YBM Magnex: Part 11 - The case of the collective unconscious (first half of article)
YBM Magnex: Securities Industry Due Diligence in a post-Bre-X Market - Part 11 - The case of the collective unconscious
Word that representatives of Deloitte & Touche, L.L.P., former auditors for YBM Magnex International, are unwilling to appear at an upcoming Ontario Securities Commission hearing means that the field of public vision offered by such a process, already narrow, has shrunk some more.
The Financial Post's Sandra Rubin has revealed in two recent articles that Deloitte & Touche is concerned that its testimony before the OSC might be used in lawsuits by investors holding devalued YBM shares -- halted since May 13 1998. Consequently, the hearing, adjourned several times already, is now scheduled to commence on August 19 and run for only three days - well short of the originally anticipated two week session.
Counsel for YBM, Joe Groia, a former senior OSC official, told the Post that "it would be extremely difficult for either side to prove its case without Deloitte." Indeed, while there remain a myriad of unanswered questions about the company's affairs, the notice of hearing originally issued by the OSC on May 13 restricts itself to those issues related to D&T's 1997 year-end audit of YBM.
On March 19 1998, YBM Vice-President Jim Held told the news-service Canada Stockwatch that Deloitte & Touche was "finished with the 1997 audit and I don't know what really more to say about it." Despite Held's assurance that YBM's "big six public accounting firm" had "finished" its 1997 review, there was really much more to say - and days later, on March 23, Deloitte & Touche raised its serious concerns before YBM's audit committee.
Why did it take YBM until mid-May to disclose to the public that the 1997 year end audit had been suspended? Why did YBM release its first quarter 1998 results to investors during this period of audit suspension -- even though Deloitte and Touche was concerned that "one or more illegal acts may have occurred" which may have a material impact upon such financial statements? What did YBM management tell various fund managers and securities analysts privately (in conference calls and meetings) about the Deloitte & Touche review? These are among the questions that might be answered in detail at a regulatory hearing limited to audit-related issues.
Deloitte's re-audit of YBM's 1996 year-end financials, prior to the OSC's acceptance of a prospectus that cleared the way for the issuance of more than CDN $100 million in shares, raised enough red flags to alarm a market-wise observer. (It was this re-audit that prompted my first YBM article in Canada Stockwatch, entitled "Unusual corporate affairs leave YBM Magnex analysts and investors happy.") But evidence that the company had been misleading in its public disclosure about sales growth in North America, and that the company was engaged in questionable oil dealings did not, apparently, trouble those professionals in position to direct other peoples' money into YBM stock. (Nor did these players, some of whom publicly praised the quality of YBM's management without providing any basis for their viewpoint, express any discomfort with the dubious Canadian public company track record of long-time directors Michael Schmidt and Kenneth Davies.)
Following publicity of the U.S. federal government's "Organized Crime Strike Force" raid of YBM headquarters and its criminal probe into suspected money laundering, securities fraud and customs and immigration violations, however, numerous Canadian fund managers and securities analysts have broken with tradition. Instead of climbing on each others backs to shout, "Give me a Y, give me B, give me an M, give me a Y-B-M!!!", members of the Bay Street cheerleading squad can now rarely be heard talking about YBM for the record.
A few have put down their pom-poms to adopt more dignified poses. ScotiaMcleod "special situations" analyst, Rob McConnachie, (formerly with Canaccord Capital and Marleau Lemire Securities), has been admiringly referred to in print as a securities "super sleuth" - "sort of like a Columbo." The Columbo character, played so well by actor Peter Falk, always managed to help people and solve the mystery - discerning the truth after following an often confounding trail of clues. Yet McConnachie's reports saluting YBM Magnex and an earlier, scandal-plagued, company, Cycomm International, fail to note tell-tale signs of trouble with the background of these companies and their management. These cases of curiously lacking due diligence make it look more like Hollywood script-writers mixed up Peter Falk's lines with those of another fictional role model - like, say, Alicia Silverstone's character in "Clueless." Michael Soni (michael_soni@scotia-mcleod.com) is on a team of money managers and makes stock recommendations through an internet site known as TheStreet.com (@ thestreet.com ). Soni and his partner, Greg Guichon, had pitched YBM to investors on-line earlier this year (but without using the megaphone tactics favoured by some of their peers). After the U.S. feds' raid they remarked of their YBM pick: "It looks like we got sandbagged on it."
The reportedly "wily" and "savvy" Vancouver-based money manager Wayne Deans (an enthusiastic booster of Bre-X Minerals when it was trading over $170 per share), has been less direct, or consistent, with post-raid self-appraisal. Deans, of Deans Knight Capital and portfolio manager with the Navigator Value Investment Retirement Fund and other mutuals that bought into YBM stock based upon somebody's definition of due diligence, appears to have so often, or expediently, changed his story on YBM matters, it's not clear what he may really believe. If Rob McConnachie's output finds him compared to television or movie actors, Deans' method may be better likened to that of a politician who's stumping with his wet finger in the wind.
