Decision in Brief: TeknoScan Systems Inc., Enforcement Proceeding, Merits, December 23, 2024

In this enforcement proceeding, the OSC says that TeknoScan Systems Inc. and three of its officers and directors, H. Samuel Hyams, Phillip Kai-Hing Kung and Soon Foo (Martin) Tam, committed fraud. They told shareholders that TeknoScan was negotiating with a sophisticated investor, for a purchase of up to 50 percent of TeknoScan’s common shares at an attractive price. Preferred shareholders could participate in the transaction by converting all of their preferred shares to common shares. If they did that, they would permanently lose the rights that went along with being preferred shareholders. Ninety-two percent of preferred shareholders converted their shares to common shares.

However, the transaction that the three officers and directors told shareholders about was not real.

The OSC also says that the respondents made misleading statements to the preferred shareholders and that Hyams and Kung made misleading statements to the OSC while it was investigating their conduct.

Kung and Tam, among others, were interviewed during the OSC’s investigation. At the hearing, the Tribunal was asked to decide whether transcripts of the interviews of Kung and Tam and two others could be used as evidence. The Tribunal decided that because Kung and Tam had, at their examinations, said that they wanted the protection against self-incrimination contained in s. 9 of the Evidence Act, the answers that Kung and Tam gave in their interviews could not be used against them in this proceeding. The Tribunal also decided that the transcripts of the two other people could not be used because the best evidence would be for those two people to testify, and the OSC had not tried to get them to testify.

The Tribunal decided that the respondents committed fraud. There was no reasonable expectation that the transaction would actually happen. The notice sent to preferred shareholders about the transaction was dishonest and misleading, because it left out important facts about the lack of funding for the transaction, the nature of the “sophisticated investor” and his ability to complete the transaction, and the risks for preferred shareholders who gave up the benefits that went along with their preferred shares. Hyams, Kung and Tam prepared the notice to shareholders, issued it on behalf of TeknoScan, and were aware that important information was missing and that they were causing preferred shareholders to risk suffering a loss.

The Tribunal also decided that TeknoScan made misleading statements to shareholders that had an effect on the value of TeknoScan’s common shares. Important information about the legitimacy of the transaction and the risks for preferred shareholders was left out of the notice. Since the preferred shareholders converted their shares only after the announcement of the transaction in the notice, and before this the preferred shares were either equal to or worth more than common shares, the Tribunal decided that the notice had a significant effect on the value of the common shares. As the officers and directors of TeknoScan, Hyams, Kung, and Tam are liable for TeknoScan’s conduct.

The Tribunal decided that Kung and Hyams did not make misleading statements to the OSC during its investigation. It is the OSC’s responsibility during an investigation to ensure the questions they ask respondents are clear, and not enough care was taken in this case.

As a result of this decision, the Tribunal will hold a hearing to decide what sanctions and costs should be ordered against the respondents because of their conduct.