Settlement Agreement: In the Matter of Ralph Schatzmair
R.S.O. 1990, c. S.5, AS AMENDED
AND
IN THE MATTER OF
RALPH SCHATZMAIR
SETTLEMENT AGREEMENT
I INTRODUCTION
1. By notice of hearing dated May 4, 1993 (the "Notice of Hearing"), the Ontario Securities Commission (the "Commission") announced its intention to hold ahearing to consider:
(a) whether pursuant to section 27 [now s. 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 thepublic interest to suspend, cancel, restrict or impose terms and conditions upon the registration of or to reprimand Ralph Schatzmair ("Schatzmair"); and
(b) whether pursuant to section 128 [now s. 127] of the Act, in the opinion of the Commission, it is in the public interest to order, subject to such terms andconditions as it may impose, that any or all of the exemptions contained in sections 35, 72, 73 and 93 of the Act do not apply to Schatzmair.
2. Staff of the Commission (the "Staff") and Schatzmair agree to recommend the settlement of the proceedings initiated in respect of Schatzmair by the Notice ofHearing in accordance with the terms and conditions set out hereinafter. Schatzmair agrees to the making of an order respecting him on the basis of the factsagreed to as hereinafter provided.
3. Staff and Schatzmair agree that only if, as and when this settlement is approved by the Commission, may this settlement agreement be released to the public.
4. Schatzmair agrees with the facts set out in the Settlement Agreement to the extent that he is directly aware of them, and to the extent that he does not havedirect knowledge, agrees that they are not inconsistent with his understanding.
5. The Staff acknowledges that the facts contained in this Settlement Agreement are consistent with its investigation.
II STATEMENT OF FACTS
6. At all material times Schatzmair was a registered representative employed by McConnell & Company Limited ("MCL") and was registered as a salespersonunder the Act. Schatzmair was employed in this capacity by MCL from February 26, 1990 to May 14, 1991.
7. Since May, 1991, Schatzmair has been and is currently employed as a registered representative with a registered dealer.
8. Since the Notice of Hearing was issued, Schatzmair has, at the request of the Staff, acted under a requirement for strict supervision by his employer and hiscurrent employment is subject to this requirement.
Ravencrest Condominium Hotel Limited Partnership
9. A public offering of units in the Ravencrest Condominium Hotel Limited Partnership ("RCHLP") was made pursuant to a prospectus (the "prospectus") datedNovember 28, 1990. A final receipt for the prospectus was issued on November 29, 1990. The prospectus permitted the sale of up to a maximum of 13,875limited partnership units, each priced at $1,000.00, for a total of $13,875,000.00. Each investor in the public offering had to subscribe for at least 25 units for aminimum investment of $25,000.00. In order for the first closing of the public offering to occur, the prospectus required that a minimum of 5,151 units, for atotal of $5,151,000.00, had to be sold on or by December 27, 1990. If the first closing failed to occur as stipulated, then all subscription documents and moneycollected were to be returned immediately to the subscribers.
10. As described in the prospectus, RCHLP, pursuant to applicable securities law, was deemed to be a "connected issuer" to MCL because an affiliate of MCLowned all of the outstanding shares of the general partner Ravencrest Development G.P. Limited (the "General Partner") . MCL acted as the principal agent forthe sale of units in the public offering.
11. In addition, as noted in the prospectus, the Project Manager, Ravencrest Development Co. Ltd. (the "Project Manager") was owned by affiliates of MCL andwas therefore a non-arms length party to RCHLP.
12. Acting as a salesperson employed by MCL, in December 1990 Schatzmair sold units of the RCHLP pursuant to the public offering to five clients who hadoriginally participated as seed capital investors (the "seed capital investors") and one new client. Schatzmair received $6,700 in gross commissions on the sale ofthese units.
13. The seed capital investment made by the seed capital investors consisted of a subscription price of $118,000 comprised of an immediate payment of $36,000and the delivery of two promissory notes in favour of RCHLP in the amounts of $61,000 and $21,000. When the public offering closed, the seed capital investorswould have the option of either demanding RCHLP to repurchase the units, for which they would earn a profit of $10,800, or of rolling into the public offeringby retaining the units, and receiving back the promissory note of $21,000. In the event that the public offering did not close the seed capital investors, uponhonouring the two promissory notes totalling $82,000, would acquire a 25% interest in a condominium suite in an existing development in Whistler B.C.
