POWER IN HIGH PLACES
By Linda McQuaig and Ian Austen
It was late at night Tuesday April 12. Eight members of the Ontario Securities Commission (OSC) gathered for an emergency meeting in a downtown Toronto office tower and they faced a weighty question: should they prosecute prominent financier Conrad Black? Confronting the men were strong recommendations that they should lay charges of misrepresentation and other breaches of the Ontario Securities Act against the 38year-old millionaire chairman of Argus Corp. Those recommendations were made not only by the OSC’s investigators but also by provincial Attorney General Roy McMurtry. Then, as the midnight deadline for laying charges approached, the commission decided it would not turn Black over to the courts. The full reasons for the decision may never be known, but it raised major questions about the way big business, politics and the judicial system interrelate in Ontario and, more generally, how power is wielded in high places.
The impact of the OSC’s decision was
immediate. Thursday morning’s newspapers carried reports of the OSC decision. On the same day, Black attended the annual meeting of Norcen Energy Resources Ltd., one of the principal companies in Black’s empire, with a clean record and later he declared that he had been “absolutely exonerated.” But neither Norcen’s shareholders nor
Recommendations to the Ontario Securities Commission called for 26 charges—nine against Conrad Black
the public at large knew that the OSC’s own investigators and McMurtry had requested that charges be laid under the Securities Act.
In fact, Maclean's has learned that after an 11-month investigation into Norcen’s unsuccessful bid to take over the Cleveland-based Hanna Mining Co., two OSC investigators, Gary Curran and
David Knight, produced an internal 138-page report—including 19 documents, many of them confidential—to make their case. In sometimes strong language, they called for a total of 26 charges to be laid—nine of them against Black himself. Of the remaining 17 charges, they said that eight should be directed at Norcen and nine at the company’s president, Edward Battle. The proposed charges related to five public documents which the investigators said contained false statements that could unfairly mislead shareholders. Individuals convicted under those charges face a maximum fine of $2,000 or up to one year in prison or both. Not only did the commission have that report to rely on, but two of McMurtry’s Crown attornies, both experts in securities law, made forceful representations on the minister’s behalf, backing up the submission of the OSC’s investigators.
The OSC is not the only body that has looked into the Norcen takeover bid. In a strongly worded statement, Judge John Manos of Cleveland granted Hanna a temporary injunction, pre-
venting the takeover, last June and the matter was later settled out of court. As well, the United States Securities and Exchange Commission—the U.S. federal securities regulatory agency—investigated and settled for a promise from Black and others that they would adhere to U.S. securities laws. In Canada the Metropolitan Toronto Police fraud squad launched an investigation which is now entering its second year.
Those investigations focused on the same issue—when did Black and Norcen form an intention to take over or gain a significant interest in the U.S. mining giant? The question arises because securities laws require that when a corporation plans a major move, such as a takeover, it must publicly reveal its intentions. That is because reports of a takeover bid usually drive up the prices of the stocks involved, and insiders could profit as a result.
The OSC first suspected something might be wrong during the U.S. court action. On April 13 last year Hanna’s lawyers in Canada met with then OSC Chairman Henry Knowles. They presented him with a letter charging that Norcen had knowingly withheld information about the takeover bid and they requested that the OSC investigate. Under Ontario law, the OSC, a ninemember body, has broad powers over the securities industry. Not only can it conduct investigations of its own but with the approval of the minister of consumer and commercial relations, currently Robert Elgie, it may also lay
charges under the Securities Act. Because Toronto dominates the Canadian securities markets, the OSC is effectively the industry’s national watchdog.
Even though a large volume of material from the U.S. court action was available last spring, the OSC investigation proceeded slowly. In fact, the investigators did not produce their first report until last September. Their work was far from complete at that point, but they indicated even then that they had strong suspicions that the Securities Act had been seriously violated.
