IN THE MATTER OF THE SECURITIES ACT,

R.S.O. 1990, c. S.5, as amended

AND

IN THE MATTER OF

PHILIP SERVICES CORP., ALLEN FRACASSI, PHILIP FRACASSI, MARVIN

BOUGHTON, GRAHAM HOEY, COLIN SOULE, ROBERT WAXMAN AND JOHN WOODCROFT

STATEMENT OF ALLEGATIONS

Staff of the Ontario Securities Commission ("Staff") make the

following allegations:

I THE RESPONDENTS

1. Philip Services Corp. ("Philip" or the "Company") was, at all

material times, a reporting issuer in Ontario, Alberta, British

Columbia, Quebec, Saskatchewan, Nova Scotia and Newfoundland.

Philip's common shares were listed for trading on the Toronto Stock

Exchange (the "TSE"), the Montreal Exchange and the New York Stock

Exchange under the symbol PHV. At all material times, Philip was a

corporation amalgamated under the laws of the Province of Ontario,

with its head office in the City of Hamilton, in the Province of

Ontario. Prior to May, 1997, Philip operated its business under the

name of Philip Environmental Inc.

2. Philip was, at all material times, an integrated resource

recovery and industrial services company providing metal recovery

and processing services to major industry sectors throughout North

America. According to Philip's Annual Report (the "Form 10-K"),

Philip "was one of North America's leading suppliers of metals

recovery and industrial services". For the year ended December 31,

1997, Philip reported revenues of US $1.75 billion, of which US $1.1

billion was attributed to the Company's Metals Recovery Group (the

"Metals Group"). On or around September 29, 1995, the President and

Chief Executive Officer ("CEO") advised the Company's Board of

Directors that the Company expected consolidated revenue to reach

Cdn $1.5 billion by the end of 1997 as a result of internal growth

and acquisitions. At all material times, Philip's fiscal year-end

was December 31. All amounts referred to hereinafter are in U.S.

dollars, unless otherwise indicated.

3. Allen Fracassi ("A. Fracassi") was, at all material times, the

President, CEO and a Director of Philip.

4. Philip Fracassi ("P. Fracassi") was, at all material times, the

Executive Vice-President, Chief Operating Officer and a Director of

Philip. P. Fracassi and A. Fracassi are brothers and are the

founders of the Company.

5. Marvin Boughton ("Boughton") was, at all material times, the

Executive Vice-President and Chief Financial Officer ("CFO") of

Philip. Boughton is a chartered accountant. Prior to joining Philip

in or around 1991, Boughton was a partner in the accounting firm of

Deloitte & Touche ("Deloitte"), in its Hamilton, Ontario office and

had been employed by Deloitte for approximately 32 years.

6. Graham Hoey ("Hoey") was, at all material times, Senior

Vice-President, Finance of Philip. Prior to joining Philip in 1996,

Hoey was a partner with Deloitte.

7. Colin Soule ("Soule") was, at all material times, the General

Counsel, Executive Vice-President and Corporate Secretary of Philip.

8. Robert Waxman ("Waxman") became a Director of the Company in

January, 1994 and was the President of the Metals Group from

February, 1996 until September, 1997, when he was relieved of all

his duties and operating authority. Waxman's alleged resignation as

a Director of Philip and as President of the Metals Group was

publicly announced in a press release dated January 5, 1998. Details

surrounding Waxman's departure from the Company are more fully

described below in Part VI.

9. John Woodcroft ("Woodcroft") was, at all material times, the

Executive Vice-President, Operations of Philip. Woodcroft is a

chartered accountant.

II BACKGROUND

10. In 1997, Philip's business was organized into two operating

divisions - the Metals Group and the Industrial Services Group

("ISG"). Both of these divisions reported to Philip's head office,

hereinafter referred to as "Corporate".

11. The Metals Group was Philip's largest operating division,

accounting for more than 60% of the Company's revenue in 1997. The

Metals Group was comprised of three key divisions - copper, ferrous

and aluminum processing and recycling. As indicated above, Waxman

was President of the Metals Group at all material times.

12. Deloitte, a firm of chartered accountants, was Philip's external

auditor from 1990 until December, 1999. During 1997, the partners

from Deloitte who were assigned to the Philip audit engagement

included the following: the Lead Client Services Partner 1997, the

U.S. Audit Partner 1997, the Quality Control/Audit Partner 1997 and

the National Office Partner 1997.

III OVERVIEW OF STAFF'S ALLEGATIONS

13. The following allegations are being advanced by Staff of the

Commission:

Failure to provide full, true and plain disclosure in a prospectus,

dated November 5, 1997, (the "Prospectus") of material facts

concerning Robert Waxman, a Director and President of Philip's

Metals Group

1) Philip filed and Messrs. A. Fracassi, P. Fracassi, Soule, Waxman

and Woodcroft authorized, permitted or acquiesced in Philip filing

the Prospectus, with the Ontario Securities Commission (the

"Commission"), which failed to contain full, true and plain

disclosure of all material facts relating to the securities offered,

specifically, material facts relating to:

(i) financial losses incurred by Philip, in the amount of

approximately $20 million, which were allegedly caused by Waxman in

connection with various unauthorized transactions;

(ii) Waxman being relieved of his duties and all operating authority

he had at Philip in or around mid-September, 1997;

(iii) the $10 million promissory note executed by Waxman on or about

October 28, 1997, in favour of Philip (the "Waxman Promissory

Note"); and

(iv) Waxman's admission in or around mid-September, 1997 that he had

derived a personal benefit of approximately $2 million from certain

unauthorized transactions that he had instituted on behalf of the

Company.

Failure to provide full, true and plain disclosure in the Prospectus

of material facts in respect of the Special Charges - the

restructuring charge

2) Philip filed and Messrs. A. Fracassi, P. Fracassi, Boughton, Hoey

and Woodcroft authorized, permitted or acquiesced in Philip filing

the Prospectus, with the Commission, which failed to contain full,

true and plain disclosure of all material facts relating to the

securities offered, specifically, material facts relating to a

restructuring charge in the amount of $155.720 million, which was

not disclosed by Philip until 1998.

Failure to provide full, true and plain disclosure in the Prospectus

of material facts in respect of the Special Charges - the material

financial transactions

3) These material financial transactions amount to approximately

$110 million of the total $234.992 million in charges taken by

Philip, and are as follows:

(i) that Philip filed and Messrs. A. Fracassi, P. Fracassi,

Boughton, Soule, Waxman, and Woodcroft authorized, permitted or

acquiesced in Philip filing financial statements contained in the

Prospectus which failed to contain full, true and plain disclosure

of approximately $31 million for holding certificates in respect of

inventory, which were issued by Philip in 1996 and were improperly

recorded because Philip failed to record the underlying transactions

as liabilities or, alternatively, failed to remove the inventory

from the accounting records;

(ii) that Philip filed and Messrs. A. Fracassi, P. Fracassi,

Boughton, Waxman and Woodcroft authorized, permitted or acquiesced

in Philip filing financial statements contained in the Prospectus

which failed to contain full, true and plain disclosure of

approximately $29 million of unrecorded liabilities for invoices

issued by its customer, Pechiney World Trade Inc., in 1996 and

settled by Philip in 1997;

(iii) that Philip filed and Messrs. A. Fracassi, P. Fracassi,

Boughton, Waxman and Woodcroft authorized, permitted or acquiesced

in Philip filing financial statements contained in the Prospectus

which failed to contain full, true and plain disclosure of

approximately $30.222 million regarding a financing arrangement

between Philip and Commodity Capital Group, finalized on or about

August 13, 1997, which was not properly recorded in the financial

statements;

(iv) that Philip filed and Messrs. A. Fracassi, P. Fracassi,

Boughton, Hoey and Woodcroft authorized, permitted or acquiesced in

Philip filing financial statements contained in the Prospectus which

failed to contain full, true and plain disclosure of approximately

$10 million regarding a financing arrangement between Philip and

Canadian Imperial Bank of Commerce, finalized on or about June 27,

1997, which was not properly recorded in the financial statements;

and

(v) that Philip filed and Messrs. P. Fracassi and Woodcroft

authorized, permitted or acquiesced in Philip filing financial

statements contained in the Prospectus which failed to contain full,

true and plain disclosure of the $10 million Waxman Promissory Note

which was improperly recorded in the financial statements in

inventory.

IV THE NOVEMBER 1997 OFFERING

14. On November 6, 1997, Philip made a public offering of 20 million

common shares (the "November Offering"), 15 million of which were

sold in the United States and 5 million of which were sold in Canada

and internationally. The November Offering raised approximately $364

million and closed on or about November 12, 1997. The price per each

offered common share was $16.50.

