How YBM Magnex got to market
Questions are swirling over how the industrial magnet maker - a company partly owned by an international crime ring boss - found its way on to Canada's most prestigious stock market.
Saturday, May 23, 1998
By Karen Howlett and Paul Waldie
The Globe and Mail
Semion Mogilevitch learned at a young age how to operate outside the system. He started out running a small fruit stand in Moscow and managed to stay in business despite the Soviet Union's strict laws forbidding private enterprise. The principles of free enterprise and the experience of law breaking have served him well.
Today, according to police reports, Mr. Mogilevitch runs one of the world's largest criminal syndicates whose suspected activities include drug smuggling, money laundering, prostitution and murder.
"You have to realize where they come from it was always 'live to beat the system,' " said Joe Campanella, a specialist in organized crime at the United States Customs Service. "They move around and they find places they can set up with the least amount of law enforcement or anybody that is going to look for them."
MR. Mogilevitch, 51, runs his empire from a $2.3-million (U.S.) mansion in Budapest and travels with a team of bodyguards in a white, armour-plated limousine. He has at least 1,000 workers -- five times larger than the biggest Mafia family in the United States -- who operate out of Moscow, Kiev, Tel Aviv and Los Angeles. London police have pegged his personal worth at about $100-million.
In 1995, he added Canada to the long list of countries in which he does business. He helped create YBM Magnex International Inc. , a Pennsylvania-based industrial magnet maker listed on the Toronto Stock Exchange.
Last week, the FBI and several U.S. agencies seized documents from the company's head office in connection with a criminal investigation. Canadian regulators have also issued a cease trade order on YBM's shares and the company's auditors have raised concerns about its finances. YBM says it has done nothing wrong. It also says Mr. Mogilevitch does not exercise any control over the company.
Questions are now swirling about how YBM managed to glide on to the TSE -- and into its prestigious 300 index -- despite the fact that from day one it was partly owned by Mr. Mogilevitch and his associates. Officials from the TSE and Alberta Stock Exchange declined to comment for this story.
British investigators passed on information about Mr. Mogilevitch's alleged criminal activity to Canadian police in 1995. But it seemed that nothing would get in the way of YBM becoming a stock market darling.
The story begins in 1988. Police say that's when Mr. Mogilevitch met Sergei "Mihas" Mikhailov, a young waiter in a Moscow bar and a coach of the Russian boxing team. The two started a number of illegal businesses, including controlling much of the fruit trade around Moscow. Mr. Mikhailov, now 40, was later arrested for racketeering and held in prison for two years, police reports say.
In 1990, with the Soviet Union falling apart, Mr. Mogilevitch moved to Budapest with about 40 associates. Mr. Mikhailov headed to Vienna with another group.
Soon, the police say, the two were earning hundreds of millions of dollars from a string of illegal activities. One of Mr. Mogilevitch's first ventures was called Army Co-op, which became active in the global arms trade, according to police.
To help launder the illicit proceeds, Mr. Mogilevitch set up dozens of legitimate companies. One of his first creations, Arigon Co. Ltd., was established in the Channel Islands on May 24, 1990, by Galina Grigorieva, his former girlfriend and mother of his son. Mr. Mogilevitch sat as a director in the mid-1990s along with several other Hungarian cronies.
A few months later, Arigon set up a subsidiary in Moscow known as Arbat International Ltd. Police say Arigon and Arbat both became the main money laundering vehicles for Mr. Mogilevitch and Mr. Mikhailov.
In 1991, Arigon bought a Hungarian manufacturing company called Kiss es Kaiser Klan Kft, for $1.8-million. The company was renamed Magnex and started producing industrial magnets from a plant in Budapest.
Igor Fisherman, a Russian mathematician, was named president of Magnex. He later became president of Arigon and a partner in Anix Investment Club, a Hungarian partnership with members who are associated with Mr. Mogilevitch's organization.
By the early 1990s, Mr. Mogilevitch and Mr. Mikhailov were eager to expand into North America, police say.
In 1992, according to U.S. Customs reports, Mr. Mogilevitch visited the United States at least three times using different Israeli passports.
A year later, Mr. Mogilevitch's associates came in contact with Jacob Bogatin, a Russian academic who lived in Pennsylvania and specialized in magnet technology.
Mr. Bogatin was working for a Pennsylvania-based technology company at the time. Magnex RT -- Arigon's Hungarian magnet maker -- started buying equipment from a private company he owned, and paid it nearly $1-million for supplies in 1993 and 1994.
The relationship between Mr. Bogatin and Mr. Mogilevitch's associates became closer in February, 1994, when he left his Pennsylvania employer and formed YBM Magnex Inc. in Hatboro, Penn. YBM Magnex then merged with Arigon.
Two months later, Mr. Bogatin ventured north to Canada and created Pratecs Technologies Inc., an Alberta incorporated company.
