OSC ignored YBM warning
Approved financing despite lawyers' objections
Saturday, December 26, 1998
KAREN HOWLETT and PAUL WALDIE
The Globe and Mail
The Ontario Securities Commission approved an equity financing by YBM Magnex International Inc. last year over the objections of lawyers in the OSC enforcement branch, industry and regulatory sources say.
The approval paved the way for YBM to raise $53-million in November, 1997, by selling shares at $16.50 each on the Toronto Stock Exchange. But no sooner had YBM received the go-ahead to sell the shares than the OSC's enforcement branch told the company it was under formal investigation, the sources say.
In effect, they say, two important branches within the OSC were at odds over how to deal with YBM, a company dogged at the time by questions about the identity and ultimate location of its customers.
Lawyers in the enforcement branch wanted to dig deeper into YBM's affairs, but staff in corporate finance -- the branch that approves companies' disclosure documents -- were satisfied after chartered accountants Deloitte & Touche performed an extensive, "high-risk" audit of YBM's 1996 financial statements.
YBM's equity financing, initially announced in May, 1997, had been delayed for six months because of OSC staff concerns about the company. At the OSC's request, YBM hired Deloitte to re-audit financial statements that had already been audited by a small Philadelphia accounting firm.
"The real question that somebody has to answer is, based on what they knew at the time, did [the OSC] come to the right conclusion or not," said one of the sources.
In response to questions from The Globe and Mail, the OSC issued a news release Thursdaydefending its actions. The OSC also said Deloitte's clean audit opinion was instrumental in its decision to approve the prospectus.
Deloitte met with the OSC after it completed the audit to respond to staff questions, the release says. It adds there was no indication of the kind of problems Deloitte would uncover only a few months later, while it was auditing YBM's 1997 statements.
"At no time was staff given reason to believe that it could not rely on Deloitte & Touche's work."
The OSC's statement goes on to say that, "in the absence of any reason to believe it could not rely on the work of Deloitte & Touche, it would not have been reasonable, in these circumstances, for [OSC] staff to have . . . audited the auditor."
But critics of the OSC say its handling of the YBM fiasco is consistent with the way the regulator has dealt with problems in recent years -- giving the benefit of the doubt to corporations at the expense of protecting investors.
Philadelphia-based YBM was delisted from the TSE earlier this month, in the wake of allegations that the company was running an elaborate money-laundering operation and that one of Russia's most powerful mob bosses was directly involved in its affairs.
Documents filed in an Alberta court this month in connection with YBM's receivership application, as well as interviews with sources close to the situation, provide a rare glimpse into the OSC staff's handling of the matter.
Staff at the OSC got involved with YBM a full year before the Organized Crime Strike Force in the U.S. Attorney's Office raided the company's headquarters in Newtown, Penn., on May 13, 1998, in connection with a criminal probe.
In May, 1997, YBM filed a preliminary prospectus with the OSC concerning the equity financing. While the OSC's corporate finance branch normally deals with such documents, enforcement lawyers were also involved on an informal basis because of the questions surrounding YBM at the time.
OSC staff told YBM it would not approve its prospectus unless a major accounting firm re-audited its 1996 financial statements. But there was friction between corporate finance and enforcement over the scope of Deloitte's audit engagement, the sources said.
Enforcement lawyers wanted a detailed forensic audit done, something that "sniffs all over the place and just doesn't take the green pencil and tick off things," one of the sources said.
But Brenda Eprile, the OSC's executive director at the time, decided the high-risk audit would be sufficient, the source said. Both enforcement and corporate finance branches reported to her.
Ms. Eprile approved the prospectus in November, 1997, in her capacity as acting head of corporate finance. She left the OSC in January to join Deloitte & Touche, where she heads up its new regulatory consulting services practice. She could not be reached for comment.
Asked about the tension between the two groups, the OSC said in its statement Thursday: "As would be expected, in any matter where professional judgment and discretion are involved . . . different approaches were extensively discussed and analyzed by staff."
And commenting on the fact that the enforcement branch launched an investigation into YBM in November, 1997, after the prospectus was approved, the OSC said such an investigation "will not, per se, result in a refusal to issue a receipt for a prospectus."
P.S. ...yes, there are numerous agencies and individual entities whose contributions to the YBM scandal are worth studying (and who, as yet, are not named as defendants in any civil actions)
|
