Well finally found a good recap on all this insider selling business......Rampant
Unique Broadband Systems Inc UBS
Shares issued 87,765,779 Dec 29 close $1.40
Fri 29 Dec 2000 Street Wire
TO MAKE A MOCKERY
by Stockwatch Business Reporter
On Dec. 19, Unique Broadband Systems, its president Alex Dolgonos, and
chief financial officer Stephen Rosen filed a detailed statement of claim
against The Vancouver Sun and business reporter David Baines over a Nov. 8
article calling attention to insider transactions involving the heavily
traded stock. On the same day that Vancouver lawyers Howard Shapray and
Stephen Fitterman of Shapray Cramer & Associates filed the statement of
claim on behalf of Unique Broadband, Mr. Dolgonos and Mr. Rosen, the
Ontario Securities Commission (OSC) released insider trading reports for
Tina Livchits, Mr. Dolgonos's wife. Ms. Livchits sold more than
$3.4-million worth of Unique Broadband shares between Feb. 18 and June 21,
but the transactions were not reported until Dec. 19. Under Ontario
securities regulations, insider trades are supposed to be reported within
10 days of the transaction.
While Ms. Livchits is not one of the plaintiffs against Mr. Baines and The
Sun, she figured prominently in the Nov. 8 article that caused such a furor
at Unique Broadband. Indeed, in the second paragraph of his article, Mr.
Baines reported that Ms. Livchits had sold more than $20-million worth of
stock from a control position, claiming that she had breached B.C.
securities law by not filing advance notice of her intent to sell. In a
letter to The Sun, Unique Broadband pounced on those claims, pointing out
that Ms. Livchits had not sold those shares at all; rather, it was the
spousal trust set up by Mr. Dolgonos in the Barbados, of which Ms. Livchits
"is simply the beneficiary." Moreover, Unique Broadband pointed out that
the sale did not give rise to a reporting obligation in B.C. because it did
not occur in the province or between parties resident in the province.
In a Stockwatch interview after receiving Unique Broadband's letter
demanding a retraction, Mr. Baines pointed out that he had expanded on his
introductory shorthand remark regarding Ms. Livchits in the body of his
article, making it quite clear that it was indeed the spousal trust that
had transferred the $20.25-million worth of stock. However, Mr. Baines's
claim regarding an obligation under B.C. securities law to file advance
notice of the intent to sell was incorrect, and that error was compounded
by the claim that Mr. Dolgonos had also failed to file advance notice when
he transferred 24.3 million shares to a Barbados trust in December of 1999.
After further investigation, Mr. Baines acknowledged the error in a Nov. 20
article, explaining how it had arisen.
Evidently Mr. Baines's explanation for the erroneous claim did not satisfy
Unique Broadband. "In the November 20th article, the Defendants purported
to place the blame for their error upon the media relations officer for the
British Columbia Securities Commission," the plaintiffs allege in their
Dec. 19 statement of claim. In several Stockwatch interviews, Mr. Baines
has never indicated that any "blame" should be attached to Dean Pelkey, the
media relations officer for the British Columbia Securities Commission
(BCSC). According to the reporter, Mr. Pelkey did his job quite well,
referring the question to the appropriate department at the BCSC and
relaying the answer to him. Unfortunately, the specific context of the
question was lost in that process. Mr. Pelkey informed Mr. Baines that
there are "no exemptions" from filing a notice of intent to sell from a
control position. Missing from that answer was the fact that B.C.
securities regulations require no such notice for transactions that occur
beyond the provincial boundaries or between parties not resident in the
province. And missing from the Dec. 19 statement of claim is any mention
that Mr. Baines, through The Sun, accepted full responsibility for the
incorrect conclusion drawn on the basis of the answer provided by Mr.
Pelkey. "On this basis, The Sun incorrectly concluded in a Nov. 8 story in
the business section that Dolgonos and his wife had breached securities
rules by not filing advance notices," Mr. Baines wrote on Nov. 20.
The circumstances surrounding the publication of the subsequently corrected
error raise issues that go far beyond the resulting brouhaha involving
Unique Broadband and the lawsuit against Mr. Baines. One of those issues,
of course, turns on the notion of responsible reporting. According to the
statement of claim, the plaintiffs allege that Mr. Baines wrote and The Sun
published statements falsely and maliciously, knowing them "to be untrue or
recklessly not caring whether the statements were true or false." A
statement of defence has not yet been filed, but it will likely contain a
garden-variety denial of the allegations, offering little in the way of
specific details. For example, the statement of defence is not likely to
delve into the fact that Mr. Baines, as a responsible reporter, sought
clarification regarding a puzzling matter of securities regulation from the
BCSC before incorporating the information into his article. Moreover, when
that information was challenged, Mr. Baines, as a responsible reporter,
investigated further and, upon learning of the error, both acknowledged and
accepted responsibility for it.