Pratecs then got listed on the Alberta Stock Exchange. It was one of hundreds of junior capital pool companies whose only asset was its stock exchange listing. The idea behind the junior capital program is to make it easy for little-known venture companies to go public. They raise up to $500,000 (Canadian) on the exchange and then have 18 months to find an asset.
Mr. Bogatin came to Robert Ventresca, someone well experienced with Canada's junior stock markets. Although Mr. Ventresca is no longer associated with YBM, at the time, the two men both owned shares in YBM and Pratecs.
Mr. Ventresca declined to comment for this story.
Mr. Ventresca teamed up with Michael Schmidt, a real estate agent in Burnaby, B.C., who also became a shareholder of Pratecs. The two men knew each other from their earlier involvement in a Vancouver Stock Exchange company.
According to YBM's corporate documents, Mr. Schmidt also had trading authority over Anix Investment Club, which included Igor Fisherman of Magnex and Konstantin Karat. British police say Mr. Karat is an associate of Mr. Mogilevitch.
Mr. Schmidt declined to comment when contacted by The Globe and Mail.
Shortly after Pratecs went public on the ASE, it announced that it was merging with YBM Magnex. Its plans were delayed briefly by what now turns out was a sweeping police investigation on the other side of the Atlantic Ocean.
On the morning of May 16, officers from the Southeast Regional Crime Squad in Britain raided the London offices and homes of Mr. Mogilevitch's lawyers and Ms. Grigorieva, the former girlfriend. They also seized 100 files relating to Arigon, the Channel Islands company that Mr. Mogilevitch was a director of, according to a source with knowledge of a confidential police report on the matter.
The source said police alleged that Arigon was a client of a London law firm and that over a three-year period, $50-million (U.S.) that had passed through accounts at Royal Bank of Scotland were the proceeds of organized crime in Eastern Europe. The police report added that the accounts were operated by the law firm on behalf of Arigon.
The investigation, known as Operation Sword, was the police's first attempt to tap into Russian organized crime in Britain.
It did not appear to make much of an impression in Canada. Pratecs said in a news release in July, 1995, that trading in its shares was halted over allegations made in London against two shareholders of YBM Magnex. It noted that the allegations were aimed at two British companies and their lawyers but said the companies "are in no way related to YBM or its subsidiary, Arigon."
The release also said the investigation had been dropped and that all proceedings against the two YBM shareholders had been dismissed.
But according to the three-page police report, the contents of which were disclosed by The Observer newspaper in London last Sunday, the charges were dropped because Russian authorities did not co-operate and provide them with evidence. The case also did not proceed because of a technicality, the source said. Under Britain's money laundering laws introduced in 1993, lawyers are required to notify a bank of any suspicious transactions. But the law did not apply to lawyer-client relationships that preceeded 1993.
The investigation produced 545 records and 1,325 exhibits. The report concluded that Mr. Mogilevitch is "one of the world's top criminals" and the target of law enforcement agents in several countries. He has been barred from entering Britain.
Pratecs formally acquired YBM Magnex in October, 1995, and changed its name to YBM Magnex International. At that time, Mr. Mogilevitch and five of his associates, including Mr. Karat and Ms. Grigorieva, owned just under one-third of YBM's shares outstanding.
The company had an ambitious business plan. It estimated that the global industrial magnet market would soar 14 per cent annually to $8-billion by 2000. It posted sales of $64-million and profit of $11.2-million for the nine months ended Sept. 30, 1997.
Until recently, YBM had everything going for it: A good story to tell, membership in the TSE's flagship 300 index and a stock price that was going nowhere but up.
The shares reached a peak of $20.15 two months ago, giving the company a market capitalization of nearly $1-billion. They last traded at $14.35 before the Ontario Securities Commission issued a temporary cease trading order against them last week.
At this point, it is uncertain whether they will ever trade again. The OSC will hold a hearing on June 3 to determine whether the cease trade order should be lifted or extended. The TSE removed the shares from the 300 index yesterday and is also reviewing its listing.
For now, investors in YBM, which include some of Canada's biggest mutual funds, are wondering and hoping for the best.
"There is always the possibility the thing comes out fine and everything is rosy again," said one large YBM shareholder. "But there will always be a tarnish on this company."
YBM Magnex Board of Directors
Harry Antes, chairman
Kenneth Davies
Jacob Bogatin, president, CEO
Robert Mitchell
Frank Greenwald
Michael Schmidt
Igor Fisherman
Hon. David Peterson
Officers
Jacob Bogatin, president, CEO
Guy Scala, vice-president, sales and marketing
Daniel Gatti, vice-president of finance, chief financial officer
Igor Fisherman, chief operating officer
Gyorgy Podolak, vice-president of bicycle operations
Gabor Varga, vice-president of magnetic operations
James Held, vice-president, business development and investor relations
Source; the company |
