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 CORPORATION
(formerly known as First Marathon Securities Limited)

 

STATEMENT OF ALLEGATIONS OF STAFF OF THE ONTARIO SECURITIES COMMISSION

Staff of the Ontario Securities Commission (the "Commission") make the followingallegations:

I. The Respondents

1. YBM Magnex International Inc. ("YBM" or the "Company") was incorporated on March16, 1994, in Alberta, Canada as Pratecs Technologies Inc. On October 5, 1995 the Companychanged its name to YBM. YBM became a reporting issuer in Ontario on January 22, 1996. YBMshares were listed and posted for trading on The Toronto Stock Exchange on March 7, 1996. OnMay 13, 1998 the Commission issued a temporary cease trade order in respect of YBM shares,which order remains in effect. On December 8, 1998, pursuant to an order of the Court of QueensBench of Alberta, a Receiver was appointed respecting the present and future assets, property andundertaking of YBM.

2. During the period May 1, 1996 to May 13, 1998 (the "material time"), there were eightmembers of the YBM Board of Directors (the "Directors"), two of whom were officers of theCompany. The remaining six directors were not officers of YBM. The Directors were:

a) Harry W. Antes ("Antes"), Chairman of the Board of YBM and a member of theYBM Audit Committee; appointed director on April 29, 1996; a retired VicePresident of a technology company;

b) Jacob G. Bogatin ("Bogatin"), President and Chief Executive Officer of YBM;appointed director on April 4, 1994;

c) Kenneth Davies ("Davies"), appointed director on April 4, 1994; a principal of amineral exploration company;

d) Igor Fisherman ("Fisherman"), Chief Operating Officer of YBM; appointeddirector on April 29, 1996;

e) Frank S. Greenwald ("Greenwald"), a member of the YBM Audit Committee;appointed director on April 29, 1996; a retired Vice President of an engineeringcompany;

f) R. Owen Mitchell ("Mitchell"), a member of the YBM Audit Committee;appointed director on January 26, 1996; a Vice President and Director of FirstMarathon Securities Limited (now known as National Bank FinancialCorporation),

g) David R. Peterson ("Peterson"), appointed director on April 29, 1996; a partnerwith a Toronto-based law firm; and

h) Michael D. Schmidt ("Schmidt"), appointed director on April 4, 1994; anindependent businessman.

3. Daniel E. Gatti ("Gatti") was the Vice President of Finance and Chief Financial Officer ofYBM during the material time, appointed an officer on January 26, 1996.

4. Lawrence D. Wilder ("Wilder") is a partner with the law firm Cassels Brock andBlackwell which was the Canadian general counsel to YBM during the material time. Wilder hadprimary responsibility for the YBM engagement which commenced on or about September 1995and ended on August 19, 1998.

5. On or about May 6, 1997, YBM entered into an agreement with two Canadian securitiesdealers to act as co-lead underwriters (the "Co-Lead Underwriters") for a financing beingcontemplated at that time by YBM. The Co-Lead Underwriters, and the percentage of the YBMoffering each was ultimately obligated to purchase, were:

a) National Bank Financial Corp., known during the material time as First MarathonSecurities Limited ("FMSL") which during the material time was, and continues tobe, registered under the Securities Act as a Broker and Investment Dealer (35%);and

b) Griffiths McBurney & Partners ("GMP") which during the material time was, andcontinues to be, registered under the Securities Act as a Broker and InvestmentDealer (35%).

6. In addition to FMSL and GMP, there were three "junior" members of the underwritingsyndicate for YBM's 1997 public offering, which in accordance with the terms of an UnderwritingAgreement dated November 17, 1997 were obligated to purchase the remaining 30% of the YBMoffering.

7. During the material time when Mitchell acted as a Director of YBM, he was also theprincipal representative of FMSL in the underwriting syndicate.

II. Overview of Staff's Allegations

8. There are six specific allegations being advanced by Staff of the Ontario SecuritiesCommission ("Staff"), which may be summarized as follows:

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

b) that the Directors, Chief Executive Officer and Chief Financial Officer of YBMauthorized, permitted or acquiesced in YBM filing a preliminary prospectus datedMay 30, 1997 and a final prospectus dated November 17, 1997 that failed tocontain full, true and plain disclosure of all material facts relating to the securitiesoffered; specifically, material facts respecting the mandate, information obtained byand findings of the Special (Independent) Committee created by the YBM Boardof 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 and plaindisclosure of all material facts relating to the securities offered; specifically,material facts respecting the mandate, information obtained by and findings of theSpecial (Independent) Committee created by the YBM Board of Directors onAugust 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 a materialchange 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 April 20, 1998that it would not perform any further services for YBM, including the rendering ofan audit opinion in respect of YBM's 1997 annual financial statements, until YBMhad completed an in-depth forensic investigation addressing specific concerns tothe satisfaction of D&T;

e) that the members of the YBM Audit Committee (Antes, Greenwald and Mitchell),the Chief Executive Officer (Bogatin), the Chief Financial Officer (Gatti) and theChief Operating Officer (Fisherman) of YBM authorized, permitted or acquiescedin YBM failing to comply with its continuous disclosure obligations by not issuinga news release forthwith disclosing the nature and substance of a material changein the affairs of YBM; specifically, that the auditor for YBM, D&T, had advisedYBM by no later than April 20, 1998 that it would not perform any furtherservices for YBM, including the rendering of an audit opinion in respect of YBM's1997 annual financial statements, until YBM had completed an in-depth forensicinvestigation addressing 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 and atthe time and in the light of the circumstances under which the statements weremade, were misleading or untrue or did not state a fact that was required to bestated or that was necessary to make the statements not misleading; specifically,statements contained in a letter from Wilder to Staff dated July 4, 1997 concerningthe results of due diligence conducted in respect of YBM.

