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To: Mighty_Mezz who wrote (941)4/27/2005 10:44:43 PM
From: StockDung
   of 978
 
DON'T GO OFFSHORE WITHOUT IT web.archive.org

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To: Mighty_Mezz who wrote (941)4/27/2005 11:03:58 PM
From: StockDung
   of 978
 
"YBM's other experienced director with an acceptable track record upon the
JCP being listed is Kenneth Davies, a citizen of the world identified by
the company as "Principal Montello Resources Ltd.""
Message 20028083

=====================================================

LINES OVERSEAS MANAGEMENT LOL

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Mission Statement
Company History
Company Profile

Montello Resources Ltd. is a public company that trades on the Alberta Stock Exchange under the trading symbol MEO. We have large land positions in both the Peace River area next to Ashtons recent Kimberlite discovery and an exciting property near Hinton, Alberta. Over the past three years we have been active on our Hinton property tracking down the source of the 24 diamonds that we found. The 147 magnetic anomalies - initially identified on our two million-acre property by an airborne magnetic survey - have been thouroughly examined and narrowed down to 21 targets that appear to be some type of intrusive. Our $8 million joint venture partner, Kennecott Canada Ltd., has been analyzing these targets and is excited about the possiblity of finding the source of our diamonds. Kennecott has even referred to these targets as "Kimberlite-like pipes." Kennecott has already started an extensive drill program that will test these anomalies to see if they are indeed the source of Montello's gem quality diamonds.




SUMMARY OF EVENTS LEADING UP TO THE DRILLING

April 1994
Acquire 950,000 acres in Hinton, Alberta area.
July 1994
Diamonds found in surface sample.
Aug 1995
Chuck Fipke visits the property and takes more samples for his laboratory.
Jan 1995
Chuck Fipke finds diamonds, chromites and other indicator minerals in samples.
Jan 1995
Airborne Magnometer readings identify numerous anomalies
Oct 1995
Kennecott Cnada Ltd. joint ventures for $3,000,000 to earn interest in 230,000 acres.
Oct 1995-present
Extensive geochemical and geophysical work conducted by Kennecott on anomolies.
May 1996
Kennecott announces after detailed ground work program, anomolies narrowed down to 11 Class "A" anomolies.
Montello stakes additional land surrounding original claims.
Aug 1996
Kennecott joint ventures additional 1,138,000 acres for an additional $5,000,000.
January 1997
Kennecott commences drilling on the Kimberlite-like anomalies..
January 1997
Montello stakes 600,000 acres in the Buffalo Hills area of Alberta next to Ashtons Kimberlite field.
February 1997
Montello stakes 3.4 additional acres next to Ashtons kimberlite field discovery

Company Profile
Corporate Headquarters:
Suite 1473 - 595 Burrard Street, PO Box 49057
Vancouver, BC, Canada V7X 1C4
Phone: 604-689-1799/1-800-268-2636
Fax: 604-689-8199
Email: ppower@axionet.com
Incorporated:
02-MAY-86
Province of British Columbia Capitalization:
Authorized: 100,000,000 common shares
Issued: 29,000,000 common shares
Approx Float: 10,000,000
Share Prices:
Registered:

Listed:
ASE
Trading Symbol: MEO
CUSIP # 612382109/451277 For Investor Relations Call:
Thomas
Phone: 604-689-1799
Email: ppower@montello.com
Transfer Agent:
Montreal Trust Company - June P. Glover, Acct Mgr
510 Burrard Street, Vancouver, BC V6C 3B9 Barrister & Solicitor:
Godinho, Sinclair - Bruce Bragagnolo
10th Floor, Montreal Trust Centre, 510 Burrard St., Vancouver, BC V6C 3A8
Phone: (604) 689-9930
Fax: (604) 689-9940
Email: bb@axionet.com
Directors and Officers:
Patrick Power, President & Director
Jeannine Davies, Secretary & Director
Daniel Power, Director Auditors:
Rob Charlton
#1088 - 999 W. Hastings St., Vancouver, BC V6C 2W2
Phone: (604) 683-3277
Fax: (604) 684-8464
Management:
Patrick Power
Jeannine Davies
Ken Davies


--------------------------------------------------------------------------------
1997 Montello Resources Ltd. . All rights reserved.

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To: Mighty_Mezz who wrote (941)4/27/2005 11:07:36 PM
From: StockDung
   of 978
 
YBM MAGNEX INTERNATIONAL INC.,

IN THE MATTER OF THE SECURITIES ACT
R.S.O. 1990, c.S.5, as amended

AND

YBM MAGNEX INTERNATIONAL INC.,
HARRY W. ANTES, JACOB G. BOGATIN, KENNETH E. DAVIES,
IGOR FISHERMAN, DANIEL E. GATTI, FRANK S. GREENWALD,
R. OWEN MITCHELL, DAVID R. PETERSON, MICHAEL D. SCHMIDT,
LAWRENCE D. WILDER, GRIFFITHS MCBURNEY & PARTNERS,
NATIONAL BANK FINANCIAL CORPORATION
(formerly known as First Marathon Securities Limited)






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IN THE MATTER OF THE SECURITIES ACT
R.S.O. 1990, c.S.5, as amended

AND

YBM MAGNEX INTERNATIONAL INC.,
HARRY W. ANTES, JACOB G. BOGATIN, KENNETH E. DAVIES,
IGOR FISHERMAN, DANIEL E. GATTI, FRANK S. GREENWALD,
R. OWEN MITCHELL, DAVID R. PETERSON, MICHAEL D. SCHMIDT,
LAWRENCE D. WILDER, GRIFFITHS MCBURNEY & PARTNERS,
NATIONAL BANK FINANCIAL CORPORATION
(formerly known as First Marathon Securities Limited)

STATEMENT OF ALLEGATIONS OF STAFF OF THE ONTARIO SECURITIES COMMISSION

Staff of the Ontario Securities Commission (the "Commission") make the following allegations:

I. The Respondents

1. YBM Magnex International Inc. ("YBM" or the "Company") was incorporated on March 16, 1994, in Alberta, Canada as Pratecs Technologies Inc. On October 5, 1995 the Company changed its name to YBM. YBM became a reporting issuer in Ontario on January 22, 1996. YBM shares were listed and posted for trading on The Toronto Stock Exchange on March 7, 1996. On May 13, 1998 the Commission issued a temporary cease trade order in respect of YBM shares, which order remains in effect. On December 8, 1998, pursuant to an order of the Court of Queens Bench of Alberta, a Receiver was appointed respecting the present and future assets, property and undertaking of YBM.

2. During the period May 1, 1996 to May 13, 1998 (the "material time"), there were eight members of the YBM Board of Directors (the "Directors"), two of whom were officers of the Company. The remaining six directors were not officers of YBM. The Directors were:

a) Harry W. Antes ("Antes"), Chairman of the Board of YBM and a member of the YBM Audit Committee; appointed director on April 29, 1996; a retired Vice President of a technology company;

b) Jacob G. Bogatin ("Bogatin"), President and Chief Executive Officer of YBM; appointed director on April 4, 1994;

c) Kenneth Davies ("Davies"), appointed director on April 4, 1994; a principal of a mineral exploration company;

d) Igor Fisherman ("Fisherman"), Chief Operating Officer of YBM; appointed director on April 29, 1996;

e) Frank S. Greenwald ("Greenwald"), a member of the YBM Audit Committee; appointed director on April 29, 1996; a retired Vice President of an engineering company;

f) R. Owen Mitchell ("Mitchell"), a member of the YBM Audit Committee; appointed director on January 26, 1996; a Vice President and Director of First Marathon Securities Limited (now known as National Bank Financial Corporation),

g) David R. Peterson ("Peterson"), appointed director on April 29, 1996; a partner with a Toronto-based law firm; and

h) Michael D. Schmidt ("Schmidt"), appointed director on April 4, 1994; an independent businessman.

3. Daniel E. Gatti ("Gatti") was the Vice President of Finance and Chief Financial Officer of YBM during the material time, appointed an officer on January 26, 1996.

4. Lawrence D. Wilder ("Wilder") is a partner with the law firm Cassels Brock and Blackwell which was the Canadian general counsel to YBM during the material time. Wilder had primary responsibility for the YBM engagement which commenced on or about September 1995 and ended on August 19, 1998.

5. On or about May 6, 1997, YBM entered into an agreement with two Canadian securities dealers to act as co-lead underwriters (the "Co-Lead Underwriters") for a financing being contemplated at that time by YBM. The Co-Lead Underwriters, and the percentage of the YBM offering each was ultimately obligated to purchase, were:

a) National Bank Financial Corp., known during the material time as First Marathon Securities Limited ("FMSL") which during the material time was, and continues to be, registered under the Securities Act as a Broker and Investment Dealer (35%); and

b) Griffiths McBurney & Partners ("GMP") which during the material time was, and continues to be, registered under the Securities Act as a Broker and Investment Dealer (35%).

6. In addition to FMSL and GMP, there were three "junior" members of the underwriting syndicate for YBM's 1997 public offering, which in accordance with the terms of an Underwriting Agreement dated November 17, 1997 were obligated to purchase the remaining 30% of the YBM offering.

7. During the material time when Mitchell acted as a Director of YBM, he was also the principal representative of FMSL in the underwriting syndicate.

II. Overview of Staff's Allegations

8. There are six specific allegations being advanced by Staff of the Ontario Securities Commission ("Staff"), which may be summarized as follows:

a) that YBM filed a preliminary prospectus dated May 30, 1997, and a final prospectus dated November 17, 1997, that failed to contain full, true, and plain disclosure of all material facts relating to the securities offered; specifically, material facts respecting the mandate, information obtained by and findings of the Special (Independent) Committee created by the YBM Board of Directors on August 29, 1996;

b) that the Directors, Chief Executive Officer and Chief Financial Officer of YBM authorized, permitted or acquiesced in YBM filing a preliminary prospectus dated May 30, 1997 and a final prospectus dated November 17, 1997 that failed to contain full, true and plain disclosure of all material facts relating to the securities offered; specifically, material facts respecting the mandate, information obtained by and findings of the Special (Independent) Committee created by the YBM Board of Directors on August 29, 1996;

c) that the Co-Lead Underwriters signed a certificate to a preliminary prospectus dated May 30, 1997 and a final prospectus dated November 17, 1997 which prospectuses, to the best of their knowledge, did not contain full, true and plain disclosure of all material facts relating to the securities offered; specifically, material facts respecting the mandate, information obtained by and findings of the Special (Independent) Committee created by the YBM Board of Directors on August 29, 1996;

d) that YBM failed to comply with its continuous disclosure obligations by not issuing a news release forthwith disclosing the nature and substance of a material change in the affairs of YBM; specifically, that the auditor for YBM, Deloitte & Touche LLP (U.S.) ("D&T"), had advised YBM by no later than April 20, 1998 that it would not perform any further services for YBM, including the rendering of an audit opinion in respect of YBM's 1997 annual financial statements, until YBM had completed an in-depth forensic investigation addressing specific concerns to the satisfaction of D&T;

e) that the members of the YBM Audit Committee (Antes, Greenwald and Mitchell), the Chief Executive Officer (Bogatin), the Chief Financial Officer (Gatti) and the Chief Operating Officer (Fisherman) of YBM authorized, permitted or acquiesced in YBM failing to comply with its continuous disclosure obligations by not issuing a news release forthwith disclosing the nature and substance of a material change in the affairs of YBM; specifically, that the auditor for YBM, D&T, had advised YBM by no later than April 20, 1998 that it would not perform any further services for YBM, including the rendering of an audit opinion in respect of YBM's 1997 annual financial statements, until YBM had completed an in-depth forensic investigation addressing specific concerns to the satisfaction of D&T; and

f) that Wilder made statements to Staff of the Commission during the course of Staff's review of YBM's preliminary prospectus that, in a material respect and at the time and in the light of the circumstances under which the statements were made, were misleading or untrue or did not state a fact that was required to be stated or that was necessary to make the statements not misleading; specifically, statements contained in a letter from Wilder to Staff dated July 4, 1997 concerning the results of due diligence conducted in respect of YBM.

