R. v. Maitland Capital Ltd., 2011 ONCJ 168

Her Majesty the Queen v. Maitland Capital Limited et al. [Indexed as: R. v. Maitland Capital Ltd.] 105 O.R. (3d) 503 2011 ONCJ 168 Ontario Court of Justice, Sparrow J.

March 23, 2011 Securities regulation -- Offences -- Defendants charged with Securities Act offences arising from their operation of boiler room --Defendants trading in securities without being registered -- Trade not falling within accredited investor exemption -- Defendants andtheir employees not asking investors about their income or assets -- Clause in purchase agreement in which investor attested that he orshe met definition of accredited investor not showing due diligence on part of defendants as purchase agreements were sent out aftersubscription agreements were signed and investors frequently did not read, sign or return purchase agreement -- Defendants also guilty ofmaking undertakings as to future value of shares.

G was president and director of Maitland Capital, and U was secretary-treasurer. Neither Maitland Capital nor G had ever beenregistered with the Ontario Securities Commission, and U was registered as a salesperson, subject to restrictions, in 1997 and 1998. Allthree defendants were charged with offences under the Securities Act, R.S.O. 1990, c. S.5 arising from their involvement in an allegedboiler room operation. Maitland Capital was a minority shareholder in Maitland Energy, an oil and gas venture.

G represented himself topotential investors as a "pre-IPO professional" and he, U and their employees told potential investors that Maitland Energy was soon tobe listed on a stock exchange and advised them to buy shares before the price went up. Maitland Energy was not, as represented by thedefendants, a subsidiary of Maitland Capital. It was not "pre- IPO"; rather, it was in its infancy, with no land and insufficient resources toexplore and produce.

In response to charges of trading in securities without being registered, contrary to ss. 25(1) and 53(1) of the Actand authorizing, permitting or acquiescing in trades conducted by employees without having complied with ss. 25(1) and 53(1), thedefendants relied on the accredited investor exemption. Held, the defendants should be convicted. The prosecution proved the actus reus of the offences under ss. 25(1) and 53(1) of the Act. The defendants clearly traded in securitieswithout being registered and without a prospectus having been issued.

Only one of the investor witnesses was, in fact, an "accreditedinvestor", defined in the Act as those who meet a stipulated minimum asset or income level. The defence of due diligence was not madeout. With a few exceptions, investors were not asked about their income or assets. Due diligence was not established by a clause in thepurchase agreements in which the investor attested by signature that he or she met the definition of accredited investor.

The purchaseagreements were sent out after the subscription agreements were signed and the cheques picked up, and investors frequently did not read,sign or return the purchase agreements.

Neither G nor U took reasonable steps to ascertain whether the investors they dealt with fellwithin the definition of accredited investor or to ensure that the salespeople did so. [page504] The defendants were also convicted of making undertakings as to the future value of the shares and authorizing, permitting oracquiescing in the same behaviour by salespersons, and with making representations that the shares would be listed on a stock exchangeand authoring, permitting or acquiescing in the same behaviour by salespeople. The defence of due diligence was not applicable. TRIAL on charges under the Securities Act.

Cases referred toEuston Capital Corp. (Re), 2007 ABASC 46, 2007 LNABASC 49 (Sec. Comm.); R. v. Guettler (February 5, 2001),Babe J. (Ont. C.J.), consd Other cases referred to R. v. Armaugh Corp., [1993] O.J. No. 4360 (C.J.); R. v. Felderhof, [2007] O.J. No.2974, 2007 ONCJ 345, 224 C.C.C. (3d) 97, 75 W.C.B. (2d) 46; R. v. Fell (1981), (ON CA), 34 O.R. (2d) 665, [1981]O.J. No. 3176, 131 D.L.R. (3d) 105, 64 C.C.C. (2d) 456, 59 C.P.R. (2d) 34 (C.A.); R. v. Richardson (1981), (ONCA), 34 O.R. (2d) 348, [1981] O.J. No. 2511, 62 C.C.C. (2d) 417, 6 W.C.B. 384 (Div. Ct.); R. v. Sault Ste.

Marie (City), (SCC), [1978] 2 S.C.R. 1299, [1978] S.C.J. No. 59, 85 D.L.R. (3d) 161, 21 N.R. 295, 40 C.C.C. (2d) 353, 7 C.E.L.R. 53, 3 C.R. (3d)30, 2 W.C.B. 321 Statutes referred to Canadian Charter of Rights and Freedoms, ss. 7, 8, 9, 10, 24(2) Provincial Offences Act, R.S.O.1990, c. P.33, s. 47(3) Securities Act, R.S.O. 1990, c.

S.5, ss. 1(1), 1.1, 25(1), 38(2), (3), 53(1), 122(1)(b) [as am.], (c) [as am.], (3) [asam.] Authorities referred to Ontario Securities Commission Rule 45-105 Swaigen, John, Regulatory Offences in Canada: Liabilities andDefences (Toronto: Carswell, 1992) Derek Ferris, for Ontario Securities Commission. Marcy Segal, for accused Maitland Capital Limited and Abraham Herbert Grossman Ex parte, Hanoch Ulfan.

SPARROW J.: -- Introduction [1] Maitland Capital Limited is an Ontario company incorporated November 2, 2004 with an initial address on Yonge Street in Toronto.The accused Grossman is listed in corporate records as president and director of Maitland; the accused Ulfan was secretary-treasurer,having resigned on January 25, 2006. Ulfan has never appeared at this trial, which has proceeded against him ex parte. The company isno longer conducting sales or other activities.

[ 2 ] The prosecution, conducted by staff of the Ontario Securities Commission, alleges that Maitland was what is referred to in the securities industry as a "boiler room operation", selling [page505] large volumes of shares through high-pressure telephone-sales tactics. It is alleged that the accused did so by misrepresenting material facts, failing to disclose material facts and selling to investors who were not qualified under the Ontario Securities Act, R.S.O. 1990, c.

S.5 and its Regulations and Rules to buy the shares. [ 3 ] The specific charges, laid in pairs are as follows: Count 1 -- The offence of trading in securities of Maitland without registration, contrary to s. 25(1) and s. 122(1) (

c) of the Securities Act ; Count 2 -- The offence of authorizing, permitting or acquiescing in trades in securities of Maitland without Maitland and its salespersons being registered to trade in such securities contrary to s. 25(1) and s. 122(3) of the Securities Act; Count 3 -- The offence of trading in securities of Maitland without a prospectus, contrary to s. 53(1) and s. 122(1)(

c) of the Securities Act; Count 4 -- The offence of authorizing, permitting or acquiescing in trades in securities of Maitland where such trading was a distribution of such securities without a prospectus, contrary to s. 53(1) and s. 122(3) of the Securities Act; Count 5 -- The offence of giving prohibited undertakings as to the future value or price of the securities of Maitland with the intention of effecting trades, contrary to s. 38(2) and s. 122(1)(

c) of the Securities Act; Count 6 -- The offence of authorizing, permitting or acquiescing in the giving of undertakings as to the future value or price of the securities of Maitland with the intention of effecting trades, contrary to s. 38(2) and s. 122(3) of the Securities Act; Count 7 -- The offence of making prohibited representations regarding future listing of the securities of Maitland on a stock exchange, contrary to s. 38(3) and s. 122(1)(

c) of the Securities Act; Count 8 -- The offence of authorizing, permitting or acquiescing in the making of prohibited representation regarding future listing of the securities of Maitland on a stock exchange with the intention of effecting trades, contrary to s. 38(3) and s. 122(3) of the Securities Act; [page506] Count 9 -- The offence of making a misleading or untrue statement, contrary to s. 122(1)(

b) of the Securities Act; and Count 10 -- The offence of authorizing, permitting or acquiescing in the making of a misleading or untrue statement, contrary to s. 122(1)(

b) and s. 122(3) of the Securities Act. [ 4 ] The prosecutor has explained that in the counts in which Grossman and Ulfan are named alongside the company -- counts 1, 3, 5 and 7 -- it is alleged that they personally conducted trades and made misrepresentations contrary to the Act. The company is charged in each count as all trades, whether made by Grossman, Ulfan or other salespeople, are alleged to also have been made by the company.

