ONTARIO SECURITIES COMMISSION
IN THE MATTER OF THE SECURITIES ACT, R.S.O. 1990, c.S.5, as amended
YBM MAGNEX INTERNATIONAL INC.
HARRY W. ANTES
JACOB G. BOGATIN
KENNETH E. DAVIES
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)
REASONS FOR DECISION OF THE
ONTARIO SECURITIES COMMISSION
MOTION DATE: February 22, 2001
BEFORE: Howard I. Wetston, Q.C. - Vice-Chair,
Ontario Securities Commission
Mary Theresa McLeod - Commissioner
Robert W. Davis, FCA - Commissioner
COUNSEL: Michael Code - For the Staff of the Ontario
Kathryn Daniels - For the Staff of the Ontario Securities Commission
Brian P. Bellmore - For the Applicant,
Daniel E. Gatti
Paul H. LeVay - For the Applicants,
Harry Antes and
I. NATURE OF THE MOTION
These reasons are in support of an Order issued by the Ontario Securities Commission (the "Commission") on March 8, 2001 dismissing the Motion for relief filed by the Applicant, Daniel E. Gatti ("Gatti" or the "Applicant").
On January 31, 2001, Gatti filed a Notice of Motion with the Commission requesting an order permanently staying the proceeding commenced by Notice of Hearing on November 1, 1999 as against Gatti. The Motion was joined by the Respondents Harry W. Antes ("Antes") and Frank S. Greenwald ("Greenwald"), and supported by the Respondents National Bank Financial Corp. ("National Bank") and Griffiths McBurney & Partners ("GMP").
The Applicant's motion raises the following principal issues for consideration:
i. Did Staff's investigation exceed the scope of the December 5, 1997 section 11 investigation order;
ii. Did the February 18, 2000 section 11 investigation order cause an unfairness to the Applicant because it was issued ex parte or on the basis of insufficient material; and
iii. Is the issuance of the Notice of Hearing a quasi-judicial decision requiring an independent review by the Commission or a Commissioner who would then be precluded from hearing the matter on its merits.
1. YBM Magnex International Inc. ("YBM") was incorporated in Alberta as Pratecs Technologies Inc. on March 16, 1994. On October 5, 1995 the company changed its name to YBM Magnex International Inc. YBM became a reporting issuer in Ontario on January 22, 1996. YBM shares were listed and posted for trading on the Toronto Stock Exchange on March 7, 1996. On May 13, 1998 the Commission issued a temporary cease trade order in respect of YBM shares, which order remains in effect.
2. Gatti was the Vice President of Finance and Chief Financial Officer of YBM. He was appointed an officer on January 26, 1996.
3. Antes was Chairman of the Board of YBM and a member of the YBM Audit Committee. He was appointed a director on April 29, 1996.
4. Greenwald was a member of the YBM Audit Committee. He was appointed a director on April 29, 1996.
5. National Bank, formerly known as First Marathon Securities Limited, was, and continues to be, registered as a Broker and Investment Dealer under the Securities Act, R.S.O. 1990, c. S.5, as amended (the "Act").
6. GMP was, and continues to be, registered under the Act as a Broker and Investment Dealer.
7. On December 4, 1997, Gregory J. Ljubic, a member of staff of the Commission ("Staff"), forwarded a memorandum to the Commission seeking a section 11 investigation order into the affairs of YBM. The memo traced the six-month history of Staff's enquiries concerning YBM and referred to a number of developments that had caused Staff to have, among other things, "concerns about the integrity of YBM's reported sales of magnets and oil in fiscal 1996."
8. On December 5, 1997, the Commission issued an order (the "1997 Order" or the "Order") under section 11 of the Act, authorizing Staff to investigate certain matters concerning YBM.
9. Pursuant to the 1997 Order, Staff issued section 13 summonses, examined witnesses and made requests for the production of documents.
10. YBM, Owen Mitchell, David Peterson, and GMP were the only Respondents subject to a section 13 summons. Gatti, Antes, and Greenwald were never subject to requests under the 1997 Order.
