was linked to PPI's repurchases of Newmex Shares from LynChris, ASCOOP and SPIDA (discussed above in connection with the Financial Disclosure Allegations). Staff contended that the Individual Respondents sought to produce market prices for Newmex Shares that would match these agreed repurchase prices, and instructed Olnick to move the market price of Newmex Shares to these levels on those dates.
2. Position of the Respondents
  [1090] As noted, the Corporate Respondents took no part in the Hearing and thus expressed no position on the Market Manipulation Allegation.
  
  [1091] The Individual Respondents contended that there was no market manipulation. Workum further submitted that, if Olnick did manipulate the price of Newmex Shares, Workum had no reason to believe that Olnick's trading was for anything other than legitimate market-making. Pointing to evidence from Horgan, the Individual Respondents argued that, even if Olnick had attempted to create specific market prices for the Newmex Shares in February and September 2000 (which they denied), the effort was unsuccessful and did not create an artificial price for the Newmex Shares. The Individual Respondents further contended that, even if Olnick had traded improperly, he did not do so at their instruction but for his own purposes.
  
  [1092] More broadly, the Individual Respondents argued that Staff's entire case on the Market Manipulation Allegation rested on Olnick's testimony and that, his testimony being wholly unreliable, Staff had no case.
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  [1093] The Individual Respondents also urged the panel to note that Staff had adduced no expert evidence (even though Staff had, according to the evidence of a Staff member, discussed preliminary matters with a third party but had not received any opinion from him) and had not subjected the trading data to electronic trading analysis using software applied by securities regulatory authorities in other cases. The Individual Respondents contended that the panel should draw an adverse inference that Staff had retained a market expert whose opinion did not support Staff's position.
3. No Adverse Inference
[1094] We first address the last-mentioned contention by the Individual Respondents. The suggestion was not that we draw a conclusion based on evidence before us, but rather on an absence of evidence. Moreover, the suggestion was that, in so doing, we should speculate as to the reasons for that absence of evidence and, in effect, make a guess as to what the evidence might have been had it existed.

[1095] Although an adverse inference has its place in law, the evidence here did not warrant its application. The Individual Respondents' speculations were not supported by the evidence. There was no evidence that the person consulted by Staff would be qualified by this panel was an expert or that he – or any other such person – had provided any opinion to Staff on the Market Manipulation Allegation, much less that it would have been unfavourable to Staff's position.

[1096] Staff is entitled (within the bounds of fair process) to present its case as it sees fit, in the reasonable expectation that the decision-maker will make findings on the basis of such relevant evidence as is before it.

[1097] Expert evidence can, in some cases, be of considerable assistance to a panel, but that is not always the case. There is, in any event, no requirement for expert evidence, whether the topic is alleged market manipulation or another.

[1098] For these reasons, we conclude that it would be inappropriate to draw any inference either from Staff's not having called expert evidence on the Market Manipulation Allegation or from Staff not having presented evidence of the application of electronic trading data analysis. We therefore draw none.
THE EVIDENCE
1. Documentary Evidence
  [1099] The documentary evidence we considered included:
  - Brokerage Firm statements for the Cheshire Trading Account, the Lexington Trading Account and the Strategic Trading Account;
  - Head Office Daily Trading Activity Reports prepared by McDermid ("Daily Trading Reports") that recorded the volume, date, time and price of each securities trade executed by their respective brokers;
    
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  - daily Normal Vancouver Stock Exchange trading blotters prepared by McDermid that identified the buyer or the seller in each securities trade over the Exchange on a particular day;
  - the daily Security Record & Position prepared by McDermid that showed clients' activity and position in a particular security on a particular date;
  - the Exchange's Trading Surveillance Report (the "Surveillance Report") for Newmex Shares for the periods 24 February to 2 March 2000 and 20 September to 2 October 2000; and
  - the Exchange's Market Information for Newmex Shares for the period 4 January 2000 to 29 December 2000 that recorded prices – opening and closing, "High" and "Low", "Bid" and "Ask", "last price", 10-day closing average – and volumes.
    
    [1100] These records were introduced into evidence through counsel for Workum, with the exception of some of the monthly brokerage account statements which came from the Brokerage Firm, via Olnick. All of these records were generated and maintained in the usual and ordinary course of the business of the Exchange and the Brokerage Firm.
    
    [1101] Unfortunately, time-stamped buy orders or trade tickets were not in evidence. Without these, we could not determine precisely when during a day Olnick's purchase orders were entered into the trading system, nor the precise terms of his orders (for example, whether he placed a price or time limit on an order). Without the order timing information, we could not always determine with certainty whether Olnick had engaged in particular trading practices as alleged (such as improper "upticks" and "high closing"). The evidence before us did, however, enable us to ascertain essential information, notably (for Olnick's purchase orders) the volume, the price and whether he specified a price or offered to buy at the prevailing market price.
2. Witness Evidence
  1. Olnick
    [1102] Olnick testified in the Hearing as a witness for Staff. As discussed elsewhere in these reasons, we found Olnick to be a thoroughly unreliable witness. We therefore could not rely on any of his testimony, and we placed limited reliance on Olnick-sourced documentary evidence.
  2. Horgan
  2008 ABASC 363 (*)
  [1103] As mentioned, we questioned the depth of Horgan's expertise in trading techniques and their effects on market prices of publicly traded securities. Considering the totality of his evidence, we found portions useful but, over all, we found his focus to have been too narrow to be persuasive on the issues before us.
3. Evidence Relied On
[1104] For the reasons given, our analysis and findings of fact were based primarily on the documentary evidence and our own understanding of securities trading practices and their effects on market prices. We considered Horgan's testimony, to a degree. We did not rely on Olnick's testimony in making our findings on the Market Manipulation Allegation.
BACKGROUND
[1105] As noted, Olnick was a securities broker who worked in Vancouver from at least 1995 to 2002, first for McDermid and then for Haywood. Olnick was identified in both McDermid and Haywood records by the "registered representative" number 1079, which facilitated identification of his trading activities.

[1106] Olnick was first introduced to Workum in the mid-1980s. Their business relationship commenced in 1994 or 1995 when Workum transferred his personal brokerage accounts to Olnick. Olnick was also the registered representative for the Core Trading Accounts. These accounts, at various times, held cash and securities including PPI Shares and Newmex Shares. As discussed, Schöni testified that Workum dealt directly with Olnick and instructed Olnick's trading in the Core Trading Accounts.

TRADING IN NEWMEX SHARES

[1107] We now turn to the trading activity in Newmex Shares that Staff alleged was improper. To give context we provide an overview of the trading in Newmex Shares and review Olnick's specific trading activity. Although the definition of "trade" in the Act mentions a sale but not a purchase of a security, for simplicity in the discussion that follows we use "trade" and "trading" to refer to both purchases and sales.

Historical Newmex Trading

[1108] Newmex Shares were listed for trading only on the Exchange. Historically, Newmex Shares were thinly traded. Their trading was characterized by substantial spreads between "bid" (offers to buy) and "ask" (offers to sell) prices. There were relatively few trading days in 2000 on which more than 5 000 Newmex Shares changed hands and many trading days that year on which none were traded. Throughout 2000 –excluding February and September, which exhibited atypically high volumes – average trading volumes for Newmex Shares were only 36 493 per month. Including February and September in the computation raised the per-month average volume to 53 985 Newmex Shares, still well below the February and September volumes.

2008 ABASC 363 (*)

[1109] Newmex Shares traded on several occasions in 1998 and 1999 at prices in the vicinity of $1.00 per share. In 2000 the trading price of Newmex Shares ranged from a low of $0.35 to the high of $1.20 that it reached on 29 September 2000. For most of 2001, the Newmex Shares did not trade above $0.90.

[1110] Monthly trading in Newmex Shares during 2000 looked like this (data for the two months that are the focus of the allegations are emphasized):

Month	Volume	Range of Closing Prices	Month-End Closing Price
January	67 963	$0.35 to $0.65	$0.40
February	136 250	$0.35 to $1.00	$1.00
March	50 600	$0.90 to $0.47	$0.47
April	14 350	$0.36 to $0.59	$0.50
May	28 639	$0.36 to $0.45	$0.36
June	28 400	$0.35 to $0.65	$0.65
July	26 260	$0.52 to $0.75	$0.60
August	38 480	$0.55 to $0.62	$0.55
September	146 660	$0.55 to $1.20	$1.20
October	39 840	$0.65 to $1.00	$1.00
November	42 874	$1.00 to $1.05	$1.04
December	27 526	$1.00 to $0.65	$0.65

[1111] This summary shows clearly how atypical were the trading volumes in February and September 2000. The February volume was more than double that for any other month in the year except September, in which the volume was yet higher.

Olnick's Trading

[1112] We examined trading in Newmex Shares in and about the latter days of February and September 2000, focusing on two key intervals within those periods: 25 to 29 February 2000 (the "February Period"); and 26 to 29 September 2000 (the "September Period"). We considered whether there were discernable patterns, or changes in trading, and whether any such patterns or changes could be attributed to Olnick's trading.

[1113] To assist our analysis, we combined the trading data from the Daily Trading Reports and the Surveillance Report. We note that Horgan did not rely on the Daily Trading Reports because he did not know the times the orders were entered and would have preferred to see Olnick's time-stamped original orders. While those might indeed have been helpful, the Daily Trading Reports did provide valuable, relevant information.

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[1114] For days when there were differences between the sequences of orders as recorded in the Daily Trading Reports and in the Surveillance Report, we relied on the sequence recorded in the former because, as we understood it, the Daily Trading Reports recorded buy orders in the order in which they were received and entered into the trading system. As can be seen from the trading data which follows, Olnick's buy orders were often filled not in a single trade but in multiple tranches at different times. The trades recorded on the Surveillance Report did not indicate the volume or time of the buy orders entered by Olnick. Rather, this report recorded the volumes and times that resulting trades were executed on the Exchange.

February Trading

Data

[1115] A total of 28 570 Newmex Shares traded in the period from 1 to 24 February 2000, at prices ranging from $0.38 to $0.75. No Newmex Shares traded on six trading days in February. On 23 February, 2170 Newmex Shares traded; the closing price was

$0.44.

[1116] On 24 February, 1000 Newmex Shares traded; the closing price was $0.65. Olnick apparently made no trades on this day. We consider that the $0.21 price increase from the previous day could have been attributable to some extent to a news release issued by Newmex on 23 February (discussed below).

[1117] We now survey Olnick's February Period trading in Newmex Shares, by day:

25 February 2000

Purchasing account	Volume ordered	Order price	Volume bought	Trade price	Trade time	Selling firm*
Strategic	5000	$0.60	2500	$0.60	07:32:35	TD Securities
			2500	$0.60	07:33:48	TD Securities
Strategic	2500	$0.70	2500	$0.70	09:33:27	RBC Dominion
Cheshire	5000	$0.80	2500	$0.80	11:00:46	Merrill Lynch
			1000	$0.80	11:00:46	Nat'l Bank
			1500	$0.80	11:00:46	Canaccord
Strategic	5000	$0.85	1500	$0.85	12:29:28	Canaccord
			1000	$0.85	12:36:14	Canaccord
			500	$0.85	12:40:15	Canaccord

In this and succeeding tables, the information under the caption "Selling firm" consists primarily of abbreviated versions of the names of registered dealers. In some cases the evidence disclosed that the seller was one of the Corporate Respondents or another Olnick client; in those cases, that seller is identified under this caption.

