DynaMotive president belatedly reports stock sales
David Baines
Vancouver Sun
Wednesday, September 10, 2008
The president and CEO of a publicly traded, government-subsidized Vancouver company has belatedly filed insider trading reports disclosing millions of dollars in previously unreported share sales.
Robert Andrew Kingston of DynaMotive Energy Systems Corp. filed more than 200 insider trading reports in July, showing that his family trust, domiciled in the Isle of Man, sold $2.8 million worth of shares during the past five years. The reports also show that, during the same period, the trust acquired $1.6 million worth of shares.
The net result is that the trust grossed $1.2 million (before brokerage fees) in share transactions that were not previously reported.
Kingston did not make the filings until after I wrote a column on May 31 noting discrepancies in his share ownership, as reported in various company filings.
He attributed the discrepancies to "confusion" over whether the trust, Cape Fear Ltd., is legally required to report its trades.
I don't think there should have been any confusion. According to the B.C. Securities Act, insiders must disclose "any direct or indirect ownership of, or control or direction over, securities of the reporting issuer."
According to the company's latest proxy circular, Kingston held 330,958 shares in the name of Cape Fear Ltd. as of May 15. (According to the newly filed reports, that figure should have been 734,998.)
Cape Fear was described in the proxy circular as "an Isle of Man company [all of whose] shares are held by an arm's-length trustee of a discretionary trust of which Mr. Kingston is a beneficiary."
Kingston said he set up the trust several years ago when he immigrated to Canada to take advantage of certain tax provisions that were available to immigrants.
He said he has no control or direction over the DynaMotive shares held by the trust, but he confirmed that he, along with his family members, are beneficiaries of the trust.
On this basis, it seems clear that Kingston has an indirect interest in any and all shares held by the trust, and is therefore obliged as a DynaMotive insider to report any shares that the trust holds, buys or sells.
But dealing with Kingston is like dealing with mercury: Just when you think you have corralled it, it takes on a new shape and slips away.
"I'm a beneficiary, but I don't beneficially own the shares," he said, paradoxically.
He said that, for tax planning reasons, one of the conditions of the trust is that the shares of Cape Fear (not to be confused with the DynaMotive shares held by Cape Fear) cannot be returned to him.
He was unable, however, to explain why this renders him a non-beneficial shareholder. "It's a legal difference. I'll have to check with the trustees."
Due to these technical complexities, he said, there was "some confusion" whether trades in DynaMotive shares made by the trust are subject to insider reporting rules.
I say this is hogwash. Kingston contracts his services to DynaMotive through Cape Fear. In May 2003, for example, DynaMotive paid Cape Fear 330,880 shares for Kingston's services, in lieu of cash. It is specious to suggest that Kingston can escape his obligation to tell shareholders what he does with these shares simply by burying them in an offshore trust.
Also, for years, Kingston reported Cape Fear's holdings of DynaMotive shares (albeit erroneously) on SEDI, on the Canadian securities electronic disclosure database (SEDAR), and on the U.S. database (EDGAR). Why did he do this if he didn't think he had to? Even more critically, why did he now decide to report all his trades?
It is interesting to note that these previously unreported purchases and sales -- which added up to a $1.2-million payday for Kingston and his family -- occurred at the same time DynaMotive's business was going from bad to worse, when the optics of the president and CEO disposing of shares would have been terrible.
By the time I wrote my column in May, DynaMotive had spent more than $50 million constructing two plants in Ontario to turn wood waste into biofuel, and neither was operating.
Despite repeated claims that it had been booking sales, the company had no recorded revenues. Losses were horrendous. The previous year, it had lost $14.7 million, raising cumulative losses to $87.3 million. (It has since lost another $5.8 million.) Losses were being exacerbated by large and growing management salaries and bonuses.
The previous year, Kingston had earned $977,745 in salary and cash bonuses, an increase of 23 per cent over the previous year, while chairman and major shareholder Richard Lin made $632,659, an increase of 17 per cent.
To finance these losses, the company was printing shares like crazy, causing massive share dilution.
During the previous three years, the company's outstanding shares had more than doubled to 208 million, and the stock price has crumbled from a high of $1.72 in March 2006 to a mere 22 cents.
And it isn't just DynaMotive shareholders who are suffering. Taxpayers, through the federal government's Technology Partnerships Canada, have committed $7.5 million to help pay for the Ontario plant.
"The only mitigating factor that I could find was Kingston's stock sales, or lack thereof," I stated in my column.
According to his original insider reports, he had acquired a total of 969,409 shares by May 2006 and hadn't sold a single share since then.
Based on these filings, it appeared he was "sitting on his shares like a good mother hen," I noted.
How wrong I was.
After I questioned his accounting, he belatedly reported more than 225 transactions. The B.C. Securities Commission charged him a late filing fee of $50 per transaction, for a grand total of $11,400.
That may not -- and should not -- be the end of it.
I think commission enforcement staff should make it clear that this sort of offshore dipsy-doodle won't be tolerated, and ensure that public shareholders get the information they need to make informed investment decisions.
dbaines@vancouversun.com
© The Vancouver Sun 2008
