YBM Magnex: Part 7 - The road well-travelled
YBM Magnex: Securities Industry Due Diligence in a post-Bre-X Market - Part 7 - The road well-travelled
In mid-March 1998 I was off for three weeks - taking a rare break from a routine of daily stock market investigations. By the time I resumed examining the affairs of YBM Magnex International the microfiche files of YBM/Pratecs ordered from the Alberta Securities Commission had arrived - as had answers about Arigon Co. of the Channel Islands and details of other entities that had helped to spawn a Canadian stock market phenomenon.
Things had not been dull in my absence. On my return they turned darkly surreal.
A Stockwatch subscriber in Vladivostok jettisoned a cranky email to the publication: "It's not really cool, fellows! We urgently expect you to send us something more interesting. Or we'll be forced to fuck you off. We really mean it, buddies!"
The writer didn't cite the cause of this ill temper, a condition that could be easily attributable to innumerable circumstances unrelated to YBM Magnex -- an absence in Russia of a good Philly cheese steak, for example.
Independent securities analyst John Kaiser had secured his ringside seat. Bay Street brokerage analyst Peter Sklar had, instead, secured his loyal reputation. On March 24 and April 2 1998 he issued separate, but equally encouraging, YBM buy recommendations to Nesbitt Burns clients.
Interestingly, Kaan Oran, the analyst at First Marathon Securities who'd proclaimed YBM had passed the "forensic study by Deloitte and Touche with flying colours", found new employment between the time of his dubious line being published (February 3 1998) and the date of the raid on YBM's Pennsylvania headquarters by agents with the FBI, IRS, U.S. Immigration and Naturalization and Services and U.S. State Department (May 13 1998). Oran left his position at First Marathon in Toronto to work for Vancouver-based money managers Connor Clark & Lunn Investment Management Ltd.
Connor, Clark and Lunn had stepped into the breach the previous year during the waiting period of YBM's CDN $52.8 million prospectus financing. As explained by Mike Middleton, an analyst with YBM underwriter Griffiths McBurney & Partners: "Given the time delay in clearing the company's prospectus, it was impossible for YBM to issue the full C$100 million in equity in time to close the Crucible acquisition on August 22 1997. Fortunately, a Canadian investment fund purchased C$48 million senior subordinated secured convertible notes at 8%, due August 2002, with a conversion at $12.00 upon clearing of the prospectus."
In this way, the public company YBM received CDN $48 million in August 1997 and a further CDN $52.8 million was raised in November 1997. Prior to it "fortunately" picking up the CDN $48 million notes which converted into 4,000,000 shares (at CDN $12.00 each) Connor, Clark and Lunn already held 2,529,000 shares of YBM Magnex on behalf of funds and accounts under its management. With the hiring of Kaan Oran, one of YBM's biggest financial backers was directly teamed with one of its most effusive cheerleaders.
Oran's former employer, First Marathon, Canada's largest independently-owned brokerage house, still lists YBM director Robert Owen Mitchell as one of its vice presidents. Mitchell, whose securities firm was part of the underwriting syndicate that floated YBM's CDN $52.8 million financing last November, took on added duty this spring as one of the unidentified members of an "independent committee" appointed by YBM to review serious concerns raised by auditors Deloitte & Touche in March and April 1998.
A previous review of YBM's affairs by Deloitte & Touche, in 1997, had highlighted those public misrepresentations of sales data, and other questionable elements of the company's financial affairs, that had added to my sense of alarm and led to my first writing about YBM Magnex.
YBM's final prospectus dated November 17 1997 was certified as representing "full, true and plain disclosure" by company principals Jacob Bogatin, Daniel Gatti, Harry Antes and David Peterson alongside brokerage principals Peter Jones (First Marathon), Eugene McBurney (Griffiths McBurney & Partners), Brian McChesney (ScotiaMcLeod), Mark Polubiec (Canaccord Capital) and Christopher Blackwell (Gordon Capital). The prospectus (to qualify the sale of $52.8 million in shares and the conversion of $48 million in debentures) contained these notes:
"In order to address the special risks inherent in carrying on business in Hungary in particular and Eastern Europe in general, YBM:
(a) has established improved cash controls at its Hungarian facilities;
(b) has developed more detailed end user and distributor approval criteria;
(c) is in the process of establishing a more accurate database respecting its distributors and end users;
(d) is in the process of implementing new management information systems;
(e) is in the process of improving an centralizing controls over all of its international accounting activities at its Newtown, Pennsylvania head office.
