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Toronto Star

May 31, 2002 Friday Ontario Edition

Peterson blames OSC for clearing YBM

BYLINE: Madhavi Acharya-Tom Yew, Toronto Star

SECTION: BUSINESS; Pg. E01

LENGTH: 675 words

HIGHLIGHT:
Regulator should have warned firm, ex-premier says

YBM Magnex International Inc. would not have proceeded to sell new shares to the public if the Ontario Securities Commission had informed company directors of its concerns about alleged ties to Russian organized crime, a regulatory panel heard yesterday.

"If the chair of the securities commission had phoned me and said, I have a number of concerns, I would have said, 'Let's get to the bottom of this.' I'd try to have our people work with (their) people," former Ontario premier and YBM director David Peterson testified.

"If at the end of the day, he said, I don't think you should go forward with this (prospectus), I would have gone back to the board and said, 'We can't proceed.'"


Peterson is one of nine senior YBM officers and board members, along with Bay Street investment dealers Griffiths McBurney and National Bank Financial Corp. (formerly First Marathon), facing allegations of failing to disclose all material facts about YBM in its 1997 prospectus, which raised about $100 million from investors. The OSC contends that YBM officials were aware of allegations that company founders had ties to the Russian mob months before they alerted investors. None of the allegations has been proved in court.

The respondents argue that OSC staff had more information about the alleged mob ties than they did. Commission staff was aware of an investigation into the company by RCMP and other law enforcement officials.

The OSC gave a green light to the prospectus in November, 1997, despite reservations about the company and unfavourable information from confidential sources. The regulator insisted that YBM engage a Big Six accounting firm to audit its 1996 sales figures, which later came up clean.

For its part, the commission argues that directors had other information that pointed to mob ties, including the findings of a report by a special committee of YBM's board. The committee hired investigators from the Fairfax Group, which uncovered evidence of falsified financial records, poor cash controls at the company's operations in Eastern Europe, and commission payments to a suspected mobster.

Peterson, represented by lawyer Alan Lenczner, and other directors have testified at length that the committee's work turned up only administrative problems with the company, but no hard evidence of illegal activity.

OSC staff didn't clearly spell out their concerns, Peterson said yesterday. "I had no idea what your concerns were. If someone had told me what the concerns were, I would have said, 'Let's work this out.'"

Prosecutor Jay Naster continued to challenge Peterson, who completed his testimony, on why the board didn't mention the special committee in its 1996 annual report.

The board furiously debated this subject before accepting lawyers' advice that there was no need to disclose it because there was no evidence of anything illegal, Peterson said. "Our lawyers didn't think it was discloseable. Thoughtful people in the room didn't think it was discloseable. You think otherwise after the fact, but I respectfully submit to you that if you were in the room you would have come to the same conclusion."

YBM's headquarters in Newtown, Pa., was raided by U.S. authorities on May 13, 1998. Officers seized and copied scores of documents but didn't shut down the operations, Peterson told the panel this week, adding that he still believed in the company's management.

That changed in mid-June, when Deloitte & Touche informed the board that Igor Fisherman, YBM's chief operating officer in Eastern Europe, had placed $12 million in escrow in a Russian bank as part of a deal to acquire an abandoned magnet factory.

The board had voted down the acquisition in early April, after a due diligence report described the factory as being in a "sad state of disrepair," Peterson said. "Alarm bells really started to go off there. He didn't have the authority to do this."

He resigned over the issue in July.

The hearing will continue in June with testimony from YBM director Ken Davies.