The OSC investigators’ main concern was an apparent discrepancy between two key documents. The minutes of a Norcen executive committee meeting in Calgary on Sept. 9,1981, show that Battle announced that Norcen had started to buy a 4.9-per-cent interest in an unidentified U.S. company “with the ultimate purpose of acquiring a 51-per-cent interest at a later date.” Black and Battle later identified the company as Hanna Mining. But a month later, when Norcen decided to buy back a small amount of its own stock, the company told shareholders in a mailing that it planned no major changes, which would presumably indicate that it had no takeover intentions. The police were investigating that same apparent contradiction in connection with possible fraud or forgery charges under the Criminal Code.
Last February the pace of the investigations began to accelerate. In roughly one month the OSC investigators and the
police interviewed 17 Norcen directors, officers and consultants, including Conrad Black and his brother, Montegu. By the time the interviews were completed and the report arrived on the desk of OSC Chairman Peter Dey in late March, the deadline for laying charges was rapidly approaching. Under the Securities Act, court proceedings must begin within a year from the time the commission receives a complaint. In this case, the deadline was midnight on the night when the eight commissioners met.
From the beginning, Dey was concerned about a possible conflict. While there are no laws setting out conflict-ofinterest guidelines for the OSC, Dey had an anusual relationship with the Norrjn case. Before taking up his post at the securities commission in January, he had been a highly respected securities lawyer and partner at the prominent Bay Street law firm Osier Hoskin & Harcourt. That is the same firm that Norcen retains for legal advice on securities matters and one that worked with Norcen during the takeover bid. Dey insists that he never had any involvement with Norcen during that bid. However, he told Maclean ’s that he did work on a matter for Norcen in 1980. Dey pointed out that when he went to the OSC, he severed his ties completely with Osler Hoskin. But while his OSC contract states that he and Osier Hoskin have no mutual commitment, it does specifically leave open the possibility that he may go back after his two-year term as chairman expires.
Regardless of Dey’s personal relationship with Osier Hoskin, his former firm’s role in the attempted takeover bid is clear. Dey’s onetime partner in the Osier Hoskin corporate law department, Fred Huycke, not only handles Norcen’s account but is also a Norcen director. Indeed, Huycke’s actions were part of the OSC staff investigation.
Maclean ’s has learned that an internal Osier Hoskin memo addressed to Huycke is included among the documents attached to the OSC investigators’ findings. In the memo another lawyer at Osier Hoskin, David Drinkwater, described how he had advised senior
Norcen officials on the importance of disclosing major changes to the OSC and to the public.
Huycke and Drinkwater told OSC investigators in an interview that their advice was of a general nature and not directly related to Hanna. When asked about his relationship with Huycke and others at Osier Hoskin,
Dey replied: “I’m embarrassed, my law firm is going to be embarrassed so I would rather not talk about the internal operations of the firm.”
Before reviewing the Norcen case at the OSC,
Dey first took his concerns about a possible conflict to Brian Bellmore, an outside lawyer whom the commission retains. Bellmore cleared him, Dey says, but the OSC chairman still felt it necessary to raise the matter with his fellow commissioners. Maclean’s asked Dey if his participation would not create suspicions at least of an apparent conflict of interest in the public’s mind. Dey answered:
“Our procedures should never have been a public issue. They should never have been exposed to public scrutiny.”
And indeed, even in this case, the decision-making process remains largely secret. Dey refuses to discuss what went on behind the closed doors of the OSC. What is known is that the commissioners held three separate meetings to grapple with the pointed arguments of their investigators. In their report, the investigators charged that in deciding
to acquire a significant holding in Hanna—months before revealing it publicly in April, 1982—Black, Norcen and some company officials broke the law by making false statements. According to the report, five public documents that Norcen filed with the OSC contain untrue information.
In an attempt to buttress a case about the intentions of Black and Norcen, Maclean’s has learned, the report details the maze of relationships and business transactions surrounding the takeover bid.
