Statement of Allegations: In the Matter of Primenet Communications Inc. et al.

Statement of Allegations

IN THE MATTER OF THE SECURITIES ACT
R.S.O. 1990, c. S.5, AS AMENDED

AND

IN THE MATTER OF
PRIMENET COMMUNICATIONS INC.,
RAYMOND J. HOMER,
ROBERT F. BLEASBY AND JAMES LAKS

STATEMENT OF ALLEGATIONS OF STAFF
OF THE ENFORCEMENT BRANCH OF THE
ONTARIO SECURITIES COMMISSION

 

        Staff of the Enforcement Branch of the Ontario Securities Commission ("Staff") make the following allegations:

The Parties
 
1.       The respondent, PrimeNet Communications Inc. ("PrimeNet"), has been a reporting issuer with the Ontario Securities Commission (the "Commission") since August 30, 1983. PrimeNet was incorporated on April 29, 1983 under the Business Corporations Act, R.S.O. 1990, c. B.16, as amended, as First Southern Resource Corp.
 
2. First Southern Resource Corp. changed its name to Antrex Holdings Corp. on April 15, 1993. Antrex Holding Corp. changed its name to Medican Pharma International Inc. on February 13, 1995. Medican Pharma International Inc. changed its name to PrimeNet on August 23, 1995.
 
3. The respondent, Raymond J. Homer ("Homer"), has been the President and Chief Executive Officer of PrimeNet since October 15, 1996 and is and has been a director of PrimeNet since August 14, 1995. Homer has been the Chief Financial Officer of PrimeNet since August 14, 1995.
 
4. The respondent, Robert Bleasby ("Bleasby"), was a director of PrimeNet from August 14, 1995 until July 29, 1997.
 
5. The respondent, James Laks ("Laks"), is and has been a director of PrimeNet since June 10, 1994.
 
6. David Austin ("Austin"), was the former President and former Chief Executive Officer of PrimeNet and is currently the Vice-President, Special Projects and a director of PrimeNet. Austin was also the president and a director of Linstok Capital Corp. ("Linstok"). Austin died on July 12, 1997.
 
7. Linstok is a company which had a consulting agreement with PrimeNet to provide the services of David Austin to PrimeNet.
 
Special Warrant Financing Transaction
 
8. In or about April, 1996, PrimeNet contacted Yorkton Securities Inc. ("Yorkton") in order to raise approximately $2 million through a special warrant financing transaction (the "Special Warrant Financing"). Yorkton agreed to underwrite the Special Warrant Financing to raise $6 million in such a manner as would provide PrimeNet with 40% of monies payable on closing and the balance payable when a receipt for the final prospectus was issued.
 
9. Yorkton's due diligence process identified issues which had to be addressed to Yorkton's satisfaction if it were to proceed with the Special Warrant Financing: (1) Austin owned a large number of PrimeNet shares which were not escrowed; (2) through Linstok, Austin had several marketing and consulting contracts with PrimeNet; and (3) Austin's annual salary of $250,000 was deemed too high for a start-up company.
 
10. Linstok's consulting agreement with PrimeNet dated August 1, 1995 provided that Austin's consulting fees would be increased to $300,000 annually if PrimeNet successfully concluded a financing. The annual discretionary bonus contained in the Linstok consulting agreement dated August 1, 1995 provided that a further bonus of fifteen percent (15%) of all funds raised, loaned or advanced to PrimeNet be paid to Austin. The Linstok consulting agreement dated July 11, 1996 provided for a discretionary bonus payment to Austin no less than once per year.
 
11. At a meeting between Yorkton and PrimeNet on June 17, 1996, PrimeNet and Austin agreed to address Yorkton's concerns by: (1) placing Austin's shares in escrow for three years; (2) cancelling Austin's marketing and consulting contracts with PrimeNet without condition or consideration by the closing date of July 11, 1996; and (3) reducing Austin's annual salary to $175,000.
 
12. On or about June 20, 1996, Austin, Laks, Homer and Bleasby, as PrimeNet's board of directors, approved a one time payment of $450,000 to Linstok as compensation for cancelling the previous marketing and consulting agreement with Linstok.
 
13. On or about June 20, 1996, PrimeNet filed a material change report with the Commission dealing with an unrelated matter but this material change report did not disclose the PrimeNet directors' resolution approving the $450,000 payment to Linstok. PrimeNet also failed to issue and file a news release disclosing this information.
 
14. On July 4, 1996, PrimeNet issued a news release (the "July 4 News Release") announcing that PrimeNet intended to issue 4,038,000 special warrants at a price of $1.50 per special warrant for aggregate gross proceeds of $6,057,000. The July 4 News Release indicated that Yorkton would be acting as PrimeNet's agent in connection with the Special Warrant Financing. The July 4 News Release also indicated that 40% of the aggregate proceeds of the offering, net of commissions and offering expenses, would be released to PrimeNet on closing and the remaining proceeds would be held in escrow and released on the earlier of: (i) satisfaction by PrimeNet of certain conditions in the Special Warrant Financing; and (ii) 24 months from the closing of the Special Warrant Financing.
 
