PyroGenesis Canada Inc. PYR-T, a small Montreal-based seller of technology to the metals industry, says in a recent news release its investors have reasons to “take comfort” and to be “reassured.”

What should prompt such Zen-like feelings? Well, the TSX-listed company says, it’s because the Quebec securities regulator, the Autorité des marchés financiers, has limited its allegations of fraud by the company and its CEO to one series of transactions in 2018 – not anything else that happened in the dozen years surrounding it.

And the news release also assures shareholders that of the $14.5-million in penalties and allegedly ill-gotten proceeds the AMF is seeking in the matter, the regulator wants only $550,000 from the company if the case succeeds. Nearly all the rest would come from P. Peter Pascali, PyroGenesis’s CEO.

Oh. Okay, then. Perhaps we should recount some of the company’s history, and the AMF’s allegations, to see whether stockholders should be more riled up than reassured.

PyroGenesis made its debut on the TSX Venture Exchange in 2011. In its early securities filings, it said it developed systems to convert multiple kinds of waste to gases that could be used in power generation. The company said it had signed contracts three years prior with the U.S. Air Force Special Operations Command and a defence contractor that would deliver the finished product to the U.S. Navy.

Key to its business, however, was intellectual property it didn’t own. It was held, instead, by Peter P. Pascali – the father of CEO P. Peter Pascali, who, along with his son, was a major shareholder of PyroGenesis. (Together, they owned nearly 70 per cent of the public company’s shares.)

So in early 2011, in preparation for its listing, PyroGensis struck a deal with Phoenix Haute Technology Inc., the elder Pascali’s company, to acquire the IP for about $8-million. PyroGenesis agreed to pay Phoenix $40,000 per month for the next 30-plus years – payments that would total $14.28-million and imply an interest rate of 4.85 per cent.

It is what happened over the next seven years that forms the crux of the AMF’s allegations, which are unproven and will be tested before a Quebec administrative tribunal. In short, according to a legal filing from the AMF the younger Mr. Pascali engaged in the “communication of false documents, the use of false signatures and the dissemination of false or misleading information to the market and to regulatory bodies.”

The AMF says the deal between PyroGenesis and Phoenix got tweaked a number of times via contractual amendments. In two major changes in February, 2012, and December, 2013, new provisions were inserted that would allow Phoenix, headed by the elder Mr. Pascali, to demand all $14-million in payments at once – therefore jacking up the $8-million price of the intellectual property.

The AMF alleges, however, there were some problems with the changes. One is that the PyroGenesis board allegedly didn’t learn of the amendments to the deal, which would leave PyroGenesis on the hook for much more money than intended, until 2018. And, the AMF notes, shareholders were not told.

But, most startlingly, the AMF is using an opinion from VeriScript, a Quebec expert in signature analysis, to allege that the elder Mr. Pascali did not sign the amendments to the agreement on behalf of Phoenix. The AMF says that during its questioning of his son, the company’s CEO, he “never answered the precise question as to whether he was the author of the signature.” But he did say that if he signed it, it’s because he received verbal instructions from his father. (Mr. Pascali the elder, who resided in Cyprus, died July 28, 2021, as the AMF was investigating.)

“It appears in all probability that the author of the signature said to be that of Pascali Senior is Pascali Junior,” the AMF said in its statement of allegations. And that means, the AMF says, that Mr. Pascali the CEO is in a “blatant conflict of interest” because he was negotiating with himself. (These are translations, as the AMF case documents are solely in French.)

Over subsequent years, PyroGenesis did stock offerings, and it said that the elder Mr. Pascali had subscribed to buy shares. But the AMF alleges that he did not purchase shares but instead was issued them by the company to pay off most of the obligation. By Dec. 31, 2017, the PyroGenesis financial statements said the balance owed was $111,928.

However, in early 2018, Phoenix said it was instead owed $5,531,928, the AMF says. That was the difference between what it had already been paid by PyroGenesis and the estimated 30-year total of more than $14-million in payments.

In the ensuing board discussions, Angelos Vlasopoulos, the chair of the audit committee, resigned. The AMF said he told the regulator during its investigation that he quit because “the circumstances surrounding this proposed transaction unduly exposed PyroGenesis to the risk of fraud.” (Mr. Vlasopoulos did not return a message requesting comment, sent via LinkedIn and e-mail to his current employer.)

The AMF says the remaining board members agreed in April, 2018, to let Mr. Pascali the CEO negotiate with his father. However, the AMF says the elder Mr. Pascali had signed a power of attorney on July 11, 2017, giving full powers to his son for a period of two years. So “it was Pascali Junior himself” who told the company that Phoenix was owed the money, the AMF says.

PyroGenesis then settled with the elder Pascali for $3.699-million in stock. The company issued the shares. Less than two months later, the senior Mr. Pascali sold the shares back to his son. He didn’t pay for them, instead issuing a promissory note, the AMF says.

After a big gain in PyroGenesis shares – which rose tenfold by the summer of 2020 – Mr. Pascali, the son, sold them for profits of $9.57-million, the AMF says. It is those profits the regulator now wants Mr. Pascali to forfeit. Some of the sales went undisclosed in the system for company insiders to reveal their stock-trading activity, the AMF also alleges.

And now, back to PyroGenesis. In announcing the AMF action last week, the company said Mr. Pascali, fellow defendant and board chairman Alan Curleigh, and the company itself, all deny the AMF allegations, believe they are without merit, and will vigorously defend against the allegations.

PyroGenesis also says “the operations of the company continue as usual.” Perhaps shareholders should neither take comfort nor be reassured by that. The company has never made an operating profit in a dozen years as a public company, and the shares are down 93 per cent from the February, 2021, highs.

The big winner at PyroGenesis, instead, seems to be the Pascali family. At least, for now.

With reports from Nicolas Van Praet