***OT***
Russian Gangsters Exploit Capitalism to
Increase Profits
By RAYMOND BONNER
ASHINGTON -- A few years ago, British intelligence and law
enforcement agencies began investigating the money-laundering
activities of Russian organized crime in Britain. At the center of
their concerns was Semyon Yukovich Mogilevich, a man described by
British authorities in one classified report as "one of the world's top
criminals, who has a personal wealth of $100 million."
His money came from "large-scale extortion, prostitution, arms dealing and
drug trafficking," and it was laundered through a London bank with the help
of a lawyer there, the report said.
The British shut down that operation in 1995, prompting Mogilevich to
begin laundering his illicit profits into a new venture: an American company
listed on the Canadian stock exchange that sold its stock to investors
throughout North America.
Current and former American officials say Mogilevich is the harbinger of a
disturbing new trend: the Russian mobster masquerading as crack capitalist.
It is also a new twist in how international criminals turn their illegally
obtained cash into legitimate assets.
Historically, drug barons and those who amass mountains of cash have
laundered their money through private companies, which are subject to less
stringent reporting requirements.
But in the bull market of the 1990's, authorities say, public companies offer
criminals the chance to make even more money by artificially pumping up
the stock price and bilking investors.
Mogilevich's move into the North American equity markets began with a
company he set up in suburban Philadelphia called YBM Magnex.
Its primary business was the manufacture of industrial magnets at a factory
in Hungary and later at a factory the company bought in Kentucky. YBM
attracted a blue-ribbon board, its books were audited by two prominent
American accounting firms, it issued glossy annual reports and it had its own
Web site.
All of this turned out to be sophisticated cover for what was also a vast
money-laundering operation, American intelligence and law enforcement
officials say. They add that it is far from a unique case and that Russian
organized crime, which has acquired devastating power in much of Eastern
Europe and the former Soviet Union in the last decade, has made inroads in
America's highly regulated financial markets.
"This is the first public demonstration of the manipulation and infiltration of
world financial markets by Russian organized crime," said a senior
Administration official whose responsibilities include following Russian
organized crime groups.
Last month, in a negotiated agreement, YBM pleaded guilty to securities
fraud in the Federal District Court in Philadelphia. The criminal
investigation is continuing, and officials said it is focusing on the role that
Mogilevich and two associates played in setting up and running the company.
Like a handful of other Russian crime figures, Mogilevich is barred from
entering the United States. But he has Israeli citizenship, as do several other
prominent Russians involved in crime, American diplomats and intelligence
officials said.
While American officials believe they have shut down Mogilevich, or at least
curtailed his activities -- "in a box," as a senior intelligence official put it --
they fear that there are similar schemes waiting to be exposed.
"This is just one case, but there are others like it throughout the world," said
Jim E. Moody, a retired F.B.I. agent who headed the organized crime
section for many years and was one of the first agents to begin working with
the Russian police after the collapse of the Soviet Union.
In the three years between the British action and the American authorities'
penetration of YBM's corporate facade, the company had raised $114
million (Canadian) on Canada's capital markets. Helped by glowing claims
about sales and profits, YBM's stock soared, and Mogilevich and some of his
associates sold their shares for millions of dollars in profits.
The shares were traded in Canada, attracting some American investors,
while the company awaited approval for listing on the Nasdaq exchange in
the United States.
"They cloaked themselves in an air of legitimacy that was beyond belief,"
said a former F.B.I. official whose job included watching Mogilevich.
The company had sales but it also exaggerated them. It had customers, but it
also maintained fictitious customer lists.
It paid suppliers, but some were companies controlled by associates of
Mogilevich. Some YBM officers and directors were complicit with
Mogilevich, but others thought they were engaged in a legitimate business,
investigators say.
With the investigation continuing, and a investors' class-action suit pending
-- as yet with no reply from the defendants -- there is a general reluctance to
discuss what attracted anybody to YBM.
"It would be lunacy for me to say anything," said one former company
official.
Lawyers for the plaintiffs in the class action said they would not permit their
clients to talk about their investments because they feared retaliation by
Mogilevich.
A public portrait of Mogilevich's criminal empire first appeared in May
1998 in The Village Voice in an article by Robert Friedman, who had access
to classified F.B.I. and Israeli intelligence reports. After the article
appeared, Mogilevich put out a contract on Friedman's life, a threat that was
picked up during a telephone intercept by the Central Intelligence Agency,
law enforcement and intelligence officials said.
Mogilevich started as a small-time thief and counterfeiter in the 1970's,
officials say, then made millions in the 1980's from Jews leaving the Soviet
Union. He took their art, jewelry and other valuables, promising to sell them
and send the money. He kept most of the proceeds, officials say.
Not long after the Berlin wall came down and the Soviet Union collapsed,
making travel easier, Mogilevich set up operations in Budapest, where he
ran a prostitution ring out of a topless bar called the Black and White Club,
European and American officials say.
Mogilevich, who is believed to spend most of his time these days in Budapest
and Moscow, could not be located. But a small Hungarian newspaper
reported last month that it had interviewed him (the newspaper did not say
where or how) and that he had denied any criminal activity.