III. YBM's Corporate Structure During the Material Time

9. Although YBM was a Canadian company during the material time, as of May 1, 1997 it had no Canadian operations. YBM's head office was located in the United States, the location of its wholly-owned subsidiary YBM Magnex Inc ("YBM Inc."). YBM Inc. controlled 100% of the "ordinary" shares of Arigon Company Ltd. ("Arigon"), an Alderney, Channel Islands company, with offices in Budapest, Hungary. YBM Inc. also controlled 100% of the "ordinary" shares of United Trade Limited ("UTL"), a Cayman Islands company. On or about April 1, 1996, Arigon assigned its assets and business to UTL, also with offices in Budapest, Hungary. The assets and business assigned to UTL included approximately 99.9% of the shares of Magnex RT ("RT"), a Hungarian corporation also located in Budapest, Hungary. On April 1, 1996 YBM divested itself of another subsidiary, Arbat International, Inc. ("Arbat"), a Russian trading company. On or about August 22, 1997, YBM completed the acquisition of Crumax Magnetics, a magnet manufacturer located in the United States.

10. According to YBM's public disclosure as of May 1, 1997, YBM was a manufacturer and distributor of magnets. YBM also bought and sold oil. YBM's magnet manufacturing process was conducted by RT which owned manufacturing facilities in Budapest, Hungary. Pursuant to agreements entered into between RT and Arigon in September 1992, Arigon transferred to RT machinery and equipment necessary for the manufacture of magnets. Arigon also became responsible for securing all applicable clearances for production purchases and delivery of materials and supplies to RT. Arigon also became responsible for arranging for the marketing, sale and distribution of the products manufactured by RT as well as the marketing, sale and distribution of products manufactured by others. Arigon was also responsible for the purchase and sale of oil. On or about April 1, 1996, these responsibilities were assumed by UTL. Fisherman, who was the President of Arigon, and other officers and directors of Arigon, resigned their positions at Arigon and assumed the same appointments with UTL.

11. On April 29, 1996, the newly constituted Board of Directors of YBM (elected by the YBM shareholders at the annual meeting held earlier that day) held a meeting attended by all of the Directors and YBM's Canadian general counsel. During the meeting the Directors discussed the reasoning for the divestiture of Arbat and the relocation of Arigon. The minutes of the meeting record the following:

The Chairman [Bogatin] updated the board as to various other matters including the Company's plans to sell Arbat International Inc. to a group of arm's length purchasers for consideration equal to approximately (US) $250,000. The Chairman indicated that the rationale for the sales [sic] was that the Company's operations in Eastern Europe were difficult to supervise and exposed it to certain potential liability. The Chairman confirmed that Arbat will continue to render services to the Company but only on a contractual basis.

The Chairman also advised the board of a proposal to relocate the Company's wholly-owned subsidiary, Arigon Co. Ltd. from the Channel Islands U.K. to the Cayman Islands. The Chairman explained that the rationale for such move was to bring Arigon's operations closer to the Company's North American headquarters. The Chairman advised that the Royal Bank of Canada was assisting the Company and Arigon in this move. The Chairman also advised that upon completion of such move, Arigon's name will most likely be changed to United Trade Limited. The Chairman advised that this move would be accomplished by way of a tax free reorganization of assets.

IV. The Alleged Failure to Make Full, True and Plain Disclosure of All Material Facts

i) What Was Disclosed by YBM?

12. On May 30, 1997 YBM filed a short-form preliminary prospectus with the Commission.

13. The preliminary prospectus contained a Certificate which was signed by Bogatin and Gatti in their capacity as CEO and CFO respectively, and by Antes and Peterson on behalf of the Board of Directors. The Certificate stated that:

The foregoing together with documents incorporated herein by reference, constitutes full, true and plain disclosure of all material facts relating to the securities offered by this prospectus as required by the securities laws of the provinces of...Ontario...

14. The preliminary prospectus also contained a Certificate signed by each of the underwriters (including the Co-Lead Underwriters) stating that:

To the best of our knowledge, information and belief, the foregoing, together with the documents incorporated herein by reference, constitutes full, true and plain disclosure of all material facts relating to the securities offered by this short form prospectus as required by the securities laws of the provinces of...Ontario...

15. YBM's Annual Information Form, dated May 1, 1997 ("AIF"), was incorporated by reference in the preliminary prospectus. The AIF stated, in part, under the heading "Business Risks, Risks Associated with Activities in Eastern Europe", that:

The Company's manufacturing operations are located in Hungary. Additionally, 47% of consolidated net sales are concentrated in Eastern Europe. Economic, political and general business conditions in these regions are highly inflationary and are potentially unstable.

The evolving market economies in Eastern Europe are characterized by a high level of cash transactions as well as less rigorous financial controls. The Company has and continues to implement recommendations made by independent public accountants and others with expertise in these regions to improve the Company's operations in these regions.

Over the last two years the Company became aware of concerns that had been expressed in the media and by government authorities generally concerning companies doing business in Eastern Europe and, particularly, in Russia. To this end, the Company has taken a number of steps to address these concerns, including:

1. The divestiture in the first quarter of 1996 of Arbat International Inc. ("Arbat"), the Company's Russian trading company which distributed a variety of consumer goods and materials through Eastern Europe and Russia. Upon a review of Arbat's operations, management was not satisfied that adequate customer and sales representative acceptance procedures could be implemented, including monitoring the propriety of sales commissions paid to sales representatives; and

2. the establishment of an independent committee of the Board of Directors who retained experts knowledgeable with political, social and economic issues in Eastern Europe to review the Company's operations to ensure that they are consistent with the standards applicable to Canadian public companies. Recommendations resulting from such review are being implemented by the Company. The Board of Directors, through the Audit Committee, will monitor ongoing compliance by the Company with such recommendations.

16. On June 3, 1997 a meeting was held between Staff responsible for the review of the preliminary prospectus, Canadian general counsel for YBM, counsel for the underwriters (Fogler, Rubinoff) and senior officers of the Co-Lead Underwriters. The purpose of the meeting was to discuss the time frame for Staff's review of the preliminary prospectus. During the course of the meeting Staff was informed that YBM had hired The Fairfax Group, a firm located in the United States, to look into rumours and innuendo surrounding the Company. Staff was informed at this meeting that Fairfax could not find any evidence to substantiate the rumours. Staff was also informed that YBM's Canadian general counsel did not look into whether the authorities in the United States had any concerns with the Company, but understood that the United States Justice Department approved the Crucible [Crumax Magnetics] transaction which gave Canadian general counsel comfort.

17. Staff issued its first comment letter in respect of the preliminary prospectus on June 16, 1997. Among the comments made by Staff in respect of the AIF was the following:

On page 6, under the heading "Risks Associated with Activities in Eastern Europe", reference is made to new standards for business practices being implemented by the Board. Please describe the circumstances respecting the review [by the Independent Committee of the Board of Directors referred to in the AIF] of the Company's operations. What recommendations are being implemented? Describe the "standards applicable to Canadian companies". [emphasis added]

18. On June 18, 1997 YBM, through their Canadian general counsel, in a letter copied to counsel for the underwriters, responded to Staff's first comment letter and, in connection with Staff's request for information in respect of the "Circumstances Surrounding the Review of the Company's Operations", stated as follows:

Over the past year, the Company has had some difficulty in being issued certain business visas for employees. As a result, the Company decided to investigate this further in order to resolve the problem. The Company's efforts confirmed that U.S. law enforcement agencies had placed a priority on uncovering infiltration of organized crime from the former Soviet Union into U.S. businesses. Given the roots of the Company and its affiliates in Russia, and the involvement of former Russian nationals as shareholders and managers of the Company, the Company believes that it may have been examined as part of any such investigation. The visas which prompted the concerns were subsequently issued by the U.S. Government without comment.

As noted in the AIF, the Company took a number of steps to address any possible concerns, including the divestiture in the first quarter of 1996 of Arbat International Inc., the Company's Russian trading company, and the establishment of a special committee of the board to review the operations of the Company in Eastern Europe.

Special Committee Recommendations

The Special Committee made the following recommendations which have been or are being implemented by the Company's management:

- Establishment of improved cash controls at the Company's Hungarian facilities;

- Establishment of more detailed customer and agent approval criteria;

- Establishment of a more accurate data base on these customers and agents;

- Establishment of new management information systems; and

- Consolidation of accounting control at the Company's Newtown, Pennsylvania, head office through establishment of integrated information systems at each site of the Company's operations.

Standards Applicable to Canadian Companies

The reference in the AIF to "standards applicable to Canadian companies" refers to internal controls and financial reporting requirements normally found in diversified Canadian public companies. [emphasis added]

19. On June 24, 1997 Staff requested that YBM undertake an independent audit of YBM's income statement for the year ended December 31, 1996 and requested that the assignment be performed by a "Big Six" accounting firm. In response to Staff's proposal, by letter dated July 4, 1997, Wilder informed Staff as follows:

As discussed above, the Confirming Accountant will be in a position to deliver its report to you no later than Tuesday, July 8, 1997. Based upon the results reported to date, we believe that the report will represent a continuation of the series of favourable due diligence results pertaining to the business of YBM conducted by independent parties. This stands in stark contrast to the rumors and innuendo to which YBM has been subject and which , based upon the information provided to us to date, have not been subject to any outside scrutiny or independent verification whatsoever.

As discussed previously, the Company, its advisors, as well as the underwriters and their advisors have made every effort to address each concern raised to date in order to complete this financing and allow the Company to complete its acquisition transaction which is crucial to its continued success. Needless to say, YBM's inability to proceed with this financing despite the efforts of all the parties concerned and referenced herein would have serious and lasting negative consequences to the Company and its shareholders. We respectfully submit that such an occurrence would not be in the public interest in view of the extensive due diligence completed to date and the uniformly positive results thereof. [emphasis added]

20. On October 13, 1997 D&T issued an unqualified audit opinion in respect of YBM's financial statements as of December 31, 1996. The audited financial statements formed part of a material change report issued by YBM dated November 13, 1997.

21. On November 17, 1997 Bogatin and Gatti, in their capacity as CEO and CFO respectively, and Antes and Peterson, on behalf of the Board of Directors, signed the Certificate to YBM's final prospectus representing that the prospectus, together with the documents incorporated by reference therein, constituted full, true and plain disclosure of all material facts. Each of the underwriters (including the Co-Lead Underwriters) signed a Certificate representing that, to the best of their knowledge, information and belief, the prospectus and the documents incorporated by reference therein, constituted full true and plain disclosure of all material facts.

22. On November 20, 1997 YBM received a receipt for the final short-form prospectus dated November 17, 1997. Pursuant to the final prospectus YBM distributed 3.2 million common shares for gross proceeds of $52.8 million. In addition, the final prospectus qualified the distribution of an additional 4 million common shares issuable upon the conversion of $48 million of secured convertible notes which YBM had previously distributed, on a prospectus-exempt basis, on or about August 21, 1997. The underwriters' fee, exclusive of any over-allotment option, was $2,376,000. In addition, subsequent to the closing of the public offering, YBM paid to FMSL and GMP $600,000 each for advisory services rendered in connection with the $48 million private placement noted above.

23. The final prospectus continued to incorporate by reference YBM's AIF. Also incorporated by reference was the November 13, 1997 material change report. In respect of the review of the Company's operations conducted by the independent committee of the YBM Board of Directors and experts retained by it, as referred to in the AIF, the only additional disclosure contained within the final prospectus, or any document incorporated by reference therein, was the following, as stated in the final prospectus:

In order to address the special risks inherent in carrying on business in Hungary in particular and Eastern Europe in general, YBM:

(a) has established improved cash controls at its Hungarian facilities;

(b) has developed more detailed end user and distributor approval criteria;

(c) is in the process of establishing a more accurate database respecting its distributors and end users;

(d) is in the process of implementing new management information systems; and

(e) is in the process of improving and centralizing controls over all of its international accounting activities at its Newtown, Pennsylvania head office.

The intent of the foregoing initiatives is to ensure that despite the fact that YBM carries on a substantial portion of its activities in Eastern Europe, its internal controls and financial reporting standards will be in accordance with those otherwise generally applicable to Canadian public companies...

ii) What Was Not Disclosed?