III. YBM's Corporate Structure During the Material Time

9. Although YBM was a Canadian company during the material time, as of May 1, 1997 ithad no Canadian operations. YBM's head office was located in the United States, the location ofits wholly-owned subsidiary YBM Magnex Inc ("YBM Inc."). YBM Inc. controlled 100% of the"ordinary" shares of Arigon Company Ltd. ("Arigon"), an Alderney, Channel Islands company,with offices in Budapest, Hungary. YBM Inc. also controlled 100% of the "ordinary" shares ofUnited Trade Limited ("UTL"), a Cayman Islands company. On or about April 1, 1996, Arigonassigned its assets and business to UTL, also with offices in Budapest, Hungary. The assets andbusiness assigned to UTL included approximately 99.9% of the shares of Magnex RT ("RT"), aHungarian corporation also located in Budapest, Hungary. On April 1, 1996 YBM divested itselfof another subsidiary, Arbat International, Inc. ("Arbat"), a Russian trading company. On orabout August 22, 1997, YBM completed the acquisition of Crumax Magnetics, a magnetmanufacturer located in the United States.

10. According to YBM's public disclosure as of May 1, 1997, YBM was a manufacturer anddistributor of magnets. YBM also bought and sold oil. YBM's magnet manufacturing process wasconducted by RT which owned manufacturing facilities in Budapest, Hungary. Pursuant toagreements entered into between RT and Arigon in September 1992, Arigon transferred to RTmachinery and equipment necessary for the manufacture of magnets. Arigon also becameresponsible for securing all applicable clearances for production purchases and delivery ofmaterials and supplies to RT. Arigon also became responsible for arranging for the marketing, saleand distribution of the products manufactured by RT as well as the marketing, sale anddistribution of products manufactured by others. Arigon was also responsible for the purchase andsale of oil. On or about April 1, 1996, these responsibilities were assumed by UTL. Fisherman,who was the President of Arigon, and other officers and directors of Arigon, resigned theirpositions at Arigon and assumed the same appointments with UTL.

11. On April 29, 1996, the newly constituted Board of Directors of YBM (elected by theYBM shareholders at the annual meeting held earlier that day) held a meeting attended by all ofthe Directors and YBM's Canadian general counsel. During the meeting the Directors discussedthe reasoning for the divestiture of Arbat and the relocation of Arigon. The minutes of themeeting record the following:

The Chairman [Bogatin] updated the board as to various other matters including theCompany's plans to sell Arbat International Inc. to a group of arm's length purchasers forconsideration equal to approximately (US) $250,000. The Chairman indicated that therationale for the sales [sic] was that the Company's operations in Eastern Europe weredifficult to supervise and exposed it to certain potential liability. The Chairman confirmedthat Arbat will continue to render services to the Company but only on a contractual basis.

The Chairman also advised the board of a proposal to relocate the Company's wholly-owned subsidiary, Arigon Co. Ltd. from the Channel Islands U.K. to the Cayman Islands.The Chairman explained that the rationale for such move was to bring Arigon's operationscloser to the Company's North American headquarters. The Chairman advised that theRoyal Bank of Canada was assisting the Company and Arigon in this move. The Chairmanalso advised that upon completion of such move, Arigon's name will most likely bechanged to United Trade Limited. The Chairman advised that this move would beaccomplished by way of a tax free reorganization of assets.

IV. The Alleged Failure to Make Full, True and Plain Disclosure of All Material Facts

i) What Was Disclosed by YBM?

12. On May 30, 1997 YBM filed a short-form preliminary prospectus with the Commission.

13. The preliminary prospectus contained a Certificate which was signed by Bogatin andGatti in their capacity as CEO and CFO respectively, and by Antes and Peterson on behalf of theBoard of Directors. The Certificate stated that:

The foregoing together with documents incorporated herein by reference, constitutes full,true and plain disclosure of all material facts relating to the securities offered by thisprospectus as required by the securities laws of the provinces of...Ontario...

14. The preliminary prospectus also contained a Certificate signed by each of theunderwriters (including the Co-Lead Underwriters) stating that:

To the best of our knowledge, information and belief, the foregoing, together with thedocuments incorporated herein by reference, constitutes full, true and plain disclosure ofall material facts relating to the securities offered by this short form prospectus as requiredby the securities laws of the provinces of...Ontario...

 

15. YBM's Annual Information Form, dated May 1, 1997 ("AIF"), was incorporated byreference in the preliminary prospectus. The AIF stated, in part, under the heading "BusinessRisks, Risks Associated with Activities in Eastern Europe", that:

The Company's manufacturing operations are located in Hungary. Additionally, 47% ofconsolidated net sales are concentrated in Eastern Europe. Economic, political and generalbusiness conditions in these regions are highly inflationary and are potentially unstable.

The evolving market economies in Eastern Europe are characterized by a high level ofcash transactions as well as less rigorous financial controls. The Company has andcontinues to implement recommendations made by independent public accountants andothers with expertise in these regions to improve the Company's operations in theseregions.

Over the last two years the Company became aware of concerns that had been expressedin the media and by government authorities generally concerning companies doingbusiness in Eastern Europe and, particularly, in Russia. To this end, the Company hastaken a number of steps to address these concerns, including:

1. The divestiture in the first quarter of 1996 of Arbat International Inc. ("Arbat"),the Company's Russian trading company which distributed a variety of consumergoods and materials through Eastern Europe and Russia. Upon a review of Arbat'soperations, management was not satisfied that adequate customer and salesrepresentative acceptance procedures could be implemented, including monitoringthe propriety of sales commissions paid to sales representatives; and

2. the establishment of an independent committee of the Board of Directors whoretained experts knowledgeable with political, social and economic issues inEastern Europe to review the Company's operations to ensure that they areconsistent with the standards applicable to Canadian public companies.Recommendations resulting from such review are being implemented by theCompany. The Board of Directors, through the Audit Committee, will monitorongoing compliance by the Company with such recommendations.

16. On June 3, 1997 a meeting was held between Staff responsible for the review of thepreliminary prospectus, Canadian general counsel for YBM, counsel for the underwriters (Fogler,Rubinoff) and senior officers of the Co-Lead Underwriters. The purpose of the meeting was todiscuss the time frame for Staff's review of the preliminary prospectus. During the course of themeeting Staff was informed that YBM had hired The Fairfax Group, a firm located in the UnitedStates, to look into rumours and innuendo surrounding the Company. Staff was informed at thismeeting that Fairfax could not find any evidence to substantiate the rumours. Staff was alsoinformed that YBM's Canadian general counsel did not look into whether the authorities in theUnited States had any concerns with the Company, but understood that the United States JusticeDepartment approved the Crucible [Crumax Magnetics] transaction which gave Canadian generalcounsel comfort.

