Ontario's top securities watchdog delivered fines against two brokerages and ruled that a number of directors of YBM Magnex International should be barred from sitting on the boards of Canadian firms for three years or more.
But, the Ontario Securities Commission also declined to take action against former Ontario premier David Peterson - once a member of YBM's board - saying he acted reasonably ahead of a share offering in late 1997, although he "could have done more.`
"His due diligence defence is available to him, but just barely," the OSC said in a 120-page written decision.
"...While Peterson meets the legal test of due diligence, the panel remains disappointed that he did not offer more insight and leadership to the board in these circumstances."
Wednesday's ruling caps a marathon case - which included 120 days of testimony - in which the OSC's enforcement arm accused YBM's board and its underwriters National Bank Financial - known as First Marathon Securities Ltd. at the time - and Griffiths McBurney & Partners of failing to disclose the firm's reputed links to Russian organized crime in a prospectus for a 1997 financing.
"YBM's disclosure leads the reader to believe that the risks faced by YBM were no greater than the inherent risks faced by any company operating in Eastern Europe at that time," the regulators said.
"We find this to be incorrect. YBM was subject to company-specific risks. An investor in YBM's securities had the right to know what specific risks were presently threatening the issuer."
Both National Bank Financial and Griffiths McBurney & Partners paid $400,000 each toward the cost of the investigation. Griffiths McBurney was also ordered to submit to a review of its underwriting practices and procedures by an independent person approved by the OSC.
In total, five individuals were also sanctioned by the regulator, with the OSC recommending they be barred from sitting on boards for terms ranging from three years to permanently.
In the ruling, the OSC recommended that former YBM president and chief executive officer Jacob Bogatin and former chief operating officer Igor Fisherman both be permanently prohibited from service as board members.
The regulator also recommended a three-year ban for former YBM chairman and audit committee member Harry Antes. Mr. Antes was also ordered to pay $75,000 in investigation and hearing costs.
As well, the OSC panel said Kenneth Davies, former director and member of YBM's special committee, and Owen Mitchell, chair of the special committee, be barred from sitting on company boards for three and five years respectively. The panel also recommended Mr. Mitchell be ordered to pay $250,000 in costs, while Mr. Davies was ordered to pay $75,000.
In addition to Mr. Peterson, the OSC took no action against former YBM CFO Daniel Gatti and directors Frank Greenwald, Michael Schmidt and Lawrence Wilder.
YBM - once known as Pratecs Technologies Inc. - traded first on the Alberta Stock Exchange and then moved to the Toronto Stock Exchange in 1996.
Shortly after that shift, information coming in from south of the border began to raise concerns, with a U.S. lawyer telling the board that the company was the subject of a "very sensitive criminal investigation" by authorities in the United States.
The company set up a special committee and hired a forensic investigator and later - at the request of the OSC - brought in an auditor to perform a high-risk audit.
However, YBM still went ahead with its share offering, even though the OSC later alleged that it hadn't revealed everything that had been discovered.
On May 13, 1998, FBI agents raided YBM's Pennsylvania headquarters, and trading in the stock was halted. Trading of the shares has never resumed.
In a statement, the commission said Wednesday's decision clarifies standards for company directors and officers, adding it is now clear that risks - even if they have yet to be proven - must be disclosed to investors.
"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," the regulator said.
"It is about the disclosure of risk. Materiality is reinforced as the standard for such disclosure in securities markets by taking into account the considerations associated with the exercise of judgement and reasonable diligence."
In a statement, National Bank Financial also said it was glad to put the matter behind it, calling the events "historical in nature." The events, it said, took place six years ago at First Marathon, which was purchased by National Bank in 1999 and merged with Lévesque Beaubien Geoffrion, to form National Bank Financial, under a new management team.
"At NBF, compliance has been and continues to be a priority," the brokerage said.
"A number of policies, procedures and resources have been in place for some time to address issues that arose in this matter. Additionally, all compliance operations are under the oversight supervision of a board-level compliance committee that is composed exclusively of independent directors."
Terry Weber