24. On August 15, 1996 the Board of Directors of YBM held a meeting at the YBM offices in Newtown, Pennsylvania. All of the Directors were in attendance along with Gatti, Wilder, and YBM counsel from the United States ("U.S. Counsel"). According to the minutes of the August 15, 1996 meeting, the following was discussed:

Jacob Bogatin and Daniel Gatti discussed the largely publicized interest of the United States government in companies doing business in Eastern Europe. They indicated that it is likely that the United States government has an interest in YBM because of the degree of scrutiny employees receive traveling to and from YBM's Hungarian operations and because of comments made to management in pursuing reasons for such delays. In addition, YBM Magnex has sponsored a number of employees (Hungarian and Russian nationals) in obtaining visas and has assisted many of them with US Immigration Laws. They informed the board that management in the past six months, had tried to establish closer ties to U.S. embassys [sic] abroad. They also indicated that the U.S. government, probably as a matter of policy, looks at any company with ties to Eastern Europe. Management does not believe such interest will be alleviated until the market economies in Eastern Europe are fully developed and business relationships between the East and West become routine. [emphasis added]

25. Among the "comments made to management in pursuing reasons for such delays" were comments made by U.S. Counsel for YBM to Bogatin on August 2, 1996. U.S. Counsel reported on inquiries made of the United States Attorney for the Eastern District of Pennsylvania, stating as follows:

Peter called the U.S. Attorney and requested a meeting and offered the Company's full cooperation. The U.S. Attorney returned Peter's call and said he could not meet with us [YBM]. He confirmed that the Department of Justice was conducting a "highly sensitive" criminal investigation of YBM Magnex and that it would be inappropriate to meet with us. He told Peter that nothing we could offer would be appropriate at this time. He said he could not discuss the nature of the investigation because it is "especially sensitive".

In view of the fact that, for the first time, we have a confirmation that YBM Magnex is the target of a federal criminal investigation, we must advise that this information be immediately made known to the Board of Directors. Peter and I are willing to meet with your Board and make a full report, if you believe it would be helpful. The Board may wish to consider undertaking a full internal investigation, although we have previously discussed the difficulties of investigating when we are unaware of the nature of the specific allegations against the Company.

I believe we have exhausted our efforts to obtain information about the nature of the concerns that the federal government has about YBM Magnex. We have no idea how long this cloud may continue to linger over the Company. We do know, however, that the situation is serious. [emphasis added]

26. On August 29, 1996 a Special Meeting of the YBM Board of Directors was held in Toronto. Minutes of this meeting have not been identified. Attending this meeting were: Antes, Davies, Greenwald, Mitchell, Peterson, Wilder and U.S. Counsel for YBM. The Board concluded that a Special (Independent) Committee should be formed to investigate the situation. It was further decided that no further discussions would be held or attempted with U.S. authorities until the Special Committee provided a final report. Members of the Board appointed to the Special Committee were Mitchell (Chair), Davies and Schmidt.

27. On November 1, 1996 the Board of Directors held a meeting via conference call. No minutes or notes of this meeting have been identified. However, the Special Committee prepared an Interim Report entitled "Report of the Special Committee to the Board of Directors" (the "Interim Report") on or about November 1, 1996. The Interim Report included the following comments:

In August 1996, the management of [YBM] were made aware of a pending investigation of the Company and its activities through the U.S. Attorney's office in Philadelphia. The focus of the investigation was not disclosed, however, discussions with counsel confirmed that U.S. law enforcement agencies had placed a priority on uncovering infiltration of Organized Crime from the Former Soviet Union into U.S. business. Given the roots of YBM and its affiliates in Russia and the involvement of former Russian nationals as shareholders and managers of the Company it was viewed to be a reasonable expectation that this would be the basis of such investigation.

28. The Interim Report described the mandate of the Special Committee as being to "independently investigate possible areas of concern" and to "report back to the Board on findings and recommended further actions". The Interim Report also indicated that the Special Committee "was given clear authority to undertake any independent actions or investigations which it felt were appropriate". Among the further actions proposed by the Special Committee was to engage a "professional East European investigator to provide [the Special Committee] with a background dossier on certain individuals who were original shareholders of YBM and/or who have acted as commissioned salespeople receiving material compensation from the Company".

29. On or about November 8, 1996, at the recommendation of Peterson, YBM retained the services of an independent company, The Fairfax Group, Ltd. ("Fairfax"). Fairfax, now known as Decision Strategies/Fairfax International LLC, is an international investigative and security firm that conducts corporate investigations. The Fairfax officials responsible for the YBM investigation consisted of three senior officials: a lawyer who was a former Special Prosecutor; a forensic accountant; and a retired U.S. Ambassador and former senior official with the U.S. State Department. A Retainer Agreement was entered into on or about November 14, 1996 signed on behalf of YBM by Mitchell. Fairfax's initial assignment was to "assist the client by undertaking a due diligence and internal investigation of YBN [sic] Magnex, International located in Philadelphia and Hungary".

30. In conducting its investigation, Fairfax performed extensive background checks on various persons and companies associated with YBM relying on various data bases and a network of sources located throughout the world. They also attended at offices of YBM and its subsidiaries in Philadelphia and Budapest, spoke with members of senior management, reviewed company records and met with some of the original shareholders of YBM. In the period December 1996 to March 21, 1997 Fairfax regularly briefed Mitchell on the status of its investigation, including an extensive briefing on March 3, 1997 at a meeting in Chapel Hill, North Carolina during which Mitchell informed Fairfax that he would write a report reflecting the information provided by Fairfax.

31. On March 21, 1997 Fairfax reported orally on the results of its investigation to date at a meeting in Toronto. Participating in this meeting on behalf of YBM were Mitchell and Wilder in person, and Antes and Schmidt via telephone. At the conclusion of Fairfax's presentation, Mitchell requested Fairfax to make the same presentation at a meeting in Philadelphia the following day. Participating in the March 22, 1997 meeting on behalf of YBM were Mitchell, Antes, Bogatin, Gatti, Wilder and YBM's U.S. Counsel.

32. Among the information conveyed by Fairfax during the meetings on March 21 and 22, 1997 was the following:

a) that reliable Fairfax sources in several agencies of the United States Government had indicated that the visa problems being experienced by YBM personnel were due to issues involving national security and organized crime;

b) that the original shareholders of YBM were confirmed as being members of the same Russian organized crime syndicate (the "Organization"), with interests in Europe (East and West), the Middle East and North America;

c) that among the companies which reliable sources had identified as being owned or controlled by the Organization were Arbat in Russia, Arigon in the United Kingdom and "Magnek" in Hungary;

d) that a review of YBM records had revealed that sales commissions in excess of $2.5 million had been paid by Arigon to a principal leader of the Organization and his chief assistant in the years 1993 to 1996;

e) that the equipment sold by the original shareholders to RT for approximately $14 million may have been overvalued, the equipment having been purchased for one-tenth of the value recorded on the books of RT, and that the records documenting this transaction may be false;

f) that the sale of Arbat on or about April 1, 1996 for $250,000 (of which only $150,000 was received by YBM) was to two persons who were identified as being members of the Organization and as having received sales commissions from Arigon/UTL in 1996 totaling in excess of $150,000;

g) that UTL was using a bank account, in the name of a company which was not part of YBM's publicly disclosed corporate structure, as its main operating account; that transactions involving millions of dollars went through the account; and that this account was controlled by one of the YBM original shareholders who was neither an officer nor an employee of UTL;

h) that there were indications that certain books and records had been falsified;

i) that in the opinion of Fairfax all of the "ingredients" were present for YBM to be used for money laundering activities; and

j) that in respect of companies with which YBM was doing business, some of these companies were shells, others were shells within shells, others did not exist, and still others were owned by persons who had received sales commissions from Arigon/UTL.

33. At both the March 21 and 22, 1997 meetings, Fairfax made it clear that in their view the key issue confronting YBM was that there were a number of organized crime figures involved in the operations in Hungary and that this was a serious problem. Fairfax made a number of recommendations for YBM's consideration.

34. On April 9, 1997 Mitchell sent to Fairfax for their review and comment a document, drafted by Mitchell and Wilder, entitled "Report of the Special Committee to the Board of Directors YBM Magnex International Inc. April 2, 1997". Fairfax had significant reservations respecting the contents of this document which included a section entitled "Results of the Fairfax Review". Fairfax provided their comments to Mitchell in a telephone conference call on April 10, 1997. Fairfax informed Mitchell that the report was inaccurate and that it did not reflect Fairfax's findings and the information which had been conveyed to Mitchell. Subsequently, Fairfax did not receive any further information as to what, if anything, Mitchell may have reported to the YBM Board of Directors.

35. On April 13, 1997 at the request of YBM, Fairfax attended a meeting in Philadelphia. Bogatin, Gatti and Mitchell attended this meeting on behalf of YBM. At this meeting Bogatin attempted to refute the information provided by Fairfax indicating that there was no clear proof. Fairfax stood by its findings. Mitchell indicated that Fairfax might receive a call from certain underwriters.

36. At no time prior to May 13, 1998 was Fairfax contacted by anyone to discuss the work which they undertook on behalf of YBM. In particular, Fairfax was not contacted by any Director of YBM who did not participate in the meetings noted above. Nor was Fairfax contacted by any person identifying themselves as a representative of the underwriters. At no time did Fairfax express to YBM or its advisors any reluctance to speak with underwriters or any other third parties at the direction of YBM.

37. A copy of the "Report of the Special Committee to the Board of Directors YBM Magnex International Inc. April 2, 1997" was provided to FMSL and to counsel for the underwriters. The word "Draft" is written on the upper right-hand corner of the document. According to counsel for the underwriters, the contents of this report were fully and fairly described by Mitchell at a meeting attended by a representative of GMP. Information contained within this report may be summarized as follows:

a) U.S. Counsel for YBM was advised "off the record" by the U.S. Attorney's Office that there was an "ongoing investigation" involving YBM; while unable to uncover further particulars counsel confirmed that U.S. law enforcement agencies had placed a priority on uncovering infiltration of organized crime from the former Soviet Union into U.S. business; on August 15, 1996 YBM management informed the Board of Directors of its discussions, through counsel, with the U.S. Attorney's Office;

b) on August 29, 1996 a Special Committee was formed to investigate the situation; counsel for YBM advised that due to a lack of clarity surrounding the matter, public disclosure should not be made at that time;

c) the mandate of the Special Committee was to independently investigate possible areas of concern arising out of the Company's business operations to attempt to determine the basis for any investigation and to recommend further action to address any problems or potential problems uncovered;

d) the initial review of the Special Committee focused on shareholder and employees/commissioned salespeople, and on contractual arrangements with customers; these two areas were chosen as a focus "because the greatest threat to the Company would be an investigation which questioned the legitimacy of its core business";

e) the Special Committee reviewed the original shareholders list; this review did not raise any concerns, but the Special Committee nevertheless undertook a further review;

f) there is no evidence that the existence of any investigation has impacted on trading whatsoever; "Accordingly, the Committee assumes that, to date, in accordance with the strict direction of the Board, the information has not been disclosed to parties outside the Company, its Board and advisors";

g) the initial review of the Special Committee identified very substantial commission payments paid by Arbat which seemed inconsistent with Arbat's business;

h) the Special Committee was concerned about one set of parallel records which showed substantial payments to a person on one set and the exact same payments to a corporate entity with a different name on another; later a third version was identified and had different amounts and payees; management of YBM had no explanation for this;

i) on November 1, 1996 the Special Committee reported to the Board on the initial review recommending that further investigation of the original shareholders be undertaken and that commissions paid also be reviewed; it was recommended that experts in this type of investigation be engaged as soon as possible;

j) the Special Committee retained Fairfax, a large U.S. consulting organization operated by former senior Justice Department, State Department and F.B.I. officials; Fairfax came highly recommended and exhibited a strong track record with respect to dealings in Eastern Europe;

k) Fairfax was requested by the Special Committee to: discover more details respecting the "ongoing investigation"; do background checks on management and the original shareholders; do background checks on recipients of commissions; randomly examine business transactions recorded in the records of the Company to ascertain if bona fide; and review YBM operations and make recommendations regarding improved controls;

l) the Results of the Fairfax review [as reported in the "Report of the Special Committee to the Board of Directors YBM Magnex International Inc. April 2, 1997" which was provided to FMSL] included the following:

i) initial background checks on management showed no concerns regarding Bogatin or other managers located in the United States; in Eastern Europe, however, a number of concerns arose; recipients of Arbat commissions in 1993-95 had clear ties to Russian organized crime; another recipient of commissions from Arbat was incarcerated in Switzerland; the basis of these payments appears to be unsupportable; even though Arbat was sold it was under the operating control of one of the original shareholders; Arbat was identified as an alleged vehicle for criminal acts;

ii) the original transaction respecting the acquisition of the equipment "was not as originally described"; prices paid were not as recorded on invoices; invoices were prepared well after the fact; the price paid by original shareholders for the equipment "is a fraction of the face value taken back by the original shareholders in preferred shares";

iii) "A second area of concern raised by Fairfax was the commingling of the business activities of Magnex RT, United Trade (the offshore sales arm of YBM) and those of the original shareholders resident in Budapest. The same office building was being used to transact activities for all the businesses and [one original shareholder] in particular was actively involved in activities related to United Trade and Magnex RT despite not being an officer or employee of either company. There was a bank account (since terminated) through which Company business was transacted to which [this original shareholder] was a signing officer. Management has already taken steps to relocate office activities and ensure proper separation"; this same original shareholder has a long-standing friendship with YBM's Chief Operating Officer; "foreign sources also connect the original shareholders with criminal activities including prostitution although none have been convicted or are wanted by authorities";

iv) there were a substantial number of cash transactions, in particular payment of salaries and commissions; there was a large volume of cash on hand; management has already taken steps to severely restrict the use of cash payments; and

v) the customer lists were reviewed and it was very difficult to establish end users for the products because of the use of intermediate agents for most sales;

m) the Conclusions of the Special Committee included the following:

i) there is no evidence that "senior management of YBM is in any way involved in any illegal or improper activities";

ii) that in respect of the questions surrounding the original shareholders, "it is not surprising that allegations should be made at successful businessmen of Russian origin trading between the Former Soviet Union and the West";

iii) the original shareholders, in aggregate, control over 40% of YBM common stock; "the existence of this block of shareholders is of concern to the Committee. This concern will be reduced following the completion of the equity issue to fund the Crucible acquisition..."; and

iv) the Committee directed management to eliminate any ties to the original shareholders in the "day-to-day operations of the Company";

n) the Recommendations of the Special Committee were as follows:

