ALBERTA SECURITIES COMMISSION

In the Matter of the Securities Act (S.A. 1981, c.S-6.1, as amended)

(the “Act”)

and in the matter of

CTC Crown Technologies Corporation,
John Tansowny, Margaret Arbeau,
Darrell Toma
(the “Respondents”)

REASONS FOR DECISION OF THE

ALBERTA SECURITIES COMMISSION

BEFORE: Eric T. Spink

Vice-Chair

Ian E. W. McConnan, FCA

Commission Member

APPEARANCES: Lise Houle

for the staff of the Alberta Securities
Commission

Dale E. Tumbach
for the Respondents CTC Crown Technologies
Corporation, John Tansowny and Margaret
Arbeau

HEARD: In Edmonton, Alberta

August 6, 1998

(1999), 8 ASCS 1940 #08/27

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1. INTRODUCTION

This is a hearing under sections 165 and 167.1 of the Securities Act, S.A. 1981,
c. S-6.1 (the “Act”).

A Notice of Hearing was issued on April 27, 1998. The Notice of Hearing alleges,
in essence, that CTC Crown Technologies Corporation (“CTC”) and the individual
Respondents failed to provide full, true and plain disclosure of all material facts in a
prospectus filed with the Commission, and that they included an untrue statement of a
material fact in an Offering Memorandum filed with the Commission. It alleges that the
Respondents made misrepresentations in relation to two matters: 1) remuneration paid
by CTC to its directors and officers; and 2) the evaluation of a proposed major
transaction by an independent consultant.

In June of 1998, the Respondent Darrell Toma (“Toma”) executed a Settlement

Agreement that was subsequently approved by the Commission. The hearing as
against the other Respondents proceeded on August 6, 1998.

2. BACKGROUND

A Statement of Agreed Facts was entered at the outset of the hearing. That
Statement included the following (cross-references to documents entered in evidence
have been omitted here):

2.1 CTC Crown Technologies Corporation ("CTC") was incorporated under

the laws of Alberta on January 10, 1995 and has its head office and
registered office in Edmonton, Alberta;

2.2 At all material times, John Tansowny ("Tansowny") was C hief

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Executive Officer, Chief Financial Officer, President, Secretary-Treasurer

and a director of CTC, except for the period June 10, 1996 to October 10,
1996 during which time he had resigned as a director and officer of CTC;

2.3 At all material times, Margaret Arbeau ("Arbeau") was a director of CTC;

2.4 CTC became a reporting issuer on May 4, 1995, by filing a receipt for the
"Prospectus" pursuant to the Act and Alberta Securities Commission
Policy 4.11 ("Policy 4.11") and obtaining a receipt therefor;

2.5 Shares of CTC have been suspended from trading on the Alberta Stock
Exchange since August 15, 1997 and delisted since May 3, 1998;

2.6 The Prospectus contained a certificate, as required by subsections 90(1)

and 90(2) of the Act, which was signed by Tansowny as Chief Executive
Officer and Chief Financial Officer, and by Arbeau and Toma as two
additional directors of CTC. The certificate stated:

The foregoing constitutes full, true and plain disclosure of all

material facts relating to the securities offered by this prospectus as
required by Part 8 of the Securities Act and the regulations under it.

2.7 In the Prospectus, and in accordance with Policy 4.11 and Commission
Staff’s policies and procedures, CTC stated:

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2.7.1 "Prior to closing a major transaction, the Corporation shall obtain a

current evaluation of the Corporation, business, asset or property
from an independent qualified consultant ...";

2.7.2 "No remuneration is to be paid to any director or officer of the

Corporation until sufficient cash flow from operations has been
established ...";

2.8 In an Offering Memorandum dated December 1, 1995 and filed

February 5, 1996, CTC stated:

2.8.1 "As of the date hereof, no remuneration has been paid by the
Corporation to any of its directors and officers."

2.9 The Offering Memorandum contained a certificate, as required by Form 43

and section 127(1) of the Rules, which was signed by Tansowny as Chief
Executive Officer, Chief Financial Officer, President, Secretary-Treasurer
and Director and by Toma as Director. The certificate stated:

The foregoing contain no untrue statement of a material fact and

does not omit to state a material fact that is required to be stated or
omit to state a material fact that is necessary to be stated in order for
the statement not to be misleading.

2.10 An Information Circular filed with the Commission on November 9, 1995

and delivered to CTC shareholders for a shareholders’ meeting on
December 14, 1995 contained accurate disclosure (at page 7) with
respect to Tansowny, Arbeau and Toma having

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received consulting fees, independent from their duties as directors,

relating to the due diligence and review of CTC’s proposed major
transaction:

"The directors have received, independent from their duties as

directors, independent consulting fees relating to the due diligence
and review of the acquisition proposed as the Major Transaction
described herein. The total consulting fees received were less than
$30,000.00."

