OSC approved YBM offering despite knowing of money laundering investigation
OSC approved $53-million YBM offering despite knowing about RCMP investigation
Tuesday, January 26, 1999
PAUL WALDIE
The Globe and Mail
The Ontario Securities Commission approved a $53-million share offering by YBM Magnex International Inc. despite being told six months earlier that the RCMP was investigating the company for money laundering.
The RCMP told officials from the OSC and Toronto Stock Exchange about the investigation during a meeting on May 15, 1997, according to information obtained by The Globe and Mail.
Less than a month before the meeting, Pennsylvania-based YBM was included in the TSE's benchmark 300-share composite index.
According to several internal OSC and TSE memos written shortly after the meeting and reviewed by The Globe, officials were concerned that YBM was a front for Russian mob figures.
However, none of the concerns or the RCMP investigation were made public at the time and YBM's shares continued to trade.
The OSC also permitted YBM to raise $52.8-million on Nov. 17, 1997, through a public share offering at $16.50 a share. By March, 1998, YBM's share price hit $20 on the TSE.
The money laundering allegations didn't surface until May, 14, 1998, when several U.S. agencies, including the Federal Bureau of Investigation, raided YBM's headquarters in connection with a criminal investigation.
YBM, which makes industrial magnets in the United States and Hungary, was created on the Alberta Stock Exchange in 1995 and moved to the TSE a year later. The company is now in receivership and a forensic accounting report released last month alleged it had direct links to Russian mob boss Semion Mogilevitch and was involved in a sophisticated money laundering operation.
OSC spokesman Mark Conacher said yesterday the commission did not have hard evidence about the allegations before the November, 1997, stock issue.
"The information that we had prior to the [approval] of the prospectus was soft information," he said.
When asked about the details provided by the RCMP at the May, 1997, meeting, Mr. Conacher replied: "We would characterize the information as soft information. Try and characterize the nature of the RCMP investigation, where did it lead to?"
He added that the OSC is continuing its investigation into YBM.
Officials from the TSE and RCMP would not comment yesterday. The RCMP's investigation is continuing, along with the FBI's.
Prior to the November, 1997, share offering, the OSC asked YBM to reaudit its 1996 financial statements. The second audit was done by Deloitte & Touche and OSC officials have said that it addressed the commission's major concerns at that time. The second audit dropped YBM's 1996 North American magnet sales from $13.6-million to $1.8-million.
Sources close to the OSC investigation say the commission had gathered substantial information about YBM before the November, 1997, offering. Commission officials had even been told, correctly, it turned out, that YBM was not producing any product at its Pennsylvania plant.
In October, 1997, the OSC also had information from YBM's former Canadian sales manager, Len Lamourie, who alleged during a court hearing that YBM had no products for him to sell.
Mr. Conacher declined to comment on the investigation.
In May, 1998, the OSC had also drafted a 27-page statement of allegations against YBM with details of money laundering transactions through Buffalo, Edmonton, Lithuania, Russia and Hungary. However, the document has never been made public.
Instead, on May 13, 1998, after the FBI raid, the OSC issued a two-page statement containing few specific allegations as part of a temporary cease trade order on YBM shares.
Mr. Conacher would not comment on the two documents.
The OSC planned to have a hearing that summer on the cease trade order, but the hearing was cancelled.
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