Settlement Agreement: In the Matter of W. Norman Maxwell
R.S.O. 1990, c. S.5, AS AMENDED
AND
IN THE MATTER OF
W. NORMAN MAXWELL
SETTLEMENT AGREEMENT
I INTRODUCTION
1. By Notice of Hearing dated July 4, 1995, (the "Notice of Hearing"), the Ontario SecuritiesCommission (the "Commission"), announced that it proposed to hold a hearing to considerwhether, pursuant to section 127 of the Securities Act, R.S.O. 1990, c. S.5, as amended,(the "Act"), in the opinion of the Commission it is in the public interest to order that anyexemptions contained in Ontario securities law do not apply to W. Norman Maxwell("Maxwell") and others permanently or for such period as is specified in the Order.
II JOINT SETTLEMENT RECOMMENDATION
2. The Staff of the Commission ("Staff") agree to recommend the settlement of theproceedings initiated in respect of Maxwell by the Notice of Hearing in accordance withthe terms and conditions set out hereinafter. Maxwell agrees to the settlement on the basisof the facts agreed to as hereinafter provided and consents to the making of an orderagainst him in the form attached as Schedule "A" on the basis of the facts set out below.
3. Staff and Maxwell agree that the Settlement Agreement, including the attached Schedule"A", will be released to the public only if and when the settlement is approved by theCommission.
III STATEMENT OF FACTS
(i) Acknowledgement
4. Maxwell agrees with the facts set out in this Part III.
(ii) Factual Background
5. Megalode Corporation ("Megalode") was at all material times a reporting issuer and itsshares traded on the over-the-counter market and were quoted on the Canadian DealingNetwork Inc. ("CDN").
6. On July 28, 1994, Megalode advised the Office of the Chief Accountant of theCommission that possible financial irregularities and misstatements in the May 31, 1993audited financial statements and the February 28, 1994 third quarter interim financialstatements had been discovered by its auditors during the course of the audit of theMay 31, 1994 financial statements. Megalode disclosed this in a July 29, 1994 newsrelease.
7. Trading in Megalode shares was halted pending completion of the auditors' review andappropriate disclosure to the public. Trading remained halted until a cease trade orderdated November 4, 1994 was made for failure to file audited annual financial statements.The cease trade order remains in effect.
8. Maxwell was the vice-president of Megalode from December 15, 1992 to June 14, 1994and was a director from April 15, 1993 to June 14, 1994.
9. David Conforzi ("Conforzi") became president and a director of Megalode on November2, 1992 and remained president and a director at all material times.
10. Antonino Candido ("Candido") was a director, secretary and treasurer of 279 from March17, 1993 to July 1994. Candido had a consulting agreement with Megalode fromNovember 1992 to August 24, 1993.
May 31, 1993 Audited Financial Statements of Megalode
11. On February 2, 1993 Megalode entered into a share purchase agreement (the"Agreement") whereby upon shareholder consent it would acquire 1016280 Ontario Ltd.,operating as Softcode ("Softcode" or "280"), by issuing 6,024,096 common shares ofMegalode to 1016279 Ontario Ltd. ("279") valued at $.083 per share for a total value of$500,000. Softcode's main assets were represented to be $500,000 in cash and the non-exclusive right to distribute the "Tracker" software product. John Dzambazov("Dzambazov") was a director, president and sole shareholder of 279 and was a director,president, secretary and treasurer of Softcode.
12. On February 3, 1993, Maxwell chaired a directors' meeting of Megalode where thedirectors approved the Agreement. Counsel to Megalode advised the directors that priorto closing the $500,000 cash held by 279 had to be properly verified through bankconfirmation.
13. The agreement to acquire Softcode was ratified by Megalode's shareholders on March 8,1993. A news release of the same date was issued by Megalode to this effect whichdescribed the $500,000 cash as an asset of Softcode. Megalode also issued MaterialChange Reports dated January 29, 1993 and February 4, 1993 and news releases of thesame dates which described the $500,000 asset of Softcode.
