Short selling allegations raised
Starpoint Goldfields Inc STS
Shares issued 10,176,910 Aug 12 close $0.10
Tue 18 Aug 98 Street Wire
GLOBAL'S SMOLENSKY NAMED AS DEFENDANT TO COUNTERCLAIM
by Brent Mudry
Starpoint Goldfields has upped the ante in its simmering legal fight with Global Securities, a fight that began last fall with Global suing Starpoint over a $300,000 loan that now has Starpoint making short selling allegations against Global and its chairman Art Smolensky. In a decision released Monday, Master Doug Baker of the Supreme Court of British Columbia allowed Starpoint to amend its defence, add Mr Smolensky as a defendant to its counterclaim and seek internal records supporting its short-selling allegations. Mr Smolensky says he has "absolutely no idea" why he has been personally targeted and named in the action. "It defies me," the brokerage
head told Stockwatch. Starpoint president Rick Ilott and CEO Harry Bristman were less talkative. "They are not interested in discussing it with the press," said a Starpoint employee.
The legal dispute traces back to Sept. 1997, when Global filed a $336,000 suit against Starpoint. The Vancouver brokerage claims the company has refused to repay a one-year promissory note. Three Global clients: Cayman Island Securities, owned by Mr Smolensky's wife, Global Asset Management and Werner Gomoll each loaned $100,000 to Starpoint in Sept. 1996, through promissory notes convertible into shares. Global claims Starpoint defaulted on the combined loan when it was due a year later.
In its original defence, Starpoint argued that the $300,000 promissory note was a bridge loan for a $5-million financing which Global claimed it had lined up. In July 1996, Starpoint got an option for a 52 per-cent interest in the Yetwene and Riverstone diamond concessions in Angola, and it needed financing to complete its acquisition. Starpoint claims that a month later, on Aug. 27, Mr Smolensky asserted that Global had $5-million in financing, fully subscribed and the raising of the funds was a done deal. Starpoint
claims these representations were false and misleading, made to induce it to enter an exclusive agency agreement with Global. Under the agreement, Global was set to receive a $50,000 agency fee, a 7.5 per-cent commission, warrants for 300,000 shares at $1.74 and first rights on all financings in the next year. Starpoint claims the promissory note is effectivly null and void as it was procured on misrepresentations.
Starpoint also filed a counterclaim last fall, claiming it relied on Global's financing promise and abandoned other plans to finance the Yetwene and Riverstone concessions. The counterclaim notes Global cancelled the $5-million financing in Nov. 1996, leaving Starpoint high and dry. Lawyer Christopher Giaschi claims Global breached the agency agreement by failing to adequately promote, offer and sell the financing and failing to follow
up on leads and inquiries from potential investors. Starpoint places a $50-million value on the Yetwene and Riverstone diamond concessions.
This spring, Starpoint decided to pursue a short selling case and hired Shizake Ralston, a Vancouver firm of chartered accountants. "We have been asked to provide assistance in relation to the allegations of improper trading of securities and short selling by Global Securities," stated Shizake partner John Galbraith in a retainer letter to Mr Giaschi. The accountant provided the lawyer with a detailed shopping list of documents to look for, covering extensive internal Global records and any records of
Global transactions with "non-Canadian brokerage firms and financial institutions."
After some legal wrangling, the two sides faced Master Baker last Thursday, as Starpoint argued to broaden its case. "In breach of the duties owed to the defendant (Starpoint) by the plaintiff (Global) and Smolensky the plaintiff and Smolensky traded in securities of the defendant and engaged in short selling. . . through their own accounts and through accounts of their clients and accounts controlled directly or indirectly by them, all to the detriment of the defendant and its subsequent efforts to raise capital," states Starpoint in its revised counterclaim. Starpoint also claims Global and Mr Smolensky put their own financial and personal
interests in conflict with those of Starpoint, their client.
Mr Smolensky calmly dismisses the short selling claims as unfounded. "They have dreamt up all this other stuff," he told a reporter. "If they are legal short sales, then who cares. . . for me a short sale is stored-up buying," he explains. The Global head adds there were very few buy-ins at the time. "It is kind of crazy to short under $3 unless you are dealing with legended stock. . . it is all a red herring. . . it is absolutely ridiculous," states Mr Smolensky. Mr Smolensky was reluctant to reveal his clients in the $300,000 loan, besides noting his wife, although their identities are disclosed in regulatory filings. "They are people that are
good clients of mine," states Mr Smolensky. The brokerage head notes "I can only think the reason they can bring it up is an allegation of an illegal short sale," which would decided by a third party before presented to a judge.
Global lawyer Shayne Strukoff is also confident his client will win, with an 18A summary trial expected in October. "Starpoint will have an uphill battle," he states. The lawyer notes he has seen no evidence of any improper short-selling and he suggests it was an "unfounded" attempt to pressure his client into dropping the suit. Global is now in the process of assembling its internal trading records, covering Starpoint trading from Aug. to Nov. 1996, the period of the aborted $5-million financing. Mr Strukoff notes the records may have clients' names obscured, and all
documents are subject to confidentiality.
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