Decision and Reasons: In the Matter of Alexis Fortuna-St. John et al.
IN THE MATTER OF THE SECURITIES ACT
R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF
ALEXIS FORTUNA-ST. JOHN,
ANTONIA STORM-ST. JOHN,
AND PHOENIX HEAD ENTERPRISES OF CANADA
Hearing: May 12 & 13, 1998Panel: J.A. Geller, QC - Vice-Chair
Helen M. Meyer - Commissioner
R. Stephen Paddon, QC - Commissioner
Counsel: Tim Moseley - For the Staff of the Ontario SecuritiesCommission
Arthur Barat - For the Respondents
DECISION AND REASONS
Notice of Hearing and Allegations
These proceedings were commenced by Notice of Hearing dated June 20, 1996, in which the staff ("Staff") of the Commission requested sanctions underparagraph 127(1) 2 of the Securities Act (the "Act") against the Respondents.
The relief was sought on the basis of the following allegations, made by Staff in its Statement of Allegations attached to the Notice of Hearing:
1. Alexis Fortuna St. John ("Alexis") is an individual who lives in Kingsville, Ontario. At all material times, Alexis operated a sole proprietorship by the namePhoenix Head Enterprises of Canada ("Phoenix Head").
2. Antonia Storm St. John ("Antonia") is an individual who lives in Kingsville, Ontario. At all material times, Antonia worked with her sister Alexis at PhoenixHead.
3. Neither Alexis nor Antonia was, at any material time, registered with the Ontario Securities Commission (the "Commission") pursuant to the Securities Act(the "Act").
Business Activities of the Respondents
4. During at least the period from January 1, 1996 to August 31, 1996, Alexis accepted funds from more than 800 individuals.
5. In most or all cases, Alexis entered into agreements with the individual investors, pursuant to which Alexis agreed to invest the funds in securities which Alexiswould choose. Alexis agreed to pay the investors the profits resulting from the investment of funds, subject to fees of 10% of any profit made, plus $50.00 pertransaction.
6. Alexis represented to investors that their principal investment was guaranteed, and that they would realize returns of at least 100% and probably 200% in ashort time.
7. From time to time, Alexis issued statements to investors, purporting to show securities transactions entered into by her on behalf of the investors. Thesestatements were false, in that no such transactions were completed by Alexis.
Losses Suffered by Investors
8. As at June 14, 1996, Alexis had accepted approximately $3.1 million from various investors. Instead of investing these funds as promised, Alexis diverted thefunds to her own use and to the use of her family, friends and associates.
9. On September 24, 1996, Alexis filed a Notice of Intention to Make a Proposal, pursuant to the Bankruptcy and Insolvency Act. That notice reflected totalinvestments made by investors in excess of $3.8 million, and shows withdrawals of approximately $1.7 million.
Conduct of Alexis
10. Upon learning that the Commission was conducting an investigation into her affairs and into the affairs of Phoenix Head, Alexis took steps to attempt toconceal her activities and to falsify records being delivered to the Commission.
11. In particular, Alexis sought the co-operation of various investors in backdating contracts which purported to change the nature of the investment made withAlexis by the investors. Alexis characterized these investments as a loan to her, upon which she would pay a fixed rate of interest.
12. Alexis also sought the co-operation of investors to destroy documents in an effort to frustrate the ability of the Commission to investigate this matter and toprotect the investors.
Breaches of the Securities Act
13. By her conduct, Alexis traded in securities without being registered, contrary to paragraph 25(1)(a) of the Act.
14. Alexis was assisted in her activities by Antonia. By her conduct, Antonia traded in securities without being registered, contrary to paragraph 25(1)(a) of theAct.
15. As a result of her conduct as outlined in paragraphs 10 to 12 above, Alexis submitted information to the Commission which was, to her knowledge, false in amaterial respect. Alexis therefore committed an offence contrary to section 122(1)(a) of the Act.
Phoenix Head Enterprises of Canada ("Phoenix Head") was a sole proprietorship of Alexis Fortuna-St. John ("St. John") which carried on its business inKingsville, Ontario, in Essex County.
According to St. John, who was called to give evidence by her counsel, her prime profession is that of a psychic. She carried on her activities as a psychic andcrystal consultant under the trade name of "House of Seraphim" on a fee-for-service basis. Her formal education ended in about grade 6 (she couldn't rememberprecisely), at which time she had to leave school due to health reasons. For 18 years she worked in the psychic area, doing paranormal research, in California.Thereafter she returned to Canada, residing in the Harrow-Kingsville area, and carrying on her various business activities there.
According to St. John's testimony, she commenced investing in stocks, on behalf of herself and members of her family, at the age of 14, and has done socontinuously since that time. Her evidence was that, as a result of her psychic abilities, she has never lost money in the stock market.
Antonia Storm-St. John ("Storm") is St. John's sister, and worked with her in the Phoenix Head business.
St. John carried on her investment business under the Phoenix Head trade name, commencing in 1994. By the time that a temporary cease trading order wasmade by the Commission against the Respondents on June 14, 1996, about 800 (according to Staff evidence) or 1,000 (according to St. John's evidence) peoplewere giving money to St. John for investment purposes. The basis on which they were doing so was subject to some dispute at the hearing, and we will deal withthis subsequently in these Reasons. Over $3,800,000 was deposited with Phoenix Head by investors. St. John did not advertise or solicit investment clients, andprospective investors were lead to deal with St. John through hearing from others in the relatively small and close-knit Kingsville and surrounding areascommunity, and as far away as London, Ontario, of fantastic (perhaps in both meanings of the word) returns which were said to have been realized by St. Johnon behalf of persons who left their funds with her for investment.
Other St. John Interests
In addition to her activities as a psychic and her investment activities through Phoenix Head, St. John had interests in a china and gift shop, carried on inKingsville under the trade name of "Oh Once Upon A Time" and in a farming operation, carried on by St. John and other members of her family in the Kingsvillearea, under the trade name of "Thunderbird Farms". Her brother David Fortuna carried on a business known as " Bronze Tiger Inc.", in addition to having aninterest in the Thunderbird Farms operation.
On June 14, 1996, a 15 day cease trading order was made against the Respondents by the Commission pursuant to paragraphs 127 (1) 2 and 5 of the Act. OnJune 26, 1996, the Hearing in this matter was adjourned sine die on consent, and it was ordered on consent that trading in securities by any of the Respondentscease pending further order of the Commission.
On June 14, 1996 the Commission also issued directions under subsection 126 (1) of the Act to Canadian Imperial Bank of Commerce and Nesbitt Burnsfreezing certain assets of the Respondents. On June 19, 1996, a further such direction was issued to Glendale Securities Inc. ("Glendale").
On July 23, 1996, the Ontario Court (General Division) heard an application by the Commission, made pursuant to Section 128 of the Act, for the appointmentof a receiver and the implementation of a process by which people who had deposited funds with Phoenix Head could make claims on the assets which had beenfrozen. The Court also continued the freeze directions which had been made by the Commission.
On August 8, 1996, a further direction was made by the Commission to Robert Mc Kerrow, a lawyer, freezing certain assets of the Respondents which wereunder his control, and on September 13, 1996, the Court continued this freeze direction.
On September 24, 1996, St. John filed a notice of intention to make a proposal pursuant to the Bankruptcy and Insolvency Act (Canada). The proposal was notmade, and St. John subsequently became a bankrupt.
The Hearing on this matter was held on May 12 and 13, 1998, and at the conclusion of the Hearing, we took the matter under reserve.
Principal Staff Witness
Staff's principal witness at the Hearing was Karen Morrow ("Morrow"), a staff accountant with the Commission. In June of 1996, Morrow was employed byArthur Anderson, an accounting and auditing firm, and was on secondment to the Commission as a member of Staff in the Enforcement Branch. As part of herduties, she was assigned to work on an investigation regarding Phoenix Head.
Morrow's testimony included the following.
In the course of her investigation, she obtained from Nesbitt Burns material relating to an account maintained by St. John with Nesbitt Burns. Nesbitt Burnsadvised her that this was the only account that Nesbitt Burns held for either Phoenix Head or St. John. Included in the material so obtained were monthlystatements of transactions in the account for the months of September, 1995 through May, 1996.
She also obtained from Glendale material relating to two accounts maintained with Glendale, one in the name of Phoenix Head and one in the name of St. John.
On July 10, 1996, Morrow obtained from Rita Singor, a person who had placed funds with Phoenix Head, a statement of account and forms showing paymentsin and withdrawals out of Singor's account at Phoenix Head. She compared this material with the three securities accounts which she had received from NesbittBurns and Glendale to determine if the transactions on the statement of account were actually effected in those three securities accounts. She found that therewas no instance where a transaction on Singor's statement matched transactions in any of the three accounts, or all three accounts taken together.
She also received a statement of account for another person who had placed monies with Phoenix Head, and conducted a similar analysis with respect to thisaccount. She found that there were no purchases in the Nesbitt Burns or Glendale accounts which matched up with the transactions shown on the account inquestion.