11. On September 29, 1998, the Alberta Court of Queen's Bench issued an order removing most of the YBM board of directors and placed the board essentially under the control of representatives of the institutional investors. At that time, the new solicitors for YBM invited the issuance of a fresh summons pursuant to section 13. That summons was issued on November 5, 1998. YBM produced certain documents in response to this summons.
12. On December 8, 1998, the new YBM board of directors executed waivers of solicitor- client privilege in favour of the Commission. On the same date, the board also passed a resolution ordering copies of documents located in the United States to be provided to the Commission.
13. By letter dated August 6, 1999, Staff advised Gatti that it had serious concerns about his involvement in a possible breach of securities law and asked for a response to specific questions related to allegations of non-disclosure. By letter dated September 2, 1999, Gatti provided Staff with a detailed response.
14. By letter dated October 12, 1999, Staff replied to Gatti of its intention to commence proceedings against him. The letter invited Gatti to meet with Staff on a "with prejudice" basis to provide information. By letter dated October 21, 1999, Gatti provided additional information.
15. On November 1, 1999 the Secretary to the Commission issued a Notice of Hearing indicating that a hearing would commence on, or soon after, November 29, 1999 to consider, inter alia, whether in the opinion of the Commission it is in the public interest to make an order pursuant to subsection 127(1) clauses 1 and 4 of the Act respecting the Respondents of the above-styled matter.
16. Gatti, Antes, Greenwald, National Bank, and GMP are all Respondents to the Notice of Hearing.
17. Staff continued their investigation pursuant to the 1997 Order after the Notice of Hearing was issued.
18. Without notice to any of the Respondents, Staff obtained a second section 11 investigation order dated February 18, 2000 (the "2000 Order") in respect of the matter. Staff requested the 2000 Order for two reasons: firstly, to broaden the terms of the 1997 Order; and, secondly, to grant two additional Staff members the authority to carry out the section 11 investigation.
19. Pursuant to the 2000 Order, Staff continued its investigation and conducted several more examinations of which the Applicant did not receive notice.
Staff raises two preliminary objections to the Applicant's contention that Staff's investigation exceeded the scope of the 1997 Order.
Staff submits that the Applicant's claim for a stay of proceedings should only be considered if the Applicant's personal rights have been substantially interfered with. The only parties subject to a section 13 summons were YBM, Owen Mitchell, David Peterson, and GMP. Gatti, Antes, and Greenwald reside in the United States and have never been compelled to produce evidence under a section 13 summons. As a result, Staff submits that Gatti, Antes, and Greenwald are unable to demonstrate that they were personally treated in an unfair manner as a result of the 1997 Order and, therefore, no investigative unfairness has been established.
Secondly, Staff contends that the motion is premised upon the unproved assumption that Staff's case depends substantially or significantly on the fruits of the section 11 compulsion as opposed to evidence not obtained by way of the 1997 Order. The Applicant appears to assume that virtually all of Staff's relevant evidence was obtained through section 11 compulsion, but never itemizes or summarizes the evidence actually obtained through these processes.
Staff challenges this assumption and submits that the most important evidence, for purposes of the section 127 hearing, was obtained through non-compelled enquiries not related to the 1997 Order. Staff submits that the Notice of Hearing and Statement of Allegations focus on three main allegations: non-disclosure of the activities of YBM's Special Independent Committee in 1996-97; non-disclosure of the suspension of the Deloitte & Touche audit in April 1998; and YBM counsel's statements in a July 4, 1997 letter to Staff during the prospectus review process. Staff submits that extensive evidence relating to these allegations was located in the United States and was protected by confidentiality or solicitor-client privilege. Therefore, it was beyond the reach of the 1997 Order. Furthermore, key evidence was obtained through non-compelled enquiries in the course of the prospectus review process.
Consequently, Staff challenges the basis of the Applicant's proposed entitlement to the requested relief. Staff characterizes the Applicant's argument as legally irrelevant to the remedy being sought and submits that it should be dismissed.
