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 Recusal


Hearing:
December 21 and 22, 1999

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

Counsel:
For the Staff of the Ontario Securities Commission
Michael Code
Ian Smith

Counsel:
For David R. Peterson
Alan J. Lenczner, Q.C.

DECISION AND REASONS

1. BACKGROUND

A Notice of Hearing, dated November 1, 1999 was issued to the following 13 partiespursuant 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, David R. Peterson (the "Applicant"), Michael D.Schmidt, Lawrence D. Wilder, Griffiths McBurney & Partners, and National Bank FinancialCorp, formerly known as First Marathon Securities Limited.

A Statement of Allegations, also dated November 1, 1999, accompanied the Notice ofHearing. The allegations, summarized at page 3 of the Statement of Allegations, are asfollows:

a) that YBM filed a preliminary prospectus dated May 30, 1997, and a finalprospectus dated November 17, 1997, that failed to contain full, true, andplain disclosure of all material facts relating to the securities offered;specifically, material facts respecting the mandate, information obtained byand findings of the Special (Independent) Committee created by the YBMBoard of Directors on August 29, 1996;

b) that the Directors, Chief Executive Officer and Chief Financial Officer of YBMauthorized, permitted or acquiesced in YBM filing a preliminary prospectusdated May 30, 1997 and a final prospectus dated November 17, 1997 thatfailed to contain full, true and plain disclosure of all material facts relating tothe securities offered; specifically, material facts respecting the mandate,information obtained by and findings of the Special (Independent) Committeecreated by the YBM Board of Directors on August 29, 1996;

c) that the Co-Lead Underwriters signed a certificate to a preliminary prospectusdated May 30, 1997 and a final prospectus dated November 17, 1997 whichprospectuses, to the best of their knowledge, did not contain full, true andplain disclosure of all material facts relating to the securities offered;specifically, material facts respecting the mandate, information obtained byand findings of the Special (Independent) Committee created by the YBMBoard of Directors on August 29, 1996;

d) that YBM failed to comply with its continuous disclosure obligations by notissuing a news release forthwith disclosing the nature and substance of amaterial change in the affairs of YBM; specifically, that the auditor for YBM,Deloitte & Touche LLP (U.S.) (D & T), had advised YBM by no later than April20, 1998 that it would not perform any further services for YBM, including therendering of an audit opinion in respect of YBM's 1997 annual financialstatements, until YBM had completed an in-depth forensic investigationaddressing specific concerns to the satisfaction of D & T;

 

e) that the members of the YBM Audit Committee (Antes, Greenwald andMitchell), the Chief Executive Officer (Bogatin), the Chief Financial Officer(Gatti) and the Chief Operating Officer (Fisherman) of YBM authorized,permitted or acquiesced in YBM failing to comply with its continuousdisclosure obligations by not issuing a news release forthwith disclosing thenature and substance of a material change in the affairs of YBM; specifically,that the auditor for YBM, D & T, had advised YBM by no later than April 20,1998 that it would not perform any further services for YBM, including therendering of an audit opinion in respect of YBM's 1997 annual financialstatements, until YBM had completed an in-depth forensic investigationaddressing specific concerns to the satisfaction of D & T; and

f) that Wilder made statements to Staff of the Commission during the course ofStaff's review of YBM's preliminary prospectus that, in a material respect andat the time and in the light of the circumstances under which the statementswere made, were misleading or untrue or did not state a fact that wasrequired to be stated or that was necessary to make the statements notmisleading; specifically, statements contained in a letter from Wilder to Staffdated July 4, 1997 concerning the results of due diligence conducted inrespect of YBM.

 

2. PURPOSE OF THE MOTION

A Notice of Motion filed by Mr. Lenczner on behalf of Mr. Peterson, dated November 22,1999, seeks orders compelling extensive production of documents and other materials, aswell as the removal of Mr. Naster as litigation counsel for Staff due to his role in thedetermination to receipt the final prospectus dated November 20, 1997. Mr. Lencznerstated in his factum that the basis for recusal is that Mr. Naster will be a witness in thehearing.

