Ottawa, 27 May 1998 (RFE/RL) -- Thousands of Canadian investors are anxious to find out what is happening with a Russian-controlled company, YBM Magnex International Ltd. About 40 per cent of the company's stock is held by Canadian mutual funds.
Last week, the Ontario Securities Commission - the stock market regulatory body for Canada's most industrialized province - suspended trading in shares of YBM. Soon after, the Toronto Stock Exchange removed YBM from its prestigious "TSE 300" index of stocks. The firm also trades on a stock exchange in the western Canadian province of Alberta.
The stock market actions stem from police investigations in six countries, including Canada and the United States. Police believe the company has ties to Russian organized crime groups which are involved in money laundering, prostitution, arms dealing and drug trafficking.
Ten days ago, agents from the U.S. Federal Bureau of Investigation raided the American headquarters of YBM in Newtown, Pennsylvania, on the east coast of the U.S. The raid resulted in a 25 per cent drop in the value of YBM's stock - and that prompted the Toronto Stock Exchange to halt trading in its shares. For investors, there is about 1,000-million dollars at stake.
The story is complex, involves a number of phony companies and a trail of corporate dealings that span the globe over the past several years.
Two alleged Russian mafia chiefs are involved and so is Canada's reputation as an easy place to carry out money laundering operations through the stock market or other routes because of relatively lax banking and stock market regulations.
When YBM was first listed on a Canadian stock exchange, in 1995, it was owned by a company called Arigon which was registered in the British Channel Islands. Through a reverse take-over by a shell company, Pradecs Technologies, Semion Mogalevitch - a reputed Russian mafia chief - acquired Arigon and then formed YBM, which makes industrial magnets and bicycles.
Another alleged Russian mobster, Sergei Mikhailov, is said to have ties to the YBM operations, through Arigon - and to another company acquired by YBM called Arbat International. He was arrested 18 months ago in Switzerland and faces charges for money laundering activities.
Mikhailov is said to be head of a large Russian organized crime group, Solntsevo. At one point, he was also Costa Rica's Honorary Consul in Moscow, a diplomatic plum that he lost after he was accused of being a cocaine trafficker.
To further complicate the issue, a former premier of Ontario - David Peterson - and the head of a securities brokerage that has actively promoted YBM shares - Owen Mitchell, vice-president of First Marathon Securities Ltd. - are among the four Canadian directors on the board of YBM.
A senior executive at another Toronto brokerage firm - William Mackenszie, vice-president of Fairvest Securities - says "brokerage firms are in a conflict of interest with clients when they own stock and are recommending it to their clients. There is a problem with them holding stock and then going out and hyping (promoting) it," he says.
As recently as last fall, the Ontario Securities Commission ordered a re-audit of YBM's 1996 financial report. The accounting firm of Deloitte and Touche was hired to examine the books. It noted "weaknesses" in YBM's inventory controls and also re-adjusted its earnings figures quite substantially - downward.
John Carson, the senior vice-president of market regulation for the Toronto Stock Exchange says that allegations about YBM are "unsubstantiated" - and they are also denied by YBM.
However, there are still some fingers being pointed at the Toronto brokerage houses which promoted the stock - and, up until the FBI raid, were still issuing "buy" recommendations for it. Larry Waite, head of the Ontario Securities Commission's Enforcement Branch, says he is short of staff to investigate allegations and the federal police task force will not comment.