YBM Magnex: Part 11 (second half of article, end of this series)
YBM Magnex: Part 11 - The case of the collective unconscious (second half)
Mogilevich, according to police reports, is considered to the leader of Russian organized crime in Hungary and the Czech Republic. Mikhailov's organization, AKA the Sons of Solntsevo, has main bases in Austria and Antwerp, Belgium. Reports in Europe have, for years, linked both men, and their associates to Arigon and related entities Arbat International and Magnex Rt. (Published newspaper and magazine etc. reports about the Russian mafiya would be accessible to Canadian brokers and analysts et al, while certain police intelligence reports would, under standard circumstances, be provided only to regulatory officials. It can reasonably be expected that, in the normal course of due diligence discussions between regulators and brokers, troubling matters raised in certain confidential documents would be canvassed.)
Veteran investigative reporter Michael Gillard and David Connett of The Observer have reported that a confidential 1995 British police report, (available to Canadian authorities), alleged, at the time Arigon was going public on the ASE through Pratecs/YBM, that Canada was "used purely to legitimise the criminal organisation by the floating on the stock exchange of a corporation which consists of the UK and USA companies whose existing assets and stocks have been artificially inflated by the introduction of the proceeds of crime."
So, what happened?
The brokerage establishment was, or could easily have made itself, explicitly aware of YBM's dangerous elements. (Even if these professionals, somehow, convinced themselves that recurring European reports of organized crime and money laundering activities were not to be believed, then, logically, the existence of such public records surely still posed an investment hazard in the eventuality that they'd be discovered by persons on this side of the Atlantic.) Yet, each cell of the organism - regulators, brokers et al -- failed to fully inform the public as to the investment risks. Instead, each worked, in its own way, to facilitate and nurture the growth of a stock deal that has now blown up into an international scandal and - like a trick cigar - blackened Canada's face.
There are various dishonest features common to the securities markets in Canada. But the level of systemic corruption in the "Wild East" is unparalleled.
"Russia has become what President Yeltsin termed a `superpower of crime' not merely because of the absence of adequate laws or the supposed robber baron period through which some apologists say is a natural stage of economic development, but because of the inherently corrupt nature of its law enforcement, security organs, and intelligence services. Paradoxically, it is those very organizations upon which the Russian government, the Russian people, and the West are relying to fight corruption and organized crime. The mafiya is flourishing on the vast resources of the former KGB. There are indeed capable and honest professionals in those services, as shown by those whose careers and even lives have been sacrificed. These individuals, however, do not control the services today, and without political will at home and pressure from abroad, they are unlikely to for the foreseeable future."
This synopsis is excerpted from an essay, "Russia's Great Criminal Revolution: The Role of the Security Services", by J. Michael Waller and Victor J. Yasmann, published in the Journal of Contemporary Criminal Justice (Vol. 11, No. 4, December 1995). Yasmann later commented: "In the West, the mafia operates at the margins of public life, but in Russia, organized crime includes a significant portion of the Russian political elite and of the very people who are supposed to be fighting the criminals."
In Canada, the people who, in terms of the financial markets, are supposed to be safeguarding the public interest may be more negligent or na‹ve than corrupt. Perhaps, once a regulatory agency or brokerage, money management etc., syndicate has inured itself to the prospect of Russian organized crime elements being associated with a public company in which they maintain a stake (as overseers, underwriters etc.), then the possibility that the same company may be misrepresenting its technology and/or multimillion dollar sales figures can be deemed to hold little down-side.
Whatever be the explanations (recorded in public or private) for how, or why, securities professionals have handled YBM Magnex up until May 13 1998, they're not likely to be explored with vigor by those who represent the establishment of Canada's senior stock market.
In any event, historically, it's rare for substantial results to emerge from investigations conducted by the nation's passive and reactive provincial agencies. No matter how dedicated or intelligent may be some individuals within such organizations, political dynamics and bureaucratic inertia stifle initiative and blunt the regulatory sword.
