Part 9 - YBM Magnex takes Arigon public
YBM Magnex: Securities Industry Due Diligence in a post-Bre-X Market - Part 9 - YBM Magnex takes Arigon public
"Legal counsel for Arigon has confirmed that the alleged charges are unsubstantiated and the origins of the matter are difficult to determine." With its press release dated July 19 1995, YBM Magnex International, Inc., (then called Pratecs Technologies, Inc.), dropped the lid on a Pandora's box of issues that today ensnare the company in controversy.
Two obliquely worded announcements issued by the Alberta Stock Exchange-listed company in mid-1995 were supposed to provide the public with "full, true and plain" disclosure of those facts and circumstances that had precipitated a more than month-long share trading halt. The ASE shell was then in the process of acquiring the Arigon group of companies, through the takeover of a private entity, YBM Magnex, Inc.
(In February 1994, YBM Magnex was incorporated in Hatboro, Pennsylvania. In May 1994, the stockholders of YBM and Arigon executed a share exchange agreement for the merger of the two private vehicles. On December 27 1994, the less-than-year-old YBM Magnex merged with the Arigon group - comprised of Arigon, registered in the Channel Islands, Arbat International of Moscow, Russia and Magnex Rt based in Budapest, Hungary. Plans for the public company to gain an interest in the private YBM had been in varying stages of development since before Pratecs Technologies first began public trading in Canada as a "blind pool" on August 3 1994.)
To a market-wise reader, the public vehicle's disclosure spelled trouble - but the actual words used by YBM/Pratecs in mid-1995 failed to disclose the seriousness or nature of any allegations made in London, the identity of the party or parties making any allegations that remained unspecified by the company, or even the names of any individuals about whom unidentified parties were making unspecified allegations of an unknown nature or scope.
Ignorant of such hard details, Pratecs/YBM investors, instead, were provided with the company's own assurances, and the comforting knowledge that unnamed counsel for Arigon had "confirmed" the charges were "unsubstantiated" and, further, that "the origins of the matter are difficult to determine". At the time, two principals of the public company, Pratecs/YBM, Jacob Bogatin and Robert Ventresca, were also directors of the private entity, YBM, which was, in effect, the Arigon group. YBM's releases of June 22 and July 19 1995 each carried on their bottom a legal disclaimer (of the brand pioneered by the Vancouver Stock Exchange) that read: "The Alberta Stock Exchange neither approves nor disapproves of the information contained in this news release."
Welcome to the dangerously arcane world of Canadian penny stock practices.
In mid-1998, the company offered a more global audience a demonstration of its approach toward disclosure. YBM, then listed solely on the Toronto Exchange, failed to inform the public that its year end 1997 financial audit had been suspended by Deloitte & Touche after the auditor had noted it was "extremely concerned" about certain of the company's contracts, associates and affairs. Among other concerns, the accounting firm indicated that "one or more illegal acts may have occurred which may have a material impact" on the company's latest financials (including those first quarter 1998 results released by YBM even after its management had been made aware of audit issues). When the Ontario Securities Commission learned of the audit suspension and YBM's disclosure failures it stopped all trading in the company's shares -- issuing a Temporary Cease Trade Order , or TCTO, on May 13 1998.
The following day, YBM reported that there was a "lack of any factual basis underlying the allegations made by Deloitte & Touche" and that a committee of "independent" company directors had been "sensitive to the potential for misleading the public marketplace as a result of the premature disclosure of these allegations." During this period of non-disclosure, or non-premature-disclosure, while the company's share price began to crumble on the TSE, at least one YBM director, Kenneth Davies, reaped a tremendous profit by selling his shares into the public marketplace (as has been recently revealed by The Globe and Mail newspaper). Deloitte & Touche have since resigned as auditors for YBM and a hearing before the OSC into the deep, but narrow, territory of YBM's audit-related disclosure is scheduled for August 10 1998.
On the same day that the OSC stopped trading in the company's shares, YBM's Pennsylvania headquarters had been raided by dozens of U.S. federal agents executing a search warrant as part of an ongoing organized crime probe into suspected money laundering, securities fraud and customs and immigration violations. After officials with the FBI, IRS, Naturalization and Immigration, U.S. Customs and U.S. State Departments had carted away hundreds of boxes of evidence, YBM noted in its May 14 1998 release that "the Company is unable to ascertain the ambit of the investigation arising from this search or its impact, if any, upon the Company's ongoing business and affairs."