Total trading volume 45 280 shares

Olnick's trading volume 15 500 shares Olnick's trading volume as percentage of total 34%

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Other observations:

20 buy orders were filled for clients of other dealers at prices ranging from
$0.57 to $0.85

the closing price was $0.81

28 February 2000

Purchasing account	Volume ordered	Order price	Volume bought	Trade price	Trade time	Selling firm
Strategic	5000	$0.75	2000	$0.75	12:47:53	Canaccord
Strategic		$0.75	1500	$0.75	13:13:57	Latimer (WD)
Strategic	4000	$0.80	1000	$0.80	09:30:24	RBC Dominion
Strategic		$0.80	2500	$0.80	09:43:05	TD Securities
Strategic		$0.80	500	$0.80	09:51:40	Canaccord
Strategic	2500	$0.85	1000	$0.85	07:24:21	Georgia Pac
Strategic		$0.85	1500	$0.85	08:34:42	Canaccord
Strategic	2500	$0.85	2500	$0.85	13:09:10	Canaccord
Strategic	2500	$0.85	2500	$0.85	13:29:05	Canaccord
Strategic	2500	$0.90	2500	$0.90	07:16:31	Merrill Lynch

Total trading volume 24 000 shares

Olnick's trading volume 17 500 shares Olnick's trading volume as percentage of total 73%

Other observations:

one of Olnick's buy orders was not filled, but was followed by two other buy orders for additional shares, indicating more demand than supply
four buy orders were filled for clients of other dealers at prices ranging from
$0.75 to $0.95

the closing price was $0.85

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29 February 2000

Purchasing account	Volume ordered	Order price	Volume bought	Trade price	Trade time	Selling firm
Cheshire	2500	$0.80	1000	$0.80	09:30:55	UBS Bunting
Strategic	8000	$0.85	5500	$0.85	09:31:44	Canaccord
Strategic		$0.85	2500	$0.85	09:31:44	Merrill Lynch
Strategic	11 000	$0.85	8500	$0.85	12:26:46	Canaccord
Strategic		$0.85	2500	$0.85	12:28:24	TD Securities
Strategic	1000	$0.85	500	$0.84	12:30:12	TD Securities
Cheshire	2500	$0.94	2500	$0.94	12:48:55	Global Securities
Strategic	5000	$0.95	500	$0.95	12:52:13	Merrill Lynch
Strategic		$0.95	3500	$0.95	12:52:13	Canaccord
Strategic	5000	$0.99	2500	$0.98	13:07:17	Merrill Lynch
Strategic		$0.99	2500	$0.99	13:07:17	Merrill Lynch
Strategic	4000	$1.00	2500	$1.00	13:14:53	Merrill Lynch
Strategic		$1.00	*1000	$1.00	13:14:53	Merrill Lynch

last trade of the day recorded on the Surveillance Report

Total trading volume 38 400 shares
Olnick's trading volume 35 500 shares Olnick's trading volume as percentage of total 92%

Other observations:
- Olnick placed four separate buy orders that were not completely filled, indicating more demand than supply
- three buy orders were filled for clients of other dealers at prices ranging from
  $0.77 to $0.85
- the closing price was $1.00
- Olnick clearly dominated trading and, by setting the higher prices on this day for Newmex Shares, would be viewed as leading the price for Newmex Shares

Trading after February Period
[1118] Trading in Newmex Shares continued as that week turned into March. On 1 March, 6900 Newmex Shares traded. Olnick sold 3000 shares at $1.05 for an account in the name of his sister-in-law. Olnick also purchased 500 Newmex Shares at $0.90 for the Cheshire Trading Account. The closing price for the day was $0.90.

[1119] On 2 March Olnick made two purchases of Newmex Shares – 500 shares at
$0.80 for the Cheshire Trading Account and 500 shares at $0.75 for the Strategic Trading
Account. The total volume of Newmex Shares traded that day was 1660 and the closing price was $0.67.

[1120] On 3 March, no Newmex Shares traded.

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[1121] The next week (6 to 10 March) saw a total of 21 040 Newmex Shares traded. Closing prices over the week declined from $0.65 on Monday to $0.56 on Friday. The following week (13 to 17 March) saw 16 400 Newmex Shares traded; closing prices ranged from $0.40 to $0.68. In the succeeding week (20 to 24 March), 1800 Newmex Shares traded; the closing price throughout was $0.63. During the last week of March (27 to 31 March) Newmex Shares traded only on the Thursday (2800 shares traded; the closing price was $0.47).
Observations on February Period and After
[1122] Over the course of the February Period the price of Newmex Shares increased from $0.81 to $1.00. Olnick was overwhelmingly – 92% by volume – the most active buyer on 29 February, the last trading day of the month. During that day the price rose sharply from $0.80 to close at $1.00.

[1123] The next day (1 March) the closing price of Newmex Shares fell to $0.90; throughout March it remained well below $1.00. Over ensuing months the price fell as low as $0.35 (on 7 June) and traded in the range of $0.50 to $0.75 during the summer.

September Trading

Data

[1124] From 1 to 30 September 2000 a total of 146 660 Newmex Shares were traded. No Newmex Shares were traded on nine trading days in September.

[1125] In thin trading, the daily closing price held steady at $0.55 from the first week of September until 18 September, when it rose modestly to $0.58; no Newmex Shares traded the following day. On 20 September Olnick bought 7000 shares at $0.70 for the Cheshire Trading Account. A total of 8500 Newmex Shares traded that day, and the closing price rose to $0.70.

[1126] On 21 September, 6800 Newmex Shares traded and the closing price was

$0.70. Olnick placed two separate buy orders for the Cheshire Trading Account, each for 5000 shares at $0.70, but was only able to purchase 6000 of the 10 000 shares he sought to buy.

[1127] On 22 September, 1550 Newmex Shares traded and the closing price was

$0.85. Olnick was apparently not involved in any of the trades on that date.

[1128] The next trading week began on 25 September. Olnick placed buy orders (and a few sell orders) each day that week.

2008 ABASC 363 (*)

[1129] Newmex Shares had opened on 25 September at $0.82. Olnick entered one buy order that day, for 5000 Newmex Shares at $0.90, for the Cheshire Trading Account; he was able to fill 4000 shares of this order, amounting to 21% of the 19 200 Newmex Shares traded that day. The closing price was $1.10, up $0.25 or 29% from the previous day.

[1130] We now survey Olnick's trading in Newmex Shares during the September Period, by day:

26 September 2000

Purchasing account	Volume ordered	Order price	Volume bought	Trade price	Trade time	Selling firm
Lexington	10 000	$1.05	6700	$1.05	08:47:43	RBC Dominion
Lexington		$1.05	600	$1.05	09:00:00	TD Securities
Lexington		$1.05	2700	$1.05	10:25:54	BMO Nesbitt
Lexington	5000	$1.05	**300	$1.05	12:35:10	BMO Nesbitt
Cheshire	4000	$1.09	*1500	$1.08	07:17:32	RBC Dominion
Cheshire		$1.09	2500	$1.09	07:17:32	Union Securities
Lexington	2800	$1.15	300	$1.05	11:55:14	BMO Nesbitt
Lexington		$1.15	2500	$1.15	11:55:14	Union Securities
* **	first trade of the day recorded on the Surveillance Report last trade of the day recorded on the Surveillance Report
	Total trading volume Olnick's trading volume Olnick's trading volume as percentage of total				17 400 shares 17 100 shares 98%

Other observations:

one other dealer bought Newmex Shares that day (300 shares at $1.05)

the closing price was $1.05

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27 September 2000

Purchasing account	Volume ordered	Order price	Volume bought	Trade price	Trade time	Selling firm
Cheshire	5000	$0.95	*500	$0.95	12:40:20	TD Securities
Cheshire	5000	$1.00	3000	$1.00	08:59:05	TD Securities
Cheshire		$1.00	1000	$1.00	10:17:58	TD Securities
Cheshire		$1.00	1000	$1.00	11:15:48	TD Securities
Lexington	4600	$1.05	3000	$1.05	07:40:40	TD Securities
Lexington		$1.05	1500	$1.05	07:46:21	TD Securities
Lexington		$1.05	100	$1.05	08:13:26	TD Securities
Lexington	2500	$1.05	100	$1.05	09:02:33	TD Securities
Lexington		$1.05	1000	$1.05	09:02:43	TD Securities
Lexington		$1.05	1400	$1.05	09:28:12	TD Securities
Lexington	4700	$1.05	**100	$1.05	06:34:06	Canaccord

first trade of the day recorded on the Surveillance Report; Olnick cancelled the balance

** last trade of the day recorded on the Surveillance Report

Total trading volume 15 527 shares

Olnick's trading volume 12 700 shares Olnick's trading volume as percentage of total 82%

Other observations:

two other dealers had their buy orders filled (27 shares at $1.00; 2800 shares at
$1.00 in four transactions)

the closing price was $0.95

2008 ABASC 363 (*)

28 September 2000

Purchasing account	Volume ordered	Order price	Volume bought	Trade price	Trade time	Selling firm
Cheshire	1000	$0.90	1000	$0.90	10:24:53	Global Securities
Cheshire	5000	$0.90	4500	$0.90	10:24:53	Global Securities
Cheshire	4500	$0.95	4500	$0.95	09:27:52	Global Securities
Lexington	5000	$1.00	2000	$1.00	10:26:04	Georgia Pac
Lexington		$1.00	2000	$1.00	12:33:05	TD Securities
Lexington	500	$1.05	500	$1.05	10:26:29	TD Securities
Lexington	2700	$1.10	1600	$1.10	10:28:25	TD Securities
Lexington		$1.10	1100	$1.10	10:28:25	RBC Dominion
Lexington	2500	$1.12	*2500	$1.12	13:22:05	Strategic

last trade of the day recorded on the Surveillance Report

Total trading volume 19 910 shares

Olnick's trading volume 19 700 shares Olnick's trading volume as percentage of total 99%

Other observations:

one other dealer's buy order was filled that day (210 shares at $0.92 – the first trade of the day at 07:33:09)
the closing price was $1.12, an increase of $0.17 or 18% above the previous day's close

Olnick's last trade that day – which slightly increased the price – was a sale of 2500 Newmex Shares from the Strategic Trading Account to the Lexington Trading Account; that is, Olnick was on both sides of the trade

2008 ABASC 363 (*)

29 September 2000

Purchasing account	Volume ordered	Order price	Volume bought	Trade price	Trade time	Selling firm
Lexington	7500	$1.00	4100	$1.00	07:33:31	Canaccord
Lexington		$1.00	200	$1.00	08:49:09	RBC Dominion
Lexington	1000	$1.00	*1000	$1.00	07:13:32	Canaccord
Lexington	5000	$1.05	5000	$1.05	07:37:14	Canaccord
Strategic	2500	$1.07	2500	$1.07	13:00:35	Canaccord
Lexington	100	$1.08	100	$1.08	13:15:19	Canaccord
Lexington	4700	$1.10	4700	$1.10	07:40:47	Canaccord
Lexington	4000	$1.12	4000	$1.12	11:48:09	TD Securities
Lexington	5000	$1.14	2500	$1.13	07:36:32	TD Securities
Lexington		$1.14	2500	$1.14	07:36:32	Canaccord
Cheshire	5500	$1.15	2500	$1.14	08:50:07	TD Securities
Cheshire		$1.15	3000	$1.15	08:50:07	TD Securities
Lexington	1500	$1.15	1500	$1.15	12:21:05	Canaccord
Cheshire	2500	$1.15	2500	$1.15	12:41:08	Canaccord
Lexington	6000	$1.19	100	$1.07	13:01:19	Canaccord
Lexington		$1.19	5000	$1.18	13:01:19	Canaccord
Lexington Lexington	9000	$1.19 $1.20	**900 2300	$1.19 $1.18	13:01:19 13:19:25	Olnick for client HM Canaccord
Lexington Lexington		$1.20 $1.20	4100 *2500	$1.19 $1.20	13:19:25 13:19:25	Olnick for client HM Olnick for client
Lexington		$1.20	****100	$1.20	13:20:21	SG TD Securities

first trade of the day recorded on the Surveillance Report
** Olnick was on both sides of the trade (bought for Lexington; sold for client HM)
*** Olnick was on both sides of the trade (bought for Lexington; sold for client SG)
**** last trade of the day recorded on the Surveillance Report

Total trading volume 53 673 shares
Olnick's trading volume 51 500 shares Olnick's trading volume as percentage of total 96%

Other observations:
- two other dealers had buy orders filled that day (40 shares at $0.97 and 33 shares at $1.02 for one dealer; 2500 shares at $1.06 for the other)
- the closing price was $1.20
- three of Olnick's purchases for Lexington came from accounts of two other Olnick clients – Client HM and Client SG – and were executed late in the trading day
- this was the last trading day of the month

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Trading after September Period
[1131] During the next trading week (2 to 6 October) a total of 14 000 Newmex Shares traded. On 2 October Olnick was responsible for 7000 of the 9500 Newmex Shares traded; the closing price was $0.90. On 3 October, 4500 Newmex Shares traded and they closed at $0.75. No Newmex Shares traded in the remainder of the week.

[1132] The next trading week (10 to 13 October), 3000 Newmex Shares traded on two days; the closing prices were $0.70 and $1.00. The following week (16 to 20 October) 15 040 Newmex Shares traded; closing prices ranged from $0.65 to $0.70. The next week (23 to 27 October) saw 4700 shares traded on one day; the closing price for the week, and the month, was $0.70 The final trading week of October (30 and 31 October) saw 3100 shares traded on 31 October; Newmex Shares closed the month at $1.00.

[1133] Newmex Shares traded only sporadically in November. Closing prices ranged during the month from $1.00 to $1.05. December closing prices fell from $1.00 to reach
$0.65 on 27 December, the last day on which any Newmex Shares traded that year.
Observations on September Period and After

[1134] Immediately before the September Period began, Newmex Shares had closed (on 25 September) at $1.10.