After reviewing this material, on July 12, 1996, Morrow had a telephone conversation with St. John. Morrow asked St. John to disclose all of her bank accountsand any securities accounts that she was aware of Phoenix Head's clients having an interest in. St. John told Morrow that the only bank account Phoenix Headhad was an account at the Canadian Imperial Bank of Commerce in Kingsville, Ontario, and that the only trading accounts or securities accounts which she heldwere at Nesbitt Burns and Glendale.
St. John informed Morrow that the monies which Phoenix Head had obtained from investors had been invested by St. John in small businesses and in securities.
Morrow asked St. John about Singor's account statement and why it was that the transactions on that statement did not match to the transactions reflected onthe Nesbitt Burns or Glendale securities account statements. She was told by St. John that the statement St. John had given Singor was not what actuallyhappened but what could happen, and that it was more of an exercise for Singor to determine what could have happened had she invested in stocks that theywere discussing.
In reviewing cancelled cheques which Morrow received from Phoenix Head's bankers, she found that cheques totalling approximately $375,000 had been issuedout of the Phoenix Head bank account in favour of Thunderbird Farms, Oh Once Upon a Time, House of Seraphim and Bronze Tiger Inc. At a meeting at theCommission's offices on July 16, 1996, Morrow asked St. John about these cheques. St. John advised Morrow that these amounts had been paid back by thesecompanies to Phoenix Head. Subsequently, Morrow reviewed the deposit slips included in the banking documents received from the bank, and found that theonly repayment which had been made was $3,000, by Thunderbird Farms.
At the same meeting, St. John delivered to Morrow 15 boxes of documents. Morrow's review of this material disclosed that over 800 persons had on depositwith Phoenix Head, a total amount of approximately $3 million. Morrow's review of the bank statements, as well as the Nesbitt Burns and Glendale statements,led her to determine that only approximately $1 million worth of assets existed in the accounts at the time that they were frozen by the Commission. Accordingly,Morrow determined that approximately $2 million was missing.
Subsequently, Morrow telephoned St. John and asked why there was a $2 million discrepancy. St. John told Morrow that the reason there was a discrepancywas because the records were not updated and did not reflect redemptions that investors had made. St. John said that the material was last updated in early June(which was not more than 19 days before the freeze orders were made).
On cross-examination, Mr. Barat asked Morrow whether Morrow had ever asked about accounts being maintained by St. John elsewhere than in Ontario.Morrow replied that she did ask St. John to disclose where all of her accounts were, both securities accounts and bank accounts, and that St. John's responsewas that she only dealt with the Canadian Imperial Bank of Commerce in Kingsville, and that the only securities account she held were at Nesbitt Burns andGlendale.
In answer to questions by Mr. Barat, Morrow confirmed that she had not seen any advertisements by Phoenix Head or solicitation letters from Phoenix Head.
Other Staff Witnesses
Mr. Moseley called four persons who had deposited monies with Phoenix Head to testify, Robert Lloyd, Lucy Salvati, Janet Tanner and Mary Vrucina. Theirtestimony included the following.
Robert Lloyd ("Lloyd") lives in London, Ontario, carries on business as Allied Financial Services, and is a registrant under the Act, selling mutual funds.
He first heard of Phoenix Head through a friend in London, Ontario, and, together with the friend, arranged an appointment with St. John at the Phoenix Headoffice in Kingsville. Lloyd had heard that there were some fantastic returns being generated by Phoenix Head so he inquired as to what St. John was doing,trying to get a feel for it, in order to become a potential investor. He made the decision to invest with Phoenix Head on December 5, 1995. On December 6,1995, he deposited $9,000 with St. John. On April 25, 1996, Lloyd and his father jointly deposited an additional $20,000 with Phoenix Head. On June 10,1996, Lloyd deposited an additional $25,000 with Phoenix Head. Lloyd withdrew from his account with Phoenix Head a total of $15,000.
Lloyd was told by St. John that the funds deposited with Phoenix Head were to be invested in Canadian securities, and his understanding was that he would beentitled to receive the proceeds of the investments, less a service fee of 10%.
Under date of February 29, 1996, Lloyd received from Phoenix Head a statement showing securities purchased with the initial $9,000 investment, and under dateof April 4, 1996, he received from Phoenix Head an updating statement of purchases and sales in his account.
On June 10, 1996, Lloyd entered into a new form of investment contract with Phoenix Head, backdated to December 6, 1995, the date of his original investment.St. John explained to Lloyd that she had been advised by her lawyer that the biggest mistake she made in the whole affair was providing documents, such as theprevious contracts forms, showing investment transactions, and that she now wanted Lloyd to sign this new document, retroactively back to the originalpurchase, to change the whole contract or understanding so that he was guaranteed a 10% return on his investments to appear as if he was lending St. John themoney, not investing it. This did not reflect, according to Lloyd, what the transaction really was.
On cross-examination by Mr. Barat, Lloyd acknowledged that he had never seen an advertisement or solicitation by Phoenix Head or St. John and that he hadinitiated the relationship.
Lucy Salvati ("Salvati") lives in Kingsville, Ontario, and is an accounting technician with an accounting firm, preparing personal tax returns and financialstatements.
She heard about Phoenix Head in April, 1996, as a result of preparing a 1995 personal tax return for a client. The client had invested approximately $150 withPhoenix Head, and a Phoenix Head statement showed that the client had earned about $2,000 in 1995 on this investment. She telephoned St. John to inquire asto how the profit should be treated in the client's tax return.
Salvati was told by St. John that St. John buys stocks, which increase in value, and they discussed the possibility of reporting the profit as a capital gain.
St. John talked to Salvati about St. John's business and how well she did, and said that she was very good at what she did. Salvati was very impressed in hearingabout St. John's business and how well she did for her clients, and made an appointment to meet St. John on April 11, 1996. Salvati went to the meeting withher husband.
Salvati had been hearing stories on the street on how much money St. John made for people and asked St. John how St. John made so much money for so manypeople. St. John told her that she had been doing this for 16 years and had never lost on a stock. St. John opened a binder, and showed Salvati a stock that hada value of 30 cents per unit, then flipped to another page where that same stock was shown at approximately $30 per unit. Salvati was very impressed.
Salvati told St. John that Salvati and her husband were very conservative and had never bought stocks before, not knowing the first thing about them. St. Johntold her that this didn't matter anyway, because St. John made all the decisions. St. John would decide which stocks the Salvatis would be investing in andwhether or not to sell those stocks at any point in time.
St. John told the Salvatis that their principal was guaranteed, that there was no way that they could lose, and that she always did very well on stocks. There wasno discussion about the Salvatis funds being invested in anything other than stocks.
St. John told the Salvatis that if St. John bought a stock for $2 per unit and it went up to $5 a unit, the additional $3 per unit was their capital gain and income,which they could take out at any time on notice. At the time of redemption there was to be a 10% to 15% fee charged by St. John, with, Salvati believed, aminimum of $500.
On April 11, 1996 the Salvatis invested $10,000 with Phoenix Head. After a month or so, Salvati began trying to contact St. John to find out what the Salvatis'monies had been invested in. They wanted an account statement. Over a three week period Salvati was generally unable to contact St. John, who was said to betoo busy to talk to her, or, if contacted, merely told her that a statement would be sent to Salvati in the mail.
On May 28, 1996 Salvati called St. John's office and left a message on St. John's answering machine informing St. John that the Salvatis had a very largeguaranteed investment certificate coming due the next day and that they had to talk to St. John because they had to decide how to invest this money. St. Johnreturned Salvati's call in five minutes. When the Salvatis met with St. John that evening, St. John instructed Storm to prepare an account statement so that theSalvatis could see where they stood. Storm left the room, and came back within 20 minutes with an account statement. This showed that the original investmentof $10,000 was now worth almost $20,500, after the deduction of transaction and service fees of $1,190. The Salvatis decided to leave this money on depositwith St. John and, a few days later, deposited a further $60,000 with Phoenix Head as well as an additional $6,200 in accounts for their children.
After hearing about the Commission's freeze orders, Salvati telephoned St. John. St. John told her that it was nothing more than a routine check which theCommission was doing, that the Salvatis' money was very secure, and that they had nothing to worry about because St. John had cooperated so well with theCommission, and her books were in such good order, that the Commission was actually still allowing St. John to trade stocks.
Subsequently, St. John told Salvati that Salvati was not to show her account statement to the Commission. St. John said that the Commission was accusing herof "brokering" without a license.
In late June or early July, 1996, the Salvatis met with St. John at St. John's request. She asked them to sign a new form of contract, backdated to April 11,1996, and explained that this was the exact same contract as the previous one, that all it was was a wording problem, that St. John's lawyer had a problem withthe wording and that now, as opposed to just the Salvati's principal being guaranteed, the principal plus 10% would be guaranteed.
The Salvatis asked St. John where their funds were, and were told that, before the Commission stepped in, all of St. John's investments were made in the UnitedStates, and that their money was sitting secure in the United States at that time. St. John said that the money was in an investment club which was legal in theUnited States but likely not in Canada.
