ASC issues almost $4-million penalty over investor fraud

A company and its founder who defrauded investors of $5.8 million have been permanently banned and ordered to pay almost $4 million in disgorgement, penalties and costs.

An Alberta Securities Commission (ASC) hearing panel banned Allan Robert Magneson and his company, 1111108 Alberta Ltd., from Alberta’s capital market and ordered them to pay $3.56 million in disgorgement, along with a $300,000 penalty and $70,000 in costs.

The sanctions followed a finding that Magneson raised approximately $7 million from investors, ostensibly to develop a quieter dental drill, but that at least $5.8 million of that money was diverted to personal use.

Magneson “perpetrated a fraud by knowingly making representations to investors about the intended use of their investment funds that were inconsistent with the actual use of the funds, and by failing to disclose how the funds were really spent,” the panel found.

According to the decision, Magneson — who was the primary inventor of the drill technology — argued he was entitled to all of the money he received.

Even if that was true, the panel said “it would not justify his deception, as he admitted that he did not inform [investors] of his purported entitlements when they invested.”

Ultimately, the drill was never manufactured or sold commercially, and most of the investors lost their money.

“Magneson is the only one who received a significant benefit from the drill project,” the panel said.

While the panel concluded that almost $5.8 million of investors’ money was improperly diverted, ASC staff only sought $3.56 million in disgorgement — excluding more than $2 million on the basis that some investors testified that they expected Magneson would be paid something for his work to develop the drill technology.

The panel indicated it included the $2 million in its calculations of the total that was misappropriated, “because he paid himself that amount out of investor funds contrary to his representations and without having disclosed his compensation,” it said.

While the panel was tempted to include the $2 million in its disgorgement order, it ultimately decided to accept ASC staff’s rationale for not seeking disgorgement of that money.

It also granted ASC staff’s proposed orders for a monetary penalty and costs.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.