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Sungold, "Wally Cashman" face dissident court challenge
2003-04-15 20:36 ET - Street Wire
by Brent Mudry
Sungold Entertainment and chief executive officer Kim Noble Hart, also known as "Wally Cashman," convicted of fraud-related income tax evasion, face a court fight from dissident director Melvin Reeves, who seeks to have Mr. Hart disqualified and removed as a director. In a petition filed Friday in the Supreme Court of British Columbia, Mr. Reeves claims he was terminated himself after complaining about Mr. Hart's continued management leadership.
Court documents show Mr. Reeves also seeks the disqualification of a second Sungold director, Louis Hop Lee, who openly revealed to the British Columbia Securities Commission that he was disbarred by the California State Bar Association for having misused client funds and had declared bankruptcy, both about a decade ago.
The respondents have not yet filed legal responses to the petition, filed by Vancouver lawyer Robert Millar of Fasken Martineau DuMoulin.
The Sungold brouhaha comes after Mr. Hart pled guilty on Nov. 28 to one count of tax evasion for filing false personal income tax returns for 1996 and 1997 with the Canada Customs and Revenue Agency, formerly known as Revenue Canada. Mr. Hart was fined $43,500 in British Columbia Provincial Court, representing a 75-per-cent penalty on the federal income taxes he evaded. He also must pay the $58,293 in taxes he evaded plus accumulated interest. Judge Kerry Smith imposed the fine after reviewing submissions from Department of Justice prosecutor Bruce Harper and defence lawyer Steven Cook of Thorsteinnsons.
Mr. Hart had faced four charges of evading taxes by understanding capital gains on his sale of Sungold stock by more than $880,000 between 1995 and 1997, but the case was settled with one count, based on an agreed statement of facts and joint submission on sentence signed by both Mr. Harper and Mr. Cook.
The criminal conviction marked an unfortunate setback to the career of Mr. Hart, Sungold's best-known booster, who has served as the company's CEO since 1998. Before heading the company, Mr. Hart served as a key consultant to the company dating back to at least 1995.
In the petition, Mr. Reeves seeks court orders that Mr. Hart be declared disqualified as a director and officer of Sungold and its co-respondent subsidiary Horsepower Broadcasting Inc., that the register of directors and officers of the companies be rectified to remove him, that he be disallowed from performing any function, directly or indirectly, as an officer or director, and that any corporate action involving Mr. Hart as either director or officer be declared null and void.
Mr. Reeves, a former chairman and CEO of Impark Services Ltd., Canada's top parking lot operator, is a fresh face on the Sungold scene, named Jan. 28 as a Sungold director and as a chief operating officer of subsidiary Horsepower Broadcasting Network International Ltd. The practising lawyer notes that Mr. Hart refused his request to resign, so he was forced to resort to the courts.
In a sworn affidavit, Mr. Reeves expresses concern that a Sungold executive committee meeting called for Wednesday may ratify the acts of Mr. Hart, mainly a planned ouster of Mr. Reeves and his associates. "This is a matter of considerable urgency because Sungold is a public company, its main business relates to gaming, and its shares (are) traded publicly. It is an important matter of public trust that the directors and officers of this kind of company are qualified to act," states Mr. Reeves in his affidavit.
In a second sworn affidavit, Mr. Reeves details the background to his dispute, dating back to his due diligence starting shortly before he joined Sungold in late January. "As part of that process I asked Kim Noble Hart on or about January 22, 2003, whether he had any matters outstanding that affected his reputation or character that would negatively affect the business operations of Sungold and Horsepower," states Mr. Reeves.
"Mr. Hart responded to my question by explaining to me he had an instance in relation to a fine that was imposed for a late filing of an income tax return which was caused by the fact that his accountant, due to his illness and subsequent death, had caused Mr. Hart's returns to be filed late. I thought nothing of such a circumstance and commenced the provision of consulting services as of January 24."
Mr. Reeves notes he found out the truth about Mr. Hart's conviction two months later. "On or about March 19, 2003, I met with Stephen O'Neill, counsel for Sungold, and stated that numerous people were referring to 'Wally Cashman' and I had believed the reference was to Mr. Walter Davidson, a former director of Sungold." Mr. Reeves also notes that during the week of March 24, he heard a rumour about Mr. Hart's tax evasion charge, which he soon verified.
