Proceedings

 

IN THE MATTER OF THE SECURITIES ACT
R.S.O. 1990, c. S.5, AS AMENDED

AND

YBM MAGNEX INTERNATIONAL INC., HARRY W. ANTES, JACOB G. BOGATIN, KENNETH E. DAVIES, IGOR FISHERMAN,DANIEL E. GATTI, FRANK S. GREENWALD, R. OWEN MITCHELL, DAVID R. PETERSON, MICHAEL D. SCHMIDT, LAWRENCE D. WILDER,GRIFFITHS MCBURNEY & PARTNERS NATIONAL BANK FINANCIAL CORP. (formerly known as First Marathon Securities Limited)

Decision and Reasons on Motion for Particulars


Hearing:
January 27, 2000

Panel:
Howard I. Wetston, Q.C. - Chair
Derek Brown - Commissioner
Morley P. Carscallen, F.C.A. - Commissioner

Counsel:
Jay Naster - For the Staff of the Ontario Securities Commission

Counsel:
Brian P. Bellmore and Karen Mitchell - For Daniel E. Gatti

James D.G. Douglas and David Di Paolo - For R. Owen Mitchell

John Keefe - For Griffiths McBurney & Partners

Paul Le Vay and - For Frank S. Greenwald and Harry W. Antes

Megan E. Petrie - For Jacob G. Bogatin

Mike Petrocco - For National Bank Financial Corp.

Len Zacher - For YBM Magnex

DECISION AND REASONS

BACKGROUND

A Notice of Hearing and Statement of Allegations, dated November 1, 1999 wereissued to the following 13 parties pursuant to s.127 of the Securities Act (the "Act"):YBM Magnex International Inc. ("YBM"), Harry W. Antes, Jacob G. Bogatin, Kenneth E.Davies, Igor Fisherman, Daniel E. Gatti, Frank S. Greenwald, R. Owen Mitchell, DavidR. Peterson, Michael D. Schmidt, Lawrence D. Wilder, Griffiths McBurney & Partners,and National Bank Financial Corp, formerly known as First Marathon Securities Limited("FMSL").

Notices of Motion, for further particulars, were filed on behalf of Messrs. Mitchell, andGatti; and supported on behalf of Messrs. Greenwald, and Antes (collectively, the"Motion Applicants"). The motion for particulars was heard on January 27, 2000. Mr.Bellmore also requested an order for disclosure respecting persons interviewed bystaff. By letter dated January 11, 2000, Mr. Naster advised that:

With three exceptions, you now have all the names of all such persons,and the notes or transcriptions of those interviews. The three exceptionsrelate to people in respect of whom we are seeking the appropriateauthorizations to make disclosure. We expect to be able to disclose thenames of these people and the transcription of their interviews shortly.To this extent, we do not oppose the order you seek for disclosurerespecting those people who have been interviewed. Furthermore, aspart of our continuing obligations with respect to disclosure, in the eventthat Staff interview any other persons, we will of course make disclosureof those interviews.

Mr. Wilder did not participate in this motion and has brought an application in thenature of prohibition and certiorari which is to be heard on February 15, 2000 in theDivisional Court. On January 21, 2000, the Notice of Application in the Divisional Courtwas amended and the second ground of "alleged bias, partiality and unfairness arisingout of the prospectus receipt process in 1997" was withdrawn.

