YBM Magnex: Part 5 - The melting pot starts to bubble...
In the securities business, as in other social realms of human activity, there are prevailing subcultures. Those entrepreneurial characters who populate the world of penny stocks tend to behave in a particular fashion, and follow certain patterns, that differ, say, from the processes and interactions of executives of blue chip companies. It's expected that chartered accountants typically operate in a different milieu, and maintain a different mindset, to the everyday gangster. White collar scam artists and street criminals may share certain sociopathic traits in common, but they will usually frequent different watering holes and exhibit different taste in haberdashers. Habit and custom die harder than Bruce Willis.
(Although, as the continuing debasement of Canada's senior financial market, the Toronto Stock Exchange, may be used to illustrate, certain traditional lines of distinction are becoming blurred. For example, Bay Street securities analysts and fund managers were once considered to possess greater integrity than penny stock touts hustling on the "wild west" exchanges in Calgary and Vancouver. Today, case histories show, a more significant difference may be in the number of decimal places contained in the hyperbolic share valuations pitched by these increasingly homogenous stock market barkers.)
Alarmed by the unusual corporate affairs of YBM Magnex, as documented on the public record, I'd prepared an initial article to alert investors to concerns that the brokerage analysts and money managers were not highlighting. Canada Stockwatch published the first article questioning YBM's activities on March 10 1998. This event stimulated a response from the company and its supporters that added a refreshing dimension of personality to the paper trail.
Early on the morning of March 11 1998, an unidentified male telephoned the Vancouver office of Stockwatch to ask who had written the YBM article published the previous day. (John Woods, taking a cue from such publications as The Economist, prefers the focus to be on the content of Stockwatch rather than on any individuals who contribute to his service and eschews bylines in most cases.) The caller was told my name and hung up.
Later on that same morning, James Held, vice-president of business development and investor relations for YBM Magnex, spoke to a Stockwatch representative of his dismay: "We were really surprised by the article you published yesterday, really taken aback by it. There was no indication who wrote the article. I don't know why it was published at this time because this is basically old news." Held expressed the opinion: "It seems there must be a motive for this."
Jim Held, identified by the company as an Allentown, Pennsylvania-based chartered accountant, had been the Chief Financial Officer of YBM Magnex before taking on the investor relations role - a job switch not often seen. Held's successor as CFO, Daniel Gatti of Woodlyn, Pa., had previously been audit manager of the Pennsylvania firm of Parente, Randolph, Orlando, Carey & Associates (the accountants who had been doing YBM's books prior to Deloitte & Touche being asked to conduct an independent audit following concerns raised by Ontario securities regulators). Gatti's old firm was handling the accounting duties and a Philadelphia law firm, Wolf Block Schorr & Solis-Cohen LLP, took care of YBM's Form 40-F regulatory filing in 1996. (Lawyer Richard A. Silfen was identified as the contact person at Wolf Block et al.)
Held told Stockwatch the March 10 1998 article was fundamentally off-base: "We're probably undervalued. In the U.S. there are companies with no earnings (trading) at 50 - 60 times projected earnings. Absolutely amazing." The CFO-turned-investor relations flak continued: "We just think the timing of this article, we don't understand it. It's almost as if there's a reason for it. And it depressed the stock and I wanted to get your opinion on it."
Held seemed perturbed that Stockwatch was alone in raising concern over the company's financial irregularities - and that these matters had not been viewed as similarly negative by commentators up to this point. It's understandable that, after a comfortable positioning in the junior stock-peddling culture of Bay Street analysts, YBM would be jolted by such critical analysis.
And Jim Held wasn't finding any satisfaction in his call to Stockwatch. He noted: "Actually, the facts that you have in here is what we put in a press release. And in fact almost everything else in here where I am quoted came from press releases. So I can't dispute the content that's in here. What I'm disputing is the timing and the wording." He stressed how thorough Deloitte & Touche had been in its review of the company's business and how the article amounted to insinuations about YBM Magnex based on findings that were almost five months old, or, in his estimation -- "ancient history".
"And I think if you read this (Stockwatch article), it's very, very misleading. Very negative," continued Held. "You know what happened to the stock yesterday. High of over $20 and it was down to $18.10 this morning, so we're very concerned about this. I mean, you're on our mailing list. We send you our press releases, you and John Woods, and we allow you your definition of information to the investing public. Just the tone of it is very negative."
