BCSC scores appeal court win against offshore promoter
2003-05-01 14:37 ET - Street Wire
by Brent Mudry
The British Columbia Securities Commission has scored a double win against controversial former North Vancouver promoter Cameron Willard McEwen, targeted over a 1999 offshore Arizona gold mine promotion. In a unanimous 47-page decision released Wednesday, the Court of Appeal for British Columbia has rejected both appeals of Mr. McEwen, who is also currently in hot water with Australian authorities in a related case.
In a decision underlining the BCSC's broad powers, the appeal court upheld lower court judges' findings affirming the BCSC's investigation and enforcement powers, denying Mr. McEwen's bid to cross-examine former commission senior investigator Linda Murray and denying the promoter's bid to extend solicitor-client privilege beyond communications relating just to the provision of legal advice.
The decision of Madam Justice Mary Newbury, supported by Madam Justice Jo-Ann Prowse and Madam Justice Carol Mahood Huddart, comes six weeks after a March 17 hearing. The decision is a win for commission counsel Kristine McTaggart and a loss for defence counsel Douglas Hewson Christie of Victoria. Intervenor Mark Underhill made submissions on behalf of the Law Society of B.C., which is concerned about searches on lawyers' offices. Vancouver lawyer Bryce Dodds Stewart, who served as B.C. counsel for Mr. McEwen's Fortress International promotion, was a party to the lower court actions but not the appeal court round.
Mr. McEwen is the main BCSC target, and lawyer Mr. Stewart had the misfortune of being drawn into the lower court battles due to assertions of privilege. Even if Mr. Stewart was happy to hand over everything sought by the BCSC, he could not, as only clients, not lawyers, can waive privilege.
The B.C. court decision is the latest bad news for Mr. McEwen, who was temporarily barred from leaving mainland Australia on March 6, ordered to surrender his passport and barred from moving the assets of Fortress International and Great American Gold Ltd., the main companies in his unregistered offshore gold-mine investment scheme. The investigation by the Australian Securities & Investments Commission was assisted by the BCSC, the Arizona Corporation Commission and the Arizona Department of Mines.
The continuing ASIC investigation centres on the alleged promotion of financial services in that country by Mr. McEwen, Fortress and Great American. Mr. McEwen, a Canadian national formerly in North Vancouver, moved to Arizona before recently relocating to Australia.
Mr. McEwen's offshore Arizona gold mine promotion involves three Bahamian-registered companies: Fortress International and Great American Gold, both operating from a postbox in Nassau, and Corporate Express Club Inc., with a head office in the Vancouver suburb of Surrey, and an affiliate called Offshore Knowledge Network. The BCSC launched a formal probe under a Dec. 7, 1999, investigation order naming these companies and individuals Mr. McEwen, Patrick Thomas Stojak, also of North Vancouver, John Thomas McCarthy of Surrey and Lynn Ilene Sorsdahl of Kelowna, B.C., as investigation targets.
In a sworn affidavit, Mr. McEwen claims he is merely an "authorized agent" of Fortress, and not a principal corporate officer. Mr. McEwen's Fortress describes its "Arizona Mining Project" in an undated one-page information release and a three-page "Executive Sunmary (sic)." "It has proven and economically viable reserves of gold; the project has enormous revenue potential ... Product will be refined offshore. Revenues will accumulate and be disbursed offshore. The project will be privately owned and managed offshore," states the release.
According to the profile, Gold Gulch Mining Ltd. subleased 8,200 acres of exploration claims from AU Consolidated Inc., another Arizona company, in the Gold Gulch area in Cochise county, Arizona, about 70 miles east of Tucson. (Mr. McEwen, initially served at a North Vancouver residence, claims he lives in Willcox, Ariz., 10 miles from the property, aside from his extensive travels on company business.)
Great American Gold purportedly acquired Gold Gulch Mining and retained Fortress as its financial manager and agent. Fortress describes itself as a Bahamian company which "specializes in offshore corporate management services, offshore investment banking and corporate financing." If Fortess is to believed, the Gold Gulch project has a net present value of $230-million, based on proven reserves of 1.22 million ounces of gold, probable reserves of 5.31 million ounces, impressively low extraction costs of $75 an ounce, and an assumed gold price of $250 an ounce. (All figures are in U.S. dollars.)
This is just the start. These figures, purportedly prepared by mining engineer James Coates, cover just 640 acres. "Assuming the values extend over the entire 8,200 acres of claims held by GAG, the net present value of the reserves is approximately USD$4,000,000,000," states Fortress. With probable reserves four times higher, the project could supposedly be worth about $16-billion.