[1135] During the September Period 106 510 Newmex Shares traded. Olnick was responsible for 100 600 of these – 94%. On one day during the period, 28 September, Olnick accounted for substantially all (99%) of the buying; Newmex Shares moved up that day 22% from the opening trade price of $0.92 to close that day at $1.12.

[1136] The last trading day of the month was 29 September. Newmex Shares opened the day at $1.00. Trading volume for the day was more than double that on any earlier day that week. Olnick was, by a vast margin, the largest buyer that day (over 94% of all trades of at least a board lot, and his purchases accounted for 96% of the number of Newmex Shares traded).

[1137] After all Olnick's trades that day, Newmex Shares closed for the day, and the month, at $1.20. This was an increase of $0.20 on the day.

[1138] 29 September stood out from what followed. As noted, the price dropped, and remained lower – sometimes markedly lower – for the remainder of the year. From what

we could determine, over the next year Newmex Shares never again reached the price ($1.20) at which it closed on that single day in September 2000.

ISSUES
2008 ABASC 363 (*)
[1139] In determining whether the Respondents contravened section 93(b) of the Act as alleged by Staff, we must determine:
- Did Olnick's trading create, or might it have resulted in, an artificial price for Newmex Shares?
- If so, were either or both of the Individual Respondents responsible?
ANALYSIS

The Law
[1140] We now review the law and apply the facts to the law to determine whether Olnick's purchases created or may have resulted in artificial prices for the Newmex Shares.
1. General Principles
  [1141] Alberta securities laws are designed to protect investors and to foster a fair and efficient capital market, and confidence in that market. These objectives require that those engaged in securities trading act with integrity, and that market participants have access to adequate, reasonably reliable information on which to base trading and investment decisions. Essential to this is that trading activity involve real transactions reflecting genuine supply and demand and genuine assessments of value. Trading that creates a false impression about the price or value of, or level of interest in, a security is fundamentally incompatible with fair and efficient market operation. Alberta securities laws prohibit such deceptive practices. In 2000 (the time of the impugned conduct) section 70.1(b) of the Act (predecessor to section 93(b)) stated:
  
  No person or company shall, directly or indirectly, trade in or purchase a security . . . if the person or company knows or ought reasonably to know that the trade or purchase . . .
  
  . . .
  
  (b) creates or may result in an artificial price for a security . . .
  
  [1142] This Commission discussed "artificial price" in this context in Re Podorieszach, [2004] A.S.C.D. No. 360 at paras. 84-90:
  
  . . . In our view, the meaning can best be determined by considering it in the context of the Act and the framework of securities regulation established by the Act. that
  framework is designed to protect investors and to foster fair, efficient capital markets and confidence in those markets, all of which turn on the integrity with which the market and
  market participants operate. Key to that market integrity is that the market be able to operate on real information.
  
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  . . . in this context, an artificial price can be described as a price that differs from the price that would result from the market operating freely and fairly on the basis of information concerning true market supply and demand.
  
  The capital market is the venue in which buyers and sellers come together and trade on the basis of their own investment decisions, assessments and preferences. The accumulation of their interactions makes up market supply and demand and establishes market prices. Any transactions between buyer and seller can affect market price. Normal-course transactions between buyers and sellers, operating at arm's length, reflect real demand and supply; whatever the effect on price, it can be said to be a genuine market effect. If, however, demand or supply is distorted, then price will likely also be distorted – no longer reflective of real market demand and supply, it will be artificial.
  
  Investors must have confidence that they can trade in a marketplace in which the available information properly reflects genuine trading activity. Investors in the capital market base their behaviour and their investment decisions on posted trading prices. They are entitled to assume that the posted prices reflect bona fide transactions in a market operating free of improper influence. Their own transactions are then reflected in subsequent prices. If any investor makes an investment decision in reliance on a posted price that does not reflect genuine trading activity, that investor may be harmed. Subsequent transactions could also be materially affected by that single instance of a misleading posted price. The result could be harm to investors generally and the undermining of investor confidence in the marketplace.
  
  An individual's trading activity may have the intended effect of raising or lowering the price of a security to a level different than it would be under normal market conditions. Alternatively, the trading activity may maintain a price when it would otherwise have risen or fallen. In our view, both situations create an artificial price because the price is not reflective of the market's unimpeded judgment of the value of the security being traded. Such conduct that is designed to affect artificially the prices on the market is contrary to the public interest because it misleads other buyers and sellers . As the US Securities and Exchange Commission observed in [Re Edward J. Mawod & Co., 46 SEC 865 (1977), affirmed 591 F.2d 588 (10th Cir. 1979)] at 871-72:
  
  When investors and prospective investors see activity, they are entitled to assume that it is real activity. They are also entitled to assume that the prices that they pay and receive are determined by the unimpeded interaction of real supply and real demand so that those prices are the collective marketplace judgments that they purport to be. Manipulations frustrate these expectations. They substitute fiction for fact. …The vice is that the market has been distorted and made into 'A stagemanaged performance'.
  
  Our conclusion is that in assessing whether a price is artificial, it is relevant to consider whether one party or another to a transaction is or is not acting in response to real demand for or supply of a security. For this purpose, the circumstances surrounding a transaction, including any special attributes of the parties and the manner in which it is carried out, can indicate whether or not the transaction reflects or does not reflect real demand and supply.
  Others have reached a similar conclusion. For example, the TSE in its TSE Policy 4-202 said . . . essentially that an artificial price is one not justified by supply or demand having regard to the particular circumstances involved in the trade. [emphasis added]
  
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  [1143] Thus, the fact that trading changes a price does not by itself mean that the price is artificial. The test is whether the trading itself was an expression of bona fide investment decisions by both parties to the trade – that is, genuine market demand and supply. If so (and absent some other factor), then the resulting price is not artificial. Artificiality is, rather, essentially the product of intentional misrepresentation of genuine demand or supply.
2. Application to Present Case
  [1144] Olnick was the registered representative for the Core Trading Accounts. He traded Newmex Shares in those accounts before, during and after the February and September Periods. We must determine whether his trading during the February and September Periods reflected genuine investment decisions or was, instead, contrived.
  
  [1145] We examined the evidence to understand both Olnick's actual trading conduct and the reasons for it, including whether he was motivated by something other than real demand for Newmex Shares. Based on the analysis below, we find that Olnick's trading was intended to create – and did create – an artificial price for Newmex Shares, culminating in a price of $1.00 on 29 February and $1.20 on 29 September 2000.
Was an Artificial Price Created?
1. Manipulative Trading Techniques
  [1146] A recent decision of the British Columbia Securities Commission (the "BCSC") involving market manipulation, Re Siddiqi, 2005 BCSECCOM 416 at para. 114, enumerated several "hallmarks of market manipulation" including:
  - market domination;
  - wash trades;
  - involvement in closing trades and "high closes";
  - uptick trades; and
  - uneconomic trading.
    
    [1147] These are, indeed, techniques that can manipulate markets. However, none of these techniques is, in itself, necessarily determinative of illegal trading. Even in combination, it does not necessarily follow that there has been illegal trading. However, where one or more of these indicia are present, scrutiny may be warranted.
2. Analysis of Trading Data in Context of Manipulative Techniques [1148] For the reasons that follow, we conclude from the trading data that Olnick applied all of these trading techniques during the February and September Periods. We
  found his trading suspicious and consistent with an intent to influence or move the market price of Newmex Shares. We discuss his use of these techniques in turn.
  1. Market Domination
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    [1149] Evidence of sudden market domination in a security by one market participant may reflect manipulation.
    
    [1150] The volume of trading in a security can indicate investor interest. Rising volumes can suggest liquidity (greater prospects of an investor being able to sell, if desired), in turn a possible enticement to investing.
    
    [1151] Large buy orders for a thinly-traded, comparatively illiquid security can have a dramatic effect. They can generate a short-term demand-supply imbalance, and they can be read as a signal that the buyer believes there is unrecognized value in the security – in either case, potentially putting upward pressure on the price. Repeated buying can provide momentum, strengthening the signals and the price effect. A single market participant dominating the buy side in these circumstances can have a marked impact on price.
    
    [1152] During both the February and September Periods, Olnick made several purchases of comparatively large volumes of thinly-traded Newmex Shares over a very few days. Even on days when his buy orders were not filled, he made further buy orders that same day. This suggested more demand than supply for Newmex Shares and created the illusion of momentum in the market for those securities. His successive buying was likely to convey an appearance of sustained or growing interest in the security, perhaps inducing others to buy.
    
    [1153] Olnick clearly – overwhelmingly – dominated the market for Newmex Shares in the February and September Periods. As set out above, he was the largest purchaser during these two periods, both in terms of number of trades and number of shares traded. Stated succinctly:
    - In the last two days of February he purchased 85% of the Newmex Shares traded. He did this for the Strategic and Cheshire Trading Accounts.
    - During the last week of September he purchased 84% of the Newmex Shares traded, primarily for the Cheshire and Lexington Trading Accounts.
      
      [1154] Looking specifically at the last trading day in each of February and September 2000, Olnick's trading dominance was even more apparent:
    - He entered eight buy orders on 29 February. His purchases represented 92% of the Newmex Shares traded that day.
    - He entered 13 buy orders on 29 September. His purchases represented 96% of the Newmex Shares traded that day.
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    [1155] The trading that he so dominated resulted in some striking price movements. His first purchase on 29 February was priced at $0.80. His subsequent purchases were at
    $0.85, $0.84, $0.94, $0.99 and finally $1.00. Three buy orders by others were filled by sellers at prices ranging between $0.77 and $0.85. Olnick was clearly the dominant trader and the price leader on this day.
    
    [1156] Similarly, on 29 September Olnick entered buy orders beginning at $1.00, then moving to $1.05, $1.07, $1.08, $1.10, $1.12, $1.14, $1.15 and $1.19, ending at $1.20. The resulting trades showing a similar progression in price from $1.00 to end at $1.20. Olnick was clearly the dominant trader and price leader on this day also.
    
    [1157] In our view, Olnick's dominance as buyer of Newmex Shares during the February and September Periods was consistent with Staff's position that his trading was intended to move the market price of the Newmex Shares to $1.00 and $1.20 by the end of the respective periods.
  2. Wash Trades or Match Orders
    [1158] A wash trade is one in which ultimate beneficial ownership or control does not change – the ultimate seller is also the buyer. Match orders involve buy and sell orders placed in the expectation that they will be matched and executed together. Both types of trading are potential manipulative techniques.
    
    [1159] Wash trades merit particular scrutiny, simply because they give an appearance of activity between two players in the market when, in fact, there is only one.
    
    [1160] Match orders are not inherently problematic. However, match orders guided by one market participant can also, like wash trades, give a misleading impression of more market participants making decisions than is in fact the case.
    
    [1161] On 28 September Olnick entered an order on behalf of the Lexington Trading Account to buy 2500 Newmex Shares at $1.12. This was filled as the last trade of the day with a sell order he had entered for the same volume at the same price on behalf of the Strategic Trading Account. The next day Strategic bought back the same number of Newmex Shares.
    
    [1162] These two trades are troubling because (as we found above) the same individuals – the Individual Respondents – had control and direction over trading in both accounts. Here, a match order trade between a buyer and seller that were effectively one and the same was followed the next day by the seller buying the same number of shares
    to restore its position of the day before. This, we conclude, was a mixture of match orders and a wash trade. The impression of active trading by different market participants was incorrect and misleading.
    
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    [1163] On 29 September Olnick entered two sell orders – 5000 shares at $1.19 and 2500 shares at $1.20 – for two clients unrelated to this proceeding. Those sell orders were matched by two buy orders entered by Olnick for the Lexington Trading Account. These match order trades resulted in a new high for the trading price of the Newmex Shares.
    
    [1164] We conclude that Olnick used wash trading and match orders on 28 and 29 September in a way that gave a misleading impression of market activity.
  3. Closing Trades and "High Closes"
    [1165] A closing trade is the last trade of a daily trading session on an exchange. The price of the trade is the closing price for the day. Closing prices are widely reported and used as references for measurement purposes (for example, computing the value of a securities portfolio, or pricing a transaction), for assessing the state of the market or market sentiment, and as a factor in making investment decisions.
    
    [1166] A "high close" occurs when the last trade of the day occurs at a price higher than the previous trade.
    
    [1167] Obviously, on any day on which there has been a trade, there is a closing trade. Equally, since market prices move, some closing trades are, inevitably, high closes. Consequently, these are not conclusive indicia of impropriety.
    
