TSX member Canaccord faces $336,000 Mitton-related suit
B.C. Securities Commission *BCSC
Thu 18 Apr 2002 Street Wire
See TSX Venture Exchange (*TSX) Street Wire
by Brent Mudry
Vancouver brokerage Canaccord Capital and controversial broker Brad Scharfe
face a $336,000 share suit stemming from Mr. Scharfe's dealings with
associates and fronts of notorious career fraudster Michael Mitton six
years ago. In an endorsed writ of summons filed Wednesday in the Supreme
Court of British Columbia, Nancy Frost claims she delivered 747,114 shares
of Hillestad Pharmaceuticals in mid-1996 to Canaccord, but the shares ended
up in the account of Alf Kaminsky, one of Mr. Mitton's front-associates.
A full statement of claim has not yet been filed by Vancouver lawyer Perry
Mazzone of Taylor Sourisseau Mazzone Tatchell. The allegations in the suit
have not been proven in court and statements of defence are only due after
a statement of claim is ever filed.
Ms. Frost claims she delivered share certificate No. 02370, representing
the Hillestad shares, to Canaccord on May 1, 1996, and the brokerage
deposited the shares in the account of Mr. Kaminsky, No. 260558A. The
Hillestad certificate was worth $336,200 that day, based on a market price
of 45 cents, but the stock plunged to a dime within five weeks. Unexplained
in the endorsed writ is why Ms. Frost's shares were deposited in Mr.
Kaminsky's account, rather than her own account.
At a current market price of six cents, the shares would now be worth just
$44,800. "In the circumstances the defendants owed to the plaintiff a duty
of care and in particular a duty of care to take such steps as were
reasonable and necessary to ensure that the plaintiff understood the nature
of the transaction and in particular the nature of the risk of depositing
the shares as directed by the defendants," states lawyer Mr. Mazzone in the
suit.
The Frost certificate deposit came at a particularly auspicious time in
Hillestad's history. Six days later, on May 6, regulators halted trading at
42 cents, "pending clarification of market activity." On June 11, as the
stock collapsed when a month-long trading halt was lifted, Hillestad lawyer
and director Ronald Oscar Klassen professed ignorance about the unusual
market activity. The Howe Street lawyer also told Stockwatch two debit
suits filed against him by Vancouver brokerages, totalling $310,000, had no
connection to the regulatory probe.
"To this day we don't know why we were halted ... they never told us what
the irregular trading ever was," Mr. Klassen told a reporter. The lawyer
described Hillestad as one of many "blue chip" companies he has worked for,
including Bill Mallinson and Alec Lenec's ridiculous Consolidated Golden
Unicorn promotion.
The fog of mystery lifted six weeks later, in mid-July, 1996, after
Stockwatch revealed Michael Mitton, using the alias Michael Matt, was the
head of trading ring in the Vancouver suburb of Abbotsford, featuring
another Howe Street lawyer, Oliver Barry Holmes, a law school classmate of
Mr. Hillestad. Mr. Mitton's Abbotsford ring was active in several stocks,
including Hillestad.
The BCSC subsequently imposed a five-year ban on Mr. Klassen in February,
1998. In the consent settlement, Mr. Klassen confirmed that Mr. Holmes told
him that trading for the investment group was to be directed by Mr. Mitton,
that Mr. Mitton had a regulatory history and that the career fraudster had
been banned by securities regulators.
In the current suit, Ms. Frost claims she suffered damages as a result of
the shares being transferred out of her name without her receiving any
consideration whatsoever. On the eve of the sixth anniversary of the share
transfer, Ms. Frost now blames Mr. Scharfe and Canaccord for her alleged
losses.
Although the Frost action makes no mention whatsoever of Mr. Mitton, Mr.
Scharfe has the misfortune of being best known, at least in regulatory
circles, for his role with the incorrigible fraudster's 1996 debit-kiting
rig job of Clay-Tech Industries. Mr. Scharfe was fined $87,500 in April,
2001, by the TSX Venture Exchange, then known as Canadian Venture Exchange,
the exchange formerly known as the Vancouver and Alberta stock exchanges.
The Scharfe fine came a few months after Mr. Mitton was sentenced to four
years in jail, a lengthy term by Canadian standards, that January after
pleading guilty to all six counts in the Clay-Tech criminal prosecution,
bringing his career tally to 103 convictions. The guilty pleas, a few weeks
after Stockwatch revealed Mr. Mitton's appearance in a then-current
cheque-kiting scheme, abruptly ended, in the early stages of a 117-day
criminal trial, which was set to be one of the longest stock-fraud trials
in recent B.C. history.
The CDNX found Mr. Scharfe failed in his duties to establish the identity
and reputation of his clients, failed to fulfill his gatekeeper role by
aiding and abetting improper trading schemes, and ought to have known that
Mr. Mitton's short-selling scheme violated exchange rules. Although the
criminal court judge called Mr. Mitton a "professional swindler" and the
head of the B.C. Securities Commission called him a "financial predator,"
the CDNX, ever-conscious of its fine image, chose not to mention the
infamous client at all its Scharfe notice.
To his credit, however, Mr. Scharfe was quite helpful to the United States
Securities and Exchange Commission in its investigation and prosecution of
Alexandra Montgomery and Bill Nestor, the key perpetrators of the
$19-million (U.S.) brass-bar fraud of International Nesmont Industrial. Mr.
Scharfe and several other Howe Street brokers responded to court-inscribed
invitations from the SEC to tell all under oath, and did so in testimony.
Ms. Montgomery and Mr. Nestor were banned for life by the SEC in April,
2001.
Broker Scharfe is still having troubles shaking off his Mitton baggage. In
January, the BCSC, apparently less than impressed with the modest penalty
handed out by the CDNX, issued a notice of hearing targeting Mr. Scharfe
and Mr. Mitton. A set-date appearance is set for April 26, but it will
likely be some time before the case goes to a full hearing, unless, of
course, Mr. Scharfe is able to cut a deal and settle out.
(c) Copyright 2002 Canjex Publishing Ltd. stockwatch.com |