YBM's Guy Scala told The New York Times: "I wish I had a crystal ball so I could understand what they're all looking for and where this is going." Scala, Vice-President of Sales and Marketing, was the third member of management in a matter of days to appear as the company's spokesperson. YBM President and Chief Executive Officer, Jacob Bogatin, and VP of Business Development and Investor Relations, Jim Held, both stopped making public statements as the scandal blackened amid widening revelations of the suspended audit, the U.S. government raid and YBM's Russian organized crime (ROC) links.
(The title of "mafiya" was first popularized by journalist Stephen Handelman - author of the 1995 Yale University Press published book, "Comrade Criminal" -- to help identify the unique characteristics of the ROC forces or mob. The Russian mafiya is less hierarchal in structure than its Italian mafia counterpart, La Cosa Nostra, and exhibits a flexible interaction between the many individual criminal gangs that wield power and control in the former Soviet Union -- or FSU, Russia, neighbouring countries in Eastern Europe, Israel and elsewhere. Some commentators prefer the more traditional term organizatsiya to ROC or the more freshly minted label of mafiya. It's clear that parties in the west as well as the east are still grappling to establish a consistent and distinct means of describing the elements of this increasingly global and dangerous organized crime phenomenon. Regardless of coverage in North American publications, some of it helpful and some of it sensational and inaccurate, that more extensively grafts well-known Italian mafia terminology onto the Russian criminal environment, the leaders of the organizatsiya or Russian mafiya are not known as "Dons." The original godfathers of Russian crime are referred to as the vory v zakone. This translates as "criminals within the law" or "thieves in the law" though some academics argue that "thieves professing the code" is a phrase better suited to underscore the history and traditions of the vory in the changing landscape of the former Soviet underworld. Whatever one chooses to call them, it is accepted by investigators and academics alike that the godfathers, or vory v zakone, act more as organizers for crime rather than as direct participants -- making it difficult to prosecute them under existing legislation in Russia and the FSU. In countries such as Switzerland - where Sergei Mikhailov, AKA "Mikhas", a senior Russian mobster linked to Arigon, has been in "preventive" custody since October 15 1996 - it is an offense to be a member of a criminal organization. But in the regions that have nurtured the explosive growth of the Russian mafiya, a lack of adequate legislation combined with massive political and judicial corruption is said to routinely protect the leaders of organized crime from facing prosecution in connection with everything from white collar crimes to murder.)
Within a month of the company's shares being removed from TSE trading (at a last trade price of CDN $14.35 per share), and the public learning about criminal allegations - with a familiar base -- that reached from 1995 through to 1998, YBM Magnex released its own statement intended to clear itself of any criminal wrongdoing. It would have been viewed as shockingly negative disclosure only weeks earlier, but, by this date, a confession that serious problems that were not criminal in nature had been found through the company's own review processes was interpreted by some money managers as a positive sign. Still, the few remaining cheerleaders on Bay Street were now more than counter-balanced by those casting a critical eye on the company's machinations. Canada Stockwatch published a concise summary of this classically-worded YBM news: "On June 8 YBM issued an executive summary that it says is qualified in
its entirety by detailed information in a full report that it will not
release. The entirely qualified summary says an investigation of unspecified
scope confirmed significant breaches of corporate policy it does not
identify. The company says unnamed officers were involved based on the
unidentified breaches of policy and have been reprimanded in unknown fashion. YBM says, in entirely qualified words, that an investigation of unspecified
scope confirmed significant, unspecified, policy breaches by its unnamed
chief operating officer."
This sort of vague disclosure was consistent with the style in which YBM had entered the world of junior public companies in 1995 - obscuring the view of its core businesses and associates in the Arigon group of companies.