    [1168] Similarly, a closing trade does not necessarily result from a late-day order. That will depend on the level of trading activity throughout the day. If trading is light, an order placed quite early may be the last of the day; conversely, even a rather late order placed in a hectic market might be followed by others before the trading session ends.
    
    [1169] However, the importance of closing prices can make them a target for manipulators, and high closing an effective manipulative technique. In this pejorative sense, "high closing" would typically connote placing an order for an exchange-traded security close enough to the end of the trading day that it is unlikely to be followed by other trades. A late-day buy order not prompted by a genuine investment intent might thus be expected to maintain or raise the closing price (or, if the bid is not filled, the closing bid price) above what genuine market demand would have produced.
    
    [1170] In this case, although we did not see Olnick's order tickets, we conclude from the data that Olnick was involved in some high closing trades during the February and September Periods. On the last trading day of each of February and September 2000, a
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    number of Olnick's buy orders were filled at the end of the day, and the trades were made at prices higher than what preceded them. These were buy orders for a thinly-traded security for which there was little competition in the market from other buyers; we are in no doubt that Olnick knew this, experienced trader that he was. We therefore conclude that he knew that his buy orders at his order price – even if entered well before the close of the trading day (as mentioned, we do not know precisely when he entered his orders) –were likely to be filled, with little risk that subsequent orders would result that day in trades at lower prices.
    
    [1171] We conclude that Olnick engaged in high closing, in circumstances that warrant close scrutiny.
  4. Upticks
    [1172] An "uptick" is a trade at a price higher than the previous trade price. Given that market prices change, upticks (and downticks) are a normal outcome of legitimate market activity. However, trading designed to produce an uptick – and, with it, an impression of market interest and favour – can obviously be manipulative.
    
    [1173] The data available to us were sufficient to demonstrate that Olnick entered consecutive buy orders for Newmex Shares at prices above the most recent (or what he might reasonably believe to have been the most recent) trade price. For example, the Daily Trading Reports show that Olnick entered buy orders at progressively higher prices (even if rising only a cent or two) over the course of both 29 February and 29 September 2000. We need not know the exact times of the orders for this conclusion; it is sufficient that we know the sequence of his orders, as we do.
    
    [1174] The evidence suggested that these orders were directed at producing the higher prices – the upticks – that indeed occurred, rather than reflecting a genuine desire to acquire the shares at the best price then available.
  5. Uneconomic Purchasing
    [1175] The capital market generally, and an exchange particularly, is a venue in which rationally-minded economic actors endeavour to bring together their respective investment objectives and assessments to execute investment decisions at the best price (the highest, for the seller; the lowest, for the buyer) then attainable. Factors other than price may, of course, influence investors. However, apparently uneconomic buying can indicate not just inefficiency, but also impropriety.
    
    [1176] Olnick was an experienced broker. The evidence made clear that he was familiar with Newmex and the market for Newmex Shares. We are in no doubt that he was aware of the effects that aggressive buying would have on the price of Newmex Shares.
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    [1177] Not untypically, a broker who is asked by a client to buy or sell a relatively large quantity of a security – particularly a thinly-traded security – will try to execute the order in a series of trades over a period of days (or longer), both to take advantage of ordinary fluctuations in the share price and to avoid overloading the market and triggering sudden, large price changes adverse to the client's interest. In other words, a smooth market response would be sought.
    
    [1178] Olnick did not act in this way in the February and September Periods. Rather, he concentrated his buying of Newmex Shares over two days in February (28 and 29) and over four days in September (26 to 29), making the bulk of his purchases on the last trading day of each month. In so doing he made no evident effort to accumulate Newmex Shares for the Core Trading Accounts at the most favourable available prices. To the contrary, he created a situation that precluded accumulation at favourable prices.
    
    [1179] Olnick's behaviour during the February and September Periods was, moreover, markedly unlike his more market-typical behaviour before, between and after those two periods. Outside the February and September Periods, he acted in a more rational and expected economic manner.
    
    [1180] Olnick's trading during the February and September Periods did not evidence the economic behaviour typical either of the market generally, or of himself outside those periods. We conclude that his focused and aggressive buying activity during those periods was so inconsistent with a usual and prudent economic purpose that it did not reflect a genuine investment intent.
  6. Aggregation of Indications
    [1181] Olnick's trading during the February and September Periods thus involved not one, but multiple, examples of several practices aptly described as potential hallmarks of manipulation. In so doing, he not only acted in some cases quite unlike what would typically be expected of rational economic actors – particularly experienced traders like him – but he also departed from his own more typical market behaviour exhibited at other times. His trading during these two periods was distinctly odd and disturbing.
    
    [1182] The consequence of Olnick's trading was notable. In each case, the market (led by Olnick's trading) produced increases in the closing price of Newmex Shares for the months of February and September 2000. Olnick's bursts of buying activity in these two periods did not continue, and the closing prices set for the two months were not sustained.
    
    [1183] In short, Olnick's trading behaviour in the February and September Periods was highly suspicious. He used several techniques capable of manipulating prices, his conduct was not economically explicable, and his activity produced changes in the price of Newmex Shares.
3. Expert Evidence
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  [1184] Horgan opined that it did not appear to him from the trading data that the market price of Newmex Shares had been manipulated. In forming his opinion he looked at the upticks, the downticks and "no-change" trades during the February and September Periods. He acknowledged that any buying in a thinly-traded security would probably move the price up.
  
  [1185] Horgan commented that between 25 February and 2 March 2000 the price of Newmex Shares moved only "marginally" from an opening of $0.60 to a close of $0.75. In so doing, he was necessarily suggesting that the $0.15 difference – actually a 25% increase – was merely marginal. More significantly, he acknowledged that "[t]here was trading in-between that was higher" – although he did not specify, this would have included the spike to $1.00 on 29 February – but he appeared to disregard that intervening activity. This disregard was perhaps consistent with a comment he made concerning activity on a particular day during the September Period: it would be necessary "to look at it in the context of a period of days".
  
  [1186] Horgan's evidence was that he had originally been unable to reach a conclusion as to whether the market had been manipulated but then, apparently on considering trading over a broader period, concluded that either there was no proof of manipulation or that, if there were, there were other more likely candidates for culpability than the Brokerage Firm (and Olnick). He elaborated on his belief that no artificial price had been created because "every time there was an uptick by any particular broker, the other brokers traded at that same level, so that seemed to be where the market was". He said he found it interesting that the highest price in the period was a trade for $1.05 on 1 March as a result of a sale made by the Brokerage Firm for the account of a person not part of this proceeding (Horgan did not appear to know that – as the evidence showed – the sale had been made by Olnick for his sister-in-law).
  
  [1187] We found Horgan's observations uninformative. That others traded with Olnick indicated nothing – an uptick is a trade which necessarily involves both buyer and seller, and if the bid price was attractively high it would naturally entice a seller. That might therefore be "where the market was", but it tells us nothing about whether the market was led there properly or improperly. Similarly, if Horgan were really implying that the price did not immediately drop back, the same point applies (we also note that Olnick's domination of the market and multiple buy orders were unlikely to let the market drop back).
  
  [1188] The key factor missing from Horgan's analysis seemed to be a proper analysis of intent. Horgan appeared to assume that genuine investment intent on one side of a trade demonstrated that it was bona fide. That is incorrect. We reject his opinion on this point.
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  [1189] Horgan also concluded that there was no manipulation of the price of Newmex Shares in the September Period. He focused his attention and his evidence on the pattern of trading in Newmex Shares over the last week of September 2000, more than on the last trading day of the month. He also seemed to place some emphasis on bid and ask prices after the close of the trading day. With that focus, he noted that: trading in Newmex Shares was undertaken through a number of brokerage firms, not just one or two; while the Newmex Share price rose significantly in that last week of September, a large rise occurred on 25 September (rising from $0.82 to $1.10), the Brokerage Firm being but one of five firms trading Newmex Shares that day; and, after reaching $1.20 in the final trade on 29 September, the after-closing bid and ask range was $1.00 to $1.15. This, Horgan suggested, indicated that the $1.20 closing price for the month was not out of line with where a reasonably active market had been moving Newmex Shares, and therefore not a troubling indicator of manipulation. He stated that, although the market price "moved up considerably" during the period, it was "moved up at different times by different participants".
  
  [1190] Horgan commented on other specific trades. One early on 29 September was a cross between two clients of the same broker (not the Brokerage Firm) at $1.06. This seemed to suggest that, were the Brokerage Firm (Olnick) seeking to buy for its clients, it had an opportunity to accept this $1.06 price but did not do so, instead buying over the remainder of the day at ever-increasing prices. Horgan characterized this as an "anomaly".
  
  [1191] Staff in cross-examination elicited from Horgan an acknowledgement that the circumstances of Olnick's trading on the last day of each of February and September 2000, and contrasts between Olnick's activity on those days with that on preceding days, "were worth looking at".
  
  [1192] Horgan was asked to comment on the final trade on 28 September 2000, between the Strategic and Lexington Trading Accounts. As mentioned, this uptick trade resulting in the highest closing price of the day was followed the next day by the seller buying the same number of shares. Horgan conceded that the cross trade on 28 September did "cause me a concern". The repurchase the next day he attributed to "an error".
  
  [1193] Staff asked Horgan to review the level of participation by the Brokerage Firm (including the volumes purchased and the closing price) on 29 February and 29 September 2000, assuming that the broker (Olnick) had instructions to move the market price of Newmex Shares to $1.00 and $1.20 on those days, respectively. Horgan agreed that, in those circumstances, the trading on those days would have caused him concern. We shared that concern.
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  [1194] The net effect of Horgan's testimony was slight. He seemed to indicate that, if Olnick's trading in Newmex Shares during the February and September Periods was innocently-intended, then the market was not being manipulated and the resulting month-end price was not artificial. If, however, a broker had been instructed to achieve that price on that date, then the quite markedly different trading activity on the last days of the month would be cause for concern. In other words, whether there was market manipulation depended on the broker's instructions, which in turn seemed to go to the motivation for the trading. If the motivation was as Staff alleged, then there might have been manipulation; if not, there was not. This added nothing to what we could, and did, ascertain ourselves.
4. Other Developments
  [1195] Counsel for Workum suggested to Olnick during cross-examination that the market prices reached at the end of February and September 2000 were caused not by Olnick's trading activities but by the market's reaction to public disclosure made by Newmex.
  
  [1196] On 23 February 2000 Newmex issued a news release (the "23 February Announcement") disclosing that it had entered into an option agreement to acquire an interest in a mining property in Nevada and that "[g]eostatistical studies" were under way "to ascertain the existence of additional gold resources" at that property. On 24 February Newmex issued a second news release (the "24 February Announcement") cautioning that "the resource figures stated for [that property] have not as yet been independently verified, and are therefore not to be relied upon until the independent review is complete". On 25 February Newmex issued a third news release (the "25 February Announcement") announcing the grant of stock options to its directors at $0.43 per share and PPI's exercise of its PPI Newmex Option to acquire Newmex Shares at an exercise price of $1.00 per share.
  
  [1197] It is possible that the rise in the market price for Newmex Shares at the end of February 2000 was not attributable solely to Olnick's purchasing activity. The 23, 24 and 25 February Announcements (collectively, the "February Announcements") may have had an effect on the Newmex Share price. However, for several reasons we conclude that it would be unreasonable to attribute all of the increase in the price of Newmex Shares to the February Announcements.
  
  [1198] Although the evidence included material change reports filed by Newmex in respect of other matters, there was none in evidence in respect of the news contained in the 23 February Announcement. This might indicate that Newmex did not consider that the announcement provided material new information (information that would reasonably be expected to affect significantly the market price or value of its securities). In any event, its 24 February Announcement clarified its position that the mineral resource data released the day before could not be relied on. In our view, this would have made clear
  to a reader that the announced data was probably best described as speculative. On 24 February there was only a single trade in Newmex Shares (1000 shares) – in which the price tripled $0.21 to $0.65. This might have reflected one buyer's response to the 23 February Announcement.
  
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  [1199] The volume of Newmex Shares traded on 25 February was significantly higher
  - 45 280 Newmex Shares were bought and sold by many dealers (including Olnick) –and the closing price increased from $0.65 the day before to $0.81 that day. On the next trading day (Monday 28 February) appetite for Newmex Shares by dealers other than Olnick appeared to wane, although the closing price rose slightly to $0.85. Only four of the 14 purchases that day were made by other dealers – all for small volumes, meaning that Olnick's trades again drove the market. On 29 February dealers other than Olnick made only three of the 16 Newmex Share purchases – again all for small volumes. On that day, the closing price of Newmex Shares rose from $0.85 the day before to $1.00 that day. After that day (when Olnick's heavy trading ceased), the price of Newmex Shares declined, closing at $0.47 on 30 March. It did not reach $1.00 again until 25 September 2000.
    