"a) Provide the Board with an action plan to address each of the following areas:

- Elimination of commingling of business activity with that of Company shareholders in Europe;

- Establish operational controls to ensure that management remains operationally independent from the founding shareholders;

- Establishment of improved cash controls in Hungary;

- The setting of more detailed customer and agent approval criteria;

- The establishment of an accurate data base on these customers and agents;

- Consolidation of accounting control in Newtown; and

- Engage a major accounting firm for the completion of future audits.

b) Establish a permanent subcommittee of the Board or the Audit Committee to supervise compliance with these recommendations and other issues surrounding corporate ethics in the future.

c) Advise the underwriters financing the acquisition of Crucible as to the background and results of this investigation.

d) Consider the establishment of a voluntary escrow of the Original Shareholders' shares until the completion of the acquisition and the clearance of the associated Special Warrants." [emphasis added]

38. On April 25, 1997 there was a meeting of the YBM Board of Directors held in Toronto. The meeting was attended by all of the Directors with the exception of Fisherman. Among others in attendance were Gatti and Wilder. Among the items on the agenda for this meeting was the "Report of Special Committee", which discussion was to be led by Mitchell.

39. Mitchell has indicated that a version of the report marked "BOARD DISCUSSION DRAFT", substantially similar to the version of the report provided to FMSL summarized above, was presented to the Directors at the April 25, 1997 Board meeting. Approved minutes of this meeting have not been identified.

40. One set of draft minutes of the April 25, 1997 Board meeting simply states that "Mitchell updated the Board on the findings of the Special Committee. He stated that a draft report would be tabled at the next meeting". Another set of draft minutes for the April 25, 1997 Board meeting records that "Mitchell updated the Board on the findings of the Special Committee. His report encompassed the following". These draft minutes then record, word for word, what was ultimately disclosed by YBM in their AIF (see paragraph 15 above).

41. Two sets of handwritten notes (identified below as Note 1 and Note 2) of the April 25, 1997 Board meeting, obtained from the records of YBM's Canadian general counsel, record the following in respect of the Board's discussion of the Special Committee:

Note 1:

-Special Matter - Owen

-mgmt brought it to our attention

Fairfax engaged

-confirmed active investigation

-payments made by Arbat

-to alleged crime figures

-not material amounts but

significant dollar amounts

-at first opportunity, sold bus.

-Isvestia [sic] article

-retracted

-[an original shareholder] - associated with OC but never charged or convicted

-[an original shareholder] - alleged - KGB

Concern

-large cash transactions - mgmt fixing

-co - mingling - [an original shareholder] - fixed

-adequacy of acctg - being fixed

-preferred shares - issued for $11M(U.S.)

- FMV of equip valued in $11M

- acquired equipment for much less

-Coopers hired to do valuation

- came in very high

Note 2:

Special Committee

Written report to be worked [?] with counsel

*Arbat - trade goods in Soviet Union

Payments made as commissions to Org Crime

first opportunity sold business

*Newspaper Article

Crime figures a shareholder

Only 1 - [an original shareholder]

3 individuals receiving commission questionable

original shareholder no record

sources associate them

[an original shareholder] believed to be former KGB

sits on Russian Anti-Crime Commission

Fairfax says sources tell them they are involved with bad people

*Assess [?] Hungary facility

interview 5 of original 6 shareholders

background check of buyers

Clearly there is business

customers & suppliers

They found 3 or 4 areas of concern

1) large amount of cash transactions

European Tax Plan

Issue being addressed

2) Excessive commingling activities

of company with original shareholders

Management addressing

3) Accounting records not NA stand

Improving them

systems should not be able to

be overwritten

4) Original purchase of equipment

Equipment for shares

11 mill assessed value

invoices created at a latter date

price paid actually about 1/10

US Customers

list of purchasers

Initial great concern

Agent addresses - endusers

were real. A lot of NA

sales booked through agent address

in Russia/Ukraine

Segment information correct

Fairfax satisfied.

V. The Alleged Failure to Disclose a Material Change

42. On December 3, 1997 D&T agreed to serve as auditors for YBM and to conduct the audit of YBM's annual financial statements for the year ending December 31, 1997.

43. On March 19, 1998 Bogatin sent a memo to the Vice-President of Finance for UTL, copied to the Audit Committee of the YBM Board (Antes, Mitchell & Greenwald), and to Fisherman and Gatti, stating:

As you may be aware, we have not yet received the 1997 audit report. Deloitte & Touche is reluctant to issue their report until the Board of Directors of YBM evaluates the reckless actions of United Trade related to the escrow agreements signed in December 1997. If you are unaware, United Trade entered into these agreements without anyone's knowledge or approval. Moreover, the money [US$32.2 million] was placed with an unacceptable offshore bank.

44. On March 23, 1998 D&T met with the YBM Audit Committee. At this meeting D&T brought to the Audit Committee's attention significant accounting and business issues including management's lack of internal controls over material liquid assets of the Company. D&T provided the Audit Committee with a list of certain transactions in respect of which D&T expressed concerns. The Audit Committee undertook to develop a detailed plan to investigate these transactions to the satisfaction of D&T. D&T informed the Audit Committee that in order to complete its audit, D&T would need to review and consider the results of the investigation. It was anticipated that the investigation would take several weeks.

45. In a memo dated April 7, 1998 Gatti provided to the Audit Committee a summary of the various transactions which were identified by D&T as requiring further inquiry by the Audit Committee. Gatti noted the following:

Since its inception, United Trade has controlled its own cash. United Trade management has been able to authorize and execute transactions consistent with running its day-to-day operations. My arrival in January 1996 did not result in a modification to this delegation of authority.

Since January 1996, corporate finance has made many operating changes and improvements in Hungary. However, there have been other proposed changes and improvements, including moving cash management to corporate headquarters that have not been endorsed by the CEO and COO. The transactions above validate the need to establish greater cash controls from corporate headquarters.

46. On April 9, 1998 YBM held a meeting of the Board of Directors in Philadelphia. According to minutes of the meeting all members of the Board were in attendance. Mitchell presented to the Board the concerns raised by D&T respecting certain transactions involving escrow arrangements, acquisitions and the identity of the escrow agent. Mitchell also reviewed an additional "spin-off concern" identified by D&T: that the Company engaged in related party transactions whereby suppliers of magnets, providers of goods and services, buyers of magnets and sellers of technology to YBM were, in certain circumstances, the same parties. Mitchell advised the Board that a detailed review of the transactions was required. The Board resolved that the Audit Committee be authorized to "to investigate and ascertain the facts" respecting the various transactions in respect of which D&T had expressed concerns, and directed the Audit Committee to report their findings to the Board and D&T.

47. On April 19, 1998 D&T participated in a conference call with Antes, Mitchell and YBM's U.S. Counsel. During the course of the meeting D&T indicated that since March 23, 1998 they had tried to get comfortable with some of the questioned transactions but had been unable to do so. D&T advised that a forensic investigation was required. D&T told the Company that it was in a "stop position" and that no further audit procedures or any other service would be rendered by D&T on behalf of YBM.

48. By letter dated April 20, 1998 from D&T to Mitchell, copied to Antes, D&T confirmed their discussion on April 19, 1998 indicating that the information they had received to date had made them "extremely concerned"; that there was uncertainty respecting the status of certain entities involved in the questioned transactions and that certain individuals associated with these entities and related entities were reputed to have ties to organized crime. D&T further advised that "the information obtained heightens our serious concerns that these transactions may be bogus and are being used to cover the flow of money between these companies for other purposes".

49. In the letter of April 20, 1998 D&T also reiterated its request for an in-depth forensic investigation and that such investigation should not involve management of YBM. D&T also stated the following:

We will not perform any further audit procedures or other services for YBM until the Committee completes its investigation and all matters are resolved to our satisfaction. Upon completion of the investigation, Deloitte &Touche will need to make a determination (i) whether it is willing to continue to be associated with YBM; (ii) whether it is able to issue an opinion on YBM's 1997 financial statements; and (iii) whether it will continue to be associated with YBM's 1996 financial statements.

We believe that it is highly unlikely that these issues can be resolved by your April 30 filing deadline. We are also concerned that you have released your 1997 earnings. Accordingly, we recommend that you consult with your securities counsel to address these issues.

50. On April 27, 1998 YBM issued a news release in which YBM announced its results from operations for the three month period ending March 31, 1998. YBM reported that net income had increased 94.6% compared to the year before and that sales had increased 38.2%. The news release contained no information respecting the 1997 audit.

51. On April 28, 1998 D&T informed Mitchell and Antes that it was concerned that YBM had released its first quarter earnings for 1998, having regard to the fact that the issues relating to the questioned transactions which occurred in 1997 had not been resolved and may have an impact upon first quarter earnings. D&T also recommended that:

...you consult with your securities counsel to address the Company's need to disclose to the Ontario Securities Commission and the public that the audit of the Company's 1997 financial statements has been suspended pending the completion of an investigation by the Audit Committee....

52. On May 8, 1998 D&T once again informed Mitchell and Antes that it was concerned that the Company had released its first quarter results but had failed to disclose that D&T had suspended its audit.

53. On May 8, 1998 YBM issued a news release announcing that it was in the process of filing an application with the securities regulators seeking a 45-day extension from the May 20, 1998 deadline for filing and mailing its 1997 audited financial statements to shareholders. In the news release YBM disclosed that the reason for the application was that "it is possible that it [YBM] will not receive an audit report on its 1997 financial statements from its auditors, Deloitte & Touche LLP, in time to meet the required filing and mailing deadline". YBM disclosed that "as part of concluding its audit" D&T had requested that the Board of Directors conduct an independent review of certain aspects of the Company's business and operations in Eastern Europe. As to the reason for this review YBM stated:

Management attributes the extensiveness of the audit and the requirement for this review to the fact that business practices in the Company's major market, Eastern Europe, differ from those in North America due to the relatively early stage of development of the Eastern European market economies.

54. On May 8, 1998, YBM's Canadian general counsel filed an application with the Commission on behalf of YBM seeking a 45-day extension from the May 20, 1998 deadline for filing and mailing its 1997 audited financial statements to shareholders. In this application, it is stated:

The Company completed an offering of 3.2 million common shares by way of short-form prospectus on November 26, 1997. In connection with its review of the prospectus, the Corporate Finance and Enforcement Branches of the Ontario Securities Commission (the "Commission") made certain inquiries into the Company's business, operations and public disclosure record. To the knowledge of the Company, the inquiries have not been concluded and the Company has not been advised of any finding by the Commission in connection with such inquiries. Largely as a result of the ongoing and increased scrutiny by the Commission, on April 20, 1998, subsequent to the completion of virtually all of the substantive portion of the Company's 1997 audit, the Company's auditors, Deloitte & Touche LLP ("D&T") requested that the Company perform an in-depth independent investigation (the "Investigation") to confirm the identity of certain parties to certain transactions involving the Company and generally to confirm the veracity of certain transactions underlying the Company's business.