14. On March 15, 1993, Maxwell chaired a meeting of the directors of Megalode. At thatmeeting, Maxwell proposed a resolution that the directors were satisfied that all conditionsand warranties had been met in accordance with the Agreement as it pertained to theacquisition of Softcode and that the closing of the transaction could proceed. Maxwellrepresented to the directors that a letter was coming from a financial institution to verifythe $500,000 asset. On this basis, the resolution was passed.
15. The acquisition of Softcode by Megalode was completed on March 15, 1993 and6,024,096 shares of Megalode valued at $.083 per share for a total value of $500,000 wereissued to 279. The existence of the $500,000 asset of Softcode was not verified prior tothe completion of the transaction.
16. On March 16, 1993, the completion of the reverse takeover transaction respecting Softcodewas announced by Megalode. Maxwell signed the Material Change Report indicating thatin his and Megalode's opinion the reverse takeover transaction was a material change inthe affairs of Megalode.
17. Kirk Boyd ("Boyd"), one of the Megalode directors, made requests of Maxwell forverification of the $500,000 asset. When Maxwell did not provide verification, Boydprepared a letter dated March 30, 1993 addressed to Maxwell formally requestingverification of the $500,000 asset. Maxwell, through Conforzi, advised Boyd that legalcounsel to Megalode had already received confirmation of the asset.
18. On April 13, 1993, Maxwell became a director of Megalode.
19. In October 1993 an external audit was conducted of Megalode's May 31, 1993 financialstatements. The audit was conducted by Bruce Wright ("Wright") of T.H. Bernholtz &Co. Ltd. Wright requested proof from Conforzi and Maxwell of the existence of $500,000represented to have been received by Megalode for the acquisition of 280. Megalodeissued a cheque on October 7, 1993 signed by Conforzi and Maxwell to Midland Walwynwhich was used to purchase $500,000 in Canada Bonds for the account of 279. The fundsto make this purchase had been received by Megalode from subscribers to a $4.5 millionspecial warrants offering.
20. Candido and Dzambazov signed Statutory Declarations dated October 20, 1993 stating thatthey held the $500,000 in bonds for 280 from the date of the takeover of 280 by Megalodein March 1993 until August 24, 1993. The bond serial numbers described in the StatutoryDeclarations were those of the bonds purchased by Megalode with the cheque datedOctober 7, 1993 and signed by Conforzi and Maxwell. The bonds purchased October 7,1993 were not held by Dzambazov and Candido since the March 1993 date of the takeoverof 280. The Statutory Declarations were, therefore, false to the knowledge of Maxwell.
21. The bonds purchased October 7, 1993 and the statutory declarations dated October 20,1993 were shown to the auditor by Conforzi and Maxwell. At the suggestion of Wright,Candido deposited the bonds in the bank account of 280 and provided Wright with proofof the deposit and his signing authority. Satisfied by physical inspection of the bonds, theStatutory Declarations and the deposit of the funds into 280's bank account, Wright signedthe audit report for the May 31, 1993 financial statements. The financial statementsincluded the $500,000 in bonds as assets received by Megalode for the acquisition of 280.
22. The financial statements were approved by the directors of Megalode, including Maxwell,at the October 27, 1993 Board of Directors meeting. Maxwell and Conforzi signed thefinancial statements on behalf of the Board and the statements were filed with theCommission on October 27, 1993. The inclusion of the $500,000 in bonds materiallymisstated the financial statements. The financial statements for the period ended May 31,1993 were untrue in a material respect.
February 28, 1994 Interim Unaudited Financial Statements of Megalode
23. An audit of December 31, 1993 financial statements of Megalode was conducted byanother audit firm, Deloitte & Touche, in connection with a prospectus which Megalodewas planning to prepare. These financial statements were not filed with the Commissionand were not generally disclosed to the public as Megalode did not file a prospectus.