We have considered the submissions of both Staff and the Applicant on this point. While we are of the opinion that there may be some merit to the submissions of Staff, we are not inclined to decide the first issue on the basis of these preliminary objections. We are of the view that, given the extraordinary regulatory nature of the section 11 investigation order and the fact that this is a regulatory proceeding, a review of the scope of the 1997 Order would be in the public interest.
(i) Scope of the Order
An assessment of the scope of the 1997 Order begins with a plain reading of the document. The 1997 Order authorizes certain members of Staff to investigate the business of YBM relating to the following matters:
1. YBM Magnex International Inc. ("YBM") is a reporting issuer in Ontario whose shares are listed and posted for trading on The Toronto Stock Exchange.
2. In the context of a prospectus review process with staff of the Commission earlier this year, YBM engaged the services of a new third party auditor to review its financial statements for the fiscal year ended December 31, 1996 and in connection therewith, restated its financial statements. The restated financial statements contained a number of significant changes from the earlier disclosure made by YBM both in its public filings and in its representations to staff of Market Operations Branch during the prospectus review process.
3. Staff of the Enforcement Branch requested an explanation from YBM for the inconsistencies in YBM's disclosure to the public and to staff of Market Operations Branch. YBM's explanation fails to adequately explain the inconsistencies. These inconsistencies relate to YBM's 1996 reported sales of magnets and oil.
4. Staff requests for the voluntary production of documents in support of YBM's 1996 reported sales of magnets and oil have not been satisfied. As a result, staff is desirous of obtaining additional information in respect of those sales and other aspects of YBM's business, affairs and operations.
IT IS HEREBY ORDERED pursuant to section 11 of the Act that each of Gregory Ljubic, Alan Stewart and Jay Naster is appointed to investigate and inquire into:
a) the affairs of YBM Magnex International Inc. ("YBM") including any trades, communications, negotiations, transactions, investigations, loans, borrowings or payments to, by, or on behalf of, or in relation to or connected with YBM, and any property, assets or things owned, acquired or alienated in whole or in part of YBM or by any other person or company acting on behalf of or as agent for YBM relating to the matters described in paragraphs 1 through 4 above; and
b) the assets at any time held, the liabilities, debts, undertakings and obligations at any time existing, the financial or other conditions at any time prevailing in or in relation to or in connection with YBM, and any relationship that may at any time exist or have existed between YBM and any other person or company by reason of investments, commissions promised, secured or paid, interests held or acquired, relating to the matters described in paragraphs 1 through 4 above.
The Applicant argues that the 1997 Order, and Staff's submissions in support of it, permits only an investigation of the inconsistencies in YBM's 1996 reported sales of magnets and oil and does not permit an investigation of all of the matters referred to in the Notice of Hearing. As a result, the Applicant submits, the summonses issued under the authority of the 1997 Order were beyond its scope.
Staff makes three arguments in response, two in fact and one in law. First, Staff contends that the Applicant's construction of the 1997 Order is too narrow. In Staff's view, the 1997 Order expressly authorizes an investigation into four separate matters, each outlined above, only one of which relates to YBM's reported sales of magnets and oil. Staff also contends that the 1997 Order contains a basket clause authorizing Staff to obtain information in respect of YBM's sales as well as "other aspects of YBM's business, affairs and operations." Staff submits that the 1997 Order allows Staff to investigate the background of YBM's public disclosures.
Secondly, Staff submits that even if the 1997 Order is construed narrowly and restrictively by limiting the matter to its third recital, then the subsequent investigations are all within the scope of the 1997 Order because they are relevant to explaining the inconsistencies in the 1996 sales of magnets and oil.