Still other YBM fans (all-stars like Steve Misener from BPI and Allan Jacobs of Sceptre funds, alongside analysts at Griffiths McBurney & Partners and elsewhere) have become quieter than a razorback clam (known in Vancouver marker circles, unscientifically, as Harry Mollusc little rascalus). Peter Sklar, the Toronto brokerage analyst who was stoutly recommending YBM stock until hours before dozens of U.S. government agents swarmed through the company's offices, has now placed himself under a dome of silence at Nesbitt Burns. (Another still-employed-but-not-talking Nesbitt analyst, Egizio Bianchini, so impressed the principals of the TSE's biggest 1997 gold fraud, Bre-X Minerals, that they proposed to name a non-existent ore zone on their Indonesian property after him.) Former First Marathon Securities YBM-hypester, Kaan Oran, is now more quietly working for Vancouver money-managers Connor, Clark & Lunn Investment Mgmt. - who saw upwards of CDN $48 million of their clients' money flow into YBM Magnex securities last year.
(Wayne Deans and representatives of Connor, Clark and Lunn are among those identified as "Mentors" to the members of the University of British Columbia's Portfolio Management Society. Someone is guiding the students into interesting stock-picking territory - the UBCPMS fund found its way to YBM Magnex.)
Those questions surrounding YBM Magnex that could most acutely, and potentially, embarrassingly, reveal the level of due diligence and extent of knowledge of Canadian stock brokers, analysts, fund managers and even securities regulators will not receive a full airing in any hearing that remains narrowly focussed on YBM's audit, and related disclosure, problems.
In a pair of articles published in June 1998, journalist Ted Alden revealed in The Financial Times of London that world experts in rare earth materials applications say there is no known commercial use for an oil desulphurisation process which YBM claims generated sales of more than US $20 million in fiscal 1996.
How almost one-quarter of the public, former TSE-300-listed, company's revenues could be accounted for by a phantom process is one question that may not be answered publicly outside of a courtroom. Deloitte & Touche, (which audited the 1996 statements reporting the million$ in oil-related revenues), Ontario securities officials (who were warned by industry experts before approving YBM's 1997 prospectus that the oil desulphurisation claims could not be substantiated), and YBM Magnex (the primary publisher of the questionable claims and sales figures) would each be obvious parties to examine with respect to this significant issue.
The Financial Times' Alden has reported that the experts who dispute YBM's multimillion dollar claims to be desulphurising Ukrainian oil with a neodymium powder byproduct include: "Fred Jones, a 35-year consultant to the permanent magnet industry; John Creighton, development specialist with Grace-Davidson, a large commercial supplier of rare earth materials to the oil industry; Tom Halford, director of process and technology for Petro-Canada's refining division; John Giesman, gas project manager for Universal Oil Products, the world's largest seller of licensed technology to oil refineries; and Barry Kilborn, formerly of the rare earth producer Molycorp, who is regarded as the world's foremost expert on uses for rare earth materials."
As well, the Times reported: "A comprehensive literature search by the centre for rare earths and magnetics at Iowa State University, the major clearing house for information on rare earth applications, turned up no reference to the procedure. YBM has not provided evidence to substantiate its claims."
Of course, Ontario regulators have placed themselves in a very awkward position to openly pursue such a potentially devastating aspect of YBM's public disclosure. It's already been publicly disclosed in the Financial Times that Canadian market officials knew YBM's oil-related claims contrasted with the scientific record - and, still, they went ahead and approved YBM's 1997 prospectus financing (for a CDN $52.8 million share offering plus a CDN $48 million debenture conversion).
It's possible that the regulators themselves could be held legally responsible for failures in connection with their review of YBM Magnex. The Financial Post has reported that Ontario regulators knew about the investigation by U.K authorities into the Russian organized crime links to YBM Magnex - before they allowed the company's shares to be listed on the Toronto Stock Exchange. The Post's Sandra Rubin has quoted statements of Michael Walsh, a Vice-President of First Marathon Securities, that suggest his firm and other Bay Street brokerages were also aware of the British police investigation that resulted in Russian mafia godfather Semion Mogilevich being barred from the U.K. and his organization, and all bank accounts under U.K. jurisdiction, being shut down in mid-1995.
At the same time that Mogilevich, AKA "Uncle Seva", and his associates were being run out of England, a central vehicle for their operations, Arigon Co. of the Channel Islands, was in the process of gaining a public listing in Canada on the Alberta Stock Exchange. A series of inter-locking corporate moves resulted in Arigon and its subsidiaries, Arbat International of Moscow, and Magnex Rt of Budapest, Hungary, being absorbed, together with a newly created private U.S. company, YBM Magnex of Pennsylvania, into an ASE "blind pool", Pratecs Technologies. Like so many parts of a matrioshka, (the Russian dolls that stack neatly one inside each other), this multi-layering effect encased these core entities within a shell that was then renamed YBM Magnex International.