15. In connection with the November Offering, Philip filed a

Prospectus with the Commission and obtained a final receipt on

November 6, 1997. As required pursuant to section 58 of the

Securities Act, R.S.O. 1990, c. S.5, as amended (the "Act"), the

Prospectus contained an Issuer's Certificate signed by A. Fracassi,

the CEO, and Boughton, the CFO and two directors, Waxman and Herman

Turkstra, on behalf of Philip's Board of Directors. A registration

statement (the "Registration Statement") was filed with the United

States Securities and Exchange Commission (the "SEC") on or about

November 6, 1997.

16. The Prospectus included audited financial statements for the

Company for the years ended December 31, 1996 and December 31, 1995,

for which Deloitte had issued unqualified audit opinions. Deloitte

consented to the inclusion of these audit opinions in the

Prospectus. Furthermore, the Prospectus contained unaudited interim

financial statements for the six month periods ended June 30, 1997

and June 30, 1996. Deloitte provided a letter of comfort to the

Commission dated November 5, 1997, with respect to the inclusion of

the unaudited interim financial statements in the Prospectus. The

Prospectus also included unaudited third quarter results for the

three and nine month periods ended September 30, 1997.

17. In connection with the November Offering, Philip entered into a

U.S. Underwriting Agreement dated November 6, 1997 with a syndicate

of underwriters, which provided for the sale by the Company of 15

million common shares in the United States. Salomon Brothers Inc.

and Merrill Lynch & Co. acted as the co-lead underwriters on behalf

of the syndicate of underwriters. Philip also entered into an

International Underwriting Agreement, dated November 6, 1997 with a

syndicate of international underwriters, which provided for the sale

by the Company of 5 million common shares internationally, including

Canada. Salomon Brothers International Limited and Merrill Lynch

International acted as representatives on behalf of the

international underwriters. The Canadian underwriters that

participated in the international underwriting were as follows:

Salomon Brothers Canada Inc., Merrill Lynch Canada Inc., CIBC Wood

Gundy Securities Inc., Midland Walwyn Capital Inc., First Marathon

Securities Inc., Gordon Capital Corporation, RBC Dominion Securities

Inc. and TD Securities Inc. (the "Underwriters").

V PUBLIC DISCLOSURES AND REGULATORY FILINGS

18. In a press release dated September 29, 1997, Philip announced

that it had filed a Registration Statement in the United States and

a preliminary prospectus ("Preliminary Prospectus") in Canada with

respect to an offering of 20 million of its common shares.

19. On or about October 24, 1997, Philip filed an amended

Preliminary Prospectus with the Commission.

20. In a press release dated November 5, 1997, Philip reported

record net earnings of $25.4 million for the three month period

ended September 30, 1997, a 105% increase over the $12.4 million

from continuing operations for the same period in 1996. It also

reported that its revenues for the three month period ended

September 30, 1997 increased 246% to $502.2 million from $145.2

million for the same quarter in 1996. The financial information

released on November 5, 1997 was incorporated into the Prospectus.

21. On or about November 6, 1997, Philip obtained a receipt for the

Prospectus from the Commission.

22. In a press release dated November 18, 1997, Philip reported that

total net proceeds from the November Offering amounted to

approximately $364 million.

23. In a press release dated January 5, 1998, Philip announced the

resignation of Waxman as a Director and President of the Company's

Metal Group.

24. Philip issued a press release dated January 26, 1998,

approximately 11 weeks after the November Offering closed,

announcing the following:

... the Company will record a one time year end charge to earnings

of between US $250 million and US $275 million, which on an

after-tax basis, is between US $175 million to US $200 million. This

one time charge will be comprised of two items. One item will be in

the form of a restructuring charge, which on an after-tax basis will

amount to between US $100 million and US $120 million. This

restructuring charge includes a write-down of goodwill, which makes

up 60% to 70% of this charge, severance payments, relocation costs

and a variety of other items. The second component being US $75

million to US $80 million after-tax relates primarily to physical

inventory adjustments and also to trading losses and charges

relating to a market revaluation of inventory held for resale by our

Metals Recovery Group.

25. In a press release dated January 27, 1998, Philip clarified its

January 26, 1998 announcement, stating that the goodwill write-down

related to a number of acquisitions the Company concluded over the

period from 1993 to 1996. It also stated that the physical inventory

adjustment of approximately $60 million after-tax involved the

difference between book inventory and physical inventory in the

Metals Group copper yard business.

26. On Friday, January 23, 1998, the closing price for Philip's

shares on the TSE was $18.90. On January 27, 1998, following the

announcements of January 26 and 27, Philip's common shares on the

TSE closed at $12.00.

27. In a press release dated March 5, 1998, Philip announced its

financial results for the year ending December 31, 1997 and the

results of an audit conducted by external auditors into the copper

inventory discrepancy. In this press release Philip made a number of

disclosures, including that:

(i) its 1997 year-end audited financial results included a $185.4

million (pre-tax), one-time special and non-recurring charge related

to the write-down of certain assets;

(ii) it reported a loss of $95.8 million for its 1997 year-end;

(iii) it was restating its earnings for fiscal year 1995 to $3.2

million (rather than approximately Cdn $32.7 million as originally

disclosed) and for fiscal year 1996 to a $20 million loss (rather

than a profit of approximately Cdn $39 million as originally

disclosed); and

(iv) there was a discrepancy in the copper inventory in the audited

financial statements for the year ended December 31, 1997 in the

amount of approximately $92 million (pre-tax) resulting from trading

losses and a further amount of approximately $32.9 million (pre-tax)

caused by incorrect recording of copper transactions, which losses

were incurred over a three year period as a result of speculative

transactions done outside of Philip's normal business practices.

28. On or about March 31, 1998, Philip, pursuant to the United

States Securities Exchange Act of 1934, filed the Form 10-K for its

1997 fiscal year with the SEC. The Form 10-K included an unqualified

audit opinion signed by Deloitte on March 4, 1998.

29. In a press release dated April 1, 1998, Philip announced that on

March 31, 1998, Philip had filed its Form 10-K for its 1997 fiscal

year-end financial statements and reported that "as part of its

final audit review" it was determined that an additional charge of

$13.6 million had to be added to the special and non-recurring

charges of $185.4 million (pre-tax), disclosed in its news release

of March 5, 1998. These additional charges included $10 million in

unrealized losses from copper swap contracts and $3.6 million in

"other" costs relating to copper operations.

30. In a press release dated April 23, 1998, Philip announced that

its 1997 Audited Financial Statements previously filed with its

Annual Report on Form 10-K with the SEC "did not properly reflect

the results of transactions in the Company's copper operation and as

a result underestimated the Company's liabilities by an amount

estimated to be approximately $30 million". It also announced an

adjustment to "certain balance sheet accounts" of approximately $5

million.

31. On or about May 5, 1998, Philip filed a Material Change Report

with the Commission, pursuant to section 75(2) of the Act, with

respect to its announcement on April 23, 1998 as described in

paragraph 30.

32. On or about May 14, 1998, Philip filed an amended Form 10-K (the

"Form 10-K/A") with the SEC which reflected the further adjustments

required to its 1997 audited financial statements as announced in

its press release dated April 23, 1998.

33. On or about May 22, 1998, Philip filed its Annual Financial

Statements for its fiscal year ended December 31, 1997 with the

Commission.

VI ALLEGATIONS RELATING TO ROBERT WAXMAN - Paragraph 13 (1)

Background Facts

34. In 1973, Waxman began working in the scrap metals industry for

I. Waxman & Sons Limited, the Waxman family business. In or around

September, 1993, I. Waxman & Sons Limited rolled all of its active

operating assets into Waxman Resources Inc. ("Resources") and then

sold all of the shares of Resources to Philip. At the time Philip

purchased the shares of Resources, Waxman was the President and

Chief Executive Officer of Resources.

35. In light of his substantial experience and contacts in the

metals industry, Philip gave Waxman the responsibility of running

the operations it had acquired from the Waxman family interests as

well as other metals holdings of Philip. Waxman performed an

integral role for Philip in both the operations of the Metals Group

and the strategic planning for the numerous acquisitions by Philip

in the metals industry.

36. In January, 1994, Waxman became a Director of Philip. On

February 28, 1996, Waxman was appointed President of the Company's

Metals Group.

37. At all material times, Waxman reported to A. Fracassi. On a

day-to-day basis, Waxman also reported to P. Fracassi and Woodcroft.

38. In 1996 and 1997 the Metals Group accounted for approximately

60% of Philip's revenues.

Relevant Portions of the Prospectus

39. Page 5 of the Prospectus states the following under the

heading "Forward-Looking Statements":

Factors that may cause actual results to differ materially from

those contemplated or projected, forecast estimated or budgeted in

such forward-looking statements include among others, the following

possibilities...(6) loss of key executives... [Emphasis added.]

