TSE's changing tune on the Magnex/Mafia scandal
When Mindy McCready asks, "Is he just being clever, or what?!", in her recent hit song, "What If I Do?", the American country music star is debating some fella's motivation.
Members of the investing public might consider the same question when weighing the evolving comments of John Carson, the Toronto Stock Exchange's senior vice-president of market regulation, in the wake of the YBM Magnex scandal.
On Wednesday May 13 1998, about five dozen U.S. federal agents swarmed the Newtown, Pennsylvania headquarters of YBM Magnex - removing numerous boxes of documents as part of an extensive investigation into suspected money laundering, securities fraud and customs and immigration violations. Officials of the FBI, IRS, Immigration and Naturalization Service and U.S. State Department executed a precision raid that sealed off the YBM Magnex building at 10:30 a.m.
Twenty-three minutes after the raid began, trading in YBM shares was halted on the TSE. Less than 48 hours laters, John Carson was vocally defending his organization's decision to list YBM Magnex on Canada's senior stock exchange and to include its stock in the once-prestigious TSE 300 Index.
Reporters for The Globe and Mail newspaper first pointed out that Arigon Co., a private Channel Islands company that spawned the public vehicle, YBM Magnex, was publicly linked to Sergei Mikhailov, a notorious godfather of the Russian mafia. Mikhailov, nicknamed "Mikhas", has been in preventive custody in Geneva, Switzerland since late 1996 on charges of money laundering, illicit real estate dealings and being a member of a criminal organization.
The newspaper noted that stock market regulators need have looked no further than the internet to learn of the organized crime associations to Arigon, and two original YBM Magnex subsidiaries, Magnex Rt and Arbat International, as detailed in international police reports and news articles.
Carson told the Globe that it is unrealistic to expect exchange officials
to amass information on everything and every individual associated with a
company when it applies for an exchange listing. Carson's response suggested that unearthing this public record information was beyond the purview of his staff: "If you have to carry out a. forensic accounting audit any time somebody wants to list here, we'd have to go out of business." He said that other regulatory agencies were woefully understaffed and that few of the numerous investigative reports forwarded by the TSE to the Ontario Securities Commission and the police "actually are acted upon." Carson told the Globe: "I would love to have the ability to call upon 50 RCMP agents when we identify a problem. We're lucky to get even one guy to read a file."
On the same day, Carson disclosed to a different financial journal that YBM Magnex was no longer deemed suitable for listing by the TSE. Still, in comments made to The Financial Post, he defended the review process that permitted its original listing. "It is a vetting process," he said. "What it is not is a criminal investigation. There seems to be some kind of suggestion around situations such as YBM that the fraud squad should be on the case in order to be listed here or on another exchange. But the fraud squad is a police matter and we don't believe it's necessary to carry out a criminal investigation to determine whether a company can be listed."
By the date these words appeared in print, on May 16 1998, The Vancouver Sun newspaper was first to reveal that another powerful Russian mafioso, Semion Mogilevich, nicknamed "Uncle Seva", was identified in YBM Magnex documents as a significant shareholder and vendor to the company. Mogilevich, whose criminal organization has been reported by international police to engage in "large scale extortion, prostitution, arms dealing and drug trafficking", has been closely associated with each of Arigon, Arbat and Magnex Rt.
The names of Mogilevich and various mafia associates were disclosed in documents filed by YBM Magnex with Alberta securities regulators prior to approval being granted for transactions that resulted in Arigon, Arbat and Magnex Rt being absorbed into an Alberta Stock Exchange-listed shell company.
On Sunday May 17 1998, The Observer, one of England's most venerable broadsheets, published further details of the infamous activities of Russian mafia godfathers Mogilevich and Mikhailov and their association with those core entities that formed YBM Magnex.
The Observer disclosed that British detectives concluded in a 1995 report that Semion Mogilevich was "one of the world's top criminals". The UK police investigation, code-named Operation Sword, alleged that Canada was "used purely to legitimise the (Mogilevich) criminal organization 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."
An attempted criminal prosecution of Mogilevich and associates in Britain fell apart and the allegations were dropped in 1995 following a lack of documentation from Russian authorities. Officials in Moscow failed to supply evidence sufficient to proceed. A money laundering case against Mogilevich's London lawyers failed, in part, because of a technicality that allowed for "grand-fathering" under the law. It was held that Britain's money-laundering rules applied only to new clients and the lawyers, it was established, had "long term connections" with Mogilevich.