On July 23, at a subsequent meeting, the Salvatis asked St. John for their money back. St. John said that she couldn't do this, because she would be admitting to"brokering" without a license.
Janet Tanner ("Tanner") lives in Colchester, Ontario, and is a real estate agent. She first heard of Phoenix Head in January, 1996 through two friends who hadinvested with Phoenix Head. She borrowed money from another friend so that she could invest as well. Her initial investment was $600. She subsequentlyinvested over a period of time a further $34,700, and withdrew a total of $8,476.85.
At their initial meeting, Tanner was told by St. John that, although St. John did not guarantee a specific return, she did very well, and that the principal amountwas secured because St. John was worth enough money to cover all of the principal investments should the stocks fail. Tanner was told by St. John thatTanner's profit would be calculated depending on what the stocks had done.
Under date of May 27, 1997, Tanner received from Phoenix Head a statement of her account showing deposits, withdrawals, purchases and sales. This showeda total account value of $63,141.11, after withdrawals of $6,000, on an investment of $35, 562.62, over a four month period.
On June 29th, 1996, Tanner deposited $200 U.S. with St. John, after returning from a vacation. Although Tanner had heard about the cease trade order, shewas assured by St. John that everything was okay, not to worry, it was business as usual with no problems. She did not get a receipt for this deposit. At thesame meeting, Tanner was asked by St. John to sign new documentation. St. John said that this was necessary to change things for the sake of what theCommission was doing. The new documentation consisted of backdated promissory notes under which Phoenix Head agreed to pay 10% per annum, calculatedmonthly. St. John told Tanner that these were intended to replace the original documents because the Commission wouldn't like what was on the originaldocuments and that the original documents should be destroyed.
On cross-examination by Mr. Barat, Tanner confirmed that she had never seen any advertisement of the Phoenix Head business.
Mary Vrucina ("Vrucina") lives in Leamington, Ontario, and is employed in the family business. She first heard of Phoenix Head from a friend, and heard that itcould make good money. On August 22, 1996 she and her husband met with St. John at the Phoenix Head office. She was told by St. John that moneydeposited with Phoenix Head by St. John would be invested for the Vrucina's in stocks. Vrucina had never invested in stocks before. Vrucina was told by St.John that Vrucina's money would be doubled by July 5, 1997.
The Vrucinas invested a total of $22,000 with Phoenix Head. All of the monies were deposited with Phoenix Head between August 22, 1996 and the end of thatmonth. On August 23, 1996, Vrucina gave St. John a cheque for $10,000, and St. John filled in the name of the payee as "Phoenix Head Enterprises". Aftersome days, St. John called Vrucina and said that she needed another cheque, because the first one had been destroyed, somebody had spilled coffee all over it soshe needed another one. Vrucina gave St. John a new cheque, and asked for her old cheque back. She was told that it had been thrown away, destroyed.Again, St. John filled in the name of the payee, but this time as "Bronze Tiger Inc.". Vrucina was told by St. John that Bronze Tiger was a safe company that St.John was investing in, and that it was in the United States. St. John said that St. John's brother had an interest in the company. The second cheque was alsodated August 23, 1996.
Vrucina was called by St. John about a week before the Hearing. St. John told her that St. John already had cheques written and that the Vrucinas were going toget their money. St. John then asked Vrucina whether someone had called Vrucina from Toronto for Vrucina to testify. Vrucina replied that she had beencalled, but that she would rather not go. St. John told Vrucina that she didn't have to go even if she got "papers that I have to go". St. John told Vrucina thatthere would be a lot of reporters at the hearing and that Vrucina might end up on the first page of newspapers, and it really wasn't important for her to attend thehearing.
Mr. Barat called three witnesses, Dorothy Brohman, St. John and Margaret Woltz. Their testimony included the following.
Dorothy Brohman ("Brohman") lives in Essex, Ontario, a community close to Kingsville. She and her husband were investors in Phoenix Head. Brohman metSt. John a number of years ago, first visiting St. John for a psychic reading. Brohman and her husband invested $62,700 in Phoenix Head, and, over time,received back $55,032. Brohman trusts St. John and still considers St. John to be her friend. Brohman feels that St. John ran into trouble because she had toomany investors and the business just snowballed out of sight. Brohman thinks that St. John was naive.
It was Brohman's understanding that St. John was going to invest for the Brohmans in stocks, with a guarantee of 10%, and that they would get more if thestocks did better.
St. John Testimony
St. John developed an interest in stocks and the stock market at a very young age. She has, since she was fourteen, followed the market.
Her psychic business, carried on under the trade name of "House of Seraphim", was commenced in 1988. She considers herself to be a consultant. Peoplecome in to discuss anything with her from marriage problems to romantic problems to financial problems to working out matters of a personal, delicate nature,such as emotional problems. In the course of her psychic consultancy business, she got involved in the financial business of people who came to consult her.
The Phoenix Head business, which began in 1994, started with different clients requiring financial assistance from St. John. They would bring in a small amountof money which she would invest. Once the investment was completed, she would return to the investors the complete amount earned by the investment,without fees being deducted. The earliest investors came to her through her psychic business.
St. John never asked anybody to come and invest with her and never had an advertisement. She has never sought registration with the Commission.
St. John considered registering with the Commission in 1996, when she realized how much of her work was into securities. But, because she was dyslexic and itwould take too much time off her usual work, and she is always busy, she did not have the time to go do this type of training. You can't be a broker unless youfirst apprentice under a broker and have to have a broker's licence. It isn't that simple that you just get a licence and open a business and say "I am a broker".
The forms used in the Phoenix Head business were made up by St. John.
St. John originally testified that the money deposited with Phoenix Head by investors was lent to her and that, after the investors paid for her time as if they werecoming in for a consultation, she would give them back their money plus whatever money it had generated. [These two statements are, of course, quiteinconsistent.]
If anyone asked St. John where the money was going, she would tell them, and they often "watched it go up with me". She would tell them the name of thestock and what exchange it was on and, if they didn't know how to look it up, would show them.
After the Commission's freeze directions had been given, St. John planned to make a proposal under the Bankruptcy and Insolvency Act, in which she would paythose people who deposited funds with Phoenix Head the full amount of the deposit, less withdrawals made. About $3.1 million was required for this purpose.St. John spoke to individuals with whom she had had business transactions and who were holding funds of hers, and told them that it was important the fundsnow be returned immediately in order to satisfy the claims of investors. It was decided that the amount required was $2.5 million U.S.
The amount was to come from a company called Advance Precision Stamping Inc. ("Advance Precision") which was a project that St. John had been working onsince January, 1996 in order to build a tool and dye plant in the state of Michigan. St. John and certain associates had advanced $5 million U.S. to AdvancePrecision for this purpose.
Although St. John received a fax of a cheque in this amount, the original was not delivered to her "because, at the time we were underneath the court order toturn everything that I had over, and it wasn't that we were concealing funds; it was just simply that we wanted to have a chance to put a proposal into place.Because, the original funds that were taken from me, I had no real disclosure as to what was going on with them or how much was even left".
St. John and her lawyers were concerned to get the proposal done as soon as possible. It became important to get the cheque itself "but not in my hands,because there was a court order stating that if I had it, I had then to turn it over to the OSC, and my attorney, Mr. Leslie, was concerned that, "If that were tooccur, the funds would be used incorrectly," those were his words not mine, sir, I am only repeating what I was advised by my attorney."
The cheque was "brought over by Mr. Bomber on September the 11th", and was " then placed by my brother, David, and Dacy Manley (phon.), underneath ourattorney's orders, in a safety deposit box in Detroit, Michigan at the NBD Bank, box number 618, and it was never touched".
St. John's notice of intention to make a proposal was filed on September 24, 1996. St. John's lawyer then advised her that the $2.5 million U.S. amount was toohigh and that St. John was to cash the $2.5 million U.S. cheque and bring back two cheques, one to her lawyer's law firm to be held in a trust account, and oneto go the trustee in bankruptcy. Her lawyer advised St. John that "he felt that technically we were breaking the Securities Act, that we were under the 127, byhaving the cheque in the Phoenix name, and I had already been in front of the Judge for contempt of court. And, he felt it was much better that if we broke thecheque down into two accounts, one million Canadian to go into his trust fund, not even in money, but to go into his trust fund and to be wired from theHuntington Banks directly to his trust fund, and the remainder of the cheque to be signed over, I believe it is to Price Waterhouse, as my official Trustees of theproposal".
St. John then received a call from Mr. Bomber [apparently the principal of Advanced Precision] who asked her to hold off cashing the cheque. She made it clearto him that he knew the consequences and she could not hold back in cashing the cheque. St. John subsequently learned that Bomber had moved the funds.
Since she could not go through with the proposal, St. John filed in bankruptcy on October 4, 1996.
In again describing her arrangement with investors, St. John said "Those stocks were purchased as pooled purchases by myself, and were owned by myself, andthose funds were my funds, that were made by me, and they only became the property of the individual upon request, and that is the individual who lent me themoney". St. John received well over $3 million in funds from individuals, all of which went into "pool investments and stocks". She never took any of thesemonies for personal living expenses.
