By James Langton

(December 11 – 12:30 ET) – The Ontario Securities Commission has revealed the circumstances surrounding the public disclosure of its investigation into Yorkton Securities Inc.

Typically, the OSC refuses to confirm or deny the existence of an investigation unless it proceeds to an actual enforcement action, which is then made public. In this case, Yorkton was forced to disclose the existence of an investigation in a prospectus it was working on for a client, Engineering.com Inc.

Today the OSC confirmed that commission staff applied to have the disclosure included in the prospectus in a behind-closed-doors hearing, although the arguments of Yorkton and OSC staff, and the reasons for the commission’s decision remain confidential.

The OSC says that Yorkton and Engineering.com applied to have the case heard in private and that order remains in effect, although with their consent the commission is now confirming the circumstances surrounding the move.

The OSC says that it held a hearing back on November 23, as a result of an unnamed OSC director trying to determine whether the existence of the investigation had to be disclosed.

The OSC says, “The question was referred in the context of a prospectus that had been submitted by an issuer. The director sought a determination from the commission as to whether or not the issuer was required to disclose, in its prospectus, that Yorkton Securities Inc., the underwriter of the offering, was the subject of an investigation currently being carried on by commission staff.”

The commission found that the existence of an investigation was a material fact, and so it had to be disclosed in the prospectus. The prospectus noted, “an informal investigation recently initiated by OSC staff in respect of potential conflicts in Yorkton’s role as underwriter in connection with certain past and unspecified financings (unrelated to Engineering.com) in which Yorkton has acted as the sole or lead underwriter. There have been no allegations of potential conflicts of interest made by the OSC in respect of Engineering.com’s relationship with Yorkton.”

Yorkton insisted that it does not consider this investigation to be a material fact, saying it agreed to include the disclosure “for the sole purpose of avoiding the penalty … in the event that a receipt for this prospectus is not issued.”

The prospectus went on to say, “OSC staff advised in a prospectus comment letter to the company dated November 9, 2000 that the investigation involves an examination of whether the market value of the securities that were the subject of these prior financings may have been affected by one or more potential conflicts of interest arising out of:

  • Yorkton and/or its employees and executives trading shares of the issuer as principal;
  • Yorkton providing the primary or sole coverage of the issuer’s activities;
  • other prior relationships between the issuer and employees or executives of Yorkton; and
  • the degree of control or influence exercised by Yorkton over the board of directors of the issuer.”

Yorkton advised the company and the OSC that it “strongly refutes any suggestion that it has contravened applicable securities laws”.

The OSC has been working on rules governing these sorts of conflicts since they emerged several years ago in several cases involving junior stocks.

In recent memory, the only other time the OSC has publicly confirmed the existence of an investigation such as this, was when it forced World Heart Corp. to reveal that one of its directors, former Corel Corp. CEO Michael Cowpland, was under investigation.