Regulators in British Columbia ruled that a pair of Vancouver men committed securities fraud when they raised more than $21 million from almost 700 investors without disclosing that the issuers raising the funds were in poor financial shape, and for not using some of the funds as promised.

A B.C. Securities Commission (BCSC) hearing panel found that the men, Michael Patrick Lathigee and Earle Douglas Pasquill, committed fraud when they raised $21.7 million for a group of companies that they jointly directed and controlled called the Freedom Investment Club (FIC Group) “without telling the investors important facts about the financial condition of the corporate respondents.”

The panel found that the pair knew that FIC Group had severe cash flow problems, including an unfunded $8 million cost overrun on its biggest project, when they distributed the securities. It also found that $8.5 million of the money raised for one of the companies was used to make loans to related companies instead of investing in foreclosed U.S. real estate, as promised.

In the decision, the panel notes that the respondents argued, among other things, that investors were not misled because they were told in the offering memoranda (OM) used to sell the securities, and they acknowledged, that the investments were extremely risky. However, the panel ruled that general statements of risk in the OM are no defence to alleged fraud.

“The question is whether the respondents disclosed to investors the important fact of FIC Group’s financial condition. They did not – the offering memoranda contained no disclosure about that, and it was not included among the host of risks that the OMs did disclose,” it says.

Ultimately, it concluded that failing to disclose FIC Group’s financial condition to investors was dishonest, and amounted to fraud. It also ruled that they acted dishonestly when they used the proceeds certain offerings for purposes other than investing them in the U.S. real estate market, as investors were promised; and that this amounted to fraud as well.

The panel did not immediately hand down any sanctions in the case. It set down a scheduled for hearing submissions from both BCSC staff and the respondents in the case on sanctions over the next couple of months.