17. Staff issued its first comment letter in respect of the preliminary prospectus on June 16,1997. Among the comments made by Staff in respect of the AIF was the following:

On page 6, under the heading "Risks Associated with Activities in Eastern Europe",reference is made to new standards for business practices being implemented by theBoard. Please describe the circumstances respecting the review [by the IndependentCommittee of the Board of Directors referred to in the AIF] of the Company'soperations. What recommendations are being implemented? Describe the "standardsapplicable to Canadian companies". [emphasis added]

18. On June 18, 1997 YBM, through their Canadian general counsel, in a letter copied tocounsel for the underwriters, responded to Staff's first comment letter and, in connection withStaff's request for information in respect of the "Circumstances Surrounding the Review of theCompany's Operations", stated as follows:

Over the past year, the Company has had some difficulty in being issued certain businessvisas for employees. As a result, the Company decided to investigate this further in orderto resolve the problem. The Company's efforts confirmed that U.S. law enforcementagencies had placed a priority on uncovering infiltration of organized crime from theformer Soviet Union into U.S. businesses. Given the roots of the Company and itsaffiliates in Russia, and the involvement of former Russian nationals as shareholders andmanagers of the Company, the Company believes that it may have been examined aspart of any such investigation. The visas which prompted the concerns were subsequentlyissued by the U.S. Government without comment.

As noted in the AIF, the Company took a number of steps to address any possibleconcerns, including the divestiture in the first quarter of 1996 of Arbat International Inc.,the Company's Russian trading company, and the establishment of a special committee ofthe board to review the operations of the Company in Eastern Europe.

Special Committee Recommendations

The Special Committee made the following recommendations which have been or arebeing implemented by the Company's management:

- Establishment of improved cash controls at the Company's Hungarian facilities;

- Establishment of more detailed customer and agent approval criteria;

- Establishment of a more accurate data base on these customers and agents;

- Establishment of new management information systems; and

- Consolidation of accounting control at the Company's Newtown, Pennsylvania,head office through establishment of integrated information systems at each site ofthe Company's operations.

Standards Applicable to Canadian Companies

The reference in the AIF to "standards applicable to Canadian companies" refers tointernal controls and financial reporting requirements normally found in diversifiedCanadian public companies. [emphasis added]

19. On June 24, 1997 Staff requested that YBM undertake an independent audit of YBM'sincome statement for the year ended December 31, 1996 and requested that the assignment beperformed by a "Big Six" accounting firm. In response to Staff's proposal, by letter dated July 4,1997, Wilder informed Staff as follows:

As discussed above, the Confirming Accountant will be in a position to deliver its reportto you no later than Tuesday, July 8, 1997. Based upon the results reported to date, webelieve that the report will represent a continuation of the series of favourable duediligence results pertaining to the business of YBM conducted by independent parties.This stands in stark contrast to the rumors and innuendo to which YBM has been subjectand which , based upon the information provided to us to date, have not been subject toany outside scrutiny or independent verification whatsoever.

 

As discussed previously, the Company, its advisors, as well as the underwriters and theiradvisors have made every effort to address each concern raised to date in order tocomplete this financing and allow the Company to complete its acquisition transactionwhich is crucial to its continued success. Needless to say, YBM's inability to proceed withthis financing despite the efforts of all the parties concerned and referenced herein wouldhave serious and lasting negative consequences to the Company and its shareholders. Werespectfully submit that such an occurrence would not be in the public interest in view ofthe extensive due diligence completed to date and the uniformly positive resultsthereof. [emphasis added]

20. On October 13, 1997 D&T issued an unqualified audit opinion in respect of YBM'sfinancial statements as of December 31, 1996. The audited financial statements formed part of amaterial change report issued by YBM dated November 13, 1997.

21. On November 17, 1997 Bogatin and Gatti, in their capacity as CEO and CFO respectively,and Antes and Peterson, on behalf of the Board of Directors, signed the Certificate to YBM'sfinal prospectus representing that the prospectus, together with the documents incorporated byreference therein, constituted full, true and plain disclosure of all material facts. Each of theunderwriters (including the Co-Lead Underwriters) signed a Certificate representing that, to thebest of their knowledge, information and belief, the prospectus and the documents incorporatedby reference therein, constituted full true and plain disclosure of all material facts.

22. On November 20, 1997 YBM received a receipt for the final short-form prospectus datedNovember 17, 1997. Pursuant to the final prospectus YBM distributed 3.2 million common sharesfor gross proceeds of $52.8 million. In addition, the final prospectus qualified the distribution ofan additional 4 million common shares issuable upon the conversion of $48 million of securedconvertible notes which YBM had previously distributed, on a prospectus-exempt basis, on orabout August 21, 1997. The underwriters' fee, exclusive of any over-allotment option, was$2,376,000. In addition, subsequent to the closing of the public offering, YBM paid to FMSL andGMP $600,000 each for advisory services rendered in connection with the $48 million privateplacement noted above.

23. The final prospectus continued to incorporate by reference YBM's AIF. Alsoincorporated by reference was the November 13, 1997 material change report. In respect of thereview of the Company's operations conducted by the independent committee of the YBM Boardof Directors and experts retained by it, as referred to in the AIF, the only additional disclosurecontained within the final prospectus, or any document incorporated by reference therein, was thefollowing, as stated in the final prospectus:

In order to address the special risks inherent in carrying on business in Hungary inparticular and Eastern Europe in general, YBM:

(a) has established improved cash controls at its Hungarian facilities;

(b) has developed more detailed end user and distributor approval criteria;

(c) is in the process of establishing a more accurate database respecting itsdistributors and end users;

(d) is in the process of implementing new management information systems;and

(e) is in the process of improving and centralizing controls over all of itsinternational accounting activities at its Newtown, Pennsylvania headoffice.

The intent of the foregoing initiatives is to ensure that despite the fact that YBM carrieson a substantial portion of its activities in Eastern Europe, its internal controls andfinancial reporting standards will be in accordance with those otherwise generallyapplicable to Canadian public companies...

ii) What Was Not Disclosed?

