The two biggest shareholders of Lydia Diamond Exploration of Canada Ltd. paid for clothes, food, liquor and other personal expenses out of the company's bank accounts, a forensic accountant told an Ontario Securities Commission hearing yesterday.
Stephanie Collins, an accountant in the enforcement branch of the OSC, testified that her analysis of records from Lydia bank accounts showed company principals Emilia and Jurgen von Anhalt spent thousands of dollars from those accounts on non-business expenses.
OSC staff have alleged that Lydia and the von Anhalts sold shares to the public with no prospectus and without proper registration, improperly paid commissions to help distribute shares and misled the commission about the number of shareholders.
Ms. Collins said she originally was assigned to the case in December, 2000, to find out how many investors held stock in Lydia and how much money they paid for their shares. As a private company, Lydia was not supposed to have more than 50 shareholders, but it actually had almost 400, Ms. Collins testified.
She said she began to look at the company's bank accounts and how the money was spent when she noticed "some expenses didn't appear to be for diamond exploration."
Some of the payments seemed odd, she said, even though a lawyer for the firm insisted that "all investor funds had gone into the ground," meaning that they were used for exploration at Lydia's Ontario site.
An analysis of the accounts, where $1.8-million from investors was deposited, suggested that was not really the case, Ms. Collins testified.
For example, one account record showed a $1,256 bill from Saks Fifth Avenue, Ms. Collins testified. Other payments were made for personal legal fees for the von Anhalts, rent, clothes, French lessons, food, liquor and travel, she said.
Ms. Collins also said some money from investors went directly into the von Anhalt's personal accounts, even though the company had its own accounts.
In his opening remarks to the panel of commissioners last week, OSC prosecutor Matthew Britton said the von Anhalt's "behaved as though Lydia and themselves were one and the same."
In his opening, the von Anhalt's lawyer, Joseph Groia, said all the money was properly accounted for. Yesterday, he said evidence from Lydia's auditor will present a very different picture from that of Ms. Collins.
Many of the investors in Lydia were recruited by Fran Harvie, a psychic consultant who is a friend of Ms. von Anhalt.
Ms. Collins testified that Ms. Harvie was paid a commission of 10 per cent of the gross proceeds from the stock she sold, either in cash or Lydia shares.
Two weeks ago, Ms. Harvie signed a settlement agreement with the OSC, in which she admitted illegally selling Lydia shares and improperly collecting commissions.
The main concern of the defence lawyers in the case is that Lydia's reputation has been damaged by the OSC allegations. They say the firm is legitimately and professionally searching for diamonds at its Southern Ontario exploration site.
Mr. Groia has said the allegations concern essentially "technical violations" of securities laws, rather than any significant breach that has harmed investors.
During his cross examination of Ms. Collins yesterday, Mr. Groia said the OSC "searched long and hard" but couldn't find any unhappy investors who felt they had been harmed by the company's actions.
The hearing continues today.