Mr. Lenczner did not argue Mr. Naster's partiality as a basis for recusal. Our review of themotion record and law does not substantiate that the Applicant should succeed on this basisin any event. At the conclusion of his reply argument on the motions, Mr. Lencznersuggested that it was doubtful that he would subpoena Mr. Naster. However, should hesubpoena Mr. Naster, Mr. Lenczner indicated that he did not want to be held accountablefor the disruption of the hearing. Mr. Code submitted that counsel for Staff would notsubpoena Mr. Naster.

 

A number of other respondents brought motions for production and particulars. OnlyMr. Peterson seeks to have Mr. Naster recused. This decision and reasons for decisiononly pertain to the motion for removal, not to any other matter.

We, of course, recognize that a motion for prohibition and certiorari, dated November 3,1999, has been brought on behalf of Mr. Wilder in the Divisional Court, to quash the Noticeof Hearing and to prohibit the Commission from proceeding. At this time, the hearing isscheduled for February 15, 2000. Among the grounds for this motion are the following:

(m) The circumstances surrounding the issuance of the Notice of Hearing,including considerable public criticism of Staff's decision to issue areceipt for the 1997 prospectus, create a reasonable apprehension ofbias on the part of the Commission in the outcome of this proceeding.For that reason, the Commission should be prohibited from proceeding.

(n) The conduct of the Commission Staff's investigation of this matter hasnot been fair and impartial.

Despite the timing and breadth of this court application, we felt it necessary to proceed withour decision and reasons regarding the recusal motion at this time.

3. LEGAL PRINCIPLES

It is not surprising that the Courts have resisted motions where counsel seeks to callopposing counsel as a witness and have, accordingly, discouraged the practice of counseltestifying; Essa Township v. Cuergis (1993) 15 O.R. (3d) 573 at 583 (Ont. Ct. Div. Ct.); R.v. St. Laurent (1984), 11 C.C.C. (3d) 74 at 76 (Que. C.A.); R. v. Baxter 1975 C.C.C. (2d)96 at 117 (Ont. C.A.). While such motions appear more regularly in civil or criminal matters,it would seem to us that similar principles apply in an administrative law context.

Three (3) criteria must be established before such a motion will succeed:

(i) It must be probable that counsel's proposed evidence will be relevant; R. v.Harris (1994), 93 CCC (34) 478 at 479 (Ont. C.A.);

(ii) It must be necessary that counsel give evidence. That is, there should be noother witnesses available and no possibility of admissions being made thatwould render it unnecessary to call counsel as a witness; R. v. Brown et al(No. 1) Dec. 2, 1996 at 44-45 (Ont. Ct. Gen. Div.);

(iii) It must not be premature that counsel be recused. That is, counsel should notbe removed at the early pre-trial stages when the case is still undevelopedand it cannot be foreseen with certainty whether the high standards ofrelevance and necessity will emerge or not at the hearing; Essa Township,supra at 582.

Counsel for Staff, Mr. Code, submitted that there is apparently no reported case, nor a casethat has not been reversed on appeal, where the defence has ever succeeded in removingCrown counsel on the basis of being a witness. Counsel for the Applicant did not direct usto any contrary authority.

4. ANALYSIS

(1) Likely or Probable Relevance

The first test is set out in R. v. Harris, supra, at 480 wherein a defence subpoena that hadbeen served on Crown counsel was quashed. At trial, Ferguson J. held that Crown counsel"may" have relevant evidence to give. However, on appeal the Court of Appeal held thatFerguson J. applied the wrong test of relevance, and stated:

In our view, it is not sufficient to sustain the subpoena that the witness"may have" evidence material to the case. The burden was on therespondent to establish that Murphy was likely, or to put it another way,would probably have evidence material to the issues raised. (Ownemphasis)

While Mr. Code and Mr. Lenczner have very different views regarding what is the essentiallis between the parties, we are not persuaded, at this time, that it is probable that Mr.Naster has relevant evidence to give in connection with this matter. In this context, we viewrelevance to mean evidence that tends to make the existence of any fact in issue moreprobable or less probable than without the evidence. Consequently, the Applicant fails tomeet the test of probable relevance.

