thewiz, to wit...
YBM Magnex: will Arigon's public trail be avoided by a**-covering, alibis and amnesia?
In oft-told tales of the recent Bre-X gold fraud, a Filipino geologist, Mike de Guzman, was fingered as the, figurative and literal, “fall guy”.
The case of YBM Magnex, another fallen Bay Street wonder stock, illustrates that the practice of pointing fingers is not a survival instinct exclusive to the core perpetrators of a scam. The public record of YBM, more graphically than does the Bre-X file, shows how securities regulators, brokers, analysts, money managers, accountants and other members of the financial establishment combine in a fiasco – and, further, how they may strive to disassociate themselves from such a collective, compounded, failure.
Although documented history reveals it as a charade, there is an emerging dynamic within the Canadian securities firmament to try and hang the YBM can primarily on auditors Deloitte and Touche, LLP (called in by the Ontario Securities Commission in mid-1997 to review YBM's books).
No doubt, there's enough blame to be shared in connection with this latest TSE mega-bust. Still, an attempt to focus public attention on the events of mid-1997 and later – while serving the purposes of some securities officials, stock brokers and money managers – neglects the critical, formative, stages of the YBM scandal.
In effect, Arigon Company, a vehicle linked (by numerous international police intelligence, and news, reports) to Russian Organized Crime activities, went public in Canada through the good graces of the Alberta Stock Exchange. As detailed elsewhere on the “howenow” web-site (@ imagen.net ), beginning in 1994, the pieces were put in place to enable Arigon to gain an ASE-listing through a “blind pool” originally called Pratecs Technologies (later renamed YBM Magnex).
Despite having easily identified rogues on its board of directors, YBM Magnex gained the approval of Alberta stock market regulators and the support of Canadian brokers such as Michael Prew, a Vice-President of Yorkton Securities and a former Chair of the ASE. Broker Prew, operating out of Yorkton's Calgary office (the same branch which launched the Timbuktu gold swindle onto the ASE in 1995/96), sponsored YBM taking Arigon public.
At the same time that Russian mafia godfather Semion Mogilevitch was being banned from Great Britain, and his associated companies and bank accounts shut down – in another region of the commonwealth, Canada -- Arigon, Mogilevitch and associates (Konstantin Karat etc.) were being granted welcome access to the public markets.
As early as mid-1995 Canadian officials became aware of money-laundering investigations into Arigon, Mogilevitch and others – but failed to ensure that the investing public was adequately informed of such alarming matters.
YBM shares began trading on the Toronto Stock Exchange on March 7 1996.
In early 1996, the motley management crew aboard Pratecs/YBM was augmented by a pair of Bay Street names: on January 26, First Marathon VP Robert Owen Mitchell (whose brokerage firm served to underwrite and tout YBM stock) became a director; and, on April 29 1996, ex-Ontario Premier David Peterson joined the team. (Peterson's law firm, Cassels Brock and Blackwell, provided legal services to YBM in connection with its 1997 prospectus financing.) What type of due diligence Mitchell and Peterson conducted before lending their names to the YBM promotion may be learned as various class action civil suits make their way through the court system.
It can be seen that YBM (which absorbed Arigon and its related companies like so many Russian matrioshka – or stacking -- dolls) was seeded on the ASE in 1994/95 and had been listed and established on the TSE in 1996 (well before auditors Deloitte and Touche were invited to the party). It's hard to fathom how regulatory officials at the TSE, OSC, ASE and ASC can defend their 1995 – 1997 response to information such as is contained in the UK police intelligence report reprinted below.
(As London's Observer newspaper was first to report, British authorities investigating Arigon and its related entities alleged, as early as November 1995, that Canada was “used purely to legitimise the (Russian) criminal organisation by the floating on the stock exchange of a corporation which consists of the UK and USA companies whose existing assets and stocks have been artificially inflated by the introduction of the proceeds of crime”.)
It's worth asking how Canadian stock analysts like Rob McConnachie (of Canaccord Capital and then Scotia Capital Markets), money managers such as Sceptre Investment Counsel's Allan Jacobs (who, with seemingly unintentional irony, noted how he liked YBM's “strong entrepreneurial management”), Wayne Deans (of Deans Knight Capital Management) and other boosters of the company's shares, could issue public recommendations or votes of support when, with a modest level of research, they could have known of YBM's Russian mafia associations through Arigon and its core assets and the allegations of money laundering which surrounded Arigon et al.
There was sufficient material on the public record to alarm prudent financial players long before the Fall 1997audit report of Deloitte and Touche flagged other, serious, problems at YBM. In these days of managed money mania, however, those entrusted with informing, and/or investing for, the public are insulated and are rarely called to account for their actions.
Even after the trade journal Canada Stockwatch began, on March 10 1998, to highlight public misrepresentations and dangers evident in YBM's affairs, some Canadian securities professionals acted as cheerleaders. On April 2 1998, Nesbitt Burns' analyst Peter Sklar described the weakness in YBM's share price, which he attributed to the coverage in Stockwatch, as presenting “a buying opportunity.”
