R.S.O. 1990, c. S.5, AS AMENDED



Decision and Reasons on Motion for Disclosure

December 21 and 22, 1999

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

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


Alan J. Lenczner, Q.C. - For David R. Peterson

Peter Howard - For YBM Magnex

Paul Le Vay - For Frank S. Greenwald and Harry W. Antes

Bryan Finlay
Megan E. Petrie - For Jacob Bogatin

James A. Hodgson - For National Bank Financial Corp.

John Keefe - For Griffiths McBurney & Partners

Brian P. Bellmore - For Daniel E. Gatti

James D.G. Douglas - For R. Owen Mitchell



A Notice of Hearing, dated November 1, 1999 was issued to the following 13 partiespursuant to s.127 of the Securities Act (the "Act"): YBM Magnex International Inc. ("YBM"),Harry W. Antes, Jacob G. Bogatin, Kenneth E. Davies, Igor Fisherman, Daniel E. Gatti,Frank S. Greenwald, R. Owen Mitchell, David R. Peterson, Michael D. Schmidt, LawrenceD. Wilder, Griffiths McBurney & Partners, and National Bank Financial Corp, formerlyknown as First Marathon Securities Limited ("FMSL").

These motions are for orders compelling production of documents and other materials.Notices of Motion were filed on behalf of Messrs. Peterson, Mitchell, and Gatti and FMSL;and supported on behalf of Messrs. Greenwald, and Antes, and GMP (collectively, the"Motion Applicants"). Qualified support for disclosure was provided on behalf of thereceiver of YBM.

The motions were heard on December 21 and 22, 1999. In addition to the motions fordisclosure, a motion on behalf of Mr. Peterson for recusal of Mr. Jay Naster was heard onDecember 21 and 22, 1999. The decision and reasons on the motion for recusal datedJanuary 5, 1999, contain a summary of the Statement of Allegations dated November 1,1999. This decision and reasons only pertain to the motion for disclosure, not to any othermatter.

Mr. Wilder did not participate in this hearing and has brought an application in the natureof prohibition and certiorari which is to be heard on February 15, 2000 in the DivisionalCourt. In response to this application, on December 17, 1999, Staff served and filed sixaffidavits and substantial documentation in the Divisional Court. These affidavits anddocuments deal exclusively with the second ground in the application that is, "the allegedbias, partiality and unfairness arising out of the prospectus receipt process in 1997."Counsel for Staff, Mr. Code, submits that the affidavits and documentation reveal the stateof the Staff's knowledge at the time and also explain in considerable detail the basis forthe Director's decision in 1997 to receipt the prospectus.

On January 21, 2000, the Notice of Application in the Divisional Court was amended andthe second ground of "alleged bias, partiality and unfairness arising out of the prospectusreceipt process in 1997" was withdrawn.


The Motion Applicants generally contend that in order to defend themselves against theCommission's allegations they require disclosure of all documents that indicate whatinformation Commission Staff had when they decided to receipt the YBM prospectus.Accordingly it is argued that the decision of the Director to receipt the prospectus while inpossession of the same kind, type and level of information as the Motion Applicants isdirectly relevant to determining whether any alleged omission to disclose was material,whether the standard of judgement for a director was met, and whether it is in the publicinterest to make any order against the Motion Respondents.

Mr. Lenczner submits that Staff knew more about YBM than his client did. He submits thatthe prospectus was a joint or partnership effort between Staff and the Motion Applicants.Mr. Douglas submits that it would be contrary to the public interest to make findingsagainst the Motion Applicants if it was demonstrated that Staff knew as much or moreabout YBM than the Motion Applicants. He also submits that, based on s. 61(2) of the Act,if the Director knew that there was an investigation of YBM underway, and such aninvestigation was material, the Director should have denied the receipt.

Mr. Keefe submits that if Staff knew as much or more than the Motion Applicants and ingood faith decided that a matter was not material enough to require disclosure in the publicinterest, there was no failure to make full true and plain disclosure. Accordingly, hesubmits that the Commission's conduct in the context of the overall disclosure in the YBMprospectus is a barometer of materiality.

Counsel for Staff, Mr. Code submits that, in this s. 127 hearing, Staff will call as evidencethe information that was in the possession of YBM officials and directors in March andApril, 1997 and again in March and April, 1998. That information will be contrasted withwhat was disclosed publicly to investors. It is submitted that the essential lis between theparties revolves around two simple issues.

