Tricks of the Mining Promotion Trade

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Facts

7 In the summer of 1994, Christopher Stuart and Larry Birchall were seeking to purchase a shell company trading on the Vancouver stock exchange. Both were employees of First Marathon -- a member of the Vancouver, Alberta and Toronto stock exchanges, and a registered investment dealer under the Act. A shell company would be used to vend in other businesses, allowing them access to the capital markets without having to go through the slower process of an initial public offering.

8 In October 1994, Hartvikson and Johnson, with six other brokers from First Marathon, acquired a controlling block of shares in Cartaway, which was then a small company in the business of licensing garbage containers in Kelowna, British Columbia. The control group included Hartvikson, Johnson, Robert Disbrow, David Lyall, Eric Savics, and Stuart. This control group acquired Cartaway.

9 In the spring of 1995, Voisey's Bay in Labrador was the location of a staking rush resulting from the discovery of considerable nickel, cobalt and copper deposits. In April 1995, the respondents were presented with an opportunity to purchase some mining claims in the Voisey's Bay area. The vendor wanted $300,000 and 1.2 million free-trading shares in exchange for the claims. On April 5, an oral agreement to purchase the claims was reached. The respondents used a shelf company, 489895 B.C. Ltd., for the purpose of warehousing the various mining claims they were pursuing.

10 In the meantime, after the oral agreement was made, and without disclosing to the market the effective acquisition of the claims and the change in business of the company, Cartaway raised money to finance the acquisition through a brokered private placement on May 5, 1995. First Marathon acted as agent for the offering. Over 82 per cent of the units were placed with the control group or with their friends. The seven million unit placement was priced at $0.125 per unit. When Cartaway announced the closing of the placement it indicated that $875,000 had been raised, and would go towards undetermined future acquisitions.

11 The purchasers of the units under the private placement relied on an exemption from the normal prospectus requirements provided by s. 74(2)(4) of the Act, which allows a person to purchase as principal more than $97,000 worth of shares. The respondents, along with some of the other members of the control group, split the exemption by purchasing shares for other employees who did not individually meet the $97,000 requirement. The respondents relied on a legal opinion that this splitting was acceptable.

12 In June 1995, Cartaway completed the purchase of the Voisey's Bay claims through the acquisition of all the outstanding shares of the shelf company, 489895 B.C. Ltd., and became the owner of the claims. On June 29, 1995, Cartaway announced the change in its business to a natural resource exploration firm, and that it was making an "arm's length" acquisition of the Voisey's Bay claims. Cartaway then proceeded with another private placement for $1 per share purchase warrant, which closed on July 11, 1995. The offering memorandum for this private placement failed to disclose the respondents' acquisition of the mining claims, the extent of the control group's holdings or any conflicts of interest.

13 The investigation into Cartaway was triggered by events that took place almost a year later. On May 8, 1996, Cartaway announced that it had found significant mineralization on the Voisey's Bay claims based on a visual inspection of drilling samples. The share price jumped dramatically to $23, but later fell below $1 when an analysis of the samples failed to confirm these findings. Hartvikson and Johnson reaped in total $5.1 million in profits by trading Cartaway shares.