The origins of Arigon and its trail of founders, organizers and associates is not difficult to determine. Police intelligence, and news, reports from countries including Canada, the U.S., England, Russia, Czechoslovakia, Germany, Belgium, Switzerland, Hungary, Israel and Costa Rica - many of which can be simply located through searches on the internet -- provide a picture of those dark elements of the YBM Magnex story than can not be located in the promotional reports of Canadian brokerage house analysts, or the company's own public files. How much YBM's underwriters and other brokerage and mutual fund industry supporters, as well as Canada's stock market regulators, knew of these troubling details over the years 1995 - 1998 will likely not be examined under a public light until any expected shareholder class action suits proceed. Why such information, that could impact upon a reasonable person's investment decisions, was not made public by any of these parties is still, therefore, open to question.
On December 9 1994, the United Kingdom's National Criminal Intelligence Service (NCIS) delivered to the Money Laundering Investigation Team (MLIT) of England's South East Regional Crime Squad (SERCS) a package of information for investigation under the code name, Operation Sword. According to a summary report prepared on November 10 1995: "Operation Sword concerned the activities in the United Kingdom of a Russian Organised Crime Group headed by one Semion Yudkovich Moguilevitch, Born 30.06.46."
(As with numerous names translated from the Russian language, Mogilevich appears spelled various ways in English - principally as Mogilevich, Mogilevitch or Moguilevitch. All three spellings can be found in reports, articles and incorporation documents pertaining to the Arigon group of companies. I have adopted, in my own writings, the most commonly represented version - namely Semion Mogilevich.)
Mogilevich (nicknamed "Seva" or "Uncle Seva") was identified by U.K. police as "one of the world's top criminals who has a personal wealth of $100 million. He is a target of Law Enforcement Agencies and Security Services in several countries and as a result of the effect of his financial impact on the City of London he clearly falls in the category of an NCIS core criminal."
An operational order containing information about a raid to be carried out on May 16 1995 noted that Arigon Company Ltd. was formed in the tax and privacy haven of the Channel Islands in 1990. (Documents obtained from the Court of Alderney, Channel lslands, record Arigon being incorporated on May 24 1990. Mogilevich is identified by these official filings as a director of Arigon in 1995. Several Mogilevich associates also show up as Arigon directors in the Alderney records.) According to the 1995 British police report: "The directors of this company (Arigon) are connected to Russian Organised Crime and indeed the main individual Semion Mogilevich, is considered to be the leader of R.O.C. in Hungary and the Czech Republic."
An FBI report issued in May 1995, as Pratecs was proceeding with its takeover of the Arigon group, stated: "Semion Mogilevich runs an extensive prostitution operation out of the Black and White Nightclubs in Prague and Budapest. Foreign law enforcement agencies have documented Mogilevitch's prostitution operation as the centrepiece of his operations in Europe." The FBI report identified Arigon as a central element of the Mogilevich Organization.
Between December 1994, when England's SERCS Money Laundering Investigation Team began its probe under Operation Sword, and May 1995 "officers from the MLIT were required to conduct extensive enquiries in a number of countries. This was in order to properly develop the investigation and these enquiries identified the world wide structure of the Moguilevitch and other Russian Organised Crime Groups." The MLIT reported that: "Intelligence became available from a number of Law Enforcement Agencies in Eastern Europe, the United States of America and Canada which indicated that the Moguilevitch Organisation was involved in large scale extortion, prostitution, arms dealing and drugs trafficking."
British authorities investigating Arigon's dealings disclosed in mid-1995 that "in the past three years some US $80 million has passed through the account of Arigon at the Royal Bank of Scotland in London." Investigators noted that: "Detailed analysis of the bank records for the past year show approximately US $30 million moving through the account. Intelligence sources indicate that a large proportion of this money is the proceeds of the activities of Russian Organised Crime in Eastern Europe, specifically the Mogilevitch organisation and an organisation called Solntsevskaya whose leaders are based in Vienna, Austria."
The Solntsevskaya is recognized as the largest criminal organization in Russia (comprising an estimated 300 individual gangs). This mafiya group is also referred to as the Sons of Solntsevo (named after the Moscow suburb from which it emerged). The most notorious leaders of the Solntsevskaya are the two Averin brothers, the elder Victor Sergeevich (nicknamed "Avera") and younger Aleksandr Sergeevich ("Sasha-Avera"), alongside Sergei Mikhailov (also spelled Mihailov and known as "Mikhas"). The Averins and Mikhailov (until his arrest at Switzerland's Geneva-Cointrin airport in 1996) operated out of home bases in Hungary and Austria. Prior to his arrest, Mikhailov was considered the godfather of the Solntsevskaya. Two days after being detained by Swiss police, "Mikhas" was charged with several violations of Swiss law including being a member of a criminal organization and money laundering. He is currently in custody pending trial on these and other charges.