"The Sun is read by employees and members of the CDNX, the Toronto Stock
Exchange, securities regulators, brokers, business people, investment
advisers, investors and others involved in the securities industry," the
plaintiffs claim. That statement is probably true, and a goodly portion of
that audience may well follow Mr. Baines's articles with a great deal more
interest than, say, the bland missives of notables such as The Globe and
Mail's Andrew Willis, whose stories frequently have all the punch and
limited import of an obituary. Interestingly, it does not seem that the
wide audience attributed to The Sun raised much of a hue and cry about Mr.
Baines's subsequently corrected error regarding the requirement to file a
notice of intent to sell from a control position. Given the wide audience
of regulators, brokers, financial advisers, and so on, that raises the
issue of just how well investors are served by those professionals. Indeed,
Mr. Baines says that the further investigation that he initiated to sort
out the matter took some considerable time and effort, indicating that
those credited with being knowledgeable about such matters may not be as
well versed in securities regulations as is widely supposed. As it happens,
Stockwatch contacted the insider trading filing department of the OSC on
Dec. 28 where a spokesman familiar with the lawsuit and the controversy
acknowledged that he was "a little hazy" with respect to the regulations
regarding filing notices of intent to sell from a control position.
Another issue that follows from Mr. Baines's Nov. 8 article is the
patchwork of securities jurisdictions in Canada. Unique Broadband is a
reporting issuer in B.C., but the governing jurisdiction is Ontario and the
securities regulations in those two provinces are not exactly the same. An
investor, or a reporter, putting a question to the BCSC might well receive
a different answer than would be provided by the OSC. To take a rather
simple example, under B.C. securities regulations, insider trading reports
must be filed within 10 days of the end of the month in which the
transaction occurs; under Ontario regulations, however, insider trading
reports must be filed within 10 days of the transaction. The OSC boasts
that requiring insider trades to be reported within 10 days of the
transaction provides much greater transparency. In principle, that would
appear to be true. However, the practical application of that requirement
makes a mockery of any notion of transparency, as the late filings by Ms.
Livchits clearly demonstrate.
As a result of Mr. Dolgonos's transfer of 24.3 million shares to a spousal
trust in December of 1999, Ms. Livchits was classified as an insider with
responsibility to file trading reports. Evidently that responsibility
escaped notice until just recently. Between Feb. 18 and June 21, Ms.
Livchits sold 336,504 shares with a value of $3.41-million in 53
transactions. The OSC released that information on Dec. 19; so much for
transparency and requiring that insider trades be reported within 10 days
of the transaction. Curiously, as of Dec. 30, those trades had still not
been reported by the BCSC, though Stockwatch has learned that Ms.
Livchits's trading reports were faxed to, and received by, the BCSC on Nov.
24.
From Feb. 18 to Feb. 28, Ms. Livchits sold 118,000 shares in 12
transactions at prices ranging from $11.84 per share to $13.75 per share,
for proceeds of $1.49-million. In March, Ms. Livchits was an even more
active trader, selling 137,700 shares in 24 transactions at prices ranging
from $7.05 to $12.70 per share, for proceeds of $1.5-million.
Interestingly, it appears that Ms. Livchits shorted $854,000 worth of the
stock from Feb. 21 to March 1, covering her position by exercising 150,000
options at 34 cents on March 6. While Ms. Livchits was busy selling shares,
including selling short, in February and March, Unique Broadband was
finalizing a $40-million special warrant financing that closed on March 16.
The busy trader took a break from the market in April and May, but resumed
her selling in June, disposing of another 80,800 shares at prices ranging
from $4.58 to $5.75, for proceeds of $410,000. Apart from the 19.3 million
shares in the trust of which she is the beneficiary, it seems that Ms.
Livchits has disposed of all of her shares of the company. Given that she
reported an opening balance of direct holdings of 100,000 shares, it would
appear that she sold at least 900,000 shares prior to being classified as
an insider.
Whether the OSC will take Ms. Livchits to task for her late reporting is an
open question, but, as it stands, that reporting makes a mockery of system
that claims to provide transparency. According to an OSC official, there
are occasionally mitigating circumstances that can be taken into
consideration by regulators. In this case, however, he told Stockwatch that
there were no mitigating circumstances of which he was aware. While the OSC
may turn a blind eye to some late insider filings, late filings involving
large sums of money or that raise other concerns, may be passed along to
the enforcement department for review. According to the OSC source, whether
that department takes any further action depends on a number of factors,
including how many other things investigators happen to be working on at
the time. Recently, the OSC has been bogged down by the Bre-X trial, among
other things. In keeping with OSC policy, the spokesman would not disclose
whether Ms. Livchits's insider trading reports had been brought to the
attention of the enforcement department. Nonetheless, it was quite clear
that he was familiar with Unique Broadband and the lawsuit in the wake of
Mr. Baines's article, even calling up a Dec. 20 Stockwatch article
outlining the statement of claim while talking with a reporter.
