YBM Magnex: Part 6 - Get yer lucky number program here!
The second article to highlight less than stellar aspects of YBM Magnex, then on its ascendancy in the TSE 300 constellation, was published by Canada Stockwatch and carried over its electronic news wire before the Toronto stock market opened on March 16 1998.
A few hours later, Stockwatch received a phone call from a "pissed off" sounding Jacob Bogatin, the president and CEO of YBM.
(Bogatin, a resident of Richboro, Pennsylvania, had replaced Robert Ventresca of Doylestown, Pa. as YBM's head following the company's shares gaining a public listing in Alberta. Ventresca, reported to be a Certified Public Accountant, was also identified by the then ASE-listed shell as president and a shareholder of Alpha Financial Group. Alpha's other shareholders were Jacob Bogatin and Michael Bachurski. Ventresca, named as co-owner of the private YBM Magnex alongside Bogatin, appears to have personally vacated the Fountainville, Pa. offices of his Alpha Financial Group sometime in April or May of 1998.)
Jacob Bogatin's initial call suggested a potential legal threat. By the time editor/publisher John Woods arrived at Stockwatch on March 16 and returned Bogatin's call, however, several hours had passed. By this time YBM's president sounded frustrated rather than angered.
Bogatin advised Woods that Jim Held, his investor relations manager who was away at the moment, would provide Stockwatch with YBM documents so that there would be no further misunderstanding of his company.
An example of the type of disclosure practices that I have questioned - not just in YBM's case but in connection with other, unrelated, public company files - involves certain comments made during the "waiting period" of the company's 1997 prospectus financing.
On May 30 1997 a preliminary prospectus was filed in connection with a CDN $52.8 million underwriting of YBM shares (3.2 million shares priced at CDN $16.50 each) to be completed by a syndicate of Canadian brokerage houses: First Marathon Securities, Griffiths McBurney & Partners, ScotiaMcleod. Canaccord Capital, and Gordon Capital.
The prospectus noted that this financing was "subject to the approval of certain legal matters on behalf of the Corporation (YBM) by Cassels Brock and Blackwell." YBM director and stock optionee, lawyer, David Peterson is a senior partner at Cassels Brock & Blackwell. Legal approvals on behalf of the underwriters were to be provided by the law firm of Fogler, Rubinoff.
The "waiting period" is that time between the filing of a preliminary prospectus and the issuance of a receipt by market regulators of a final prospectus. In YBM's case this period stretched from May 30 until the latter part of November 1997.
The Ontario Securities Commission, which vetted YBM's prospectus, has published a position that: 1) "No interviews should be given to the financial media by directors or senior officers of an issuer immediately prior to or during the waiting period"; and 2) "No director or senior officer of an issuer should make any statement during the period of distribution of securities (which includes the period immediately prior to the waiting period, the waiting period and the period following the waiting period until completion of the distribution) which constitutes a forecast, projection or prediction with respect to future financial performance, unless that statement relates to and is consistent with a forecast contained in the prospectus." The OSC has advised issuers and their legal counsel to consider the SEC guidelines in this area - which note that principals of issuers should avoid: 1) "issuance of forecasts, projections, or predictions relating but not limited to revenue, income or earnings per share" and; 2) "publishing opinions concerning values."
During the waiting period of YBM's 1997 share distribution, a company director, Jacob Bogatin, and senior officer, James Held, both, gave interviews to the media and their statements, as reported around the globe, contained forecasts, projections or predictions.
In September and October 1997, international media announced that YBM had signed a letter of intent in Peking about a US $40 million investment in China. One newspaper explained: "(YBM) invest in China because this is the founding place of the important materials needed for the special magnets which are ten times stronger than traditional ones. The company registered in Canada was founded by Jacob Bogatin, an ex-engineer of an ex-Soviet military research institute. Bogatin first settled in Budapest, then went to Canada, where he established the Russian-Hungarian-Israeli company, which has its seed in Magnex Rt, Budapest."
YBM president and CEO Bogatin was reported as saying: "The small Canadian stock exchange (TSE) has become too narrow for us. So in 1998 we will probably appear on the New York Stock Exchange."
YBM vice-president Held was cited as the source of other comments not contained in the company's prospectus: "Russia is a big customer of the company - said Held - we sell magnets there for US 28 million dollars per year. (YBM) took over a factory in Sheffield, England, and in the summer of 1997 they bought an American company called Crucible Magnets. The company's sales in 1996 were US 90 million dollars and this year they plan US 120 million dollars. The value of the company is estimated to US 360 million dollars by vice president Held."
Following disclosures in the foreign press, in late September 1997 YBM issued its own press release to disclose it had "entered into a non-binding letter of intent to enter a joint venture with three mainland China manufacturers of rare-earth permanent magnets." The company identified its three would-be-partners but added: "Contrary to published reports, YBM has not formalized financing for its expansion into China, nor has it formalized plans to trade on a US stock exchange."