15. The closing of the Special Warrant Financing occurred on July 11, 1996. Yorkton received releases from Austin and Linstok by which they released PrimeNet of any and all obligations relating to the marketing and consulting contracts.
 
16. On or about July 15, 1996, Austin delivered his share certificates to the escrow agent as requested by Yorkton in connection with the Special Warrant Financing.
 
17. On or about July 17, 1996, PrimeNet disbursed the $450,000 payment to Linstok by issuing a cheque in the amount of $357,000 to Laks in trust and a second cheque for $93,000 directly to Austin.
 
18. On or about July 18, 1996, the special warrant transaction was completed by the delivery by Austin of his share certificates to the escrow agent.
 
19. On or about July 18, 1996, PrimeNet issued a news release (the "July 18 News Release") announcing the completion of the issue of special warrants at $1.50 per special warrant. The July 18 News Release also stated that PrimeNet received $2,422,800 on closing with the remaining proceeds being held in escrow until PrimeNet satisfied certain conditions of the offering. It also stated that PrimeNet completed transactions which confirm that Austin would remain as PrimeNet's controlling shareholder. The July 18 News Release did not disclose the payment of $450,000 to Linstok.
 
20. On or about July 23, 1996, PrimeNet filed its offering memorandum dated July 2, 1996 with the Commission. This offering memorandum related to the Special Warrant Financing.
 
21. On or about July 26, 1996, PrimeNet announced a normal course issuer bid pursuant to which PrimeNet intended to acquire up to 100,000 common shares of itself. On August 14, 1996 and September 3, 1996, Yorkton's counsel complained to PrimeNet that a normal course issuer bid was inconsistent with purposes for which monies were raised by the Special Warrant Financing.
 
22. On or about September 6, 1996, PrimeNet filed its preliminary prospectus (the "Preliminary Prospectus") with the Commission to qualify the distribution of 4,038,000 special warrants issued July 11, 1996 at the price of $1.50 per special warrant. PrimeNet announced the filing of the preliminary prospectus in a news release dated September 13, 1996. The Preliminary Prospectus did not disclose the $450,000 payment to Linstok.
 
23. On or about September 19, 1996, PrimeNet filed its interim financial statements for the three month period ending June 30, 1996 with the Commission. These interim financial statements did not disclose the liability to make the $450,000 payment to Linstok.
 
24. On or about October 3, 1996, PrimeNet's auditors discovered the $450,000 payment to Linstok and advised PrimeNet that the liability for this payment should have been accrued in the financial statements ending June 30, 1996.
 
25. On or about October 4, 1996, PrimeNet's securities' counsel informed Yorkton's counsel of the $450,000 payment to Linstok.
 
26. On or about October 16, 1996, a confidential material change report was filed by PrimeNet's securities' counsel addressed to the office of the General Counsel of the Commission. The confidential material change report disclosed the $450,000 payment to Linstok. The confidential material change report stated that the $450,000 payment had not been disclosed in: (1) PrimeNet's offering memorandum dated July 2, 1996; (2) PrimeNet's preliminary prospectus dated September 6, 1996; or (3) in the materials mailed to shareholders in connection with the annual and special meeting of shareholders to be held on October 30, 1996. The confidential material change report stated that PrimeNet believed that premature disclosure of the material changes could prejudice PrimeNet's ability to give the special warrant holders comfort with respect to the non-disclosure of the $450,000 payment to Linstok.
 
27. On or about October 18, 1996, PrimeNet's securities' counsel was advised by staff of the Commission that the confidential material change report could not be kept confidential given that the Preliminary Prospectus had been filed and given that a news release had to be issued and the Preliminary Prospectus amended to reflect the adverse material change set out in the confidential material change report.
 
28. On or about October 18, 1996, staff of the Commission contacted the Canadian Dealing Network ("CDN") and CDN temporarily halted trading of the common shares of PrimeNet.
 
29. On or about October 23, 1996, PrimeNet withdrew the Preliminary Prospectus and issued a news release (the "October 23 News Release") announcing several developments relating to the Special Warrant Financing and the payment to Linstok. The October 23 News Release stated that: (1) the special warrant holders had the right to obtain a refund of their escrowed monies as PrimeNet had not given notice that adequate satellite transponder space had been secured for PrimeNet; (2) on July 18, 1996, PrimeNet made a payment of $450,000 to Linstok; (3) "no other officer or director of the Company will be receiving any incentive compensation, bonuses or options until 12 months after the successful launch of the Company's first network although the officers of PrimeNet and Linstok, under its new consulting agreement, will continue to receive base compensation payments"; (4) Yorkton's position is that the $450,000 payment to Linstok should not have been made since Linstok signed a termination of the original consulting and marketing agreements and all related obligations at the closing of the special warrant offering on July 11, 1996; (5) Yorkton has, among other things, demanded that Linstok repay PrimeNet in full, that Austin and Laks resign as officers and directors of PrimeNet, that Austin surrender sufficient shares of PrimeNet to the company for cancellation to reduce his holdings to a minority interest and that two nominees acceptable to Yorkton be appointed to the board of directors of PrimeNet; (6) Larry Steinman was appointed as an independent committee of the board given that Mr. Steinman was not on the board of PrimeNet on June 20, 1996 when the $450,000 payment to Linstok was authorized; (7) independent counsel concluded that the $450,000 payment to Linstok should have been disclosed in the offering memorandum and the preliminary prospectus; and (8) independent counsel recommended that the special warrant purchasers should receive a notice from
 
