J. E. Boritz and D. J. Cockburn
Centre for Accounting Ethics
School of Accountancy
University of Waterloo
Waterloo ON N2L 3G1
YBM Magnex International, Inc. (YBM) is a Canadian company incorporated in Alberta in March 1994. On July 1, 1994 it issued 4,000,000 common shares, was listed on the Alberta Stock Exchange, and by March 1996 was listed and traded on the Toronto Stock Exchange (TSE). Although it was a Canadian incorporated company, YBM was headquartered in Newtown Pennsylvania, a suburb of Philadelphia.
YBM and its directors and officers are the subject of a number of U.S. shareholder class action suits and are subject to disciplinary proceedings by the Ontario Securities Commission (OSC). The class action periods range from February 6, 1996 to May 14, 1998 (a temporary cease trading order had been issued on May 13, 1998 by the OSC).
The defendants in the class action suits are YBM, its directors and officers and its auditors (the auditors were located in the U.S.). The parties involved in the OSC proceedings include, in addition to those in named in the class action suits, the general counsel to YBM and two security dealers and exclude the auditors.
A newspaper article dated April 26, 2001 indicated that the receivers of YBM have sued the two security dealers, a director of both a security broker and YBM, the law firm that advised YBM and one of the law firm’s senior partners, who was also a director of YBM, for $475 million.
The principal complaint is that while YBM seemed to be operating legitimate businesses it really was engaged in laundering of criminal proceeds derived from illegal activities carried out in the former Soviet Union and other eastern European countries and in a stock fraud.
The attached Statement of Allegations contains six allegations by the OSC against the company, eight Board members of whom two were officers of the company, the chief financial officer of the company, a partner in the company’s outside general counsel and two Canadian security dealers (the co-lead underwriters). Three of the Board members were members since April 4, 1994; one became a Director on January 26, 1996 and four became Directors on April 29, 1996.
The allegations are set out in greater detail in section II of the attached Statement of Allegations.
- Allegations (a), (b) and (c) relate to a failure to disclose in both a preliminary and final prospectus material facts respecting the mandate of, information gathered by and findings of the Special (Independent) Committee created by the Board on August 29, 1996;
- Allegations (d) and (e) relate to a failure to disclose that the auditors of the company had advised the company that they would not perform any further audit services for the company, including completion of the 1997 audit, until the company had completed to the satisfaction of the auditors an in-depth forensic investigation addressing specific concerns;
- Allegation (f) relates to the statements provided in writing by the company’s outside general counsel to the OSC relating to the results of due diligence.
Assume that you have been asked to advise the Board. Does the Board or do certain members thereof have reasonable defenses to be put forward in response to these allegations?
Glossary - Ontario Securities Act
- Securities Act - the Act that regulates distribution and trading of securities in Ontario.
- Ontario Securities Commission (OSC) - the securities regulator in Ontario.
- Part XV of the Securities Act - the part of the Act that deals with the distribution of securities by prospectus.
- Section 56 - describes, in general terms, the purpose and content of a prospectus.
- Section 58 - prescribes certification of a prospectus on behalf of the issuer by the CEO and CFO and, on behalf of the Board, two directors.
- Section 122 - discusses offences, defenses and penalties under the Act.
- Section 127 - discusses orders that may be made in the public interest by the Ontario Securities Commission including cease-trading orders.
- Section 128 - permits the OSC to apply to the Ontario Court (General Division) for a declaration that a person or company has not or is not complying with the Act and remedial orders.