1. What information did YBM officials and directors possess; and

2. What information did they disclose to the investing public.

Mr. Code submits that whatever information or knowledge Staff possessed is not relevantto these issues. Mr. Code further submits that the contention that the non-disclosedinformation must not have been material is flawed for the following three reasons:

a. The Motion Applicants' assertion of relevance is entirely speculative since neitherthe Fairfax investigation report nor the independent committee's report to the boardwere passed on to Staff;

b. Even if Staff possessed essentially the same information, the legal effect of sucha state of affairs would not be to relieve the Motion Applicants of their independentduty to disclose all material facts to the investing public. At best it might mean thatboth Staff and the Motion Applicants failed in their quite separate duties to thepublic;

c. Finally the real issue for Staff, in terms of their duties to the public, was not whetherthey possessed information about YBM's alleged criminal activities but whether theycould use such information at a hearing after a refusal to receipt the prospectus.In other words, did the law of informant privilege and public interest immunityrelating to the confidentiality of ongoing police investigations prevent Staff fromrelying on or disclosing confidential information? It is submitted that it is apparentthat this issue, while highly relevant to Staff's duties, has no application to YBM'sduty to disclose to the public.



Counsel for Staff accepts that the principles of natural justice and fairness now provide foressentially the same level of disclosure in a Commission hearing as in a civil or criminaltrial. There is no obligation to disclose what is irrelevant. R. v. Stinchcombe [1991] 3S.C.R. 326; Re: Ontario Human Rights Commission and House et al (1993) 115 D.L.R.(4th) 279 (Ont. Ct.-Div. Ct.); Howe v. Institute of Chartered Accountants of Ontario (1994),19 O.R. (3d) 483 (Ont. C.A.); Re: Glendale Securities et al (1995) 18 O.S.C.B. 5975.

The law of disclosure is based upon the fundamental right to make full answer anddefence. In R. v. Dixon (1998), 122 C.C.C. (3d) 1 (S.C.C.), Mr. Justice Cory explainedrelevance in the law of disclosure as being "material that could reasonably be used by thedefence in meeting the case for the Crown." He further noted that "one measure ofrelevance of information in the Crown's hands is its usefulness to the defence. If it is ofsome use it is relevant and should be disclosed." In this regard, we are of the opinion thatthe test is simply relevance not semblance of relevance.

In Stinchcombe, supra, at 340, Mr. Justice Sopinka noted that disclosure should be"guided by the general principle that information ought not to be withheld if there is areasonable possibility that the withholding of information will impair the right of theaccused to make full answer and defence, unless the non-disclosure is justified by the lawof privilege." While Stinchcombe, supra, was a criminal case, it has been applied by theCommission in Re: Glendale Securities et al., supra. We have also been guided in thisdecision by the Ontario Securities Commission Rules of Practice, in particular rule 3.3 (2)and rule 3.4.

Public Interest Jurisdiction (S. 127)

In a motion for disclosure we must determine that the production of the requestedinformation can reasonably be used in meeting the case, advancing a defence or inmaking a decision that would effect the conduct of the Motion Applicants' case; R. v.Dixon, supra. What then is the case to meet?

Mr. Code contends that the six specific violations of the Act are the only conduct that isalleged to be contrary to the public interest. Staff have advanced no other basis for relief;that is, if no violations are found, the conduct would not be contrary to the public interest.Implicit in this argument is the presumption that, if Staff prove these violations, then afinding that the conduct was contrary to the public interest would follow. That is not anunreasonable suggestion.

In this regard, Mr. Code takes an approach that equates the Notice of Allegations withcriminal charges or civil pleadings. Such an approach has some merit as it provides aconvenient framework in which to exercise our discretion. However, such an approachconfines, to some extent, our public interest jurisdiction, since s. 127 requires theCommission to form an opinion as to whether there has been conduct contrary to thepublic interest warranting a sanction. First, the Commission must determine if there isconduct warranting an order in the public interest. Second, if there is such a finding, theCommission must determine what the appropriate sanction, if any, that would follow. Theburden of proof rests with the Staff of the Commission to establish that an order in thepublic interest is appropriate.