The Wally Cashman and related references are detailed in Mr. Hart's agreed statement of facts, concurrent with his guilty plea. "Some of the cheques that Hart provided to the auditor purportedly in support of his purchase of the Sungold shares had been altered after they had cleared the bank, so that the amounts written on them were higher than what had actually been negotiated," states the document.
"One of the cheques that had originally been made out to 'CASH' was altered after it had been negotiated at the bank to be payable to 'WALLY CASHMAN,'" states the document. "The two receipts provided to the auditor were also fraudulent. The people who purportedly issued the receipts did not actually make them. A search warrant executed on Hart's residence uncovered a receipt book with practice signatures matching the signature on one of the fraudulent receipts."
At issue is whether Mr. Hart is disqualified under Sections 114 and 133 of the Company Act, as Mr. Reeves claims, based on his fraud-related conviction.
Lawyer Mr. Millar, representing dissident director Mr. Reeves, served a resignation demand on Mr. Hart on April 9, and a related letter the same day to Vancouver securities lawyer Stephen F.X. O'Neill of O'Neill & Co., Sungold's counsel.
"Based upon his guilty plea it is clear that Mr. Hart was convicted of an offence within British Columbia involving fraud. Mr. Reeves has sought the resignation of Mr. Hart by reason of this and we understand that he has refused and he has indicated that his offence did not involve fraud. We further understand that Mr. Hart said he was provided legal opinions from two lawyers, one of whom we understand was you, which stated that Mr. Hart was not precluded from acting as a director or officer," states Mr. Millar in his letter to Mr. O'Neill.
"While we believe that no such opinions exist, we have been instructed by Mr. Reeves to request that you deliver to him a copy of any opinion that you prepared for the company in relation to his status and ability to continue to act as an officer and director. In a brief response, Mr. O'Neill indicated it was inappropriate for him to reply until he received directions from Sungold's board.
Mr. Reeves is also upset about Mr. Lee continuing as a director, noting he voiced his concerns to company counsel Mr. O'Neill on March 20.
Hong Kong-based Mr. Lee, Sungold's vice-president of Asian operations, discloses his North American baggage in a Form 51-902F filing, formerly known as a Form 4B, with the BCSC. "I had one, maybe two, judgments taken against me in a civil court in San Francisco, California, approximately 1993 for spending funds from a trust account belonging to my clients," states Mr. Lee in his sworn statement.
"In 1995, to forestall an eviction, I filed a petition in bankruptcy in San Francisco. After filing, I did nothing further and the court dismissed my action for taking no further action," states Mr. Lee.
"I was disbarred by the California State Bar in 1995 for the offenses listed in #10a above (spending clients' trust funds), as well as for failing to discharge my other duties as an attorney."
Alas, Mr. Reeves, the blemish-free lawyer trying to clean Sungold's house, is now being swept out the door.
In a brief April 8 Sungold executive committee meeting, with only Mr. Hart, Anne Kennedy and Walter Wolff, the latter by telephone, present, the company passed a resolution to terminate the consulting services agreement of Mr. Reeves. Ms. Kennedy and Mr. Wolff passed the motion, with Mr. Hart abstaining. The single-item resolutions claim the termination was based on a recommendation by company counsel Mr. O'Neill, specifically stated as termination for cause.
Only one paragraph of several in the consulting agreement was quoted, devoid of any other background explanation or detail. "The contractor, the consultant or any of its or his employees committing an act of fraud or dishonest or serious misconduct, or any act detrimental to the reputation of the company in circumstances that would, in the reasonable opinion of the company's representative, make the contractor or consultant unsuitable to continue to act on behalf of the company;" states the cited paragraph in a list of paragraphs.
While no explanation is noted, it appears that Sungold's executive committee agrees that Mr. Reeves, an unblemished whistleblower trying to clean house, is unsuitable, while Mr. Hart, convicted of fraud-related tax evasion is indeed suitable.
Meanwhile, in a similar single-issue meeting on March 26, with just Mr. Hart, Mr. Wolff and Ms. Kennedy present, the executive committee unanimously approved a private placement of three million units at five U.S. cents to Mr. Hart. Each unit consists of one share and a warrant, exercisable for one share at five U.S. cents for three years.
The agenda for Wednesday's board meeting includes a motion to accept the resignation of Mr. Lee as a director and a new consulting proposal from subsidiary Horsepower Broadcasting for Mr. Lee. The new business includes considering a proposed agreement with the National Thoroughbred Racing Association, considering the allegations of Mr. Reeves regarding company management and procedures, and considering the appointment of a new director to replace Mr. Lee.