St. John's Phoenix Head business began simply by word of mouth. All of her investors were referred to her by other investors. She would discuss with themwhat their problems were, would see what the proper solution was, and "then if there was no other place to generate funds, then we would take a certain amountand work it for the client".
St. John never advertised her services and never solicited people to give her money to invest. She sometimes refused to invest money for people when she didn'tknow them.
Storm did clerical work only. All clients inquiries respecting any purchases or sales of stocks or respecting refunds were always referred to St. John.
Although St. John wants to be able to invest her own monies in securities, she doesn't want to get involved in something like Phoenix Head again. She does notwant to ever be put in a position where she would, in any way or for any reason, in Ontario, be holding funds for anybody else that is into stocks or beresponsible for such funds.
Mr. Barat filed a copy of a letter from St. John to the Better Business Bureau of Windsor and Essex County, in response to a request for information withrespect to Phoenix Head, saying that he wanted "to be in a position, at the end, to argue straightforwardly, before you that this lady, to the extent that she could,has cooperated with everybody who has come forward." This letter included the following statements:
"In regards to your first request: the statement of stocks purchased on behalf of our clients. Let us first understand what it is that Phoenix Head Enterprises ofCanada does with it's lenders monies and we do not do. First, we do not buy stock on behalf of our private lenders. "We are not stockbrokers". Please dowhat you can to correct this public impression or perhaps we should say misimpression of what it is our business does do. Phoenix Head Enterprises of Canada,does often purchase stock investments for its own growth and for means to repay our private lenders the fees and principal amounts, that have been lent to ourbusiness. Our lenders have the right to know the stocks we may have purchased with their funds, and often enjoy observing the stock's progress, but that is all.Our private lenders receive only the agreed upon interest rate that is stated in our FUNDS CONTRACT. What, if any other monies that our private lenders mayreceive from our offices, depends on the nature of their individual needs, or the state of their finances".
"As discussed in our June 20th, meeting, we are enclosing with this letter a statement of one of our current stock portfolio monthly reports, from our businessbrokerage; as well as, a private portfolio report from Nesbitt Burns, with whom we have an account in my name only. This is not a privately held account, but intruth is a second business account of Phoenix Head Enterprises of Canada and functions at the knowledge of our private lenders. This account is in my ownname, due to Nesbitt Burns rather strange and often narrow account guidelines. Please take note of the fact, that neither account is in any of our lenders' names.This is typical Phoenix Head Enterprises of Canada stock portfolio".
On cross examination by Mr. Moseley, St. John said that when she invested in a stock in the past she has never lost money. She is absolutely confident that, ifshe invests in a stock, there is no risk of losing the money. She cannot always guarantee it is going to go up, but she can guarantee that she will not lose themoney. This is because she is a very good psychic.
Mr. Moseley questioned St. John about stocks shown on Phoenix Head statements to clients, but not purchased by St. John through either Nesbitt Burns orGlendale. In particular, Mr. Moseley referred to an investment in Gandolf Technologies. St. John stated that she bought the stock through Paul Schiefer, anindependent broker operating in New York City. Schiefer worked with several brokerages in the United States. St. John was reluctant to state who thesebrokerages were, but, on being instructed by the panel to answer the question, named two and then said that she couldn't remember the names of the others. St.John had previously stated that she had an excellent memory, but it appeared to fail her in this connection.
The following exchange then took place:
"Q. Did You ever get any statements, or any documents of any kind from Mr. Schiefer, or for any of the brokerages he worked for?
A. I reviewed them consistently, yes, sir.
Q. Did you ever receive them?
A. I had them in my possession at different times, yes, sir.
Q. What did you do with them?
A. Gave them back to Mr. Schiefer once I was finished reviewing them.
A. Because that was the way we worked. He would do the purchases... I would make the choices; he would do the purchases; I would confirm that thepurchases had been made; and then once I had done that and written down, for my own satisfaction and my own files, I would then return it to him.
Q. The firms that he worked for, and Mr. Schiefer never....
A. Not worked for, sir.
Q. Worked with...
A. It is important that that be stated.
Q. I can see that. The firms that he worked with, or Mr. Schiefer, personally, never sent you, by mail, any statements about your stock holdings; is that correct?
A. By mail? No, sir.
Q. You have no documentary evidence, whatsoever, am I correct, that you ever dealt with him? There is nothing before this Commission that even suggests thathe exists; is that correct, other than your testimony?
A. Yes, sir.
Q. In fact, you told Ms. Morrow, as part of the investigation, that the only securities accounts you held were in Ontario, at Nesbitt and Glendale; isn't that right?
A. Which is quite true.
Q. How much money went from you, or any of your businesses, to Advance Precision Stamping?
A. Five million dollars was what we put together, Paul Schiefer and I.
Q. Well, I don't want to know what you put together. How much money went from you to Advance Precision Stamping?
A. Three million.
Q. Do you have a receipt for that?
A. I did have a receipt for it.
Q. What happened to that?
A. I turned it over to them at the time, when all this was going on to protect it.
Q. To protect what?
A. The receipt, to make sure that it wasn't lost in the middle of all that was going on. There are some documents that have since not been able to be found, butthey weren't in my possession.
Q. I see. And where did the money go from, when it went to Advance? Was it in cash, or did it go from a bank or some other form?
A. It went from bearer bonds to different forms of securities. It was in several avenues, actually.
Q. How did those bearer bonds, and so on, get purchased?
A. They were purchased through different banks, and they were purchased...and sent through different banks.
Q. Well, was this Phoenix Head funds that were being used to buy that U.S. $3,000,000...
A. It was funds that Paul Schiefer had from our pool, yes, sir.
Q. I see, but we still have no evidence of any money going from Paul Schiefer; do we?
A. Not evidence that I have ever been able, or even asked to produce. I haven't been asked.
Q. You have not one document that you have ever produced to anyone, including the trustee or the Commission, that suggests that this money ever went toAdvance Precision Stamping, other than the ones that have been introduced at this Hearing; am I correct?
A. I have never been asked for any, that I know of, and I have turned everything that I had over to Price Waterhouse.
Q. But you don't know what banks the money went through, or how this went through Paul Schiefer to go to Advance Precision Stamping; is that what your aresaying?
A. I know which banks we commonly used.
Q. That is not what I asked. Do you know what the flow of funds was to get to Advance Precision Stamping?
A. That wasn't part of the job, no, sir.
Q. Whose job was it?
A. It was Paul Schiefer's.
Q. Weren't these Phoenix Head Funds?
Q. Weren't these funds invested by these over 1,000 people in the Kingsville area, that were going to Advance Precision Stamping?
A. Yes, sir.
Q. But you have got nothing to show for it?
A. Not at this time, no, sir."
Mr. Moseley then asked St. John whether she had one standard arrangement that she would enter into with people about how their returns would be calculated.The following exchange then took place:
"A. The only arrangement that I had with them was that they would receive 10 percent, no matter whether the stocks went up or down, on the funds they gaveme.
Q. But, in fact, isn't it the case that, from the beginning the standard deal you entered into was that people would earn returns based on the performance of thestocks, and it wasn't just 10 percent?
A. It was the standard deal that they would receive 10 percent, and the option was that, whatever they made, less my fees for what it took to take the time to dothe buying and selling, would go back to them, yes, sir. I had no need for the money.
Q. Well, when you say that was the option, how did people decide whether...it sounds like a good option. Did anyone turn that one down?
A. Not unless they wanted me to hold it and continue to run the money for them.
Q. In which case it was still their money, but in your possession; correct?
A. No, sir, their money was the original. That was always their money.
Q. Right, but at the end of the day, if they wanted to close their account, what would...
A. They could do so, and many did so.
Q. What would they get back?
A. The entire amount less my fees, or what I had earned using the money they gave me to use.
Q. So you weren't paying them 10 percent interest per annum, were you? You were paying them the return on the stocks, less your fees; correct?
A. I wasn't paying, I was giving it to them upon request, and upon whatever it was that it earned. If it didn't earn above the amount they gave me, I gave them10 percent.
Q. But you gave them at least 10 percent? You gave them the performance on the stocks that you told them you had purchased for them, plus...or, sorry, lessyour fees?
Q. So 10 percent was a minimum, it wasn't a flat interest rate per annum; was it?
A. Yes, it is, because say if the money never did anything, it didn't generate anything, it just sat there, that was 10 percent.
Q. That makes it a minimum, but if they earned it more, if they earned more than 10 percent, they got the more than 10 percent; correct?
A. Yes, sir."
St. John denied that she accepted any funds from Vrucina in August, 1996. She said that she received funds from Vrucina which she returned.
In reply to a question from Commissioner Paddon, St. John stated that the approximately $2 million of unaccounted for funds went to Advance Precision. St.John said that she had a receipt for the funds, that attorneys were in the process of preparing the company for a public distribution of shares, and that she wouldhave been the major shareholder.