    [1200] We consider that the news contained in the February Announcements would have been sufficiently disseminated and digested, in the days immediately following each, for trading and pricing effects to be discernable by the following Monday – 28 February, before the end of the February Period. The decrease in buying interest by others than Olnick on 28 and 29 February (and after) noted above was in our view inconsistent with the proposition that the February Announcements accounted for the significant trading and price changes at the end of the month. We therefore do not believe that the February Announcements can account for the strengthening of the price of Newmex Shares during the latter part of the February Period. We conclude that this strengthening can be accounted for only by Olnick's trading activity.
    
    [1201] There was no evidence of any corporate news or developments in or shortly before the September Period that might account for the strengthening of the price of Newmex Shares during the September Period – Newmex's news releases dated 29 June 2000 and 6, 7 and 17 July 2000 were too far removed from the September Period to have affected the price of Newmex Shares then. Indeed, there was no evidence of anything other than Olnick's trading activity to account for that strengthening.
5. No Concerns from Other Trading Overseers
  [1202] Workum argued that there was no evidence that Olnick's trading activity during the February and September Periods had aroused the suspicions of any other regulator, market surveillance specialist or brokerage firm (including the Brokerage Firm which, as Olnick's employer, was responsible for reviewing his trading). Workum submitted that this lack of evidence supported his contention that there had been no manipulation of the market price of Newmex Shares. He suggested that, until Staff
  posited their theory to Olnick, and Olnick "confessed" to Staff in 2002, no one had reason to suspect that a manipulation of the market price of Newmex Shares had occurred.
  
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  [1203] It is true that we heard no evidence that any other regulator or other entity responsible for monitoring or supervising trading on the Exchange had looked at or expressed concern about Olnick's trading activities in Newmex Shares. We do not know whether, at the time, Olnick's trading was scrutinized, or attracted any attention, comment or suspicion. This lack of evidence is not, however, determinative of – or, indeed, of any assistance in assessing – the Market Manipulation Allegation.
6. Motive for Olnick's Trading
  [1204] Olnick's trading during the February and September Periods involved short-lived bursts of buying characterized by multiple buy orders in comparatively large volumes in a thinly-traded security – resulting in his being the dominant trader on those days – and buying at increasing prices. His activity was abnormal and suspicious. We found it telling that on the last day of each of February and September 2000 the closing price of Newmex Shares reached peaks, higher than in the preceding and succeeding days (the $1.20 reached on 29 September was the highest trading price for the entire year). Once Olnick ceased his dominating flurries of buying, the resulting prices were not sustained.
  
  [1205] The evidence of Olnick's trading in Newmex Shares during the February and September Periods was consistent with Staff's allegation of manipulation. That did not, however, amount to proof. Having concluded that Olnick's trading exhibited traits –alone and in combination – that were inconsistent with normal trading practices and activities, we examined his motive for those trades. If he acted with a deliberate intention to raise the price of Newmex Shares, then the resulting prices were "artificial" and his trading was improper. Thus, for the Market Manipulation Allegation to be proved, there must be cogent evidence of an improper trading motive.
  1. Market-Making As Motive
    [1206] Olnick's trading during the February and September Periods not appearing consistent with an investment intention to accumulate Newmex Shares for the Core Trading Accounts, we consider Workum's contention that Olnick had been performing a legitimate function as "market-maker" in Newmex Shares.
    1. Market-Making Activities
      [1207] Market-making is usefully discussed in Exchange Policy 3.4 Investor Relations, Promotional and Market-Making Activities ("Exchange Policy 3.4"), which was in effect during 2000. It provided guidance to those who proposed to engage in market-making activities relating to a security listed on the Exchange. Section 2.2 of Exchange Policy 3.4 did not "define, discourage or sanction market-making activity", but
      set out guidelines "to help distinguish between proper market-making activities and market manipulation or market control", among them the following:
      
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      [1208] Exchange Policy 3.4 then identified several practices that the Exchange considered improper market-making activities – including practices similar to manipulation techniques discussed above (for example, wash trades).
      
      [1209] Section 3 of Exchange Policy 3.4 (titled Disclosure) advised that, "[a]lthough proper market-making arrangements should not affect the market", the Exchange required that any such arrangement be publicly disclosed. Section 3 continued by clarifying the type of disclosure required, such as in an offering document, news release or material change report, depending on the circumstances. The section then set out the information to be disclosed by the issuer.
      
      [1210] The BCSC commented on market-making in Re Sirianni, [1991] 40
      B.C.S.C.W.S. 7. There, the BCSC explained that "[t]he purpose of market making is to add liquidity to the market and to stabilize prices by reducing the effects of short term excesses of supply and demand". In finding that the trading activity there at issue was not proper market-making, the BCSC noted the following expert evidence:
      
      [A] large number of the trades by the [accounts in question] were inconsistent with the fundamental principles of market making as they did not add any actual liquidity to the market, did not tend to have a stabilizing influence on the market, and may have contained an element of price leadership adding to the short-term volatility of the market price.
    2. Analysis
      [1211] The evidence did not support the contention that Olnick's trades in the February and September Periods were legitimate market-making, designed to maintain an orderly market in the Newmex Shares.
      
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      [1212] First, there was no evidence that Newmex had disclosed (as required by section 3 of Exchange Policy 3.4) any market-making arrangement with Olnick. Second, Olnick was not using his own account to conduct his alleged market-making activities in Newmex Shares as contemplated under Exchange Policy 3.4. Olnick's use of the Core Trading Accounts (and three other client accounts) for this purpose would clearly have been contrary to section 2.5 of Exchange Policy 3.4. Third, Olnick's short bursts of buying activity over a few days on two widely-separated occasions in 2000, characterized by buying repeatedly in a rising market and buying all the securities offered at or above the posted price, exhibited many of the techniques described in Exchange Policy 3.4 as unacceptable. Olnick's actions were inherently inconsistent with the market-making objective of fostering orderly trading and price stabilization.
      
      [1213] We find that Olnick's trading activity in Newmex Shares during the February and September Periods could not reasonably be described as legitimate market-making.
  2. Motive Alleged by Staff – the Newmex Transaction
    [1214] Staff submitted that Olnick's motive in trading as he did was to move the price of the Newmex Shares to the prices needed to support PPI's repurchases of the Newmex Shares that were the subject of the Newmex Transaction.
    
    [1215] Given our inability to rely on Olnick's testimony, Staff's contention could be proved only if demonstrated, on the balance of probabilities, by other clear, convincing and cogent evidence.
    1. Circumstantial Evidence
      [1216] It is not unusual in cases of alleged market manipulation for there to be only circumstantial, not direct, evidence as to motivation. Our having declined to accept Olnick's testimony, that was the situation here. We had only circumstantial evidence. We reviewed and assessed the documentary evidence – and drew inferences from that evidence – as to Olnick's knowledge and intent that he was or might be creating an artificial price.
      
      [1217] As part of this process, we examined whether there were facts consistent with Staff's contention that PPI needed to have the Newmex Shares trade at $1.00 on 29 February 2000 and at $1.20 on 29 September 2000 (that day – a Friday – being the last trading day in September, meaning that the closing price that day would be the closing price for the month). In analyzing the circumstantial evidence in this case we were careful to consider potential alternative inferences. We also considered whether any
      inferences that could be drawn were equally consistent with an improper motive and an innocent motive. Were we able to draw from the evidence two equally plausible inferences, one innocent and one not, we would find no improper motive.
      
      2008 ABASC 363 (*)
    2. The Newmex Transaction
      [1218] The Newmex Transaction was discussed in detail above. It involved the sale (or purported sale) by PPI of its Newmex Shares to three buyers: LynChris, ASCOOP and SPIDA. The transactions were to take effect on 30 September 1998 at a price of
      $1.00 per Newmex Share. In 2000, PPI bought the Newmex Shares back.
      1. Reacquisition from LynChris
        [1219] Under the Newmex/LynChris Transaction, LynChris had issued the $2 582 875 LynChris Promissory Note to PPI in payment for 2 582 875 Newmex Shares. LynChris was to be left whole economically when PPI later reacquired those Newmex Shares. PPI had promised LynChris's principal, Faithfull, that it would "indemnify LynChris for all expenses associated with the Newmex [T]ransaction and as such [PPI] will reimburse LynChris for . . . taxes".
        
        [1220] Concerns arose as to potential income tax exposure to LynChris, in respect of unpaid interest on the LynChris Promissory Note and any "forgiveness" of debt were it not to repay the full amount of the note. To address this concern, Faithfull and PPI came up with a plan for offsetting cash payments, computed such that LynChris would pay PPI the full amount of interest under the note and receive from PPI a payment to cover the interest payment (adjusted to reflect the effect on LynChris's income taxes).
        
        [1221] They also moved forward with PPI's reacquisition of the Newmex Shares. By at least mid-December 1999, Faithfull and the Individual Respondents agreed (as documented in the Third LynChris Addendum) that the LynChris Promissory Note would be satisfied by LynChris transferring the Newmex Shares back to PPI. Closing was to take place on 29 February 2000. They had, as mentioned, calculated LynChris's tax exposure and computed the amounts of the offsetting cash payments that would leave LynChris economically whole. Clearly implicit in the overall arrangement was that the settlement of the LynChris Promissory Note for the Newmex Shares would not expose LynChris to further expense, including income tax. This in turn required that the note settlement involve no debt forgiveness (taxable): each dollar of indebtedness had to be settled with one dollar's worth of Newmex Shares, measured by the market price. As Faithfull testified:
        
        . . . Hennig . . . indicated to me that the shares had to be repurchased at market value. I kept asking to be kept whole, okay? Theo Hennig established the, the, the final repurchase price, if you will, which would allow me to be kept whole.
        2008 ABASC 363 (*)
        [1222] Timing had been an issue. Although Faithfull had wanted the reacquisition to occur soon, he testified that he understood that PPI did not want to complete the reacquisition of Newmex Shares from LynChris until the audit of PPI's 1999 Financial Statements was complete (but no later than 29 February 2000) because it did not want to recognize the reacquisition in its 1999 financial year (perhaps to avoid unwanted scrutiny of the Newmex Transaction were it reported as being reversed or unwound too soon). The audit was indeed completed, and the 1999 Financial Statements were filed, in mid-February 2000.
        
        [1223] Thus, by mid-December 1999 the Individual Respondents and Faithfull had targeted the end of February 2000 for PPI's reacquisition of Newmex Shares from LynChris at $1.00 per share (so that the principal amount of the LynChris Promissory Note would match the aggregate market value of the Newmex Shares being retransferred). However, as the target date (29 February 2000) neared, the trading price of Newmex Shares was below $1.00. We believe that the Individual Respondents came to believe that the market would need some assistance for the price to reach $1.00 by that date.
        
        [1224] As noted earlier, PPI held the PPI Newmex Option, giving it the right to acquire 475 875 Newmex Shares from Newmex at $1.00 per share. It announced its exercise of that option on 25 February 2000 – more than two years before its April 2002 expiry (more than three years before expiry, if the April 2003 expiry date mentioned in the Newmex 1998 Circular was accurate) – at a time when the market price of Newmex Shares was well below the $1.00 exercise price under the PPI Newmex Option. This seemingly unthrifty exercise was publicly disclosed in the 25 February Announcement. That coincided with the start of the February Period surveyed above – when Olnick began his unusual and suspicious trading in Newmex Shares.
        
        [1225] PPI's reacquisition of the Newmex Shares from LynChris went ahead. Although the evidence indicated that it was not actually completed until 9 March 2000, the parties held to their agreed effective date for the transaction, 29 February 2000.
        
        [1226] As we have seen, Newmex Shares closed that day (the end of the February Period) on the Exchange at $1.00. Before the February Period (on 24 February) they had closed at $0.65, and within two trading days after the period they had fallen back to close at $0.67.
        
        [1227] We noted above in our consideration of the Financial Disclosure Allegations that PPI on 15 March 2000 PPI announced its reacquisition of Newmex Shares from LynChris (without naming LynChris), indicating that this was done at a price of approximately $1.08 per Newmex Share. As discussed, that announcement omitted reference to the offsetting payments between PPI and LynChris in respect of tax-effected
        interest which, if taken into account, meant that the portion of the total acquisition allocable to the Newmex Shares themselves equated to $1.00 (not $1.08) per share.
        