(2) Necessity

The second test is contained in R. v. Sungalia, [1992] O.J. No. 3718 (Ont. Ct. Gen. Div.)wherein defence counsel sought to examine Crown counsel concerning a witness interview.Mr. Justice Campbell states:

There is a persuasive burden on the lawyer who seeks to force opposingcounsel to go into the witness box and relinquish his role as counsel. Thepersuasive burden is to show relevance and necessity.

More recently, in R. v. Brown et al (No. 1), supra, at 44-45, Trafford J. held that there wasno necessity to call the Crown as a witness where other individuals could testify as to thesame matter.

Lastly, although Ms. Kingston has relevant evidence to offer to the court asa result of the interviews of November 15 and 28, 1994, there is nocompelling or legitimate need to call her as a witness. Both DetectiveSneddon and Robert Charley are available to testify at trial. Both of themcan give evidence of the critical aspect of those meetings, namely, theidentification of Francis and the reason for the change since April 22, 1994.If, contrary to the evidence called on this application, other aspects ofthose interviews become material, those witnesses may, in somecircumstances, be able to refresh their memories from the notes of Ms.Kingston. See R. v. Carosella (1995), 102 C.C.C. (3d) 28 (Ont. C.A.) andR. v. Buxbaum (1989), 70 C.R. (3d) 20 (Ont. C.A.). Alternatively, theCrown may make admissions of fact to obviate any necessity to call her totestify.

We are not persuaded that Mr. Naster's knowledge concerning YBM is not shared by otherswho can testify, should the circumstances require it. If Staff's knowledge becomes a factin issue in this matter, the director, being the decision maker under s. 61 of the Act, andother Staff, past and present, have significant knowledge of the facts associated with theissuance of receipt to YBM. In addition, we are not persuaded that Mr. Naster's state ofknowledge could not be stipulated or admitted based on the materials disclosed in the sixAffidavits filed in the Divisional Court. Consequently, the Applicant has not met this test.

(3) No Premature Applications

The third test is found in Essa Township, supra at 582 where the Divisional Court had toconsider a removal request at the pre-trial stage:

As discussed in the Carlson decision, an application to remove counsel canbe made to the trial judge when it is certain there is a problem. In this caseMr. Green may, or may not be, subpoenaed to testify. Concessions oradmissions may be made which will obviate the need to call him as awitness. The evidence he could give may be readily obtainable from otherwitnesses. As issues are developed, or resolved during trial, his evidencemay not be required at all. A trial judge will be in a much better position todetermine if his firm should be disqualified.

We see no reason why this finding should not be applied herein. Staff counsel should beremoved only in clear cases. Mr. Code indicated that he will not subpoena Mr. Naster andMr. Lenczner indicated that it is doubtful that he will subpoena Mr. Naster. Further, thereis an insufficient basis for us to make a determination as to relevance at this time.Accordingly, it is only at the hearing that the necessity of Mr. Naster's evidence can betested. We are of the opinion that this motion is premature.

Mr. Naster did have a role in the pre-allegation stage and has been involved in this matteras a member of the enforcement branch. Such a Staff role emanates from theresponsibilities of the Commission in the administration and enforcement of the Act. AsMadame Justice L'Heureux-Dubé stated in Brosseau v. Alberta Securities Commission,[1989] 1 S.C.R. 301 at 310, "In assessing the activities of administrative tribunals, the courtsmust be sensitive to the nature of the body created by the legislator."

For the above reasons, the motion to remove Mr. Naster as senior litigation counsel in thismatter is dismissed.

January 5th, 2000.

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