The report traces Black’s initial
awakening of interest in Hanna back to August, 1981—eight months before he went public with his plans. (Black knew the workings of Hanna because of joint interests he held with the firm in the Iron Ore Co. of Canada Ltd.) Initially Black launched what was to become a long—and unsuccessful—campaign to convince the heirs of Hanna’s founder either to sell their shares or to create an alliance with Norcen. That summer Black ordered Dominion Secu-
rities to quietly buy up just under five per cent of Hanna’s stock. Meanwhile, Norcen told the Canadian Imperial Bank of Commerce to establish a secret line of credit for $20 million to finance the Hanna acquisition program. That small purchase and the overtures to the Humphries grew into an enormous corporate battle that reached a climax when Black publicly made his takeover bid in April, 1982.
In urging that charges be laid, the OSC investigators’ report apparently also argues strongly that Black and the others be brought before the courts, and
not be dealt with by regulations. In December, 1982, OSC staff members considered the possibility of making a deal with Norcen. Under the proposed arrangement, the OSC would take no action if Norcen would make a binding agreement not to violate the Securities Act. The scheme fell through because the Norcen individuals involved would only allow the company’s name, not their own, to appear on the agreement. The investigators rejected the possibility of attempting to make such an arrangement in the future on the grounds that it would be ineffective. Since such a deal would neither find guilt nor apply penalties, the investigators concluded that it would inspire little public confidence, particularly in cases involving well-known individuals. The investigators also rejected the possibility that the commission, rather than the courts, would hold public hearings on the matter. Such forums do not have the power to impose any punishment—other than to issue a specific order against a company. In
the Norcen case, the investigators argued, that might be futile, harmful to Norcen’s shareholders and unfair to Black and Battle.
But when the eight commissioners gathered for the third review of the affair on Friday, April 8, they decided unanimously not to take any action against Black, Norcen or Battle. That night Dey reported the verdict in a phone call to Elgie, the man who would have to approve any charges. That was
not the last time the commissioners had to rule on the case. They would deal with it again three days later.
Details of the OSC’s decision not to prosecute promptly reached McMurtry’s ministry, which had been working with the police for about a year on the criminal investigation. McMurtry was disappointed that the OSC had rejected charges. In an earlier report dated Feb. 21, 1983, Maclean's revealed that there were continuing suggestions by senior officials in the attorney general’s office that the police should reduce their criminal investigation to a probe of charges under the Securities Act. (Securities convictions generally carry much lighter penalties than those under the Criminal Code.) The police resisted that pressure, but it also appears to have had the effect of slowing down their investigation.
Less than 24 hours after the commission’s decision, an urgent meeting took place between OSC representatives and Harry Black, a senior Crown attorney in the attorney general’s ministry, who is working with the police on the case. He met Dey and four other OSC members. Harry Black’s mission was twofold. He wanted to know why the commission reached its decision. But he also had a very unusual query: even though the commission had no plans to lay charges itself, would it support an application led by the attorney general to instead allow the police to lay charges under the Securities Act? Although Black pushed for an answer, the commission did not respond.
Elgie was the next cabinet minister to intervene. On Monday he summoned Dey to his office for a briefing on the situation. Time was running out, with the Tuesday night deadline fast approaching. On Tuesday McMurtry sent a letter to Elgie requesting that the OSC review its decision after hearing another presentation by officials from the attorney general’s office at a special commission meeting at 4 p.m. Harry Black, accompanied by Crown Attorney David Doherty, again went to the securities commission. They made another pitch for securities charges, then they left the meeting to allow the board to reflect on its decision on Black, Battle and Norcen. McMurtry’s efforts were in vain. After about six hours, the commission reaffirmed its original decision.
At 4:51 p.m. on Wednesday, April 13, in newsrooms and offices across the country, Teletype machines spewed out the first news of the commission’s decision. The release, headed, ATTENTION: FINANCIAL EDITORS, was a curt 13 lines. The message was clear: there would be no charges. The release carefully stated that the conclusion “was made without approving or disapproving the manner
in which Norcen acquired its interests in Hanna and the disclosures made by Norcen and its directors and officers in the course of making the acquisition.” There was a conspicuous absence of any mention of the investigators’ recommendations. In fact, many readers might well have been left with the impression that the investigators supported the commission’s decision not to prosecute. The release read in part: “Based upon its review of the investigation carried out by its staff, the commission has concluded there are not sufficient grounds to support a recommen-
dation to prosecute or to institute any other proceedings against Norcen or any of its officers or directors under the Securities Act.”