40. Page 18 of the Prospectus states the following under the heading

"Reliance on Key Personnel":

The Company's operations are dependent on the abilities, experience

and efforts of its senior management. While the Company has entered

into employment agreements with certain members of its senior

management, should any of these persons be unable or unwilling to

continue his employment with the Company, the business prospects of

the Company could be materially and adversely affected. [Emphasis

added.]

41. Robert Waxman is described on page 67 of the Prospectus under

the heading "Management" as "President, Metals Recovery Group and

Director". On page 68 of the Prospectus, Waxman is further discussed

as follows:

Mr. Waxman has been a director of Philip since January, 1994. Mr.

Waxman has been the President, Metals Recovery Group, since February

28, 1996. Since September 1993, Mr. Waxman has been President and

Chief Executive Officer of Waxman Resources Inc. From 1989 to 1993,

Mr. Waxman was Chief Operating Officer of I. Waxman & Sons Limited.

42. The only disclosure provided in the Prospectus regarding

indebtedness to Philip by any person who is or was during the

relevant time period an executive officer or senior officer of

Philip is set out on page 7 as follows:

As at November 4, 1997, the aggregate amount of indebtedness (other

than routine indebtedness) due to the Company from all current or

former officers, directors and employees was Cdn $737,200,

consisting of the outstanding balance of a loan made to Allen

Fracassi, the President and Chief Executive Officer of the Company

for the purpose of purchasing a home ... the largest aggregate

amount outstanding under the loan during the fiscal year ended

December 31, 1996 was Cdn $787,200.

43. As indicated in paragraph 15, Waxman was one of the directors

who executed the Certificate of the Company (the "Certificate"), at

page C-1 of the Prospectus, on behalf of the Board of Directors. The

Certificate was in the form required pursuant to s.58(1) of the Act

as follows:

The foregoing constitutes full, true and plain disclosure of all

material facts relating to the securities offered by this prospectus

as required by Part XV of the Securities Act and the regulations

thereunder.

Allegations Relating to Waxman's Unauthorized Transactions

44. In early 1997, the Vice-President of Finance in the Metals Group

("VP Finance") commenced an investigation (the "Copper

Investigation") into various copper cathode transactions entered

into by the Metals Group. In June of 1997, after completion of the

Copper Investigation, Woodcroft and A. Fracassi were advised of the

VP Finance's suspicions about Waxman's involvement in the removal of

approximately $10 million worth of copper cathode from Philip's

account.

45. At or around the same time as the Copper Investigation, an

investigation was being conducted into Waxman's company expense

account. By memo dated May 22, 1997, P. Fracassi and Woodcroft were

advised that Waxman had improperly obtained payment from Philip for

a number of expenses unrelated to Philip, and with no legitimate

business purpose, such as: golf, rare wines and airfare for his wife

on the Concorde. On or about July 7, 1997, Philip cancelled Waxman's

Visa Corporate expense credit card.

46. In or around June, 1997, the Executive Vice-President, Corporate

and Government Affairs received information from a senior employee

of the Metals Group about the attempted establishment of a

"shrinkage programme" by Waxman and an employee of Philip who

reported to Waxman (the "Waxman Employee") to improperly divert

Philip inventory.

47. In or around July, 1997, the Executive Vice-President, Corporate

and Government Affairs became aware that the financial records of

the Metals Group had been falsified in that they purported to

acknowledge receipt of a higher grade of metal than Philip had in

fact received, thereby causing Philip to pay for the higher grade.

48. In or around October, 1997, the Executive Vice-President,

Corporate and Government Affairs, advised Messrs. A. Fracassi, P.

Fracassi, Boughton, Soule and Woodcroft about the matters discussed

in paragraphs 46 and 47.

49. At around the same time, the VP, Financial Operations of Philip

was preparing a report for A. Fracassi regarding potential

inappropriate copper cathode transactions being effected in the

Metals Group. At the same time, the VP, Financial Operations was

also advised of the details regarding the Copper Investigation.

50. As a result, the VP, Financial Operations prepared a handwritten

memo dated September 12, 1997 to A. Fracassi (the "VP, Financial

Operations' Memo"), advising of four transactions "controlled by Bob

Waxman which appear[ed] to be of a fraudulent nature" as follows:

(1) During late 96 and early 97, we borrowed 9.6 million lbs of

cathode from GM. Of this, 5.4 million lbs was given to Pechiney but

never invoiced. The balance was sold and properly invoiced. However,

we paid Pechiney for 3.0 million lbs and MIT for 1.2 million lbs of

cathode which was not received by us. The total loss on the scam at

US 1.00 per lb is US 9.6 million.

(2) During the one year period ended March 97 we lost US 10.0

million on cathode sales to Parametal Trading. These were

predominantly paper, non-physical transactions. There is no valid

reason, including borrowing, hedging or outright speculating that

could explain a loss of this size based upon the average monthly

trading volume of US 10.0 million. The only logical conclusion is

that money is being taken from the Company.

(3) In April of 97, we started buying UBC's from Pechiney. We

brokered the scrap to various customers at market prices. The loss

to date on these transactions is US 275,000. Madesker has modified

the Pechiney invoices to reduce the loss to us. Experience has shown

that this is just a delay tactic. Eventually the full amount of the

loss will be realized. Initially, we sold to the UBC customers

directly. Now MIT has been introduced as a middleman between us and

our customers. A bad deal is about to get worse. There is no reason

for these transactions other than to put money in other people's

pockets.

(4) In May 97, we started selling #2 copper scrap to MIT who in turn

sells it to Southwire. We are supposed to be paid on the basis of

copper recovered by Southwire. By accident, we have discovered that

Southwire's recoveries are twice the amount reported to us by MIT.

Based upon the initial order alone, we have been cheated out of US

175,000. It is clear that the reason for using a broker is to divert

money to the principal of MIT...

The memo concludes as follows:

I have more examples as does [the Executive Vice-President,

Corporate & Government Affairs] who has information on yard theft.

But without going into more detail we are already up to CAD 27.0

million.

Bob must not be allowed to enter into any transactions. All people

loyal to him should be fired and we should try to recover whatever

we can without having the whole thing blow up.

51. The VP, Financial Operations' Memo was provided to Woodcroft.

Woodcroft advised the VP, Financial Operations that he had discussed

the matters raised in the VP, Financial Operations' Memo with A.

Fracassi. The VP, Financial Operations also provided a copy of the

Memo to his wife.

52. As is more fully discussed at paragraphs 61 to 63, in or around

mid-September, 1997, Waxman admitted to Woodcroft that he had

derived a personal benefit of $2 million from certain transactions

that he had instituted.

As a result of the matters concerning Waxman discussed in paragraphs

44 to 52 (the "Waxman Issues"), in or around September/October,

1997, A. Fracassi, P. Fracassi, Soule and Woodcroft caused Philip to

take a number of steps as follows:

(a) Waxman was relieved of his duties and all operating authority

that he had at Philip on or around September 16, 1997;

(b) Waxman's signing authority was removed;

(c) The VP, Financial Operations was re-positioned as head of the

Metals Group, reporting to P. Fracassi and Woodcroft, on or around

September 16, 1997;

(d) The Waxman Employee was terminated in or around late September

or early October, 1997, and was paid $120,000 in return for his

agreement not to compete with Philip for three years;

(e) the Waxman Promissory Note was obtained from Waxman; and

(f) legal advice was sought with respect to Philip's prospectus

disclosure obligations regarding issues concerning Waxman (as is

more fully discussed in paragraphs 55 to 57).

54. Notwithstanding that Waxman had been relieved of his duties and

all operating authority, he continued to be held out, by Messrs. A.

Fracassi, P. Fracassi, Soule, Waxman and Woodcroft, as President of

the Metals Group to the remaining members of Philip's Board of

Directors, other members of senior management, the employees of

Philip and the general public. In fact, Waxman continued to attend

Board meetings, represented the Company in connection with the

finalization of certain acquisitions and executed the Certificate,

on behalf of the Board of Directors.

55. A letter dated October 30, 1997 from a Toronto law firm (the

"Toronto Law Firm") to Soule (the "Canadian Legal Opinion") states

the following with respect to instructions and information it

received from Philip:

You requested our views in relation to recent events which have

occurred within Philip Services Corp. (the Company) and which may be

summarized as follows: As a result of information received from an

employee, senior management of the Company learned that a senior

officer and other employees had been defrauding the Company. The

fraud took the form of fraudulent invoices and record-keeping, theft

of property and misrepresentation. The total loss to the Company was

approximately $20 million; and it involved activities of the

fraudulent employees in Canada, the United States and elsewhere.

We understand that, upon being confronted by senior management of

the Company, the fraudulent employees admitted their wrongdoing and

resigned. The senior officer agreed to repay to the Company

approximately $10 million. You advised that the Company was of the

opinion that this was the most that could be recovered from this

individual.