24. On August 15, 1996 the Board of Directors of YBM held a meeting at the YBM offices inNewtown, Pennsylvania. All of the Directors were in attendance along with Gatti, Wilder, andYBM counsel from the United States ("U.S. Counsel"). According to the minutes of the August15, 1996 meeting, the following was discussed:

Jacob Bogatin and Daniel Gatti discussed the largely publicized interest of the UnitedStates government in companies doing business in Eastern Europe. They indicated thatit is likely that the United States government has an interest in YBM because of thedegree of scrutiny employees receive traveling to and from YBM's Hungarianoperations and because of comments made to management in pursuing reasons forsuch delays. In addition, YBM Magnex has sponsored a number of employees (Hungarianand Russian nationals) in obtaining visas and has assisted many of them with USImmigration Laws. They informed the board that management in the past six months, hadtried to establish closer ties to U.S. embassys [sic] abroad. They also indicated that theU.S. government, probably as a matter of policy, looks at any company with ties toEastern Europe. Management does not believe such interest will be alleviated until themarket economies in Eastern Europe are fully developed and business relationshipsbetween the East and West become routine. [emphasis added]

25. Among the "comments made to management in pursuing reasons for such delays" werecomments made by U.S. Counsel for YBM to Bogatin on August 2, 1996. U.S. Counsel reportedon inquiries made of the United States Attorney for the Eastern District of Pennsylvania, statingas follows:

 

Peter called the U.S. Attorney and requested a meeting and offered the Company's fullcooperation. The U.S. Attorney returned Peter's call and said he could not meet with us[YBM]. He confirmed that the Department of Justice was conducting a "highlysensitive" criminal investigation of YBM Magnex and that it would be inappropriate tomeet with us. He told Peter that nothing we could offer would be appropriate at this time.He said he could not discuss the nature of the investigation because it is "especiallysensitive".

In view of the fact that, for the first time, we have a confirmation that YBM Magnexis the target of a federal criminal investigation, we must advise that this informationbe immediately made known to the Board of Directors. Peter and I are willing to meetwith your Board and make a full report, if you believe it would be helpful. The Board maywish to consider undertaking a full internal investigation, although we have previouslydiscussed the difficulties of investigating when we are unaware of the nature of the specificallegations against the Company.

I believe we have exhausted our efforts to obtain information about the nature of theconcerns that the federal government has about YBM Magnex. We have no idea how longthis cloud may continue to linger over the Company. We do know, however, that thesituation is serious. [emphasis added]

 

26. On August 29, 1996 a Special Meeting of the YBM Board of Directors was held inToronto. Minutes of this meeting have not been identified. Attending this meeting were: Antes,Davies, Greenwald, Mitchell, Peterson, Wilder and U.S. Counsel for YBM. The Board concludedthat a Special (Independent) Committee should be formed to investigate the situation. It wasfurther decided that no further discussions would be held or attempted with U.S. authorities untilthe Special Committee provided a final report. Members of the Board appointed to the SpecialCommittee were Mitchell (Chair), Davies and Schmidt.

27. On November 1, 1996 the Board of Directors held a meeting via conference call. Nominutes or notes of this meeting have been identified. However, the Special Committee preparedan Interim Report entitled "Report of the Special Committee to the Board of Directors" (the"Interim Report") on or about November 1, 1996. The Interim Report included the followingcomments:

In August 1996, the management of [YBM] were made aware of a pending investigationof the Company and its activities through the U.S. Attorney's office in Philadelphia. Thefocus of the investigation was not disclosed, however, discussions with counsel confirmedthat U.S. law enforcement agencies had placed a priority on uncovering infiltration ofOrganized Crime from the Former Soviet Union into U.S. business. Given the roots ofYBM and its affiliates in Russia and the involvement of former Russian nationals asshareholders and managers of the Company it was viewed to be a reasonable expectationthat this would be the basis of such investigation.

28. The Interim Report described the mandate of the Special Committee as being to"independently investigate possible areas of concern" and to "report back to the Board on findingsand recommended further actions". The Interim Report also indicated that the Special Committee"was given clear authority to undertake any independent actions or investigations which it feltwere appropriate". Among the further actions proposed by the Special Committee was to engagea "professional East European investigator to provide [the Special Committee] with a backgrounddossier on certain individuals who were original shareholders of YBM and/or who have acted ascommissioned salespeople receiving material compensation from the Company".

29. On or about November 8, 1996, at the recommendation of Peterson, YBM retained theservices of an independent company, The Fairfax Group, Ltd. ("Fairfax"). Fairfax, now known asDecision Strategies/Fairfax International LLC, is an international investigative and security firmthat conducts corporate investigations. The Fairfax officials responsible for the YBM investigationconsisted of three senior officials: a lawyer who was a former Special Prosecutor; a forensicaccountant; and a retired U.S. Ambassador and former senior official with the U.S. StateDepartment. A Retainer Agreement was entered into on or about November 14, 1996 signed onbehalf of YBM by Mitchell. Fairfax's initial assignment was to "assist the client by undertaking adue diligence and internal investigation of YBN [sic] Magnex, International located inPhiladelphia and Hungary".

30. In conducting its investigation, Fairfax performed extensive background checks on variouspersons and companies associated with YBM relying on various data bases and a network ofsources located throughout the world. They also attended at offices of YBM and its subsidiariesin Philadelphia and Budapest, spoke with members of senior management, reviewed companyrecords and met with some of the original shareholders of YBM. In the period December 1996 toMarch 21, 1997 Fairfax regularly briefed Mitchell on the status of its investigation, including anextensive briefing on March 3, 1997 at a meeting in Chapel Hill, North Carolina during whichMitchell informed Fairfax that he would write a report reflecting the information provided byFairfax.

31. On March 21, 1997 Fairfax reported orally on the results of its investigation to date at ameeting in Toronto. Participating in this meeting on behalf of YBM were Mitchell and Wilder inperson, and Antes and Schmidt via telephone. At the conclusion of Fairfax's presentation,Mitchell requested Fairfax to make the same presentation at a meeting in Philadelphia thefollowing day. Participating in the March 22, 1997 meeting on behalf of YBM were Mitchell,Antes, Bogatin, Gatti, Wilder and YBM's U.S. Counsel.