Russian mob boss Mogilevich was, however, banned from entering Britain after Operation Sword concluded in 1995. Details of the investigation carried out by the U.K.'s National Criminal Intelligence Service and National Crime Squad were passed on to Canadian authorities prior to YBM Magnex moving from the ASE and listing on the TSE in 1996.
The first news stories following the 1998 FBI raid on the Pennsylvania offices of YBM Magnex left an impression that stock exchange regulators in Canada had been unaware of reports, widely published in Europe, of Russian organized crime links to the company's operations in Hungary, Russia and the Ukraine (where the company purports to sell hundreds of millions of dollars worth of magnets) - and that it was too much to expect the TSE to obtain such knowledge.
On May 20, three days after the story broke in Great Britain, The Financial Post told its Canadian audience about the involvement of godfather Semion Mogilevich with the Magnex-related entities and of the conclusions of Operation Sword.
By this date, Toronto exchange official John Carson was shifting his public refrain. Confronted with questions about the British intelligence investigation and the 1995 report which was available to such agencies as the Royal Canadian Mounted Police, Carson told the Post: "We don't as a matter of course check with the RCMP. If we became aware of information that suggested we should check with the RCMP on something, then we would do so." When asked if the TSE had checked in connection with YBM Magnex, Carson said: "I don't know."
On May 21, The Globe and Mail broke the news that just less than one-third of the shares of YBM Magnex were held by Russian mob boss Mogilevich and five associates shortly after it went public on the ASE in 1995. (As ever in such distributions, other possible associates or nominees remain to be identified.) On this same date, The Financial Post was first to report that unidentified sources said that TSE officials knew of the damning British police investigation into Mogilevich prior to granting YBM a listing on the senior exchange in 1996. The TSE's Carson had nothing to say and was reported to be reviewing the circumstances surrounding the original listing of YBM on his exchange.
By this time, YBM Magnex, which had originally claimed to be somewhat dumbfounded by the FBI raid, was admitting for the first time that Semion Mogilevitch held shares in it. Company president and CEO, Jacob Bogatin, acknowledged this fact but downplayed any significance to the company. On May 21, various Canadian media were reporting on a YBM Magnex issued press release that Bogatin had promised would "answer all. questions".
The company's actual statement was not fully responsive to serious, and far-reaching, issues that had been raised publicly, but, instead, walked a carefully circumscribed territory in its brief explanations concerning mafia godfathers Semion Mogilevich and Sergei Mikhailov. When it came to characterizing the company's public disclosure of the major British criminal investigation, Operation Sword, in 1995, YBM's press release appeared studiously oblique.
On Friday May 22 and Saturday May 23, at the end of the first full week of a growing international scandal, John Carson's tune, as recorded in news articles from Canada to the U.K., began to echo more closely that of such YBM Magnex spokespersons as Jacob Bogatin. Carson acknowledged in an interview with The Wall Street Journal that his exchange knew of the 1995 British investigation into Russian organized crime - before it allowed YBM Magnex to list. The Financial Times of London summarized: "John Carson, TSE senior vice-president of market regulation, says the exchange was aware of the 1995 allegations, but says they are unsubstantiated and that Mr Mogilevitch's links to the firm are tenuous."
Such a startling declaration by a TSE official might bemuse diligent parties familiar with the details and findings of Operation Sword, and who had reviewed the Arigon company filings or other corporate records in Europe, and had analyzed YBM Magnex documents filed with the Alberta Securities Commission. (It might also seem puzzling to F.S. VanAntwerpen, the U.S. District Judge who granted agents of the FBI and U.S. Customs Service a broad warrant to search the Pennsylvania offices of YBM Magnex after reading a 70 page affidavit in its support. That affidavit remains sealed.) Even to those with more casual interest, Carson's new refrain may sound a remarkable distance from his initially transcribed public comments.
"Is he just being clever, or what?!"
More charitably, it appears that Carson, typical of a manager lacking hands-on familiarity with an investigation file, has been speaking without really knowing the full history of what he's been talking about from Day One. Now that TSE staff have brought him up to speed and provided him with their own explanation of how YBM Magnex was originally listed, he's left to style the best possible rendition of the material he's been handed.