The FBI reported in 1995 that: "The use of false documentation is a common tactic used by Eurasian OC organizations to facilitate travel or residency in furtherance of criminal activities. Many of Semion Mogilevich's lieutenants and Mogilevich himself hold Israeli citizenship and carry Israeli passports. The source of the Israeli passports is Shabtai Kalmanovich. Kalmanovich has provided Israeli passports in short order for members of the Solntsevskaya Organization and the Mogilevich Organization. Based on the ease with which Kalmanovich apparently obtains Israeli documentation for Solntsevskaya and Mogilevich associates, Kalmanovich may have connections in the Israeli government."
The mention of Shabtai Kalmanovich, convicted in Israel in 1988 of being a KGB spy, serves to highlight the existence of a cultural and political milieu that facilitates the expansion of Russian organized crime and provides mafiya leaders with opportunities to exercise greater influence in their regions of economic power. Kalmanovich, who had been something of a double-agent while working for the Mossad (Israel's intelligence agency), was pardoned by the Israeli government and escorted back to Moscow in 1993 by his friend and business partner, Iosof Kobzon.
Kobzon, a biznes man and baritone, last September ended a 40 year career as one of the most popular singers in Russian history. Frank Sinatra, the great American crooner who passed away in May 1998, was known for his Las Vegas ties and being pictured with American mafioso including Sam Giancana. But Kobzon, often referred to as "The Russian Frank Sinatra", appears to maintain closer mafiya ties than did "Ol' Blue Eyes." In 1995 Kobzon was denied an entry visa to the United States. That same year he was delayed entering Israel through Ben-Gurion Airport after that country's Interior Ministry listed him as a Russian mafia member. Kobzon was ultimately allowed into Tel Aviv. In his farewell concert tour in 1997, Kobzon played to appreciative audiences throughout the FSU but was refused entry without explanation by a former republic, Uzbekistan.
Kobzon is an acknowledged friend of Vyacheslav Kirillovich Ivankov (known as "Yaponchik" or "The Little Jap"). Ivankov, like the Averin brothers, is a close associate of mafiya leader Semion Mogilevich. An old-style vory v zakone who spent many years in prison building his own organization, "Yaponchik" obtained an early release in 1991 and travelled to New York where he told the press: "I have been authorized to bring order here in ‚migr‚ circles." Ivankov, known as the "father of Soviet extortion", carried on with his specialized biznes interests in America which resulted in his being arrested in 1996 and subsequently convicted in connection with a US $5.9 million extortion scheme. It was reported that, at the time of his arrest, FBI investigators found five passports at Ivankov's Brighton Beach, Brooklyn apartment: three with Russian names, one identifying him as Polish and another saying he was a U.K. citizen. Noted one paper: "FBI agents also found another common tool of Russian criminals - a set of papers for incorporating a business."
Another friend of Iosof Kobzon is Yuri Luzhkov, the powerful and controversial mayor of Moscow (and a possible contender for the job of Russian president after Boris Yeltsin). On September 14 1997, Kobzon himself became a political figure as he was elected, in a landslide, for a State Duma seat in the Agin-Buryat Autonomous Okrug (the Duma being Russia's Lower House of Parliament.)
There has been public criticism - by commentators in Russia as well as the west -- that one of the perks of such a position is parliamentary immunity from prosecution. In the recent past, corrupt individuals have run for, or been elected to, parliament apparently to escape pursuit of their criminal activities.
"Russia has become the criminal capital of the world. In Russia today, the organized mafia and the government are one and the same thing. They're two hands of the same ruling elite." These words uttered in May 1996 by Yuri Maltsev, a former senior advisor to Mikhail Gorbachev, provide additional context in which to view Russian organized crime and to consider the activities of such mobsters as Semion Mogilevich, Sergei Mikhailov and those others linked by position or money to Arigon.
End of Part 9
For more on this story, look into The Magnex Files @ imagen.net ; for other stock market news and analysis, visit the Investigative Research & Analysis web-site at imagen.net
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