In the companion counts 2, 4, 6 and 8, it is alleged that Grossman and Ulfan authorized, permitted or acquiesced in trades or misrepresentations made illegally by salespeople working for the company. In counts 9 and 10, Grossman and Ulfan are charged with making and authorizing or permitting a false statement in a report filed with the Commission. The Facts [ 5 ] Many facts are uncontested. Grossman and Ulfan met in 2003 at a company called Limelight Entertainment Inc., which was selling shares to fund ventures involving the recordings of Shania Twain.

Grossman was, in his words, in "investor relations", selling shares to persons who had already invested in the company. Grossman and Ulfan had considered creating a second company called Limelight Capital Management; however, they ultimately founded Maitland Capital Ltd.

It commenced operations at the office on Yonge Street, with only a few salespeople, and moved in early 2005 to Eglinton Avenue, where there were eventually about 15 salespeople and a few office administrators in several offices on a few floors. [ 6 ] Maitland Capital's major, if not only, significant function became the raising of capital to buy shares of a Calgary oil and gas venture known as Maitland Energy Inc., also incorporated in 2004. Tim Hoar, a retired Calgary lawyer, and five other directors put in seed capital of $30,000 and started identifying energy prospects.

Certain directors began discussing the raising of further capital with Grossman, and a letter of intent between Limelight and Maitland Energy was signed on October 20, 2004. Ultimately, a subscription agreement provided that Maitland Capital would provide $10 million to Maitland Energy in four [page507] tranches, in exchange for shares, with closings on December 1, 2005, May 1, 2006, October 1, 2006 and April 1, 2006. [ 7 ] Maitland ultimately subscribed for 1 million shares of Maitland Energy at 50 cents per share, for a total investment of $500,000.

As of September 30, 2005, Maitland Capital owned only 17 per cent of Maitland Energy. The subscription agreement was terminated on January 18, 2006. Maitland Energy had negligible revenue in 2004 and 2005, and only acquired land and started drilling wells in 2006. As of the end of trial, it was unclear as to whether Maitland Energy, whose name had changed to Alogo Energy Inc., would be productive. [ 8 ] In the fall of 2004, Ulfan arranged for Moe Wortzman, through his company Heritage Transfer Agency Inc., to perform functions such as maintaining a shareholder list and issuing share certificates.

An agreement was signed. In response to a summons issued by the Ontario Securities Commission, Wortzman produced treasury directions to issue shares, signed by both Grossman and Ulfan. He also produced documents disclosing approximately 1,234 Maitland Capital investors in various provinces and 1,755 Maitland Capital share certificates. The signatures of both Grossman and Ulfan appear in the certificates. [ 9 ] Telephone records of Maitland Capital filed at trial show that in 2005 the company used 18 to 27 telephone lines, and had bills of $500 to $15,000 per month, covering 275,520 long distance calls.

The calls were made throughout Canada and into seven other countries. [ 10 ] Maitland Capital bank documents from its accounts at a branch of TD Canada Trust on Yonge Street were also filed. Grossman and Ulfan both had signing authority. It is clear that Maitland Capital raised approximately $5.5 million; $500,000 was paid to Maitland Energy, and two businesses, AEI Construction and Landrite Ltd., each received about $1.5 million from the accounts.

Landrite was owned by Ulfan; AEI was owned by Grossman. [ 11 ] It should be noted that although the facts stated above involving Wortzman, the telephone records and the bank records are now acknowledged, they were the subject of a motion to exclude evidence pursuant to ss. 7 , 8 , 9 , 10 and 24(2) of the Canadian Charter of Rights and Freedoms . The motion was dismissed on July 7, 2010. [ 12 ] Neither Maitland nor Grossman has ever been registered with the Commission in any capacity.

Ulfan was registered as a salesperson, subject to restrictions, from August 1997 until April 1998. [page508] [ 13 ] Maitland Capital has never filed a prospectus with the Commission. In its minimal contact with the Commission, the company and Grossman took the position that registrations and the filing of a prospectus were not required because all sales were to "accredited investors" and therefore exempt under Ontario Securities Commission Rule 45-105. Accredited investors are defined as those who have

$1 million in financial assets or have earned $200,000 or $300,000 with a spouse, in lack of the two preceding years. [ 14 ] Regulatory proceedings regarding this case have been adjourned pending the outcome of this prosecution; a temporary cease trade order is in force. The facts noted below, some of which were also the subject of the motion to exclude, are not expressly admitted. Testimony of Employees Michelle Dunlop [ 15 ] Michelle Dunlop testified that she began working for Maitland in November 2004 on Yonge Street, along with senior sales consultant Rick Blaine. Three salespeople worked from home.

When the company moved to Eglinton Avenue, she became office manager. Fifteen salespeople and four to seven people called "qualifiers", who made initial calls, were hired. [ 16 ] Dunlop explained that Maitland purchased telemarketing lists, which qualifiers used to make cold calls and the following pitch: Hi, Mr. Smith. I'm not sure if your remember me. But I spoke to you a couple of years ago about an investment opportunity with Dynamic. Dynamics started on the TSX selling at -- it was a private venture.

Sales started selling at, say, .75 cents a share and it went on to hit the TSX on blank date and it actually hit the TSX at, say, $4.00 a share or $5.00 a share. At that time, you weren't interested in pursuing this opportunity, but you agreed that on my next project that I could call you back about the details of my next project, and that's the reason that I'm calling today. I have right now an opportunity with Maitland Capital.

They are exploring oil and what I'd like to do is to send you our company proposal, give you some opportunity to digest it, and then a sales individual will get back to you to go into further detail. [ 17 ] Dunlop testified that cue cards with contact information were generated for those who were receptive and passed on to salespeople by both Ulfan and Grossman. Salespeople then called the potential investor, and most recited a script referred to as the "Mike Prince script", which read as follows: Hi _________ my name's Mike Prince and I'm calling from Maitland Capital.

You were talking with one of my assistants (last week). I think it was [page509] ____________. You also received a fax from our company president, Al Grossman, outlining the details of our current investment opportunity. But before I go on with that _________, apparently, you and I spoke about 1 [cents] years ago, and that's why I'm calling you back. I don't expect you to remember a call from that long ago. But I have the advantage of sitting here in front of my computer with some notes recorded in the database from our conversation back then.

I brought you an investment opportunity called Amerigo Resources ("arg" on TSX). It sold for 20 cents a share at that time. When it went public 12 months later, it opened on the TSX at $1.80 a share, which is considered a blockbuster in terms of profit. I'm just looking at my notes of our discussion at the time. It appears that you were looking at investing more money into your business which is no problem, it happens all the time. Anyway _________, you did give me permission to contact you when my next project got under way. That's why you got a call from my assistant.

Currently I have an excellent opportunity with a Canadian Oil & Gas company called Maitland Energy, and I believe that Maitland will do even better than Amerigo did. I'm sure you agree that this certainly looks like a very nice opportunity from reading through what I sent you. But ___________, let me take a moment to explain what we do. That'll go a long way towards giving you a better understanding of just "how good" this opportunity really is. We're Venture Capitalists. We look at about 40-50 proposals every year from Canadian companies that come to us looking to expand their operations and raise capital.