        2008 ABASC 363 (*)
        [1228] We are in no doubt – and we find – that PPI, through the Individual Respondents, placed enough importance on the market price of Newmex Shares reaching
        $1.00 on 29 February 2000 (to support the reacquisition from LynChris) that PPI, through the Individual Respondents, took steps to get it there.
        
        [1229] We conclude that PPI's exercise of the PPI Newmex Option was one such step. It was not evidently economically prudent or sensible. First, as indicated, in exercising the option – years before it was to expire – at the $1.00-per-share exercise price, PPI paid considerably more than the price at which Newmex Shares were then available in the secondary market over the Exchange. Second, if owning Newmex Shares were the goal, PPI already knew that it was shortly to acquire far more Newmex Shares, almost 2.6 million of them from LynChris.
        
        [1230] Moreover, PPI's exercise of the PPI Newmex Option occurred just as Olnick –with whom the Individual Respondents had frequent contact – began his highly unusual trading activities during the February Period. We think that no coincidence.
      2. Reacquisition from ASCOOP and SPIDA
        [1231] The other part of the Newmex Transaction had seen PPI purport to sell 750 000 Newmex Shares to each of ASCOOP and SPIDA for cash, at $1.00 per share. The Longer Newmex/ASCOOP Terms Agreement established BuyBack Arrangements, exercisable by PPI in 24 months. Under these BuyBack Arrangements the Newmex Shares would return to PPI, and ASCOOP and SPIDA would receive their original purchase price plus an 0.8333% "premium" for each month until the buyback occurred.
        [1232] On 6 November 2000 PPI and Newmex each publicly announced that PPI had acquired 1.5 million Newmex Shares, half each from ASCOOP and SPIDA. PPI's 2000 AIF disclosed that this reacquisition was made effective 30 September 2000. The 2000 AIF stated that the cash consideration was $1.8 million – $1.20 for each of the 1.5 million Newmex Shares reacquired. The difference between the $1.8 million reacquisition price and the original $1.5 million aggregate sale price (and the difference between the $1.20-per-share reacquisition price and the original $1.00-per-share purchase price) produced exactly the promised premium computed for the 24-month interval between purchase and buyback. Thus, effective 30 September 2000, PPI's reacquisition of these Newmex Shares at $1.20 per share satisfied its obligations to ASCOOP and SPIDA under the Longer Newmex/ASCOOP Terms Agreement.
        
        [1233] This $1.20 per share price was also the price that Newmex Shares reached on the Exchange on 29 September 2000 at the conclusion of Olnick's buying flurry in the September Period – the closing market price for that month.
        2008 ABASC 363 (*)
        [1234] We conclude that it was important to PPI and the Individual Respondents that the market price of Newmex Shares at the end of September 2000 match the price PPI was to pay ASCOOP and SPIDA effective on that date. They may have worried that a transaction above the market price – though necessary to keep ASCOOP and SPIDA whole – might attract unwanted attention to the original Newmex/ASCOOP Transaction and PPI's accounting for it. Hennig himself later ascribed importance to this matching when, in defending the bona fides of the Newmex/ASCOOP Transaction, he told Staff in a 29 June 2001 letter that "the [Newmex Shares] were reacquired at their market price of
        $1.20 per share at the time". We find that the Individual Respondents were sufficiently motivated to achieve this matching to take active steps to move the market price to where they needed it – $1.20 – on 29 September 2000.
        
        [1235] The trading data reviewed above also indicates that the market price of Newmex Shares was unlikely to reach that level on that date, unassisted. Indeed, as we saw, on the next trading day after 29 September 2000, Newmex Shares ended down at
        $0.90 and they never again hit $1.20 in 2000. As discussed below, we think that one-day price peak no coincidence.
  3. Conclusion on Motive
    [1236] We have concluded that it was important enough to PPI that the market price of Newmex Shares be at $1.00 on 29 February 2000 and at $1.20 on 29 February 2000 for the Individual Respondents to take steps to that end. The evidence was clear that they and Olnick were in frequent contact. We found earlier that the Individual Respondents had control and direction over the Core Trading Accounts through which Olnick conducted most of the impugned trading.
    
    [1237] The evidence supports no plausible explanation or motive – including a market-making motive – for Olnick to act as he did but for the desire to achieve the price results PPI wanted. We found striking – indeed difficult to credit on any other account –the coincidence between the end-of-February market price and the price at which PPI had agreed to reacquire Newmex Shares from LynChris, and the coincidence between the profit realized by ASCOOP and SPIDA from their resale of Newmex Shares at the end-of-September market price and the return they were promised in their original agreement with PPI.
    
    [1238] We therefore conclude that Olnick's buying of Newmex Shares during the February and September Periods was not motivated by genuine investment intent. His motive was not bona fide; it was to move the Newmex Share price to target levels on target dates. His trading achieved that. His buying activity that produced that result, not having been prompted by genuine investment intent, did not reflect real demand for Newmex Shares. The resulting prices were thus artificial. He was in a position to know that such would be, or might have been, the result.
    [1239] This trading contravened section 93(b) of the Act.
7. Responsibility
  2008 ABASC 363 (*)
  1. Core Offshore Companies
    [1240] We have made no finding as to who actually owned any of the Core Offshore Companies. However, irrespective of the locus of their ownership, the Core Trading Accounts through which the manipulative trading in Newmex Shares was primarily effected belonged to these companies. The companies opened the securities trading accounts, and the companies were the direct clients of the Brokerage Firm and of Olnick when the improper trading occurred.
    
    [1241] There was no suggestion that any of the Core Offshore Companies were themselves the subject of deceit by Olnick or the Individual Respondents, such that the companies were unknowing victims of the improper trading.
    
    [1242] We discern no basis on which the Core Offshore Companies can disavow responsibility for what occurred in their respective Core Trading Accounts, including the improper trading in Newmex Shares.
    
    [1243] That said, Staff stated in the Hearing (in connection with the original misnaming of Lexington in that notice of hearing) that they were not seeking any sanction against Lexington. For that reason, we decline to make a finding against Lexington on this issue. There was not a similar concern in respect of Strategic and Cheshire.
    
    [1244] We therefore find that each of Strategic and Cheshire contravened section 93(b) of the Act.
  2. Individual Respondents
    [1245] We have discussed PPI's objectives, and the Individual Respondents' involvement, in PPI's planned reacquisitions of Newmex Shares from LynChris, ASCOOP and SPIDA. We have also discussed in some detail trading information, including daily closing prices, for Newmex Shares. This pricing information would have been readily available to the Individual Respondents. Given their close involvement with Newmex (they were officers), and with the Newmex Transaction, we believe that they would have been familiar with and closely followed such data.
    
    [1246] As discussed, the trading data persuades us that it was highly improbable that Newmex Shares would have reached $1.00 on 29 February 2000 and $1.20 on 29 September 2000 through the normal and proper operation of the market. That, we believe, was well known to the Individual Respondents. As indicated, we do not believe that they were willing to take the chance that the price would not reach the prices they
    needed for PPI's reacquisitions of Newmex Shares in 2000. As stated, we found that steps were taken to achieve the prices they wanted, beginning with PPI's exercise of the PPI Newmex Option.
    
    2008 ABASC 363 (*)
    [1247] We are in no doubt that the Individual Respondents caused PPI to exercise the PPI Newmex Option when it did, for this purpose. However, news of that exercise (and the earlier February Announcements) did not suffice to move the Newmex Share price to the level they needed.
    
    [1248] Given their close and continuing relationship, it was easy for the Individual Respondents to have sought, and obtained, assistance from Olnick. The latter's experience would have enabled him to identify trading techniques that could achieve what the Individual Respondents wanted; and who, like the Individual Respondents themselves, had access to the Core Trading Accounts and apparently few, if any, inconvenient moral objections to tampering with the market. We conclude the Individual Respondents did – successfully – engage Olnick for this purpose.
    
    [1249] We find that both Individual Respondents knew at least generally the sorts of things that Olnick could and would do to assist by way of manipulative trading, and that such activity would be improper. These trading improprieties, we believe, would have been clear to any reasonable observer of or participant in the capital market who was aware both of the trading techniques used and the reasons.
    
    [1250] On this last-mentioned topic, we found suspicious – though not determinative –a comment made by Hennig in a note he sent to Workum on 22 March 2000 (shortly after the reacquisition of the Newmex Shares from LynChris) discussing regulatory aspects of another financing: "The TSE will only be concerned if there is obvious manipulation of the share price. Something we would never consider!" The gratuitous nature of the comment suggests that it was intended facetiously, in which case the timing (so soon after the exercise of the PPI Newmex Option and, especially, Olnick's trading in the February Period) could indicate that the comment was an allusion to that activity. While that is mere speculation, this note does indicate that the topic of "manipulation" was, at the time, on the minds of the Individual Respondents.
    
    [1251] We are in no doubt that the Individual Respondents made use of their relationship with Olnick to have him trade in a manner that would produce, artificially, the prices for Newmex Shares that they sought. Whether conveyed as instructions or a friendly request or in some other fashion, we find that what Olnick did in so trading, he did at the instance of the Individual Respondents. We also conclude that the Individual Respondents knew that an artificial price may, or would, result. That, in fact, was obviously the Individual Respondents' intention.
    2008 ABASC 363 (*)
    [1252] In sum, the evidence (circumstantial though it was) was clear, convincing and cogent. We find, on the balance of probabilities, that the Individual Respondents enlisted Olnick to undertake trading to raise the market price of the Newmex Shares to the prices targeted on the dates targeted. With and through Olnick, the Individual Respondents contrived to manipulate the market price of Newmex Shares in a manner that not only may have resulted but, we find, did result, in artificial prices for the Newmex Shares during (in particular, at the end of each of) the February Period and the September Period.
    
    [1253] It follows, and we find, that the Individual Respondents each contravened section 93(b) of the Act. That element of the Market Manipulation Allegation is proved.
8. Conduct Contrary to the Public Interest

[1254] The Individual Respondents' manipulation of trading in Newmex Shares was the sort of behaviour that can generate a false impression, to existing and prospective Newmex investors and to the capital market generally, about the price or value of, or level of interest in, Newmex Shares. As such, their conduct was clearly incompatible with the fair and efficient operation of the capital market and the investor-protection purposes of Alberta securities laws.

[1255] Accordingly, it follows that those we have found responsible for the improper trading – the Individual Respondents, Strategic and Cheshire – also clearly acted contrary to the public interest. We so find. This element of the Market Manipulation Allegation is also proved.

PART FIVE

INSIDER TRADE REPORTING

THE ALLEGATION
[1256] Staff alleged in the Second Notice of Hearing that Workum and Hennig "traded in securities of PPI and other companies related to PPI" but failed to report those trades, as insiders, in contravention of the insider trade reporting requirements under the Act. In argument Staff referred in particular to trades made through the Four Trading Accounts in securities of PPI, Newmex, Azterra, Canadian Rocky Mountain Properties Inc. ("Rocky Mountain") and Invader Exploration Inc. ("Invader").
POSITIONS OF THE PARTIES
1. Position of Staff
  [1257] Staff asserted in this regard that the Individual Respondents were insiders of the companies just mentioned and that trading in securities of these companies effected through the Four Trading Accounts was directed by Workum for his and Hennig's benefit. Therefore, Staff contended that both Workum and Hennig were subject to, but in contravention of, the requirement to report such trading.
2. Position of the Individual Respondents
  2008 ABASC 363 (*)
  [1258] Each Individual Respondent acknowledged that he had not filed insider trade reports in respect of the trading in issue. Their position, rather, was that they were not required to.
  1. Position of Workum
    [1259] Workum submitted that for Staff to succeed on their allegations concerning breaches of the insider trade reporting requirements, Staff would have had to – but failed to – prove that Workum was the owner of the Corporate Respondents (in whose names the respective Four Trading Accounts were opened and operated). Further, he contended that he did not direct trading in the Strategic, Cheshire and Lexington Trading Accounts (he was silent on – but did not concede to – directing trading in the Ashland Trading Account).
  2. Position of Hennig
[1260] Hennig disclaimed authority over or ownership of the Four Trading Accounts and therefore denied the alleged insider trade reporting breaches.
ANALYSIS
1. The Law
  [1261] The insider trade reporting requirement spanned the entire Relevant Period. The section numbers of the applicable legislation changed during that time, but the substance did not. Section 182(1) of the Act stipulated that a person or company that became an insider of a reporting issuer was required to file with the Executive Director a report "disclosing any direct or indirect beneficial ownership of or control or direction over securities of [that] reporting issuer". Thereafter, an insider "whose direct or indirect beneficial ownership of or control or direction over securities of [that] reporting issuer changes" from what the insider had most recently reported was required to file a report of that change (section 182(2)) with the Executive Director.
  