The Statement of Allegations alleges the following:

c) that each of Antes, Bogatin, Davies, Fisherman, Greenwald, Mitchell,Peterson, Schmidt and Gatti, authorized, permitted or acquiesced in YBMfailing to make full, true and plain disclosure in YBM's 1997 preliminaryprospectus and final prospectus of material facts respecting the Special(Independent) Committee created by the Board of Directors of YBM onAugust 29, 1996. In so doing, each of Antes, Bogatin, Davies, Fisherman,Greenwald, Mitchell, Peterson, Schmidt and Gatti acted in a mannercontrary to the public interest.

d) that each of Antes, Bogatin, Fisherman, Greenwald, Mitchell and Gattiauthorized, permitted or acquiesced in YBM failing to comply with YBM'scontinuous disclosure obligations by not issuing a news release forthwithdisclosing that YBM's auditor had notified YBM, by no later than April 20,1998, that it had decided not to perform any further services for YBM,including the rendering of an audit opinion in respect of YBM's 1997financial statements, until YBM had completed an in-depth forensicinvestigation addressing specific concerns to the satisfaction of theauditor. In so doing, each of Antes, Bogatin, Davies, Fisherman,Greenwald, Mitchell, Peterson, Schmidt and Gatti acted in a mannercontrary to the public interest.

The Motion Applicants contend that in order to defend themselves against theCommission's allegations they require particulars of the specific material factsrespecting the mandate, information obtained by and findings of the Special(Independent) Committee (the "Special Committee") of the Board of Directors of YBMwhich the Commission says YBM was required to disclose in the preliminaryprospectus and final prospectus. The Motion Applicants also request further particularsas to the manner in which the advice received by YBM from Deloitte & Touche on orbefore April 20, 1998 changed the business, operations or capital of YBM or was achange in the business, operations or capital of YBM. Mr. Bellmore additionallyrequests particulars of the provisions of "Ontario securities laws" which Mr. Gatti isalleged to have violated.

LEGAL PRINCIPLES

In a hearing of this nature, fairness requires sufficient particularization of theallegations to define the issues, prevent surprise and to enable the parties to preparefor the hearing; Re Takahashi and College of Physicians and Surgeons of Ontario(1979), 102 D.L.R. (3d) 695, 26 O.R. (2d) 353 (Div. Ct.); Re Finch and Association ofProfessional Engineers and Geoscientists of British Columbia (1994) 114 D.L.R. (4th)292 (B.C. C.A.); Jory v. College of Physicians and Surgeons of British Columbia(December 13, 1985), Vancouver A850601; Re Ryckman (5 July 1995), 10 C.C.L.S. 38(ASC). Given that there is no formal discovery in a hearing of this nature, sufficientparticularization is necessary to accomplish the above purposes. We note also thatparticulars are required to inform the motion applicants of the nature of the case theyhave to meet as distinguished from the mode in which the case is to proceed.

As stated in our Decision and Reasons on the Motion for Disclosure dated January 25,2000, it would be inappropriate, given our public interest jurisdiction to treat the Noticeof Hearing and Statement of Allegations as a criminal information or indictment.Moreover, in a hearing of this nature, particulars cannot bind counsel for Staff to formalproof thereof, as in a criminal case.

Madam Justice McLachlin, as she then was, commented on the nature of particulars inJory, supra, at 8-9:

Particulars relate to facts, not law. The question of whether or notconduct constitutes unprofessional misconduct is ultimately a legal andethical question which the legislature has left to the committee and thecouncil: s.50(1).

The Supreme Court distinguished between a question of fact, a question of mixed lawand fact and a question of law in Canada (Director of Investigation and Research,Competition Act) v. Southam Inc. [1997] 1 S.C.R. 748 (S.C.C.) (Q.L.) at para. 35-37:

Briefly stated, questions of law are questions about what the correct legaltest is; questions of fact are questions about what actually took placebetween the parties; and questions of mixed law and fact are questionsabout whether the facts satisfy the legal tests.

We have referred to the Southam, supra, in order to provide a framework for ourconsideration as to whether the Motion Applicants are indeed seeking more facts orwhether the request is more in the nature of particulars of law or mixed fact and law. Inaddition, we note that counsel for Staff is not obligated to particularize evidence, itstheory of the case or the mode in which it is to proceed.