Once more, it will, primarily, be up to class action lawyers, journalists or other investigators to illuminate the mechanics and context of this affair for the average member of the public. (It's expected it may be some time before the FBI or other U.S. agencies issue any public statements with regard to their criminal investigation.) A probe that cuts to the essence of regulatory and brokerage industry standards in this country could be more damaging to the reputation of Bay Street than it is to YBM Magnex.
Questions have already been raised by this continuing series of articles entitled "Securities Industry Due Diligence in a post-Bre-X Market" and by the solid work of numerous journalists covering the YBM story. And there are still many questions that need be asked - or repeated.
The building blocks of a scandal can be traced from the earliest days of public filings made by Pratecs/YBM with the Alberta Securities Commission and ASE in 1994 and 1995 - when Semion Mogilevich and associates planted their corporate flag on North American soil.
Why did Yorkton Securities vice-president, and former ASE Chair, Michael Prew certify as representing "full, true and plain disclosure" a Pratecs/YBM prospectus that omitted disclosing the role of Michael Schmidt with the golf machine stock scam, Technigen Corp.? (As well as being an original, and present, director of the public YBM, Schmidt held trading authority over the account of a major YBM shareholder, Anix Investment Club - a partnership of Vladamir Guberman and Mogilevich associates Konstantin Karat and Igor Fisherman.)
What was Jean Lear of Cedar Glen West, Lakehurst, N.J., an elderly retiree who'd spent years minding her own business, doing as Vice-President of a Canadian-listed public company?
Who was "William Feldstein, B.Sc., M.B.A.", (author of a "project analysis" used by YBM in going public on the ASE), and how could he claim (as the company reported he did on May 4 1994) that YBM's "precursor corporations" Magnex Rt, YBM Technologies Inc., and Arigon Company Limited were all "large, Eastern-European-based companies complete with their own significant histories, proven product lines, and market niches"?
Why did Pratecs/YBM, in an information circular issued in late 1994 while approval was being sought for the takeover of the Arigon/YBM group, state that "YBM's Canadian sales were roughly US $1,500,000 and US $2,000,000 in 1992 and 1993, respectively" - when financial statements released after Arigon et al had gone public revealed that Canadian sales for 1992 and 1993 were exactly US $0 and US $0, respectively?
And why didn't market regulators, stock brokers or money managers raise public questions about these or other curiosities, inconsistencies, discrepancies, omissions, and misrepresentations found in the public disclosure record?
In a feature news article published in May 1998, Gyorgi Kocsis, an editor with HVG, Hungary's leading political and economic weekly, has pointed out that YBM's locally-based subsidiaries, Magnex Rt (magnets) and Schwinn-Csepel Rt (bicycles), are marginal operations in Budapest based upon the companies' financials published in Hungary. How, HVG asks, do these enterprises form part of such a profitable money-machine once the marketing and sales arms of Arigon/Arbat (and, since 1997, United Trade Limited of the Cayman Islands in place of Arigon) are factored into the equation?
On May 8 1998, YBM Magnex, listing as its contact VP Jim Held, issued a press release that reflected, with perhaps unintentional irony, some of the complications facing the company. In reference to delays with the Deloitte & Touche 1997 year-end audit, the company stated: "Management attributes the
extensiveness of the audit and the requirement for this review to the fact
that business practices in the company's major market, Eastern Europe,
differ from those in North America due to the relatively early stage of
development of the Eastern European market economies. Management believes
that as the company's business becomes further diversified, as it has with
the acquisition of Crumax Magnetics in the United States and Philips Rare
Earth Permanent Magnets in the United Kingdom, and as the economic and
social climates in Central and Eastern Europe are better understood, such
scrutiny will dissipate." Five days later, plainclothes agents for the FBI, IRS, Customs, Immigration and Naturalization Service and the U.S. State Department raided YBM's headquarters and seized records for scrutiny.