In the previous week, Carson had said the TSE took comfort from the endorsement of the company's 1996 financial statements by auditors Deloitte & Touche. But, as a March 10 1998 article in Canada Stockwatch highlighted, this Deloitte & Touche audit raised alarming questions about the operations and practices of YBM Magnex. Such concerns, when combined with a knowledge of the Russian organized crime links to Arigon, Arbat, and Magnex Rt, could be expected to have spurred some different action by market regulators who had watched YBM's incredible climb from its level as a penny stock on the ASE to $20 per share on the TSE with a market capitalization approaching CDN $900 million.
Amazingly, the North American public never learned - not from the company itself, nor from any brokers, securities analysts, mutual fund managers, advisors, or stock market regulators (all of whom were in position to have informed themselves) - about the dubious origins of YBM Magnex entities or details about the Russian organized crime links publicized in Europe.
(Now that the TSE is admitting to having been aware, for years, of the British intelligence investigation into Semion Mogilevich et al, it may be asked whether or not the TSE informed Deloitte & Touche of such circumstances before the auditors were asked to review YBM Magnex financial affairs last year. Deloitte has suspended its most recent audit of the company, citing, among other points, concern that "one or more illegal acts may have occurred which may have a material impact on the 1997 financial statements.")
On Saturday May 23, in what appears to be another astounding admission, The Financial Post quoted Michael Walsh, a vice-president of First Marathon Securities as saying that his brokerage firm was aware of the Russian organized crime allegations at the time it and other Canadian securities dealers helped YBM Magnex raise CDN $52.8 million from institutional investors (in late 1997). Walsh told the Post: "I've been told by people working on it that there's nothing knew in this information, that it was all known and all reviewed at the time of issue."
Another vice-president of First Marathon, Robert Owen Mitchell, has been a director of YBM Magnex since January 1996. Fellow director David Peterson endured his shares of controversies (involving the DelZotto brothers and another Ontario real estate developer, Marco Muzzo), while he was premier of Canada's most populated province. Two other Canadian YBM Magnex directors, Mike Schmidt and Kenneth Davies, (as pointed out in a March 16 1998 Stockwatch article), have been previously associated with failed Vancouver penny stock promotions and, based upon their track record, were hardly "blue chip" management even for a junior public company.
Aside from those comments issued by Walsh at First Marathon, lacking in specificity, the big brokerage boosters of the company, including Griffiths McBurney & Partners, have yet to reveal the depth of their knowledge about the company's background. It's possible that a familiar chorus will be heard from those Bay Street backers of the deal.
What may not be learned, outside of a court of law, is what, if any, independent investigations were carried out by brokers prior to them lending their imprimatur to the multimillion dollar YBM Magnex financing. It may also be asked why these brokerage firms failed to inform the public of matters that could potentially impact upon an investor's decision-making process. Mutual fund managers and advisors may also be called upon to explain their due diligence practices.
For the moment, Jacob Bogatin, YBM Magnex CEO and president, does not give weight to the published police and news reports linking Russian mafioso to his company's subsidiaries (Arbat International, one of the three European entities that originally formed YBM Magnex, was sold off by the public company in the first quarter of 1996).
Bogatin's view of such matters as irrelevant or unsubstantiated was placed in a new context by revelations contained in the current issue of The Village Voice. The magazine's May 26 cover story, "The Most Dangerous Gangster in the World", is a lengthy feature about Semion Mogilevich and his ruthless criminal organization. The Voice notes: "YBM Magnex vehemently denies that it is connected to Russian organized crime or has engaged in any criminal activities Bogatin is no stranger to the mob, however. His brother, David, a top Russian crime figure. is now serving an eight-year term in a New York State prison for a multimillion-dollar gasoline tax fraud scheme."
The Toronto Stock Exchange holds its annual meeting in downtown Toronto this Thursday, May 28 1998. As the Magnex/Magnex scandal continues to unravel, it's a safe bet, (or, at least, a more secure investment than shares in certain TSE 300 companies of late), that no matter what tune TSE officials are singing by Thursday, no one - not even in sweet-natured ol' Nashville - will mistake them for being clever.
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