30. On or about October 28, 1996, PrimeNet's board of directors passed a resolution that the $450,000 payment to Linstok be treated as an advance to be repaid by 300,000 PrimeNet shares held by Linstok (valued at the price of $1.50 per share).
 
31. On or about October 31, 1996, PrimeNet issued a news release (the "October 31 News Release") stating that PrimeNet had received notice from all of the special warrant purchasers purporting to exercise their rights of rescission in respect of the purchase of the special warrants and the return of their purchase proceeds. The October 31 News Release stated that it was PrimeNet's position that no rights of rescission exist.
 
32. On or about January 23, 1997, PrimeNet filed a material change report with the Commission which stated that PrimeNet had repurchased 60% of the issued special warrants from the purchasers.
 
Non-Disclosure of Information in Documents Filed by PrimeNet with the Commission
 
33. PrimeNet filed documents with the Commission which failed to disclose the following information: (1) the board resolution authorizing the $450,000 payment to Linstok dated June 20, 1996; and (2) PrimeNet's $450,000 payment to Linstok on July 18, 1996.
 
34. The information referred to in paragraph 35 above ought to have been disclosed by PrimeNet in each of the following documents filed with the Commission:
 
 
  1. offering memorandum dated July 2, 1996;

     

  2. Preliminary Prospectus dated September 6, 1996;

     

  3. interim unaudited financial statements for the quarter ending June 30, 1996; and

     

  4. the materials sent to shareholders in connection with the annual and special meeting of shareholders to be held on October 20, 1996.

     
35. The non-disclosure of the $450,000 payment in the Preliminary Prospectus constitutes a breach of subsection 54(1) and clause 122(1)(b) of the Act.
 
36. The non-disclosure of the board resolution authorizing the $450,000 payment to Linstok in the confidential offering memorandum and in the interim unaudited financial statements constitutes a breach of clause 122(1)(b) of the Act.
 
37. The Preliminary Prospectus failed to comply with the requirements of the form and content for prospectuses as required by subsection 54(1) of the Act. Specifically, the Preliminary Prospectus failed to meet the requirements of Form 12 of Regulation 1015 for: (1) Item 5 - Use of proceeds to issuer; (2) Item 22 - executive compensation; and (3) Item 23 - Indebtedness of directors and senior officers.
 
38. Austin, Homer, Bleasby and Laks, as officers and/or directors of PrimeNet, were aware of and/or authorized, permitted or acquiesced in the commission of offences under subsection 54(1) and clause 122(1)(b) of the Act by PrimeNet contrary to subsection 122(3) of the Act.
 
Breaches of the Continuous Disclosure Obligations of the Act
 
39. The PrimeNet board resolution dated June 19, 1996 and the subsequent payment of $450,000 to Linstok as described in paragraphs 10, 14 and 15 above were material changes in the affairs of PrimeNet for which a news release and material change report were not issued forthwith after the material change contrary to subsections 75(1) and 75(2) of the Act.
 
40. PrimeNet improperly relied on the filing of the confidential material change report filed with staff of the Commission on October 16, 1996 once the payment of $450,000 to Linstok was disclosed by PrimeNet's accountant.
 
41. PrimeNet failed to file a news release or a material change report or news release regarding the PrimeNet Board resolution dated October 28, 1996 which provided that the $450,000 payment to Linstok be treated as an advance to be repaid by 300,000 shares of PrimeNet held by Linstok, contrary to subsections 75(1) and 75(2) of the Act.
 
42. Austin, Homer, Bleasby and Laks, as directors and/or officers of PrimeNet were aware of and/or authorized, permitted or acquiesced in the commission of offences under subsections 75(1) and 75(2) of the Act, contrary to subsection 122(3) of the Act.
 
Conduct Contrary to the Public Interest
 
43. The conduct of PrimeNet, Linstok, Austin, Homer, Bleasby and Laks was contrary to the public interest in that:
 
 
  1. the conduct of PrimeNet was contrary to sections 54(1), 75(1), 75(2) and 122(1)(b) of the Act;

     

  2. Austin, Homer, Bleasby and Laks were aware of and/or authorized, permitted or acquiesced in the commission of the above-noted offences by PrimeNet contrary to section 122(3) of the Act; and

     

  3. such other allegations as staff may make and the Commission may permit.

     

November 28, 1997.