Shortly before the raid, while he was still talking to the press, YBM's Jim Held provided the first public record explanation of some of the different business practices encountered in Eastern Europe -- offering some insight into dealings that had never been described in the Bay Street analysts' share recommendation reports, or in YBM's own literature. On May 12 1998, The Financial Post quoted Held saying of Russia and the Ukraine: "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." In a subsequent article the Post outlined one recent bartering transaction, as presented by Held, in which a broker swapped magnets for small motors, which were then traded for food processors, which, it turn, were replaced with canned meat, which was then sold for cash to a car manufacturer that used the tinned meat to feed and pay its staff.
(This and other Post coverage of the YBM story has been greeted by libel notices from Cassels Brock & Blackwell, the law firm of YBM director, David Peterson - a former Ontario politician of mixed repute. However, unlike other stock market-related entities upset by media coverage in Canada, the company has not filed a statement of claim so the seriousness, or intent, of YBM to follow through with any legal action is uncertain. Shareholder legal actions against YBM are anticipated, but, as yet, none has been filed. Bizarrely, the fact that some 40 percent of YBM's shares are held by Canadian mutual funds - and an untold percentage rest in the hands of U.S. and international funds - appears to be limiting the outcry over the YBM scandal. Fund managers, who may have their own reasons to fear lawsuits, are not anxious to pursue legal remedies on behalf of those investors whose million$ they've put at stake.)
However different business practices may be in Eastern Europe or the former Soviet Union, there has not been a shortage of quizzical YBM-related activities uncovered in North America in the three months that have elapsed since the U.S. government raid and the company's shares stopped trading.
The Globe and Mail's Karen Howlett, proving herself much more of a sleuth than ScotiaMcLeod's "Columbo", Rob McConnachie, or his peers in the stock-picking racket, has disclosed that Ken Davies, another of YBM's long-time directors, realized a profit of CDN $245,700 when he dumped out most of the YBM shares held in his name before the public learned that Deloitte & Touche had suspended its audit amid serious concerns about the company's affairs. (There is no indication, as yet, whether or not the OSC plans to pursue this as an insider trading case.) When Davies was asked if he held stock through other companies (i.e. nominee accounts), he told the Globe: "I can't disclose that."
The Vancouver Sun's stock market reporter, David Baines, has revealed that, over the prior 18 month period, YBM's President Jacob Bogatin transferred shares, with an aggregate gross value of CDN $6.8 million at the May 13 closing price, to G. Bogatin, "presumably a relative", and persons unknown. "The effect of these dispositions was to remove 473,184 free-trading shares, or 48 percent of his holdings, from his name to third parties who did not report their acquisition of those shares or any subsequent disposal," said the Sun. Bogatin and YBM's latest spokesperson, Guy Scala, did not return the newspaper's telephone calls to explain the purpose or nature of these unusual, off-market, transactions.
Bill Yingling, situated near ground zero for the U.S. Organized Crime Strike Force's raid on YBM, writing for The Bucks County Courier Times, broke the news that Jacob Bogatin's 26-year-old nephew, Michael Kogan, is President of an obscure brokerage firm, Jefferson Gersch Inc., that's recently run afoul of securities regulators in Pennsylvania and Maryland and is being wound down by Kogan in all states where it's registered. Stranger still, for six months, (beginning in mid-1996), Kogan's short-lived stock-shop was housed under the roof of YBM's Newtown, Pa. headquarters. (ASC-filed documents identify Roza Kogan, relationship unknown, as one of YBM's original shareholders along with Bogatin, Mogilevich and others.)
Questions about these matters, and other non-audit-related issues that shroud the YBM affair, await public answers.
On August 10 1995, Britain's Home Secretary signed an order excluding Russian organized crime leader Semion Mogilevich from the United Kingdom.
On this date, August 10 1998, the OSC was to begin a regulatory hearing into YBM Magnex International, the public company spawned by Mogilevich and associates through the Arigon group of companies.
In the "Keystone state" of Pennsylvania, where YBM/Arigon came to land, there's a saying that's promoted: "Memories last a lifetime."
In the dysfunctional state of Canada's securities markets, where YBM stock came to be promoted, memories are much shorter.
End of Series
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