The intent of the foregoing initiatives is to ensure that despite the fact that YBM carries on a substantial portion of its activities in Eastern Europe, its internal controls and financial reporting standards will be in accordance with those otherwise generally applicable to Canadian public companies."
Should this not have been reassurance enough, the YBM final prospectus also stated: "Management believes that the various steps taken to improve the Corporation's controls, monitoring, reporting and other information systems will ensure that its financial information is and will continue to be accurate and complete."
Almost seven months, and CDN $100 million, after publishing these reassurances - and following a major raid of YBM's Newtown, Pa. Headquarters coordinated by the U.S. Attorney's Organized Crime Strike Force, the OSC's public disclosure that YBM had failed to tell investors that its latest audit had been suspended by Deloitte & Touche, and other troubling revelations -- the company issued an "entirely qualified' statement saying that an "independent committee" (on which, according to news reports, First Marathon's Mitchell sat) recommended "documentation of contracts and other business documents be upgraded as close as possible to North American standards." As well, among other measures, the unsung Mitchell trio recommends YBM "institute heightened oversight of its Hungary-based operations."
YBM's summary report of June 8 1998 appears to represent another classic example of oblique public disclosure (in regard to unidentified "significant breaches in corporate policy" by unnamed company officers, of YBM's "apparent market share" etc.). It, however, seemingly unavoidably, suggests that the company's internal controls and information reporting is not of an acceptable standard. The company itself now says a recently completed investigation of unidentified scope found that "adequate documentation of customers and suppliers did not exist" and that "substantial transactions" did not receive required Board of Directors approval. (Like much of the material content of this 1988 release, YBM fails to provide detail sufficient to enable a member of the public to better assess the nature of these transactions and their full implications.)
Back in November 1997, YBM executives Jacob Bogatin and Harry Antes issued a statement to shareholders: "In conclusion, our Company is one that has experienced significant growth in a relatively short period of time and one that has operated with a tremendous amount of entrepreunuriel (sic) spirit. As such it is not unreasonable to assume that we will face challenges from time to time. However, we have and always will view any challenge not as impediments, but as opportunities."
Trading in YBM shares remains suspended by the Toronto Stock Exchange (the initial halt occurring on May 13 1998 - 23 minutes after the raid of YBM offices by U.S. federal agents began in Pennsylvania). As a consequence, it's not possible to determine how investors - many of whom are represented by their mutual and pension fund managers - may view yet another opportunity being welcomed by YBM management to explain that the company's documentation, reporting etc. failings will be fixed and that its business has integrity.
But, in April 1998, when I returned to my YBM due diligence investigative work, the company's stock was still trading and the company's insiders and backers were anxious about questions being raised by myself and others in the financial community.
YBM vice-president Jim Held had already made it clear to Canada Stockwatch "that there would be nothing for us (YBM) to gain by providing Stockwatch with more information". With his public company refusing to provide the news service with any materials - such as those it was passing out to mutual fund managers, brokerage analysts and other key supporters - I posted a message to internet financial newsgroups and chat groups in mid-April: "Looking for copies of YBM promo bumpf, brokerage touts etc. If anyone has copies of YBM promo materials (in any format) and any brokerage analyst recommendation reports (or any other materials used to pitch YBM stock) that they no longer need or can spare a copy it would be greatly appreciated. If you do, please contact my e-mail address: howenow@imagen.net "
Curiously, YBM representatives did not contact me directly at my address which was posted and available to anyone in the world with internet access. Instead, company president Jacob Bogatin approached Stockwatch. Unlike his initial call, in which he accused Stockwatch of "sleazy" and "unethical" activities, this approach by Bogatin was more in line with his first conversation with editor/publisher John Woods - an expression of frustration and annoyance. Bogatin once again told Wolds that Jim Held would provide anything that was helpful in understanding his company. He felt it was wrong that I could post items on an internet chat group (at the Silicon Investor site) that he felt, in some proprietary context, was YBM's discussion group.
