Deloitte Resigns as Auditor of YBM, Refuses to Approve 1997 Statements
By Mark Heinzl, Staff Reporter
The Wall Street Journal Monday, June 29, 1998
YBM Magnex International Inc., whose operations are under criminal investigation, said its auditor, Deloitte & Touche LLP, resigned and refused to approve the company's 1997 financial statements.
Deloitte's resignation hampers the industrial magnet maker's efforts to resolve the investigation and lift a trading ban on its once-popular stock.
YBM, a Canadian-incorporated company, has been the focus of an investigation by the Federal Bureau of Investigation and other U.S. law enforcement agencies, which raided the company's Newtown, Pa., headquarters on May 13 and removed boxes full of documents. Officials decline to discuss the nature of the investigation.
On the same day as the raid, the Ontario Securities Commission halted trading of YBM's stock on the Toronto Stock Exchange, noting that Deloitte was concerned that "one or more illegal acts may have occurred which may have a material impact on the 1997 financial statements." Deloitte had also requested that YBM conduct an independent review of the company's operations in Eastern Europe, where the company makes industrial magnets, the OSC noted.
YBM earlier this month said an investigation by Pinkerton Investigation Services, a New York investigative firm, found "no evidence of participation in criminal acts" by anyone at the company. The company did acknowledge that Semeon Mogilevitch has been a significant YBM shareholder since the company's creation in Alberta a few years ago. Mr. Mogilevitch was a subject in a 1995 investigation by British police into Russian organized crime and money laundering. No charges were brought in that case.
Deloitte said in a statement that the Pinkerton report "failed to answer all questions and resolve all issues raised during the audit, and failed to provide competent auditable evidence regarding certain 1997 transactions." Deloitte officials declined to provide further details.
YBM spokesman Guy Scala said that the company doesn't know what questions and issues Deloitte is referring to and that the company is contacting other major accounting firms to find a new auditor. A senior Pinkerton official declined to discuss its YBM report. YBM released a short summary of the report but declined to provide the full report, and Mr. Scala said he has read only the summary.
Joseph Groia, YBM's lawyer, said that the company has "nothing to hide" and that he is "hopeful" that finding a new auditor to approve the company's 1997 financial statements will satisfy "most, if not all" of the concerns of securities regulators. An OSC official declined to comment. Trading of YBM shares will remain halted at least until August, when the OSC will hold a hearing regarding YBM.
YBM's shareholders aren't as optimistic as the company. "It doesn't look very good," said Wayne Deans, who holds YBM shares in a few mutual funds he manages at Deans Knight Capital Management Ltd. In Vancouver, British Columbia. Deloitte's resignation probably means "there's some very serious problems" with the company that haven't been revealed yet, Mr. Deans said, adding that he has written the value of YBM shares down to zero.
YBM is the second major embarrassment for Deloitte in Canada this year. The company audits Philip Services Corp., a Hamilton, Ontario, industrial-services company that has twice restated its earnings to show a large loss for 1997. Philip blamed an internal copper-trading scandal, which it says it is investigating.
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