THE CLOUDS OVER YBM MAGNEX GET DARKER
BUSINESS WEEK ONLINE
June 26, 1998
Edited by Richard S. Dunham
THE CLOUDS OVER YBM MAGNEX GET DARKER
YBM Magnex International Inc., the Pennsylvania-based company whose ties to a suspected Russian mob figure are under federal investigation, has suffered yet another setback. The company's auditor, Deloitte & Touche, disclosed that it will be unable to report on YBM's 1997 financial statements and says it has resigned the account.
Deloitte & Touche told YBM that "questions and issues" remain unsettled about the company, despite an outside investigation commissioned by YBM's independent directors. The outside investigators found fault with some YBM procedures but found no evidence of illegal activity by the company, according to YBM.
"We have concluded, based on the questions and issues which remain after our review of the report and the lack of competent auditable evidence, that it is unlikely that sufficient additional audit procedures could be performed which would reduce to an acceptable level the risk of material misstatement in YBM Magnex International Inc.'s financial statement for the year ended December 31, 1997 due to error or fraud," Deloitte & Touche wrote YBM.
YBM released the news of its auditor's move on June 26, three weeks after YBM gave D&T its outside report. While YBM has not released the report, it has released excerpts. The outside report admits to a "passive shareholding" by Semeon Mogilevitch, whom it describes as "a reputed crime figure." Budapest-based Mogilevitch, along with several relatives and friends, was a significant shareholder when YBM went public on the Canadian stock markets in 1995, but he left "no evidence of any involvement" in YBM since its initial public offering, according to the company.
As detailed in Business Week's June 8, 1998, issue ("Stock Regulators: What Happened to Canada's Red Flags?"), investigators in Canada and the U.S. have been investigating the company for about two years. On May 13, officials of the FBI, U.S. Customs Service, IRS, and the Immigration & Naturalization Service raided the company's Philadelphia-area headquarters, carting away boxloads of information. Trading in the company's stock was promptly halted on the Toronto Stock Exchange. The stock had soared from pennies to nearly $14 a share by last March, giving YBM a market value topping $600 million. It's now believed to be worth a fraction of that.
The company's hastily assembled independent probe, led by Pinkerton Investigation Services, largely vindicated YBM. It found no evidence of participation in criminal acts by the company, its officers, or employees, or any companies it deals with. It did, however, note that there were "significant breaches in corporate business policy and common business prudence" by a top company executive regarding European business, and it added that officers involved have been reprimanded. These "breaches," however have not been publicly revealed.
The YBM affair has become an international embarrassment for Canadian securities regulators and the country's stock exchanges, especially the Alberta Stock Exchange, where YBM first traded, and the leading Toronto Stock Exchange. The Toronto exchange had even listed YBM among its prestigious top 300 stocks. YBM, however, says it intends to seek resumption of trading, saying it's now seeking a new auditor for its 1997 results. The "questions and issues" that Deloitte & Touche says remain, along with the ongoing U.S. federal probe, almost surely will complicate that effort.
By Joseph Weber in Toronto
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Copyright 1998, by The McGraw-Hill Companies, Inc. All rights reserved.
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