At page 5 of the Information Circular, it is also stated:

"The Corporation does not compensate its officers or directors in their

capacities as such."

2.11 Tansowny received $19,500.00 for services rendered to CTC between

March 1, 1995 and January 31, 1996 and Margaret Arbeau received
$16,500.00 for services rendered during the same period.

2.12 CTC’s Major Transaction, in accordance with Policy 4.11, was completed
in December, 1995.

The Statement of Agreed Facts refers to Policy 4.11, which deals with Junior
Capital Pool Offerings (“JCPs”). Paragraph 2.12 of Policy 4.11, headed “Use of
Proceeds” says in part:

2.12.1 At least 70% of all proceeds form the sale of all securities, including
proceeds from sales prior to the Prospectus, shall

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be utilized by the issuer in pursuit of its intended business purpose

and objectives and shall not be used for...

2.12.1.2 officers’ or director’s salaries or other forms of

compensation....

The Statement of Agreed Facts included some evidence of Toma, who also
testified at the hearing. In addition, we heard evidence from Pierre Vermette, a financial
analyst with the Commission, and from John Tansowny (“Tansowny”). Margaret Arbeau
(“Arbeau”), who is married to Tansowny, was prepared to testify but did not. Instead,
counsel stipulated that her evidence would corroborate the testimony of her husband.

Although the facts in this case are considerably more intricate than those set out
in the Agreed Statement, there is almost no dispute about the relevant facts. Counsel
for the Respondents conceded that “technical breaches” occurred, but he argued
forcefully that a “due diligence” defence was established by the evidence.

The issues to be resolved relate to the context in which the particular events
occurred and what the Respondents thought, or should have thought, at the time. It is
therefore convenient to review the evidence and our findings under separate headings
relating to the allegations contained in the Notice of Hearing, the defence of due
diligence, and other issues that arose in the proceedings.

3. EVIDENCE AND FINDINGS

(a) Alleged Misrepresentations Regarding Remuneration of Directors and Officers

In 1994, prior to the creation of CTC, Tansowny, Arbeau and Toma were involved with
a private corporation, Crown Holdings Incorporated (“Crown”). Tansowny

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was CEO, president and director of Crown. Toma was a director and shareholder.
Tansowny and Arbeau were the major shareholders. Other persons were involved as
well. Tansowny described Crown as a “sophisticated investment club or private mutual
fund” that would identify targets, assist them in business development, and possibly
take them public.

In January of 1995, CTC was incorporated at the direction of Tansowny.

Tansowny became the CEO, CFO, president, secretary-treasurer and director. Toma
and Arbeau were the other directors. From the outset, the intention was for CTC, as a
JCP, to be the vehicle for taking an appropriate technology company public. After the
CTC prospectus was finalized, Crown purchased 100% of the CTC shares offered
pursuant to the prospectus.

The Commission issued a receipt for the CTC prospectus on May 4, 1995. The
prospectus states: “No remuneration is to be paid to any director or officer of the
Corporation until sufficient cash flow from operations has been established...”. The
evidence showed that CTC never did generate positive cash flow from operations.

Tansowny’s evidence was that, as of May 4, 1995, no remuneration had been

paid by CTC to any director or officer. He said that he and Arbeau had been preparing
time sheets and invoicing Crown, and had been paid by Crown, for work done in
relation to CTC since February of 1995. Sometime i n late May of 1995, Tansowny,
Arbeau and Toma met with their lawyer to discuss various matters relating to CTC.
Tansowny testified that, as a result of that meeting, he understood that he and the other
directors could charge CTC for consulting fees provided: 1) the work was necessary; 2)
the services were outside the normal duties of an officer or director of a JCP; 3) they
were qualified to perform the work; 4) the fees were reasonable; and 5) the total cost
remained within the “30% rule” in Policy 4.11.

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Sometime early in June, new back-dated invoices were prepared and submitted
to CTC for that same work, with the same time sheets. The amounts previously paid to
Tansowny and Arbeau by Crown were then recorded in the general ledger of CTC as
though they had been paid by CTC shortly after the dates shown on the back-dated
invoices. In this way, Crown was re-imbursed for what had been paid to Tansowny and
Arbeau.

Copies of the invoices and time sheets submitted by Tansowny and Arbeau to
CTC for the period e nding December 31, 1995 were entered in evidence. All of
Tansowny’s invoices are for entitled “Invoice for Consulting Services Rendered”. Most
of Arbeau’s invoices are for “Administrative, Professional and Due Diligence Services”.
Payments to Tansowny for this period totalled $19,500, and payments to Arbeau
totalled $16,500.