Much of the Fortress records have been effectively sealed in court for several years pending the outcome of various court actions, so the BCSC has been stymied in its investigation. The appeal court ruling should help the BCSC jump-start its probe.
The focus of the first appeal is the BCSC's investigations and enforcement powers, given under the Securities Act, particularly the commission's ability to summon witnesses and compel the production of witnesses. The focus of the second appeal is to protect solicitor-client privilege, but make sure it is not abused or extended beyond its proper limits.
Much of the first appeal centred on Mr. McEwen's bid to turn the tables on the BCSC, and cross-examine Ms. Murray, the lead investigator, who has since left the commission for a new challenge, compliance at Wolverton Securities.
"In my view, no basis has been shown for the Court to exercise its discretion to allow Ms. Murray to be questioned on her affidavit at this stage," states Judge Newbury. "Cross-examination would delay the hearing of the petition for what appears to be a fishing expedition, frustrate the purposes of the Act, and impose an unnecessary layer of process on what the Supreme Court of Canada has said is intended to be an expeditious and cost-effective regulatory scheme."
The appeal court rejected all of Mr. Christie's arguments on this point.
"There is simply no basis in law for the notion that a person in CWM's position has a constitutionally-protected right to cross-examine an investigator on an affidavit filed in support of a petition in the circumstances of this case. If it were otherwise, what is intended to be a time- and cost-efficient administrative function would become an 'investigation of the investigators,' beset with all the formalities and delays of a criminal trial," states Judge Newbury.
The second appeal, regarding solicitor-client privilege, will likely be closely watched by lawyers and clients across Canada, as it reinforces the limits on claims of such privilege in searches of lawyers' offices. Other notable recent decisions include the Lavallee decision of the Supreme Court of Canada on Dec. 13 and the Festing decision in the Court of Appeal for B.C. on Feb. 25.
The McEwen case was concerning enough that the Law Society of B.C. intervened. Counsel Mr. Underhill noted his submissions were made without prejudice, as the law society sometime in the future may question the constitutionality of Section 148 of the Securities Act, as it pertains to solicitor-client privilege. Mr. Underhill requested the appeal court issue directions to apply in future cases to demands and summonses issued under the Securities Act to lawyers and their agents and employees, but the court ruled this would now be just an academic exercise in the McEwen case.
Mr. McEwen claimed privilege on virtually every document or communication handled by lawyer Mr. Stewart.
"I considered all my communications as (Fortress) agent, and all the documents I have reviewed as being privileged because they were all communicated subject to and for the purpose of obtaining his legal advice on each and every document or instruction should he be of the opinion that any were illegal or even questionable," stated the promoter in an Oct. 23, 2001, affidavit. "I am shocked that these confidential documents are now being reviewed by the court to breach my solicitor/client privilege and secrecy."
Defence lawyer Mr. Christie argued that when a solictor and client anticipate and expect their business will be "secret and private," a court of law cannot or should not assert what he called "inquisitorial powers over solicitors."
The appeal court, however, noted that Mr. Christie tried to blend the concepts of solicitor-client privilege and confidentiality. "There is no doubt that lawyers are under an obligation to keep confidential all documents and other communications made to them by their clients, but not all such communications are subject to solicitor-client privilege and a claim of privilege does not convert non-privileged documents into privileged documents," states Judge Newbury.
The appeal court noted the lower court judge set out four criteria for claiming privilege in the McEwen case, which were not challenged by defence lawyer Mr. Christie. The critical point was the final one, "the communication must be directly related to the seeking, formulating or giving of legal advice." Mr. McEwen and Fortress lawyer Mr. Stewart had unsuccessfully asserted a blanket privilege in the lower court.
In the lower court, Mr. McEwen and his counsel unsuccessfully contended that privilege applied broadly to even such documents as banking records or communications between a lawyer and third parties, such as investors and others, "because of the client's expectation that (lawyer) BDS would advise continuously on the legality of all aspects of all transactions."
The appeal court dismissed this appeal.
The message is clear to all securities investigation targets who try to deter pesky investigators by asserting privilege on everything by asserting solicitor-client privilege: You can run, but you can't hide.
Mr. McEwen, of course, remains presumed innocent of any wrongdoing until the BCSC or the ASIC prove otherwise.
bmudry@stockwatch.com
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