Held was invited to fax over to Stockwatch any press releases or explanation that would make the company's position known and was promised the material would be reviewed. "Okay, I will. Just like we discussed here", the YBM spokesman agreed. Held's promised fax has yet to arrive.
One fax that wasn't long in coming, however, was a two page missive authored by "Private Investor", a YBM backer listing a phone/fax number in Saskatchewan @ (306) 664-1991. After the close of trading on March 11, this letter addressed to myself was sent to Stockwatch. The pseudonymous letter-writer, obviously unaware that I don't work there, began: "As you didn't show up for work today you were probably out looking for a job with the National Enquirer."
I had heard this trite line numerous times when investigating Vancouver penny stock promotions - it was almost reassuring to find that I was entering familiar territory looking at a TSE 300 company. "Your tabloid article on YBM yesterday really makes Canada Stockwatch look like a 'Mickey Mouse' operation," wrote (306) 664-1991. The writer shared Jim Held's view on the article's content and timing: "All the facts in your hyped-up article are about six months old - have you been sleeping for the past six months?"
"Private Investor" went further than Held in articulating another predictable charge -- that the article was motivated by "dummies" engaged in short-selling (a practice in which a person, through a specially set-up account, sells shares in a company in the expectation that the stock will drop in price; if the stock does drop, the short-seller closes the transaction by purchasing shares they'd previously sold - in selling high and then buying low they can pocket the difference as profit just as if they had first bought low and then sold high in the traditional sequence).
The letter-writer(s) closed with a supposed warning: "Perhaps the OSC should look into your trades and the staff of Canada Stockwatch during this period - what a good idea I think I'll phone them first thing in the morning."
While the content of the body of this letter was typical of the milder forms of abuse one receives when investigating questionable penny stocks, the writer did add something original -- a sign, perhaps, of the character of those hitched to the higher investment grade qualities of a TSE star. The "dummies" letter was cc'd -- not only to John Woods of Stockwatch, but also to brokerage analysts Kaan Oran, of First Marathon Securities, Rob McConnachie, at Scotia Capital Markets, Peter Sklar, with Nesbitt Burns and Mike Middleton, of Griffiths McBurney Partners. One day, I figured, someone would ask these YBM brokerage boosters if they'd received this letter. And, I strongly hoped that this "Private Investor" had taken the time to call the OSC.
The January 31 1997 edition of Investor's Digest, a Canadian securities trade paper, contained an interview with Allan Jacobs, a ballyhooed portfolio manager with Toronto-based Sceptre Investment Counsel. The largest holding of a Sceptre mutual fund under Jacobs' management was YBM Magnex International. He explained that one of the key things he liked about YBM was its "strong, entrepreneurial management."
The next article I prepared looked at this under-recognized element of YBM's history (in the context of a more extensive review of plans by the VSE to begin listing the lowest grade of shell company - known as a "blind pool"). Following is the feature originally published by Stockwatch on March 16 1998:
Lowering standards
YBM Magnex International Inc YBM
Shares issued 44,222,901 Mar 13 close $19.00
Mon 16 Mar 98 Street Wire
See Vancouver Stock Exchange (VSE) Street Wire
SHELLS AHOY
By Stockwatch Business Reporter
If one sea of shells is good, are two seas twice as good?
Apparently the answer is yes. Just enough years have passed for the wheels
at the Vancouver Stock Exchange to forget how trafficking in shell
companies gave both the exchange and BC a very bad name. That name,
invented by Forbes magazine and carried around the globe, was Scam Capital
of the World. It was the shell creators' horrible legacy. Even local market
supporters such as ex-Superintendent of Brokers Rupert Bullock eventually
grew publicly critical of the flood of worthless paper then swamping the
VSE. Finally, after a vigorous campaign and a tongue-lashing by the
exchange's most influential member, then president Donald Hudson
reluctantly turned off the river of rubbish.
Unfortunately, it was too late. As years of shell trafficking culture begat
years of jokes and scams, the VSE lost much of its Canadian market share.
Long before Michael Johnson became president and brought his talk of "zero
tolerance" to the exchange, its importance, relative to the country's other
exchanges, had dwindled. In the early 1980s, before the shell makers ran
amok, the VSE had 40 to 50 percent of Canada's overall share trading volume
and between six and 11 percent of total value. By 1995 these numbers had
fallen in half, as the VSE accounted for 20 to 25 percent of overall
volumes and only three to four percent of value. Even in the boom times of
recent years, while other markets have hit successive record highs, the
VSE's composite index has remained one of the worst performers in the
world.