No invoices or time sheets covering the period after December 31, 1995 were in
evidence. The evidence did show that, for the 6 month period ending July 31, 1996,
Tansowny received a further $16,500, and Arbeau received a further $12,000 from
CTC.

The time sheets submitted to CTC by Tansowny and Arbeau that were in
evidence, covering the period ending December 31, 1995, described a wide variety of
activities. Tansowny testified that the work described in the time sheets was only a
small portion of the work actually done, and reflected only the services deemed by them
to be outside the normal duties of an officer or director of a JCP.

The time sheets are largely handwritten and show individual entries under
particular dates, with a number of hours (between 0.5 and 8.0) and a brief description
for each entry. For example, Tansowny’s time sheet for June, 1995 is as follows:

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Date Hours Description

June 3 3.0 Finalize Airlite Investor Package
June 5 2.0 Revise Airlite Financial Plan
June 6 1.0 Research Benefits Plan / Airlite
June 10 3.0 Prepare CTC Promo Package
June 13 2.0 Airlite - Marketing Plan
June 15 2.0 Prepare CTC promotional plans
June 16 1.0 Research Marathon Coatings
June 19 1.0 Review Airlite Audit details
June 20 5.0 Medallion Group Due Diligence
June 22 1.0 Due Diligence on Medallion
June 23 2.0 Review Marketing Plan for Airlite
June 26 2.0 Marathon Due Diligence / Bus Plan
June 27 4.0 Prepare Marathon Offer / D ue Diligence
June 28 2.0 Write News Release / Distribute
June 29 3.0 Research Marathon / Prepare Offer (illegible)
June 30 1.0 Marathon Due Diligence / R&D Claim
TOTALS 35

For this, Tansowny invoiced CTC $1500.00, which was typical for most months. For
some months, Tansowny submitted two invoices for $1500.00 each.

Arbeau’s time sheets were similar, although they provided somewhat more detail
under “Description”, placing all the various activities under one of three categories: “due
diligence”; “administrative”; or “professional”. For example, Arbeau’s time sheet for
June, 1995 includes the following entries (this is a partial list):

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Date Hours Description

June 1 3.5 Due diligence – Marathon
1.5 Prof’l services - review agreements, master packages,
report
3.0 Administrative - accounting, telephone
June 7 4.5 Prof’l - policies & procedures manual - type -write –
revise
June 12 4.0 Prof’l - revise agrmnts, edit, type revisions
1.5 Admin - post office
June 13 5.5 Due diligence - Medallion Group
June 14 1.0 Due Diligence - Medallion
4.0 Administrative - telephone calls, typing, clerical duties,
prepare mailing list – database
June 19 4.5 Prof’l services - review Marathon’s R&D file - tax
claim, prepare recommendations for accountant’s
review
1.5 Administration

Arbeau’s time sheet for June, 1995 shows a total of 80.5 hours, for which CTC was
invoiced $1500.00. This was typical. Although the number of hours per month varied,
Arbeau invoiced CTC $1500.00 per month.

Mr. Vermette testified that he reviewed the invoices and time sheets in detail. In
his opinion, most of Tansowny’s and Arbeau’s services, as described, fall within the
normal duties of an officer or director of a JCP. Mr. Vermette indicated that, in his
opinion, some of these services could have been properly provided to CTC, for a fee, by
outside consultants, but not by CTC’s officers or directors. He also testified that some of
the services described in the invoices and time sheets appeared to be work

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provided for potential target companies (e.g. editing the business plan, and designing
and drafting an organization chart for Airlite, as described in Tansowny’s April, 1995
invoice to CTC). In Mr. Vermette’s opinion, such services are beyond the scope of what
a JCP is expected to do, regardless of whether the services are performed by a director
or officer of the JCP, or by a consultant paid by the JCP.

CTC’s Offering Memorandum dated December 1, 1995 says that “no

remuneration has been paid by the Corporation to any of its directors and officers”.
Toma and Tansowny both testified that this statement was included in the Offering
Memorandum by error, and that the statement should have included the additional
phrase: “in their capacity as Directors and Officers”. Tansowny testified that, when he
saw a draft version of the Offering Memorandum he was sufficiently concerned about
this issue to bring it to the attention of legal counsel. However, both he and Toma
signed the Certificate page of the Offering Memorandum without anything being
attached to it. Tansowny admitted that, although he was concerned that the disclosure
was wrong, he never saw a revised version of that disclosure and does not know
whether a revised version was ever prepared.