32. Among the information conveyed by Fairfax during the meetings on March 21 and 22,1997 was the following:

a) that reliable Fairfax sources in several agencies of the United States Governmenthad indicated that the visa problems being experienced by YBM personnel weredue to issues involving national security and organized crime;

b) that the original shareholders of YBM were confirmed as being members of thesame Russian organized crime syndicate (the "Organization"), with interests inEurope (East and West), the Middle East and North America;

c) that among the companies which reliable sources had identified as being owned orcontrolled by the Organization were Arbat in Russia, Arigon in the UnitedKingdom and "Magnek" in Hungary;

d) that a review of YBM records had revealed that sales commissions in excess of$2.5 million had been paid by Arigon to a principal leader of the Organization andhis chief assistant in the years 1993 to 1996;

e) that the equipment sold by the original shareholders to RT for approximately $14million may have been overvalued, the equipment having been purchased for one-tenth of the value recorded on the books of RT, and that the records documentingthis transaction may be false;

f) that the sale of Arbat on or about April 1, 1996 for $250,000 (of which only$150,000 was received by YBM) was to two persons who were identified as beingmembers of the Organization and as having received sales commissions fromArigon/UTL in 1996 totaling in excess of $150,000;

g) that UTL was using a bank account, in the name of a company which was not partof YBM's publicly disclosed corporate structure, as its main operating account;that transactions involving millions of dollars went through the account; and thatthis account was controlled by one of the YBM original shareholders who wasneither an officer nor an employee of UTL;

h) that there were indications that certain books and records had been falsified;

i) that in the opinion of Fairfax all of the "ingredients" were present for YBM to beused for money laundering activities; and

j) that in respect of companies with which YBM was doing business, some of thesecompanies were shells, others were shells within shells, others did not exist, andstill others were owned by persons who had received sales commissions fromArigon/UTL.

33. At both the March 21 and 22, 1997 meetings, Fairfax made it clear that in their view thekey issue confronting YBM was that there were a number of organized crime figures involved inthe operations in Hungary and that this was a serious problem. Fairfax made a number ofrecommendations for YBM's consideration.

34. On April 9, 1997 Mitchell sent to Fairfax for their review and comment a document,drafted by Mitchell and Wilder, entitled "Report of the Special Committee to the Board ofDirectors YBM Magnex International Inc. April 2, 1997". Fairfax had significant reservationsrespecting the contents of this document which included a section entitled "Results of the FairfaxReview". Fairfax provided their comments to Mitchell in a telephone conference call on April 10,1997. Fairfax informed Mitchell that the report was inaccurate and that it did not reflect Fairfax'sfindings and the information which had been conveyed to Mitchell. Subsequently, Fairfax did notreceive any further information as to what, if anything, Mitchell may have reported to the YBMBoard of Directors.

35. On April 13, 1997 at the request of YBM, Fairfax attended a meeting in Philadelphia.Bogatin, Gatti and Mitchell attended this meeting on behalf of YBM. At this meeting Bogatinattempted to refute the information provided by Fairfax indicating that there was no clear proof.Fairfax stood by its findings. Mitchell indicated that Fairfax might receive a call from certainunderwriters.

36. At no time prior to May 13, 1998 was Fairfax contacted by anyone to discuss the workwhich they undertook on behalf of YBM. In particular, Fairfax was not contacted by any Directorof YBM who did not participate in the meetings noted above. Nor was Fairfax contacted by anyperson identifying themselves as a representative of the underwriters. At no time did Fairfaxexpress to YBM or its advisors any reluctance to speak with underwriters or any other thirdparties at the direction of YBM.

37. A copy of the "Report of the Special Committee to the Board of Directors YBM MagnexInternational Inc. April 2, 1997" was provided to FMSL and to counsel for the underwriters. Theword "Draft" is written on the upper right-hand corner of the document. According to counsel forthe underwriters, the contents of this report were fully and fairly described by Mitchell at ameeting attended by a representative of GMP. Information contained within this report may besummarized as follows:

a) U.S. Counsel for YBM was advised "off the record" by the U.S. Attorney's Officethat there was an "ongoing investigation" involving YBM; while unable to uncoverfurther particulars counsel confirmed that U.S. law enforcement agencies hadplaced a priority on uncovering infiltration of organized crime from the formerSoviet Union into U.S. business; on August 15, 1996 YBM management informedthe Board of Directors of its discussions, through counsel, with the U.S.Attorney's Office;

b) on August 29, 1996 a Special Committee was formed to investigate the situation;counsel for YBM advised that due to a lack of clarity surrounding the matter,public disclosure should not be made at that time;

c) the mandate of the Special Committee was to independently investigate possibleareas of concern arising out of the Company's business operations to attempt todetermine the basis for any investigation and to recommend further action toaddress any problems or potential problems uncovered;

d) the initial review of the Special Committee focused on shareholder andemployees/commissioned salespeople, and on contractual arrangements withcustomers; these two areas were chosen as a focus "because the greatest threat tothe Company would be an investigation which questioned the legitimacy of its corebusiness";

e) the Special Committee reviewed the original shareholders list; this review did notraise any concerns, but the Special Committee nevertheless undertook a furtherreview;

f) there is no evidence that the existence of any investigation has impacted on tradingwhatsoever; "Accordingly, the Committee assumes that, to date, in accordancewith the strict direction of the Board, the information has not been disclosed toparties outside the Company, its Board and advisors";

g) the initial review of the Special Committee identified very substantial commissionpayments paid by Arbat which seemed inconsistent with Arbat's business;

h) the Special Committee was concerned about one set of parallel records whichshowed substantial payments to a person on one set and the exact same paymentsto a corporate entity with a different name on another; later a third version wasidentified and had different amounts and payees; management of YBM had noexplanation for this;

i) on November 1, 1996 the Special Committee reported to the Board on the initialreview recommending that further investigation of the original shareholders beundertaken and that commissions paid also be reviewed; it was recommended thatexperts in this type of investigation be engaged as soon as possible;

j) the Special Committee retained Fairfax, a large U.S. consulting organizationoperated by former senior Justice Department, State Department and F.B.I.officials; Fairfax came highly recommended and exhibited a strong track recordwith respect to dealings in Eastern Europe;