You have asked for our advice as to whether there is a specific

legal requirement for the Company to disclose the above events

publicly or to any public authority. In this regard, you advised

that senior management of the Company, having considered the issue,

does not believe that the above events are "material facts",

"material changes" or "material information" under applicable

Ontario & Toronto Stock Exchange securities regulatory requirements.

You have indicated, however that the Company is currently in the

"waiting period" in respect of a public offering of common shares in

the United States and internationally, a preliminary prospectus

dated September 26, 1997 having been filed in Ontario and a

corresponding registration statement having been filed with the

Securities & Exchange Commission in the United States.

56. The Canadian Legal Opinion expressed the following views:

(a) Item 23 of Form 12 ... under the Regulations to the Securities

Act (Ontario) requires disclosure of indebtedness to the Company by

any person who is an executive officer or senior officer of the

Company. In the broadest meaning of the term "indebtedness", an

agreement by the senior officer involved to pay the Company $10

million may be considered indebtedness, whether or not the senior

officer executes and delivers a promissory note for the amount.

(b) Item 29 of Form 12 requires disclosure of the amount of any

material interest of a senior officer within the three years prior

to the date of the preliminary prospectus, or in any proposed

transaction, which has materially affected or will materially affect

the issuer or any of its subsidiaries. While you have indicated that

the Company does not view the matter as material, we would point out

that the de minimis exception contained in paragraph 5(iv) of the

Item is $50,000. We would also point out that if the transaction is

material to a subsidiary, it may be caught. We understand that the

activities involved took place within one of the Company's operating

subsidiaries.

(c) As a related point, there may be disclosure requirements in

relation to the Company's audited financial statements. While the

$10-million and $20-million amounts may not be material overall, in

the context of a particular line item or note disclosure, the

amounts may well be material. There may also be an issue as to the

integrity of the Company's financial systems and reporting which

would require mention in the notes. These issues, and potentially

others, would have to be addressed by your auditors.

57. The Toronto Law Firm, on behalf of Philip, also obtained a legal

opinion from an American law firm, dated October 23, 1997 (the

"American Legal Opinion"), with respect to Philip's Registration

Statement disclosure obligation regarding the "Company[s]

discover[y] that one of its executive officers has been involved in

embezzlement activities in the amount of Cdn $20,000,000". The

American Legal Opinion expressed similar views to those expressed in

the Canadian Legal Opinion, including the following statement:

I found no item specifically requiring disclosure of this situation.

However, the executive in question may be a significant contributor

to the Company either on the management team or in production or in

research and development. As such any significant changes in

management should be disclosed. Moreover, the circumstances

surrounding the departure of the employee in question should be

disclosed if he or she is an executive officer, director or a

significant employee because it would be considered material to a

prospective investor. The handling of this situation reflects on the

company's business ethics and practices. Many investors today will

invest only in ethical investments and as a result the omission of

this situation could be material. In addition, this situation will

probably be very difficult to keep confidential. Any possible leak

of this information could have an even more detrimental affect on

the Company than simply revealing the information forthright.

[Emphasis added.]

58. The matters described in paragraphs 44 to 57 were known to

Messrs. A. Fracassi, P. Fracassi, Soule, Waxman and Woodcroft prior

to filing the Prospectus.

59. Messrs. A. Fracassi, P. Fracassi, Soule, Waxman and Woodcroft

failed, and caused Philip to fail, to advise the following:

(a) Philip's Board of Directors;

(b) Philip's auditor, Deloitte;

(c) the Underwriters; and

(d) the public,

of the Waxman Issues, the Waxman Promissory Note and of Waxman being

relieved of his duties and all operating authority prior to filing

the Prospectus.

60. In fact, with respect to Philip's auditor, a representation

letter dated November 6, 1997 (the "Representation Letter"), the

same date that the Prospectus was filed, states: "No shortages or

irregularities have been discovered that have not been disclosed to

you and to our knowledge there is nothing reflecting upon the

honesty or integrity of personnel of our organization". [Emphasis

added.] The Representation Letter is signed by A. Fracassi and

Boughton.

Allegations Relating to the Waxman Admission

61. In or around mid-September, 1997, Waxman admitted to Woodcroft

that he had derived a personal benefit of $2 million from certain

transactions that he had instituted (the "Waxman Admission").

62. The day after the Waxman Admission, Woodcroft advised Soule and

A. Fracassi about what Waxman had confessed to him. Immediately

after the Waxman Admission, Waxman was relieved of his duties and

any operating authority that he had at Philip. Messrs. P. Fracassi

and Soule were also advised of the Waxman Admission and that Waxman

had been relieved of his duties and operating authority prior to the

issuance of the Prospectus.

63. The Board of Directors was not advised about the Waxman

Admission until December 23, 1997, at a meeting of the Board of

Directors. The minutes of this meeting reflect the following with

respect to the circumstances surrounding the Waxman Admission:

Allen Fracassi advised the Board that in the late spring of 1997,

the Company became concerned about certain copper transactions that

Robert Waxman, the President of the Company's Metal Recovery

Operations had entered into. The Company had commenced a review of

the transactions and though questionable in nature, the Company had

been unable to conclude that the transactions were anything other

than bad business judgement or poor management. Subsequently, in

mid-September of 1997, Mr. Waxman admitted to Mr. John Woodcroft,

Executive Vice-President, Operations, that he had derived a personal

benefit of US $2 million from certain transactions that he had

instituted. Mr. Woodcroft reported Mr. Waxman's admission to Mr.

Fracassi. Mr. Waxman was immediately relieved of his duties and any

operating authority that he had. The Company intensified its review

of Mr. Waxman's actions. Pending the completion of the review, Mr.

Waxman as an indication of his willingness to reimburse the Company,

executed a US $10 million promissory note. Mr. Fracassi apprised

[the Chairman of the Board of Directors],[ and two outside

directors] of the Waxman admission.

Mr. Fracassi advised that the Company's subsequent review of the

Waxman transactions indicated that invoices for approximately US $5

million had not been rendered. H[e] noted that Mr. Waxman had caused

US $1.5 million of the un-invoiced transactions to be repaid and was

prepared to guaranty an additional US $2.5 million of receivables

due from Parametals.

... The Board concluded that the Company should request Mr. Waxman's

immediate resignation from his position as an officer and director.

[Emphasis added.]

64. Messrs. A. Fracassi, P. Fracassi, Soule, Waxman and Woodcroft

failed, and caused Philip to fail, to advise the following:

(a) Philip's Board of Directors;

(b) Philip's auditor, Deloitte;

(c) the Underwriters; and

(d) the public,

of the Waxman Admission and of Waxman being relieved of his duties

and all operating authority prior to filing the Prospectus.

65. Allegations concerning the adjustments which were taken to the

Company's financial statements as a result of the Waxman

irregularities are more fully discussed at paragraphs 175 and 176.

Waxman's Alleged Departure from Philip

66. Almost four months after Waxman had been relieved of his duties

and operating authority, Philip issued the following misleading

press release dated January 5, 1998 relating to Waxman's "departure"

from Philip:

Philip Services Corp. ("Philip") today announced that as part of the

Company's consolidation and restructuring program, a senior

management structure has been established within each of the four

key divisions of its metals operations ... As part of this

consolidation, Philip has accepted the resignation of Robert Waxman,

as a Director & President of the Company's Metals Services Group,

effective January 5, 1998. [Emphasis added.]

VII ALLEGATIONS RELATING TO THE SPECIAL CHARGES - Paragraph 13 2)

and 3)

Background Facts

67. The second deficiency in the disclosure made in the Prospectus

involved the financial statements. In particular, Philip failed to

disclose in the Prospectus that the Company had identified and

quantified items to be included in the restructuring charge.

Philip's process of identifying and calculating items to be included

in the restructuring charge commenced in the late summer of 1997.

Also, the financial statements contained in the Prospectus were

incorrect because of inappropriate accounting treatments for many

material transactions. They were subsequently corrected in 1998 as

part of the Special Charges.

68. On January 17, 1998, the Globe and Mail reported that Philip

would be taking a one-time restructuring charge and would disclose

the amount of the restructuring charge on January 26, 1998.

69. On January 26 and 27, 1998, only 11 weeks after the Prospectus

was filed with the Commission, Philip issued two press releases

announcing that the Company would be taking a restructuring charge.

As set out in paragraph 24, in a January 26, 1998 press release,

Philip disclosed that it would be taking a restructuring charge and

a charge relating to material transactions (the "Special Charges").

According to the press release:

...the company will record a one time year end charge to earnings of

between US $250 million and US $275 million, which on an after tax

basis is between US $175 million to US $200 million. This one time

charge will be comprised of two items. One item will be in the form

of a restructuring charge, which on an after tax basis will amount

to between US $100 million and US $120 million. This restructuring

charge includes a write-down of goodwill, which makes up 60% to 70%

of this charge, severance payments, relocation costs and a variety

of other items. The second component being US $75 million to US $80

million after tax relates primarily to physical inventory

adjustments, and also to trading losses and charges relating to a

market revaluation of inventory held for resale by our Metals

Recovery Group.