Alternatively, Staff submits that if there is some basis for the Applicant's argument that an overly broad investigation was conducted by Staff that exceeded the scope of the 1997 Order, there would, nevertheless, be no violation of the common law rules of procedural fairness. Relying on the Supreme Court of Canada's decision in Re Irvine et al. v. Restrictive Trade Practices Commission et al. (1987), 34 C.C.C. (3d) 481 (S.C.C.), Staff argues that the Applicant would not be entitled to procedural fairness in the investigative fact-gathering stage before he was identified as a person against whom proceedings would likely be commenced. Staff also contends that, because the Applicant was not compelled by a section 13 summons under the 1997 Order, he could not rely on the procedural fairness requirement identified in the Court's later decision of British Columbia Securities Commission v. Branch (1995), 123 D.L.R. (4th) 462 (S.C.C.). Staff concedes that the Applicant was owed a degree of fairness once he was identified as a person against whom proceedings would likely be commenced; however, Staff maintains that the duty of fairness at this stage was discharged by the notice and opportunity to respond provided to the Applicant between August and October 1999.
Upon reviewing the language of the 1997 Order, and its supporting documents, we are of the opinion that it clearly authorized Staff to investigate into the inconsistencies in YBM's magnet and oil sales in the context of a prospectus review. It must be recognized that the section 11 investigation order is issued under the Securities Act, which is regulatory in nature: Branch, supra, at 477. Moreover, the predominant purpose of the section 11 investigation order is to serve a legitimate public interest: to investigate violations of the Act, which is essentially a scheme of economic regulation to discourage detrimental forms of commercial behaviour: Branch, supra, at 478 and 487. Furthermore, the 1997 Order was issued at a very early stage in the investigation. In our opinion, Staff was authorized to look for the root cause of the inconsistencies and not merely at the sales of magnets and oil for the year 1996 as the Applicant contends. Indeed, the Applicant would have us treat the 1997 Order as if this were a criminal proceeding, which might require a narrower reading and construction of the 1997 Order. That is not its purpose, particularly where the Commission is not bound by the same restrictions as a criminal court and has the obligation to act in the public interest. To apply such a strict reading would limit the effectiveness of the investigation and severely reduce the Commission's ability to exercise its public interest mandate in accordance with the Act.
In these circumstances, therefore, we cannot accept the Applicant's argument. We find that the scope of the 1997 Order is sufficient to support Staff's investigations made under it. We acknowledge that Staff's third argument has some merit; however, in light of our view regarding the sufficiency of the 1997 Order, it is unnecessary to decide this point.
(ii) The February 2000 Order
The Applicant attacks the February 2000 section 11 Order on two grounds: first, that it should not have been issued ex parte and without notice to the Respondents; and, second, that the 2000 Order was issued without a sufficient basis.
Staff submits that the first branch of this argument was recently considered by the Commission in YBM et al. (2001), 24 O.S.C.B. 1061. The Applicant joined and supported that motion. We see no reason to depart from that decision. In essence, we concluded that that section 11 investigative powers must be exercised ex parte in order to be effective.
As to the second branch of the argument, the Applicant claims that the memo supporting the request, dated February 17, 2000, was an insufficient basis upon which to issue the 2000 Order. This argument, however, assumes that this memo was the only basis upon which the 2000 Order was granted. Attached to the memo was the 1997 Order, and referred to in the memo were the Notice of Hearing and the Statement of Allegations. In addition, appended to the memo was a draft order setting out substantial portions from the Statement of Allegations. These documents, viewed as a whole, provide a sufficient basis upon which to authorize the 2000 Order.
Moreover, section 11 of the Act does not specify any particular level of disclosure that must be met before an order can issue. The standard to be met is expediency for the administration of Ontario securities law. In our opinion, the materials supporting the issuance of the 2000 Order were sufficient to meet the threshold of expediency.
(iii) Screening of the results of investigations before issuing the Notice of Hearing
The Ontario Securities Commission performs a number of different roles. One of these is the enforcement of the Act, which necessarily involves investigative, prosecutorial, and adjudicative functions. These functions are contemplated by the statute and, as such, have been found to not violate fairness principles: Brosseau v. Alberta Securities Commission (1989), 57 D.L.R. (4th) 458 (S.C.C.); Re W.D. Latimer Company Limited et al. v. Bray et al. (1974), 52 D.L.R. (3d) 61 (O.C.A.) ("Latimer and Bray").