The CTC Information Circular dated November 9, 1995 contains different

disclosure. According to Tansowny, the original draft of the information circular
contained the same statement as the Offering Memorandum (that no remuneration had
been paid to officers and directors). This led Tansowny to discuss the issue with his
legal counsel and, as a result of these discussions, the Information Circular was
revised. According to the Statement of Agreed Facts, the Information Circular contained
“accurate disclosure” with respect to Tansowny, Arbeau and Toma having received
consulting fees. We discuss the Information Circular under a separate heading, below.

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We find that the statements in CTC’s Prospectus and Offering Memorandum

regarding remuneration of directors and officers were misrepresentations as defined in
the Act.

We agree with Mr. Vermette’s assessment of the services as described in the

invoices and time sheets. Most of the services provided by Tansowny and Arbeau were
not significantly different from what is normally expected of a JCP’s directors and
officers. The Prospectus says that CTC will identify and evaluate prospective target
companies, which is exactly what the Respondents were doing. The other services
described often appeared to be work done on behalf of target companies, which is not
expected or appropriate for a JCP. Appropriate or not, all these services were paid for
by CTC. Those payments were clearly remuneration of the officers and directors,
contrary to the statements in the Prospectus and Offering Memorandum.

Mr. Vermette testified that Commission staff always require specific prospectus
disclosure to ensure that the directors and officers of a JCP do not receive any
remuneration for services provided prior to completion of the major transaction. Mr.
Vermette viewed the disclosure in the CTC prospectus as exceeding the normal staff
requirements in that it provided for no remuneration until sufficient cash flow from
operations had been established, and most JCPs have no cash flow until well after
completion of a major transaction. Mr. Vermette also testified that the rationale for
denying remuneration is that directors and officers receive cheap stock and options at
the time the JCP is formed.

We agree with Mr. Vermette’s opinion on the rationale for denying remuneration
to directors and officers of JCPs. The cheap stock and options received by a JCP’s
directors and officers provide an obvious incentive for them to pursue a successful
major transaction. It is well known that the performance of a JCP’s directors and officers
is the single most important factor in the success or failure of the JCP. It is understood

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that, when investing in a JCP at the IPO stage or anytime before the major transaction,
one is really investing solely in the directors and officers because there is nothing else
to distinguish one JCP from another. If directors and officers were remunerated by the
JCP prior to the major transaction, it would create other incentives for directors and
officers and compromise the entire JCP system. That is why all JCP prospectuses are
required to disclose that no remuneration is to be paid to the officers and directors for
services provided prior to completion of the major transaction.

(b) Alleged Misrepresentation Regarding Independent Consultant

The Prospectus said that:

“Prior to closing a major transaction, the Corporation shall obtain a current

evaluation of the Corporation, business, asset or property from an
independent qualified consultant...”

This did not occur. The evaluation of the major transaction target was performed
primarily by Mr. Toma, with contributions by Tansowny and Arbeau, for which they were
paid by CTC. We find that this statement in the Prospectus is a misrepresentation.

(c) Due Diligence Defence

The Respondents’ position is that they never knew that they were doing anything
wrong. Tansowny, who was clearly the dominant figure in every aspect of CTC’s affairs,
testified that he understood that his lawyers approved of everything that occurred
except for the error in the Offering Memorandum, which the lawyers acknowledged as
an error on their part.

The Respondents’ position requires that we address the following issues:

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(i) whether due diligence can be a defence in this type of proceeding;

(ii) whether the Respondents’ position, if established, amounts to due

diligence; and

(iii) whether the Respondents’ position has been established by the evidence.

(i) whether due diligence can be a defence in this type of proceeding

If this were a prosecution of an alleged offence under the Act, then due diligence
could be a complete defence. That is because offences under the Act are “strict liability”
offences according to the categories described by the Supreme Court of Canada in R.
v. Sault Ste. Marie (1978), 85 D.L.R. (3d) 161. Dickson J. described this category as
follows, at pp. 181-2:

Offences in which there is no necessity for the prosecution to

prove the existence of mens rea; the doing of the prohibited
act prima facie imports the offence, leaving it open to the
accused to avoid liability by proving that he took all
reasonable care. This involves consideration of what a
reasonable man would have done in the circumstances. The
defence will be available if the accused reasonably believed
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 the particular event. These offences may properly be
called offences of strict liability.