VSE president Michael Johnson says in speeches that his exchange is not in
competition with others, such as the similarly speculative Alberta Stock
Exchange, and that each of Canada's exchanges has its own special niche.
The VSE's chosen niche happens to be a two-step affair: (1) financing
mineral exploration, and (2) quickly seeing exploration successes off to
other exchanges.
Bre-X Minerals, and other business killing calamities such as Hixon Gold,
have evidently caused a 180 degree change in heart - not to mention change
in revenue -- at the Vancouver Stock Exchange. In an effort to win back
some of the non-niche business that pours steadily elsewhere, especially
over the Rockies to the ASE, the VSE now proposes to return to the shell
game in a big and better way. Although senior Vancouver Exchange officials
are in no-comment mode, a major back room lobby has been underway since
last May to adopt Alberta's junior capital pool program locally. For
obvious reasons, nobody on the lobbying team that must convince the BC
Securities Commission this is a good idea, refers to this line of business
as trafficking in shells.
The Alberta experiment with JCPs, formerly "blind pools," began
auspiciously in 1986 with Audit Resources. Audit was a shell company that
shared brokers and promoters with VSE-listed Hi Peg Resources. Both
companies were fraudulent vehicles that met sorry ends, bringing down with
them an Alberta brokerage firm, First Commonwealth Securities, and a good
old boy from Arkansas, Floyd Leland Ogle, who did jail-time for his part in
manipulating Audit shares on the ASE.
Nonetheless, since the days of Audit the JCP program has brought the
Alberta exchange and its members many dollars and, it appears, turned the
once sleepy little bourse into the envy of Howe St.
By giving shell makers a way to peddle their wares in BC, the VSE reckons
it should be able to accommodate a sea of asset-bereft companies that could
not possibly satisfy today's modest listing standards. Unofficially, a JCP
is a legally incorporated entity that has nothing going for it except a
gleam in somebody's eye and a stock structure that lends itself to rigging.
Such a structure, in the view of the VSE, will provide promoters with the
means to go hunting for new ideas that they can then list on the exchange.
Simply remove the rig-word, replace "promoter" with "entrepreneur," "idea"
with "business opportunity," and you have the exchange's back-room lobby
position.
Indeed, the lure of junior capital pool dollars is a powerful magnet for
the VSE. Its pitch is that using the Alberta experience over the past three
years, the VSE can expect to increase its listing base by 150-165% per
year. They even have pictures. Eyeing the success of their counterparts at
the ASE, the VSE takes the position that shell quality can be maintained by
ensuring that management has a successful history of involvement with
public companies. In essence, the VSE believes, the successful track
records of JCP directors will be the only assets upon their listing of
these good-for-business shells. A look at how this formula has succeeded
with Alberta JCPs makes for a powerful argument in their favour, says the
VSE.
Or does it?
One of the latest stock market winners to come bobbing out of the ASE's sea
of shells is a marvel called YBM Magnex International, originally
incorporated as Pratecs Technologies, and now touted by First Marathon
Securities and Griffiths McBurney Partners. On July 18, 1994 Pratecs became
a junior capital pool corporation under the regulations of the Alberta
Securities Commission. On July 27, just nine days later, Pratecs entered
into a letter of intent to merge with YBM Magnex and its subsidiaries.
Under Alberta rules a JCP has up to 18 months to complete its "Major
Transaction" and gain assets but the quick-out-of-the-blocks team at
Pratecs/YBM were on course before their shares began public trading on the
ASE on August 3, 1994.
YBM's history exemplifies the VSE's point -- benefits of having directors
on board with a background in junior public companies. While most of the
original Pratecs directors were initiates to the local world of penny stock
promotions, the company started out with two directors that boasted a
public company track record and remain with YBM today as the
magnet/bicycle/diesel oil and more venture climbs to the $1 billion market
cap level on the TSE.