Commissioner Meyer referred St. John to one investor who had deposited $6,000 with Phoenix Head and received back $67,000 over a period of a year, and toanother investor who had invested $7,500 and received back over $50,000 in a one year period. St. John stated that had Phoenix Head carried on with itsbusiness, an investor would have been able to ask for the entire amount generated by the stocks in which the investors monies had been invested, less St. John'sfees, and that St. John would have given the investor that amount.
Commissioner Meyer stated that she was puzzled why there was absolutely no documentation about St. John's relationship with Schiefer, and the followingexchange took place:
"THE WITNESS: I will be completely frank with you, ma' am. When this first happened, I was very concerned about other people that were involved with me,of having their accounts frozen, as well. It was a bit of a shock. You got to try to understand.
COMMISSIONER MEYER: How long have you been dealing with Mr. Schiefer?
THE WITNESS: Mr. Schiefer and I have been in dealings since 1979, ma'am.
COMMISSIONER MEYER: Okay, so that is a long, long time. Does he not provide account statements to the...like, I am trying to understand why LehmanBrothers wouldn't have provided contracts...
THE WITNESS: Not to me.
COMMISSIONER MEYER: ...confirmations...
THE WITNESS: But not to me because the accounts were not kept in my name. They were always... like myself, Mr. Schiefer bought as a pool, for more thanone of us. It wasn't...that was my concern. If it had just been Paul Schiefer and I, we would have come to you and explained, but we were not just dealing withour funds.
COMMISSIONER MEYER: How did you know what Phoenix Head owned, that Paul Schiefer had bought?
THE WITNESS: Because I would...
COMMISSIONER MEYER: No, how did you know? Like, when you are sitting there and you are doing your month end, or your year end, or whatever, howdid you figure out what you owned in the States?
THE WITNESS: Because I was the one who chose the stocks, then he would show me the confirmation the stocks had been purchased, and how much theywere purchased for.
COMMISSIONER MEYER: So did you keep a ledger of what you owned down there?
THE WITNESS: Yes, of course.
COMMISSIONER MEYER We haven't seen any of that stuff. All we have seen is...
THE WITNESS: That is with Price Waterhouse, and that was very simply kept. It was bought this; sold that. Underneath each individual person, includingmyself, that is the only way I kept it. I didn't need anything further because, when I first came here to Canada, when I returned here to do business, I was simplyrunning my own money. It was not necessary. I have known Paul Schiefer for a numerous amount of years. I had never lost money with him. He had nevershown me anywhere that he was not an honest person. If I asked him for monies, it was always there. If I asked him to make a purchase for me, he alwaysconfirmed the purchase, and I would see the slips to confirm the purchase, but they were not just my purchases. There were numerous purchases on thosesheets. I just know I provided the money. There was money showing that the purchase was done. It was what I asked him to buy. The same thing when I soldsomething, then he would get the money and get the money and give it back to me. That was the way we dealt for numerous years.
COMMISSIONER MEYER: Okay, but when you are trading with Mr. Schiefer for Phoenix Head...
THE WITNESS: I didn't mean to trade for Phoenix Head. I had no books in place. I was attempting to hire an accountant and a bookkeeper.
COMMISSIONER MEYER: But you are using money that people put into Phoenix Head...
THE WITNESS: Yes.
COMMISSIONER MEYER: ...and you bought stocks in the States...
THE WITNESS: Yes, and I kept an accounting.
COMMISSIONER MEYER: ...through Paul Schiefer...
THE WITNESS: Yes.
COMMISSIONER MEYER: ...and I have yet to see one piece of paper that this...
THE WITNESS: When this happened, anything I did have was with Paul. Anything I had in my own office, I gave to Paul, which we had made an agreement, hewould then, if necessary, turn over to the authorities. We never expected any of this to happen. I expected to pay the people back, then come before and say, "Imade a mistake. I really made a mistake. I have paid everybody back their money. I don't expect you to let me go without paying a penalty, but I didn't stealanybody's money."
COMMISSIONER MEYER: Okay. Did you keep a personal record, for Phoenix Head, of what stocks you owned in the States that you had purchased throughPaul Schiefer?
THE WITNESS: To the best of my ability, yes, I did.
COMMISSIONER MEYER: And has anyone seen these statements?
THE WITNESS: Everything I had in my possession, I turned over to Price Waterhouse.
COMMISSIONER MEYER: Were there monthly records indicating those stocks that were turned over to Price Waterhouse?
THE WITNESS: There was supposed to have been a binder of that, yes, ma'am.
COMMISSIONER MEYER: What do you mean "supposed to have been"?
THE WITNESS: I haven't gone...after I turned them over, I cannot say what they have and don't have. I know it was logged in. I know what I gave them, butI haven't seen them. You have to understand, I haven't seen those records since...not in full, since August of 1996.
COMMISSIONER MEYER: I understand that, but would you have known what was in them?
THE WITNESS: Yes.
COMMISSIONER MEYER: I mean, you would know what you did every month.
THE WITNESS: Yes, and I am saying, yes, I kept a record of the stocks I bought.
COMMISSIONER MEYER: And those should be a Price Waterhouse?
THE WITNESS: Yes, ma'am, they should be.
COMMISSIONER MEYER: Okay, I have no further questions".
Vice-Chair Geller then had the following exchange with St. John.
"THE CHAIR: I understood from your evidence, and please correct me if I am wrong, that he [Paul Schiefer] acted as one of your brokers?
THE WITNESS: He was the main person that I worked with because I come from the States, and in the area of my work and my background, he was the personthat I worked with primarily for a long time.
THE CHAIR: I would like you to answer my questions very carefully, and...
THE WITNESS: I am.
THE CHAIR: ...I asked you whether he was one of your brokers?
THE WITNESS: Yes, he was my primary broker.
THE CHAIR: He was your primary broker?
THE WITNESS: Yes, sir.
THE CHAIR: In addition, from what you say, he seems to have been a partner in the sense that you invested together?
THE WITNESS: He was more like, when we began, he was my employer for a long amount of time. He would employ me to investigate certain stocks, to seewhat I thought they were going to do. As a psychic, I am fully admitting that. That was our relationship. At the same time, instead of taking funds from him, Iwould leave my earnings with him, and then he would, in turn, invest those earnings in stocks that I chose.
THE CHAIR: Let's talk in terms of Advance Precision.
THE WITNESS: Yes, sir.
THE CHAIR: Just what was your arrangement with Mr. Schiefer with respect to Advance Precision?
THE WITNESS: We were going to complete the enactment procedures in the U.S. to turn the company into a complete stockholding company, where we wouldbe the majority stockholders, and then we were intending, in three months, to sell, after we broke land in September, the stock.
THE CHAIR: "We" being you and Mr. Schiefer, or Phoenix Head and Mr. Schiefer?
THE WITNESS: Phoenix Head and Mr. Schiefer, yes, sir.
THE CHAIR: And, so, that is why I asked you, you had a partnership arrangement of some kind with him, where you were jointly investing in AdvancePrecision?
THE WITNESS: We were jointly investing, yes, sir.
THE CHAIR: What was your proportionate percentages of your investment?
THE WITNESS: With Advance Precision, it was 50/50.
THE CHAIR: Fifty/fifty?
THE WITNESS: Yes, sir.
THE CHAIR: As far as you are aware, he was investing his own funds in that, or other people's funds?
THE WITNESS: Oh, no, sir, it was his funds and other individuals' funds, as well. I knew that.
THE CHAIR: I see.
THE WITNESS: I just couldn't say whom they were.
THE CHAIR: No. Ordinarily, when you dealt with a broker, I take it you were used to getting both confirmations in particular, and [sic] purchases or sales, andmonthly statements, and annual statements from your brokers?
THE WITNESS: Yes, sir, as a rule. I had limited accounts with most individuals, though. I would sometimes use a brokerage for one buy only, and I hadaccounts with them, and then use them later again for another buy.
THE CHAIR: But when you used them, you would get a confirmation of a purchase or sale...
THE WITNESS: Usually just a slip...
THE CHAIR: ...plus a statement?
THE WITNESS: ...that would confirm that I had, with them.
THE CHAIR: And at the end of the month, would you not get a statement from them showing what you had bought during the month?
THE WITNESS: Not always, sir, no. I can name you several...even here in Toronto, that you do not get monthly statements from them. You get quarterly oryearly.
THE CHAIR: But you got quarterly or yearly statements from them?
THE WITNESS: Usually, sir.
THE CHAIR: Why did you enter into this somewhat unusual relationship with Mr. Schiefer where you neither got confirmations nor statements?
THE WITNESS: Simply because, at the time when I was doing it originally with Mr. Schiefer, it was more of the fact that I didn't want to be bothered. I ambeing very honest with you. He took care of all the paperwork, and I had more than enough work to do with my end of it.
THE CHAIR: But I did understand you to say that you would go over to the States to look at the confirmations, and such.
THE WITNESS: Or sometimes he would come to me, yes, sir.
THE CHAIR: He would sometimes come to you in Canada?
THE WITNESS: Yes, sir.
THE CHAIR: Why didn't he just mail you what you needed?