Against this background, the Applicant argues that fairness in the circumstances would be achieved by an independent and objective review of the evidence by the Commission or a Commissioner prior to issuing a Notice of Hearing. The purpose of the screening would be to review the results of the Staff investigation and determine whether Staff had made out a prima facie case sufficient to initiate proceedings against him.
In support of this argument, the Applicant relies on the Commission's decision in Re Malartic Hygrade Gold Mines (Canada) Ltd. (1985), 8 O.S.C.B. 1557, which describes the Commission's procedure, at the time, in screening Staff's recommendations prior to issuing a Notice of Hearing:
An investigation may lead to a recommendation by the staff for proceedings under the Act. Such proceedings are initiated only upon the authorization by a quorum of the Commission (that is to say, at least two Commissioners) or by a single Commissioner acting under a delegation pursuant to section 3(2) of the Act. A proceeding before the tribunal is not begun unless a prima facie case has been made out by the staff. The Commissioner or Commissioners before whom that case is made take no part in subsequent proceedings.
The Securities Act was amended in 1994. The Applicant contends that a plain reading of the 1994 amendments reveals that they did nothing more than change the requirement for a mandatory report at the end of a formal investigation to a report that may be requested on a discretionary basis. In the Applicant's view, this did not expressly or impliedly annul the quasi-judicial pre-charge approval procedures described in Malartic.
The Applicant also contends that the common law also requires this objective pre-notice of hearing review. Professional discipline cases were largely used to support this contention: French et al. v. Law Society of Upper Canada (1975), 9 O.R. (2d) 473 (C.A.); Baker v. Discipline Committee of the Law Society of Upper Canada (1999), 42 O.R. (3d) 413 (Div. Ct.); Edwards v. Law Society of Upper Canada et al. (2000), 48 O.R. (2d) 330 (C.A.); Kain v. Board of Governors of the University of British Columbia (1980), 31 N.R. 214 (F.C.C.); Brett v. Board of Directors of Physiotherapy (1992), 9 O.R. (3d) 613 (Div. Ct.); Re Howe and The Professional Conduct and Disciplinary Committee of the Institute of Chartered Accountants of Ontario (1994), 19 O.R. (3d) 483 (C.A.).
Staff argues that neither the Act nor the common law mandates a screening by the Commission or a Commissioner prior to initiation of proceedings. Staff submits that since Latimer and Bray and Malartic, the Act has been amended so that the common law tri-partite model calling for a separation of functions as between the investigative/prosecutorial and adjudicative functions is now complete. As such, fairness is best achieved where the Commission or a Commissioner has no involvement in the decision to issue the Notice of Hearing. Moreover, Staff submits that the professional discipline cases upon which the Applicant relies are distinguishable. They were decided under different statutes and regulations which impose either mandatory reporting requirements or some form of pre-notice of hearing screening prior to initiating proceedings. It is also argued that fairness toward the Applicant was achieved by Staff advising persons who are under investigation and likely to be named in the proceeding in writing of the general nature of the investigation, including the alleged violations, along with the opportunity to meet with Staff, albeit on a "with prejudice" basis.
(a) The Statute
In determining the requirements set forth in the statute, we are once again guided in our approach to the interpretation of the Act by the decision in Re Rizzo & Rizzo Shoes Ltd.,  154 D.L.R. (4th) 193 at 204 (S.C.C.), where Mr. Justice Iacobucci stated that:
Elmer Driedger in Construction of Statutes (2nd ed. 1983) best encapsulates the approach upon which I prefer to rely. He recognizes that statutory interpretation cannot be founded on the wording of the legislation alone. At p. 87 he states:
Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatic and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.
It is clear that Latimer and Bray and Malartic were decided under a different statutory regime. A plain reading of the present Act reveals no express requirement for the Commission or a Commissioner to review the results of an investigation and decide whether a prima facie case has been made before a Notice of Hearing is issued. Moreover, the Act does not require investigators to report their findings to the Commission unless requested by the Chair or by a Commissioner. Pursuant to section 15 of the Act, an investigator may be asked for a report by the Chair or by the member of the Commission who appointed the investigator. In this sense, there is a discretionary reporting obligation.