55. On May 13, 1998 the Commission issued a temporary cease trade order in respect of the securities of YBM. This order remains in effect.

VI. The Allegation that Information Submitted to Staff was Misleading or Untrue

56. In a letter dated July 4, 1997 signed by Wilder and submitted to Staff of the Commission on behalf of YBM (see paragraph 19 above) the following statements were made:

As discussed above, the Confirming Accountant will be in a position to deliver its report to you no later than Tuesday, July 8, 1997. Based upon the results reported to date, we believe that the report will represent a continuation of the series of favourable due diligence results pertaining to the business of YBM conducted by independent parties. This stands in stark contrast to the rumors and innuendo to which YBM has been subject and which , based upon the information provided to us to date, have not been subject to any outside scrutiny or independent verification whatsoever.

As discussed previously, the Company, its advisors, as well as the underwriters and their advisors have made every effort to address each concern raised to date in order to complete this financing and allow the Company to complete its acquisition transaction which is crucial to its continued success. Needless to say, YBM's inability to proceed with this financing despite the efforts of all the parties concerned and referenced herein would have serious and lasting negative consequences to the Company and its shareholders. We respectfully submit that such an occurrence would not be in the public interest in view of the extensive due diligence completed to date and the uniformly positive results thereof. [emphasis added]

VII. Conduct Contrary to the Public Interest

57. It is the position of Staff that the conduct alleged above constitutes conduct contrary to the public interest as follows:

YBM Magnex International Inc.

a) that YBM failed to make full, true and plain disclosure in its 1997 preliminary prospectus and final prospectus of material facts respecting the Special (Independent) Committee created by the Board of Directors of YBM on August 29, 1996. In so doing, YBM acted in a manner contrary to the public interest.

b) that YBM failed to comply with its continuous disclosure obligations by not issuing a news release forthwith disclosing that YBM's auditor had notified YBM, by no later than April 20, 1998, that it had decided not to perform any further services for YBM, including the rendering of an audit opinion in respect of YBM's 1997 financial statements, until YBM had completed an in-depth forensic investigation addressing specific concerns to the satisfaction of the auditor. In so doing, YBM acted in a manner contrary to the public interest.

The Directors and Officers of YBM

c) that each of Antes, Bogatin, Davies, Fisherman, Greenwald, Mitchell, Peterson, Schmidt and Gatti, authorized, permitted or acquiesced in YBM failing to make full, true and plain disclosure in YBM's 1997 preliminary prospectus and final prospectus of material facts respecting the Special (Independent) Committee created by the Board of Directors of YBM on August 29, 1996. In so doing, each of Antes, Bogatin, Davies, Fisherman, Greenwald, Mitchell, Peterson, Schmidt and Gatti acted in a manner contrary to the public interest.

d) that each of Antes, Bogatin, Fisherman, Greenwald, Mitchell and Gatti authorized, permitted or acquiesced in YBM failing to comply with YBM's continuous disclosure obligations by not issuing a news release forthwith disclosing that YBM's auditor had notified YBM, by no later than April 20, 1998, that it had decided not to perform any further services for YBM, including the rendering of an audit opinion in respect of YBM's 1997 financial statements, until YBM had completed an in-depth forensic investigation addressing specific concerns to the satisfaction of the auditor. In so doing, each of Antes, Bogatin, Fisherman, Greenwald, Mitchell and Gatti acted in a manner contrary to the public interest.

The Co-Lead Underwriters for YBM's 1997 Public Offering

e) that each of FMSL and GMP signed a certificate to a preliminary prospectus dated May 30, 1997 and a final prospectus dated November 17, 1997 which prospectuses, to the best of their knowledge, did not contain full, true and plain disclosure of all material facts relating to the securities offered; specifically, material facts respecting the Special (Independent) Committee created by the Board of Directors of YBM on August 29, 1996. In so doing, each of FMSL and GMP acted in a manner contrary to the public interest.

Wilder

f) that Wilder made statements in a letter dated July 4, 1997 to Staff of the Commission that in a material respect, and at the time and in the light of the circumstances under which the statements were made, were misleading or untrue or did not state a fact that was required to be stated or that was necessary to make the statements not misleading; specifically, statements concerning the results of due diligence conducted in respect of YBM. In so doing, Wilder acted in a manner contrary to the public interest.

58. Staff reserve the right to make such other allegations as Staff may advise and the Commission may permit.

DATED at Toronto this 1st day of November, 1999.







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To: Mighty_Mezz who wrote (941)4/27/2005 11:09:32 PM
From: StockDung
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Kenneth Davies and Harry Antes each receive three-year director bans and were ordered to pay costs of $75,000.

OSC levies $1.2 million in penalties in YBM Magnex case
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The Ontario Securities Commission levied fines against two brokerage firms Wednesday in its long awaited decision on YBM Magnex International Inc.

The OSC ordered that YBM cease trading permanently, and that its executives, Jacob Bogatin and Igor Fisherman, be permanently prohibited from becoming or acting as a director or officer of any issuer.

Investment banker and YBM director, Owen Mitchell, receives a five-year ban from acting as a director or officer and must pay investigation and hearing costs of $250,000. Directors Kenneth Davies and Harry Antes each receive three-year director bans and were ordered to pay costs of $75,000.

While the OSC said the penalized directors were worthy of sanction, it found that former premier of Ontario, David Peterson, met his obligations. "We believe Peterson could have done more, we have concluded that Peterson acted reasonably based on his involvement in the matter, his skill and his access to information in the circumstances. Accordingly, his due diligence defence is available to him, but just barely."

The firm’s underwriters, National Bank Financial Corp. must pay investigation and hearings costs of $400,000. Brokerage firm Griffiths McBurney & Partners also faces the same costs and it must submit to a review of its practices and procedures as an underwriter by an independent person approved by OSC staff and institute any changes recommended by that person.

In a summary of the ruling handed down by a panel consisting of former OSC vice chair, Howard Wetston, and commissioners Derek Brown and Robert Davis, the OSC found that, "YBM’s key disclosure documents did not, we find, contain full, true and plain disclosure of all material facts."

The commission says that, despite a hearing which took over 124 hearing days to complete, "this case is not about organized crime, money laundering or whether the respondents believed YBM was not a real company. It is about the disclosure of risk. Materiality is reinforced as the standard for such disclosure in securities markets by taking into account the considerations associated with the exercise of judgement and reasonable diligence."

It said that YBM’s disclosure "leads the reader to believe that the risks faced by YBM were no greater than the inherent risks faced by any company operating in Eastern Europe at that time," but the OSC finds this to be incorrect. "YBM was subject to company-specific risks. An investor in YBM’s securities had the right to know what specific risks were presently threatening the issuer."



Disclaimer - The opinions expressed in this article are not necessarily held by all or any of the subscribed advisors. Readers are urged to consult a Professional Advisor for expert advice on this subject.



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To: Mighty_Mezz who wrote (941)4/27/2005 11:12:09 PM
From: StockDung
   of 978
 
The National Post reported last month that the Ontario Securities Commission (OSC) was intending to take disciplinary action against Mr. Peterson, a former director of YBM, and three other Canadian-based directors -- Owen Mitchell, Kenneth Davies and Michael Schmidt -- for "conduct contrary to the public interest" when they failed to disclose information linking YBM to the Russian mob.

Russian Mafia - Politicians - Mogilevich and Birshtein
(1) Background Note:
The man behind the TSE-300 listed company, YBM, is the Russian Mafia mobster Semyon Mogilevich, described as the "Most Dangerous Mobster in the World". YBM was delisted from the Toronto Stock Exchange for fraud, after reaching a market capitalization of CDN$900 million. Former Liberal Premier of Ontario was on the Board of Directors of YBM. Mogilevich was also involved in the US$15 billion money laundering investigation at the Bank of New York. Mogilevich is linked to many other Russian Mafia mobsters and is banned from several countries. Mogilevich and his mobster colleagues were present at a Russian Mafia summit meeting in Tel Aviv, Israel on Oct 10 - 19, 1995 which was hosted by Boris Birshtein.

Birshtein (via Seabeco) made significant financial contributions to Leonid Kuchma's 1994 presidential campaign, after Olexander Volkov joined the Kuchma team in 1994. Volkov was a "business partner" with Birshtein and became one of the mafia oligarchs in Ukraine. Volkov is under investigation in Belgium and Switzerland for money-laundering, and millions of dollars in bank accounts in the UK, Germany, Monaco, Luxembourg, Switzerland, and the US have been frozen. Media reports claim that through Volkov, industries in Ukraine have "been carved up among sometimes unsavoury insiders connected to the Kuchma administration."

Birshtein had emigrated from the Soviet Union in the late 1970s to Israel and subsequently moved to Switzerland where he built his business. He has ties to political leaders not only in Ukraine, but also in Russia, Moldova, Canada and Kyrgyzstan. Izvestia asserted that Birshtein "is known as a (double) agent of the KGB and Mossad." Birshtein's Seabeco partner, Dmitri Yakubovski left Canada for Russia after a shoot out in the posh Bridle Path area of Toronto. In Russia, Yakubovski (Iakubovski) was arrested and convicted for the 1994 heist of up to $700 million of rare manuscripts from the Russian National Library that were destined for Israel.

In the late 1980s, Boris Birshtein (chairman of Seabeco) worked on Canada-USSR trade deals with well known companies such as Molson Canada, Gillette Canada, and even Vladislav Tretiak.

The Toronto Star reported that Boris Birshtein "knows everybody", including Brian Mulroney, Hal Jackman, Gerry Weiner, Michael Wilson, Barbara McDougall, and Monte Kwinter.

============================================================

nationalpost.com

Tuesday, November 02, 1999
(2) Securities charges filed against former Ontario premier
Peterson, others accused of failing to disclose YBM's links to Russian mob

Theresa Tedesco, Chief Business Correspondent National Post

Canada's leading securities commission has filed administrative charges against a group of 10 directors -- including David Peterson, a former premier of Ontario -- lawyers and two brokerage firms, for allegedly violating the Ontario Securities Act as a result of their involvement in YBM Magnex International, the failed U.S.-based magnet maker with links to Russian organized crime.

The National Post reported last month that the Ontario Securities Commission (OSC) was intending to take disciplinary action against Mr. Peterson, a former director of YBM, and three other Canadian-based directors -- Owen Mitchell, Kenneth Davies and Michael Schmidt -- for "conduct contrary to the public interest" when they failed to disclose information linking YBM to the Russian mob.

Yesterday, the OSC levelled six allegations in a notice of hearing against the men.

Five other YBM directors and officers who do not reside in Ontario -- Harry Antes, chairman of the board, Jacob Bogatin, chief executive officer, Igor Fisherman, chief operating officer, Daniel Gatti, chief financial officer, and Frank Greenwald -- were also named by the provincial regulator.

The disciplinary action stems from a prospectus filed by YBM in November, 1997, that enabled the industrial magnet company to raise $52.8-million from public investors seven months before its Pennsylvania headquarters was raided by the FBI. Staff at the securities watchdog, which for the past two years had been investigating the conduct of the company's board of directors and its advisors that led to the prospectus, alleged that YBM and its advisors failed to disclose that U.S. law enforcement agencies were investigating YBM at the time it sold 3.2 million shares on the Toronto Stock Exchange.

According to confidential company documents, YBM's board of directors knew about an FBI investigation in August, 1996. The company hired New-York based Fairfax Group, which advised senior management in March, 1997, of "various connections between the company, its affiliates, and/or its management and shareholders, on the one hand, and individuals and entities with reported ties to organized crime, on the other."

However, that information was not disclosed to the OSC or to public shareholders when YBM filed its preliminary prospectus to raise money two months later in May, 1997. Securities laws in Ontario require companies to disclose all material information that could affect the share price. The prospectus was approved by the OSC's corporate finance department in November, 1997, but now officials in the watchdog's enforcement branch claim the filing "failed to contain full, true, and plain disclosure of all material facts."

In a statement, Mr. Peterson denied the OSC's accusations, saying he will "vigorously defend his reputation."

Also facing potential disciplinary action are Lawrence Wilder, a securities lawyer at Toronto law firm Cassels Brock & Blackwell, who is accused of "misleading or untrue" statements to the OSC in his role as YBM's Canadian counsel.

First Marathon Securities and Griffiths McBurney, the two Toronto-based brokerage firms who signed the November, 1997, prospectus and helped sell YBM shares, are also alleged to have misled investors.