k) Fairfax was requested by the Special Committee to: discover more detailsrespecting the "ongoing investigation"; do background checks on management andthe original shareholders; do background checks on recipients of commissions;randomly examine business transactions recorded in the records of the Company toascertain if bona fide; and review YBM operations and make recommendationsregarding improved controls;

l) the Results of the Fairfax review [as reported in the "Report of the SpecialCommittee to the Board of Directors YBM Magnex International Inc. April 2,1997" which was provided to FMSL] included the following:

i) initial background checks on management showed no concerns regardingBogatin or other managers located in the United States; in Eastern Europe,however, a number of concerns arose; recipients of Arbat commissions in1993-95 had clear ties to Russian organized crime; another recipient ofcommissions from Arbat was incarcerated in Switzerland; the basis of thesepayments appears to be unsupportable; even though Arbat was sold it wasunder the operating control of one of the original shareholders; Arbat wasidentified as an alleged vehicle for criminal acts;

ii) the original transaction respecting the acquisition of the equipment "wasnot as originally described"; prices paid were not as recorded on invoices;invoices were prepared well after the fact; the price paid by originalshareholders for the equipment "is a fraction of the face value taken backby the original shareholders in preferred shares";

iii) "A second area of concern raised by Fairfax was the commingling of thebusiness activities of Magnex RT, United Trade (the offshore sales arm ofYBM) and those of the original shareholders resident in Budapest. Thesame office building was being used to transact activities for all thebusinesses and [one original shareholder] in particular was activelyinvolved in activities related to United Trade and Magnex RT despite notbeing an officer or employee of either company. There was a bank account(since terminated) through which Company business was transacted towhich [this original shareholder] was a signing officer. Management hasalready taken steps to relocate office activities and ensure properseparation"; this same original shareholder has a long-standing friendshipwith YBM's Chief Operating Officer; "foreign sources also connect theoriginal shareholders with criminal activities including prostitution althoughnone have been convicted or are wanted by authorities";

iv) there were a substantial number of cash transactions, in particular paymentof salaries and commissions; there was a large volume of cash on hand;management has already taken steps to severely restrict the use of cashpayments; and

v) the customer lists were reviewed and it was very difficult to establish endusers for the products because of the use of intermediate agents for mostsales;

m) the Conclusions of the Special Committee included the following:

i) there is no evidence that "senior management of YBM is in any wayinvolved in any illegal or improper activities";

ii) that in respect of the questions surrounding the original shareholders, "it isnot surprising that allegations should be made at successful businessmen ofRussian origin trading between the Former Soviet Union and the West";

iii) the original shareholders, in aggregate, control over 40% of YBM commonstock; "the existence of this block of shareholders is of concern to theCommittee. This concern will be reduced following the completion of theequity issue to fund the Crucible acquisition..."; and

iv) the Committee directed management to eliminate any ties to the originalshareholders in the "day-to-day operations of the Company";

n) the Recommendations of the Special Committee were as follows:

"a) Provide the Board with an action plan to address each of the followingareas:

- Elimination of commingling of business activity with that ofCompany shareholders in Europe;

- Establish operational controls to ensure that managementremains operationally independent from the foundingshareholders;

- Establishment of improved cash controls in Hungary;

- The setting of more detailed customer and agent approval criteria;

- The establishment of an accurate data base on these customers andagents;

- Consolidation of accounting control in Newtown; and

- Engage a major accounting firm for the completion of future audits.

b) Establish a permanent subcommittee of the Board or the Audit Committeeto supervise compliance with these recommendations and other issuessurrounding corporate ethics in the future.

 

c) Advise the underwriters financing the acquisition of Crucible as to thebackground and results of this investigation.

d) Consider the establishment of a voluntary escrow of the OriginalShareholders' shares until the completion of the acquisition and theclearance of the associated Special Warrants." [emphasis added]

38. On April 25, 1997 there was a meeting of the YBM Board of Directors held in Toronto.The meeting was attended by all of the Directors with the exception of Fisherman. Among othersin attendance were Gatti and Wilder. Among the items on the agenda for this meeting was the"Report of Special Committee", which discussion was to be led by Mitchell.

39. Mitchell has indicated that a version of the report marked "BOARD DISCUSSIONDRAFT", substantially similar to the version of the report provided to FMSL summarized above,was presented to the Directors at the April 25, 1997 Board meeting. Approved minutes of thismeeting have not been identified.

40. One set of draft minutes of the April 25, 1997 Board meeting simply states that "Mitchellupdated the Board on the findings of the Special Committee. He stated that a draft report wouldbe tabled at the next meeting". Another set of draft minutes for the April 25, 1997 Board meetingrecords that "Mitchell updated the Board on the findings of the Special Committee. His reportencompassed the following". These draft minutes then record, word for word, what wasultimately disclosed by YBM in their AIF (see paragraph 15 above).

41. Two sets of handwritten notes (identified below as Note 1 and Note 2) of the April 25,1997 Board meeting, obtained from the records of YBM's Canadian general counsel, record thefollowing in respect of the Board's discussion of the Special Committee:

Note 1:

-Special Matter - Owen

-mgmt brought it to our attention

Fairfax engaged

-confirmed active investigation

-payments made by Arbat

-to alleged crime figures

-not material amounts but

significant dollar amounts

-at first opportunity, sold bus.

-Isvestia [sic] article

-retracted

-[an original shareholder] - associated with OC but never chargedor convicted

-[an original shareholder] - alleged - KGB

Concern

-large cash transactions - mgmt fixing

-co - mingling - [an original shareholder] - fixed

-adequacy of acctg - being fixed

-preferred shares - issued for $11M(U.S.)

- FMV of equip valued in $11M

- acquired equipment for much less

-Coopers hired to do valuation

- came in very high

Note 2:

Special Committee

Written report to be worked [?] with counsel

*Arbat - trade goods in Soviet Union

Payments made as commissions to Org Crime

first opportunity sold business

*Newspaper Article

Crime figures a shareholder

Only 1 - [an original shareholder]

3 individuals receiving commission questionable

original shareholder no record

sources associate them

[an original shareholder] believed to be former KGB

sits on Russian Anti-Crime Commission

Fairfax says sources tell them they are involved with bad people

*Assess [?] Hungary facility

interview 5 of original 6 shareholders

background check of buyers

Clearly there is business

customers & suppliers

They found 3 or 4 areas of concern

1) large amount of cash transactions

European Tax Plan

Issue being addressed

2) Excessive commingling activities

of company with original shareholders

Management addressing

3) Accounting records not NA stand

Improving them

systems should not be able to

be overwritten

4) Original purchase of equipment

Equipment for shares

11 mill assessed value

invoices created at a latter date

price paid actually about 1/10

US Customers

list of purchasers

Initial great concern

Agent addresses - endusers

were real. A lot of NA

sales booked through agent address

in Russia/Ukraine

Segment information correct

Fairfax satisfied.