Mr. Baines's Nov. 8 article, primarily intended to draw attention to the
large insider holdings and transactions involving the heavily traded stock,
including the transfer of millions of shares to offshore trusts, was
published one day before the annual general meeting. The plaintiffs allege
that this was no coincidence, that it was done "knowing and intending that
doing so would cause harm to the Plaintiffs, or one or more of them, or in
reckless disregard of same." In a Dec. 29 Stockwatch interview, Mr. Baines
dismissed the suggestion that the article was planned for publication on
Nov. 8, just prior to the annual general meeting. According to the
reporter, he was not even aware of when the meeting was scheduled until the
article was almost finished. Moreover, once the article was completed, the
publication date was just a routine matter of the paper's publishing
schedule; it could have been published earlier or even after the Nov. 9
meeting, the date of which was not a consideration. In any case, the
article evidently prompted some uncomfortable questions at the shareholders
meeting, according to a report in The Toronto Star on Nov. 10.
Judging by The Toronto Star report of the annual meeting, shareholders were
not much concerned by whether Mr. Dolgonos and Ms. Livchits had failed to
file notices of intent to sell from a control position. Some, however, were
obviously concerned that millions of shares had been transferred to
offshore trusts and worried about future reporting of insider trading.
Unique Broadband responded to the newspaper report of those concerns the
same day. "The trust established by Mr. Dolgonos is considered an insider
and, accordingly, is required under securities law to file insider trading
reports with respect to any trades, including acquisitions and dispositions
of UBS stock," the company soothed. That was just two weeks before Ms.
Livchits apparently brought her insider trading reports for transactions
dating back to February up to date, something that may not instill a great
deal of confidence among concerned shareholders. "With respect to the
transfer of five million shares by the trust in August, the trust
established by Mr. Dolgonos still maintains in excess of 19 million UBS
shares," the Nov. 10 release went on to reassuringly state. "Any future
disposition of these shares is reportable." In fact, future dispositions
from the spousal trust are reportable only as long as the trust continues
to be classified as an insider by virtue of holding more than 10 per cent
of the company's shares. If it falls below that threshold, either through
future dispositions, dilution, or a combination of the two, it will not
have to report any further dispositions. If an officer or a director held
those shares, that would not be the case; they would have to report
transactions as long as they held even one share. That, in any case,
appears to be the reasonable assessment to be drawn from information
obtained from regulators, but without the guidance of a securities lawyer,
something that most investors, and reporters for that matter, do not
generally have the benefit of during the normal course of investing or
reporting.
What most reasonable investors, and reporters for that matter, do have is a
healthy dose of common sense. They neither read nor write massive innuendo
where none is intended. From reading the statement of claim filed on behalf
of Unique Broadband by Mr. Shapray and Mr. Fitterman, one might wonder
whether lawyers have the same common sense, or any at all. The statement of
claim draws heavily from Mr. Baines's Nov. 8 article, including a section
where the reporter noted that five million units of Unique Broadband at 40
cents were sold to F.T.S. Worldwide Corp. of Geneva, Switzerland. "The
beneficial owners of this company have never been publicly disclosed," Mr.
Baines wrote, adding that the company was not obliged to report its trades
insofar as it owned less than 10 per cent of Unique Broadband's shares.
That passage drew an objection. "In their natural and ordinary meaning
and/or by way of innuendo, the said words were meant and were understood to
mean that Mr. Dolgonos and Mr. Rosen have an undisclosed direct or indirect
interest in F.T.S. Worldwide Corp. ('F.T.S.') and that the sale of five
million units to F.T.S. was a means by which they could avoid disclosure of
interests in UBS on insider trading reports," the statement of claim
alleges. Clearly, the "natural and ordinary meaning" of the words contain
no such claim, so it would seem that the allegation must rest on some
purported innuendo.
Purported innuendo appears to be the foundation of another allegation in
Unique Broadband's statement of claim. Mr. Baines briefly sketched some of
the background of Mr. Dolgonos and Mr. Rosen in his Nov. 8 article. Among
other things, he noted that Mr. Dolgonos was born in Russia and that Unique
Broadband has a strong Russian connection, including an office in St.
Petersburg and several dozen employees of Russian descent. He also noted
that Mr. Dolgonos's postsecondary education consisted of a one-year diploma
course in electronic engineering. He reported that Mr. Rosen had
relinquished his chartered accountant designation after a failed business
forced him into bankruptcy. A good deal was read into that sketch. "In
their natural and ordinary meaning and/or by way of innuendo, the said
words were meant and were understood to mean that one of more of the
Plaintiffs are or may be associated with criminal elements in Russia and
that Mr. Dolgonos and Mr. Rosen are neither fit, competent or capable of
directing the business and affairs of UBS," the plaintiffs allege. While
Ms. Livchits's very late insider trading reports make a mockery of
reporting requirements and transparency, Unique Broadband's statement of
claim seems to be well on the way to making a mockery of language. Perhaps
it will all come to an end while there are still reporters brave enough to
take up a pen and risk having extravagant innuendo read into their words
far beyond their natural and ordinary meaning.
In the meantime, there is no innuendo at all regarding the stock price.
Unique Broadband continues to languish, closing out the week at $1.40.
(Further information regarding Unique Broadband is contained in a
Stockwatch articles dated Nov. 21 and 29; and Dec. 20.) |
