An interesting read from NYTimes on money laundering through stocks..
"July 24, 1999
Russian Gangsters Exploit Capitalism to
Increase Profits
By RAYMOND BONNER
ASHINGTON -- A few years ago, British intelligence and law
enforcement agencies began investigating the money-laundering
activities of Russian organized crime in Britain. At the center of
their concerns was Semyon Yukovich Mogilevich, a man described by
British authorities in one classified report as "one of the world's top
criminals, who has a personal wealth of $100 million."
His money came from "large-scale extortion, prostitution, arms dealing and
drug trafficking," and it was laundered through a London bank with the
help of a lawyer there, the report said.
The British shut down that operation in 1995, prompting Mogilevich to
begin laundering his illicit profits into a new venture: an American company
listed on the Canadian stock exchange that sold its stock to investors
throughout North America.
Current and former American officials say Mogilevich is the harbinger of a
disturbing new trend: the Russian mobster masquerading as crack
capitalist.
It is also a new twist in how international criminals turn their illegally
obtained cash into legitimate assets.
Historically, drug barons and those who amass mountains of cash have
laundered their money through private companies, which are subject to less
stringent reporting requirements.
But in the bull market of the 1990's, authorities say, public companies offer
criminals the chance to make even more money by artificially pumping up
the stock price and bilking investors.
Mogilevich's move into the North American equity markets began with a
company he set up in suburban Philadelphia called YBM Magnex.
Its primary business was the manufacture of industrial magnets at a
factory in Hungary and later at a factory the company bought in Kentucky.
YBM attracted a blue-ribbon board, its books were audited by two
prominent American accounting firms, it issued glossy annual reports and it
had its own Web site.
All of this turned out to be sophisticated cover for what was also a vast
money-laundering operation, American intelligence and law enforcement
officials say. They add that it is far from a unique case and that Russian
organized crime, which has acquired devastating power in much of Eastern
Europe and the former Soviet Union in the last decade, has made inroads
in America's highly regulated financial markets.
"This is the first public demonstration of the manipulation and infiltration of
world financial markets by Russian organized crime," said a senior
Administration official whose responsibilities include following Russian
organized crime groups.
Last month, in a negotiated agreement, YBM pleaded guilty to securities
fraud in the Federal District Court in Philadelphia. The criminal
investigation is continuing, and officials said it is focusing on the role that
Mogilevich and two associates played in setting up and running the
company.
Like a handful of other Russian crime figures, Mogilevich is barred from
entering the United States. But he has Israeli citizenship, as do several
other prominent Russians involved in crime, American diplomats and
intelligence officials said.
While American officials believe they have shut down Mogilevich, or at
least curtailed his activities -- "in a box," as a senior intelligence official put
it -- they fear that there are similar schemes waiting to be exposed.
"This is just one case, but there are others like it throughout the world," said
Jim E. Moody, a retired F.B.I. agent who headed the organized crime
section for many years and was one of the first agents to begin working
with the Russian police after the collapse of the Soviet Union.
In the three years between the British action and the American authorities'
penetration of YBM's corporate facade, the company had raised $114
million (Canadian) on Canada's capital markets. Helped by glowing claims
about sales and profits, YBM's stock soared, and Mogilevich and some of
his associates sold their shares for millions of dollars in profits.
The shares were traded in Canada, attracting some American investors,
while the company awaited approval for listing on the Nasdaq exchange in
the United States.
"They cloaked themselves in an air of legitimacy that was beyond belief,"
said a former F.B.I. official whose job included watching Mogilevich.
The company had sales but it also exaggerated them. It had customers, but
it also maintained fictitious customer lists.
It paid suppliers, but some were companies controlled by associates of
Mogilevich. Some YBM officers and directors were complicit with
Mogilevich, but others thought they were engaged in a legitimate business,
investigators say.
With the investigation continuing, and a investors' class-action suit pending
-- as yet with no reply from the defendants -- there is a general reluctance
to discuss what attracted anybody to YBM.
"It would be lunacy for me to say anything," said one former company
official.
Lawyers for the plaintiffs in the class action said they would not permit
their clients to talk about their investments because they feared retaliation
by Mogilevich.
A public portrait of Mogilevich's criminal empire first appeared in May
1998 in The Village Voice in an article by Robert Friedman, who had
access to classified F.B.I. and Israeli intelligence reports. After the article
appeared, Mogilevich put out a contract on Friedman's life, a threat that
was picked up during a telephone intercept by the Central Intelligence
Agency, law enforcement and intelligence officials said.
Mogilevich started as a small-time thief and counterfeiter in the 1970's,
officials say, then made millions in the 1980's from Jews leaving the Soviet
Union. He took their art, jewelry and other valuables, promising to sell
them and send the money. He kept most of the proceeds, officials say.
Not long after the Berlin wall came down and the Soviet Union collapsed,
making travel easier, Mogilevich set up operations in Budapest, where he
ran a prostitution ring out of a topless bar called the Black and White Club,
European and American officials say.
Mogilevich, who is believed to spend most of his time these days in
Budapest and Moscow, could not be located. But a small Hungarian
newspaper reported last month that it had interviewed him (the newspaper
did not say where or how) and that he had denied any criminal activity.
