The B.C. Court of Appeal has lowered the administrative fines levied against two former First Marathon brokers for conflict of interest breaches related to deal-making involved with the Cartaway Resources Corp.

While the court maintained a finding by the B.C. Securities Commission that the two brokers, Rob Hartivikson and Blayne Johnson, acted contrary to the B.C. Securities Act, the court showed considerable sympathy for them regarding the impact of commission’s decision — particularly the finding that they were “de facto directors”.

Agreeing with Johnson and Hartvikson’s lawyers, the BCCA stated thate the finding that they were “de facto directors and officers became a ‘springboard’ upon which the commission could make findings of conflict of interest and breach of fiduciary duties.”

The commission had stated that it “only categorized the appellants as directors in order to alert the financial community generally as to what would happen in such circumstances,” noted the BCCA, adding that “if such consequential findings were not necessary, they should not have been made. By this I do not mean that the general finding of de facto directorship should not have been made, as that finding was probably necessary in the Commission’s reconstruction of the narrative of events. Nevertheless, the Commission ought not to have continued on to cite Hartvikson’s alleged breach of his duties.”

The public “was not harmed” by the broker’s action, wrote the BCCA. “Apparently no shareholder has complained about the conduct of the appellants. Nor has any shareholder been hurt.” Therefore, the court ruled, “one can hope that the alleged [reputational] damage … caused by the commission’s ruling will be somewhat mitigated by these reasons.”

Despite, this evident sympathy, the BCCA was reluctant to overturn the commission’s findings. It is a fact of administrative law in Canada that the courts look for highly egregious reasoning before they will overturn the decisions of specialized administrative tribunals staffed by experts in their fields.

The FMSL-Cartaway story began in 1994 when a group of eight First Marathon brokers, including Hartivikson and Johnson acquired the control block from Cartaway’s existing control group.

The commission found Hartivikson and Johnson made an oral agreement with a partnership of companies to acquire the mining claims in Voisey’s Bay, Labrador, on the terms requested by the partnership. The commission also found that this was a “material change” in Cartaway’s business, which should have been disclosed that day or the next, before trading opened.

At the same time, the First Marathon brokers agreed to proceed with two brokered private placements. But a stock analyst published a report critical of the role of the First Marathon brokers, suggesting that they had been in a conflict of interest as shareholders of Cartaway while First Marathon was brokering Cartaway’s private placements. After that, First Marathon ceased to perform any corporate finance activities on behalf of Cartaway, apart from assisting in preparing the prospectus issued under private placements. New financing was subsequently arranged through other underwriters.

Johnson and Hartvikson appealed the commissioned finding that they were de facto directors and, therefore, too harshly fined. The central issue of their appeal was whether there was any evidence to support the commission’s finding that on April 5, 1994, Johnson and Hartvikson, on behalf of Cartaway, and with the approval of Michael Stuart (another First Marathon broker) as president of Cartaway, made a legally binding deal to acquire the Voisey’s Bay claims in Labrador.

“The commission was of the view that the stated objective of the group [including Hartvikson and Johnson] as to find a venture to vend into Cartaway. It was obvious to the commission that the contested agreement was the very play that satisfied that objective … Accordingly, I am of the opinion that there existed a matrix of properly proven established facts before the commission from which, based on their particular expertise, the commission could draw the inferences necessary to their ruling.”

With files from James Langton.