70. In the late summer of 1997, Philip commenced a process to

identify and calculate items to be included in a restructuring

charge. The restructuring charge calculated during the course of

this process is very similar to the amounts announced on January 26

and 27, 1998, as set out in paragraph 106.

71. In the final audited financial statements for the year ended

December 31, 1997, Philip recorded various Special Charges relating

primarily to its copper business, including a restructuring charge

of $155.720 million and Special Charges relating to material

transactions of $234.992 million.

72. The Special Charges relating to material transactions impacted

on previously reported earnings by Philip in the years ended

December 31, 1995 and 1996 and the three quarters ended March 31,

June 30 and September 30, 1997 respectively.

THE RESTRUCTURING CHARGE - Paragraph 13 (2)

Background Facts

73. In the 10-K filed with the SEC on April 1, 1998, Philip

explained the restructuring charge as follows:

As at December 31, 1997, the Company recorded a pre-tax charge of

$155.7 million ($117.1 million after tax) reflecting the effects of

(i) restructuring decision made in its Industrial Services Group

following the mergers of All Waste and Serv-Tech, (ii) integration

decisions in various of its acquired Metals Services Group

businesses, the most significant of which were acquired in late

October 1997 and (iii) impairments of fixed assets and related

goodwill resulting both from decisions to exit various business

locations and dispose of the related assets, as well as assessments

of the recoverability of fixed assets and related goodwill of

business units in continuing use.

All businesses assessed for asset impairment were acquired in

purchase business combinations and, accordingly, the goodwill that

arose in those transactions was included in the test for

recoverability. Assets to be disposed of were valued at the

estimated net realizable value while the assets of the business

units to be continued were assessed at fair value principally using

discounted cash flow methods.

Special and non-recurring charges relate to the impairment of fixed

assets and related goodwill and comprised of the following items:

($US '000)

Business units, locations or activities to be exited:

Goodwill written off $ 10,032

Fixed assets written down to estimated net

realizable value of $4,843K 47,584

Unavoidable future lease and other costs

associated with properties 9,358

Other assets to be disposed, including $7,800K

accrued disposal costs 17,740

Business units to be continued:

Goodwill impairment 49,558

Fixed assets written down to estimated net

realizable value of $8,810K 10,984

Severance, $2,000K paid before year-end 4,464

Accrued costs 6,000

TOTAL $ 155,720

74. Philip had identified and quantified most of these items that

were written off as a restructuring charge prior to filing the

Prospectus. However, there was no specific disclosure in the

Prospectus that Philip intended to take a restructuring charge or in

the alternative, the minimal disclosure provided was not

representative of what was known at the time the Prospectus was

filed.

75. Deloitte's management letters, prepared at the conclusion of the

1994 and 1995 engagements, indicate that the accounting for

acquisitions, the capitalization of costs (especially start-up costs

and losses) and the recognition of accounting for goodwill were

serious concerns for its auditor on an annual basis.

Relevant Portions of the Prospectus

76. The following excerpts from the Prospectus are the only

references made by Philip that may possibly relate to the

restructuring charge that the Company was contemplating:

(a) The Preamble to the Financial Information

The selected historical consolidated financial data ... is derived

from the audited Consolidated Financial Statements ... and ... is

from the unaudited interim consolidated financial statements of

Philip, which in the opinion of management include all adjustments

(consisting solely of normal recurring adjustments) necessary to

present fairly the financial information for such periods. [Emphasis

added.]

(b) Risk Factors

The Prospectus noted that Philip may record additional charges, at a

later date, resulting from acquisition or integration issues.

However, the Prospectus does not disclose that the Company had

already quantified the significant components of the restructuring

charge.

In particular, reserves established or charges recorded in

connection with acquisitions or the integration thereof may be

insufficient and the Company may be required to establish additional

reserves or record additional charges at a later date. [Emphasis

added.]

(c) Notes to the Unaudited Pro Forma Consolidated Financial

Statements - Note 8

The following Note to the Unaudited Pro Forma Consolidated Financial

Statements contemplated non-recurring costs, but only in relation to

integration costs arising from the AllWaste and Serv-Tech

acquisitions and not to the restructuring charge that was being

contemplated by Philip during 1997.

Philip expects that it will incur non-recurring costs relating to

severance, relocation and other integration costs. These costs are

not quantifiable at this time. [Emphasis added.]

The Quantification of the Restructuring Charge during 1997

77. In January and/or February of 1997, during the course of the

finalization of the 1996 engagement, the Lead Client Services

Partner 1997 advised A. Fracassi to consider a restructuring charge

as synergies would be realized from the previous pattern of

acquisitions, and the United States marketplace was not reacting

adversely to restructuring charges at the time.

78. In early 1997, at least P. Fracassi, Woodcroft and the VP

Finance were aware that inappropriate accounting had taken place in

finalizing the 1996 results. It was agreed that earnings targets for

1997 would be reduced in order to manage the expectations of the

public and enable corrective accounting action to be taken. The

expectations, however, were not reduced and it was decided that the

corrections would take place as part of the restructuring charge

being considered.

79. On February 24, 1997, a meeting was held to discuss the

finalization of the 1996 audit engagement. In attendance were A.

Fracassi, Boughton, the Partner - National Office and the Lead

Client Services Partner 1997. Notes of the meeting record that,

amongst other points,

· "divisions" structure going forward[:] services - metals, and

· [o]ut of this 're-org' - the Company is contemplating a

· restructuring charge in Q2/3 [of] 97.

80. During the course of the next few months, Deloitte continued to

provide advice to Philip on the issue of a restructuring charge and

discussed the charge with Philip on a conceptual basis.

81. During the late spring or summer of 1997, various staff of

Philip were made aware that a restructuring charge was going to take

place. At the same time, in the early summer of 1997, the

Underwriters began meeting with Philip to discuss equity financing.

82. On August 1, 1997, the Executive Vice-President, Corporate

Development received a fax from Merrill Lynch containing an analysis

of the impact of extraordinary charges on the stock price of other

publicly listed companies. Attached to the fax were graphs

illustrating the impact of "extraordinary charges" on the price of

three separate public companies.

83. Shortly after August 5, 1997, Deloitte became aware that a

prospectus was going to be issued in the United States and that

Deloitte would be required to provide an opinion on the Philip

financial results for January to June, 1997 (the "Q2 Review"). The

Q2 Review was conducted by Deloitte in September, 1997. The main

participants from Philip in the Q2 Review were Boughton, Hoey, the

Corporate Controller and the Manager, Financial Reporting.

84. Deloitte, however, was not aware that staff at Philip were

attempting to quantify the charge.

85. By August 25, 1997, Philip had decided to raise an equity

financing.

86. Prior to August 25, 1997, the Corporate Controller met with at

least Boughton and the VP Finance to identify and quantify items to

be included in a restructuring charge. At the meeting, Boughton

assigned the Corporate Controller the responsibility of identifying

items in Corporate and ISG to be included in the restructuring

charge. Boughton asked the VP Finance to provide suggestions of

components that may form part of a possible restructuring charge in

the Metals Group.

87. On August 25, 1997, the VP Finance submitted a memo addressed to

Waxman, and copied Boughton and the Corporate Controller. In the

memo entitled "Write-off", the VP Finance summarized what had been

discussed at the meeting. The memo included a list of "items to

consider" for a restructuring charge/write-off. The VP Finance

included the following on the list: the "closure of Centennial yard"

and the "cost of exiting the solids copper business in Hamilton.

Take hit on inventory".

88. Shortly after August 25, 1997, the VP Finance gave the Financial

Analyst this memo and asked her to complete a restructuring charge

based on the items in it.

89. In early September, 1997, the Financial Analyst prepared

schedules quantifying the items to be included in the restructuring

charge. The Financial Analyst prepared several iterations of a list

comprising items that the Metals Group were suggesting should be

included in a restructuring charge or write-down. In spreadsheets

dated September 2, 1997, the Financial Analyst quantified the

"Metals Recovery Restructure Costs" as at July 31, 1997. The

spreadsheets included the amount of Cdn $127 million under the

heading of "cathode". The items that the Financial Analyst included

in this category were primarily losses that had been inappropriately

deferred on the books of the Metals Group and improperly recorded as

an asset. These items would ultimately form part of the Special

Charges disclosed by Philip in 1998. The Financial Analyst submitted

the analysis, totalling Cdn $158 million, to the VP Finance.

90. On September 4, 1997, the VP Finance prepared a second memo.

This memo, addressed to Boughton and copied to Waxman, was entitled

"Restructuring". The memo commences with the sentence "… these are a

number of items we would consider as part of a restructuring

charge". The schedule attached to the memo, totalling Cdn $193

million, refers to several items that were later included in the

restructuring and Special Charges subsequently recorded in the 1997

annual financial statements.