YBM went into receivership in December, 1998, five months after its headquarters was raided by the U.S. Attorney's Office in Pennsylvania, leaving millions of investors stranded holding about $635-million in worthless shares.

Earlier this year, the company pleaded guilty in U.S. court to conspiracy to commit mail and securities fraud and a class-action suit has been filed in the U.S. against the company, its directors and auditors.

The first hearing before an OSC tribunal of commissioners is scheduled for Nov. 29. The penalties range from a ban on trading, suspension and reprimand and in some cases their licences to sell securities in Ontario's capital markets could be revoked.

Staff at the regulator have also taken the unprecedented step of seeking an endorsement of the OSC's findings from the Ontario Superior Court of Justice -- and have asked the court for additional sanctions. Although they would not re-argue the case if that were to happen, OSC staff want the court to impose tougher penalties, ranging from paying fines as a form of reparation to prohibiting any of the accused from serving as an officer or director of a publicly traded company. There are no jail penalties.

"This is a very unusual approach the commission has adopted," explained a Bay Street lawyer who asked not to be named. "It's highly unusual because they are asking for the trial to take place in the OSC hearing room and the sentencing to unfold in the courtroom."

The response to the OSC's allegations was swift. Mr. Wilder issued a statement "vigorously" denying the allegations made against him. He served notice that he intends to file an application with the Ontario Superior Court of Justice to "prohibit the commission from proceeding against him."

Mr. Wilder has already served notice that he intends to take the matter before the Law Society of Upper Canada, which is the licensing body for lawyers in Ontario.

Mr. Peterson, who is an associate of Mr. Wilder's at Cassels Brock & Blackwell, said he "deplores the OSC's action. It is motivated by staff's awareness of its own culpability."

The controversial prospectus was approved by the OSC after months of consultation with YBM officials, Mr. Wilder and the brokerage firms. However, the commission learned of potential links to money laundering and Russian organized crime at YBM during a meeting with RCMP and other securities enforcement groups on May 13, 1997.

In an internal OSC memo first revealed by the National Post last month, a staff member wrote about how "there is a suspicion that the company is a front for Russian mafia money laundering." The document, dated May, 1997, noted that a TSE official advised the OSC should not approve YBM's prospectus because it would be "worse than Bre-X."

The OSC did not confront YBM officials with the information but launched a detailed review of the prospectus filing, which was ultimately approved six months later in November, 1997.

"OSC staff look forward to producing evidence before the commission to substantiate all of the allegations made," said OSC spokesman Frank Switzer.
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ukar.org

The Village Voice
May 20 - 26, 1998
(3) The Most Dangerous Mobster in the World
By Robert I. Friedman

According to the FBI and Israeli Intelligence, Semion Mogilevich Rules Over an Arms-Trafficking, Money-Laundering, Drug-Running, and Art-Smuggling 'Red Mafia'

In two posh villas outside the small town of Ricany, near Prague, one of the most dreaded mob families in the world savagely murders its terrified victims. The mob's young enforcers, trained by veterans of the Afghanistan war, are infamous for their extreme brutality. Their quarry, usually businessmen who have balked at extortion demands, are repeatedly stabbed and tortured, then mutilated before they are butchered. The carnage is so hideous that it has scared the daylights out of competing crime groups in the area.

The torture chambers are run by what international police officials call the Red Mafia, a notorious Russian mob family that in only six years has become a nefarious global crime cartel. Based in Budapest, it has key centers in New York, Pennsylvania, Southern California, and as far away as New Zealand.

The enigmatic leader of the Red Mafia is a 52-year-old Ukrainian-born Jew named Semion Mogilevich. He is a shadowy figure known as the ''Brainy Don''--he holds an economics degree from the University of Lvov--and until now, he has never been exposed by the media. But the Voice has obtained hundreds of pages of classified FBI and Israeli intelligence documents from August 1996, and these documents--as well as recent interviews with a key criminal associate and with dozens of law enforcement sources here and abroad--describe him as someone who has become a grave threat to the stability of Israel and Eastern Europe.

''He's the most powerful mobster in the world,'' crows Monya Elson, who is listed in classified documents as one of Mogilevich's closest associates and partners in prostitution and money laundering rings. The Brighton Beach­based Elson, who once led a pack of thugs and killers known as Monya's Brigada, is currently in the Metropolitan Correctional Center in lower Manhattan awaiting trial for three murders and numerous extortions.

In July 1993,after Elson was grievously wounded by rival mobsters in a bloody shoot-out outside his Brooklyn apartment building, Mogilevich spirited him out of the country. Mogilevich then set up his Russian Jewish refugee friend in an alleged massive money-laundering scheme in Fano, Italy, where he was eventually arrested and extradited back to America. Elson, an integral part of the Red Mafia, had been one of the most feared mobsters in Brighton Beach, ground zero for Russian organized crime in America, which has exploded here following perestroika.

''If I tell on Mogilevich, Interpol will give me $20 million,'' boasted Elson. ''I lived with him. I'm his partner, don't forget. We are very, very close friends. I don't mean close, I mean very, very close. He's my best friend.'' Nevertheless, after extensive interviews over the course of the last six months, Elson ultimately confirmed some of the details about Mogilevich contained in the classified FBI and Israeli documents.

Allegations of Mogilevich's devilish array of criminal activities are extensively detailed in the reports: The FBI and Israeli intelligence assert that he traffics in nuclear materials, drugs, prostitutes, precious gems, and stolen art. His contract hit squads operate in the U.S. and Europe. He controls everything that goes in and out of Moscow's Sheremetyevo International Airport, a ''smugglers' paradise,'' says Elson. Mogilevich bought a bankrupt airline in a former Central Asian Soviet republic for millions of dollars in cash so he could haul heroin out of the Golden Triangle. Most worrisome to U.S. authorities is Mogilevich's apparently legal purchase of virtually the entire Hungarian armaments industry, jeopardizing regional security, NATO, and the war against terrorism.

In one typical criminal deal, Mogilevich and two Moscow-based gangsters sold $20 million worth of pilfered Warsaw Pact weapons from East Germany, including ground-to-air missiles and 12 armored troop carriers, according to the classified Israeli and FBI documents. The buyer was Iran, says a top-level U.S. Customs official who requested anonymity.

In another deal, an FBI informant told the bureau that one of Mogilevich's chief lieutenants in Los Angeles met two Russians from New York City with Genovese crime family ties to broker a scheme to dump American toxic waste in Russia. Mogilevich's man from L.A. said the Red Mafia would dispose of the toxic waste in the Chernobyl region, ''probably through payoffs to the decontamination authorities there,'' says a classified FBI report.

Mogilevich is particularly intrigued by art fraud. In early 1993, he reached an agreement with the leaders of the powerful Solntsevskaya crime family in Moscow to invest huge sums of money in a joint venture: acquiring a jewelry business in Moscow and Budapest. The business, according to classified FBI documents, was to serve as a front for the acquisition of jewelry, antiques, and art, which the Solntsevskaya mob had stolen from churches and museums in Russia, including the Hermitage in St. Petersburg. The gangsters also robbed the homes of art collectors and even broke into synagogues in Germany and Eastern Europe to steal rare religious books and Torahs.

Mogilevich's operation, again in collusion with the Solntsevskaya mob, also purchased a large jewelry factory in Budapest. Russian antiques, such as Faberge eggs, are sent to Budapest for ''restoration.'' Mogilevich's men ship the genuine Faberge eggs to an unwitting Sotheby's auction house in London for sale, then send fake Faberge eggs as well as other ''restored'' objects back to Moscow.

Mogilevich's early years are murky. Soviet authorities first learned of his criminal activities in the 1970s, when he was a member of the Liubertskaya crime group that operated in the Moscow suburb of the same name. He was involved in petty thefts and counterfeiting.

But Mogilevich made his first millions fleecing fellow Jews. In the mid 1980s, when tens of thousands of Jewish refugees were hurriedly immigrating to Israel and America, Mogilevich made deals to buy their assets--rubles, furniture, and art--cheaply, promising to exchange the goods for fair market value and send refugees the proceeds in ''hard'' currency. Instead, he sold their valuables and pocketed the considerable profits.

In the 1980s, he established a petroleum import-export company, Arbat International, and registered it in Alderney, one of the Channel Islands, which is known to be a tax haven. One of his partners--with a quarter share of the company--was Vyacheslav Ivankov, the legendary Russian criminal who in March 1992 became Godfather of the Russian mob in America. Ivankov was convicted in 1996 of extorting two Russian-born Wall Street stockbrokers. He now resides in Raybrook, a Federal prison in upstate New York.

In early 1990, Mogilevich fled Moscow, as did many other dons, to avoid the gangland wars that were then roiling the capital. Mogilevich and his top henchmen settled in Israel, where they received Israeli citizenship. He ''succeeded in building a bridgehead in Israel'' and ''developing significant and influential [political] ties,'' says an Israeli intelligence report.

Mogilevich is married to a Hungarian national, Katalin Papp. That marriage allowed him to legally emigrate to Budapest, Hungary, in 1991, where he began to build the foundations of his global criminal empire. He bought a string of nightclubs in Prague, Riga, and Kiev--called the ''Black and White Clubs''--that has become one of the world's foremost centers of prostitution. Monya Elson is a partner in the clubs, according to his own admission and classified FBI documents. The Black and White Club in Budapest became the hub of Mogilevich's operations. He quickly built a highly structured criminal organization, in the mode of a traditional American mafia family. Indeed, many of the organization's 250 members are his relatives.

To the consternation of international law enforcement officials, Mogilevich began to legally purchase much of Hungary's arms industry. The legitimate companies he bought include:

Magnex 2000: a giant magnet manufacturer.

Digep General Machine Works: an artillery shell, mortar, and fire equipment manufacturer, which was financed by a $3.8 million loan from the London branch of Banque Francaise De L'orean.

Army Co-op: a mortar and anti-aircraft gun factory.
Army Co-op was established in 1991 by two Hungarian nationals, both in the local arms industry, who were looking for a partner. Mogilevich has bought 95 per cent of Army Co-op through another Channel Island holding company, Arigon, Ltd., and also deals extensively with the Ukraine, selling oil products to the Ukrainian railway administration.

These transactions enabled the Mogilevich organization to become a direct owner of the Hungarian armaments industry. In 1994, he purchased a license enabling him to buy and sell weapons. Now a legitimate armaments manufacturer, one of his companies participated in at least one arms exhibition in the U.S., where it displayed mortars modified by Israel.

Like mob bosses everywhere, Mogilevich couldn't sustain his empire without the help of corrupt police and politicians. There is one documented example of a criminal associate of Mogilevich mingling with American politicians. In March 1994, Vahtang Ubiriya, one of Mogilevich's top lieutenants, was photographed by the FBI at a tony Republican Party fundraiser in Dallas, says an FBI report. Ubiriya, a high-ranking official in the Ukrainian railway administration, has a prior conviction for bribery in the Ukraine.

In Europe and Russia, the ''corruption of police and public officials has been part of the Semion Mogilevich Organization's modus operandi,'' says a classified FBI document. ''The corruptive influence of the Mogilevich organization apparently extends to the Russian security system. During 1995, two colonels from Department of the Russian Presidential Security Service . . . traveled to Hungary under commercial cover to meet with Mogilevich . . . seeking information for use in the Russian political campaign.'' An Israeli associate of Mogilevich met with the two colonels and provided intelligence. Mogilevich also paid off a Russian judge to secure Vyacheslav Ivankov's early release from a Siberian prison, where he was doing hard time for robbery and torture, according to U.S. court records and classified FBI documents.

On April 28, the German national television network ZDF reported that the BND (the German intelligence agency) had entered into a secret contract with Mogilevich to provide information on the Russian mob. The charges were made by several sources, including Pierre Delilez, a highly regarded Belgium police investigator who specializes in Russian Organized Crime. Because of this deal with the BND, police in Belgium, Germany, and Austria have complained that it is now impossible to investigate the ''Brainy Don.'' If the television report is accurate, one possible motive for BND's deal, says a U.S. law enforcement expert on the Russian mob, is that the Germans recently ''pulled their people out of Moscow because they didn't like the level of cooperation they were getting from the Russian authorities on the Russian mob.'' Gangsters, said this source, often talk to intelligence agencies about their rivals.