So naturally, they come to people like us who have over 3,000 investors in our portfolio, to raise the capital. So what we do, is a very thorough due diligence. Much more thorough than you would EVER do when you're looking to invest in a stock, for example. . . . But the point is, that's not to say that out of the 40 or 50 we look at, that there aren't some FABULOUS Canadian companies out there. There really are. But we've got to make a determination to the best of our ability. I've been doing this for almost 20 years.

I'm a pre-IPO Specialist, and when we decide on a project, I'm extremely confident in the end result. . . . . . And __________, there's no better sector to be involved in today than Oil & Gas. You can see that every time you fill up at the pumps, right ___________. Then, if you go one step further into a sub-sector -- CANDAIAN Oil and Gas, I mean it just doesn't get any better. The Chinese are investing all over Canada. And just last week, they purchased yet another Canadian Oil & Gas company. So, we're in excellent shape here. There IS no better sector.

I want to finally get you onboard and have you start with a small position[.] [ 18 ] The words "we are about 8 to 10 months away from the big board" are hand printed on the script filed in evidence. [ 19 ] Dunlop testified that potential investors were also sent the business plan of Maitland Energy, referring to its exploration activity, and other documents called "sizzlers" -- usually [page510] articles about oil price increases and positive developments in the Western Canadian oil and gas industry. One referred to Chinese investment in the Canadian industry.

In one document she faxed to investors, titled "Pre- IPO Opportunities", Grossman referred to himself as a "Pre- IPO professional". [ 20 ] Dunlop testified that when a sale was made, she faxed a subscription agreement to the investor who signed it and faxed it back. A courier picked up a cheque from the investor, and it was given to Ulfan. A share certificate and purchase agreement were then sent to investors, some of whom signed and returned the agreement. Purchase agreements were then given to salespeople called "loaders", who tried to convince shareholders to buy more.

[ 21 ] She testified that salespeople received commissions of 20 per cent at first, but later received only 17 per cent. Commissions paid for second sales were much less. [ 22 ] Dunlop testified that Ulfan told salespeople to tell investors that they had worked on other projects such a "Dynamic" and "Amerigo" which went from "pre-IPO" (initial public offering) status to being listed on the Toronto Stock Exchange.

She heard Ulfan advising salespeople that the company was a certain number of days away from being listed on the TSX, and heard salespeople repeating this to customers and telling them to buy before the price went up. She testified that she heard Geller advise investors that the stock would be listed on September 1, and that he anticipated a price increase. She said that she once heard Grossman telling him not to do this. [ 23 ] She testified that there were no manuals or guidelines about what could be said to investors or who was eligible to invest.

Many salespeople used aliases; Geller called himself "Robert Sinclair" and Abel daSilva used the name "Rick Blaine". She said that Grossman told Geller to use his real name. [ 24 ] After the Saskatchewan Financial Services Commission issued a cease trade order against Maitland Capital in July 2005, Ulfan told her not to process sales in Saskatchewan and that "our lawyers are working on it".

She resigned shortly thereafter, partly because "the practice for publicly traded or private stocks are being misrepresented by both management and sales representatives" and because salespeople were not ensuring that investors could afford to lose the money. Diana Cassidy [ 25 ] Diana Cassidy testified that she was hired by Grossman to work as a salesperson from April to July 2005. She was paid 17 per cent commission, and assumed she was raising capital for [page511] the oil and gas project in Alberta.

She said there were no manuals or training for salespeople -- they just learned from each other and used scripts. She was never told that there were categories of investors to whom she could not sell. [ 26 ] Cassidy was hired as the office administrator in September 2005, after Dunlop left. She recalled that both Grossman and Ulfan were involved in the day-to-day operation of the business, sales, marketing and administration. She said that salespeople reported to both accused, perhaps more often to Grossman.

They both received and deposited cheques from investors and gave cheques to salespeople after she calculated commissions. Both reviewed lists of new shareholders before details were sent to Heritage Transfer Agency. [ 27 ] She also testified that she was given the title of "compliance supervisor", but that she spent no more than five hours in that role and "never really did anything. It was more of a title I had." She said that files were "a mess", and no systems were in place.

She resigned in October 2005, as she had been preparing paperwork for various securities commissions under the direction of both Ulfan and Grossman, but found [the] task almost impossible. She said that both Grossman and Ulfan were involved in the "stuff for the securities commissions". Robert Geller [ 28 ] Geller worked as a salesperson between June and October 2005, largely as a "loader" -- i.e., selling shares to existing shareholders. He testified that he answered an advertisement for the job and was interviewed by Ulfan, who told him he would be raising money for an oil and gas venture.

He was never registered with the Ontario Securities Commission. Ulfan told him he could not sell to unaccredited investors; however, he assumed that the investors he was trying to "load" had already been accredited. [ 29 ] Geller testified that he was given a script, which said that Maitland was "going public" and which was different from the "Prince script". Ulfan told him all filings had been done, that Maitland was going public shortly and that the share price would increase.

He advised investors to buy more shares for this reason. [ 30 ] He also testified that while working at Maitland, there were 15 to 20 salespeople in two rooms, and eight people known as qualifiers. Everyone could hear each other. He earned between $2,000 and $11,500 a week, working about four hours per day, and recalled that most investors invested between $2,000 and $15,000. He never asked them about their income or [page512] assets, but asked them what they could afford to invest.

He never saw a compliance manual. [ 31 ] Geller testified that he dealt only with Ulfan, and was not sure what Grossman's duties were. Each accused had his own office. The two had a huge fight in July concerning a "problem in Saskatchewan", and he was told not to sell there. In October, he was told not to sell in Alberta. [ 32 ] Geller was never cross-examined as Grossman declined to do so personally, and could not be located by the time defence counsel was hired and commenced cross-examination. Gord Valde [ 33 ] Valde worked as a salesperson at the same time as Geller, although he was hired by Grossman.

He stated there were about ten salespeople and two qualifiers working at the time. Grossman told him that Maitland was an oil and gas company. [ 34 ] Valde testified that he never asked people about their income or assets, and basically followed the "Prince script". He advised investors that the company planned to go public. He left in October, along with many others. Roger McKenzie [ 35 ] McKenzie testified that he was interviewed by Grossman for 20 minutes before being hired as a qualifier.

He worked during November 2005, but left when told by his supervisor that the office was shutting down. [ 36 ] McKenzie testified that he was given cue cards and would call 150 to 300 people per day to generate 15 to 20 leads. Although the script didn't mention assets or incomes, he asked very general related questions. The script said something about a public offering and oil

and gas. He testified that there were four or five others qualifiers, some of whom got bonuses for making more sales. Interested investors were told they would get an information package. Testimony of Investors Investors who dealt with Grossman [ 37 ] Michael Feltham, owner of a wood flooring company, met with Grossman at the Yonge Street office on December 2, 2004 to discuss investing in Maitland Capital.

He testified in chief that he and his wife each had a net income in 2005 of about $120,000 and that he had $50,000 in his RRSP -- far less than needed to be an accredited investor as defined under the Rules of the [page513] Ontario Securities Act . At one point in cross- examination, he agreed that their net annual income was "pretty close" to $300,000. [ 38 ] Feltham testified that Grossman told him that he anticipated that shares would be listed on a stock exchange shortly and that the share prices were going to peak.

In cross- examination, he agreed that Grossman and Ulfan gave the impression that the shares "could", as opposed to "would", be listed. [ 39 ] Feltham invested $15,000 in Maitland, sending a cheque by courier. In chief, he testified that he skimmed and signed a purchase agreement six weeks later, although he never returned it.

In cross-examination, he testified that could not remember when he received the purchase agreement. [ 40 ] Feltham also testified that (1) no one asked him about his income before he invested; (2) he thought that Maitland Capital and Maitland Energy were the same company as they were referred to together; and (3) he received several subsequent calls from Grossman and Ulfan telling him the shares were "about to skyrocket" and be listed on an exchange, and calls from Grossman or someone else from the office asking him to invest further.