On April 29 I wrote to Jim Held and the message was acknowledged as received by YBM through its corporate web-site. I told YBM's ex-CFO-now-IR-spokesman:
"My name is Adrian du Plessis. I am a financial researcher based in Canada. Recently I have been collecting materials on your company through on-line sources.
John Woods, the editor/publisher of Canada Stockwatch (an on-line and hard copy trade publication and news service), informs me that Jacob Bogatin contacted him in recent days and assured him that you would provide copies of any and all promotional, research etc. material that your public company has available.
I understand that you previously told a Stockwatch employee that you would provide no such materials. However, the call from Mr. Bogatin to Mr. Woods, followed your call and was insistent that YBM (through you) would be providing this information.
Accordingly, I am taking this opportunity to follow up on Mr. Bogatin's promise and make the appropriate arrangement for the delivery of these materials."
I provided Held with an email address to contact myself and another address for John Woods at Stockwatch - leaving him the choice of dealing with whomever he preferred. Later that same day I received an email response from someone at YBM who was using the internet address Eyull@aol.com . "Eyull" asked me for a mailing address which I promptly supplied. (Seven weeks later, these communications have yet to result in a single page being received by myself or Canada Stockwatch.)
YBM may have been slow, or failed to cooperate, in providing information to interested parties from whom it saw "nothing to gain", but, at least, it was quick to contact those parties that questioned its affairs.
I learned that an employee of a brokerage firm in Vancouver had also been researching YBM Magnex. They'd concluded that the company's fundamentals did not add up - raising further doubts about the firm's purported claims of dominance in sectors of the permanent magnet industry and its vaunted sales and profits figures. As part of their due diligence process, this Howe Streeter had sent out questions to various members of the magnet industry. Almost comically, a query had been forwarded to one of the U.S. magnet-makers that had recently been acquired by YBM Magnex. Brass at the public company, YBM Magnex International, were not amused, however, and aggressively complained to the Vancouver brokerage.
In late April 1998 an unidentified male telephoned my Internet Service Provider. The caller's accent was so heavy that, at first, the ISP representative couldn't decipher the words being voiced in an accusatory tone. It then became understood that the annoyed party was demanding to know how to locate me. (If they simply wanted to contact me, my email address has been public for years.) When such information was not forthcoming, the caller made comments to the effect that the ISP would be responsible for what I was doing.
By this time I had learned about YBM's Russian mafia origins and links. I knew from the file of data amassed on the company that this had the potential of being the most serious - as well as the most bizarre - case I'd investigated in my entire career. I was warned about the dangers of proceeding by: a Russian who'd been assisting me with translations; a senior Canadian journalist and editor; American and Canadian stockbrokers; and several other professional and personal contacts. Even John Woods at Stockwatch and my own family - for the first time ever - did not think it would be safe to dig deeper.
The people behind those companies which formed YBM Magnex International - Arigon Co., Arbat International, and Magnex Rt - were not beer-bellied good-ol'-boys from Calgary. Over the years investigating junior stocks in Canada I've encountered bikers, cocaine traffickers, a billionaire arms-dealer, a deposed dictator, South African mercenaries, ex-convicts of many stripes, and other "heavy" types mingled with the more presentable faces of such wayward entrepreneurs as money launderers, corrupt fund managers and bribed stock brokers.
This deal, however, is unique. Semion Mogilevich and Sergei Mikhailov, two godfathers (or "vor v zakone") of the Russian mafia (or "mafiya"), have long been linked by international news and police intelligence reports to those entities that spawned YBM Magnex. Life in the former Soviet Union has been likened to "Chicago in the thirties" - and the region has been tagged "The Wild East."
Mogilevich and Mikhailov and their associates are akin to the Lucky Lucianos and Bugsy Siegels of this new organized crime order. But, unlike such mafia operations as were found in Chicago, New York, Las Vegas and other U.S. mob territories in decades past, the groups wielding corrupt power in Russia and Eastern Europe today benefit from well-established, sophisticated, financial networks. La Cosa Nostra's Meyer Lansky had to pioneer a money-laundering trail. Today's gangsters are able to travel comfortably over well-worn routes of commerce.
After confirming YBM's mafiya links I contacted the police. As well, I began to prepare this series of articles as a road-map for other investigators, and the public at large, should any wish to explore it some day.
End of Part 7
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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