Mogilevich's main activity in the U.S. appears to be money laundering, says a classified FBI report. He has set up companies in Los Angeles--FNJ Trade Management--and Newton, Pennsylvania--YBM Magnex International--as well as dozens of shell companies, which have received more than $30 million from Arigon, Ltd., the center of Mogilevich's financial operations.

Last Friday, U.S. Attorney Robert Courtney, head of the organized-crime strike force, led a a joint FBI, IRS, INS, and Customs raid of YBM's offices in Newton. Cartons of documents were seized, with Canadian and U.S. police citing the company's alleged ties to Russian organized crime. YBM is publicly traded on the Toronto Stock Exchange, and two days before Friday's raid, trading in its stock was suspended by Canadian authorities.

The president and CEO of YBM is Jacob Bogatin, a professor of physical metallurgy. In May 1996, he contacted the FBI in Philadelphia to find out why the INS had denied visas to YBM employees arriving from Hungary and the Ukraine. When he was rebuffed, he had intermediaries step forward and pester the FBI. The State Department has banned Mogilevich himself from obtaining a U.S. visa because he's on the department's watch list of international organized-crime figures. Nevertheless, he has surreptitiously entered America under aliases and on visitor visas issued in Tel Aviv to visit Elson and Ivankov.

Bogatin admitted during a telephone interview that Mogilevich owns his company. When asked if he knew that numerous law enforcement agencies here and abroad considered Mogilevich to be a leader of one of the most ruthless organized-crime families in recent times, Bogatin replied, ''We have an investors relations guy. You want to talk with him about this stuff.'' He added that he had read allegations in the Eastern European press that his boss was a Mafia don, but didn't believe them. YBM vehemently denies that it is connected to Russian organized crime or has engaged in any criminal activities.

Bogatin is no stranger to the mob, however. His brother, David, a top Russian crime figure who once served in North Vietnam for the Soviets in an anti-aircraft unit, is now serving an eight-year term in a New York State prison for a multimillion-dollar gasoline tax fraud scheme. Just prior to trial, he had jumped bail, fleeing to Poland. There he set up the first commercial banks, which moved vast sums of money controlled by Russian wiseguys. (This after handing over his mortgages for five pricey Trump Tower apartments to a Genovese associate. The mortgages were liquidated and the funds were moved through a mafia-controlled bank in Chelsea.) Eventually he was caught and returned to the U.S. In the meantime, he lived like royalty in a five-star Viennese hotel, surrounded by a praetorian guard of 125 Polish parachutists, some of them bedecked in shiny gold uniforms.

Mogilevich has not refrained from associating with known killers in America, prime among them Elson and Ivankov. A confidential informant told the FBI that Vladimir Berkovich, an L.A. resident, is a chief lieutenant in Mogilevich's organization and has arranged contract killings here, supplying the weapons and spiriting the killers out of the country. The visas, says the report, were obtained through the Palm Terrace restaurant, a watering hole for Russian gangsters, which Berkovich owns. Berkovich told the Voice that he is aware of the government's charges, and that they are ''total bullshit.'' Although he has no criminal record in the U.S., Berkovich's son, Oleg, was convicted in Los Angeles of solicitation to commit murder on October 11, 1989. He was sentenced to four years. Oleg's business card identified his employer as Magnex, Ltd., a company owned by Mogilevich in Budapest. Oleg was recently arrested in Hungary on unspecified charges but was released.

Oleg's uncle, the colorful Lazar Berkovich, whose last known address was New York City, arrived in the Big Apple after having survived a shootout with Italian gangsters, says his brother Vladimir. The FBI report claims that Lazar was head of Russian criminal activities in Italy prior to his coming to America to recuperate from his wounds, though Vladimir Bercovich denies that Lazar was ever connected to the Russian mob.

Israeli and U.S. law enforcement sources agree that the Red Mafia, though in existence for a mere six years, has become one of the most formidable Russian organized-crime families in the world. Strongest in the Ukraine, Hungary, the Czech Republic, and the U.S., Mogilevich has increased his strength by forging ties with other powerful Russian mob groups as well as with the Italian Camorra. His reported ties to the German BND and ex­police officers in Hungary keep him informed of police efforts to penetrate his organization. ''He also ingratiates himself with the police by providing information on other [Russian crime] groups' activities, thus appearing to be a cooperative good citizen,'' says a classfied FBI report. This, along with his strong leadership qualities, his acute financial skills, his talented and highly educated associates, and his use of cutting-edge technology, has so far made the ''Brainy Don'' impervious to prosecution.
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ukar.org

Charles Clover Financial Times 30Oct99 Organized crime meets in Tel Aviv

Mr Birshtein hosted a summit meeting of Russian organised crime figures at his office in Tel Aviv from October 10-19, 1995.

Financial Times
Saturday October 30 1999

World News / Europe

(4) UKRAINE: Questions over Kuchma's adviser cast shadows

The Ukrainian president's administration is facing serious allegations ahead of polls this weekend, writes Charles Clover

Few people in Kiev will speak openly about Olexander Volkov, a top adviser to President Leonid Kuchma and manager of his campaign for re-election at polls to be held on Sunday. One well known journalist will not even say his name out loud, preferring to write it on a scrap of paper. He is a powerful man.

Mr Volkov, however, has become an issue in the campaign. The president's opponents claim that Mr Kuchma's 5-year-old administration has been shot through with corruption and they place Mr Volkov at the heart of it.

In fact, they claim that with the help of Mr Volkov, Ukraine's industry has been carved up among sometimes unsavoury insiders connected to the Kuchma administration. If Mr Kuchma wins a second term, these concerns are likely to escalate.

Mr Volkov's influence in the Kuchma camp is great. After joining Mr Kuchma's successful 1994 presidential election campaign, he served as an official adviser to the new president from 1995-96. In September 1998, he was appointed vice-chair of the Co-ordinating Committee for Domestic Policy, headed by Mr Kuchma, which currently functions as Mr Kuchma's election committee.

But concerns about Mr Volkov's business connections have persisted, including from abroad. Two years ago, in response to a legal assistance request from Switzerland, a Belgian judge froze $3m in Mr Volkov's bank accounts in Belgium. The prosecutor's office launched an investigation.

What they found was that $15m had transited Mr Volkov's Belgian accounts from 1993-97, and that he also had bank accounts in the UK, Germany, Monaco, Luxembourg, Switzerland, and the US.

Mr Volkov declined to be interviewed for this article.

No charges have been filed against Mr Volkov, but the Belgians have asked to come to Ukraine and conduct interviews to determine the source of some of the money transiting Mr Volkov's accounts. Since July, they have been waiting for visas but so far in vain.

"Until now, we have had no co-operation at all from the Ukrainian side," said an official from the Belgian prosecutor's office. "To be honest, I would say this is due to deliberate obstruction from a very high level."

The Belgian investigation has revealed Mr Volkov's commercial ties to figures who western law-enforcement agencies say are associated with a Russian organised crime syndicate, the Solntsevskaya mafia, whose influence in Ukraine has grown dramatically since 1994.

Belgian prosecutors confirm that at least $5m of the transfers to Mr Volkov, starting in September 1994 and ending in January 1996, came from companies owned by Boris Birshtein or by associates of Mr Birshtein. It is Mr Volkov's connection with Mr Birshtein that primarily interests Mr Kuchma's political rivals — and also international law enforcement authorities. A Russian emigre financier and businessman, Mr Birshtein is currently being investigated by Antwerp police for suspected money-laundering.

Mr Birshtein is known to have contributed funds to Mr Kuchma's 1994 election campaign, and has developed business interests in the Ukraine. He could not be reached for comment for this article.

The Belgian probe found that of the $5m transferred to Mr Volkov's Belgian bank account, Mr Birshtein's company Seabeco transferred $2m, while Mr Birshtein's associates transferred $3m.

Mr Volkov first came to the attention of European law enforcement organisations as part of a Swiss investigation into Mr Birshtein's business partner, Sergei Mikhailov. Mr Birshtein and Mr Mikhailov jointly control at least one company, MAB International, registered in Belgium, according to Swiss police.

In a fax to the Geneva prosecutor on December 6, 1996, the Russian interior ministry identified Mr Mikhailov as the "leader of the Solntsevskaya criminal syndicate". Mr Mikhailov was arrested in Geneva in October 1996. He was charged and tried for alleged money-laundering and for being a member of an organised crime organisation but was acquitted in December 1998 for lack of evidence.

During the Swiss investigation of Mr Mikhailov, prosecutors found a wire transfer from a trading company named Fearnley — owned by an associate of Mr Mikhailov — to Mr Volkov's account in a Belgian bank in September 1994. It was this transfer that led to the opening of the Belgian file on Mr Volkov.

Jurgen Roth, a German writer and researcher, claims in his latest book on Russian organised crime, The Grey Eminence, published last month, that as early as November 1994, Mr Birshtein was given a leading role in organising the distribution of energy supplies in Ukraine.

Mr Roth cites a report by the US Federal Bureau of Investigation dated August 1996, and obtained by the FT, which says Mr Birshtein hosted "a summit meeting of Russian OC [organised crime] figures" at his office in Tel Aviv from October 10-19, 1995. The FBI confirmed the authenticity of the report.

Participants in the meeting included Mr Mikhailov and Semion Mogilevich, who is currently one of the suspects of the money-laundering investigation involving Bank of New York that became public last August.

According to the FBI report: "The subject of the meeting was the sharing of interests in Ukraine."

According to Volodymyr Malinkovitch, who was one of Mr Kuchma's key advisers for his successful 1994 presidential bid, campaign finance came from Birshtein's company Seabeco, after Mr Volkov joined the campaign in February 1994.

These transfers are cited as evidence by Mr Kuchma's political opponents that Mr Volkov has acted as Mr Birshtein's representative in dealings with Mr Kuchma earlier in his presidency.

Mr Malinkovitch was unwilling to talk about the reasons for which Mr Birshtein might have contributed to the 1994 Kuchma campaign. "I don't want to go into the details, because I am afraid if I did, the western countries would categorically refuse to give us credits," he said.

Insiders in the Ukrainian security services say any contacts there may have been between Mr Kuchma and Mr Birshtein would have ended after January 1997, when Mr Birshtein's visa to Ukraine was revoked.

But even if the links between the Ukrainian government and Mr Birshtein have now been severed, the questions it has raised about Mr Kuchma's first term in office are casting shadows over the second, which most observers believe he has an even chance of winning this weekend.
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theglobeandmail.com

(5) Watchdogs swoop down on YBM

Ex-premier targeted in securities case against firm with alleged mob links

KAREN HOWLETT and JOHN PARTRIDGE
The Globe and Mail; With a report from Richard Blackwell.
Tuesday, November 2, 1999

Toronto -- A long-running scandal surrounding YBM Magnex and its alleged links to the Russian mob broke wide open yesterday as securities watchdogs swooped down on virtually everyone involved with the company, including former Ontario premier David Peterson.

The Ontario Securities Commission's enforcement arm accused Mr. Peterson, two Bay Street investment firms, former company directors and others of withholding material information from the public during YBM Magnex International Inc.'s brief reign as a stock-market darling two years ago.

The regulator made the allegations against all directors who sat on the board of the now-defunct company, as well its underwriters, First Marathon Securities Ltd. (now part of National Bank of Canada) and Griffiths McBurney & Partners.

In an unprecedented move, the commission said it plans to seek a court order that will allow it to fine the individuals it holds responsible and strip them of their right to act as directors or officers of public companies.

"It's absolute nonsense," Mr. Peterson said in an interview yesterday. "Full disclosure was made in all cases. I did everything appropriate in the circumstances."

Losing the right to sit on boards would be a major blow for Mr. Peterson, a partner at blue-chip Toronto law firm Cassels Brock & Blackwell. He has collected a number of lucrative corporate directorships since leaving politics after the defeat of his Liberal government in 1990. He is chairman of bookstore chain Chapters Inc. and a director of companies including Rogers Communications Inc., Cambridge Shopping Centres Ltd. and Industrial-Alliance Life Insurance Co.

YBM has been at the centre of a sweeping probe by the Federal Bureau of Investigation and other U.S. law-enforcement agencies for more than a year, amid suspicions that the Pennsylvania-based magnet maker is a front for the Russian mob. No charges have been laid, but the company, which is now in receivership, has pleaded guilty in the United States to one count of committing securities fraud. The OSC also has jurisdiction because YBM's shares were listed on the Toronto Stock Exchange until May 13, 1998, the day the FBI raided the company's Pennsylvania head office.

But the commission itself is also entangled in the YBM mess amid questions centring around how much it knew about the company's reputed mob connections and why it did not block a $53-million equity financing in the fall of 1997.

