The Ontario Securities Commission's landmark case against YBM Magnex International Inc. ended with a whimper yesterday as regulators slapped five ex-directors but let others involved off the hook, including the underwriters and former Ontario premier David Peterson.
A disciplinary panel found that YBM's key disclosure documents, including a prospectus for a $100-million equity financing in 1997, failed to reveal the company's reputed links to organized crime.
But the panel found that only five of YBM's eight board members bore any responsibility for the disclosure lapses and banned them for varying terms of three years to life from acting as an officer or director of a publicly traded company in Ontario.
The penalties pale in comparison to those requested by the OSC's enforcement arm. OSC staff asked the panel to ban Mr. Peterson, one of eight directors, from serving as a director of a public company for five to 10 years. They also asked that investment firms Griffiths McBurney & Partners and National Bank Financial Corp., formerly First Marathon, be banned from underwriting any public financings for up to a year.
Although the firms were not punished for their role in the equity financing, the panel found shortcomings with their work and they were asked to pay hearing costs of $400,000 each.
As well, Griffiths McBurney has agreed to have its underwriting practices and procedures reviewed.
The much-anticipated ruling follows 124 days of hearings that ended last November -- the longest on record for the OSC.
Although the regulator says the ruling clarifies standards for directors, it was greeted with a mixture of relief, puzzlement and criticism.
"I am delighted with the outcome," Mr. Peterson said. "But it's not been that much fun for 3½ years."
YBM's underwriters also said they were pleased to put the protracted case behind them.
"The YBM matter has hung over us for 6½ years now," said Kevin Sullivan, chief executive officer of Griffiths McBurney.
Lawrence Haber, an executive vice-president with National Bank Financial, the brokerage arm of National Bank of Canada, described the ruling as reasonable. "We think the decision of the panel is just and measured."
But Alan Lenczner, Mr. Peterson's lawyer, said the decision, which was criticized by corporate governance experts, doesn't clarify anything for directors. "If you were a director of a company, you'd read this thing and say, 'What the hell am I supposed to do?' "
The decision comes more than five years after the U.S. Federal Bureau of Investigation raided the Pennsylvania head office of YBM, a supposed industrial magnet maker listed on the Toronto Stock Exchange.
The OSC suspended trading in YBM shares on May 13, 1998, the same day as the FBI raid. The shares last traded at $14.10 each.
This past April, U.S. federal prosecutors indicted four men tied to YBM, including Jacob Bogatin, its former CEO and Igor Fisherman, European operating manager on racketeering and money laundering charges.
But the OSC panel distanced its ruling from the U.S. indictments.
"Despite a hearing which took over 124 hearing days to complete, this case is not about organized crime, money laundering or whether the respondents believed YBM was not a real company," says the three-member panel, led by OSC vice-chairman Howard Wetston. "It is about the disclosure of risk."
The panel says investors had a right to know what risks were threatening the company, but says the 1997 prospectus resorted to "muddled" disclosure about the role of a special committee of the board.
The prospectus said the committee was examining general concerns related to doing business in Eastern Europe. In fact, however, the committee was probing the company's suspected links to the Russian mob.
"While disclosing good news with little hesitation, its practice was to restrict the disclosure of bad news," the panel says.
The panel says Mr. Peterson could have done more to get to the bottom of the suspicions surrounding the company but concludes that he acted reasonably. The panel says it was disappointed that he did not offer more insight and leadership to the board.
The harshest penalties were to Mr. Bogatin and Mr. Fisherman, who were prohibited for life from acting as an officer or director of any publicly traded company in the province.
Mr. Bogatin, who was born in Russia and has been living in the United States for more than a decade, was arrested at his home in Richboro, Pa., in April in connection with the U.S. indictments.
Owen Mitchell, a former executive at National Bank Financial and YBM director, was hit with a five-year ban and ordered to pay hearing costs of $250,000. The panel says he was in a conflict of interest as chairman of the special committee of YBM's board and with his role at National Bank Financial. The firm would benefit if YBM completed the equity financing, the panel says. As a result, the conflict compromised his judgment.
Mr. Mitchell declined to comment when reached yesterday.
Two other directors -- Pennsylvania businessman Harry Antes and Kenneth Davies of White Rock, B.C. -- were each banned for three years and ordered to pay costs of $75,000.
Mr. Davies was the only director who had a personal visit from the FBI in 1996, the decision notes. He did not discuss the visit with the rest of the board and thus failed to act prudently, it adds. He could not be reached for comment.
The OSC's enforcement arm initially accused everyone involved with the company, including all of its directors, of withholding material information from the public when it unveiled its allegations in November, 1999.
Yesterday, however, two other directors besides Mr. Peterson were not blamed for the long-running scandal -- Frank Greenwald, a U.S. resident, and Michael Schmidt, a Canadian.
Harry Underwood, Mr. Schmidt's lawyer, said his client was "very pleased" he was cleared of all the allegations.
The eight-year saga of YBM
YBM CHRONOLOGY
1995: YBM Magnex merges with Alberta Stock Exchange-listed Pratecs Technologies.
1996: YBM lists on the Toronto Stock Exchange
1997: YBM files preliminary prospectus with Ontario Securities Commission for an equity financing.
1998: YBM's auditors raise concerns about financial statements and allege possible illegal acts. U.S. law enforcement agencies seize documents from YBM's head office in Newtown, Pa. OSC issues a cease-trade order on the firm's stock.
1999: Nov . 1: OSC files allegations against YBM directors, officers; advisers and underwriters.
2001: May 7: YBM hearing begins in front of three-man panel at OSC offices.
2002 : May 28-30: David Peterson testifies at the OSC hearing. N ov. 28: YBM hearing ends after 124 days of proceedings.
2003: April 25: Four YBM executives indicted in United States for alleged fraud, money laundering and racketeering.
THE YBM PLAYERS
Jacob Bogatin, Former YBM chief executive officer. Born in Russia, he was on the audit committee until the firm went bankrupt after being raided by the FBI. Banned for life.
Igor Fisherman , A native of Hungary, Mr. Fisherman was YBM's chief operating officer and was also responsible for the firm's Eastern European operations. Banned for life.
Owen Mitchell, a former investment banker at National Bank Financial Corp. Chairman of a special committee of the board and a member of the audit committee. Five-year ban, $250,000 in costs.
Kenneth Davies , joined the board in 1994, seeing YBM through its creation as a shell company listed on the former Alberta Stock Exchange to a TSX-listed firm. Three-year ban, $75,000 in costs.
Harry Antes , Former YBM chairman who resigned that post on Sept. 11, 1998. A retired scientist living in the United States. Three-year ban, $75,000 in costs.
David Peterson , the former Ontario premier, joined the board in 1996 and resigned in 1998. No ban, no costs.
Daniel Gatti , Former YBM chief financial officer and vice-president of finance, became involved with the firm in 1995. An accountant who had never previously served as a CFO. No sanctions.
Frank Greenwald , who lives in Illinois, resigned his directorship in September, 1998. He is a former member of the audit committee. A retired scientist living in the United States. No sanctions.
Michael Schmidt , a Burnaby, B.C., realtor, joined the board in 1994. He left the board in September, 1998. No sanctions.
Lawrence Wilder , a lawyer who advised YBM, settled with the OSC part way through the hearing, paying $400,000 in costs.
National Bank Financial , Acquired First Marathon Inc. in 1999. First Marathon was a YBM underwriter. Payment of $400,00 in costs.
Griffiths McBurney & Partners , YBM underwriter. Payment of $400,000 in costs and an order to submit to an independent review of its underwriting practices.
Karen Howlett