91. The VP Finance's estimate of Cdn $193 million included an amount

of Cdn $167 million for inventory at Centennial. Items related to

inventory at Centennial comprised most of the Special Charges which

were subsequently recorded in the 1997 financial statements.

Originally, all these accounting irregularities formed part of the

proposed restructuring charge. It was not until January of 1998 that

these items were accounted for separately as a Special Charge and

not as a restructuring charge. Most of the items other than

Centennial were much smaller, and had come from assorted plans to

consolidate yards and operations, and to move out of certain

businesses.

92. In September of 1997, at the time that the Waxman Issues

discussed in Part VI were being dealt with, Philip management was

considering exiting the cathode trading and copper brokerage

business located at Centennial. Since early 1997, Philip had been

exploring whether they could replace the Centennial yard with

another location. Waxman and Woodcroft would have been aware of

these significant changes to the business. Waxman's operational

authority was removed on or about September 16, 1997 and the Waxman

Employee was terminated on September 23, 1997. When the Treasurer

was re-positioned as head of the Metals Group (the "New President of

the Metals Group"), he was instructed to close out all cathode

trades and not enter into any new ones. The New President of the

Metals Group reported to P. Fracassi and Woodcroft.

93. During the first week of September, 1997, the Financial Analyst

received the VP Finance's second memo dated September 4, 1997. At

that time, the Financial Analyst prepared another list of items in

the Metals Group to be included in the restructuring charge. On

approximately September 9, 1997, the VP Finance and the Financial

Analyst met briefly with Hoey and the Corporate Controller. The VP

Finance distributed copies of one of the Financial Analyst's list of

items totalling Cdn $194 million, which was based on the estimates

at July 31, 1997.

94. On September 5, 1997, a spreadsheet totalling $137 million in

respect of restructuring items for ISG was prepared by the Corporate

Controller and given to Boughton. The Corporate Controller continued

to refine the list and faxed a slightly revised version to the

President, ISG Group on September 30, 1997. The list faxed to the

President, ISG Group totalled $128 million.

The Prospectus & The Continuing Effort at Philip to Quantify the

Restructuring Charge

95. On September 24, 1997, a due diligence conference call session

was held concerning the Preliminary Prospectus. Philip management

was represented by Boughton, Hoey and the Corporate Controller. The

participants (the representatives of the Underwriters) were told

that Philip was going to take charges to write off goodwill. They

were also advised that while the amount was not quantifiable, it

would be sizeable. No further explanation of the approximate

magnitude was given.

96. On September 25, 1997, the Board of Directors of Philip

discussed and approved the share offering.

97. On September 26, 1997, the Preliminary Prospectus was filed with

the Commission.

98. As noted at paragraphs 93 and 94, at September 30, 1997, Philip

had identified approximately Cdn $194 million for the Metals Group

and $128 million for ISG in respect of a potential restructuring

charge.

99. In October, 1997, the Financial Analyst, on the instructions of

the VP Finance, made certain recalculations to the restructuring

schedules as at September 30, 1997. Subsequently, the Financial

Analyst gave this analysis to the VP Finance.

100. In mid-October 1997, A. Fracassi advised Deloitte that Philip

was considering a charge.

101. On November 5, 1997, Philip held a due diligence session by

conference call concerning the Prospectus. During the conference

call, Hoey advised that Philip was considering a restructuring

charge but was not close to a decision. Boughton's notes of the

conference call indicate that he informed the meeting that there

"may be write-downs - looking at it - W/B of size".

102. At the time of the Prospectus, the U.S. Audit Partner 1997 had

discussions with Soule and Hoey regarding the restructuring charge.

In fact, Deloitte continually inquired as to the status of the

restructuring charge. Soule and Hoey confirmed that the decision of

whether to take a restructuring charge had not been made and that

the asset impairments had not yet occurred. Deloitte was advised

that Philip had consulted legal counsel regarding the appropriate

disclosure of the possible charge in the Prospectus.

103. The schedules prepared by the Financial Analyst and the VP

Finance were not disclosed to Deloitte prior to 1998.

104. Prior to filing its Prospectus on November 5, 1997, Philip had

sufficient information to conclude that it would be taking a

material charge to earnings but did not disclose this fact to

Deloitte, its auditor, or the Underwriters in connection with the

public offering and did not disclose that it would be taking a

material charge to its earnings, in the Prospectus.

105. The final restructuring charge taken by the two operating

divisions, ISG and the Metals Group, amounted to $101.298 million

and $54.422 million respectively for a total of $155.720 million.

Many of these restructuring costs were identified prior to September

30, 1997.

106. In particular, the following items were identified as of

September 30, 1997, as of January 26, 1998 (the date of a press

release by Philip regarding the charge), and actually recorded for

the December 31, 1997 year-end and prior years:

$US '000 Quantification at Press Release Adjustment

September 30, 1997 January 26, 1998 Recorded for

December 31, 1997

and prior years

Industrial

Services Group

Quebec $ 20,000 $ 10,400 $ 17,532

Tech Services 26,000 23,700 21,868

Burlington 40,000 31,500 29,000

Environmental

Kansas City 11,000 11,400 9,897

Other 31,400 27,400 23,001

TOTAL $ 128,400 $ 104,400 $ 101,298

Metals Group

Centennial (Cdn

Plant $168,900) 122,214 45,600 3,775

Closure

Other (Cdn 17, 200 50,647

$ 23,770

TOTAL (Cdn $ 139,414 $ 45,600 $ 54,422

$192,670)

Special Charge

– Restructuring $ 267,814 $ 150,000 $ 155,720

Special Charge

- Inventory and

- related accounts $ 125,000 $ 234,992

Total Special

Charges (pre-tax) $ 267,814 $ 275,000 $ 390,712

November to December 1997

107. The VP Finance prepared a spreadsheet dated November 27, 1997

which calculated the restructuring charge for the Metals Group at

approximately Cdn $201.599 million. The Corporate Controller relied

on this spreadsheet in preparing her list. The Corporate

Controller's list consolidated the spreadsheet of the Metals Group

with the ISG list. It also contained an item for "Metals" as

$146.087 million (Cdn $201.599 million) and the amount of

approximately $128 million for ISG. This was also noted in the list

that the Corporate Controller faxed to the ISG President on

September 30, 1997. The Corporate Controller gave the spreadsheet to

Boughton and Hoey on November 27, 1997.

108. Subsequently, the Corporate Controller met with Boughton and

Hoey to discuss the spreadsheet.

109. On December 2, 1997, Boughton and Hoey attended a meeting to

discuss a list entitled "Restructuring Charge", listing charges

totalling $267 million. An amount of $121 million is included in the

list and is described as "Centennial Redundant Assets". Handwritten

notes on two separate copies of the list reflect the amount being

changed to $100 million, suggesting that this item was discussed at

the meeting.

110. In late December, 1997, Boughton informed the Lead Client

Services Partner 1997 of "ball-park" numbers of the restructuring

charge ($200 million). On December 22, 1997, the Lead Client

Services Partner 1997, the U.S. Audit Partner 1997, Boughton and

Hoey attended a meeting held in Boughton's office. Boughton outlined

the proposed restructuring charge in general terms, but did not

provide supporting detail. Boughton indicated that a charge would be

taken of approximately $100 million for ISG and $100 million for

Metals.

111. On December 23, 1997 the Corporate Controller distributed a

memo and schedule at a meeting attended by P. Fracassi, Boughton,

Woodcroft, the New President of the Metals Group and Hoey. This

meeting was convened to discuss the restructuring charge. According

to the spreadsheet, Centennial is noted as having redundant assets

of $150 million with the action required being to "close yard and

liquidate inventory".

January 1998

112. As indicated above at paragraph 106, a significant component of

the restructuring charge initially related to inventory at the

Centennial yard. According to the minutes of an Audit Committee

meeting held on January 19, 1998, Boughton argued that Centennial

was a "discontinued" operation and therefore should be dealt with as

a separate charge outside of normal operations. However, Deloitte

disagreed. As set out in paragraph 27, on March 5, 1998, Philip

issued a press release which stated that the trading losses that

were incurred were due to "speculative transactions done outside of

Philip's normal business procedures".

113. By March, 1998, the items at Centennial had been eliminated

from the restructuring charge and were as written in the Special

Charges.

Philip Discloses the Restructuring Charge

114. On January 26, 1998, Philip issued a news release, as described

at paragraph 24, announcing that Philip planned to take a "one-time

year-end charge to earnings" of approximately $250 million to $275

million. One component of the charge related to a copper inventory

adjustment of approximately $60 million after tax.