14. One seed capital investor had elected from the outset of his investment to require RCHLP to repurchase his units upon closing of the public offering; theother four seed capital investors had elected to roll over into the public offering.
15. Subsequent to the sales to the seed capital investors, Schatzmair received a memorandum from senior management of MCL indicating that there was apossibility that they would not be able to sell a sufficient number of units to meet the minimum closing requirements of the public offering and that it would be inthe best interests of the seed capital investors to elect to roll into the public offering. Acting on that advice, Schatzmair advised the seed capital investor who hadinitially elected not to roll his seed capital investment into the public offering to roll his investment into the public offering. To roll over each investor wasrequired to substitute the $61,000 promissory note with a cash payment of $61,000, which the seed capital investors financed by various means.
16. Schatzmair also sold units of the public offering to a new client under what was referred to as the Ravencrest Mortgage Loan Proposal (the "Proposal"). The388 units sold under the Proposal formed part of the second closing on December 31, 1990.
Participation of Schatzmair in the Public Offering
17. The first closing took place on December 28, 1990. Of the 5449 units represented as sold on the first closing, 22.15% were purchased by four employees ofMCL. On December 28, 1990 Schatzmair, at the invitation of senior management of MCL, subscribed for 263 units in the limited partnership at a price of$263,000. Of that purchase price, $137,938 was financed by McConnell Development Corporation ("MDC"), which was an affiliate of MCL, and the balancewas financed by a vendor take-back mortgage. The MDC financing was secured by a promissory note signed by Schatzmair on December 31, 1990.
18. In conjunction with his participation in the public offering, on December 31, 1990 Schatzmair entered into an agreement with MDC and the Project Managerwherein MDC and the Project Manager agreed to pay all of the costs (interest and principal) associated with the financing obtained by Schatzmair to purchasethe units in the public offering. In return, MDC and the Project Manager became entitled to all cash flow attributable to the units purchased by Schatzmair.Schatzmair was entitled to take advantage of any tax loss available to investors in units of the RCHLP. The prospectus did not disclose or offer these financingarrangements to other potential purchasers of units in the RCHLP and such arrangements were not made available to them.
19. It was Schatzmair's understanding that his units were to be re-acquired by MCL or an affiliate shortly into the new year. He was not responsible for arrangingany financing for the units. Had the agreement with MDC and the Project Manager been honoured by MDC and the Project Manager, Schatzmair would nothave been required to make any payments. Schatzmair claimed a tax loss for 1990 in connection with the units.
Receivership of MCL
20. On May 14, 1991, a receiver and manager of MCL and MDC was appointed by Court Order on the application of the Toronto Stock Exchange. Thereceivership was the result of a regulatory capital deficiency on the part of MCL.
21. Pursuant to an agreement dated May 28, 1991, Schatzmair assigned all of his rights, title, and interest in the 263 units of RCHLP to the Project Manager.The assignment was accepted on May 31, 1991.
Mitigating Factors
22. Schatzmair did not participate in the organization, planning, underwriting or administration of the public offering for the RCHLP.
23. Schatzmair had no intention of acting other than in the best interests of his clients. In offering units of the RCHLP to his existing clients he relied onrepresentations from senior management of MCL that the acquisition of the units was in the best interests of these clients.
24. Schatzmair, when acquiring units in the RCHLP on terms not available to other purchasers, relied on management of MCL. He did not believe at that timethat the acceptance of these units was contrary to Ontario securities law or otherwise contrary to the public interest.
25. After the appointment of a receiver and manager for MCL, Schatzmair first learned that the public offering had closed without obtaining the minimumsubscription required under the prospectus. He assisted investors in the RCHLP in dealing with the partnership's business, in pursuing remedies that appeared tobe available to them against the trust company that supervised the closing of the public offering under the prospectus and in instructing counsel on behalf of thesepurchasers.
26. Schatzmair also cooperated with Staff and representatives of the RCMP in connection with their investigation into the events relating to the public offering ofunits of the RCHLP.