  [1262] The term "insider" was defined in section 1 of the Act as follows:
  1. "insider" or "insider of a reporting issuer" means
    1. every director or senior officer of a reporting issuer,
    2. every director or senior officer of an issuer that is itself an insider of a reporting issuer,
      
      (ii.1) every subsidiary of a reporting issuer,
    3. any person or company that
      1. beneficially owns, directly or indirectly, voting securities of a reporting issuer,
      2. exercises control or direction over voting securities of a reporting issuer, or
        
        2008 ABASC 363 (*)
      3. beneficially owns, directly or indirectly, certain voting securities of a reporting issuer and exercises control or direction over certain other voting securities of a reporting issuer,
        
        carrying more than 10% of the voting rights attached to all voting securities of the reporting issuer for the time being outstanding other than voting securities held by the person or company as underwriter in the course of a distribution, or
        
        . . .
        
        [1263] Section 1 of the Act also defined "senior officer" to mean:
        
        the chairman or vice-chairman [changed in 2002 to "chair or vice-chair"] of the board of directors, the president, vice-president, secretary, comptroller, treasurer or general manager of a company or any other individual who performs functions for an issuer similar to those normally performed by an individual occupying that office, and
        
        each of the 5 highest paid employees of an issuer, including any individual referred to in subclause (i);
        
        Sections 3 and 4 of the Act operated together to define "subsidiary" as an issuer controlled – through the holding of more than 50% of its voting securities – by another issuer.
2. Workum's and Hennig's Trade Reporting Obligations
  [1264] Workum and Hennig, as directors and senior officers of PPI during the Relevant Period, were insiders of PPI. They were therefore required to report their trading in PPI securities. They did so, in respect of such trades conducted outside the Four Trading Accounts. This compliance indicated the Individual Respondents' awareness of the insider trade reporting obligations.
  
  [1265] PPI, Newmex, Azterra, Rocky Mountain and Invader were each public companies with securities listed on the Exchange (or, in PPI's case, on the TSE); each was a reporting issuer. PPI owned more than 10% of the voting securities (and thus voting rights) of: Newmex (up to 74.5%; we have found that the Newmex Transaction did not involve true dispositions of those securities by PPI); Rocky Mountain (64%, from October 2000); and Invader (53% in 2000, according to the 2000 AIF). Thus, during the periods when PPI's ownership exceeded the 10% threshold, PPI was an insider of each of Newmex, Rocky Mountain and Invader. Given the definition of "insider", the Individual
  Respondents, as directors or senior officers of PPI, were thus also insiders, during those periods, of Newmex, Rocky Mountain and Invader.
  
  2008 ABASC 363 (*)
  [1266] Having found that relevant portions of the Azterra Transaction did not in fact close, it follows that PPI did not acquire more than 10% of Azterra's voting securities through that transaction. There was no evidence that PPI had or acquired such percentage of Azterra's voting securities through other means. There was, therefore, no evidence that PPI was an insider of Azterra, and thus neither PPI nor the Individual Respondents became insiders of Azterra on that ground.
  
  [1267] The Individual Respondents were also directors or senior officers (or both) of Newmex and thus also direct insiders of Newmex.
  
  [1268] In short, the Individual Respondents were insiders, throughout or for portions of the Relevant Period, of each of PPI, Newmex, Rocky Mountain and Invader (together, the "Reportable Issuers"). As such, the Individual Respondents were required under section 182 of the Act to report their direct or indirect beneficial ownership of or control or direction over securities of the Reportable Issuers (the "Reportable Securities") and changes (that is, purchases and sales) to that ownership of or control or direction over the Reportable Securities that occurred while they were insiders of the respective issuers. Given the absence of evidence that the Individual Respondents were insiders of Azterra, we do not conclude that this requirement applied to them in respect of trading in securities of Azterra.
3. Relationship of Individual Respondents to the Four Trading Accounts [1269] There was no discussion of direct trading by the Individual Respondents (for example, in personal accounts) in Reportable Securities, other than those of PPI which, as noted, were apparently reported.
  
  [1270] The documentary evidence considered in respect of the Undisclosed Financial Benefits Allegation also showed that Reportable Securities were purchased and sold in various of the Four Trading Accounts at times when the Individual Respondents were insiders of the corresponding Reportable Issuers. The issue thus becomes whether the purchases and sales constituted reportable trading by one or both of the Individual Respondents.
  
  [1271] We found above in connection with other allegations that the Individual Respondents had – and exercised – control and direction over the Four Trading Accounts. This finding was not made in respect of particular securities within those accounts (although we also specifically found above that the Individual Respondents were responsible for certain trades of Newmex Shares within some of the accounts); it applied to the accounts as a whole and thus necessarily applied also to the assets within them
  from time to time. This finding did not require that we reach a conclusion as to ownership of the Corporate Respondents.
4. Insider Reporting Requirement Triggered
2008 ABASC 363 (*)
[1272] It follows, and we find, that purchases and sales of Reportable Securities within the Four Trading Accounts had the effect of changing the Individual Respondents' control and direction over those securities. Accordingly, Workum and Hennig were each required to report such changes that occurred when they were, respectively, insiders of the relevant Reportable Issuer. They did not do so.
CONCLUSIONS

Contravention of Alberta Securities Laws
[1273] The Individual Respondents did not fulfil their individual obligations to file reports of being or becoming insiders of Reportable Issuers in respect of holdings through the Four Trading Accounts, and reports of purchases and sales of Reportable Securities in the Four Trading Accounts made when they were insiders of the corresponding Reportable Issuers.

[1274] We therefore find that Workum and Hennig each contravened the insider trade reporting requirements, contrary to section 182 of the Act. This allegation is proved against each Individual Respondent except in respect of trading in securities of Azterra.

PART SIX MISREPRESENTATIONS TO STAFF
1. THE ALLEGATIONS
  [1275] In the First Notice of Hearing Staff alleged that "PPI made misrepresentations in respect of material submitted or given to the Commission contrary to [section] 194(1)(a) of the Act and the public interest". In the Second Notice of Hearing Staff alleged that, throughout the investigation, the Individual Respondents made numerous misrepresentations to Staff by concealing information from Staff, lying to Staff and otherwise misleading Staff. Both groups of allegations were clearly directed at communications between the Individual Respondents and Staff. We refer to these allegations in both Notices of Hearing collectively as the "Misrepresentation Allegations".
2. POSITIONS OF THE PARTIES
  1. Position of Staff
    [1276] Staff argued that the evidence adduced proved the Misrepresentation Allegations set out in the First Notice of Hearing, including misrepresentations made to Staff in the course of exchanges about PPI's financial disclosure of the Newmex, Orion and Azterra Transactions. Staff did not proceed with their allegation in the Second Notice of Hearing that disclosure in respect of related parties in PPI's 2001 Financial
    Statements involved misrepresentation, but argued that the evidence proved the other alleged misrepresentations to Staff set out in that Notice of Hearing.
    
    2008 ABASC 363 (*)
    [1277] Staff contended that the alleged misrepresentations to Staff addressed in the First Notice of Hearing (essentially, those that pertained to communications between the Individual Respondents and Staff in respect of matters that were the subject of the Financial Disclosure Allegations) fell within the classes of offences enumerated in the Act, specifically in section 194(1)(a). Staff acknowledged that this is not, in fact, a proceeding under section 194 (those offences may be prosecuted in a court, not before a Commission hearing panel) but that conduct that is an offence is also contrary to the public interest.
  2. Position of the Respondents
    1. Position of Workum
      [1278] Workum contended that Staff's Misrepresentation Allegations "fail miserably", largely on the ground that the specific alleged instances cited by Staff were factually unsupported. He also argued that Staff's Misrepresentation Allegations are unfair – it is wrong, he submitted, to put a respondent at risk of liability for misrepresentations by reason of disputing and defending (unsuccessfully) against other Staff allegations. He further argued that, in deciding the Misrepresentation Allegations, the panel must apply the definition of "misrepresentation" in the Act, which imports the concept of "materiality", and Staff failed to prove the materiality of the alleged misrepresentations. In the event that the panel determines that "misrepresentation" has a meaning other than that defined in the Act, Workum argued that the panel could only find him "liable if there is evidence that [he] knew or ought to have known that the 'fact' that he was testifying to at the time of his interview was untrue".
    2. Position of Hennig
  [1279] As noted, Hennig contended that his written communications with Staff had been drafted, reviewed and edited by many others. He denied making any misrepresentations to Staff and asserted that the evidence did not support the Misrepresentation Allegations. He also accused Staff of having made misrepresentations about him, charging Staff with using prosecutorial "zeal" and seeking to protect a "'star' witness", likely Olnick.
3. ANALYSIS
  1. Preliminary Matters
    1. Essence of the Misrepresentation Allegations: Untruthfulness
      [1280] The fact that the Misrepresentation Allegations stem from two Notices of Hearing dealing predominantly with quite different sets of allegations added a degree of complexity that was reflected, to an extent, in the arguments of the parties. Nonetheless, we believe that the Misrepresentation Allegations in essence amounted simply to a complaint by Staff that the Individual Respondents had been untruthful in their dealings
      with Staff, and that this was contrary to the public interest. We think that this essence was clear to all parties.
    2. Misrepresentation Allegations Not Unfair
      2008 ABASC 363 (*)
      [1281] Workum, as noted, suggested that the Misrepresentation Allegations were unfair. As we understand the suggestion, the potential unfairness stems from the risk that the Misrepresentation Allegations might be sustained simply as a consequence of the Individual Respondents challenging other allegations against them, presenting an awkward – and inappropriate – dilemma for the Individual Respondents.
      
      [1282] We consider that suggestion without merit. The Misrepresentation Allegations do not centre on the Individual Respondents having disagreed with Staff. As stated, the essence of these allegations is that the Individual Respondents were untruthful. There is a world of difference between disagreement and untruthfulness. One can dispute another's position, argue, present facts and interpretations that support one's own position, and challenge facts and interpretations put forward by one's opponent, all in a truthful fashion. Having done so, whether one wins or loses the argument, one cannot be said to have been untruthful.
      
      [1283] We discern in the Misrepresentation Allegations no suggestion that the Individual Respondents could not, or should not, have engaged in an honest and truthful debate with Staff over matters of genuine dispute. Their having done so, even if the matters honestly so disputed were to be resolved in favour of Staff's position, would not have exposed the Individual Respondents to any finding of untruthfulness. The posited dilemma does not exist. The Misrepresentation Allegations could be sustained only if, in arguing their position to Staff, the Individual Respondents did so in a dishonest manner.
    3. Section 194(1)(a) of the Act Not Relevant
      [1284] The parties differed as to the relevance of section 194(1)(a) of the Act to the Misrepresentation Allegations. As noted, the provision was cited in the First Notice of Hearing. The relevant portions of section 194 (section 161 for most of the Relevant Period), as it read during the Relevant Period, stated:
      
      Any person or company that does one or more of the following commits an offence:
      
      (a) makes a misrepresentation in respect of any material submitted or given under this Act or the regulations [changed to "under the Alberta securities laws" in June 2000] to the Commission, its representatives, the Executive Director or any person appointed to make an investigation or audit under this Act; . . .
      
      [1285] We did not rely on section 194 in our analysis of the Financial Disclosure Allegations, and we do not do so here. As discussed, the public interest is not determined by whether conduct has been expressed to be an offence, but rather by a panel's
      application of its knowledge and understanding of the capital market and the purposes of Alberta securities laws to the facts before it in a given situation.
    4. Definition of "Misrepresentation" Not Applicable
      2008 ABASC 363 (*)
      [1286] We now consider the nature of the "misrepresentation" contemplated in the Misrepresentation Allegations. Workum correctly noted that the term is defined in the Act. That definition (quoted above in connection with the Financial Disclosure Allegations) centres on communication about a "material fact", a concept in turn defined by reference to an effect on the price or value of a security.
      
      [1287] In applying a provision of the Act that uses a term defined in the Act, we are reluctant to ignore the definition given the term by the Act. Before departing from a statutory definition, we would look for some clear indication that an alternative meaning can properly be considered. In Dobler (at paras. 208-14) we held that the term "misrepresentation" must be given its defined meaning when applied to allegations about conduct and communication between a seller of a security and an investor in the security, in the context of an alleged breach of a prohibition under the Act on the making of misrepresentations with the intention of effecting a trade in a security. We found no clear indication, in that context, that some other meaning could properly be given to the term.
      
