CDNX loses to Global's Smolensky in court
Mon 29 Jan 2001 Street Wire
See Canadian Venture Exchange (CDNX) Street Wire
by Brent Mudry
CITATION SECRECY THWARTS YORKTON DUE DILIGENCE
The Canadian Venture Exchange's disclosure win against Global Securities
chairman Art Smolensky was short-lived, barely lasting a few business
hours. With the CDNX's high-stakes insider trading and stock manipulation
hearing into Mr. Smolensky, the highest-profile hearing in many years, just
a week away, the exchange's disclosure powers will be reviewed by a senior
judge this week.
(The allegations, the most serious charges targeting the head of a
Vancouver brokerage in well over a decade, remain as yet totally unproven,
and Mr. Smolensky remains presumed innocent until proven guilty. Mr.
Smolensky is the only named respondent in the proceeding, and there are no
allegations of any wrongdoing by Global, Trooper Technologies, or any
Trooper employees or agents, including founder, president and chief
executive Stan Lis.)
After the British Columbia Securities Commission capped a full-day hearing
late Friday afternoon upholding the CDNX's order that Mr. Smolensky must
provide full details of his defence in the Trooper Technologies case,
including his list of intended witnesses, what they will say, and his
proposed evidentiary documents, a single judge of the Court of Appeal of
British Columbia took barely 15 minutes to stay the order on Monday
morning.
In a rush chambers application, Mr. Justice Lance Finch heard brief
submissions from lawyer Stephen Zolnay, an associate of Mr. Smolensky's
lead lawyer Mark Skwarok, and ruled to stay the CDNX's disclosure order.
Judge Finch made no ruling on the merit of the case. While counsel for the
CDNX and the BCSC were notified of the appeal application, neither
regulator was represented in court.
After considering the urgency of the matter, Judge Finch also agreed to set
a short-notice leave hearing for Wednesday, when Mr. Smolensky's counsel
will seek leave to appeal the BCSC's Friday ruling. If leave is granted,
meaning the appeal court has agreed to hear the case, it could be weeks
before a three-judge appeal panel could hear full submissions on the case.
In the interim, the stay would probably be extended, forcing the CDNX to
decide whether to go ahead with the Smolensky hearing next Monday without
being tipped off in advance about his full defence, or to delay its hearing
pending resolution of the disclosure issue in the appeal court.
This disclosure demand on the defence may come as a surprise to outside
legal observers. In criminal cases, defence lawyers have virtually no
obligation to give prosecutors any disclosure of the witnesses, intended
testimony and other evidence, prior to being tendered in court.
At trial, the Crown is required to make its full case first, which the
defence then answers. With the defence keeping its hand close to its chest,
the Crown is thus prevented from unfairly tailoring its case to pre-empt
and address the defence's case.
If the Smolensky court appeal progresses, the CDNX will have to satisfy
three of B.C.'s most senior judges that it is immune from the disclosure
standards which are a major stalwart of Canadian criminal justice system.
In addition to seeking an unusual advantage in its upcoming case, the CDNX,
meanwhile, may be facing its own disclosure fiasco in-house over the
Smolensky affair. Whether ignorant or plain clumsy, the exchange appears to
have kept the citation against Mr. Smolensky, which is shaping up to be a
major Howe Street scandal, a tightly-held secret for 10 months.
Although the CDNX issued an amended notice of hearing against Mr.
Smolensky, outlining its charges against him, on March 8, 2000, it was not
until last week that the brewing scandal was revealed, after Stockwatch
stumbled upon the case by accident. The Smolensky case popped up through
notice of the BCSC hearing into the disclosure fight.
Although the notice of hearing is obviously a public document of great
public interest, the CDNX has done a masterful job, either by unintentional
bumbling, or by express design, in keeping the matter under wraps.
While the BCSC has set a model standard of publicizing notices of hearing,
both by sending such notices to the media for broad dissemination and by
prominently posting such documents on its Web site, there is no evidence
that the CDNX experimented with similar diligence.
It is also unclear if any member firms knew of Mr. Smolensky's situation
prior to last week's media coverage.
Trooper president Mr. Lis claims that Yorkon Securities abruptly terminated
its sponsorship of his company after reading about the Smolensky citation
in the case. "The stock was halted after John McCoach called yesterday
because of Trooper's name being dragged into it," stated Mr. Lis last week,
in a lengthy call from Poland.
Mr. Lis claims he had no clue himself about the Smolensky citation,
although he notes he co-operated during the exchange's investigation. "I
haven't been aware of this situation of Mr. Smolensky," Mr. Lis stated.
Mr. Lis claims Mr. McCoach, Yorkton's head of corporate finance in
Vancouver, also had no clue about the Smolensky citation until reading
about it in Stockwatch 10 months after the fact, just two weeks before the
CDNX hearing is set to start.
Mr. McCoach declined to comment on either Yorkton's sponsorship of Trooper
or his knowledge of the Smolensky citation. "It would be inappropriate to
discuss the status of the sponsorship other than what is in the CDNX (halt)
notice," stated the Yorkton official.
If Mr. Lis's suggestion that Mr. McCoach was unaware of the Smolensky case
proves true, this would be embarrassing, not just for Yorkton, but for the
CDNX, which has a public duty to be public about such matters, and to not
keep them a secret from its own members, let alone the general public at
large. As well, the exchange touts the due diligence skills it practices,
on behalf of both investors and its bill-paying members.
Mr. Lis says that in-the-dark Yorkton was at an advanced stage of due
diligence, and a representative of the brokerage was doing such work in
Poland last week, the second due Trooper diligence trip to Poland by
Yorkton, when the Smolensky citation emerged in the press.
The Trooper founder says Mr. McCoach called him just after the first
article came out to scrap the sponsorship, even though the due diligence
was going well. "He says 'Stan, I hate to do this, but we have to review
our sponsorship,'" stated Mr. Lis.
Mr. Lis claims he heard nothing but positive words regarding Yorkton's due
diligence, and Mr. McCoach told him Trooper had good comments from the
brokerage's researcher, who had just wrapped up his work in Poland. "He
saying all sorts of good things about you," Mr. Lis recalls Mr. McCoach
telling him.
The Trooper founder said that although Yorkton's due diligence showed that
"everything is hunkey-dorey with the business," the brokerage suggested he
look for somebody else to take on the sponsorship. "They have not even
landed back in Vancouver and they have already pulled out," stated Mr. Lis
last week.
Had the CDNX not hidden the Smolensky citation, Yorkton's extensive due
diligence and background checks would presumably have discovered the
document and prevented any last-minute embarrassment .
Although Mr. McCoach declines to comment on the matter, the fact that he
and Yorkton could quite possibly have had no knowledge about the Smolensky
citation is troubling for all the CDNX members. Mr. McCoach is a governor
of the exchange. In addition, his boss, Yorkton head Scott Patterson, is
the chairman of the CDNX.
Yorkton finds itself in an odd spot: At one end of the country, a regulator
(the Ontario Securities Commission) will not stop publicizing its
Yorkton-affecting due diligence; at the other end, another regulator is
damningly silent. It is not easy to be a broker these days.
(c) Copyright 2001 Canjex Publishing Ltd. stockwatch.com |