115. On January 27, 1998, as described at paragraph 25, Philip

issued another news release explaining a $90 million inventory loss

in its scrap operations in Hamilton.

116. The matters described in paragraphs 73 - 106 were known to

Messrs. A. Fracassi, P. Fracassi, Boughton, Hoey and Woodcroft,

prior to filing the Prospectus.

THE SPECIAL CHARGES IN RESPECT OF MATERIAL FINANCIAL TRANSACTIONS -

Paragraph 13 (3)

117. In the final audited financial statements for the year ended

December 31, 1997, Philip recorded Special Charges relating

primarily to its copper business. In addition to the restructuring

charge, the major components of the Special Charges regarding the

Inventory and Related Accounts (the "material financial

transactions"), disclosed by Philip in the Form 10-K and the Form

10-K/A, are detailed as follows:

($US '000)

Non-recurring charges recorded as operating

expenses

(including CIBC $10 million and CCG $30 million) $ 78,260

Costing errors recorded as operating expenses 32,875

Previously incurred but unrecorded trading losses

resulting from speculative trading of copper

cathode, recorded as special charges 92,235

(including Holding Certificates $31 million,

Pechiney $29 million and other "Cathode Trading Losses"

(including Waxman Promissory Note) $32.13 million)

Overstatement of revenue and accounts receivable,

recorded as adjustments to revenue, of which

$22.114 million is separately identified. 31,622

TOTAL $ 234,992

118. The Special Charges caused Philip to restate its comparative

financials for the fiscal years ending December 31, 1996 and

December 31, 1995, as they were inaccurate. The inaccurate financial

statements for the fiscal years ending December 31, 1996 and

December 31, 1995 were contained in the Prospectus.

Discovery of an Inventory Shortfall

119. The Special Charges were discovered by Deloitte as a result of

the significant "shortfall" in the inventory of the Metals Group, of

which Deloitte was informed in January of 1998.

120. Deloitte and another accounting firm, which was also conducting

an investigation into the inventory discrepancy, identified many

significant accounting irregularities which accounted for the

inventory shortfall and also other accounting irregularities which

did not impact on the inventory account. Some of these are outlined

below.

121. The accounting irregularities amount to approximately $110

million of the total $234.992 million, noted at paragraph 117 and

are discussed as follows:

· Holding Certificates

· Reversal of Invoices from Pechiney World Trade (USA), Inc.

· ("Pechiney")

· Commodity Capital Group Metals Inc. ("CCG")

· Canadian Imperial Bank of Commerce ("CIBC")

· Waxman Promissory Note

122. None of the items that are discussed below was properly

disclosed in the financial statements that were contained in the

Prospectus.

1. Holding Certificates

123. At various times during the material time, Philip financed its

operations with the use of holding certificates. Philip issued

holding certificates signifying that the inventory being held by

Philip was the property of the customer. The holding certificates

issued in 1996 represented a total invoice value of approximately

$31 million and were issued to the following customers: $8.8 million

to Conversion Resources; $7.2 million to Pechiney; $3.5 million to

Pechiney; $1.2 million to MIT International LLC; $3.4 million to

Parametal Trading Inc. ("Parametal"); $1.9 million to Kataman Metals

Inc. ("Kataman") and $4.7 million to Southwire Company.

124. The majority of the holding certificates were signed by Waxman

and Woodcroft. Soule, on behalf of Philip, executed a "Purchase

Money Security Agreement (Inventory)" in respect of Kataman.

125. The inventory was never sold and never left the premises of

Philip. Philip issued holding certificates to these customers.

Philip recorded each transaction involving the holding certificates

as a "sale", despite the fact that these were financing

transactions.

126. These transactions were not properly recorded in the Company's

financial statements for the year ended December 31, 1996.

127. The financial statements that were contained in the Prospectus

were misleading and not accurate due to the inappropriate accounting

treatment of the holding certificates, recorded in 1996. A special

charge to the 1996 statement of earnings was required to be made

because either, a) the liability to repurchase this inventory was

not recorded, or b) the inventory remained in the books and records

as being owned by Philip, at the date of the Prospectus.

128. The matters described in paragraphs 123 - 127 in respect of the

holding certificates were known to Messrs. A. Fracassi, P. Fracassi,

Boughton, Soule, Waxman and Woodcroft, prior to filing the

Prospectus.

2. Reversal of Invoices - Pechiney

129. Philip bought and sold copper cathode at various times during

the material time.

130. In early 1997, the VP Finance made an adjustment to the 1996

results in the amount of approximately $29 million. He did so to

increase profits pursuant to a request by Woodcroft. The VP Finance

achieved this by reversing seven invoices for the purchase of copper

cathode from Pechiney. The invoices were not recorded as liabilities

in the results for 1996, despite the fact that the inventory had

been received and was recorded as an asset in the 1996 results.

131. In April of 1997, Philip paid these invoices, but the

unrecorded liability continued to be deferred until written-off at

year-end, when their write-off formed part of the Special Charges.

132. The purchases and repayments involving Pechiney were not

properly recorded in the Company's financial statements for the year

ended December 31, 1996 and for the quarters ended March 31, 1997,

June 30, 1997 and September 30, 1997.

133. A special charge to the 1996 statement of earnings was required

in respect of these transactions because the liability to purchase

this inventory was not recorded.

134. The financial statements that were contained in the Prospectus

were misleading and not accurate due to the inappropriate accounting

treatment of the Pechiney purchases and repayment in 1996 and 1997.

135. The matters described in paragraphs 129 - 134 were known to

Messrs. A. Fracassi, P. Fracassi, Boughton, Waxman and Woodcroft

prior to the filing of the Prospectus.

3. Commodity Capital Group Metals Inc. ("CCG")

136. In early 1997, Philip began negotiating a financing transaction

with CCG, a corporation based in New York. In August and September

of 1997, CCG provided approximately $31 million in financing to

Philip. In addition to the amount advanced from CCG, Philip also

paid to CCG interest payments totalling approximately $1.6 million.

The Agreements

137. On or about August 13, 1997, Philip finalized the financing

arrangement with CCG. In summary, the arrangement consisted of the

following:

(a) Philip agreed to sell "commodity lots" (scrap metal) to CCG at

the market value of the commodity;

(b) In the "letter of assurance" addressed to the consortium of

banks, Philip also acknowledged that it was aware that CCG financed

these purchases by obtaining loans from a consortium of banks;

(c) Philip was obliged to repurchase the commodity lots from CCG at

the same prices at which Philip sold the commodity lots to CCG, plus

interest. Philip's obligation to repurchase the commodity lots was

"absolute and unconditional". Philip also acknowledged that CCG's

obligations to Philip were, at all times, subordinated to CCG's

obligations to the banks; and,

(d) According to the holding certificates, "Philip agrees to

indemnify and hold harmless CCG, the agent, the banks... from and

against all claims and liabilities... as a result of holding such

commodity lot at the location referred to above."

138. The invoices, backdated to June 30, 1997, were issued by Philip

to CCG for the sale of 27 million pounds of inventory. On the same

date, June 30, 1997, Philip issued holding certificates for 27

million pounds of inventory held on behalf of CCG.

The August 19, 1997 and September 16, 1997 Transactions

139. On August 19, 1997, (the "first transaction"), Philip "sold" 27

million pounds of various inventory (commodity lots) to CCG for US

$26.550 million, by invoice dated June 30, 1997. In return, on

August 22, 1997, CCG paid Philip US $25.225 million, which

represented 95% of the purchase price. The 5% balance (net of

interest and handling fees) was retained by CCG as a hold-back and

was to be paid to Philip at the date Philip "repurchased" the

commodity lot from CCG.

140. According to the Treasurer's memo, he was,

...requested by Marvin Boughton to control the receipt of funds at

Corporate and ensure other liabilities of the Metals Recovery group

were extinguished with the funds, namely amounts due to Pechiney

Inc.

141. On the same day, CCG issued a postdated invoice to Philip for

the sale to Philip of the same quantity of inventory and for the

same price, with a due date of November 19, 1997. This invoice,

dated August 19, 1997, was "approved for payment" by Woodcroft and

Waxman. On November 19, 1997, as agreed to in the Purchase and Sale

Agreement, Philip was obligated to repurchase the inventory from

CCG.

142. On September 16, 1997, (the "second transaction") Philip "sold"

5.4 million pounds of various inventory (commodity lots) to CCG for

approximately US $4.752 million. In return, Philip received

approximately US $4.5 million which represented 95% of the purchase

price. The balance was retained by CCG as a hold-back.

143. On the same day, CCG invoiced Philip for the sale to Philip of

the same quantity of inventory and for the same price, due on

December 17, 1997.

144. Prior to December 17, 1997, the VP Finance alerted Hoey that

repayment to CCG would create a charge of approximately $29 million

which would have to be taken to earnings or otherwise dealt with.