      [1288] Here, the context is different. The allegations go to communications with Staff, not an investor. Staff were not being asked to invest in a security. The communications centred on facts – what had or had not been done, and why, and the implications in light of certain laws and principles. This all occurred in a context quite removed from capital market interaction between (for example) a buyer and a seller of a security. The interaction between Staff and the Individual Respondents did not involve a particular security or particular trade in a security; Staff were not being offered an investment. In the present context, then, what "security" would be looked at to ascertain whether a "material fact" was being communicated in the course of that interaction? Any effort to identify such a security would be a highly artificial exercise. The definition simply does not fit the context.
      
      [1289] This, we conclude, is a situation clearly indicating that the term "misrepresentation" is used in a sense other than as defined in the Act. It is appropriate –and necessary – to apply another meaning. We believe that the Misrepresentation Allegations addressed misrepresentation in the colloquial sense, and should be assessed accordingly.
    5. Knowledge Requirement
      [1290] That said, we think there was some validity to Workum's alternative contention that, for this purpose, a misrepresentation must involve a communication – we include within that concept things both said and unsaid (statements or documents, and omissions)
      - that the maker knew or ought to have known conveyed a false or misleading
      impression. Thus, for example, an inadvertent misstatement would not support the Misrepresentation Allegations.
    6. Conclusion on Preliminary Matters
      [1291] We therefore conclude that the merits of the Misrepresentation Allegations must be assessed on the basis of whether one or other, or both, of the Individual Respondents communicated to Staff in a manner that he knew, or ought reasonably to have known, conveyed a false impression as to facts that were known (or ought reasonably to have been known) by him.
  2. Specific Communications
  [1292] We considered some of the communication by the Individual Respondents to Staff. We set out here a limited number of examples already mentioned or alluded to above:
  
  2008 ABASC 363 (*)
  - There were important instances of agreements supposedly discarded or prepared to address Exchange or accounting concerns, but which we found did not in fact alter the real agreements between the parties. For example, we found that despite the First LynChris Addendum having purportedly been discarded, PPI and LynChris operated in accordance with its terms. We also found that the purported replacement of the Longer Newmex/ASCOOP Terms Agreement by the Shorter Newmex/ASCOOP Terms Agreement was merely cosmetic, and the parties (PPI, ASCOOP and SPIDA) operated in accordance with the terms of the longer document. The Individual Respondents knew this. They nonetheless communicated the false portrait to Staff.
  - The Cofima Guarantees were among the topics that arose in the course of communications between the Individual Respondents and Staff about the Orion and Azterra Transactions. The Individual Respondents portrayed the Cofima Guarantees as instruments of substance that bolstered their position on financial disclosure. The Individual Respondents neglected to mention that Cofima was neither able nor expected to pay on the guarantees were they to be called upon, and made no mention of the Orion Guarantee Addendum that (as discussed) gutted the Orion Guarantee of value to its supposed beneficiary, EnerGCorp.
  - The evidence persuaded us that Workum, with Hennig's knowledge or assistance, concocted the Schöni/Wick Letters, the Bucher Letters and the Purported Lines of Credit to mislead Staff in their investigation concerning what we have found to be undisclosed financial benefits.
  - In the June 2001 Hennig/ASC/OSC Letter Hennig made several inaccurate statements including: "Management on all sides is [sic] treating the [Orion and Azterra] [T]ransactions as completed". This was untrue.
    
    2008 ABASC 363 (*)
  - In a 15 August 2001 letter to Staff, Workum (signing for PPI) suggested, in respect of Staff's expressed concerns about PPI's financial disclosure of the Newmex, Orion and Azterra Transactions, that "[PPI's] auditors and the opinions of a 'Big Five' audit firm support this disclosure". This statement was untrue; as discussed, KPMG's Newmex and Orion Opinions did not support PPI's disclosure, but rather expressed views based on factual assumptions that did not correspond to what actually occurred.
  [1293] These examples suffice, in our view, to demonstrate that both Individual Respondents made misrepresentations to Staff on matters about which the Individual Respondents were in fact well informed. They did so in a effort to deflect Staff concerns about (in the examples cited) PPI's financial disclosure of certain transactions or its nondisclosure of certain financial benefits. The Individual Respondents ought to have known that what they were communicating to Staff (positively or by omission) was untrue. Moreover, we are in no doubt – and we find – that they did know this and indeed acted deliberately in that knowledge. As discussed, the fact that this conduct was itself the subject of other allegations does not demonstrate any unfairness to the Individual Respondents.
  
  [1294] The Individual Respondents' misrepresentations to Staff (of which those mentioned were merely a sample) were so numerous as to constitute a pattern of conduct. Stated bluntly, the Individual Respondents repeatedly lied to Staff.
4. CONCLUSIONS ON MISREPRESENTATION ALLEGATIONS

[1295] We found that the Individual Respondents each made misrepresentations to the Commission and Staff, orally and in writing.

[1296] Evasion, obfuscation and untruth in responding to Staff queries obviously hinder Staff's performance of their responsibilities to monitor and enforce compliance with Alberta securities laws. Such actions are an obstacle to effective capital market regulation. Indeed, as the Ontario Court of Appeal, per Sharpe J.A., stated in Wilder v. Ontario Securities Commission (2001), 53 O.R. (3d) 519 at 529:

The OSC is charged with the statutory obligation to do its best to ensure that those involved in the securities industry provide fair and accurate information so that public confidence in the integrity of capital markets is maintained. It is difficult to imagine anything that could be more important to protecting the integrity of capital markets than ensuring that those involved in those markets, whether as direct participants or as advisers, provide full and accurate information to the OSC.

2008 ABASC 363 (*)

[1297] The Individual Respondents' communications to Staff were of a character wholly incompatible with what is appropriate, expected and required of participants in the Alberta capital market. That such misrepresentations can constitute an offence under section 194 of the Act underlines their seriousness, although (as mentioned) this was not the basis of our conclusion on these allegations.

[1298] Therefore, we find that in this way Workum and Hennig each acted contrary to the public interest. The Misrepresentation Allegations are proved.

PART SEVEN CLOSING

SUMMARY OF FINDINGS
[1299] We have concluded that allegations were proved against all of the Respondents but Ashland and Lexington. The allegations against Ashland and Lexington are dismissed.
1. Financial Disclosure
  [1300] We found that PPI's 1998 Financial Statements, 1999 Financial Statements and 2000 Financial Statements – specifically in respect of the reporting of gains attributed to the Newmex, Orion and Azterra Transactions, respectively – were not prepared in accordance with GAAP and thus were contrary to Alberta securities laws. We also found that those financial statements contained misrepresentations.
  
  [1301] We further found that in making additional, related inaccurate disclosure in other documents, PPI made further misrepresentations.
  
  [1302] The issuance of non-GAAP compliant financial statements, and the making of misrepresentations as described, we found to be conduct contrary to the public interest.
  
  [1303] We found that the Individual Respondents each bore responsibility for this improper financial disclosure and the associated misrepresentations. We therefore found that they each contravened Alberta securities laws and acted contrary to the public interest.
2. Undisclosed Financial Benefit
  [1304] We found that the Individual Respondents each obtained financial benefits, from or through the Four Trading Accounts and the Mandolin Offshore Bank Account, which were funded by commission payments made by PPI on private placements and other transactions. Although this was not in itself necessarily improper, the arrangement was not disclosed as required, and this was contrary to the public interest. We found that the Individual Respondents bore responsibility for this and thereby both acted contrary to the public interest.
3. Market Manipulation
  2008 ABASC 363 (*)
  [1305] We found that the Individual Respondents, Strategic and Cheshire each bore responsibility for securities trading that resulted, or could reasonably be expected to have resulted in, an artificial price for such securities. Their conduct we found to have been contrary to Alberta securities laws and to the public interest.
4. Insider Trade Reporting
  [1306] We found that the Individual Respondents contravened the insider trade reporting requirements of Alberta securities laws.
5. Misrepresentations to Staff
  [1307] We found that the Individual Respondents each made misrepresentations to Staff, so numerous as to constitute a pattern of conduct. We found that, in so doing, they each acted contrary to the public interest.
6. Concluding Remarks
[1308] The Individual Respondents, who held the most senior positions with PPI, a public company, engaged in numerous contraventions of Alberta securities laws involving: structuring and public reporting of transactions to produce a misleading impression of PPI's financial position and results; instigating market manipulation to create an artificial price in securities of another public company (Newmex); and failing to report trades as insiders of various reporting issuers. They also bore responsibility for the concealment of financial benefits they derived from commissions paid by PPI on financings and other transactions, which should have been publicly disclosed, and they made numerous misrepresentations – they lied – to Staff. All of these activities we found to be contrary to the public interest. We also found that two of the Corporate Respondents (Strategic and Cheshire) contravened Alberta securities laws and acted contrary to the public interest by their involvement in the market manipulation.

[1309] This was, from start to finish, a story of deception, concealment and manipulation. This web of impropriety persisted over a period of years. Little if any of it, in our view, involved obscure or merely technical aspects of law and capital market conduct. In our view, the Individual Respondents not only fell profoundly short of fulfilling their respective responsibilities as directors and senior officers of PPI –responsibilities to their shareholders and to the investing public generally – but their conduct was the very antithesis of what is expected, and demanded, of participants in the Alberta capital market.
SECOND PART OF PROCEEDING

[1310] Our findings above conclude the first part of this proceeding.

2008 ABASC 363 (*)

[1311] It remains to be determined in the second part of this proceeding whether it is in the public interest to make any orders against any of Workum, Hennig, Strategic or Cheshire and, if so, what order or orders would be appropriate. The panel will receive such relevant evidence, and such submissions, as the parties choose to present on this issue.

[1312] We will reconvene at 9:30 a.m. on Friday 18 July 2008 at the Commission hearing rooms in Calgary to set dates for the second part of this proceeding and to deal with any necessary matters preliminary thereto. Parties or their counsel may attend for that purpose in person or by telephone. We direct any party or counsel who wishes to appear in person on that date to so advise the Executive Assistant to the Chair of the Commission by Tuesday 8 July 2008.

7 June 2008

For the Commission:

"original signed by"

Glenda A. Campbell, QC

"original signed by"

Jerry A. Bennis, FCA

"original signed by"

Stephen R. Murison

ALBERTA SECURITIES COMMISSION

DECISION

(Merits)

Citation: Workum and Hennig, Re, 2008 ABASC 363 Date: 20080607

Theodor Hennig, Peter Jay (or J.) Workum, Cheshire Capital Inc., Lexington Capital Corp., Strategic Investments Fund and Ashland Holdings Corp.

Panel: Glenda A. Campbell, QC Jerry A. Bennis, FCA Stephen R. Murison

Appearing: D. Young, A. Neapole and C. Anderson for Commission Staff

Hearing Dates: 22 and 23 December 2003; 1, 2, 3, 4 and 7

Decision: 7 June 2008

Table of Contents

PART ONE INTRODUCTION

THE HEARING

BACKGROUND

The Respondents

Workum

Hennig

Corporate Respondents

PPI

The Company and its Business

Directors and Management

Subsidiaries and Significant Shareholders

PPI's Auditors

Other Entities

ASCOOP

Azterra

Cofima

Commcept

Creative Classics

EnerGCorp

IIC

LynChris

Mandolin

Newmex

Orion

PE Holdings

SPIDA

Swiss Plastering

Triad

Willow Creek

PRELIMINARY AND EVIDENTIARY CONSIDERATIONS

Misnamed Corporate Respondent

Standard of Proof

Credibility of Certain Witnesses

Olnick

Mackenzie

Schöni

Foscolos

Charlton

Reliability of Documentary Evidence

Contention of the Individual Respondents

PPI-Sourced Documentary Evidence

Conclusion on Documentary Evidence

Documentary Evidence from Olnick

Staff-Prepared Summaries

Scope of Investigation Not Unfair

Witnesses Potentially Opposed in Interest

Expert Testimony

Commission Chief Accountant as Expert

Expert Evidence Relating to Securities Trading

Relevance of "Hindsight" or Subsequent Developments

Sharing of Office Premises

Adverse Inference against Individual Respondents

PART TWO

THE FINANCIAL DISCLOSURE ALLEGATIONS

FINANCIAL DISCLOSURE ALLEGATIONS SUMMARIZED

POSITIONS OF THE PARTIES

Position of Staff

Position of the Individual Respondents

Findings On Financial Disclosure Allegations Summarized

FINANCIAL DISCLOSURE ISSUES

FACTS CONCERNING FINANCIAL DISCLOSURE

Overview

Summary of Pertinent Financial Disclosure

General Presentation

Summary Table

Newmex Transaction and PPI's 1998 Financial Statements

Orion Transaction and PPI's 1999 Financial Statements

Azterra Transaction and PPI's 2000 Financial Statements

Subsequent PPI Financial Statements

The Newmex Transaction