The public record indicates that regulatory officials in, both, Alberta and Ontario knew of police investigative work and international intelligence reports linking the Russian mafiya to Arigon/Magnex/Arbat/YBM prior to them allowing the company to gain a public listing on stock exchanges in their respective provinces.
When, in May 1998, Special Agents for the FBI and U.S. Customs Service obtained a warrant to search YBM's Newtown, Pa. headquarters, the items they were authorized by the courts to seize included those records and documents relating to YBM Magnex International, Magnex Rt, United Trade Limited (YBM's Cayman Islands subsidiary - under Mogilevich's Arigon co-directors Igor Fisherman and Sandorne Bodonyi -- to which the assets of Arigon had been transferred before Arigon was dissolved voluntarily on April 10 1997), YBM Magnetics, Inc., YBM Technologies, Crumax Magnetics, Arbat International (sold to an unidentified purchaser by YBM in the first quarter of 1996) and Arigon Co. from January 1993 to the present.
By at least mid-1995, (the period during which Pratecs/YBM issued press releases that failed to provide full, true and plain disclosure of the U.K. investigation into Arigon, Mogilevich et al), Canadian authorities were in possession of information that provided a reasonable basis for them to consider how the public interest would be served if Arigon was allowed to be floated here. And beginning in 1995, public record documents -- including incorporation files, court records, regulatory filings, and news reports - have been available that would enable any stock broker, securities analyst or fund manager to piece together the history of YBM Magnex and its notorious connections.
With a particularity and clarity distinct to the Bre-X affair, the YBM scandal also points to the insidious nature of Canada's stock markets today.
Bre-X was a hoax - a classic, and unoriginal, gold mining "salt job" that made it into the stratosphere of TSE stocks fuelled by Bay Street's promotional network of brokers, analysts and fund managers. It may be inexcusable that those in the profession, and profiting from Bre-X, neglected or failed to properly inform investors of Bre-X founder David Walsh's history of public misrepresentations and failed ventures, or of regulatory violations by his close associates, or of the lack-lustre drilling history of Bre-X's Busang property, or of the company's unusual practices of not saving drill core etc. etc. But, Bre-X boosters could argue, even a disreputable, or controversial, penny stock promoter like Robert Friedland succeeded in locating a "world class" major metals deposit. (Though, as Inco is now demonstrating with the Voisey's Bay nickel deposit -- bought at top dollar from Friedland's Diamond Fields Resources -- there can be a big difference between an ore body and a mine.) The gold was there (at least in the eyes of Nesbitt's Egizio Bianchini and other Bay Street pros), and, hey, why couldn't Walsh and his circle of rounders transcend their pasts as nickel-and-dime losers and cheats and beat the odds to discover the biggest gold deposit in the history of mankind?
And, as it turns out, the wizards now claim to have been fooled by the criminal genius of the Bre-X fraudsters. (If Columbo had to face such brilliance in one of his tv episodes, it'd have been over before the first commercial break.) Anyway, don't'cha know, it was that geologist who fell out of a helicopter and his Filipino pals who plotted it all out in secret. Yeah, that was it. Who could know?
History means nothing.
The masters of the Bay Street universe chose to collectively ignore the past and pretended to repeal the stock market's natural laws of gravity, suspending common sense along with Bre-X's ever-inflating stock price and boasts. Their position may not be supportable under the weight of scrutiny, but some caught up in the Bre-X scandal, the smoke-and-mirrors product of a beer-bellied stock promoter and his cronies, claim that it was an impenetrable, "inside job," that duped them.
There appears no such handy rationale that would easily explain similar financial industry behaviour in the YBM scenario. No one has suggested that YBM is a complete hoax a la Bre-X, but nor can industry professionals snared in this latest TSE scandal successfully argue that critical issues which mire the company in controversy today were unknowable. On the track of YBM-related matters the public record was littered with yellow and red flags.
If one chooses to believe international police intelligence - in place of what passes for intelligence in the brokerage community - YBM, a company dealing in magnets, bicycles, oil and more, is a manifestation of organized crime.
By 1995, British investigators had concluded that Arigon director and YBM vendor/shareholder, Semion Mogilevich, "is one of the world's top criminals." Mogilevich's associate and sometimes partner, Russian mob boss Sergei Mikhailov, AKA "Mikhas", was, effectively, put on ice the following year by Swiss police. Mikhas, a leader of the Solntsevskaya, Russia's most notorious mafiya group, (and also linked to Arigon by international police and news reports), is currently in custody on charges of being a member of a criminal organization and money laundering.
(Mikhas was collared at the Geneva-Cointrin airport on October 15 1996. Shortly afterward, Ogonek, a major Russian weekly news magazine, published a lengthy feature on the mafiya and Mikhailov, noting: "The current arrest of Mikhailov in Geneva after two years of quiet and measured existence in a little Swiss village, in the opinion of some officials of the Russian Ministry of Internal Affairs, means only one thing: the special services of the whole world have decided that Russia cannot cope with its own organized crime, and have begun to pick off its leaders beyond Russia's borders.")
(NB see second half of this article for completion of this series...) |
