William, is this the one? ________________________________
First Marathon's Cartaway debacle
OBSTACLE COURSE
After settling with the TSE this week, the broker's problems are far from over. It also faces allegations from the B.C. Securities Commission on the actions of eight of its employees.
The Globe and Mail
Saturday, July 25, 1998
By Karen Howlett
Financial Services Reporter
When Lawrence Bloomberg read the Kaiser Bottom Fishing Report in the summer of 1995, his first concern was what the highly critical report would do to First Marathon Inc.'s reputation.
The mining newsletter had described how a group of First Marathon employees saw an obscure company called Cartaway Container Corp. as a vehicle for something bigger and made it its personal project. The group purchased 46 per cent of the shares at 10 cents each in the fall of 1994, shortly before Cartaway quit the garbage can rental business to seek mineral wealth in Labrador.
The immediate concern of Mr. Bloomberg, First Marathon's founder and chief executive officer, was that these employees had placed their own financial interests ahead of clients, the Toronto Stock Exchange says in a 45-page notice of hearing, released this week. The situation did not look good: Eight brokers in the firm's Vancouver and Calgary offices acquired control of Cartaway by picking up shares for a dime and also acted as promoters and underwriters.
The TSE alleged this week that Mr. Bloomberg told two senior executives that the firm would not tolerate this type of activity, but he took no further action. As a result, the TSE accused First Marathon of failing to supervise employees in connection with Cartaway, the now infamous junior mining company whose shares crashed to $2 from $26 in one trading session in 1996 after what looked like a promising mineral find evaporated. As First Marathon's top executive, Mr. Bloomberg has "ultimate responsibility" for compliance, the exchange said.
First Marathon agreed to pay the TSE a $4-million penalty this week to settle the allegations. Mr. Bloomberg was fined $250,000.
But the controversy surrounding First Marathon's involvement with Cartaway is far from over. Regulators in British Columbia have also accused the firm and its employees of triggering numerous conflicts of interest by wearing so many hats.
"The conflict issue is central to the whole matter," Martin Eady, deputy director of investigations at the B.C. Securities Commission, said yesterday.
A stockbroker has a duty to provide independent advice to clients, he said. The B.C. commission's notice of hearing, issued this week, "was intended to send a message that mixing the two roles, of stock promoter and independent adviser, is wrong."
The B.C. investigators will also ask the commission to seek a court order that would force First Marathon and the six individuals named in the notice to pay back any money they made on Cartaway, if that money was made in a way that does not comply with the province's securities act. Any funds collected would go into the province's treasury.
First Marathon is accused in British Columbia of not taking "any reasonable steps to ensure that the interests of Cartaway [its corporate client] and its other [investor] clients were adequately protected." The firm is also accused of failing to supervise its employees "properly or at all."
None of the allegations made in British Columbia have yet been proven. First Marathon vice-president Michael Walsh said yesterday that the firm hopes to settle with the B.C. regulators.
Howard Shapray, a securities lawyer who represents Blayne Johnson, a former broker in First Marathon's Vancouver office and one of the group that bought 46 per cent of Cartaway, said he is not sure there is anything for his client to settle.
"We think that the premises upon which the notice of hearing are based are faulty and flawed," he said. "They've got the facts wrong as far as my client is concerned."
The picture that emerges in British Columbia is of allegations that a group of First Marathon employees were deeply involved with every facet of Cartaway, as investors, as underwriters raising money for it and as promoters finding mineral assets.
Cartaway began life in 1986 renting out garbage containers in the interior of British Columbia. The Alberta Stock Exchange-listed company's journey into mining history began in September, 1994, when the eight First Marathon employees acquired their 46 per cent and the company was renamed Cartaway Resources Corp.
The following May, First Marathon raised $875,000 for Cartaway by selling seven million shares at 12.5 cents each. After that financing was completed, employees at the firm and their families owned 66 per cent of Cartaway's shares outstanding, the B.C. commission alleges.
The original eight investors acted as a control group from September, 1994, until at least May, 1995, it alleges. The commission also alleges that an offering memorandum for this financing was "false and misleading" because it did not disclose the extent of the First Marathon employees' involvement in the company.
The commission also alleges that the financing was done before the public was told that Cartaway had acquired mineral claims in April in Labrador's Voisey's Bay area, where another company had made a big nickel discovery that sparked a staking rush. Such a disclosure would have caused the price of Cartaway shares to climb.
It accuses three of the eight men -- Mr. Johnson, Robert Hartvikson, a former broker in the Vancouver office, and Michael Stuart, former manager of the Calgary office and president of Cartaway at the time -- of acting in their interests "to the exclusion of duties owed to Cartaway."
Mr. Johnson and Mr. Hartvikson, who had negotiated the purchase of the claims on Cartaway's behalf, delayed having Cartaway purchase them until after the financing so that the shares could be sold at a lower price, the notice alleges. Mr. Stuart went along with this plan, the notice adds.
It was not until June 29 that Cartaway announced it had acquired a number of mining claims.
Mr. Johnson and Mr. Hartvikson are also accused of lying to the B.C. regulators about when the mineral claims were purchased.
Mr. Hartvikson and Mr. Stuart could not be reached for comment yesterday.
For the First Marathon employees and others who got into Cartaway early, the last formal restrictions on public sale of their low-cost shares expired on May 5, 1996, just days before the price runup began.
The shares climbed to $9.50 from $4.20 on the ASE on May 9, after the company announced that visual results of the first two holes drilled on its Labrador property suggested an important copper find.
The share price peaked at $26 a few days later, on May 16, after Cartaway issued another news release saying a third drill hole on its exploration property showed "heavy concentrations" of sulphide mineralization, including pentlandite and chalcopyrite, which usually indicate the presence of nickel and copper.
This week, Alberta securities regulators accused Cartaway executives of misleading the public with the May 16 release. It alleges that Cartaway's on-site geologist had not recorded observations of pentlandite in his drill logs.
The bubble burst on May 17 when the company announced drilling results that showed little promise for a mineral find.
These days, Cartaway's shares are changing hands around 12.5 cents each. Neither First Marathon officials nor the regulators have disclosed how much the brokerage firm's employees made on Cartaway.
An initial hearing before the B.C. Securities Commission has been set for Aug. 21. |
