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Canada: Action Taken Against Firm With Alleged Ties To Russian Mob

Ontario authorities are probing Canadian involvement in a U.S.-based company with alleged ties to Russian organized crime.

Ottawa, 4 November 1999 (RFE/RL) -- Canadian involvement in a U.S.-based company alleged to have ties to Russian organized crime is the target of a court action by the Ontario Securities Commission. The long-running and complicated case stretches from stock markets in three Canadian provinces to the U.S. state of Pennsylvania and across the Atlantic to Hungary and Russia, among other countries.

At the center of the scandal is YBM Magnex International Inc., now in receivership. The firm, based in Pennsylvania, was also active in Canada where, at its height, shares were trading for close to $20 (a total market value of close to $1 billion).

YBM, an industrial magnet maker, was a one-time darling on Canadian stock markets, at least until May 1998 when the U.S. Federal Bureau of Investigation and other law enforcement agencies raided the Pennsylvania headquarters. The same day, trading of YBM shares was halted by securities commissions in the Canadian provinces of Ontario, Alberta and British Columbia.

The U.S. law enforcement officials allege the company was involved with organized crime figures in Eastern Europe. The now-defunct firm has pleaded guilty to committing securities fraud in the U.S.

In Canada, the Ontario Securities Commission (OSC) is continuing to investigate YBM but its action related to the case is also under scrutiny. On Monday, the enforcement arm of the OSC swooped down on the offices of nine former YBM directors and officers, its former legal counsel and two of its Canadian underwriters. One of the former directors is David Peterson, a former Premier of Ontario.

The OSC has launched an unprecedented legal action against the parties. It is using -- for the first time -- a section of the Ontario Securities Act which allows it to turn to civil courts. This would allow the securities watch dog to seek fines for individuals it holds responsible and to prohibit them from being directors or officers of public companies.

The OSC is charging the former YBM officials of failing to disclose alleged links with Russian mobsters and of failing to reveal that its auditors had quit when it raised serious concerns about the company's 1997 financial statements. The OSC says Lawrence Wilder -- former legal counsel to YBM -- lied to it about the audits and that YBM officials knew a year before the FBI raid that its own investigators had concluded a "number of organized crime figures" were involved in the company's operations in Hungary. The Securities Commission says the public was also kept in the dark.

However, the Securities Commission is also coming under fire. Canada's federal police -- the Royal Canadian Mounted Police -- told the OSC in April of 1997 that Semion Mogilevitch, said to be one of Eastern Europe's biggest crime lords, was a YBM shareholder. Yet, seven months later, in November of 1997, the Commission approved a prospectus that paved the way for YBM to sell $53 million worth of equity to the public.

It is this prospectus that is at the center of the Commission's case against the former officers, directors, underwriters and Wilder. He has launched a counter action asking the courts to prevent the OSC from proceeding because he was never an officer or director of YBM. The lawyer representing David Peterson is also scathing in his comments about the OSC. Alan Lenczner says the Commission knew more about the alleged links to the Russian mob than any of YBM's external directors.

The Canadian angle goes back to 1996 when the company first went public on the three provincial stock markets. Shortly after, Jacob Bogatin, YBM's former Chief Executive Officer learned that the U.S. Justice Department had undertaken a criminal investigation. He told the Canadian board of directors that the government was merely looking into any company with ties to Eastern Europe. YBM's manufacturing plant was located in Hungary.

The Board recommended hiring forensic investigators. In March of 1997, the investigators -- Decision Strategies/Fairfax Group of New York -- submitted its findings to Owen Mitchell, one of the underwriters, and the legal counsel, Wilder. The investigators said founding shareholders were part of an organized crime syndicate in Russia and that key company subsidiaries were controlled by the Russian mob. Fairfax Group said that in its opinion "all of the 'ingredients' were present for YBM to be used for money-laundering activities."

Mitchell and Wilder, however, reported to the board that there was no evidence that senior management was in any way involved in any illegal or improper activities. Fairfax Group went on the record to say that was "inaccurate" and "did not reflect its findings."

Then, a year later, in April of 1998, YBM's auditors, Deloitte and Touche, quit because of "irregularities" and "unanswered questions related to the 1997 financial statements." YBM's auditing committee did not inform the board of directors that the auditors had quit. The FBI stepped in a month later.

Securities officials and Canadian law enforcers are taking the allegations of Russian mob links very seriously. RCMP Superintendent Ben Soave heads a special investigative unit which includes police officers from across the country. He says East European organized criminals "have accomplished more in five years than traditional organized crime accomplished in a century.

Soave sassy European crime has become a serious threat to Canada in terms of national security, destabilizing our economy."

RCMP Inspector Garry Clement says "a lot of these people are former Soviet intelligence agents who were masters of their trade. They've got all their offshore corporations in place. It's extremely difficult and it's not going to be something tackled by Canada single-handedly. It's a world phenomenon."

The Combined Forces Special Investigation Unit says East European criminals are operating in most parts of Canada, especially the major cities of Toronto, Vancouver and Montreal, and that they are involved in bank fraud, money laundering, drug trafficking, smuggling and wholesale shoplifting.