24. Tim Leonard ("Leonard") of Deloitte & Touche made inquiries about the disbursement of$514,000 to Midland Walwyn on October 7, 1993. Maxwell advised Leonard thatMegalode had an investment in bearer bonds purchased from Midland Walwyn.
25. When Leonard asked to see the bonds, a new set of bonds in the amount of $500,000 werepurchased in February 1994 using the funds of Megalode to the knowledge of Maxwell.The new bonds were shown to the auditors and were represented as being the bonds whichwere purchased in October 1993.
26. The $500,000 asset was carried forward into the financial statements for the nine monthsended February 28, 1994. These financial statements were disseminated to the public overthe news wire on April 29, 1994. The inclusion of the $500,000 in bonds materiallymisstated the financial statements. The financial statements for the period ended February28, 1994 were untrue in a material respect.
27. In addition, the financial statements for the nine months ended February 28, 1994 includedsales of a Minneapolis subsidiary of Megalode, MSI, of U.S. $2,400,000 ($3,360,000Canadian). Maxwell had provided information regarding the MSI sale to the bookkeeperof Megalode and to its auditor. In fact, the sale related to purchase orders dated afterFebruary 28, 1994 for which no goods were ever shipped and no revenues were received.
28. The inclusion of the $3,360,000 MSI sale materially misstated the financial statements forthe period ended February 28, 1994. The inclusion of the sale was untrue in a materialrespect.
29. In June 1994, Maxwell resigned and transferred voting control over the 6,024,096 sharesto Brian Usher-Jones ("Usher-Jones"). Usher-Jones instructed Leonard to investigate whathappened to the $4.5 million which had been raised in October of 1993. Leonard thendiscovered that two sets of bonds existed: one set of bonds had been bought in October1993 and used to convince Wright in his audit for the period ending May 31, 1993 that280 had $500,000 in cash as of the closing of the reverse takeover on March 15, 1993.The second set of bonds had been purchased in February 1994 and used to replace theOctober 1993 bonds to convince Leonard that 280 had retained the assets throughout forthe purposes of the financial statements for the period ending December 31, 1993 and theunaudited statements for the nine months ending February 28, 1994. Leonard concludedthat the financial statements of May 31, 1993, December 31, 1993 and February 28, 1994had overstated assets by $500,000 and that the 6,024,096 shares of Megalode issued to 279should not have been issued because there was no consideration received by Megalode forthese shares.
30. On July 29, 1994, Megalode disseminated a press release over the wire service announcingmisstatements in the financial statements for the period ended May 31, 1993 and for thenine months ended February 28, 1994.
31. On August 8, 1994 Maxwell, Candido and Dzambazov met with an undercover policeofficer to attempt to arrange for a bond to prove the $500,000 asset. At this meeting,Maxwell told the undercover officer that Maxwell was aware that no $500,000 asset hadever existed.
Trading
32. Between November 1993 and January 1994, Maxwell sold 200,000 shares of Megalodefor total proceeds of $603,000.
33. Between July 12, 1993 and June 24, 1994 Maxwell sold 492,000 shares of Megalode inthe name of his wife for total proceeds of $828,596.51.
34. At the time of the sale of shares referred to in paragraphs 32 and 33, Maxwell was in aspecial relationship with Megalode and had knowledge of a material fact that was notgenerally disclosed. That material fact was the non-existence of the $500,000 asset ofSoftcode.
35. For certain of the sales of shares referred to in paragraph 33 above, Maxwell was in aspecial relationship with Megalode and had knowledge of a material fact that was notgenerally disclosed. That material fact was the non-existence of the sales by MSI of$3,360,000.
36. The conduct of Maxwell described in paragraphs 8 through 35 was conduct contrary to thepublic interest and violated paragraph 122(1)(b) and subsection 76(1) of the Act.