"I consider myself a law-respecting citizen who works in earnest and pays
taxes regularly," Mogilevich told the newspaper, Napi Magyarorszag.
Though raised in a Communist society, Mogilevich, now 53, quickly adapted
the ways of fast business dealing. In putting together YBM, he used offshore
locales where secrecy prevails over disclosure, sophisticated financial
transactions and wire transfers to move money quickly and beyond the
prying eyes of regulators.
The following account of how Mogilevich and his associates penetrated
North American capital markets is pieced together from the information and
plea agreement in the criminal case in Philadelphia; the complaint in the
class-action suit, which the investors filed in the Federal District Court in
Philadelphia; an audit of YBM's books in December 1998 by a Philadelphia
accounting firm, Miller Coffey Tate, which the company hired when
Canadian securities regulators raised questions; and YBM's annual reports,
public statements and filings with regulatory agencies in Canada.
In the beginning there was a company, Arigon, which Mogilevich set up in
the Channel Islands in 1991. This was his original conduit for laundering
money, the British report said.
One of his partners at Arigon was his mistress, who was the mother of a son
by him and the wife of the London lawyer who was reportedly in league
with Mogilevich, according to the report. (Readers of John Le Carré's latest
novel, "Single & Single," will find similarities between various elements and
characters and Mogilevich's escapades.)
Eventually, through a series of complex transactions and takeovers, Arigon
acquired control of YBM Magnex. To finance YBM's first public offering,
in Canada, Mogilevich sent $2.4 million from Arigon's bank accounts in the
Channel Islands.
YBM was headed by one of Mogilevich's trusted associates, Jacob Bogatin.
Bogatin, who has a doctorate in powder metallurgy from Volgograd State
University, came to the United States in the 1980's and eventually became a
citizen. From 1996 to 1998, he was president and chief executive of YBM.
Bogatin's lawyer in Philadelphia, Eric Sitarchuk, declined to comment about
his client, who law enforcement officials said is one of the subjects of the
continuing investigation by the United States Attorney in Philadelphia.
The company's glowing claims propelled YBM's stock from a few cents at
the time of the first offering in 1994 to $5 (Canadian) in early 1996, to
more than $20 two years later.
In its 1996 annual report, for example, the company boasted of "record sales
and earnings," with sales up 79 percent over the previous year. It also
claimed that revenues from buying and selling crude oil increased from
$13.6 million (Canadian) to $20.4 million.
YBM's books were audited for 1996 by Parente, Randolph, Orlando, Carey
& Associates in Philadelphia. The firm reported that the financial statements
"present fairly in all material respects" the company's financial position.
In the summer of 1997, when YBM was preparing for another public
offering, Ontario securities regulators asked Deloitte & Touche to conduct a
"high risk" audit. In the securities world, this means that the authorities were
suspicious and wanted the accounting firm to apply extra scrutiny and
diligence.
Deloitte & Touche gave YBM a clean bill of health.
One Canadian analyst who issued a "buy" recommendation noted that the
company had emerged from the Deloitte audit "with flying colors." And in
November 1997 YBM completed a public offering of 3.2 million shares, at
$16.50 (Canadian) each, bringing in a total of nearly $53 million.
Both accounting firms are defendants in the class-action lawsuit by investors
in YBM.
Parente, Randolph did not respond to several phone calls asking for
comment.
A spokeswoman for Deloitte & Touche, Ellen Ringel, said that the company
had carried out the audit "in accordance with applicable professional
standards" and that it would "vigorously defend" itself against the suits. She
added that in June 1998, the company resigned as YBM's auditors after it
became concerned about "questionable transactions."
But the auditors had already missed a few things.
"Money Laundering and Unusual Transactions" is the heading on a 14-page
section of a 50-page report by Miller, Tate, the accounting firm that YBM
turned to hoping once again to get a clean bill of health after Canadian
officials raised question. At the center of these transactions was a company
called United Trade, which was incorporated in the Cayman Islands and was
run by Igor Fisherman, who was also the chief operating officer of YBM.
Fisherman, who has a master's degree in mathematics from Ufa State
University in Russia, immigrated to the United States in the late 1980's and
later became an American citizen. He is also a subject of the ongoing
investigation, officials said. Fisherman's lawyer, Peter Vaira, declined to
comment.
On one occasion, $3.2 million was transferred from a bank in Lithuania to a
United Trade account in Hungary. It was then quickly transferred to
Chemical Bank in Buffalo for the benefit of six ostensibly different
companies. At the same time, United Trade sent money to Chemical Bank
for a Buffalo lawyer, Paul F. Fallon.
These transactions have "several of the indicia of money laundering," Miller,
Tate said in its report, noting, for example, that the companies involved in
the transactions, those in Lithuania, Hungary and the United States, all had
the same address -- that of Fallon's office in Buffalo.
Fallon denied in a telephone interview that he had engaged in any improper
activity. He said that Fisherman was a client, and that he had incorporated all
of the various companies involved in the series of wire transfers. He
declined to say what business activities these companies engaged in.
As for the oil sales, which YBM said had done so much for its profits,
Miller, Tate found that the company never had had any oil to sell. |
