The B.C. Securities Commission has alleged that a Nanaimo-based vacation time-share company illegally sold $12.7 million in promissory notes to 214 investors.
In a notice of hearing this week, the BCSC said that, from December 2006 to June 2011, Aviawest Resorts Inc. sold the notes without being registered to sell or advise in securities, and without issuing a prospectus.
The commission said the company purported to sell the notes under exemptions to registration and prospectus requirements, as provided in the Securities Act.
In the case of 173 investors who collectively bought $9.2 million worth of the notes, the company purported to sell them under an exemption that permits the sale to "friends, family and business associates."
However, the purchasers did not qualify as friends, family or business associates, the commission alleges.
The commission also alleges that, for another 18 investors who invested $1.2 million, Aviawest did not claim any exemptions from securities laws.
Named as co-respondents are Aviawest's directors during the period in question: Andrew Pearson and his wife, Susan; their sons James and Lawrence Pearson; and chief financial officer Rob DiCastri.
Also named are Zulak Financial Group Ltd., a life insurance firm based in Nanaimo, and its two directors, Melvin Zulak and Karla David.
The commission alleges that from February 2010 to April 2011, they marketed $1.8 million of the promissory notes to 21 investors, thereby contravening securities rules.
It is not likely that the note holders will make any material recovery. Aviawest and its subsidiaries, labouring under a mountain of debt, went into creditor protection last October and Grant Thornton Ltd. was appointed monitor. (Since then, some of the group's companies have been taken out of creditor protection and some have been placed in receivership.)
According to a court affidavit filed by DiCastri in the creditor protection proceedings, the business started in 1990 when Andrew and Susan Pearson, along with five other partners, started construction of the Pacific Shores Resort & Spa, just south of Parksville. When planned strata sales did not materialize, they decided to sell one-week interests. They also affiliated with Resort Condominium International Ltd., a time-share broker. This enabled purchasers to exchange their times for stays in time-share resorts around the world.
In 1993, the Pearsons developed the Aviawest Resorts Club, which developed or acquired further resort properties, providing purchasers with more vacation alternatives.
Those properties included the Rosewood Victoria in Victoria, the Pinnacle Lodge in Sun Peaks, the Water's Edge Resort in Ucluelet, and some suites in the Rosedale on Robson Suite Hotel in Vancouver. In 2009, the group completed its flagship property, the Parkside Victoria Resort & Spa.
In total, some 8,000 families became vacation owners or fractional owners in Aviawest's property portfolio. At its peak - before the 2008 financial meltdown - the firm employed more than 400 people, making it one of the 15 largest employers on Vancouver Island, according to DiCastri.
In the process, it incurred $68.5 million in secured debt and $21.7 million unsecured debt, for a total of $90.2 million.
Among the secured creditors was B.C. Investment Management Corp., which manages the province's public service pension plans, and Fisgard Mortgage Investment Corp., a Victoria-based firm which is funded by many small investors.
Among the unsecured creditors are the promissory-note holders, who were promised interest at 12 per cent annually.
According to DiCastri, cracks began to appear during and after the 2008 financial meltdown.
American clients, who formed the bulk of the customer base, stopped buying Aviawest time-share products. A major lender cancelled its credit lines, and other lenders stopped financing purchasers.
One project (the Parkside resort) suffered delays and cost overruns due to the "overheated construction market." The company also suffered with the departure of key personnel and sundry legal problems.
In an attempt to address the liquidity problem, DiCastri said the company sold more promissory notes to investors.
According to one email I received, the company also marketed the notes to its employees. "Are you wondering how Aviawest can afford to [pay 12 per cent interest], or think it's just 'too good to be true'?" the firm said in one pitch to employees. "Remember that it's not us paying the interest, but rather a consumer who has purchased vacation ownership. All we do is link consumer and investor, then manage and guarantee the portfolio."
While it may have sounded like a foolproof formula, it wasn't, as investors have sadly discovered.
David Baines Is A Columnist With The Vancouver Sun