THE WITNESS: Neither Paul nor I were that comfortable in using the mail system for documents that were that important, so...and since he was often over onbusiness, we would meet at least once a month, if not more than that. This has been ongoing since '79."
Margaret Woltz ("Woltz") lives in Kingsville, Ontario. Woltz worked for Phoenix Head.
Storm did clerical and typing work.
Mr. Moseley filed an undertaking to the Commission, signed by St. John and Storm and dated July 15, 1996, in which they undertook not to take any steps infurtherance of a trade of securities.
He also filed a certificate dated June 25, 1996 and issued pursuant to section 139 of the Act by a Director of the Commission, that the Commission's recordsdisclosed that none of St. John, Storm and Phoenix Head was registered with the Commission in any capacity pursuant to section 25 of the Act between January1, 1995 and June 21, 1996, inclusive.
In addition, he filed a copy of St. John's notice of intention to make a proposal under the Bankruptcy and Insolvency Act, dated September 24, 1996. Theinvestor list attached to this notice disclosed that the total amount deposited by investors with Phoenix Head was $3,822,438.88, and the total amount withdrawnby investors was $1,684,837.22.
Analysis of Evidence:
We found all of the witnesses, except for St. John, to be credible witnesses whose factual, as opposed to opinion, testimony we had no difficulty in accepting.
We found St. John, on the other hand, to be an evasive witness, much of whose testimony in crucial areas we were unable to accept. Where St. John's testimonyconflicts with that of any of the other witnesses, we accept the evidence of the other witnesses.
St. John gave several differing explanations as to the nature of the contract between Phoenix Head and investors. She described it as a loan arrangement, underwhich the investor was only entitled to get back the amount invested plus 10 percent interest. She also described it as an arrangement under which the investorcould, if he or she wanted to, get back the amount originally invested and any profits realised on the investment, less a management fee.
We find that, although the written investment agreements did vary from time to time and were by no means explicit as to what the arrangement was, the clearunderstanding and agreement between Phoenix Head and the investors was that the amounts deposited by the investor with Phoenix Head would be invested inCanadian stocks, and the investor would be entitled to receive back, upon notice to Phoenix Head, the greater of (a) the amount invested plus interest at 10percent per annum and (b) the value, at the time of repayment, of the investor's account, in each case less the Phoenix Head management fee.
We find that the understanding and agreement gave St. John full control over the investment of monies deposited by investors with Phoenix Head, and over thepurchase and sale of stocks in which the monies were invested.
We found St. John's varying explanations of her dealings with Schiefer and Advance Precision to be unbelievable. We do not believe that investments shown onaccounts given by Phoenix Head to investors as having been purchased with their funds were in fact purchased by St. John through Schiefer. It may be that atleast some of the investors' monies which disappeared were invested by Phoenix Head in Advance Precision through Schiefer, but we are not prepared toconclude this was the case on the basis of St. John's testimony.
We have our suspicions as to why Schiefer did not communicate with St. John by use of the mail, and why no documentation of dealings between St. John andSchiefer was retained by St. John in Canada, but we are unable to make any findings in this regard on the basis of the evidence presented to us.
We find that, in the period from January 1, 1996 to August 31,1996, St. John, under the Phoenix Head trade name, took investments from between 800 and1,000 individuals on the basis of the understanding and agreement discussed above.
We find that, contrary to this understanding and agreement, St. John advanced out of the monies provided by investors approximately $375,000 to firms orcorporations in which she or a member of her family had an interest, and that only $3,000 of this amount was repaid. Mr. Barat argued that, apart from agreedmanagement fees, St. John derived no benefit from the investment transactions. In fact, apart from the question of what happened to the balance of theapproximately $2 million which disappeared, it is clear to as that St. John and her family derived substantial benefit from this diversion of investors' funds.
We find that something in the neighbourhood of $2 million of the monies advanced by investors to Phoenix Head has disappeared, without a credible explanationhaving been given of what happened to these monies.
We think it probable that St. John lied to Morrow when St. John told Morrow that the only brokers with whom she and Phoenix Head dealt were Nesbitt Burnsand Glendale. If her evidence is to be believed at all, St. John's principal broker was Schiefer. She also lied to Morrow in describing her arrangements withinvestors, what the account statements given to investors represented, and why approximately $2 million of assets seemed to have disappeared. We note inpassing that St. John's explanation of her relationship with investors and brokers in her letter to the Better Business Bureau was equally lacking in candour.
We find that, upon learning that the Commission was conducting an investigation into her affairs and those of Phoenix Head, St. John took steps to attempt toconceal her activities and to falsify records being delivered to the Commission, and that she sought the cooperation of some investors in backdating contractswhich purported, incorrectly, to describe the nature of the arrangements between Phoenix Head and the investors as loans, and that St. John also sought thecooperation of investors to destroy documents in an effort to frustrate the ability of the Commission to investigate the affairs of St. John and Phoenix Head.
We find that the statements of account given by Phoenix Head to investors were complete fabrications, showing purchases of shares which had never been made.
We find that St. John did not advertise or solicit customers for the Phoenix Head business. However, the very large amount deposited by investors with PhoenixHead leads us to conclude that she did nothing to discourage the making of such deposits.
We find that Storm did not take part in the management of the Phoenix Head business, and that her activities were limited to clerical and secretarial functions.
Trading in Securities
Section 1(1) of the Act, as it read at the relevant times, defined "security" to include "any investment contract, other than an investment contract within themeaning of the Investment Contracts Act". The Act does not define "investment contract".
The leading Canadian case dealing with investment contracts is Pacific Coast Coin Exchange of Canada et al. v. Ontario Securities Commission (1997), 80 D.L.R(3d) 529, a decision of the Supreme Court of Canada. De Grandpré, J., speaking for the majority of the Court, had the following to say, at p.538:
"The expression "investment contract" is not defined in the Act. In their search for its meaning, the Courts below have been guided by the leading U.S.authorities and counsel invited us to follow the same path. I agree. While the statute under consideration here does not read word for word like its U.S.counterpart, the expression "investment contract" is found in both. In addition, the policy behind the legislation in the two countries is exactly the same, so thatconsidering the dearth of Canadian authorities, it is a wise course to look at the decisions reached by the U.S. Courts. This approach has also been adopted bythe Court of Appeal of Alberta in R.v. Great Way Merchandising Ltd. (1971), 20 D.L.R. (3d) 67, 3 C.C.C. (2d) 463,  3 W.W.R. 133 sub nom. A-G Alta.v. Great Way Merchandising Ltd., as well as by Nemetz, J.A., in the Court of Appeal of British Columbia in Re Bestline Products of Canada Ltd. et al. andSecurities Com'n (1972), 29 D.L.R (3d) 505,  6 W.W.R. 245.
I have alluded to the policy of the legislation. It is clearly the protection of the public as was said by Hartt, J., in Re Ontario Securities Com'n and BrigadoonScotch Distributors (Canada) Ltd. (1970), 14 D.L.R. (3d) at p.41,  3 O.R. 714 at p.717:
...the basic aim or purpose of the Securities Act, 1966...is the protection of the investing public through full, true and plain disclosure of all material facts relatingto securities being issued.
If any doubt could be entertained as to the intention of the Legislature in the present instance, that doubt should be dispelled by the very wide terms employed indefining the word "security". The fourteen subdivisions of the definition encompass practically all types of transactions to such an extent that this definition hadto be narrowed down by a long list of exceptions to be found in s.19 [am. 1971, Vol.2, c.31, s.3].
At this point, reference should be made to a work by Professor Louis Loss who was called by appellant as an expert witness before the Commission. In thesecond edition of his Securities Regulation (1961), vol. I at pp. 483, 488-489, and in the 1969 supplement thereto (vol. IV at p. 2501), Prof. Loss recognizesthat "the various categories in the definition are not mutually exclusive and are meant to be 'catchalls'". This view of the definition in the United States statute isvalid in our case as well.
Such remedial legislation must be construed broadly, and it must be read in the context of the economic realities to which it is addressed. Substance, not form, isthe governing factor. As noted in Tcherepnin v. Knight (1967), 389 U.S. 332 at p.336:
...in searching for the meaning and scope of the word "security" in the Act, form should be disregarded for substance and the emphasis should be on economicreality.
In the search for the true meaning of the expression "investment contract", another guideline must also be present in the forefront of our thinking. In the wordsof the Supreme Court of the United States in Securities Exchange Com'n v. W.J. Howey Co. et al. (1946), 328 U.S. 293 at p.299, any definition must permit
...the fulfilment of the statutory purpose of compelling full and fair disclosure relative to the issuance of "the many types of instruments that in our commercialworld fall within the ordinary concept of a security." ...It embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countlessand variable schemes devised by those who seek the use of the money of others on the promise of profits.
Which does not mean that the legislation is aimed solely at schemes that are actually fraudulent; rather, it relates to arrangements that do not permit thecustomers to know exactly the value of the investment they are making.
It is with all the foregoing in mind that the Supreme Court of the United States in Howey, at pp. 298, 299, 301, laid down the following test:
Does the scheme involve "an investment of money in a common enterprise, with profits to come solely from the efforts of others."?