What then is the nature and purpose of a s.127 hearing? In Committee for the EqualTreatment of Asbestos Minority Shareholders v. Ontario Securities Commission [1999] O.J.No. 388 (Ont. C.A.) (Q.L.) Mr. Justice Laskin stated at page 10 that:

The scope of the Commission's discretion to act in the public interest under section127(3) is very wide......The exercise of the Commission's discretion under thisprovision is guided by the two broad purposes of the Act set out in s. 1.1 - toprovide protection to investors from unfair, improper or fraudulent practices; and tofoster fair and efficient capital markets and confidence in capital markets - and bythe six "fundamental principles" set out in s. 2.1.

As the panel noted, the Commission's own jurisprudence states that the OSC mayexercise its public interest jurisdiction even absent a breach of the Act or of theregulations.

At page 11 he also stated that:

The purposes of the Commission's public interest jurisdiction is neither remedial norpunitive; it is protective and preventive, intended to be exercised to prevent likelyfuture harm to Ontario's capital markets. The past conduct of offending marketparticipants is relevant but only to assessing whether their future conduct is likelyto harm the integrity of the capital markets. The Commission discussed thepurpose of its public interest jurisdiction in Re Mithras Management Ltd (1990), 13O.S.C.B. 1600 at pp. 1610-11.

In Marchment and MacKay Ltd. et al v. Ontario Securities Commission (1997), 34 O.R. (3d)284 at 290 (Ont. Ct.-Div. Ct.), the court cited with approval the judgement of Craig J. inGordon Capital Corp. v. Ontario (Securities Commission) (1991), 1 Admin. L.R. (2d) 199at 211, 50 O.A.C. 258:

There is no definition of the phrase the "public interest" in the Act. It is the functionand duty of the OSC to form an opinion, according to the exigencies of theindividual cases that come before it, as to the public interest and in so doing, theOSC is given wide powers of discretion; Ontario (Securities Commission) v. Mitchell,supra at p. 599.

The scope of the OSC's discretion in defining "the public interest" standard undersub. 26(1) is limited only by the general purpose of the Act, being the regulation ofthe securities industry in Ontario, and the broad powers of the OSC thereunder topreserve the integrity of the Ontario capital markets and protect the investingpublic....

Based upon the activities, the OSC should be accorded a particularly broad latitudein formulating its opinion as to the public interest in matters relating to the activitiesof the registrants....

It is clear that the purpose of a s. 127 hearing is not to punish past conduct. It is, ifrequired, to make an order to protect any probable future harm to Ontario capital markets.

As indicated previously by Mr. Justice Laskin in Re: Asbestos, supra, the exercise of theCommission's discretion under s. 127 is guided by the two broad purposes of the Act setout in s. 1.1. While a disciplinary proceeding, such as this, might concentrate the scopeof the public interest jurisdiction somewhat, nevertheless, there are no firm criteria to bedetermined in our deliberations. Moreover, there is no definition of the public interest.Indeed it is as much a matter of opinion as fact.

In Macaulay, Practice and Procedure Before Administrative Tribunals, Volume 1, page 8-5,the author quotes from a decision of the Ontario Energy Board as follows:

In the opinion of the Board, the public interest can only be more particularly definedby examining the facts and nature of the situation in which the test is to be used.The public interest will consistently take the form of the facts to which it is applied,moulding itself to the specific use to which it is being put.

Having determined that the public interest is not generally definable, the Boardwould add that, in spite of its elusiveness, when it is applied to a specific set offacts, the reasonable man of the Common Law has no trouble determining if aparticular act meets the test.

At page 8-4 of Macaulay, supra, the OEB states as follows:

...the criteria of public interest in any given situation are understood rather thandefined and it may well not serve any purpose to attempt to define these terms tooprecisely.

Against this background we must determine whether or not an order as to furtherdisclosure is required.


The director has a clear duty under the Act to decide whether to issue a receipt for aprospectus. A prospectus must provide full, true and plain disclosure of all material factsrelating to the securities to be distributed. A prospectus must include a certificate by boththe issuer and the underwriter with respect to full, true and plain disclosure. However,Staff does pursue areas in a prospectus review where disclosure may be incomplete,unclear or inaccurate. A fact in issue in the hearing will likely be the knowledge ofparticular Motion Applicants in determining whether or not they authorized, permitted oracquiesced in a prospectus that did not have full, true and plain disclosure. To the extentthat belief, on the part of the Motion Applicants, that there was adequate disclosure in theprospectus may have been based on interaction with Staff, the motion seeks disclosureto develop those facts.