Because these proceedings are not a prosecution of an alleged offence under

the Act, the defence of due diligence is not available to the Respondents (Gordon
Capital Corporation v. Ontario Securities Commission (1991), 14 OSCB 2713). These
proceedings are regulatory and any sanctions we impose are intended to protect the

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public. This is distinct from the quasi-criminal proceedings of a prosecution under the
Act and the penal consequences that may flow from such a prosecution. So, even if the
Respondents were able to establish due diligence sufficient to provide a defence to a
prosecution under the Act, that would not necessarily prevent the Commission from
exercising its regulatory and discretionary powers to impose sanctions upon the
Respondents.

Notwithstanding that due diligence is not a defence in this type of proceeding, it

may properly be considered b y the Commission as a relevant factor in determining what
sanctions are appropriate. Even if the Respondents’ actions fall short of due diligence,
they may still be relevant in determining what sanctions are appropriate.

(ii) whether the Respondents’ position, if established, amounts to due diligence

The term “due diligence” is often used loosely. Here we are concerned with
whether the Respondents’ position, if established, amounts to due diligence as that
term was used in the Sault Ste. Marie decision.

There is a distinction between a reasonable belief in a mistaken set of facts, and

a mistake of law, as described by McGillivray C.J.A. in R. V. MacDonald (1983), 24 Alta.
L.R. (2d) 187. Mistaken facts may amount to due diligence; ignorance or mistake about
the state of the law is not due diligence.

In our view, the Respondents’ position in relation to most of the allegations is that
they were ignorant of the law. The Respondents knew exactly what they were doing in
receiving payments from CTC and in eva luating the proposed major transaction. They
suggest that they had reasonable grounds to believe that they were doing nothing
wrong. Even if that is so, it is not due diligence.

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Due diligence might be established in relation to the misrepresentation in the

Offering Memorandum. Tansowny testified that he notified his lawyers about the
inadequate disclosure in the Offering Memorandum and that he expected them to
correct it. That could be due diligence because it could be a mistake of fact.

(iii) whether the Respondents’ position has been established by the evidence

The Respondents have not shown that they were duly diligent. We find that the
evidence falls far short of establishing due diligence. We also find that Tansowny’s
evidence on a number of key points was not credible.

With respect to the time sheets initially prepared for Crown, and subsequently
submitted to CTC, there was the following exchange between Tansowny and Ms.
Houle:

Q: So is fair to say that it was anticipated that these would eventually be

charged back to CTC as early as February of 1995?
A: No. We had a number of potential projects in mind and CTC was
contemplated and it was work being done by Crown Holdings for CTC. So
in our time sheet evaluation we just identified CTC and there was no intent
to bill anybody.
Q: So just for example, the work done with respect to the Airlite project, at the
time that it was being done was it being done for Crown Holdings or for
CTC?
A: Airlite was the target, was a target for CTC. And the work, I don’t know, it is
a fine line. Was it being done for Crown Holdings or CTC? CTC was a
project for Crown Holdings and there wasn’t a company existing or a public
entity at that point. It was a concept, that is all.

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Later, there was the following exchange between Tansowny and the panel chair
relating to the time sheets :

Q: To take the first set for February of 1995, how were you able to determine
as you made those entries that the particular work being done was above
and beyond the normal duties associated with a person in your position with
CTC?
A: Oh, I think that you know fundamentally when you sort of cross what I
would call an administrative line and the work that you are performing is not
managerial in the sense of managing the corporation and you are getting
into detail that would normally be hired. If I am preparing a job description
or preparing an employment contract those would be services that would
normally be hired. I am looking at analyzing the InTouch proposal which
was, if you look on February 3rd, I spent two hours in detailing and
reviewing the marketing plans for InTouch, talking to the management and
some of their customers. It is a subjective allocation, I guess, but the
question is, is it fair and is it reasonable? And the question is, would
someone have to have been hired to do it? I don’t know who can answer
that question today. It was my judgment in assigning this work that we
would have had to hire someone.

We cannot reconcile Tansowny’s statement that “there was no intent to bill anyone” with
his subsequent explanation of how he prepared the February 1995 time sheet. We are
satisfied that Tansowny intended to charge CTC for these services from the outset.

With respect to the legal advice upon which Tansowny supposedly relied, we
note that the evidence concerning that legal advice was far from complete, and far from

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consistent. In order to show reasonable reliance on legal advice it would be necessary

to show that the legal advisors were fully aware of the facts, and that they provided
clear legal advice on the particular activity in question. The evidence here does not
show either of these things.

Although Tansowny testified that he clearly understood that he and Arbeau could
bill CTC for consulting fees, we have great difficulty seeing how he could reasonably
have reached that conclusion. For example, there was the following exchange between
Tansowny and Ms. Houle regarding advice received from legal counsel:

Q: Was there any specific discussion about providing services before or after
the major transaction, and whether you could be paid for those?
A: No, none whatsoever. The only comment that—no, he did mention that to
remunerate as an officer or director you had to be removed from the junior
capital pool. You had to have completed your major transaction before the
company could hire an officer or director on salary or under a contract.