This test was said by the Court to be just another expression of a meaning "crystallized" by prior judicial interpretation. The following passage (at p.298) isworth quoting:
The term "investment contract" is undefined by the Securities Act or by relevant legislative reports. But the term was common in many state "blue sky" laws inexistence prior to the adoption of the federal statute and, although the term was also undefined by the state laws, it had been broadly construed by state courts soas to afford the investing public a full measure of protection. Form was disregarded for substance and emphasis was placed upon economic reality. Aninvestment contract thus came to mean a contract or scheme for "the placing of capital or laying out of money in a way intended to secure income or profit fromits employment." State v. Gopher Tire & Rubber Co., 146 Minn. 52, 56, 177 N.W. 937, 938. This definition was uniformly applied by state courts to a varietyof situations where individuals were led to invest money in a common enterprise with the expectation that they would earn a profit solely through the efforts ofthe promoter or of some one other than themselves.
By including an investment contract within the scope of s. 2(1) of the Securities Act, Congress was using a term the meaning of which had been crystallized bythis prior judicial interpretation. It is therefore reasonable to attach that meaning to the term as used by Congress, especially since such a definition is consistentwith the statutory aims.
In the case at bar, it is obvious that an investment of money has been made with an intention of profit. The questions before us are the following: Is there acommon enterprise? Are the profits to come solely from the efforts of others? These two questions are so interwoven that I will be endeavouring to answerthem together.
The word "solely" in that test has been criticized and toned down by many jurisdictions in the United States. It is sufficient to refer to S.E.C v. KoscotInterplanetary, Inc. (1974), 497 F. 2d 473, and to S.E.C v. Glen W. Turner Enterprises, Inc. (1973), 474 F. 2d 476. As mentioned in the Turner case, to give astrict interpretation to the word "solely" (at p. 482) "would not serve the purpose of the legislation. Rather we adopt a more realistic test, whether the effortsmade by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise."In the same case of Turner, the expression "common enterprise" has been defined to mean (p.482) "one in which the fortunes of the investor are interwoven withand dependent upon the efforts and success of those seeking the investment or of third parties". These refinements of the test, I accept.
Like the Courts below, I hold the view that both these questions must be answered in the affirmative. Their analysis of the situation being exhaustive, it wouldserve no useful purpose to restate it in my own words and to repeat the facts summarized earlier in these reasons. I will simply underline the common enterpriseaspect and attempt to highlight two facets of the dependence of the customer upon Pacific, namely, for the success of venture and for the existence of a truemarket.
In my view, the test of common enterprise is met in the case at bar. I accept respondent's submission that such an enterprise exists when it is undertaken for thebenefit of the supplier of capital (the investor) and of those who solicit the capital (the promoter). In this relationship, the investor's role is limited to theadvancement of money, the managerial control over the success of the enterprise being that of the promoter; therein lies the community. In other words the"commonality" necessary for an investment contract is that between the investor and the promoter. There is no need for the enterprise to be common to theinvestors between themselves.
As to the dependence of the customer for the success of the enterprise, it should be recalled that appellant in its literature underlines the danger for the ordinaryinvestor to deal in futures; the text of the warning has been quoted earlier in these reasons. This is echoed by Professor Loss in his testimony: "The ordinaryfellow isn't equipped to trade in commodity futures." Appellant now attempts to recant from that position and submits that there is nothing mysterious aboutdealing in commodity futures contracts. The Courts below have refused to accept that submission and have held quite rightly that the end result of theinvestment made by each customer is dependent upon the quality of the expertise brought to the administration of the funds obtained by appellant from itscustomers. If Pacific does not properly invest the pooled deposit, the purchaser will obtain no return on his investment regardless of the prevailing value ofsilver; there is nothing that the customer can do to avoid that result.
This dependence of the investors upon the appellant is also apparent when it is noted that the margin purchaser may only look to Pacific for the performance ofhis contract. Until the investor has paid the full purchase price, he has no title to any physical property but only a claim against Pacific. Should the price of silvergo down, there is no possibility for the investor to finance his balance (except through his own resources) and from that moment, he is at the mercy of Pacific.This is not to say that we are looking at a pure question of solvency. As pointed out by the Court of Appeal (at p.643 D.L.R., p.259 O.R.), the conclusion of theDivisional Court does not rest "on such a narrow basis".
The key to the success of the venture is the efforts of the promoter alone, for a benefit that will accrue to both the investor and the promoter. Thus the nature ofthe relationship between Pacific and its margin customers establishes that is satisfies the Howey test. It matters not that the relationship was built around anobject that is a commodity and which in another context could be the subject-matter of transactions in the futures market that would not attract the restrictions ofthe Securities Act.
Another test to determine the economic realities of a security transaction is to be found in the decision of the Supreme Court of Hawaii in State of Hawaii,Com'r of Securities v. Hawaii Market Center, Inc. et al., 485 P. 2d 105, a decision of 1971. This test is possibly still more favourable to respondent in thepresent instance and the Divisional Court has examined the facts in that light also and has concluded that the risk capital approach would bring about the sameconclusion. I agree.
At the risk of repetition, I will underscore that the question raised by this appeal is not whether or not commodity futures contracts are investment contracts.The parties agree that they are not. What is at issue is the relationship between Pacific and its margin customers examined particularly in the light of the Howeyand the Hawaii tests. Such a relationship was studied recently in Jenson v. Continental Financial Corp., a decision of the U.S. District Court of Minnesotarendered on November 19, 1975, and to be found in CCH Federal Securities Law Reporters, para. 95-436, 404 F. Supp. 792, where the facts were nearlyidentical to our own. There the question was expressed in these words (para. 99, 202):
...the plaintiffs do not argue that the sale of the coins standing alone constitutes an investment contract. It is their position that the defendants method ofoperation transforms what is made to appear as the sale of a commodities futures contract into an investment contract.
And the Court answered (para. 99, 205)
It is thus clear that the defendants operation entailed more than just the sale of a standard commodity futures contract. By virtue of their pooling of investorpayments and then investing such funds in their own name, the defendants transferred the risk of their operation to the plaintiff investors who thereby becamepartners in a common enterprise with the defendants.
Substantially to the same effect is State of Idaho ex rel. Park v. Int'l Silver (Silver) Mint Corp., 3 CCH Blue Sky Law Reports, para. 67,-321, a decision of July20, 1972, by the District Court of the Fourth Judicial District of the State of Idaho.
A last word. At the invitation of the parties, I have examined the facts in the sole light of the Howey and Hawaii tests. Like the Divisional Court, however, Iwould be inclined to take a broader approach. It is clearly legislative policy to replace the harshness of caveat emptor in security related transactions and Courtsshould seek to attain that goal even if tests carefully formulated in prior cases prove ineffective and must continually be broadened in scope. It is the policy andnot the subsequently formulated judicial test that is decisive".
Applying the tests described by the Court, it is clear, in our view, that the agreements entered into between St. John, under the Phoenix Head trade name, andinvestors were investment contracts within the meaning of the Act. The investment of money by the investors was made with an intention of profit. Thearrangements between the investors and St. John were undertaken by the investors for the benefit of the investors as well as the benefit of St. John. The role ofthe investors was limited to advancing the monies, the managerial control over the success of the enterprise being entirely that of St. John. Accordingly, therequired "commonality" existed.
Whether St. John actually invested any of the monies received from investors in stocks was not at all clear from the evidence. However, the arrangementbetween St. John and the investors clearly contemplated that she would do so. Accordingly, we find that St. John issued investment contracts to the investorswho deposited monies with Phoenix Head.
The contracts entered into between St. John and investors were not, however, investment contracts within the meaning of the Investment Contracts Act.
Clause 25(1)(a) of the Act prohibits a person or company from trading in a security unless the person or company is registered as a dealer under the Act, or isregistered as a sales person or as a partner or as an officer of a registered dealer and is acting on behalf of the dealer. St. John was not so registered, either in herown name or under the Phoenix Head name. Nor was Storm so registered.
Section 35 of the Act contains a number of exemptions to the registration requirements of section 25, as do the regulations and rules made under the Act. Mr.Barat did not argue that any of these exemptions were applicable, and we have not found any which apply in the circumstances of this case.
We accordingly find that St. John breached section 25 of the Act by issuing investment contracts without being registered under the section. It does not appearto us, on the evidence, that Storm's participation in the transactions was such as to make her a party to the issuance of these investment contracts.
Other Breaches of the Act
Under clause 122(1)(a) of the Act, every person or company that makes a statement in any material, evidence or information submitted to the Commission, aDirector, any person acting under the authority of the Commission or the Executive Director or any person appointed to make an investigation or an examinationunder the Act, that, in a material respect and at the time and in light of the circumstances under which it is made, is misleading or untrue or does not state a factthat is required to be stated or that is necessary to make the statement not misleading, is guilty of an offence.
Morrow was a person appointed to make an investigation or an examination under the Act, and, as we have found, St. John made statements to her which wereuntrue in material respects at the time and in light of the circumstances under which they were made.