For his part, Black contends that he has been cleared by the OSC. He also says that the decision has now eliminated the chance of the police laying any charges under the Criminal Code. “I mean, they can’t be serious,” Black said. “We have been absolutely exonerated by the most authoritative body on the matter, and the fact is that the attorney general and the police have a great deal of explaining to do about exactly what they’ve been doing for the past 11 months.” (McMurtry declined a request for an interview, according to a spokesman, because of “the ongoing
criminal investigation. ” )
Black has maintained that allegations against him are without any foundation. He told Maclean's: “There’s absolutely not one shred of evidence of any infraction of any kind—which, of course, is what we never ceased to proclaim.” Black contends that the police and the attorney general’s office have harmed Norcen and its shareholders by bringing their investigation into the public realm. He said: “They proceeded in this way to ensure that our position was severely compromised in civil litigation in Cleveland and that our position from a reputational standpoint was really smeared in this country and the
media.” Black added that once the matter is over he will attempt to determine the reasons for the Toronto investigation. “It is as inexorable as tomorrow that we will get that explanation one way or another,” he said. In an attempt to seek answers, Black said he plans to see Paul Godfrey, the Metropolitan Toronto chairman and police commissioner.
For his part, Dey says it is “tremendously disillusioning” that the findings of an internal staff report have become public. He has always placed great stress on the secrecy of the commission’s closed proceedings. It is “not unusual at all,” he submits, for the commission to reject the recommendations of its staff. “We function independently
from the staff in that respect,” said Dey.
Dey insists that the decision not to prosecute Black was thoroughly considered. It was not, he adds, part of a new conciliatory approach to business by the OSC. Dey took over as chairman during a turbulent phase in the commission’s history. His predecessor, Henry Knowles, sometimes raised hackles on Bay Street because of his adversarial approach to settling differences. Investment dealers, accountants and other securities lawyers greeted Dey’s appointment, on the other hand, with solid enthusiasm. Shortly after his appointment by the Ontario government last
fall, Dey told The Financial Post that there might be a better way of conducting the OSC. “Adversarial proceedings are one way of settling differences,” he said. “There are other ways. And it seems that before you go all the way to an adversary proceeding, the chairman will have an obligation to explore other routes .... I’m not a litigator. As a corporate securities lawyer, I’m trained to do deals, to negotiate deals.”
However, last week Dey told Maclean 's that his commitment to openness toward the financial community extends only to policy issues, and not to enforcement. Said Dey: “We have to police the securities market, and part of the confidence that the financial community has in fair securities markets
comes from tough enforcement. We can achieve a lot with co-operation, particularly in policy formulation, but the Conrad Blacks of this world also want us to be tough enforcers because they use the markets as much as the small investor.”
The man who has to answer for Dey and the commission in Ontario’s legislature, Robert Elgie, says he is satisfied that the chairman had no conflict of interest in the case. “I’m not troubled about it,” Elgie says, “in light of the fact that he [Dey] disclosed that to the commission counsel and disclosed it to his fellow commissioners, none of whom felt he had a conflict, and I accept that.”
Whenever a figure as prominent as
Conrad Black faces the law, the public is left to wonder if the treatment he receives is the same as that received by other citizens. Dey dismissed as “naïve” a question about whether Conrad Black received special treatment. But he added: “The enforcement of the laws has to be tough and it has to be evenhanded. I’m sorry, I didn’t mean to say your question was naïve but, I mean, you can’t compromise those sorts of principles.” It is in that context that conflict of interest questions become all the more pressing. With the investigators’ 11-month probe ending in a firm recommendation for charges and their position endorsed by the attorney general those questions are pressing indeed. Nobody feels that pressure more than Peter Dey. Asked his age he replied: “I’m 42 going on 80.”
With Ann Finlayson in Toronto.