By April of 1998, North American news agencies were aware of the links between Russian organized crime and YBM, then a member of the TSE 300 Index. Due to various (and, in some instances, serendipitous) circumstances – ranging from other business story priorities, a lack of committed resources, lengthy lead-times, security concerns and, even, simple fear – the news of YBM's roots in the Russian mafia ended up becoming publicized in the west contemporaneously with the May 13 1998 raid of YBM's Pennsylvania headquarters by dozens of agents for the FBI and other U.S. law enforcement agencies.
Now, particularly as the class action suits stack up, those that knew, or ought to have known, of YBM concerns about which public investors had not been alerted must stake out their positions of defence.
Unlike past Canadian stock debacles – such as the Bre-X salt-job – various professionals may find it difficult to plausibly defend themselves or claim surprise about certain damaging details reported in the YBM scandal. And there is an extensive public record which would challenge the claims of those who would like a convenient, all-encompassing, “fall guy” – such as Deloitte and Touche.
More than anything, the YBM case shows how the Canadian brokerage establishment embodies the spirit of the three monkeys – hear no evil, see no evil and speak no evil.
Most monkeys, however, have a legitimate excuse for not following the Arigon/YBM trail. They can't read.
What explanation is there for those money managers or market regulators that can read?
SOUTHEAST REGIONAL CRIME SQUAD
REPORT
To: Regional Coordinator 10 November 1995
From: Detective Sergeant J. WANLESS
Money Laundering Investigation Team, Spring Gardens
Subject: Operation SWORD
This report concerns the investigation into Operation SWORD, which was a development package passed from the National Criminal Intelligence Service (NCIS) to the South East Regional Crime Squad's Money Laundering Investigation Team on 9th December 1994 for investigation.
Operation SWORD concerned the activities in the United Kingdom of a Russian Organised Crime Group headed by one Semion Yudkovich MOGUILEVITCH, Born 30.06.46 The operation centred around MOGUILEVITCH's relationship with two English solicitors who were partners in a legal practice called BLAKES SOLICITORS, based at 20-22 Bedford Row, London EC4 and a number of companies which had been set up by these two individuals.
Initial investigations confirmed the information provided by NCIS that MOGUILEVITCH was strongly linked with the two solicitors Adrian Bernard CHURCHWARD, Born 17.02.46 Romford, N/T CRO and Peter BLAKE-TURNER, Born 04.05.50, N/T CRO via three separate companies, these being ARIGON COMPANY LTD, CREATEBURY LTD and LIMEGOLD LTD. It was also identified that Churchward was linked with Moguilevitch via a company called PENDOSI and that Churchward's wife, Galina Vassilyevna CHURCHWARD had a son called Yuli as a result of an earlier relationship with MOGUILEVITCH.
Intelligence became available from a number of Law Enforcement Agencies in Eastern Europe, the United States of America and Canada which indicated that the Moguilevitch Organisation was involved in large scale extortion, prostitution, arms dealing and drugs trafficking, and that profits from these criminal activities were being laundered by BLAKES Solicitors in London, through a number of bank accounts held at the Royal Bank of Scotland, 67, Lombard Street, London.
As a result of this information, between December 1994 and May 1995 a total of 37 Ordes (sic) under Section 27, Drug Trafficking Act 1986 and Section 55, Drug Trafficking Act 1986 were sought. The effect of the information amassed as a result of these Orders was that it was established that approximately $50 million had passed through the client accounts of Blakes Solicitors in a three year period. It also showed that because the monies were banked or credited to the Blakes client accounts, none of the transactions came to the notice of the Money Laundering reporting officer of the Royal Bank of Scotland. One reason for this was the banks attitude that the solicitors company was itself regulated in respect of money laundering matters by the Law Society and as such there was no requirement for the Royal Bank of Scotland to persue (sic) these matters. However, it had become apparent that there was no money laundering identification system in existence at Blakes.
In the months between December 1994 and May 1995 officers from the MLIT were required to conduct extensive enquiries in a number of countries. This was in order to properly develop the investigation and these enquiries identified the world wide structure of the Moguilevitch and other Russian Organised Crime Groups.
As the investigation gathered pace it became apparent that the funds passing through the Royal Bank of Scotland accounts were unregulated and also originated from a variety of dubious sources in the former Soviet Union. However, as with all money laundering operations conducted in the UK, the criminal origin of the funds that have been laundered have to be proved beyond all reasonable doubt and this of course was extremely difficult.
It was established that the Moscow Police were investigating an advanced fee fraud whereby a man known only as MYSINKOV had set up a company in Russia called PERIGEY. This company had entered into a total of one hundred and eleven contracts with the Russian Central Government to provide food stuffs. The Russians had then advanced $3.3 million in respect of goods to be provided in the future which never were. This money was then immediately transferred to PENDOSI Ltd and CREATEBURY LTD and subsequently to account in the U.S.A. and Hungary.