"I consider myself a law-respecting citizen who works in earnest and pays
taxes regularly," Mogilevich told the newspaper, Napi Magyarorszag.
Though raised in a Communist society, Mogilevich, now 53, quickly
adapted the ways of fast business dealing. In putting together YBM, he
used offshore locales where secrecy prevails over disclosure, sophisticated
financial transactions and wire transfers to move money quickly and
beyond the prying eyes of regulators.
The following account of how Mogilevich and his associates penetrated
North American capital markets is pieced together from the information
and plea agreement in the criminal case in Philadelphia; the complaint in
the class-action suit, which the investors filed in the Federal District Court
in Philadelphia; an audit of YBM's books in December 1998 by a
Philadelphia accounting firm, Miller Coffey Tate, which the company hired
when Canadian securities regulators raised questions; and YBM's annual
reports, public statements and filings with regulatory agencies in Canada.
In the beginning there was a company, Arigon, which Mogilevich set up in
the Channel Islands in 1991. This was his original conduit for laundering
money, the British report said.
One of his partners at Arigon was his mistress, who was the mother of a
son by him and the wife of the London lawyer who was reportedly in
league with Mogilevich, according to the report. (Readers of John Le
Carré's latest novel, "Single & Single," will find similarities between various
elements and characters and Mogilevich's escapades.)
Eventually, through a series of complex transactions and takeovers, Arigon
acquired control of YBM Magnex. To finance YBM's first public offering,
in Canada, Mogilevich sent $2.4 million from Arigon's bank accounts in the
Channel Islands.
YBM was headed by one of Mogilevich's trusted associates, Jacob
Bogatin. Bogatin, who has a doctorate in powder metallurgy from
Volgograd State University, came to the United States in the 1980's and
eventually became a citizen. From 1996 to 1998, he was president and
chief executive of YBM.
Bogatin's lawyer in Philadelphia, Eric Sitarchuk, declined to comment about
his client, who law enforcement officials said is one of the subjects of the
continuing investigation by the United States Attorney in Philadelphia.
The company's glowing claims propelled YBM's stock from a few cents at
the time of the first offering in 1994 to $5 (Canadian) in early 1996, to
more than $20 two years later.
In its 1996 annual report, for example, the company boasted of "record
sales and earnings," with sales up 79 percent over the previous year. It also
claimed that revenues from buying and selling crude oil increased from
$13.6 million (Canadian) to $20.4 million.
YBM's books were audited for 1996 by Parente, Randolph, Orlando,
Carey & Associates in Philadelphia. The firm reported that the financial
statements "present fairly in all material respects" the company's financial
position.
In the summer of 1997, when YBM was preparing for another public
offering, Ontario securities regulators asked Deloitte & Touche to conduct
a "high risk" audit. In the securities world, this means that the authorities
were suspicious and wanted the accounting firm to apply extra scrutiny
and diligence.
Deloitte & Touche gave YBM a clean bill of health.
One Canadian analyst who issued a "buy" recommendation noted that the
company had emerged from the Deloitte audit "with flying colors." And in
November 1997 YBM completed a public offering of 3.2 million shares, at
$16.50 (Canadian) each, bringing in a total of nearly $53 million.
Both accounting firms are defendants in the class-action lawsuit by
investors in YBM.
Parente, Randolph did not respond to several phone calls asking for
comment.
A spokeswoman for Deloitte & Touche, Ellen Ringel, said that the
company had carried out the audit "in accordance with applicable
professional standards" and that it would "vigorously defend" itself against
the suits. She added that in June 1998, the company resigned as YBM's
auditors after it became concerned about "questionable transactions."
But the auditors had already missed a few things.
"Money Laundering and Unusual Transactions" is the heading on a
14-page section of a 50-page report by Miller, Tate, the accounting firm
that YBM turned to hoping once again to get a clean bill of health after
Canadian officials raised question. At the center of these transactions was
a company called United Trade, which was incorporated in the Cayman
Islands and was run by Igor Fisherman, who was also the chief operating
officer of YBM.
Fisherman, who has a master's degree in mathematics from Ufa State
University in Russia, immigrated to the United States in the late 1980's and
later became an American citizen. He is also a subject of the ongoing
investigation, officials said. Fisherman's lawyer, Peter Vaira, declined to
comment.
On one occasion, $3.2 million was transferred from a bank in Lithuania to
a United Trade account in Hungary. It was then quickly transferred to
Chemical Bank in Buffalo for the benefit of six ostensibly different
companies. At the same time, United Trade sent money to Chemical Bank
for a Buffalo lawyer, Paul F. Fallon.
These transactions have "several of the indicia of money laundering,"
Miller, Tate said in its report, noting, for example, that the companies
involved in the transactions, those in Lithuania, Hungary and the United
States, all had the same address -- that of Fallon's office in Buffalo.
Fallon denied in a telephone interview that he had engaged in any improper
activity. He said that Fisherman was a client, and that he had incorporated
all of the various companies involved in the series of wire transfers. He
declined to say what business activities these companies engaged in.
As for the oil sales, which YBM said had done so much for its profits,
Miller, Tate found that the company never had had any oil to sell. |