Mr. Moseley argued that this was among the worst possible cases that could come before the Commission. He said that the evidence disclosed that theRespondents, in particularly St. John, breached the Act repeatedly, lied to innocent investors, abused their trust, defrauded them of money, in some cases verysignificant sums, lied to Commission staff, solicited the cooperation of unknowing investors to frustrate the Commission's investigation and the Commission'sefforts to protect those investors, and was not truthful in her evidence at the Hearing.
Mr. Moseley made three principal submissions, as follows.
1. The agreements that St. John entered into with investors were securities. These agreements are investment contracts within the meaning of that term underthe Act. As above stated, we agree with this submission.
2. The Respondents were not registered under the Act to trade in securities. On the evidence, this is correct.
3. The conduct of the Respondents in this case warrants a permanent cease trading order.
Mr. Moseley submitted that St. John had a total and complete disregard for the authority of the Commission. Not only did she breach the Act, but the way inwhich she did it demonstrated a total disregard for the authority of the Commission. He said that St. John cannot be trusted, that her evidence is not to bebelieved, and that the public interest demands that she not be allowed to participate in the capital markets ever.
Mr. Moseley conceded that the evidence as to Storm's participation was extremely limited. He argued, however, that there was sufficient concern about how theenterprise might be carried on in the future, through Storm, given her participation to date, that she also should be removed from the capital markets.
Mr. Barat, in his argument, stipulated that neither St. John nor Storm is or has ever been a registrant under the Act, and that Phoenix Head is a soleproprietorship of St. John. Mr. Barat argued that St. John was originally, and is primarily, a person who has engaged in the business or practice of being apsychic, that she has also become somewhat of a misguided social worker in that she became embroiled, emotionally, in the personal, rent and family problems ofher clients, and that it was from that perspective that she originally put very small amounts of money out for people, as she said, " helping them".
Mr. Barat argued that St. John did not solicit and did not advertise, and that she refused funds in cases where they were excessive or unwarranted or the peoplewere not known to her, so that it was a question of people pushing themselves on St. John, rather than vice versa.
Mr. Barat also argued that St. John never shirked personal responsibility for any money that she took from people and that she signed documents which said thatthey were guaranteed and that she was personally responsible.
As regards Storm, Mr. Barat argued that there was no evidence at all, credible or otherwise, on which the Commission could make a finding against Storm.
Mr. Barat submitted that, if there was a breach of the legislation, it was unintended and unknowing, and that a two year ban, if imposed at the time of thetemporary cease trade order, would have been an appropriate disposition.
Although it may be that St. John initially became involved in what we find to have been, at minimum, a scheme operated in violation of the Act and, perhaps, afraudulent scheme, almost by accident and as an outgrowth of her psychic business, it appears quite clear to us that at some stage, if not from the first, sherealized that what she was doing was contrary to the Act. Her rewritings of the investment contract from time to time can, in our view, have had no otherpurpose than to attempt to further disguise the nature of the contractual relationship, without changing the relationship itself.
On the evidence, St. John showed a flagrant disregard for the Commission's temporary cease trade order and the undertaking which she and Storm had given tothe Commission, and continued to accept funds from investors thereafter, although once again attempting to disguise what she was doing.
St. John tried to get investors to destroy documents which were germane to the Commission's investigation.
In her evidence before the Hearing, St. John was untruthful and evasive.
Notwithstanding her protestations, it does not appear to us that St. John recognizes, or perhaps only that she is not prepared to admit, any fault in connectionwith the scheme.
It then remains for us to consider whether the permanent cease trades which Mr. Moseley has urged us to put in place in these proceedings are appropriate in thecircumstances.
The Commission, in In the Matter of Trend Capital Services Inc. et al (1992), 15 O.S.C.B 1711, at p.1748, outlined the basis on which the Commission shouldproceed in determining the approprietness of proposed sanctions in the registration context, as follows:
"Staff, in the Notice of Hearing which initiated these proceedings, have asked the Commission to sanction the Respondents for a variety of alleged activities all ofwhich involved the sales of shares of Thunder Bumpers to members of the public.
In making an order under either of these statutory provisions [i.e. the provisions which corresponded to clauses 127(1) 1. and 3.], the Commission must come tothe opinion that it is in the public interest to do so. The Courts and the Commission in prior hearings have established guidelines as to when and in whatcircumstances the discretion vested in the Commission by the Act should be exercised. It has long been recognized that the Commission's jurisdiction andconsequently its responsibility under section 27(1) of the Act is very broad. In the case of Re the Securities Commission and Mitchell  O.W.N. 595,Laidlaw, J.A. said
"The Commission has the right to suspend or cancel registration of any person, notwithstanding the fact that there has been no breach of any provision of TheSecurities Act or any regulation made thereunder: Re The Securities Act and Gardiner, et al.,  O.R. 71 at p.80,  1 D.L.R. 611."
and "Finally, the Commission may properly form its opinion to suspend or cancel any registration in the public interest without proof of actual injury to thepublic."
The Commission itself has repeatedly held that the discretion vested in it should be exercised in favour of making an order where the evidence establishes thatthere has been a reasonable likelihood that such conduct may continue in the future unless the Commission moves to prevent a recurrence. Examples of this viewof the Commission may be found in the recent decisions of Re Mithras Management Ltd. (1988) 11 OSCB 1600 and Re Gordon Capital Corporation and DavidBond (1990) 13 OSCB 2035. The latter decision of the Commission was upheld by the Divisional Court and reported in (1991), 14 OSCB 2714."
The Commission went on to say, at p.1750:
"Both sections of the Act under consideration require us to form an opinion that a decision to sanction is in the public interest. In our opinion there are twoissues which require consideration. The first, already mentioned, is whether or not, assuming the conduct is objectionable, there is a reasonable likelihood it willbe repeated. The second is whether or not the conduct of the Respondents, if objectionable, is such as to bring into question the integrity and reputation of thecapital markets in general. There were the tests which we followed in reaching our conclusions."
Although these proceedings do not involve a registrant or the restriction, suspension or termination of registration, in our view similar consideration apply in thecircumstances of these proceedings.
As we have found, St. John engaged in conduct which was objectionable in many respects. It violated the Act; it resulted in substantial losses to persons whohad put their faith in St. John and trusted her with their savings; and it involved not only breaches of the Act, but attempts to induce others to destroy evidenceand otherwise act improperly.
The question which we must then determine is whether, in light of this seriously objectionable conduct, sanctions are appropriate and if they are, what theyshould be.
In In the Matter of Mithras Management Ltd. et al (1988), 11 OSC 1600 at p.1610, the Commission set out the relevant considerations as follows:
"Under sections 26, 123 and 124 [now section 127] of the Act, the role of this Commission is to protect the public interest by removing from the capital markets-- wholly or partially, permanently or temporarily, as the circumstances may warrant -- those whose conduct in the past leads us to conclude that their conduct inthe future may well be detrimental to the integrity of those capital markets. We are not here to punish past conduct; that is the role of the courts, particularlyunder Section 118 of the Act. We are here to restrain, as best we can, future conduct that is likely to be prejudicial to the public interest in having capitalmarkets that are both fair and efficient. In so doing we must, of necessity, look to past conduct as a guide to what we believe a person's future conduct mightreasonably be expected to be; we are not prescient, after all. And in so doing, we may well conclude that a persons past conduct has been so abusive of thecapital markets as to warrant our apprehension and intervention, even if no particular breach of the Act has been made out. Equally, however, even if there hasbeen a technical breach of the Act, we may well conclude that, in the circumstances, no sanction is necessary to protect the public interest. "
St. John's conduct involved no mere technical violation of the Act. Section 25 of the Act, requiring the registration of market intermediaries, is a key element ofthe scheme of the Act in protecting investors and the capital markets, and maintaining public confidence in those markets. St. John knowingly ignored therequirements of the section and circumvented those requirements. Nor are the violation of a cease trade order and undertaking light matters. Nor is lying toinvestigating staff.
In our view St. John is not a person whom we can safely trust to participate in the capital markets in any way. We have no confidence whatsoever that if she ispermitted to participate as a investor for her own account, St. John will not once again push the envelope by engaging in conduct which is detrimental to othersand abusive of our capital markets. Accordingly we order that trading in any securities by St. John cease permanently.
Mr. Moseley argued that a similar order in respect to Storm is necessary since otherwise St. John may trade in Storm's name. We do not find this possibilitysufficient to lead us to impose any further order on Storm. From the evidence, it is clear that she had, at most, a very subsidiary role to play in St. John'sscheme. It would not be appropriate for us to prohibit Storm from trading on the basis of the evidence before us. However, she should know that if she doestrade and such trading is on behalf of her sister or others through her sister, she will be doing so in contravention of our cease trade order above.
We wish to make it clear, however, that our order with respect to St. John prohibits her from participating in any trade, directly or indirectly, and that the words"trade" and "trading", as defined in the Act, cover a very wide area of territory indeed.
June 10, 1998
"J. A. Geller" "H. M. Meyer"
"R. Stephen Paddon"