FT on magnet powder byproduct misreps etc.
The Financial Times of London
THURSDAY DECEMBER 17 1998
Americas
YBM: Company attracts scandal over money-laundering suspicions
Regulators had doubts about YBM but cleared its C$53m stock offering, reports Edward Alden. Now it is in receivership
Canadian securities regulators have fretted over the past eight months that YBM Magnex International, an obscure magnet company that became a stock market darling, might turn out to be another fraud of the order of Bre-X Minerals, the infamous C$6bn (US$3.9bn) gold company that never found any gold.
Last week, their worst fears were realised. While the scale is smaller, the YBM tale has turned out to be every bit as sordid.
YBM was placed in receivership by an Alberta court, ending any prospect that investors will recover more than a fraction of the C$900m the company was supposedly worth earlier this year.
More astonishing than those losses, documents filed with the court build a compelling case that YBM, which had claimed to be one of the world's foremost manufacturers of high-performance industrial magnets, was actually engaged in massive laundering of organised crime proceeds from Russia and eastern Europe.
The documents also show that Ontario securities regulators had strong suspicions that YBM might be laundering money, and yet allowed the company to place a C$53m stock offering last year. That clean bill of health by the Ontario Securities Commission, along with enthusiastic "buy" recommendations from the brokerage houses that underwrote the offering, helped propel the company into the Toronto Stock Exchange's 300 index.
YBM's criminal counsel now says the company is certain to be indicted by a US grand jury following a three-year investigation by the US organised crime strike force of the US attorney's office.
In addition, US lawyers last week filed a class action on behalf of investors against YBM, its auditors Deloitte & Touche and its directors.
The suit alleges that YBM was engaged in "an elaborate scheme to defraud investors".
Since the company's headquarters in Pennsylvania were raided by US authorities last May, YBM has denied all allegations of money laundering and links to organised crime. But a report submitted to the court by Miller, Tate, a US forensic accounting firm, strengthens many of the darkest suspicions about YBM.
Miller, Tate was originally commissioned by YBM to defend the company before an Ontario Securities Commission hearing. Instead, the auditors compiled damning evidence against the company. "In most cases," the report says, "significant transactions involving substantial sums of money are not supported by corroborative evidence."
Money laundering involves placing the cash proceeds of crime in a legitimate institution. It is generally done through "layering", which separates the cash from its criminal origins by passing it through several financial transactions, and through integration with legitimately obtained money.
A number of YBM transactions, conducted through the company's subsidiary United Trade, have "several indicia of money laundering [which] were never adequately explained by YBM's management", the report says.
The transactions involved millions of dollars being moved among related entities with bank accounts in Lithuania, Hungary and Buffalo, New York.
On June 6 1996, for instance, US$3.2m was received by United Trade's Hungary bank account from four entities that shared one or more common addresses. The wire transfers all originated from a bank in Lithuania. Six days later, $3.2m was withdrawn from the account and sent to five other entities with accounts at Chemical Bank in Buffalo. All five recipients shared one or more addresses.
The report also says YBM could not provide verification for many of its customers, had in fact fabricated a list of US customers, and could not document the legitimacy of its core business activities.
YBM had claimed publicly, for instance, that it earned revenues of more than $20m in 1996 and $28m in 1997 from purchasing oil, refining it with magnet powder byproduct, and then reselling the oil. The Financial Times reported last June that no such commercial application exists, but the company continued to insist that the sales were genuine.
The oil sales were the subject of "particular scrutiny" by the Ontario Securities Commission, the report says. The OSC even compelled YBM to hire Deloitte & Touche to do a "high-risk" audit of the transactions last year.
Yet Deloitte apparently never obtained documentary evidence for the transactions, though it approved the company's 1996 books.
Finally, in September, the management of YBM and United Trade changed its story, admitting privately to Miller, Tate that "powder was never used in conjunction with the oil transactions carried out by United Trade". As the report notes: "This is a direct contradiction to years of public disclosure regarding YBM's oil business."
The Miller, Tate report, while mostly written in dry language, contains some chilling moments. For example, Pinkerton agents were commissioned by YBM's audit committee earlier this year to investigate the alleged connections to the Russian mafia.
When agents visited the Budapest address of Technology Distribution, another related entity, they were greeted by several guards "carrying Uzis, Berettas or revolvers". YBM's internal audit committee, nonetheless, claimed in June to have found no evidence of criminal links.
With YBM in receivership, and no possibility the stock will ever trade again, the only questions left will have to be answered in civil and criminal courts. Deloitte & Touche, the auditors, have refused to comment, and even refused to be questioned by Miller, Tate.
The OSC, which approved YBM's 1997 share offering and set Canadian investors up for a very hard fall, will only say that it continues to investigate the company.
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