YBM director Michael Schmidt is described in the company's literature and
on its web-site as an "independent businessman." An original director of
Pratecs, Mr Schmidt, a resident of Burnaby, BC, honed his public company
skills through handling investor relations for a Saskatchewan-rooted,
VSE-listed scam called Technigen Corp. Technigen was a VSE high-flier that
reached $16 a share in 1987 based upon the company's false claims to have
sold more than $100 million in computerized golf-driving ranges to a Swiss
entity, Corporacion Relacio S.A. It turned out that the Swiss company was
really the front for a Panamanian-registered shell whose only known
representative was an ex-convict stock swindler from Maple, Ontario, named
David Charles Stuart. Mr Schmidt appeared at Technigen's 1987 AGM at a
Vancouver hotel most upset with press reports questioning the company's
legitimacy. At that time he presented himself as an independent
shareholder. Technigen's president, Larry Nesis, was subsequently banned
from the BC market by securities regulators over his golf machine lies. Mr
Schmidt became Technigen's investor relations representative after the
stock promotion was exposed publicly as a fraud. By the time he joined
Pratecs' board years later, Technigen stock was trading OTC in the US for
pennies a share.
YBM's other experienced director with an acceptable track record upon the
JCP being listed is Kenneth Davies, a citizen of the world identified by
the company as "Principal Montello Resources Ltd." In 1993 Mr Davies and
his wife, Ann, were the original shareholders of something called the
International Diamond Syndicate which failed to sparkle in efforts to
locate or develop diamond prospects in the Northwest Territories through
arrangements with various VSE listings. Also in the early 1990s, Mr Davies,
along with his daughter Jeannine, was aboard VSE-listed Golden Rainbow
Resources which failed in ugly fashion to become a producer and marketer of
"quality hair care and beauty aid products." During this time, the
entrepreneurial Mr Davies billed himself as the representative of Pacific
Coast Fish Oil, Processing and Sales Inc. of Blaine, Washington and a
specialist in "Real Estate Acquisition, Financing & Development."
YBM Magnex specializes in sales of products to unidentified end-users in
Eastern Europe (and, in particular, Russia and the Ukraine). Perhaps the
experience most relevant to Kenneth Davies' YBM post, and certainly the
only one mentioned by YBM on its corporate web-site, is his years acting as a consultant to controversial Montello Resources. Mr Davies was involved with ASE-listed
Montello in the early 1990s when the company was hyping plans to acquire an
interest in an airplane manufacturing entity in Europe identified as
Promovia SA. Financing for Promovia, described as a maker of trainer jets
and other aircraft, was to be helped along by Salim Rana, an associate of
Mr Davies who was also involved with Golden Rainbow's botched hair care
enterprise. (At last public report, the shell-makers associate, Mr Rana,
was under R.C.M.P investigation in connection with an alleged theft and
fraud involving GHK Resources Ltd. - see Stockwatch dated April 12 1996).
The Promovia affair (with a daisy-chain of links stretching from Tortola to
Dublin and beyond, including Swiss nominees Incagest and Univalor SA)
proved to be extraordinarily messy and required lengthy public explanations
by the company when it became grounded. By 1993 Montello's stock was two
cents. The company was suspended by the ASE and trading was not allowed to
resume for a full year. The dubious aircraft interests were sold to a
former Montello principal "for nominal consideration" and the company took
up mineral prospecting. Since returning to public trading in 1994, Montello
has kept a lower profile and stock price and Kenneth Davies has added YBM
to his resume. As shell directors and company employees, Mr Schmidt and Mr
Davies successfully passed the regulatory scrutiny of two stock exchanges
and one securities commission, and the due diligence process of two blue
chip brokerage firms.
Whatever experienced directors a JCP can initially attract, a successful
shell like Pratecs/YBM can entice even more high profile figures to its
board once the promotion is up and running. In the tradition of past
juniors, such as Harvard International, the french fry finagle that had
Canada's ex-Prime Minister John Turner on board as it fried investors, the
magnet merchants have attracted ex-Ontario premier, David Peterson, to
their stable. In April of 1996, Mr Peterson was granted options on 50,000
YBM shares exercisable at $3.23 each. At today's close, Mr Peterson is a
soon-to-be magnet millionaire with a paper profit of more than $800,000.
When such huge rewards and prestigious players can come from shell
creation, it is small wonder that a forgetful VSE wants back in the game.
According to Michael Watson, the acting executive director of the BC
Securities Commission, his organization has had detailed discussions with,
and received official submissions from the VSE on its proposed shell
venture in December. "They have made a proposal and we've responded,
outlining some things that caught our attention." Mr Watson said of his
views that "concerns" would be too strong a word.
(c) Copyright 1998 Canjex Publishing Ltd. canada-stockwatch.com
Whether it was because Jim Held, YBM's CFO-turned-IR-spokesman, was away for a few days, or that this article raised temperatures in company headquarters higher than had the first Stockwatch piece, a quick response was heard from YBM president and CEO Jacob Bogatin.
End of Part 5
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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