Enquiries made by the Moscow Police showed that the (sic) MYSINKOV had died in unknown circumstances and that prior to his demise his wallet and passport had been stolen and altered.
As a result of this substantial evidence relating to the handling of stolen money from an identified crime, applications were made for warrants to be obtained under Schedule 1, Paragraph 12A P.A.C.E. 1984 to search the premises of Blakes Solicitors and the home addresses of the Churchward's and Blake-Turner.
On 16th May 1995, the addresses were searched and all three were arrested on suspicion of handling stolen goods and interviewed at Paddington Green Police Station. All three were released on Police bail pending the arrival of evidence from Russia in a format which would be acceptable to an English Court.
During the course of the search of Blakes Solicitors' office over one hundred files which contained extensive intelligence relating to financial transactions conducted by the Mguilevitch Organisation were recovered and extensive evidence was obtained by way of interviews. It was also established that the Royal Bank of Scotland held a total of $2,096,145.00 in three separate accounts for ARIGON Company.
As the enquiries continued it was decided to take further action against MOGUILEVITCH himself and another suspect called Konstantin KARAT. This action took the form of obtaining first instant warrants of arrest of both men from Horseferry Road Magistrates Court for conspiracy to handle stolen goods. At the same time a sworn Affidavit was laid before the High Court and the funds in the Royal Bank of Scotland were restrained. The restraint of funds in the ARIGON accounts was conducted by the Crown Prosecution Service, Central Confiscation Unit (C.C.U.). The C.C.U. had given advice in relation to all parties in the investigation and in relation to the unregulated monies which had passed through the Blakes practice. The C.C.U. had claimed that the Practice's breach of the Money Laundering Regulations was in itself a Money Laundering Offence.
Whilst the High Court action proceeded all efforts were made to obtain the evidence from Moscow of the Perigey/Pendosi crime in order that criminal charges could be brought in the UK. It was by now that the slowness of the Russian judicial system became apparent. The request had been passed to the prosecutors department and the case had even been discussed at a high level whilst officers from NCIS and SERCS were in Moscow, however it was to no avail and to date no clear decision on assistance has reached the investigating officers. The effect of this was that criminal proceedings for conspiracy to handle stolen goods had to be abandoned in the absence of Russian evidence, this left the investigating team with the prospect of a prosecution for a minor money laundering regulations offence. It was however established that the Money Laundering regulation 1993, which concerned the manner in which the solicitors practice had conducted itself applied only to new clients. As these had been long term connections with Moguilevitch it was deemed that no successful prosecution could be brought.
In view of this the Restraint Orders were discharged and the legal costs of Mr and Mrs Churchward and Mr Blake-Turner were awarded against the C.P.S. No application for costs has ever been made by any part of the Moguilevitch Organisation.
The above is a brief resume of how Operation SWORD originated and the investigation that followed. As SWORD was the first package of its type to be produced by N.C.I.S., it is right to say that the manner of its investigation should be examined in order that any lessons may be learned for the future. With this in mind the investigation into SWORD produced some 545 Nominal Records and 1,325 exhibits, these were as a result of the 37 Orders obtained under Drug Trafficking legislation and 3 Search Warrants under Schedule 1 of PACE 1984.
CONCLUSIONS
The aim of the South East Regional Crime Squad is with the utmost vigor to bring justice and disrupt the activity of the top echelon of criminals, and it is within its criteria that Operation SWORD must be judged.
Semion MOGUILEVITCH is one of the world's top criminals who has a personal wealth of $100 million. He is a target of Law Enforcement Agencies and Security Services in several countries and as a result of the effect of his financial impact on the City of London he clearly falls in the category of an NCIS core criminal.
During the course of Operation SWORD no criminal prosecution was brought against any person, however, every company controlled by Moguilevitch has been closed down. All bank accounts, both National and International within the jurisdiction of the UK have been closed down and his entire organisation has withdrawn from UK shores.
Moguilevitch's principal method of operation in the UK was through Blakes Solicitors and in particular Adrian Churchward. As a direct result of the operation the BLAKES Partnership has been dissolved and Churchward is presently unemployed and subject to Civil litigation by the Royal Bank of Scotland. Further, in the respect of the Royal Bank of Scotland they have been the subject of a high level internal enquiry by the Special Investigation Unit if (sic) the Bank of England.
Amongst the intelligence gathered in the investigation of Operation SWORD was a record of every financial transaction conducted on behalf of Moguilevitch and other Russian Organised Crime figures by Churchward in the last five years. All of the intelligence has now been passed to NCIS for distribution to other Law Enforcement Agencies, with the added bonus that if required the South East Regional Crime Squad are in a position to produce any part of intelligence as evidence in any Court of Law.
Finally, in respect of Moguilevitch himself on 10th August 1995 the Home Secretary signed an order excluding him from entering the United Kingdom.
(signed)
John WANLESS
Detective Sergeant, MLIT.
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