YBM director sold stock before
public knew troubles
Gained $245,700 after auditor
raised concerns
Saturday, June 20, 1998
By Karen Howlett
The Globe and Mail
A Canadian stock promoter who sits on
YBM Magnex International Inc.'s
board sold most of his shares just days
before the public learned there were
serious concerns with the company's
financial statements.
Kenneth Davies made a profit of
$245,700 selling all but 3,000 of his
20,000 YBM shares in April and May,
according to insider trading reports
obtained from the Alberta Securities
Commission.
He sold his shares over a two-week
period after YBM's board of directors
learned that Deloitte & Touche was
suspending its audit of the industrial
magnet maker's 1997 financial
statements but before the public was
told.
Mr. Davies said in a telephone
interview this week that he did not stop
to consider that he may have had an
advantage over other investors when
he sold the shares, because, unlike
them, he was aware of the auditor's
concerns.
"To me, it wasn't a big deal because I
buy and sell stuff all the time," he said
from his home in White Rock, B.C. "I
don't have a nine-to-five job, so to
speak. I'm all over the place all the
time. . . . I'm a heavy trader. That's
what I do for a living."
Mr. Davies has been a director of
YBM since 1994.
He has seen it through its creation as a
shell company listed on the Alberta
Stock Exchange to a takeover of a
Pennsylvania company with magnet
and bicycle manufacturing plants in
Hungary and the United States and a
listing on the Toronto Stock Exchange.
"We worked very, very hard to put this
company together and we don't have a
payday," he said. "It's like working for
years for nothing."
Mr. Davies also said he was not
surprised Deloitte might find YBM's
accounting methods "peculiar" because
doing business in Russia or Eastern
Bloc countries is very different from
doing business in the West. "So you do
not sell an item for a dollar and get a
dollar in the mail," he said. "It's a very
complicated, unusual system of doing
business."
Trading in YBM's shares was
suspended May 13 after FBI agents
searched the company's Pennsylvania
head office in connection with a
criminal probe. That same day, the
Ontario Securities Commission
revealed that YBM's auditors had
called for a forensic investigation into
the company, amid concerns of illegal
activities. Police have alleged that the
company that created YBM -- a
Channel Islands concern known as
Arigon Co. Ltd. -- has links to Russian
mob interests. These allegations have
not been proven in court.
YBM vice-president Guy Scala said in
an interview yesterday that it would
have been premature to disclose
Deloitte's concerns prior to the board's
audit committee determining whether
there was any substance to them.
"The committee was very concerned
with the lack of any factual basis
underlying the allegations made by
Deloitte & Touche and was very
sensitive to the potential for misleading
the public," he said.
An internal review by YBM's audit
committee has found no illegal activity
by company officials but has cited
breaches in corporate policy,
according to a summary released last
week. Deloitte is in the process of
reviewing the 83-page report.
Before the controversy began swirling
around YBM last month, the company
had been a stock market darling,
attracting a wide following among
analysts and institutional investors. Its
shares, which reached an all-time high
of $20.15 each in March, last changed
hands at $14.35 on the TSE.
The Canadian mutual funds that
together own 40 per cent of YBM's
shares outstanding have written down
their value to between $1 and $3 each.
As for Mr. Davies, he picked up his
20,000 YBM shares for $64,600 by
exercising stock options at $3.23 each
on April 20, the insider trading reports
show. This was the same day Deloitte
& Touche sent a letter to YBM's audit
committee, saying it was "extremely
concerned" about certain entities and
individuals involved with the company
and that it could not complete its audit
until an in-depth forensic investigation
was done.
Four days later, Mr. Davies began
selling his YBM shares. He sold
17,000 shares over the next two weeks
at prices ranging from a high of $18.70
each to a low of $16.95, or a total of
$310,350, the reports show.
Mr. Davies made his last sale on May
8, the same day YBM announced that
it had asked securities regulators for
more time to prepare its audited
statements for 1997. Even though the
full extent of Deloitte's concerns were
not revealed at that time, the news
knocked $2.40 off YBM's share price.
"I've always kept my personal [stock]
holdings to zero," Mr. Davies
explained. Asked if he also holds stock
through other companies, he said: "I
can't disclose that."
Mr. Davies was not the only director
to sell stock after Deloitte initially
expressed concern to the audit
committee on March 23 about its
ability to complete the audited
statements.
YBM vice-president James Held sold
6,000 shares on April 16 at $19.20
each, representing a small portion of
his total holdings, the insider reports
show. And Frank Greenwald, a YBM
director who lives in Illinois and is a
member of the audit committee, sold
4,000 shares at $12.33 each on April
2, leaving him holding 7,221 shares,
the reports show.
Mr. Held was not available for
comment. But Mr. Greenwald said he
believed at the time that the problem
Deloitte expressed on March 23 could
be cleared up quickly.
"Of course, events proved me wrong.
But I had no notion at that point that
we were going to run into the problem
we've run into since."
MM |