YBM's news release, identifying Jim Held as contact person, failed to note that those published statements the company was now claiming to be untrue had resulted from interviews with, and statements attributed to, two senior members of YBM's management - Jacob Bogatin and Held, himself.
Was the company suggesting that its executives had been misunderstood or misquoted? Or was it seeking to distance itself from statements that could cause it problems with regulators in Canada - at the same time it enjoyed the promotional benefits of these statements overseas? As long as "full, true and plain disclosure" remains a stock market myth, the public may never know.
It wasn't until March 19 1998 that Jim Held spoke with a Stockwatch representative as a follow-up to Jacob Bogatin's conversation with John Woods. Contrary to Bogatin's assurance of cooperation, vice president Held explained: "We're not going to send any more information out. I think we're no longer going to have any communications with Stockwatch."
"I was out of the office for three days and I am just reading this latest (March 16) article. Right now that's in front of me and this morning I had a conversation with our president and, you know, that's where it stands," Held continued. "I mean everybody views it as negative and there isn't one phone call that I have received that's been positive. I've received phone calls from all over Canada about it and, you know, it's really - it's taken me back. I don't know what to say about it."
YBM's former CFO pointed to the company's strengths: "Well, the brokerage firms aren't only touting it (YBM), they actually had visited our facilities and saw that this is a real operation. They visited Budapest. Every analyst has visited Budapest and they have visited our latest acquisition in Kentucky, which. is the second largest magnet company in the United Sates. So, whatever these articles are inferring about some of these companies in the past, you know, I don't know what you're trying to say. Really, we've had a big six public accounting firm, Deloitte & Touche, audit '96 - re-audit '96, and they're also - they're finished with the 1997 audit and I don't know what really more to say about it."
(The 1997 audit being positively billed as "finished" by Held was the cause of great concern to Deloitte & Touche which suspended its audit prior to final completion. The auditors questioned the validity of certain significant transactions underlying YBM's business and uncovered evidence "that one or more illegal acts may have occurred which may have a material impact on the 1997 financial statements." Deloitte's concerns were brought to the attention of YBM's audit committee on March 23 1998.)
Jim Held concluded: "These two articles have been very, very damaging to our company and I just think at this point there would be nothing for us to gain by providing Stockwatch with more information about us. Obviously, it seems like you know, Stockwatch knows an awful lot about our company because they were able to put together these two articles (in) which they're providing information that I didn't even know. As I told you, I'm sitting here reading it, because I'm learning things."
In no danger of being blacklisted by YBM management -- and having his firm's access to the public company's promotional materials withheld -- was Peter Sklar, an analyst with Nesbitt Burns. The suddenly controversial magnet-bicycle-diesel-oil-and-more company had a lot to gain from boosterish reports published by Sklar and his Bay Street peers.
And Peter Sklar, CA - as they say in the business - delivered.
On April 2 1998, Nesbitt Burns sent out a Sklar buy recommendation for YBM that found a silver lining in the questions being raised about the company's unusual affairs: "We believe that these (Canada Stockwatch) articles have caused the recent weakness in YBM's stock price. Since March 9, when YBM had its high close of $19.90, the stock has declined to current levels ($17.70). During this time, the TSE has risen by about 4%. We believe that the fundamental prospects for the company are intact and that the recent weakness presents a buying opportunity."
In reference to long-time YBM directors Mike Schmidt and Kenneth Davies, whose track record with dubious VSE penny stocks had been outlined by Stockwatch, the brokerage analyst said that YBM had "accepted these two directors on the basis of advice provided by its financial advisors." According to Sklar: "The two directors who are the subject of these allegations are not involved in the management of the company, and we believe that their role is largely limited to attending board meetings."
Peter Sklar added: "We understand that at the upcoming Annual General Meeting of Shareholders, YBM intends to add two additional directors to the board, both of whom are expected to be individuals who would be unlikely to attract any further public criticism towards YBM's board of directors."
After providing this reassuring, inside, scoop on YBM affairs, Sklar concluded his report: "Given YBM's growth rate, we believe that the stock should trade at a much higher multiple. Our one-year target price of $24 is about 18X our 1999 earnings estimate."
As ever, this tout came attached to a legal disclaimer from the issuing brokerage, in this case Nesbitt Burns Inc. (NBI), a majority owned subsidiary of the Bank of Montreal: "NBI makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions which may be contained herein and accepts no liability whatsoever for any loss arising from any use of or reliance on this report or its contents." Etc.
The rosy picture seen through Peter Sklar's soft focus lens, framed without the acceptance of any liability, hung in contrast to the sharper view of newsletter writer John Kaiser, an analyst without ties to any brokerage house employer.
On March 17 1998, Kaiser, a San Francisco-based tracker of junior companies (particularly the sub-species he terms "bottom-fish") commented on Stockwatch's second YBM article and suggested that "ringside seats should be quickly secured" for what was to follow. As Kaiser later told The Vancouver Sun: "I had no doubt that this story was going to have an unhappy ending."
End of Part 6
For more on this story and other stock market news and analysis, visit the Investigative Research & Analysis web-site at imagen.net
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