TSE notice critical of First Marathon management
Cartaway Resources Corporation CWA
Shares issued 37,914,563 Jul 21 close $0.12
Tue 21 Jul 98 Street Wire
See First Marathon Inc (FMS.A) Street Wire
BLOOMBERG RELIED ONLY ON DISBROW AND STUART
by Brent Mudry
A chronically lax compliance department, a pattern of disclosure breaches
by numerous employees at head office and the Vancouver and Calgary branch
offices, and half-hearted concern by First Marathon Securities chief
executive Larry Bloomberg are the highlights of the Toronto Stock
Exchange's extensive notice of hearing issued in the aftermath of the
Cartaway Resources scandal. The 41-page document, released Monday, details
a litany of compliance breaches over the four years leading up to the
Cartaway affair, breaches that grew, not diminished, despite three
successive annual compliance reviews which won less than passing grades
from TSE officials.
The named respondents: First Marathon, Mr Bloomberg, senior executive
vice-president Stuart Henry, former compliance officer Robert Eccles,
former Calgary branch manager Christopher Michael Stuart, former Vancouver
branch manager Bob Disbrow and senior employee Elizabeth Kneis, now
Elizabeth Sgro, face a TSE hearing on September 23.
The TSE notice paints an unflattering portrait of Mr Bloomberg's management
of the aggressive Toronto-based brokerage and his efforts to nip Cartaway
in the bud, long before the penny stock catapulted into national
prominence, peaking at $26 before collapsing. The TSE notes that California
newsletter writer John Kaiser, in the July/August 1995 edition of the
Kaiser Bottom Fishing Report, was "highly critical" that a group of First
Marathon brokers had acquired control of Cartaway by buying ten-cent shares
in a change of control in October, 1994.
Mr Kaiser revealed the group had quietly bought much of the cheap paper in
"9.9 per-cent or less gobs" to avoid triggering control change disclosures.
The Cartaway Eight of First Marathon brokers boosted their undisclosed
de-facto control position on May 5, 1995, buying the lion's share of a
private placement of seven million units at 12.5 cents, which included
seven million warrants exercisable at 20 cents.
The Toronto exchange notes that Mr Bloomberg reviewed Mr Kaiser's Cartaway
article after it was published. "His immediate concern was the conflict of
interest and the reputation of First Marathon. However, other than verbally
communicating to Stuart and Disbrow that the firm would not tolerate this
type of activity, no further action was taken in response to the Kaiser
Report," states John Carson, senior vice-president of market regulation for
the TSE. "In particular, no further investigation was carried out by First
Marathon and no additional written policies relating to the matters stated
in the Kaiser Report were issued to First Marathon employees," states Mr
Carson.
Mr Bloomberg contentment to drop the Cartaway matter after his chats with
Mr Disbrow and Mr Stuart was odd, as they were respectively the heads of
First Marathon's Vancouver and Calgary branches, which each had four
brokers in the Cartaway Eight. The pair of branch managers were aware of
the Cartaway share purchases but did not question their teams of brokers.
Cartaway was one of the few First Marathon penny stock deals that Mr
Disbrow did not personally participate in.
With partner Eric Savics, Mr Disbrow headed the "Vancouver Five," a quintet
of brokers at First Marathon's Vancouver branch who were key early-stage
backers of a number of profitable Vancouver Stock Exchange promotions for
more than four years. Mr Disbrow, a co-founder of First Marathon, was an
officer and director of the firm since April, 1980, a vice-chairman since
April, 1991, and the Vancouver branch manager from April, 1988, until last
September.
Mr Stuart had a unique perspective on the Cartaway affair as he had two
jobs, running Cartaway and running First Marathon's Calgary office. Mr
Stuart, a vice-president and director of the brokerage, replaced Gerry Shaw
as Calgary branch manager on April 17, 1995, and resigned in September,
1996, in the wake of the Cartaway scandal. In the September, 1994, ten-cent
private placement, Mr Stuart and Calgary colleague were the biggest
investors, with 490,000 units each combined in their own names and their
families' names. A month later, on October 17, Mr Stuart was appointed
president and secretary of Cartaway.
In the May 5, 1995, 12.5-cent private placement, 18 days after he was
promoted to branch manager, Mr Stuart bought 500,000 more Cartway units for
his family. Mr Stuart sent a letter to the TSE on May, disclosing he was a
director of Cartaway. He neglected to add that he was also Cartaway's
president and secretary, roles he resigned from a month later, on June 6.
The next day, on June 7, Mr Stuart loaned $275,000 to Cartaway, along with
Rob Hartvikson and Blayne Johnson, the Cartaway engineers supervised by Mr
Disbrow in Vancouver. Mr Stuart loaned $50,000, while the Vancouver pair
loaned $112,500 each. The loan terms included $1.50-a-share options for all
three. The trio forgot to either consult with head office or report the
transaction, which was processed outside of the brokerage.
The busy branch manager sent a June 15 memo to First Marathon registration
clerk Maria Kedzior, belatedly informing her he had been appointed a
director of Cartaway the previous October. "Stuart also informed First
Marathon that a group he was involved with took advantage of an opportunity
to buy a large block of Cartaway in the fall of 1994. Stuart further
advised First Marathon that he was currently involved in the financing of
Cartaway as First Marathon's agent on the financing," states the TSE,
outlining the branch manager's many roles.
The month of June, 1995, was particularly busy for First Marathon's
assorted offices, while the First Cartaway promotion was also evolving. On
June 28, Ms Kneis sent a letter to the Alberta Securities Commission in
which First Marathon confirmed it was aware of Mr Stuart's role as a
director of Cartaway. Ms Kneis stated the brokerage did not believe Mr
Stuart had any conflict of interest. The TSE notes that neither Ms Kneis
nor Ms Kedzior checked with senior First Marathon staff to check if Mr
Stuart had any approval from the brokerage to act as a Cartaway director,
approval which he lacked.
The next day, on June 29, things were not going well at head office in
Toronto. The TSE, after three years of unsatisfactory compliance reviews of
First Marathon, decided to conduct a surprise review of the firm's monthly
account activity review procedures. That day, the exchange's compliance
division contacted Mr Eccles, the firm's compliance manager, to advise that
exchange staff were arriving that morning for the sudden compliance audit.
Mr Eccles begged some time while he consulted with Mr Henry, Mr Bloomberg's
right-hand man. That same day, Mr Henry contacted TSE compliance director
Gerhard Wetzel and told him not to bother coming.
First Marathon had no monthly review reports, despite three years of Mr
Bloomberg and Mr Henry promising they would be regularly prepared. Mr
Eccles was terminated, and First Marathon soon hired Mr Wetzel to clean up
its compliance department. Cartaway was already unfolding, and the
compliance changes were too late and too slow to stop it. A few months
later, Mr Bloomberg would read of Mr Kaiser's August, 1995, Cartaway
revelations, but do little to nip it in the bud.
(c) Copyright 1998 Canjex Publishing Ltd. canada-stockwatch.com
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