IV TERMS OF SETTLEMENT
37. Maxwell agrees to the following terms of settlement:
(a) pursuant to clause 2 of subsection 127(1) of the Act, Maxwell will be prohibitedfrom trading in securities for a period of 10 years from the date of the TemporaryOrder made against him on January 15, 1996 except that Maxwell will bepermitted to trade for his personal account in mutual fund securities and securitiesdescribed in clauses 1 and 2 of subsection 35(2) of the Act;
(b) Maxwell represents that he has not been or acted as a director of a reporting issuerduring the period from January 15, 1996 to the date of the Order made by theCommission as a result of this Settlement Agreement;
(c) pursuant to clause 8 of subsection 127(1) of the Act, Maxwell will be prohibitedfrom becoming or acting as a director of a reporting issuer for a period of 10 yearsfrom the date of the Temporary Order made against him on January 15, 1996; and
(d) pursuant to clause 6 of subsection 127(1) of the Act, Maxwell will be reprimanded.
V CONSENT
38. Maxwell hereby consents to an order of the Commission incorporating the provisions ofPart IV above in the form of an order annexed hereto as Schedule "A".
VI STAFF COMMITMENT
39. If this Settlement Agreement is approved by the Commission, Staff will not initiate anycomplaint to the Commission or request the Commission to hold a hearing or issue anyorder in respect of any conduct or alleged conduct of Maxwell in relation to the facts setout in Part III of this Settlement Agreement.
VII PROCEDURE FOR APPROVAL OF SETTLEMENT
40. The approval of the settlement as set out in the Settlement Agreement shall be sought ata public hearing before the Commission scheduled for such date as agreed to by Staff andMaxwell, in accordance with the procedures described herein and such further procedureswhich may be agreed upon between Maxwell and the Staff.
41. Staff and Maxwell agree that if the Settlement Agreement is approved by the Commission,it will constitute the entirety of the evidence to be submitted respecting Maxwell in thismatter other than the evidence that has been submitted at the hearing to date and Maxwellagrees to waive his right to a full hearing and appeal of this matter under the Act.
42. Staff and Maxwell agree that if the Settlement Agreement is approved by the Commission,they will not make any statements that are inconsistent with the Settlement Agreement.
43. If, for any reason whatsoever, the settlement is not approved by the Commission, or theorder set forth in Schedule "A" is not made by the Commission:
(a) Staff and Maxwell will each be entitled to proceed to a hearing of the allegationsin the Notice of Hearing and related Statement of Allegations unaffected by theSettlement Agreement or the settlement negotiations;
(b) The terms of the Settlement Agreement will not be raised in any other proceedingor disclosed to any person except with the written consent of Maxwell and Staff oras may be otherwise required by law; and
(c) Maxwell further agrees that he will not raise in any proceeding the SettlementAgreement or the negotiation or process of approval thereof as a basis for anyattack on the Commission's jurisdiction, alleged bias, appearance of bias, allegedunfairness or any other challenge that may otherwise be available.
44. If, prior to the approval of this Settlement Agreement by the Commission, there are newfacts or issues of substantial concern, in the view of Staff, regarding the facts set out inPart III of the Settlement Agreement, Staff will be at liberty to withdraw from theSettlement Agreement. Notice of such intention will be provided to Maxwell in writing.In the event of such notice being given, the provisions of paragraph 43 in this part willapply as if the Settlement Agreement had not been approved in accordance with theprocedures set out herein.
VIII DISCLOSURE OF SETTLEMENT AGREEMENT
45. The terms of the Settlement Agreement will be treated as confidential by both partieshereto until approved by the Commission and forever if for any reason whatsoever, theSettlement Agreement is not approved by the Commission.
46. Any obligation as to confidentiality shall terminate upon the approval of this SettlementAgreement by the Commission.
IX EXECUTION OF SETTLEMENT AGREEMENT
47. This Settlement Agreement may be signed in one or more counterparts which shallconstitute a binding agreement and a facsimile copy of any signature shall be as effectiveas an original signature.
DATED this 12th day of April, 2000.
SIGNED IN THE PRESENCE OF:
"W. NORMAN MAXWELL"
"MICHAEL WATSON"Director of Enforcement on Behalf of Staff of the Ontario Securities Commission