 

V. The Alleged Failure to Disclose a Material Change

42. On December 3, 1997 D&T agreed to serve as auditors for YBM and to conduct the auditof YBM's annual financial statements for the year ending December 31, 1997.

43. On March 19, 1998 Bogatin sent a memo to the Vice-President of Finance for UTL,copied to the Audit Committee of the YBM Board (Antes, Mitchell & Greenwald), and toFisherman and Gatti, stating:

As you may be aware, we have not yet received the 1997 audit report. Deloitte & Toucheis reluctant to issue their report until the Board of Directors of YBM evaluates thereckless actions of United Trade related to the escrow agreements signed in December1997. If you are unaware, United Trade entered into these agreements without anyone'sknowledge or approval. Moreover, the money [US$32.2 million] was placed with anunacceptable offshore bank.

44. On March 23, 1998 D&T met with the YBM Audit Committee. At this meeting D&Tbrought to the Audit Committee's attention significant accounting and business issues includingmanagement's lack of internal controls over material liquid assets of the Company. D&T providedthe Audit Committee with a list of certain transactions in respect of which D&T expressedconcerns. The Audit Committee undertook to develop a detailed plan to investigate thesetransactions to the satisfaction of D&T. D&T informed the Audit Committee that in order tocomplete its audit, D&T would need to review and consider the results of the investigation. It wasanticipated that the investigation would take several weeks.

45. In a memo dated April 7, 1998 Gatti provided to the Audit Committee a summary of thevarious transactions which were identified by D&T as requiring further inquiry by the AuditCommittee. Gatti noted the following:

Since its inception, United Trade has controlled its own cash. United Trade managementhas been able to authorize and execute transactions consistent with running its day-to-dayoperations. My arrival in January 1996 did not result in a modification to this delegation ofauthority.

 

Since January 1996, corporate finance has made many operating changes andimprovements in Hungary. However, there have been other proposed changes andimprovements, including moving cash management to corporate headquarters that havenot been endorsed by the CEO and COO. The transactions above validate the need toestablish greater cash controls from corporate headquarters.

46. On April 9, 1998 YBM held a meeting of the Board of Directors in Philadelphia.According to minutes of the meeting all members of the Board were in attendance. Mitchellpresented to the Board the concerns raised by D&T respecting certain transactions involvingescrow arrangements, acquisitions and the identity of the escrow agent. Mitchell also reviewed anadditional "spin-off concern" identified by D&T: that the Company engaged in related partytransactions whereby suppliers of magnets, providers of goods and services, buyers of magnetsand sellers of technology to YBM were, in certain circumstances, the same parties. Mitchelladvised the Board that a detailed review of the transactions was required. The Board resolvedthat the Audit Committee be authorized to "to investigate and ascertain the facts" respecting thevarious transactions in respect of which D&T had expressed concerns, and directed the AuditCommittee to report their findings to the Board and D&T.

47. On April 19, 1998 D&T participated in a conference call with Antes, Mitchell and YBM'sU.S. Counsel. During the course of the meeting D&T indicated that since March 23, 1998 theyhad tried to get comfortable with some of the questioned transactions but had been unable to doso. D&T advised that a forensic investigation was required. D&T told the Company that it was ina "stop position" and that no further audit procedures or any other service would be rendered byD&T on behalf of YBM.

48. By letter dated April 20, 1998 from D&T to Mitchell, copied to Antes, D&T confirmedtheir discussion on April 19, 1998 indicating that the information they had received to date hadmade them "extremely concerned"; that there was uncertainty respecting the status of certainentities involved in the questioned transactions and that certain individuals associated with theseentities and related entities were reputed to have ties to organized crime. D&T further advisedthat "the information obtained heightens our serious concerns that these transactions may bebogus and are being used to cover the flow of money between these companies for otherpurposes".

49. In the letter of April 20, 1998 D&T also reiterated its request for an in-depth forensicinvestigation and that such investigation should not involve management of YBM. D&T alsostated the following:

We will not perform any further audit procedures or other services for YBM until theCommittee completes its investigation and all matters are resolved to our satisfaction.Upon completion of the investigation, Deloitte &Touche will need to make adetermination (i) whether it is willing to continue to be associated with YBM; (ii) whetherit is able to issue an opinion on YBM's 1997 financial statements; and (iii) whether it willcontinue to be associated with YBM's 1996 financial statements.

We believe that it is highly unlikely that these issues can be resolved by your April 30 filingdeadline. We are also concerned that you have released your 1997 earnings. Accordingly,we recommend that you consult with your securities counsel to address these issues.

50. On April 27, 1998 YBM issued a news release in which YBM announced its results fromoperations for the three month period ending March 31, 1998. YBM reported that net income hadincreased 94.6% compared to the year before and that sales had increased 38.2%. The newsrelease contained no information respecting the 1997 audit.

51. On April 28, 1998 D&T informed Mitchell and Antes that it was concerned that YBMhad released its first quarter earnings for 1998, having regard to the fact that the issues relating tothe questioned transactions which occurred in 1997 had not been resolved and may have animpact upon first quarter earnings. D&T also recommended that:

...you consult with your securities counsel to address the Company's need to disclose tothe Ontario Securities Commission and the public that the audit of the Company's 1997financial statements has been suspended pending the completion of an investigation by theAudit Committee....

52. On May 8, 1998 D&T once again informed Mitchell and Antes that it was concerned thatthe Company had released its first quarter results but had failed to disclose that D&T hadsuspended its audit.

