Oh, I forgot.
YBM Magnex under gun to prove results
Cease-trade order against magnet maker raises the
prospect of another Bre-X.
David Baines, Sun Business Reporter
The Vancouver Sun May 15 1998
A cease-trade order issued by the Ontario
Securities Commission against YBM Magnex
International Inc. raises the possibility of a stock
market disaster with many similarities to that of
Bre-X Minerals.
The Pennsylvania-based magnet maker, which
boasts former Ontario premier David Peterson and
First Marathon Securities vice-president Owen
Mitchell as directors, slumped from a high of
nearly $20 in March to $14.35 on Wednesday
when the OSC suspended trading.
Whether it collapses when trading resumes
depends on whether the company can satisfy
regulators that it is, in fact, generating the level of
sales and earnings it has been reporting.
Like Bre-X, YBM was spawned on the Alberta
Stock Exchange and, almost magically, reported
head-turning financial results.
Last year, sales rose 53 per cent to $138 million
US and net income jumped 45 per cent to $25.6
million US. During the first quarter of this year,
sales leaped another 38 per cent to $40.9 million
US and net income nearly doubled to $9.2 million
US.
Like Bre-X, YBM's stock price soared and the
company graduated to the Toronto Stock
Exchange. In March, it peaked at nearly $20 and,
with a market capitalization of $900 million,
became one of the TSE's top 300 companies.
Along the way, it garnered the support of many of
Canada's top brokerage firms and mutual fund
companies, many of which had been caught in the
Bre-X fiasco.
Last week, YBM's stock price started to crumble
as investors began questioning the veracity of the
company's stunning operating results.
Like Bre-X, YBM is shaping into a binary
equation: Either its operating results are true and
the company is as good as gold, or they aren't and
the company has made fools of almost everyone.
YBM manufactures a wide range of permanent
magnets for use in computers, industrial
machinery, automobiles and electronic equipment.
Although based in Pennsylvania, YBM's main
operating subsidiary is Magnex RT, which is
located in Budapest, Hungary. Most of the
company's sales are in Russia, Ukraine and other
former East Bloc countries.
Last year, the OSC raised questions about the
company's 1996 financial statements, which had
been audited by Parente, Randolph, Orlando,
Carye & Associates of Pennsylvania. YBM's chief
financial officer, Daniel Gatti, had formerly served
as audit manager for Parente.
The OSC said that, before it would allow the
company to proceed with a $52.8-million stock
offering, it would have to provide a re-audit to
confirm its reported sales and the identity and
ultimate location of its customers.
Wayne Deans, president of Vancouver-based
Deans Knight Capital Management Ltd. -- who
had bought hundreds of thousands of YBM shares
for mutual funds that he manages -- said he wasn't
deterred by the delay.
"It's not a major concern to us...I don't anticipate
any problems," he told the Globe and Mail.
The re-audit, conducted by Deloitte & Touche
LLP of Pennsylvania, confirmed the company's
total sales, but significantly revised their
geographic distribution.
Deloitte found that, instead of selling $13.6 million
US worth of product in North America during
1996, the company had sold only $1.8 million US.
Similarly, Middle East sales dropped from $3.3
million to zero.
The OSC was sufficiently satisfied that it allowed
the company to proceed with the stock offering,
which was underwritten by First Marathon
Securities, Griffiths McBurney & Partners,
ScotiaMcLeod, Canaccord Capital Corp. and
Gordon Capital Corp.
While most analysts -- including Peter Sklar at
Nesbitt Burns -- viewed this as vote of confidence
for the company, free-lance stock market
investigator Adrian du Plessis said he was
"alarmed" by the audit's findings.
Writing in Canada Stockwatch on March 9 -- the
very day the stock peaked at $19.90 -- du Plessis
called the reclassification of sales "bizarre."
"How the company managed to mistake $15
million in Russian and Ukrainian sales is anything
but clear. Nor is it evident what may be driving a
tremendously multiplying demand for the
company's magnets in eastern Europe."
Four days later, he wrote another story noting that
YBM directors Michael Schmidt and Kenneth
Davies, both of Vancouver, had been involved in
some low-quality Howe Street promotions.
He noted that Schmidt worked as investors
relations representative for Technigen Corp.,
whose president was later suspended for securities
infractions. Davies was a director of Golden
Rainbow Resources, which tried but failed to
become a producer and marketer of "quality hair
care and beauty aid products."
The stories caught the attention of YBM president
Jacob Bogatin, who claims to have two science
doctorates from universities in Russia. He
complained vehemently to Stockwatch editor John
Woods about what he felt was an unwarranted
attack.
Nesbitt's Sklar, rather than being deterred by the
reports, issued his own report noting that the
stories appeared to have caused weakness in the
stock. He said the company was fundamentally
sound and the negative stories had, in fact, created
a "buying opportunity."
As events unfolded, however, that opportunity did
not have a chance to bear fruit. Last Friday, YBM
announced it had asked securities regulators for a
45-day extension to file its1997 audited financial
statements.
The company explained that Deloitte had asked it
to "conduct an independent review of certain
aspects of the company's business and operations
in Eastern Europe." It said nothing had arisen that
would adversely effect the company's operations
or financial position, and likened the review to the
one requested by the OSC last year.
But in an interview with the Financial Post on
Monday, YBM vice-president James Held said
that 80 per cent of the company's sales were in
Russia and the Ukraine where business was
conducted through barter.
"These are cashless societies, nobody gets paid in
cash -- not the army, not anyone. You barter or
you use a trader or middleman who gets you cash
through a series of product exchanges, and you
pay him a percentage like an outside salesman.
This explanation, which had never before been
proffered, didn't bolster investor confidence. The
stock continued to slide and, on Tuesday, Sklar
changed his recommendation from "buy" to
"hold." One Vancouver broker said that
phraseology is "brokerese for head for the hills."
On Wednesday, the OSC suspended trading after
learning that the company's auditors, Deloitte &
Touche, had serious concerns about the
company's business affairs.
The OSC said that, unknown to investors, Deloitte
had advised the company last month that it had
suspended work on its 1997 audit due to concerns
about certain contracts, entities and individuals
involved with YBM.
The accounting firm had also recommended an
in-depth forensic investigation, and specifically
asked that it exclude the involvement of company
management.
Deloitte had also told YBM that it was concerned
the company had disclosed unaudited first-quarter
results without telling shareholders its outside
accountants had suspended the audit.
The OSC said Deloitte had given the company's
mangers information indicating that illegal acts
may have occurred which may have a material
impact on the 1997 financial statements.
The OSC also said that YBM's lawyers had told
commission staff that FBI agents had attended the
company's headquarters in Pennsylvania on
Wednesday to talk to YBM executives "in
connection with an investigation."
On Thursday, the company revealed that the FBI
agents were accompanied by officials of the U.S.
Internal Revenue Service and the U.S. immigration
office. It said it was "unable to ascertain the ambit
of the investigation."
Mr Metals |