Tansowny acknowledged that CTC’s lawyers did not see the invoices that had been
charged to Crown and were later charged to CTC. The obvious issue was whether the
services being paid for constituted remuneration of officers and directors, but there is no
evidence that CTC’s lawyers knew exactly what the CTC directors were doing, or that
they provided legal advice on that particular point. On balance, the evidence suggests
that CTC’s lawyers did not know what the CTC directors were doing, and that they did
not provide specific legal advice on the remuneration issue.

Toma was involved in several meetings with CTC’s lawyers, but could recall only
one that dealt with the payment of consulting fees. Toma testified that the discussion at

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that meeting did not include any consideration of whether consulting fees could be paid
for services that might fall within the duties of a director or officer. Toma said:

“There was no specifics given which said this is the scope of work
that is possible, this is not the scope of work that is possible. The
only short, brief statement made was you can provide consulting
fees as long as they are reasonable and you are qualified. And that
is my recollection.”

Although Toma was apparently confused about the date of that particular meeting, we
are satisfied that the meeting was the same one attended by Tansowny and described
by Tansowny in his evidence. Tansowny’s description of the meeting was different from
Toma’s. Tansowny suggested that the discussion about consulting fees was more
extensive and he testified that, as a result of that meeting, he understood that “the
consulting fees are fine”. We prefer Toma’s evidence. In our view, Tansowny heard
what he wanted to hear about consulting fees and there was no reasonable basis for his
conclusion that he and Arbeau were entitled to charge consulting fees as they did.

After that meeting, we note that Toma received assurances from Tansowny, but
not from CTC’s legal counsel, that consulting fees could be charged to CTC.

Other evidence suggests that Tansowny misled CTC’s lawyers about the nature
of the services for which consulting fees were charged. Tansowny’s letter to CTC’s
lawyers dated October 12, 1995 (exhibit 5) includes the following statements:

With reference to our conversation about Directors’ remuneration,

the following summarizes amounts paid to Directors to October 1,
1995 for contract consulting work performed on behalf of CTC.
...

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I am concerned about these fees after our conversation as my

understanding was that these would not be a problem as long as
the work was for specific assignments rather than “general
administration”.

Although it appears that some of Toma’s services may have been performed pursuant
to a contract and specific assignments, Tansowny admitted that there were no contracts
or specific assignments for the work done prior to June of 1995. He was vague as to
whether he or Arbeau had contracts fo r subsequent work, and about how it was
assigned to them. On the evidence presented, we find it impossible to characterize the
services described in the time sheets of Tansowny and Arbeau as either “contract
consulting work” or “specific assignments”. Those services, as we have found, were
very much in the nature of “general administration”.

Exhibit 5 was the clearest evidence before us relating to communications

between Tansowny and CTC’s lawyers. In our view, it misrepresents what Tansowny
and Arbeau were doing. The fact that Tansowny would deliberately conceal certain
facts from CTC’s lawyers is completely inconsistent with any suggestion that he was
reasonably relying on legal advice.

We do not know what other information the lawyers may have had, or how the
lawyers interpreted Tansowny’s correspondence. No correspondence from CTC’s
lawyers to CTC or its directors was entered in evidence. Two letters from CTC’s lawyers
to Commission staff, written during the course of staff’s investigation early in 1997, were
entered in evidence. Respondents’ counsel argued forcefully that we should view the
positions taken by CTC’s lawyers in those two letters as reflecting the legal advice
earlier provided to CTC and Tansowny. We cannot accept that view. These two le tters
appear to us to contain submissions made on behalf of CTC and its directors. We see
nothing in them that indicates what advice was given to CTC or its directors. It would

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have been helpful to have heard evidence from CTC’s lawyers, but that did not occur
and we cannot speculate what their evidence might have been.

Tansowny was not an impressive witness and much of his evidence was
unsatisfactory. This was particularly so regarding his interpretation of the Prospectus.
Tansowny’s position was that the statement “no remuneration is to be paid to any
director or officer...” must be interpreted as if it included the additional phrase “in their
capacity as a director or officer”. In one of his answers, Tansowny said:

“And, you know, my background is personnel. If somebody says

there is no remuneration paid to a director my understanding of
that means in his capacity as a director. Now you can interpret that
however you want. If the director is a consultant and provides
consulting services, are the fees that he receives as a consultant
remuneration as a director? I don’t know. I think that is subject to
interpretation.”