III CONDUCT CONTRARY TO THE PUBLIC INTEREST
27. Schatzmair's conduct was contrary to the public interest in that as a salesperson of MCL he ought to have known, that:
a) he was purchasing units of the RCHLP on terms which were not disclosed in the prospectus and which were not offered to all subscribers of the RCHLP; and
b) he was purchasing units of the RCHLP on terms which provided him with an advantage that was not afforded to all persons who purchased units in theRCHLP.
IV TERMS OF SETTLEMENT
28. Schatzmair agrees to the following terms of settlement:
(a) that an order be made under subsection 127(1)1 of the Act that his registration be suspended for a period of six months commencing November 8, 1997; and
(b) that he make a voluntary contribution to the Canadian Investor Protection Fund in the amount of $7,500.00 payable on or before the last day of hissuspension. .
V CONSENT
29. Schatzmair hereby consents to an order of the Commission incorporating the provisions of Part IV above in the form of order annexed hereto as Schedule"A".
VI STAFF COMMITMENT
30. If this Settlement Agreement is approved by the Commission, the Staff will not initiate any complaint to the Commission or request the Commission to hold ahearing or issue an order in respect of any conduct or alleged conduct of Schatzmair in relation to the facts set out in Part II of the Settlement Agreement inrespect of which the Notice of Hearing was issued against Schatzmair.
31. If the Settlement Agreement is approved by the Commission, Staff undertakes to withdraw its request for strict supervision when Schatzmair resumesemployment after the period of the suspension of his registration, so that Schatzmair will not be subject to strict supervision by his employers.
VII PROCEDURE FOR APPROVAL OF SETTLEMENT
32. The approval of this Settlement Agreement shall be sought at a public hearing of the Commission scheduled for October 30, 1997.
33. The Staff and Schatzmair agree that if the Settlement Agreement is approved by the commission, it will constitute the entirety of the evidence to be submittedrespecting Schatzmair in this matter and Schatzmair agrees to waive his rights to a full hearing and appeal of this matter under the Act.
34. The Staff and Schatzmair agree that if the Settlement Agreement is approved by the Commission, Schatzmair will not make any further statements that areinconsistent with the Settlement Agreement.
35. If, for any reason whatsoever, the Settlement Agreement is not approved by the Commission or the order set forth in Schedule "A" is not made by theCommission:
(a) the Staff and Schatzmair will each be entitled to proceed with a hearing of the allegations in the Notice of Hearing, unaffected by the Settlement Agreementor the settlement negotiations;
(b) the terms of the Settlement Agreement will not be raised in any other proceeding or disclosed to any person except with the written consent of Schatzmairand the Staff or as may be otherwise required by law; and
(c) Schatzmair further agrees that he will not raise in any proceeding this Settlement Agreement or the negotiation or process of approval thereof as the basis forany attack on the Commission's jurisdiction, alleged bias, alleged unfairness or any other challenge that may otherwise be available, so long as the members of theCommission who participate in the making of any decision with respect to the Settlement Agreement do not participate as members of the Commission in thesubsequent proceeding.
36. If, prior to the approval of this settlement by the Commission, there are new facts or issues of substantial concern to the Staff regarding the facts set out inPart II of the Settlement Agreement, the Staff will be at liberty to withdraw from the Settlement Agreement. Notice of such intention will be provided toSchatzmair in writing. In the event that such notice is given, the provisions of paragraph 36 of this Part will apply as if the Settlement Agreement had not beenapproved in accordance with the procedures set out herein.
VIII DISCLOSURE OF SETTLEMENT AGREEMENT
37. The terms of the Settlement Agreement will be treated as confidential by both parties hereto until approved by the Commission, and forever, if for any reasonwhatsoever the Settlement Agreement is not approved by the Commission.
38. Any obligation as to confidentiality shall terminate upon the approval of the Settlement Agreement by the Commission.
IX EXECUTION OF SETTLEMENT AGREEMENT
39. This Settlement Agreement may be signed in one or more counterparts which shall constitute a binding agreement and a facsimile copy of any signature shallbe as effective as an original signature.
DATED this 29th day of October, 1997.
SIGNED IN THE PRESENCE OF:
"Ralph Schatzmair"
"Larry Waite"