BCSC seeks to appeal Pezim case (May 25, 1992)

The British Columbia Securities Commission intends to ask the Supreme Court of Canada for leave to appeal a provincial court decision which recently overturned its finding that Murray Pezim and several associates had contravened securities regulations.

The case was based on events in the summer of 1989 when Pezim, John Ivany and Lawrence Page managed Prime Resources and Calpine Resources and were involved in a drilling program at Eskay Creek north of Stewart, B.C. Although the main allegations of insider trading and breach of fiduciary duty were rejected, the commission found that Pezim, Page, Ivany and Prime Resources contravened disclosure requirements of material changes imposed under s.67 of the Securities Act.

But Justice Douglas Lambert and Justice Brian Carrothers of the province’s Court of Appeal rejected almost all the commission’s findings and overturned its decision, although Justice Charles Locke dissented and agreed with the commission. (The appeal was confined to “errors as a matter of law” that affected the commission’s reasoning in reaching its conclusion based on certain sections of the Securities Act.)

Much of the commission’s conclusions were based on a view that raw or plotted assay results constituted a “material change,” which under s.67 requires “disclosure as soon as practicable.” But in its majority decision, the court noted and adhered to a clear distinction between “material change” and “material fact” as defined in the Act.

“In my opinion, geological information obtained from observations of visible matter and geological information from drill cores in the form of assay results, or in the form of a properly plotted plan prepared from the results of a number of assays, are all capable of being material facts,” Lambert wrote in his decision. “That does not mean that the same geological information constituted material changes. In my opinion, geological information of the nature obtained on a continuing basis as a result of a planned drilling program does not constitute a change in the business, the operations, the assets, or the ownership of the issuer, no matter what information is obtained from the drilling results.”

And it rejected the commission’s argument that Pezim, Page and Ivany ought to have inquired about undisclosed assays rather than rely on a “Chinese Wall” system where senior management was not provided with raw assay results until made ready for public release by the geological department.

Lambert noted that while there is a duty to disclose material facts that are known, “there is no duty to inquire about material facts, and to find them out, and not to engage in securities transactions if there are any material facts that could have been found out.”

Lambert also stressed the need to understand the difference between s.67 (which imposes obligation to disclose material changes) and s.68 which prohibits an insider from buying or selling securities with knowledge of either a material fact or a material change.

But the court found no errors in law in the commission’s conclusions that a Calpine private placement did not meet disclosure requirement and that the Vancouver Stock Exchange was misled on the issue. But after taking into account all the circumstances (tax implications, for example), Lambert said the conduct of Pezim, Page and Ivany “is best described as an error in judgment.”

The court also rejected the commission’s finding that when part of a Canarim financing in Prime (a bought deal) fell through, it was a material change requiring immediate disclosure.

On this issue, Lambert wrote: “it seems to me that the only sensible course was for senior management of Prime to discuss the matter with Canarim and to try to resolve it. A press release might well have been badly counter-productive in relation to protecting the possibility of ultimately completing the transaction.”