53. On May 8, 1998 YBM issued a news release announcing that it was in the process of filingan application with the securities regulators seeking a 45-day extension from the May 20, 1998deadline for filing and mailing its 1997 audited financial statements to shareholders. In the newsrelease YBM disclosed that the reason for the application was that "it is possible that it [YBM]will not receive an audit report on its 1997 financial statements from its auditors, Deloitte &Touche LLP, in time to meet the required filing and mailing deadline". YBM disclosed that "aspart of concluding its audit" D&T had requested that the Board of Directors conduct anindependent review of certain aspects of the Company's business and operations in EasternEurope. As to the reason for this review YBM stated:

Management attributes the extensiveness of the audit and the requirement for this reviewto the fact that business practices in the Company's major market, Eastern Europe, differfrom those in North America due to the relatively early stage of development of theEastern European market economies.

54. On May 8, 1998, YBM's Canadian general counsel filed an application with theCommission on behalf of YBM seeking a 45-day extension from the May 20, 1998 deadline forfiling and mailing its 1997 audited financial statements to shareholders. In this application, it isstated:

The Company completed an offering of 3.2 million common shares by way of short-formprospectus on November 26, 1997. In connection with its review of the prospectus, theCorporate Finance and Enforcement Branches of the Ontario Securities Commission (the"Commission") made certain inquiries into the Company's business, operations and publicdisclosure record. To the knowledge of the Company, the inquiries have not beenconcluded and the Company has not been advised of any finding by the Commission inconnection with such inquiries. Largely as a result of the ongoing and increased scrutinyby the Commission, on April 20, 1998, subsequent to the completion of virtually all of thesubstantive portion of the Company's 1997 audit, the Company's auditors, Deloitte &Touche LLP ("D&T") requested that the Company perform an in-depth independentinvestigation (the "Investigation") to confirm the identity of certain parties to certaintransactions involving the Company and generally to confirm the veracity of certaintransactions underlying the Company's business.

55. On May 13, 1998 the Commission issued a temporary cease trade order in respect of thesecurities of YBM. This order remains in effect.

VI. The Allegation that Information Submitted to Staff was Misleading or Untrue

56. In a letter dated July 4, 1997 signed by Wilder and submitted to Staff of the Commissionon behalf of YBM (see paragraph 19 above) the following statements were made:

 

As discussed above, the Confirming Accountant will be in a position to deliver its reportto you no later than Tuesday, July 8, 1997. Based upon the results reported to date, webelieve that the report will represent a continuation of the series of favourable duediligence results pertaining to the business of YBM conducted by independentparties. This stands in stark contrast to the rumors and innuendo to which YBMhas been subject and which , based upon the information provided to us to date,have not been subject to any outside scrutiny or independent verificationwhatsoever.

 

As discussed previously, the Company, its advisors, as well as the underwriters and theiradvisors have made every effort to address each concern raised to date in order tocomplete this financing and allow the Company to complete its acquisition transactionwhich is crucial to its continued success. Needless to say, YBM's inability to proceed withthis financing despite the efforts of all the parties concerned and referenced herein wouldhave serious and lasting negative consequences to the Company and its shareholders. Werespectfully submit that such an occurrence would not be in the public interest in view ofthe extensive due diligence completed to date and the uniformly positive resultsthereof. [emphasis added]

 

VII. Conduct Contrary to the Public Interest

57. It is the position of Staff that the conduct alleged above constitutes conduct contrary to thepublic interest as follows:

YBM Magnex International Inc.

 

a) that YBM failed to make full, true and plain disclosure in its 1997 preliminaryprospectus and final prospectus of material facts respecting the Special(Independent) Committee created by the Board of Directors of YBM on August29, 1996. In so doing, YBM acted in a manner contrary to the public interest.

b) that YBM failed to comply with its continuous disclosure obligations by notissuing a news release forthwith disclosing that YBM's auditor had notified YBM,by no later than April 20, 1998, that it had decided not to perform any furtherservices for YBM, including the rendering of an audit opinion in respect of YBM's1997 financial statements, until YBM had completed an in-depth forensicinvestigation addressing specific concerns to the satisfaction of the auditor. In sodoing, YBM acted in a manner contrary to the public interest.

The Directors and Officers of YBM

c) that each of Antes, Bogatin, Davies, Fisherman, Greenwald, Mitchell, Peterson,Schmidt and Gatti, authorized, permitted or acquiesced in YBM failing to makefull, true and plain disclosure in YBM's 1997 preliminary prospectus and finalprospectus of material facts respecting the Special (Independent) Committeecreated by the Board of Directors of YBM on August 29, 1996. In so doing, eachof Antes, Bogatin, Davies, Fisherman, Greenwald, Mitchell, Peterson, Schmidt andGatti acted in a manner contrary to the public interest.

d) that each of Antes, Bogatin, Fisherman, Greenwald, Mitchell and Gatti authorized,permitted or acquiesced in YBM failing to comply with YBM's continuousdisclosure obligations by not issuing a news release forthwith disclosing thatYBM's auditor had notified YBM, by no later than April 20, 1998, that it haddecided not to perform any further services for YBM, including the rendering of anaudit opinion in respect of YBM's 1997 financial statements, until YBM hadcompleted an in-depth forensic investigation addressing specific concerns to thesatisfaction of the auditor. In so doing, each of Antes, Bogatin, Fisherman,Greenwald, Mitchell and Gatti acted in a manner contrary to the public interest.

The Co-Lead Underwriters for YBM's 1997 Public Offering

e) that each of FMSL and GMP signed a certificate to a preliminary prospectus datedMay 30, 1997 and a final prospectus dated November 17, 1997 whichprospectuses, to the best of their knowledge, did not contain full, true and plaindisclosure of all material facts relating to the securities offered; specifically,material facts respecting the Special (Independent) Committee created by theBoard of Directors of YBM on August 29, 1996. In so doing, each of FMSL andGMP acted in a manner contrary to the public interest.

Wilder

f) that Wilder made statements in a letter dated July 4, 1997 to Staff of theCommission that in a material respect, and at the time and in the light of thecircumstances under which the statements were made, were misleading or untrueor did not state a fact that was required to be stated or that was necessary to makethe statements not misleading; specifically, statements concerning the results ofdue diligence conducted in respect of YBM. In so doing, Wilder acted in a mannercontrary to the public interest.

58. Staff reserve the right to make such other allegations as Staff may advise and theCommission may permit.

DATED at Toronto this 1st day of November, 1999.