This arose when, in accounting for the loans from CCG, Philip offset

an amount of approximately $29 million which had arisen in 1997 when

a payment of a previously unrecorded and unrelated liability was

made (the unrecorded Pechiney invoices discussed at paragraphs 129 -

134). As a result of this offset, no liability to CCG was apparent.

145. In November, 1997, Messrs. A. Fracassi, Boughton and Hoey made

certain representations to Deloitte for the purposes of the

Prospectus. At that time, Philip management did not disclose the

liability to CCG.

146. On November 19, 1997, Philip and CCG "rolled" the first

transaction; that is, Philip received an extension of the repayment

of the loan. Philip and CCG agreed to repeat a transaction that was

identical in its terms to the transaction executed on August 19,

1997.

147. On November 19, 1997, according to the Treasurer's memo,

I [the Treasurer] co-ordinated the movement of funds to facilitate

the roll of the transaction by Bob Waxman for another 90 days to

February 17, 1998.

I also facilitated the transfer of funds on December 17, 1997 to

close out the second transaction as I was informed by [VP Finance]

it was not to be rolled.

148. On December 17, 1997, Philip repurchased the inventory

underlying the "second transaction", from CCG for approximately $4.7

million.

149. A December, 1997 journal entry processed a payment to CCG but

inappropriately capitalized the payment by charging it to

acquisition expenses. The journal entry was authorized by Hoey.

1998

150. On or about February 17, 1998, Philip was obligated to

repurchase the inventory underlying the "first transaction" from

CCG. Philip paid to CCG the resulting interest and fees and a new

agreement was put in place, resulting in the rolling of the

transaction. The new agreement required Philip to provide a greater

amount of inventory and pay an additional hold-back of $393,694.

151. On March 19, 1998, Philip terminated its involvement with CCG

and repurchased the remaining inventory (58.2 million pounds) from

CCG. Philip paid approximately $150,000 in interest and fees.

Deloitte's Discovery of the Transaction

152. In early February, 1998, at the time that he resigned from

Philip, the VP Finance informed A. Fracassi and Hoey that Deloitte

was unaware of two further adjustments that should be taken by

Philip. One of these related to the CCG transaction.

153. In mid-February and again in mid-March, 1998, the new President

of Metals informed Hoey that there was no liability recorded for

CCG.

154. Prior to the end of March of 1998, A. Fracassi and Hoey were

made aware that there was no liability on the books of the Metals

Group for the CCG transaction. Sometime in mid-April, 1998, Deloitte

was informed of the unrecorded liability.

The Adjustment

155. The financial statements that were contained in the Prospectus

were misleading and not accurate due to the inappropriate accounting

treatment of the CCG transaction.

156. After Philip filed its Form 10-K in March of 1998, an

adjustment of approximately $30 million was taken by Philip

regarding the CCG transaction. The discovery of the unrecorded

liability relating to the CCG transaction triggered the recall of

Philip's Form 10-K and Deloitte's opinion on the financial

statements contained in the Form 10-K.

157. The matters described in paragraphs 136 - 149 were known to

Messrs. A. Fracassi, P. Fracassi, Boughton, Waxman and Woodcroft

prior to the filing of the Prospectus.

4. Canadian Imperial Bank of Commerce ("CIBC")

158. In or around May of 1997, Philip and CIBC began negotiation of

a complex financing arrangement, the purpose of which was to provide

Philip with funds as a result of the "sale" of copper inventory to

CIBC. At the same time, Philip agreed to:

(a) process the inventory and store it on its premises; and

(b) market and sell the inventory on behalf of CIBC, remitting the

proceeds to the bank.

159. Philip wanted to record this series of agreements as a sale of

inventory despite the fact that this was a financing transaction.

160. The fact that CIBC also insisted that Philip enter into swap

agreements effectively meant that all of the risks of ownership of

the inventory remained with Philip. As a result, the transaction

should properly have been recorded as a financing transaction.

161. On or about June 27, 1997, Philip finalized a financing

agreement with CIBC. The Purchase, Sales Agency and Processing

agreements ("the Agreements") were signed by the Treasurer and Hoey

on behalf of Philip. Pursuant to the Agreements,

(a) Philip agreed to sell to CIBC "commodities" (unprocessed copper)

representing the equivalent of 31.5 million pounds of finished

product;

(b) Philip agreed to retain physical possession of the inventory;

(c) CIBC "directed" Philip to process the commodities pursuant to a

prescribed schedule - 2 million pounds per month between July 1997

and April, 1998 and 11½ million pounds in May, 1998;

(d) CIBC "authorized and directed" Philip to sell the commodities in

11 monthly tranches - 2 million pounds per month between July, 1997

and April, 1998 and 11½ million pounds in May, 1998;

(e) CIBC "directed" Philip to remit the sales proceeds, at the COMEX

price at the date of the sale, to CIBC, on each settlement date;

and,

(f) Philip received $26.8 million in cash, net of prepaid interest

and net of a hold-back of the processing and sales agency fees due

to Philip.

162. Simultaneously, on June 27, 1997, Philip entered into a swap

agreement with CIBC. The swap agreement was signed by the Treasurer

on behalf of Philip. The swap contract ensured that Philip would

remit to CIBC proceeds of at least the amount initially paid by

CIBC, plus interest, thus eliminating the risk to CIBC of future

fluctuations in the copper prices.

163. CIBC provided Philip with an accounting opinion indicating that

the transaction, as initially contemplated, could be recorded as a

sale.

164. Philip sought Deloitte's advice on the accounting of this

transaction. On the basis of the information that was provided to

Deloitte, and after considerable debate, they found that recording

the transaction as a sale was acceptable. The existence of the swap

agreement was not disclosed to Deloitte.

The Accounting for the Transaction

165. Philip did not process any of the inventory, as required

pursuant to the agreements. Rather, as swap agreements came due

every month, Philip "rolled" the transaction. The "rolls"

necessitated a net payment from Philip to CIBC or vice-versa.

166. Hoey instructed the VP Finance to record the transaction as a

sale with a corresponding reduction in inventory which would result

in an increase in the cost of sales. The VP Finance also recorded

the accounting for the swaps and the rolls.

167. Philip recorded the sale of its inventory and did not record

the transaction as a finance arrangement. As a result, a gross

profit of $3.2 million in the second quarter of 1997 was realized

due to the manner in which the transaction was recorded.

The Disclosure of the Swap Agreements to Deloitte

168. During that time, Philip continued to fail to disclose the

existence of the swap agreements to Deloitte.

169. In early February, 1998, at the time that he resigned from

Philip, the VP Finance informed A. Fracassi and Hoey that Deloitte

was unaware of two further adjustments that should be taken by

Philip. One of these related to the CIBC transaction.

170. On March 5, 1998, Philip issued a press release indicating

that,[t]he amount of the discrepancy was confirmed at $92.2 million

pre-tax caused by trading losses and $32.9 million pre-tax caused by

the incorrect recording of copper transactions within the copper

division.

These figures did not include an adjustment for CIBC.

171. On or about March 19, 1998, while finalizing the audit,

Deloitte discovered that there were no accounting entries for

certain transactions. In particular, Deloitte identified the swap

agreements, their impact on the CIBC transaction and the lack of

recognition of a liability. As a result, further adjustments to the

financial statements were made by Philip.

The Adjustments

172. As a result, the financial statements that were contained in

the Prospectus were misleading and not accurate due to the

inappropriate accounting treatment of the CIBC transaction.

173. In the Form 10-K, the financing arrangement with CIBC formed a

component of the adjustments, the Special Charges, announced by

Philip and made to its financial statements for the year-end

December 31, 1997. The adjustment was in the amount of $10 million.

174. The matters described in paragraphs 158 - 168 were known to

Messrs. A. Fracassi, P. Fracassi, Boughton Hoey and Woodcroft, prior

to filing the Prospectus.

5. Waxman Promissory Note

175. As indicated in paragraph 13 1) iii), the Waxman Promissory

Note was in the amount of $10 million. On the instructions of

Woodcroft, the Waxman Promissory Note was improperly recorded in the

1997 Q3 financial statements in inventory. The Waxman Promissory

Note was, however, later written off as uncollectible and was also

not included as an amount due from, or guaranteed by Waxman in his

termination agreement dated January 5, 1998. Messrs. Woodcroft and

P. Fracassi were aware that the Waxman Promissory Note had been

improperly recorded in the financial statements which were contained

in the Prospectus.

176. The Waxman Promissory Note was included in the Special Charges

as an item relating to cathode trading activities.

VIII CONDUCT CONTRARY TO THE PUBLIC INTEREST

177. The Respondents' conduct, as set out above, contravened

sections 56 and 122 of the Act and was contrary to the public

interest.

IX OTHER

178. Such further and other allegations as Staff may make and the

Commission may permit.

DATED AT TORONTO this 30th day of August, 2000.