ANALYSIS

Staff allege that the directors and officers of YBM authorized, permitted or acquiescedin YBM failing to make full, true and plain disclosure in YBM's 1997 preliminaryprospectus and final prospectus of material facts respecting the Special (Independent)Committee created by the Board of Directors of YBM on August 29, 1996. In thisregard, the Motion Applicants submit that the material facts are too broadly stated andthat the Motion Applicants must guess at which are the material facts. We disagree.

The Motion Applicants have been provided with sufficient particularization regardingthe factual basis for Staff's allegation of a failure to make full, true and plain disclosureas regards each individual applicant. Mr. Naster submitted in argument that what ismaterial is information respecting the mandate, the information obtained by and thefindings of the Special Committee. He submitted that if it does not relate to the findingsof the Special Committee of the YBM board of directors, then it is not within the scopeof Staff's allegation of materiality. In our opinion the facts and circumstances aresufficiently particularized to allow for their preparation for the hearing.

Staff also allege that the directors and officers of YBM authorized, permitted oracquiesced in YBM failing to comply with YBM's continuous disclosure obligations bynot issuing a news release disclosing that YBM's auditor had notified YBM that it haddecided not to perform any further services for YBM. In this regard,the MotionApplicants submit that there is insufficient specificity because the Statement ofAllegations does not indicate "how" the advice provided constitutes a material change.Again, we disagree. Whether this advice constitutes a material change is likely aquestion of law, or perhaps a question of mixed fact and law. As stated in Jory, supra,particulars relate to facts, not law.

However, with regard to Mr. Gatti, we are of the view that the particularization of thisallegation is inadequate. Staff contend that the allegations are based upon violationsof Ontario securities law, including the failure to file a news release regarding amaterial change. S.122(3) provides that every director or officer of a company or of aperson other than an individual who authorizes, permits or acquiesces in thecommission of an offence under sub(1) is guilty of an offence. However, Staff haselected to proceed by notice of hearing under the public interest provision, s.127. Staffalleges that Mr. Gatti has violated the continuous disclosure provisions by authorizingpermitting or acquiescing in YBM's failure to comply. The Statement of Allegationsdoes not disclose any particulars with respect to Mr. Gatti's conduct after April 7, 1998.Given the nature of the allegations against him, further particulars are required withrespect to his conduct regarding YBM's failure to comply with the continuous disclosureobligations in the time period between April 7, 1998 and the date of the issuance of thecease trade order, May 13, 1998.

Mr. Bellmore additionally requests particulars of the specific provisions of "OntarioSecurities laws" which Mr. Gatti is alleged to have violated. Given the highly specificlanguage of the allegations contained in the Statement of Allegations, we are of theview that Mr. Gatti has sufficient notice of the case he must meet.

DECISION

The principles of natural justice require that the allegations be sufficientlyparticularized. Staff shall provide Mr. Gatti with further particulars as to his conductbetween April 7, 1998 and May 13, 1998 concerning Staff's allegation that the directorsand officers of YBM authorized, permitted or acquiesced in YBM failing to comply withYBM's continuous disclosure obligations by not issuing a news release disclosing thatYBM's auditor had notified YBM that it had decided not to perform any further servicesfor YBM. In all other respects, we are of the opinion that the Statement of Allegationssufficiently particularizes the allegations so as to define the issues and to enable themto prepare for the hearing. The allegations are particularized both as to the facts thatgive rise to conduct regarding YBM's failure to disclose and by whom. Individualconduct regarding YBM's failure to disclose is alleged to give rise to certain violations.In our opinion the particulars are specific and independent enough to define the issuesand for the Motion Applicants to prepare for the hearing.

It is also ordered that Staff provide the names of all persons interviewed in the courseof Staff's investigation into this matter and the notes and transcriptions of all suchinterviews, including the names of persons interviewed and transcriptions of interviewsin respect of whom Staff is seeking the appropriate authorization to make disclosure, atsuch time as Staff receives the appropriate authorization.

February 11th, 2000.

"Howard I. Wetston"
"Morley P. Carscallen"
"Derek Brown"