Tansowny took a similarly flexible position with respect to Toma’s evaluation of

CTC’s major transaction target, and whether such evaluation was “independent”
according to the disclosure in the Prospectus. Tansowny testified that he saw no conflict
of interest in CTC’s directors and officers being employed by CTC as consultants
because, in each role, their interests were the same. This led to the following exchange
between Tansowny and the panel chair:

Q: Do you agree with me now that [Toma] is not independent?

A: Well, I don’t know if I agree. I think that it is again subject to the
interpretation of what independent means. He’s an independent consultant
and is he independent from CTC? As an individual he is but as a business
he’s not.

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Q: Then don’t we get back to the conflict of interest question? If he’s not—if
he’s truly independent you have a conflict of interest, don’t you?
A: Well, in my mind you don’t because he’s performing services for an entity
that he’s a stakeholder in. So it can’t be a conflict.
Q: If your interests are the same you have no conflict. Am I correct?
A: Yes.
Q: If your interests are different then you are independent. Do you agree with
that?
A: I think so, yes.

Tansowny’s evidence on these points is obviously self-serving and we find that it is not
credible. The statements in the prospectus are clear. Any attempt to interpret them in
the manner suggested by Tansowny is obviously untenable. It makes a mockery of the
certificates signed by the Respondents saying that the Prospectus contains “full, true
and plain disclosure of all material facts”. If such contrived interpretations were
acceptable, no one could safely rely upon such disclosure. We do not believe that
Tansowny actually thought the statements in the prospectus were “subject to
interpretation”. He simply chose to ignore them.

We reject the argument that Tansowny acted in reasonable reliance on legal

advice in this matter. In our view, the most sensible conclusion to be drawn from the
evidence, and our finding, is that Tansowny knew that it was improper for CTC to make
payments to its directors, and that CTC improperly failed to obtain an independent
evaluation of its proposed Major Transaction.

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(d) Disclosure in the Offering Memorandum

We accept that the misrepresentation in the Offering Memorandum may have

occurred partly due to an error by CTC’s lawyers. However, the ultimate responsibility
for the contents of the Offering Memorandum still rests with the CTC directors who
signed the certificate, and particularly with Tansowny, who was most directly involved.
By signing the certificate without the Offering Memorandum attached, and then
permitting the Offering Memorandum to be filed and distributed without checking the
document further, Tansowny abdicated his responsibility as a director and accepted the
risk of any misrepresentations. If the lawyers did err, that is scarcely a mitigating factor
because, if Tansowny had acted responsibly, he would surely have detected the error
before the Offering Memorandum was finalized.

(e) Disclosure in the Information Circular

Although the Notice of Hearing does not allege that there is any problem with the
disclosure in the Information Circular, we feel compelled to comment on it in order to
provide a more complete picture of the entire situation and to avoid possible
misunderstanding. The Information Circular contained the following statements:

"The directors have received, independent from their duties as

directors, independent consulting fees relating to the due diligence
and review of the acquisition proposed as the Major Transaction
described herein. The total consulting fees received were less than
$30,000.00."

"The Corporation does not compensate its officers or directors in

their capacities as such."

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The Statement of Agreed Facts describes this disclosure as “accurate”. We disagree.

We have found that the services performed were not “independent from their duties as
directors”, nor were they “independent” in the sense that a normal reader would
understand that term. The evidence also shows that the total consulting fees paid to the
directors were greater than $30,000.00 as of the date of the Information Circular. A
careful reading reveals that the consulting fees disclosed relate only to the acquisition
proposed as the major transaction, and not to consulting fees relating to other services.
The statement that CTC does not compensate its officers or directors “in their capacities
as such” is unclear, especially when read in the context of that section of the
Information Circular.

The Information Circular provides the best disclosure ever provided by CTC
regarding the remuneration of its directors and officers, but that disclosure is still
substandard. It is not necessary for us to make any finding on this point, and we make
no such finding. Our comments are intended to prevent any misunderstanding that
might arise from the characterization of the disclosure as “accurate” in the Statement of
Agreed Facts.

(f) Interpretation of Policy 4.11

We should also comment on Tansowny’s understanding of the “30% rule” in

Policy 4.11, which is, presumably, paragraph 2.12 of Policy 4.11, headed “Use of
Proceeds”, reproduced above. In his evidence, it was apparent that Tansowny
understood this rule to permit a JCP to spend up to 30% of its money on
“administration”. He felt that, as long as the consulting fees paid to directors and other
administrative expenses were less than 30%, there was no problem. It is not clear from
the evidence how Tansowny reached this understanding, but it is an incorrect
interpretation of paragraph 2.12.