He ultimately invested another $10,000. [ 41 ] On January 25, 2006, he e-mailed Grossman, asking for a copy of the company's financial statement and when the stock would be listed. He never received a response. [ 42 ] Than Shanmugarajah, a land surveyor in an informal partnership with Michael Griffiths, testified that his annual income in 2004 and 2005 was $80,000, his wife's income was $40,000 and his net financial assets were worth $50,000. [ 43 ] He testified that he received a cold call from Rick Blaine suggesting he buy Maitland shares because they would double in price when the company became public.

His partner Griffiths was in favour, and, according to Shanmugarajah, "we" decide to buy. Shanmugarajah wrote three cheques for $2,500 each, dated December 2, 2005, February 7, 2005 and March 15, 2005. [ 44 ] He also testified that Grossman called him before his last purchase and told him he should buy another 7,000 shares as there was a minimum purchase requirement of 10,000 shares. He finally agreed to purchase 2,000 more shares.

Grossman told him that the share value would double once it went public. [page514] Grossman asked him about his income and assets and Shanmugarajah gave him the information referred to above. [ 45 ] The witness identified two unsigned purchase agreements and one dated March 29, 2005 signed by Griffiths.

He did not know if they were sent back to Maitland. [ 46 ] Peter Gatzsch, a bona fide accredited investor from Calgary, testified that he earned about $1.5 million in 2005. [ 47 ] He testified that he received a call in November 2004 from Rick Blaine, who told him that Maitland would go public in 12-16 months, and that the price would go up to $4 per share. No one asked him about his income or assets. Blaine told him that Maitland Capital was the financing arm of Maitland Energy. Gatzsch received an

article about oil exploration entitled "Maitland Capital Ltd -- Estimated Size of the Prize", as well as Maitland Energy's business plan and another document on Maitland Energy letterhead -- all of which caused him to believe that Maitland Capital and Maitland Energy were the same company. [ 48 ] Gatzsch testified that he invested $12,000 on December 9, 2004 because he knew that witness Tim Hoar, who he trusted, was involved, and because he wanted to get rid of Blaine.

In January 2005, he received eight to ten calls from each of Grossman and Ulfan, urging him to buy 95,000 more shares because of a looming deal between Maitland Capital and energy giant Encana Corp. Grossman told him that Maitland Capital would be listed on the TSX. He ultimately bought the shares for $166,250 and received 95,000 warrant with them. [ 49 ] In February 2005, he met with Grossman, Ulfan and Blaine, who offered to convert his warrants to shares; he refused and asked for his money back.

Subsequently, Grossman tried to entice him to invest in several other ventures, including one which would go public shortly, but he refused. [ 50 ] He testified that he was sent a press release about an agreement between Maitland Energy and a Chinese sales agency and that at one point Ulfan told him that Maitland Energy was a subsidiary of Maitland Capital. [ 51 ] Dan Van Londersele was a real estate broker in 2004, who earned $100,000 a year. His wife was a teacher. He was not an accredited investor.

He testified that he received a call from Ulfan in early December 2004 asking him whether he would invest in a growth company which might make him money if it went public. He ultimately invested $2,500, in 1,000 shares, on December 14, 2004. [ 52 ] Like other investors, he received a Maitland Energy business plan, and other documents which led him to believe that [page515] Maitland Capital and Maitland Energy were the same company.

He also received a fax about a company called Amerigo Resources, which was stated to be another venture that had been promoted by Maitland which had multiplied in value. [ 53 ] Van Londersele testified that on January 21, 2005, he received a purchase agreement which he looked at briefly but did not sign or return. Van Londersele died before defence counsel was retained, and was never cross-examined. [ 54 ] Michelle Dunlop, the office administrator referred to above, testified that she earned about $35,000 in 2005, and her husband earned

about double that. Her financial assets were negligible. [ 55 ] In March of 2005, she asked Ulfan if she could buy shares; he said yes. She bought 1,200 shares for herself and on behalf of family members. She testified that she was never asked about her financial assets, that she did not know what an accredited investor was until July 2005 and that none of her family members were accredited investors. Other investors [ 56 ] Seven other investors -- Paul Dentz, Catherine Freeley, Wayne Hoult, Joanne Elawar, Wayne Clarke, Stacey Wellings and Rafael Wyka -- testified.

They all had direct dealing with salespeople other than Grossman or Ulfan. None had income or assets close to that of an accredited investor, although defence counsel argues that Paul Dentz purchased his shares through the partnership Dentz Berry Farms which was not shown by the prosecution to be unaccredited. All except Dentz bought 1,000 shares or less at about $2.50 per share. [ 57 ] All except Clarke testified that they were told, or given the clear impression, that Maitland Capital was exploring for oil in Western Canada.

All, except Hoult, testified that they were not asked about their income or assets, or that of their spouse. Hoult testified that he exaggerated in telling salesman Jack Adams that he earned $120,000. After investing, he received calls from Geller pressing him to buy more shares and discussing rising values in the oil and gas business. [ 58 ] Investors Dentz, Freeley, Elawar, Wellings and Wyka all acknowledged receiving a purchase agreement; however, Freeley was not sure if she signed it, Wyka was clear that he did not understand it and Elawar never read the clause referring to "accredited investor".

Like the investors who dealt with Grossman and Ulfan, most were unsure when they received it and if they returned it. [page516] [ 59 ] Many of the investors identified articles which were sent to them to encourage their purchases, including (1) the Maitland Energy business plan showing Maitland Capital's Toronto address; (2) articles from the Globe and Mail about positive developments in the oil and gas industry; (3) a press release entitled "Maitland Capital Announces Important Progress in Alberta", starting with "We have now acquired three Crown leases", addressing joint ventures and partnerships under discussion, and the view that "our shareholders" . . .

"should see great potential"; (4) a press release on Maitland Capital letterhead titled "estimated size of the prize" referring to estimates of hydrocarbon productivity in "study areas"; (5) a press release on Maitland Energy's letterhead about corporate solutions to the natural gas crisis with instruction to call Ulfan or Grossman at Maitland Capital about "exciting opportunities"; and (6) an accompanying document entitled "overview of pre-IPO opportunities" signed by Abraham Grossman. [ 60 ] All faxes were sent to investors on Maitland Capital letterhead which had an oil well and pump logo.

Most of these investors testified in chief that they were told that the stock would go up in price and that it would be listed. In cross- examination, they generally agreed that they were told that these events "could", as opposed to "would" happen. Other witnesses Moe Wortzman [ 61 ] Moe Wortzman, the transfer agent, testified in cross- examination that he told both Grossman and Ulfan that they had to file reports of exempt distribution with the Commission, and that he told Ulfan at the beginning that filing was not the responsibility of the transfer agent.

He said that Ulfan did not want to provide documents or co-operate with the Commission, although he though Grossman wanted to co-operate. [ 62 ] Wortzman testified that Ron Haller worked for Heritage and handled some of Maitland's business. However, Haller also had his own company called Fastcorp Management Ltd. When [page517] shown a letter signed by Haller on Fastcorp letterhead, in which Haller undertook to prepare the report of exempt distribution, Wortzman denied having any involvement.

Tim Hoar [ 63 ] Tim Hoar, referred to above as the Calgary lawyer who helped found Maitland Energy, testified that the copy of the Maitland Energy business plan given to investors was not "crafted" by Maitland Energy, and that the board of Maitland Energy was concerned when they saw it in circulation with Maitland Capital's street and webmail address on it. The plan appeared to have the contents of a genuine Maitland Energy plan.