Staff of the Commission has provided over fifty volumes of documents to the MotionApplicants as part of its disclosure responsibilities. They have also undertaken to makefurther ongoing disclosure of any additional relevant information that becomes available.The extensive disclosure can be summarized as including information only relevant to thestate of knowledge of the thirteen respondents to the Notice of Hearing and Statement ofAllegations, concerning YBM and information relevant to what they disclosed to the public.It does not contain information relating to Staff's state of knowledge.

The state of knowledge of Staff however, has been disclosed to the Motion Applicants byway of the application in the Divisional Court. Six affidavits of present and former Staffplus numerous documents have been served and filed. Given this disclosure, it isunnecessary for us to determine whether an order for disclosure would have been requiredin respect of these documents, had they not been filed in the Divisional Court.Nevertheless, Mr. Code contends these documents and affidavits are not relevant to thisproceeding. He submits that the affidavits reveal that the Staff were aware of ongoingrumours and suspicions about YBM but had insufficient evidence in law to deny a receiptand to defend that decision at a hearing before the Commission. Furthermore it issubmitted that the information was either unreliable or was received under promise ofconfidentiality from informants and police agencies.

Mr. Lenczner agreed during argument that he needs no further order to be able to relyupon the information filed in the Divisional Court for the purposes of this hearing.Admissibility will be determined in the hearing. However, what he requested was furtherdisclosure. In addition to the information provided, he, as well as other counsel, requestedinternal OSC notes and memoranda prepared both by OSC Staff and by OSCCommissioners including the Chairman of the OSC. In his argument Mr. Lenczner wasmore restrained in his request, while other counsel wanted "everything with YBM on it".But what is everything? Indeed it is, in our opinion, somewhat extraordinary that themotion applicants would have six affidavits of Staff and related documents available tothem as opposed to only documents.

At this stage of the proceeding we are not in a position to weigh the non-disclosure againstthe disclosure which has actually been given. However, we have given someconsideration to the nature of the legal defences which have been submitted in argument.We recognize that on the basis of the significant disclosure to date, nothing precludes theMotion Applicants from developing defences such as denial, mistake, due diligence as wellas other defences which were discussed during argument. In our opinion it would bepremature to decide whether Staff knowledge could be a valid defence in the context ofour public interest jurisdiction under s. 127. This is a matter which should be left to thehearing. Relevance and consequently admissibility, are dependent upon thedetermination of the facts that will be in issue in the hearing.

Mr. Code may very well be correct that it would be unhelpful to inquire into the state ofknowledge of Staff to evaluate whether Staff could have disclosed or used confidentialinformation from informants or from police agencies engaged in ongoing investigationssince it will be necessary to consider the law of informant privilege and the law of publicinterest immunity. During the motion hearing Mr. Code indicated that the law of publicinterest immunity would no longer apply given the disclosure in the Divisional Court butinformant privilege would continue to be applicable.

It is our opinion that, at this stage, it is not simply a question of whether the duty of Staffis different than the duty of the directors, the issuer and / or the underwriters or whetherrefusal could have been defended at a hearing before the Commission. It is whether thepublic interest suggests that, even if there is a violation of the Act, a sanction in the publicinterest is not warranted.


In conclusion, a balance needs to be struck between the extensive request for furtherdisclosure and the significant degree of disclosure already made. This balancing must bedone on the basis of the principles of disclosure, in the context of the Securities Act, andour assessment of the relative public interests at stake. Although the obligation to discloseis not absolute, Stinchcombe, supra, at 339, there must be adequate disclosure asdetermined by Mr. Justice Laskin in Howe, supra at 495: of the requirements of natural justice is adequate disclosure. It is anessential element of a fair hearing. An affected party must have an adequate opportunity of knowing the case he or she has to meet, of answering it and ofputting in his or her case....." [emphasis added]

We are of the opinion that "adequate" disclosure has been made at this time for the bestadministration of justice. We are also of the opinion that given the disclosure to date, theMotion Applicants' right to make full answer and defence will not be impaired. They havebeen provided with much more than the minimum disclosure required to enable them tomeet the case. Nevertheless, the obligation to disclose is ongoing and, as the facts inissue in this case are developed, further production may or may not be required and canbe dealt with by motion at a later date if necessary. No further order for disclosure isrequired at this time.

January 25th, 2000.

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