The myths of Arigon... (Part 2 of a series on Securities Industry Due Diligence in a post-Bre-X Market)
Brokerage houses and financial advisors can, individually and collectively, generate for themselves hundreds of thousands, even many millions, of dollars in commissions, agents and underwriters fees and other benefits associated with share and financing transactions in a single public company.
A worthwhile, and independent, due diligence review of a company such as YBM Magnex can be conducted for as little as a few hundred dollars. After a few hours work, involving some basic and methodical background checks, a market analyst worth their salt should be able to determine if there are aspects of a company's affairs that may require further, more intensive, review. Curiosity, however, appears to be a characteristic that may be singularly lacking in some mutual fund managers, fund advisors and brokers as they direct other peoples' money into some curious places.
To start my YBM Magnex-related research, after breakfast one morning I logged onto the on-line services of Canada Stockwatch, an electronic data base and news service that covers all public companies listed on Canada's stock exchanges. (All the data I pulled from the Stockwatch site can be obtained by paying a monthly fee of only $4.95 - $19.95 + GST - the higher rate enables faster/greater volume data printouts. The Stockwatch service alone, or combined with a search of newspaper databases that have similarly reasonable fee structures, can provide a view of a public company and its principals from the perspective of not only the company itself, but also such external observers as securities regulators, auditors, journalists, litigants etc.)
I learned that this public company, then known as Pratecs Technologies Inc., (a Junior Capital venture or "blind pool"), had commenced trading on the Alberta Stock Exchange (ASE) on August 3 1994.
Even before it had begun public trading on the ASE, Pratecs had announced its plans to acquire Canadian distribution rights for YBM Magnex Inc. products and, further, to acquire all the shares of YBM Magnex. Both of these represented non-arms length transactions as the president of Pratecs, Robert Ventresca, and a director, Jacob Bogatin, were also principals and/or shareholders of the private entity, YBM Magnex. The Canadian distribution rights for magnetic materials produced by YBM Magnex were to be purchased for 4,000,000 Pratecs shares valued at $0.20 each. The acquisition of 100% of YBM Magnex was to be effected through the issuance of 110,000,000 Pratecs shares to the vendors (this large number included the four million shares issued for the distribution rights).
Jacob Bogatin had no track record with Canadian public companies. Robert Ventresca, Pratecs president, had earlier been a participant in publicly traded Technigen Corp. In 1990 Ventresca had taken down a securities position (a convertible debenture with warrants attached) in Technigen which had delisted from the Vancouver Stock Exchange (VSE) in 1989 after the company's president was called to a hearing before the British Columbia Securities Commission (BCSC). Between April 1987 and August 1989, Technigen had been widely revealed in Canada as an outrageous stock market fraud. (This stock market and tax grants scandal was so elevated as to be raised repeatedly in the Legislature of two provinces, B.C. and Saskatchewan.) The company's management had repeatedly made false claims about the status of its operations and sales of its product - a computerized golf driving range. In November 1989, as a result of various misrepresentations, the BCSC banned Technigen's president, Larry Nesis, from the B.C. securities market for three years. After being thoroughly exposed as a scam in Canada, Technigen's trading and misrepresentations carried on, primarily through the U.S. over-the-counter market. (Just last month, the U.S. Securities and Exchange Commission issued a complaint against Technigen that outlined a scheme of stock manipulation and corporate misrepresentations that the SEC alleges was carried out between January 1992 and May 1993.) Pratecs/YBM Magnex principal Robert Ventresca was based in Fountainville, Pennsylvania and, from consideration of the public record, it was just as possible that he had been in the role of an innocent investor, perhaps even a victim, rather than a perpetrator or facilitator, of the Technigen swindle.
The same could not be said of Ventresca's fellow Pratecs director, Michael Schmidt. Schmidt, then identified as a friend of Technigen's president, Larry Nesis, had been an original "seed stock" shareholder in Technigen. For years, straddling both the Canadian and American promotional eras of the company, Schmidt had been in charge of "Investor Relations" for Technigen. Schmidt helped distribute and defend the company's misrepresentative literature. A Financial Post article of February 24 1989 - entitled "Technigen is a disgrace to the VSE" - captured Schmidt failing in an attempt to mislead Diane Francis about the distribution of promotional materials to an U.S. investor. Michael Schmidt's last Canadian media appearance came in July 1989 when he could be found explaining to Globe and Mail reporters why Technigen's purported employees were not visible on a tour of the plant. It was lunch hour, he said.
It was not even my lunch hour yet, and my review of YBM Pratecs - its history and principals - was already creating a disquieting feeling in my stomach.
By the time I reached just the seventh and eighth entries in the Canada Stockwatch database of the company's own press releases my original level of concern was significantly heightened. I wondered what independent investigations may have been conducted by the brokerage analysts at Nesbitt Burns, First Marathon and Griffiths McBurney in connection with this most unusual of announcements.
On June 22 1995 trading in Pratecs shares was halted on the ASE and the company issued a vague public statement about unspecified "information. regarding a subsidiary company associated with its proposed major transaction." The following month, in an obliquely worded announcement, Pratecs (soon to be renamed YBM) disclosed that the lengthy trade halt was the result of "allegations made in London, England against two individual shareholders of YBM Magnex." According to this Pratecs/YBM press release: "The allegations were aimed at two companies in the UK and the attorneys of these two companies. The companies are in no way related to YBM or its subsidiary, Arigon. However, because the companies are owned by an employee and a former director of Arigon, and the companies' monetary affairs were handled by the same solicitors that Arigon used in the past, it had put Arigon also under scrutiny."
An announcement like this is a yellow flag that calls for follow-up review. I decided to skip lunch and keep digging. Mutual fund gurus and brokerage house analysts were enthusiastically touting Pratecs/YBM stock to their clients. What depth of due diligence had they carried out into solving those mysteries surrounding YBM subsidiary, Arigon?
End of Part 2
For more on this story and other stock market news and analysis, visit the Investigative Research & Analysis web-site at imagen.net
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