He said that Maitland Energy never approved the press release reflecting its letterhead which was referred to by investors, or other articles labelled "Maitland Energy" sent to investors. [ 64 ] He testified that several representations in these documents, such as Maitland's status as "pre-IPO", the fact that it was growing, reference to a pending deal with Chinese entities and reference to Maitland Energy as a subsidiary of Maitland Capital, were false.

The company was in its infancy, with no land and insufficient resources to explore and produce. [ 65 ] Hoar received at least four inquiries from Maitland Capital investors asking "are you going public right away?", "is the opening bid going to be $10.50?" and "are you for real?". He told them that Maitland Energy had no tangible assets, although it could be drilling by early 2006. Gatzsch also called him asking about the difference between Maitland Capital and Maitland Energy. [ 66 ] Hoar also testified that Maitland Energy was never a subsidiary of Maitland Capital.

He said that Maitland Energy refused Maitland Capital's request to be an agent for the purpose of funding investors, given that the proposed agreement suggested that Maitland Energy would go public and there was no possibility of that at that time. After the Alberta Securities Commission instituted proceedings against both Maitland Capital and Maitland Energy in the fall of 2005, the Calgary directors asked Maitland Capital to make it clear on its website that it was only a minority shareholder in Maitland Energy. The website featured multiple references to Maitland Energy.

The board also terminated the share subscription agreement. Maitland Energy then changed its name to Alogo to avoid confusion with Maitland Capital. Investigators

[ 67 ] Two investigators from the Commission, Sabine Dobell and Jody Sikora, also testified at length. The steps they took are [page518] described in detail in the reason for decision on the dismissal of defence counsel's Charter motion to exclude the majority of the evidence, dated December 31, 2010. [ 68 ] In a nutshell, the Commission received a complaint about Maitland Capital in the fall of 2005; Ms. Dobell followed up immediately by sending two letters with several questions to Grossman about the sales of the company's shares.

He provided two letters in response, stating that Maitland Capital had relied on the "accredited investor exemption" in selling its shares without being registered, and that the forms providing the details of exempt sales which, are required by Rule 45-501 to be filed with the Commission, were not filed due to "administrative oversight". He also provided a list of employees and a list of 31 shareholders, which omitted a large percentage of the investors. Dobell produced a copy of Form 45-103F4 dated December 30, 2004, the one report which had been signed by Grossman and filed with the Commission.

She pointed out that it was the wrong form, and that it was incomplete in that it did not include reference to commissions paid to salespeople or reference to the exemption claimed. Seventy-nine sales were listed. She recommended that the case proceed to litigation so that a cease trade order could be sought. [ 69 ] Sikora testified that he interviewed numerous investors, and reviewed Maitland Capital's bank records. Charges were laid after he discovered that $3 million had been transferred to Landrite and AEI Construction.

Testimony of Grossman [ 70 ] Grossman then testified at some length, explaining that he met Ulfan while working at Limelight Entertainment Inc., where he sold shares and worked in "investor relations". In 2004, he and Ulfan decided to form Maitland Capital, rather than Limelight Capital, when they were introduced to a contact who was involved with Maitland Energy. [ 71 ] Grossman explained that the fact that he was named president of Maitland was not significant, as he and Ulfan had equal authority and responsibility.

He described his role again as largely "investor relations", and "keeping the peace", while Ulfan had full responsibility for regulatory compliance. His understanding was that Ulfan was a registrant with the Commission through prior employment with brokerages, although he never asked Ulfan for proof or details. A certificate filed in evidence revealed that Ulfan was registered, with conditions, only between April of 1997 and August 1998, and for a couple of other very brief periods Grossman stated that he made no efforts to ensure compliance with the Securities Act, Regulations or [page519] Rules.

He acknowledged his signature on the one report of exempt distribution filed with the Commission, which is the subject of counts 9 and 10 and said that it had been the responsibility of Wortzman or Ron Haller to prepare. [ 72 ] He said that preparation of the responses to Dobell were the responsibility of others such as Dunlop, Cassidy or other administrators. Grossman testified that he was unaware of the term "accredited investor" until about six weeks after the business started.

He repeated that all compliance and regulatory matters, including filings with the Commission, were Ulfan's responsibility, given his career at brokerages.

He agreed that none of the salespeople had manuals or other directives about how to apply the accredited investor exemption, although he thought that he saw copies of the related clause of the purchase agreement on their desks. [ 73 ] Grossman acknowledged that he signed some authorizations for Heritage to issue share certificates, deposited investor's money and signed cheques, given that he and Ulfan were equal partners. [ 74 ] With respect to sales tactics, he stated that much of the marketing material, including the Maitland Energy business plan, came from Maitland Energy.

He acknowledged that Maitland Capital had put its street address and webmail address on Maitland Energy's business plan and changed the cover sheet to show the oil well. He stated that he never told investors that shares would increase in value, that there would be an initial public offering, that he was a "pre-IPO" specialist, that other deals had been completed or that he made any other type of misrepresentation. [ 75 ] With respect to the salespeople, he stated that he was in the office daily and kept his ear open to what they were saying.

He said that there were only four people in the original office on Yonge Street. However, he had no knowledge of the persistence of some salespeople described by the witnesses, and did not acquiesce in any representation made as to future value or excessive phone calls. He acknowledged in retrospect that he perhaps should have recorded salespeople's calls. [ 76 ] In cross-examination, Grossman denied having conversations with any investors except one with each of Feltham and Gatzsch, and disagreed with the contents of the calls as related by them.

He stated that Gatzsch based his decision to buy based on his familiarity with Hoar. When asked if files were kept with respect to investors, with information about topics such as their risk tolerance, he said yes; none, however, were produced. He agreed that audits to ensure compliance with risk profiles were [page520] never done. He also agreed that many salespeople used aliases and worked from home, where neither he nor Ulfan could hear any of their representations. He saw nothing wrong with these practices, or with the huge volume of phone calls revealed by the Bell Canada records.

He acknowledged that the total amount of commissions paid on sales generally ran between 17 and 20 per cent, and that investors were not told this. [ 77 ] He also acknowledged in cross-examination that he had never had dealings with companies known as Amerigo or Dynamic, which were represented to investors as having been successfully brought to initial public offerings by Maitland. [ 78 ] Grossman also admitted that approximately $5.5 million was raised from investors and that above $3 million was taken out in what he described as "shareholder loans" to AEI and Landrite.

He said that the loans were to be repaid so that Maitland Capital could continue to invest in Maitland Energy. He acknowledged however, that (

a) he does not possess a written loan agreement, although he believed that there was one; (

b) the amounts have never been repaid and are still outstanding; and (

c) AEI Construction and Landrite Ltd. are not on the Maitland shareholder list. [ 79 ] Grossman acknowledged that correspondence and a cease trade order were received from the Saskatchewan Financial Services Commission at some point in 2005, but did not know much about it and thought Ulfan was handling it. He did not know if anything was done in response to the order, including stopping all sales into Saskatchewan. He also thought Ulfan was getting compliance advice from lawyer Daryl Mann. He knew that sales continued at least until the Ontario Securities Commission became seriously involved in late 2005.

[ 80 ] At various points, both in chief and in cross- examination, Grossman lashed out at the Commission for having forced Maitland to terminate business simply because it was "offside" certain regulations. On July 9, at p. 27 of the transcript, he stated: . . .

So if there's something that's offside -- if an organization is doing something that's offside of the Act, for example, backdating options would be a good example, I mean there's many, many examples, but we're talking about backdating of options which had the effect of billions of dollars in terms of securities business globally, you don't hear anything about that because they were dealt with in a civilized fashion[.][page521] [ 81 ] He stated he was naive to believe that if he answered Dobell's letter and otherwise co-operated that he would be given a chance to get "onside" the regulations for the benefit of investors and ultimately repay the shareholder loans.