If the Legislature intended to mandate the pre-hearing screening process described in Malartic, it clearly could have done so in the 16 years since that decision. The fact that the Act was amended in 1994 to make the reporting obligations under section 15 discretionary rather than mandatory persuades us even more in this interpretation. Moreover, section 3.5 (4) mandates that a member who performs a duty under Part VI of the Act, except section 17, is not able to sit on the hearing of the matter without the consent of the parties.
We agree with Staff's submissions that the professional discipline cases referred to us by the Applicant are distinguishable and, therefore, not persuasive. They involve different statutes and regulations, and a combination of either mandatory screening or mandatory reporting by investigators.
We are of the opinion that the Act contemplates what has been described in this motion as the common law approach, which separates as completely as possible the investigative/prosecutorial function from the adjudicative function. This is particularly important in enforcement matters, which have serious consequences to the respondents and therefore demand a high degree of adjudicative independence and neutrality. Furthermore, there are good policy reasons to separate the adjudicative function from the other two responsibilities. Public confidence in the independence of the Commission is enhanced, not only by maintaining impartiality, but also the appearance thereof. As such, we are satisfied that the involvement of Commissioners in a screening function prior to the Notice of Hearing being issued may undermine that public confidence.
However, we are also of the opinion that there may be circumstances in which the Chairman, as the Chief Executive Officer of the OSC, under section 3(7) of the Act, might become involved in deciding whether proceedings should be instituted as he is ultimately responsible for the overall resources and work of the Commission including that of the Enforcement Branch.
Accordingly, we find that there is no longer a mandatory duty to report the results of an investigation to the Commission or a Commissioner, nor is there a mandatory screening function as a condition precedent to the issuance of the Notice of Hearing.
(b) Fairness Prior to Issuing the Notice of Hearing
In the three-month period prior to issuing the Notice of Hearing, from August to October 1999, Staff advised the Applicant in considerable detail of its concerns regarding his involvement in this matter (in the motion, Staff referred to this as the "Wells Process"). The Applicant responded and offered to provide any further information or documents that Staff would require. In a second letter to the Applicant, Staff set out its allegations and invited the Applicant and his counsel to attend a "with prejudice" meeting to discuss Staff's concerns. Applicant's counsel responded in writing, but did not take up the suggestion to meet with Staff. The Notice of Hearing was issued less than two weeks later on November 1, 1999.
The Applicant contends that this process was unfair. He submits that Staff's letters indicate that they had predetermined the matter and had neglected to make any reasonable follow-up enquiries regarding the exculpatory information provided to them by the his solicitors.
While the Applicant is entitled to procedural fairness at this stage of the investigation, he is not necessarily entitled to the most favourable procedures that could possibly be imagined: Branch, supra. We have stated in the past that the requirements of natural justice and the common law duty of procedural fairness are flexible concepts that depend on a number of factors including the circumstances of the case, the nature of the investigation, the subject matter, and the statutory provisions under which the Commission is acting: A.G. of Canada v. Inuit Tapiristat of Canada,  2 S.C.R. 735.
It would appear that the investigation was approaching its late phase. The allegations were clearly serious. There were many potential respondents. Staff had advised the Applicant of the concerns and allegations against him. Staff gave the Applicant the opportunity to make written submissions and meet with Staff with the participation of his counsel.
While the process may not have been perfect, it was not, in our opinion, an empty exercise. It afforded the Applicant a real opportunity to present his case and have Staff consider it before issuing a Notice of Hearing naming the Applicant. We are of the opinion that this process discharged the duty of procedural fairness owed to the Applicant at this stage of the proceeding.
For the above reasons the motion was dismissed by order dated March 8, 2001.
March 27, 2001.
Howard I. Wetston, M. Theresa McLeod, Robert W. Davis