Re: Venard Joseph Gaudet, Patrick Anthony Chesnutt, Paul Marion Cohen, and Osler Inc.

For Immediate Release Before the Court OSC

Toronto-On July 3, 1998, Venard Joseph Gaudet ("Gaudet"), Patrick Anthony Chesnutt ("Chesnutt"), and Paul Marion Cohen ("Cohen") were each convicted on a total of 105 Charges under the Securities Act. The charges arose as a result of their conduct when they were the principal shareholders and senior officers of the now defunct brokerage firm, Osler Inc. His Honour Judge Bernard N. Kelly sentenced each of the accused to a period of four years in jail to be served concurrently with the sentences they received from their convictions for offences under the Criminal Code of Canada. Osler Inc. was also found guilty of 105 charges under the Securities Act and was fined $25,000 per count for a total of $2,625,000.




On December 15, 1987, the Toronto Stock Exchange was notified by Osler Inc. of its failure to maintain the minimum level of regulatory capital required for the brokerage firm. On January 5, 1988, the Ontario Securities Commission initiated an investigation into the affairs of Osler Inc. On January 8, 1988, The Clarkson Company Limited (now Ernst & Young Inc.) was appointed Receiver and Manager of Osler Inc. pursuant to an Application to the Court by the Commission. The Commission investigation led to charges being laid under the Provincial Offences Act in December of 1988 against 5 former employees of Osler Inc. The Commission also issued Notices of Hearing against 24 Respondents in December of 1989.

All of the 24 Respondents received sanctions, ranging from a letter of reprimand to life-time trading and registration suspensions following hearings before the Commission. On November 19, 1991, the Commission issued its Decision with respect to, inter alia, Gaudet, Chesnutt, and Cohen banning them for life from participation in the capital markets either as registrants or investors. As part of the Reasons for Decision, the Commission panel hearing the case concluded that:

"The conduct of each of these three individuals in connection with the collapse of Osler was so reprehensible that we have concluded that none of them should ever again be allowed to participate in the capital markets of the Province in any way. Not only did they contribute significantly to the collapse of Osler, but they also directed an elaborate cover-up in an attempt to conceal the true state of affairs at Osler from the regulatory authorities, and thus compounded the losses eventually suffered. We believe that the public should never again be put at any risk of any possible repetition of their actions."

The Commission Decision was appealed to the Divisional Court. The appeal was dismissed.

Provincial Offences Act Charges

The charges under the Provincial Offences Act can be divided into 5 categories:

. filing of false Monthly Financial Reports with the Toronto Stock Exchange ("TSE");

. failure to meet minimum capital requirements;

. failure to maintain enforceable written repurchase agreements;

. failure to maintain proper books and records; and

. execution of a false and misleading Letter of Representation to the auditors of Osler Inc.

In a Statement of Admitted Facts, which was filed with the Provincial Court, the three accused acknowledged that the above schemes were designed to hide from the regulator the trading losses which had been incurred. Proper reporting of these losses on the monthly regulatory reporting would have alerted the regulators to the existence of a capital deficiency. If additional capital injections were not made on a timely basis, the regulators would then have required Osler Inc. to cease operations immediately.

The necessity to maintain minimum free capital is important since it is one of the cornerstones in the protection of customers and other creditors against insolvency of a brokerage firm. It serves to allow members of the public to place their funds with brokers in confidence that such funds are safe. On an ongoing basis, brokerage firms are required to report on their capital position on a monthly basis to their primary regulator (the TSE in the case of Osler Inc.). Firms are also required to provide annual detailed financial statements accompanied by an auditor's report.

The misstatement of the net free capital position of Osler Inc. started in April 1996 when the firm reported an excess net free capital position of $1,637,000 at a time when there was a capital deficiency of $1,405,000, representing a misstatement of $3,042,000. The misstatements continued until the final monthly report filed in October 1997 where the capital deficiency had increased to $68,879,000. The misstatement by the firm was in the amount of $67,187,000. During the entire period, Osler Inc. was in a deficient position for regulatory capital.

Part of Osler Inc.'s capital deficiency was financed through repurchase agreements entered into one of its customers, the Canadian Co-operative Credit Society ("CCCS"). Contrary to the Securities Act, these repurchase agreements were not contained in enforceable written agreements. In fact, they were not even shown on the books and records of Osler Inc. as repurchase agreements. The securities were recorded as "sales" to CCCS at prices higher than their actual market values. Gaudet, Chesnutt, and Cohen in their Statement of Admitted Facts acknowledged that this was done to mislead the regulator and to create a false impression of the liquidity of the firm. By December 15, 1987, Osler Inc. had three repurchase agreements with CCCS totaling $475 million not covered by enforceable written agreements. When Osler Inc. was not able to fulfill the repurchase commitments, CCCS eventually sold out the positions at a loss of almost $40 million.

The three accused also admitted to misleading the auditors of Osler Inc., Coopers & Lybrand, with respect to the financial situation and outstanding liabilities of Osler Inc. in relation to the audit for the year ended March 31, 1997. This was done by forwarding to the auditors a Letter of Representation containing numerous false and misleading representations knowing that the auditor would rely on them. The capital deficiency by that time was approximately $5,959,000. However, the amount reported was an excess net free capital position of $471,000.

The ruling brought the Enforcement Branch's investigation and prosecution in the Osler matter to an end. The above result not only sets a precedent in terms of the length of sentence and the amount of the fine, it also sends a very important message about the significance of compliance with the self-reporting rules imposed by securities regulators.

Reference: Larry Waite

Director of Enforcement (416) 593-8156

Thomas J. Lockwood, Q.C.

Counsel (416) 598-2323