In re- examination of on July 29, 2010, he stated that in May 2005, he still didn't know what an accredited investor was and "I don't believe I do to this day". He said he did not recall ever reading the clause in the Maitland purchase agreement attesting to the purchaser's status as an accredited investor. However, he repeatedly criticized the limitations created by the accredited investor exemption, stating that it was unconstitutional, bad law and treated potential investors as "morons". He stated in re-examination: . . . It suggests that if you don't meet the threshold exactly, that you're a moron. . . .

Unlike-so in other words, it allows you to go to the corner store and buy lotto tickets. You don't have to be an accredited lotto buyer. You don't have to be an accredited casino player. But you have to be an accredited investor to participate in a-in a business project. And if you don't meet certain criteria, you're deemed to be a moron. And you're not allowed to participate.

It's just outrageous, as far as I'm concerned. [ 82 ] Grossman also stated that Maitland Capital is still a corporate entity which owns shares of Alogo, and that investors could have made money eventually but for the actions of the Commission. [ 83 ] In re-examination, he also specifically denied the allegations against him in each count. Analysis Counts 1-4 [ 84 ] As stated previously, all three accused are charged in counts 1 and 3 with trading in securities without being registered, as required by s. 25(1) of the Act, or filing a prospectus, as required by s. 53(1) of the Act.

In counts 2 and 4, Grossman and Ulfan are charged with authorizing, permitting or acquiescing in trades conducted by employees or representatives of Maitland Capital without having complied with ss. 25(1) and 53(1). [ 85 ] Counsel agreed that full submissions would be provided in this matter in writing, followed by oral responses to each other's submissions, and questions of the court.

Defence counsel has not argued that Grossman did not trade securities or authorize, permit or acquiesce in the trade of others; rather, she argued that, on all the evidence, compliance was the responsibility of Ulfan, which alleviates her client from any liability, and in any [page522] event the prosecution has not proved that the investors were not "accredited investors". That term was defined in Ontario Securities Commission Rule 45-501 as follows: "accredited investor" means . . . . . (

m) an individual who beneficially owns, or who together with a spouse beneficially own, financial assets having an aggregate realizable value, that, before taxes but net of any related liabilities, exceeds $1,000,000; (

n) an individual whose net income before taxes exceeded $200,000 in each of the two most recent years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of those years and who, in either case, has a reasonable expectation of exceeding the same net income level in the current year. [ 86 ] This definition was transferred from the Rules to a provision known as National Instrument 45-106 in September 2005, which was incorporated into the regulatory scheme.

The transfer in no way affects the analysis in this case. [ 87 ] It should be noted that pursuant to s. 1(1) of the Act, "Ontario securities law" is defined to include regulations made pursuant to the Act, and "regulations" are defined as including the Rules, unless the context indicates otherwise. [ 88 ] The prosecution made extensive submissions regarding the burden of proof with respect to the offences charged, all of which are in my view correct. The offence subsections, 122(1) (

b) and (c), state: Offences, general 122(1) Every person or company that, . . . . . (

b) makes a statement in any application, release, report, preliminary prospectus, prospectus, return, financial statement, information circular, take- over bid circular, issuer bid circular or other document required to be filed or furnished under Ontario securities law that, in a material respect and at the time and in the light of the circumstances under which it is made, is misleading or untrue or does not state a fact that is required to be stated or that is necessary to make the statement not misleading; or (

c) contravenes Ontario securities law, Is guilty of an offence and on conviction is liable to a fine of not more than $5 million or to imprisonment for a term of not more than five years less a day, or to both. [ 89 ] Section 122(3), under which Grossman and Ulfan are charged as officers and directors, states: [page523] Directors and officers

122(3) Every director or officer of a company or of a person other that an individual who authorizes, permits or acquiesces in thecommission of an offence under subsection (1) by the company or person, whether or not a charge has been laid or a finding of guilt has been made against the company or person inrespect of the offence under subsection (1), is guilty of an offence and is liable on conviction to a fine of not more than $5 million or to imprisonment for a term of not more thanfive years less a day, or to both. [90] With respect to actus reus, it is clear that the prosecution must prove beyond a reasonable doubt that the offences occurred: see R. v.Felderhof, [2007] O.J.

No. 2974, 2007 ONCJ 345, at paras. 172-76. In that case, Hyrn J. appropriately relied on the

definitions ofauthorize, permit and acquiesce contained in the Canadian Oxford Dictionary: Authorize: "sanction formally", "give authority" Permit: "give permission or consent to", "authorize", "allow", "give an opportunity to", "admit", "allow for" Acquiesce: "agree, esp. tacitly", "raise no objection", "accept" [91] With respect to mens rea, it is clear that offences under the Ontario Securities Act are matters of strict liability, meaning that theaccused are not liable if they prove that they were duly diligent in complying with the Act.

The leading definition of a strict liabilityoffence was established as follows in R. v. Sault Ste. Marie (City), (SCC), [1978] 2 S.C.R. 1299, [1978] S.C.J. No. 59,at p. 1326 S.C.R.: Offences in which there is no necessity for the prosecution to prove the existence of mens rea; the doing of the prohibited act prima facieimports the offence, leaving it open to the accused to avoid liability by proving that he took all reasonable care. This involvesconsideration of what a reasonable man would have done in the circumstances.

The defence will be available if the accused reasonablybelieved in a mistaken set of facts which, if true, would render the act or omission innocent, or if he took all reasonable steps to avoid theparticular event. These offences may properly be called offences of strict liability. [92] In R. v. Armaugh Corp., [1993] O.J. No. 4360 (C.J.), at para. 31, Westman J. adopted the reasoning in R. v. Richardson (1981), (ON CA), 34 O.R. (2d) 348, [1981] O.J. No. 2511 (Div.

Ct.) in ruling that securities offences are offences of strictliability: The purpose of the prohibition against trading in securities by a person who is not registered under the Act is, as Steele J. points out, toprotect the investing public from being defrauded.

That purpose puts the contravention of the prohibition in the category of a publicwelfare offence and it is now clear that public welfare offences, again as Steele J. says, are prima facie strict liability offences. [page524] [93] As submitted repeatedly by the prosecution, the purposes of the Act are as stated in Armaugh, supra, and the Securities Act, s. 1.1 --namely, the protection of the public, and the fostering of fair and efficient capital markets.

Actus reus [94] With respect to the commission of the actus reus, which as stated previously was not directly contested, in my view the prosecutionhas proved that it was committed as charged in counts 1 and 3. Grossman and Ulfan both clearly traded in Maitland securities withoutbeing registered and without a prospectus having been issued. Gatzsch testified that although he was contacted initially by Blaine,Grossman conducted many of the sales pitches to him. It should be noted that "trade" is defined broadly in s. 1(1) of the Securities Act:(

a) any sale or disposition of a security for valuable consideration, whether the terms of payment be on margin, instalment or otherwise,but does not include a purchase of a security or, except as provided in clause (

d) a transfer, pledge or encumbrance of securities for the purpose of giving collateral for a debt made in good faith. . . . . . (

e) any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the foregoing. [95] Feltham testified clearly that he met with Grossman at the Yonge Street office to discuss his $15,000 share purchase and receivedseveral subsequent sales calls from Grossman.

Shanmugarajah, as stated earlier, testified that Grossman called him before his thirdpurchase, telling him there was a minimum purchase requirement. [96] With respect to Ulfan, as summarized above, Van Londersele and Dunlop were clear that they arranged their share purchases withUlfan. [97] With respect to counts 2 and 4, as summarized above, seven investors testified clearly that representatives of Maitland called thenand negotiated sales.