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Paragraph 2.12 of Policy 4.11 simply describes what at least 70% of the JCP
proceeds can and cannot be used for. It does not authorize any type of expenditure for
the other 30% of the JCP proceeds. It does not permit a JCP to spend any percentage
of its proceeds on officers’ or directors’ salaries when the Prospectus says that no
remuneration will be paid to them.

4. DECISION

The misrepresentations in the Prospectus and Offering Memorandum constitute

breaches of the Act by CTC, Tansowny and Arbeau, as alleged in para. 2.15 of the
Notice of Hearing.

In our view, the most serious misrepresentations by far are those contained in
the Prospectus. Although none of the statements in the Prospectus were false on the
date it was filed, nothing turns on that because the Prospectus is not a snapshot. It is a
continuing representation by CTC and its directors until it is superseded by revised
disclosure or it lapses after one year as provided by s. 97 of the Act. The aggravating
factor here is that CTC’s directors essentially defied the disclosure in the prospectus.

The misrepresentation in the Offering Memorandum is merely a repetition of a

misrepresentation that was in the Prospectus. As noted above, Toma and Tansowny
were responsible for that misrepresentation because they signed the certificate in blank
and the fact that there may have been an error by CTC’s lawyers in relation to the
preparation of the Offering Memorandum is a slightly mitigating factor.

We have noted that Tansowny was the person most directly involved in all
aspects of CTC’s affairs. He signed both the Prospectus and the Offering
Memorandum. We understand that Tansowny charged CTC less than market rates for
the services he provided, but in our view this is a minor consideration. In determining

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what is an appropriate sanction for Tansowny, we are not so concerned with the
amount of remuneration he received from CTC as we are with the fact that he acted
deliberately and was instrumental in all the breaches that occurred. It is our view that, if
Tansowny had acted responsibly, there would likely have been no remuneration paid to
directors or officers, and there would have been an independent evaluation of the
proposed major transaction.

We must also consider that Tansowny entered into a Settlement Agreement with
Commission staff in 1996 in relation to an illegal distribution by Crown at a time when
Tansowny was President of Crown, a promoter of Crown, and directly involved in its
day-to-day operations. In the Settlement Agreement Tansowny undertook not to trade in
securities or use certain exemptions for a period of 3 months. It is not clear from the
Settlement Agreement when the illegal distribution occurred, but it appears to have
been prior to these events.

We therefore order, pursuant to s. 165 of the Act, that:

1) John Tansowny cease trading in securities;

2) the exemptions contained in sections 65, 66, 66.1, 107, 115, 116, 132 and
133 of the Act or in the regulations do not apply to John Tansowny;

3) John Tansowny resign any position he holds as a director or officer of any

issuer; and

4) John Tansowny is prohibited from becoming or acting as a director or

officer or as both a director and officer of any issuer;

for a period of 18 months from the date of these reasons.

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Pursuant to s. 167.1 of the Act, we order that John Tansowny pay, subject to the
regulations, the costs of the investigation and the costs of or related to the hearing, in
the amount of $5,000.00. The actual costs were considerably more than this, but we
have taken into account the fact that counsel for the Respondents agreed to certain
facts and the entry of numerous documents, which facilitated the efficient conduct of the
hearing.

Arbeau played a much smaller role than Tansowny in this matter. This was
evident from the time sheets and invoices, and from the evidence of Tansowny and
Toma. She did sign the Prospectus as a director, but she did not sign the Offering
Memorandum. We order, pursuant to s. 165 of the Act, that:

1) Margaret Arbeau cease trading in securities;

2) the exemptions contained in sections 65, 66, 66.1, 107, 115, 116, 132 and
133 of the Act or in the regulations do not apply to Margaret Arbeau;

3) Margaret Arbeau resign any position she holds as a director or officer of

any issuer; and

4) Margaret Arbeau is prohibited from becoming or acting as a director or

officer or as both a director and officer of any issuer;

for a period of 6 months from the date of these reasons.

With respect to CTC, we understand that the company is not currently active,
and that it is in default of filing its financial statements. As a result of these proceedings,
it will lose two of its directors. In our view, the protection of the public requires that there

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be no further trading in CTC’s securities until its affairs are back in order and proper
disclosure has been made. We therefore order, pursuant to s. 165 of the Act, that all
trading i n the securities of CTC Crown Technologies Corporation cease until further
order of the Commission.

DATED at the City of Edmonton in the Province of Alberta this 14 day of October,
1998.

“Original Signed By”

Eric T. Spink
Vice-Chair

“Original Signed By”

Ian E. W. McConnan, FCA
Commission Member

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