In determining if Grossman and Ulfan authorized permitted, or acquiesced in these trades, I note the absence ofargument on this point by defence counsel. [98] I also note that the testimony of employees reveals that (1) both were involved in the hiring of salespeople; (2) both passed outcontact information to the salespeople; (3) salespeople reported to both of them; [page525]

(4) Cassidy testified that both were involvedin the day-to-day operation of the business; (5) both signed treasury directives to have shares issued; (6) both names appeared on sharecertificates; and (7) both put the investors' cheques in the bank and had signing authority. [99] In my view, all Crown witnesses were straightforward and credible in giving the testimony referred to above. [100] Grossman himself acknowledged that he was in charge of investor relations -- i.e., that he had authority over dealings withinvestors.

This testimony, taken with the above-noted testimony of prosecution witnesses, clearly shows that the accused authorized,permitted and acquiesced in the trades of all Maitland representatives. It is clear that the Crown has proved the actus reus of the offencein counts 1 to 4. [101] It should be noted that defence counsel has taken the position that some or all of the investors were in fact accredited investors.

According to s. 47(3) of the Provincial Offences Act, R.S.O. 1990, c.

P.33, the burden of proof that an accused's conduct falls within anexemption lies upon him: Burden of proving exception, etc. 47(3) The burden of proving that an authorization, exception, exemption or qualification prescribed by law operates in favour of thedefendant is on the defendant, and the prosecutor is not required, except by way of rebuttal, to prove that the authorization, exception,exemption or qualification does not operate in favour of the defendant, whether or not it is set out in the information. [102] Again, in my view, all of the investor witnesses were straightforward and credible.

It is patently clear that none of them exceptGatzsch were accredited investors. At one point, Feltham agreed that his family income was "pretty close" to $300,000; however, thatremark clearly does not indicate accredited investor status. With respect to Dentz, it is arguable that his partnership with his brother, andnot he alone, bought his shares; however, neither he nor the business were shown by the defence to be accredited investors.

Mens rea [103] Given that the offences are strict liability matters, in my view, if the accused cannot show that their trades fall within the accreditedinvestor exemption, they must demonstrate that they [page526] were duly diligent or took all reasonable care in determining that theirtrades fell within the exemption. [104] With respect to the defence of reasonable care or mistake of fact as defined in R. v. Sault Ste. Marie, supra, in my view the defencehas not been made out with respect to any of the sales described by investors.

Feltham was quite clear that Grossman nor anyone elseasked him about his income or assets.

As Dunlop stated, Ulfan was well aware of her income -- far short of that of an accredited investor.All of the other investors, except Van Londersele and Hoult, stated specifically that they were not asked about their income or assets.Defence counsel did not demonstrate through investors, employees or any other representative of Maitland Capital that any otherinvestors were asked, in conversation, about their income or assets. [105] Instead, counsel relies on the purchase agreements, which contain a clause in which the investor attests by signature that he or shemeets the definition of accredited investor.

In my view, the evidence on this point falls far short of meeting the test in Sault Ste. Marie,supra. First, Dunlop's testimony and the date on many of the documents make it clear that the purchase agreements were sent out afterthe subscription agreements were signed and the cheque picked up. In other words, the definition of accredited investor was notconveyed to the investor until after the purchase had been made.

Second, the majority of investors testified that they were unsure as towhether they received the purchase agreement and returned it; Elawar didn't remember reading the relevant clause, and Wyka did notunderstand it. It should also be noted that none of the employees who testified indicated that they asked purchasers about their assets orincome, or even that they knew about the exemption. [106] In a similar case, Euston Capital Corp. (Re), 2007 ABASC 46, 2007 LNABASC 49 (Sec.

Comm.), the Alberta SecuritiesCommission made the following finding regarding the duty to determine accredited investor status: We do not find it surprising that many investors, including some who may have had some business acumen or investment experience, didnot pay much attention to the content of the five-page Purchase Agreement when they signed it. The Purchase Agreement arrived withthe share certificate well after payment had been made for the securities.

Investors were not directly asked to confirm their accreditedinvestor status or advised that the transaction could not be completed without that confirmation.

Investors were heard from consideredthemselves shareholders -- as apparently they were -- and the transaction completed by that time and therefore saw no need to read carefully the Purchase Agreement. [page527] Schwartz, on behalf of Euston Capital, made no effort to assist investor understanding or highlight for investors the warranties andrepresentations that they were being asked to make -- he simply requested the investor to sign the Purchase Agreement and return it.Investors did as they had been asked: They signed and returned the Purchase Agreement paying no attention to its text and unaware thatsome further act, such as signing and returning the Purchase Agreement, was required of them to consummate the transaction.

Even ifwe were to accept that Euston Capital relied on the Purchase Agreement, there was evidence that for some investors the PurchaseAgreement was unreliable. For example, Euston Capital could not have relied on representations made by corporate investors in thePurchase Agreement because there were no representations in the Purchase Agreement applicable to accredited investors who werecorporate entities. . . . Nonetheless, it is the seller who ultimately bears the legal burden under the Act.

We therefore conclude that Euston Capital traded anddistributed previously unissued securities without having first made inquires and determined that the prospective purchaser of itssecurities qualified as an accredited investor before any subscription for securities was solicited.

We further find that Euston Capitalfailed to take reasonable steps to ensure that prospectus and registration exemptions were available to it in its distribution of its securities.We therefore find that Euston Capital was in violation of sections 75 and 110 of the Act each time it solicited its securities in reliance onthe accredited investor exemption in

section 5.1 of MI 45-103. [107] In R. v. Guettler, a decision of the Ontario Court of Justice dated February 5, 2001, Babe J. ruled that the accused, who had notproved that they fell within a particular exemption to the registration and prospectus exemptions, could not claim "mistake of fact". Hestated, at p. 24: . . . There might in some cases conceivably be room for a genuine mistake of fact as to the investment sophistication and financial meansof particular subscribers, but the evidence here indicates a complete failure to make any factual inquiry before accepting all profferedsubscriptions.

Even in true criminal offences, a deliberate failure to inquire when there is reason to inquire constitutes wilful blindness asto the facts, and does not afford a defence of honest mistake of fact: Sansregret v. the Queen (1985) (SCC), 18 C.C.C.(3d) 223 (S.C.C.). A fortiori in a strict liability offence where a mistake of fact must not only be honest but also reasonable, such failureto inquire where a reasonable man would cannot provide such a defence. Clearly, there was a duty here on Guettler to inquire behind theboilerplate of the Subscription Agreement.

[108] In my view, the reasons in Guettler and Euston Capital, above, outline clearly the duties of sellers to take reasonable steps to ensurethat investors fall within exemptions to the Regulations and Rules of the Securities Act. So does the analysis and case

summary of JohnSwaigen in his book of Regulatory Offences in Canada: Liabilities and Defences (Toronto: Carswell, 1992) at p. 81: In this respect, since there is an active, as well as a passive, aspect to the defence, mistake of fact involves establishing due diligence. Toshow that a [page528] mistake of fact was reasonable, the accused must establish that he or she took all reasonable steps and made allreasonable inquiries to find out the correct information.

As several courts have said, mistake of fact and due diligence are closely related,if not the same, since both come down to the question of whether the accused exercised all reasonable care. A perfunctory inquiry is not sufficient. Moreover, an employer cannot rely solely on the fact that employees have led him/her to believein incorrect facts. It has been held that an employer may not rely on reports to him/her by subordinates as a basis for establishing amistake of fact where there are available records that showed the employees' reports are not reliable.

Once the employer knows this, heor she has a duty to take further steps including hiring employees capable of preventing further violations. [109] Neither Grossman or Ulfan took reasonable steps to ascertain whether the investors they dealt with fell within the definition ofaccredited investors, or to ensure that the salespeople were taking proper measures. The prosecution testimony, summarized above, isclear and credible.

The fact that investors, after purchase, got an agreement which referred to the exemption, but was frequently notsigned and/or returned, does not meet the test of mistake of fact or reasonable care. [Nor] do the perfunctory discussions conducted witha couple of the witnesses. [110] Grossman's testimony, that he left all compliance matters to Ulfan, who he thought was registered, and did not really know what anaccredited investor is, is inherently incredible. He had been in the investment business for years and knew enough to file a report ofexempt distribution.

He stated that he was in charge of investor relations. He showed some sophistication in the testimony aboutactivities which are "offside the Act", reviewed on para. 80, above. [111] However, even if he believed that Ulfan was registered, such belief does not make out a defence of reasonable care, or mistake offact. As president and a director, he clearly had a responsibility to make concerted efforts to ensure compliance with securities legislationby himself, salespeople and other employees. He and Ulfan fell far short of this standard. [112] Grossman and Ulfan will be convicted on counts 1-4.

The company will also be convicted as charged on counts 1 and 3; as Babe J.states, at p. 1 in Guettler, supra, and as established in R. v. Fell (1981), (ON CA), 34 O.R. (2d) 665, [1981] O.J. No.3176, 64 C.C.C. (2d) 456 (C.A.), the corporation is responsible for the acts of its "directing minds". Counts 5, 6, 7 and 8 [113] As stated previously, in count 5, all three accused are charged with making undertakings as to the future value of the [page529]shares; in count 6, they are charged with authorizing, permitting or acquiescing in the same behaviour by salespersons.

In counts 7 and 8,all three are charged with making representation that the shares would be listed on a stock exchange, and with authorizing, permitting oracquiescing in the same behaviour by salespeople. [114] The prosecution accepts the burden of proving beyond a reasonable doubt that these representations took place, and acknowledgesthat with respect to mens rea a due diligence defence is possible. [115] With respect to counts 5 and 7, there is in my view adequate proof that Grossman and Ulfan made the prohibited representations.As stated above, Feltham, who was credible, testified that both Grossman and Ulfan told him that shares were about to skyrocket, and belisted.

Dunlop testified that Ulfan told salespeople that the company was a certain number of days away from listing and that he told herthat listing was projected. Gatzsch testified that Grossman told him that the shares were going to be listed. As stated in the

summary ofDunlop's evidence, at least one marketing document referred to above was signed by Grossman, calling himself a "pre-IPO professional"and specialist. [116] In my view, it is clear that Grossman and Ulfan both made undertakings about future value and stock market listings. The defenceof due diligence is in no way applicable. [117] With respect to counts 6 and 8, the prosecution has also proved that various salespeople made representations about value andfuture listings.

Gatzsch testified that Blaine told him that the share value would go to $4 and that listing would happen in 12 to 16months; Shanmugarajah gave similar testimony about Blaine.

As stated above, investors Wellings, Wyka, Dentz, Freeley and Elawar alltestified in chief that salespeople told them that the stock would go up in price, especially when listed; however, when pressed in cross-examination they generally said that they were told that the events "could" happen or "were likely to happen", but that there were noguarantees. [118] Salesmen Geller and Valde both testified that they told investors that the company would go public; Geller told them that shareprices would increase. Valde said that he relied on the Prince script, and salesman McKenzie referred to using a sales script.

Althoughthe Prince script, in its typed and printed form, does not directly state that Maitland shares will be listed, this representation is handprinted on the document. [119] In my view, on all of the evidence, and despite the waivering of some witnesses, it is clear that salespeople other than [page530]Grossman and Ulfan made undertakings as to the future value of shares and representations that the shares would be listed.

As statedwith respect to counts 6 and 8, the only logical inference to be drawn is that Grossman and Ulfan "authorized, permitted or acquiesced" inthese undertakings and representatives given the following:(1) they made the prohibited references themselves;

(2) Ulfan was heard telling salespeople to make these references; (3) they were bothinvolved in day-to-day operations and salespeople referred to both of them as being in charge; (4) the Prince script, and all Maitlandmarketing manuals referred to above, strongly suggest that share price increases and listings were possible, including reference to "pre-IPO opportunity" in the script and in a letter signed by Grossman and untruthful references to previous Maitland IPO successes in thescript; and (5) they provided no manuals, directives or training to ensure that misrepresentation did not occur.

[ 120 ] As noted in the

summary of Grossman's testimony, he simply boldly denied commission of these offences. In my view, this testimony is not credible. As found previously, he made and authorized or permitted prohibited trades, and filed a misleading report with the Commission. Marketing documents sent to investors and the website were misleading, representing Maitland Capital as the energy explorer. Misleading representations were made in many documents sent to investors. He clearly has no respect for the prohibitions in the Act, given his strong criticisms of certain provisions.

His statement that he did not and perhaps still does not understand the meaning of "accredited investor", a straightforward concept, is not believable. He put $1.5 million of investor moneys into his own business. He was in the office daily, in earshot of the misrepresentations of salespeople who he did not train, monitor or guide.

His flat denials are simply not credible, and contradicted by the bulk of the evidence. [ 121 ] In my view, Dunlop's remark that she once heard Grossman tell Geller not to mention listings does not provide a defence of due diligence. [ 122 ] It should be noted that defence counsel argues, without providing authorities, that Geller and Van Londersele's testimony [page531] should not be considered, as they were not cross-examined. However, as the prosecution submits, Grossman was given the chance to cross-examine them personally, after he had terminated two lawyers, and chose not to do so.

After firing his second lawyer, he waited eight months to find a third lawyer, who shortly thereafter brought an application in Superior Court which was immediately dismissed. These steps created very lengthy delays during which Van Londersele died and Geller disappeared. [ 123 ] The lack of cross-examination goes at most to weight and admissibility. Both were credible in chief. I also note that the testimony of neither is essential to conviction on any counts, given all of the other evidence, with the possible exception of Geller's acknowledgement that he told investors that the share price would go up.

This remark, however, which supports count 7, was straightforward and credible in view of other testimony about widespread representations of imminent price increases within the company. [ 124 ] Grossman and Ulfan will be convicted on counts 4 to 8. The company will be convicted as charged, given that it is responsible for the acts of its directing minds. Count 9 [ 125 ] With respect to count 9, it is clear that the report of exempt distribution filed by Maitland, and signed by Grossman, was the incorrect form -- it being a Form 45-103F1, rather than a Form 51-501F1 required under Rule 45-501.

The report required that commissions paid in respect of trades and the exemption relied upon be stated. Neither of these items were included. [ 126 ] Furthermore, the report listed the sales to Shanmugarajah, Feltham and Van Londersele as exempt trades. As found above, they were not accredited investors, the trades were not exempt and Grossman was not duly diligent in assuring that prohibited trades were not made. [ 127 ] As stated above, Grossman attributed preparation of the report to Wortzman or Haller.

However, in my view, as the president of the company, and as the director who signed the report, he was responsible for ensuring that it was fully and accurately prepared. He took no such reasonable care. In my view, it is clear that the report was not complete, and that it contained a material misrepresentation about the three trades. He and Maitland Capital will be convicted on count 9. [page532] Count 10 [ 128 ] In my view, Ulfan, as a director and treasurer of the company, was also responsible for the filing of a complete report with no misleading representation.

He has not appeared at trial to provide a defence, and there is no evidence that he was duly diligent regarding proper filings. He will be convicted. [ 129 ] In my view, count 10 is duplicative of count 9 with respect to Grossman. He clearly was responsible for filing the improper report, as stated above, rather than acquiescing, authorizing or permitting it. This charge against him will be dismissed. Defendants convicted.