The Globe and Mail reported in February that the OSC's enforcement arm was told by the RCMP back in April, 1997 -- 13 months before the FBI raid -- that Semion Mogilevitch, one of Eastern Europe's biggest criminals and the target of law-enforcement agents in several countries, was a YBM shareholder.

But seven months later, the commission cleared the way for YBM to raise $53-million in equity from the public.

Alan Lenczner, Mr. Peterson's lawyer, said in a statement yesterday that his client "discharged his responsibilities reasonably and in very good faith at all times. Regrettably, the OSC did not."

The commission's official response was that it's "not appropriate" to get into a public debate about whether the regulator was complicit in keeping YBM functioning by approving a prospectus for the equity financing that is now at the centre of its own case.

However, one senior OSC official noted that yesterday's allegations say that there was an enormous amount of damaging information that the company's directors and officers kept from both the public and the regulators.

Specifically, the commission's enforcement arm accuses YBM of not disclosing in its prospectus for the 1997 equity financing that the board had engaged investigators Fairfax Group Ltd. earlier that year to look into allegations that the company had ties to Russian organized-crime figures.

As well, YBM is accused of failing to disclose in April, 1998, that Deloitte & Touche, its auditors at the time, had suspended its work on the 1997 financial statements amid concerns about certain entities and individuals involved with the company.

The targets of the allegations are nine former directors and officers of YBM as well as Lawrence Wilder, also a partner at Cassels Brock and the company's former outside lawyer, and the two underwriters. The former directors and officers are Harry Antes, Jacob Bogatin, Frank Greenwald and Daniel Gatti in the United States, Igor Fisherman of Hungary, Kenneth Davies and Michael Schmidt of British Columbia, Mr. Peterson and Owen Mitchell, a vice-president and director of First Marathon.

"I don't believe I have done anything wrong," said Mr. Schmidt, a Burnaby, B.C., realtor. "I have done everything the way I was supposed to."

Mr. Schmidt, who does not yet have a lawyer, also defended the other directors. "Nobody on the board stuck their head in the sand and said: 'There's something wrong here; we'll turn our back to it.' "

Mr. Wilder is accused of lying to commission staff in a letter in July, 1997, concerning the prospectus. His lawyer, Linda Fuerst, said in a statement that her client "categorically denies" that he misled OSC staff on any aspect of YBM's affairs.

The statement says it was never disclosed to Mr. Wilder during the review of the prospectus that OSC staff had been warned by the RCMP in 1997 of suspicions that YBM was "a front for Russian money laundering."

Mr. Wilder and Cassels Brock plan to ask the courts to bar the OSC from proceeding against him. Ms. Fuerst said in the statement that the OSC's proceedings against her client are unprecedented because he was never an officer or director of YBM.

Cassels Brock said in a statement that both Mr. Peterson and Mr. Wilder will continue to serve their clients "throughout this process."

Likewise, Griffiths McBurney said it intends to contest the OSC's allegations against it. The firm said it is confident that when all the facts are considered, it "will be found to have acted in a professional manner consistent with the standards of the Canadian underwriting community."

Shareholders were kept in the dark right up until the FBI raid on May 13, 1998. The commission halted trading in the shares that day and outlined some of the auditors' concerns. YBM's share price reached an all-time high of $19.90 in March of that year, giving the company, which began life in 1994 as a junior company listed in Alberta, a market capitalization of just under $1-billion. The shares last traded at $14.10 each.
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Subject:
(6) Russian mafia godfathers Mikhailov, Mogilevich linked to Magnex, Arigon, Arbat et al
Date: 14 May 98 19:46:49 GMT
From: "Adrian du Plessis"
Organization: Investigative Research
Newsgroups: soc.culture.russian

Earlier this year I began looking into YBM Magnex International, a most curious company listed on the Toronto Stock Exchange which had a market capitalization at that time of close to CDN $900 million. The company claims to be selling huge amounts of magnets in Russia, the Ukraine and Eastern Europe.

Information readily obtainable from various European sources (including corporate registries, court files, press reports, and police intelligence reports), combined with data easily available in Canada, (from the Alberta Securities Commission, university libraries etc.), establishes that several core entities (e.g. Magnex Rt in Hungary, Arbat International in Russia, and Arigon Co. Ltd. registered in the Channel Islands) that were central at the formation of YBM Magnex were vehicles associated with godfathers of the Russian mafia.

The two most notorious Russian mafioso to be associated with these entities are Sergei Mikhailov (sometimes anglicized as Mihailov, and nicknamed "Mikhas") and Semion Mogilevich (sometimes spelled Mogilyevich). Mikhailov is the acknowledged leader of one of Russia's largest and most dangerous criminal organizations, known as the Sons of Solntsevo (Solntsevskaya). Mogilevich, while closely associated with Mikhailov's group, heads his own criminal organization.

Sergei Mikhailov has been in custody in Geneva, Switzerland since October 15 1996 held on charges of money laundering and being a member of a criminal organization. Semion Mogilevich still runs free. Their associates are now widespread.

I had been preparing a series of articles, entitled "YBM Magnex: Securities industry due diligence in a post-Bre-X market", that highlights how Canadian mutual fund managers and brokerage analysts fail to properly concern themselves with the interests of public investors and the integrity of the marketplace.

Welcome events of the past few days, including the cease trading of YBM Magnex stock by the Ontario Securities Commission, news of an investigation by the FBI, and disclosure of the refusal of auditor Deloitte & Touche to accept the company's financial statements as they stand, has altered the necessity and timing of publication of my series.

I feel less urgency to proceed now knowing that the public is better protected. Consequently, my series on the failure of Canadian stock brokers and analysts, mutual fund managers and other industry players to investigate the origins of entities that they actively promote will continue after this Victoria Day holiday weekend in Canada.

Best wishes for a healthy and happy future. - 14/05/94 -

For more on this story, and other stock market news and analysis, visit the Investigative Research & Analysis web-site at imagen.net

YBM Magnex: Securities industry due diligence in a post-Bre-X market (Part I in a series)

The first thing that alarmed me about YBM Magnex was a cluster of Canadian brokerage analysts' reports touting the company's stock.

While visiting offices in the Vancouver Stock Exchange tower I'd initially come across four reports - two published by Nesbitt Burns, and one put out by each of First Marathon Securities and Griffiths McBurney & Partners. All contained positive buy recommendations. The analysts - Peter Sklar at Nesbitt, Mike Middleton at Griffiths McBurney and Kaan Oran at First Marathon - uniformly projected significantly higher share prices for YBM Magnex based upon their stated analysis of the company and its prospects.

In this case, (as is standard), not one of the brokerage firms, at the same time it promotes an issuer's stock, stands behind the claims of their in-house analysts. Each YBM Magnex report included detailed disclaimers, noting such pertinent points as: "Neither First Marathon Securities Limited nor any of its affiliates accepts any liability whatsoever for any loss arising from the use of this report or its contents"; Nesbitt Burns "takes no responsibility for any errors and omissions which may be contained herein and accepts no liability whatsoever for any loss arising from any use of or reliance on this report or its contents"; and "The information contained in this report is drawn from sources believed to be reliable but the accuracy or completeness of the information is not guaranteed, nor in providing it does Griffiths McBurney & Partners assume any responsibility or liability whatsoever."

What public value is there in a broker's "buy" recommendation for which the brokerage firm will not accept "any responsibility or liability whatsoever"? Such reports are routinely fed to financial news agencies which dutifully regurgitate the analysts' views and hype. In general practice, the press, even more dutifully, removes the legal disclaimers in its recycling motions.

Further complementing this form of stock market circle jerk, YBM Magnex distributed the Nesbitt Burns, First Marathon, and Griffiths McBurney analysts' buy recommendations to the media with an official disclaimer of its own prominently stamped onto the front page of each report: "Please be advised that we have not independently reviewed or verified the assumptions upon which this analyst's report is based and accordingly assume no responsibility for the accuracy thereof."

Having spent more than six months during 1997 researching the Bre-X Minerals swindle, I was acutely aware of the terrible job done by Canadian brokerage house analysts in their coverage of that company. It's an accepted truth of the junior stock markets that the track record and history of the principals and asset(s) of a venture represent material information upon which investment decisions can be based. Knowing something about the people behind a stock deal, and how the public company has travelled from Point A to B to C and so on in its life, can be helpful - even critical.

In the case of Bre-X, during that stock's promotion, many analysts failed to inform their clients, (and, by extension, through their comments to the press, the broader public), that Bre-X's David Walsh had a history of exaggerating and misrepresenting the affairs of his public companies. These analysts failed to note the history of regulatory violations and stock scandals associated with several other, lower-profile, Bre-X group principals. As well, these analysts failed to adequately detail the history of the Busang property and the backgrounds of those parties involved with the group in such places as Indonesia and Australia.

Without such background information being provided, the public lacks an appropriate context in which to place and consider a company's current claims. Whether the company is a scam or fraud, like Bre-X Minerals, or a legitimate speculation, such as Dia Met Minerals (soon to begin production at its Ekati diamond mine in the Northwest Territories), the history of the people and entities involved represents fundamental knowledge.

After reading and rereading the 15 pages of YBM Magnex "analysis" churned out by three of Canada's senior brokerage firms I was left with many unanswered questions. For example, the reports told me nothing useful about the company's principals or founders, "whatsoever". Not a single member of management, not one principal, not one founder of any of the company's operating entities was named or described in the reports. These buy recommendations also contained little or no information that would tell a reader how the company began and had progressed to its present status - reportedly a highly successful venture with geometrically increasing sales and profit figures, the shares of which were going up and up in price on the Toronto Stock Exchange (TSE).

Wonderful companies - and dreadful ones, for that matter - all start somewhere. Somebody has a product or a vision and works to develop it. That's usually an interesting story. That it didn't interest the Bay Street brokerage analysts to make the origins of YBM Magnex publicly known prompted me to begin my own, independent, due diligence.

My objective? To start to fill in some of the holes apparent in the Magnex coverage put out by the brokerage analysts. And to be prepared, unlike them, to accept responsibility for the results.

End of Part I - 12/05/98 -

YBM Magnex - Securities Industry Due Diligence… Part 2: The myths of Arigon…

Brokerage houses and financial advisors can, individually and collectively, generate for themselves hundreds of thousands, even many millions, of dollars in commissions, agents and underwriters fees and other benefits associated with share and financing transactions in a single public company.

A worthwhile, and independent, due diligence review of a company such as YBM Magnex can be conducted for as little as a few hundred dollars. After a few hours work, involving some very obvious and standard background checks, a market analyst worth their salt should be able to determine if there are aspects of a company's affairs that may require further, more intensive, review. Curiosity, however, appears to be a characteristic that may be singularly lacking in some mutual fund managers, fund advisors and brokers as they direct other peoples' money into some curious places.

To start my YBM Magnex-related research, after breakfast one morning I logged onto the on-line services of Canada Stockwatch, an electronic data base and news service that covers all public companies listed on Canada's stock exchanges. (All the data I pulled from the Stockwatch site can be obtained by paying a monthly fee of only $4.95 - $19.95 + GST - the higher rate enables faster/greater volume data printouts. The Stockwatch service alone, or combined with a search of newspaper databases that have similarly reasonable fee structures, can provide a view of a public company and its principals from the perspective of not only the company itself, but also such external observers as securities regulators, auditors, journalists, litigants etc.)

I learned that this public company, then known as Pratecs Technologies Inc., (a Junior Capital venture or "blind pool"), had commenced trading on the Alberta Stock Exchange (ASE) on August 3 1994.

Even before it had begun public trading on the ASE, Pratecs had announced its plans to acquire Canadian distribution rights for YBM Magnex Inc. products and, further, to acquire all the shares of YBM Magnex. Both of these represented non-arms length transactions as the president of Pratecs, Robert Ventresca, and a director, Jacob Bogatin, were also principals and/or shareholders of the private entity, YBM Magnex. The Canadian distribution rights for magnetic materials produced by YBM Magnex were to be purchased for 4,000,000 Pratecs shares valued at $0.20 each. The acquisition of 100% of YBM Magnex was to be effected through the issuance of 110,000,000 Pratecs shares to the vendors (this large number included the four million shares issued for the distribution rights).

Jacob Bogatin had no track record with Canadian public companies. Robert Ventresca, Pratecs president, had earlier been a participant in publicly traded Technigen Corp. In 1990 Ventresca had taken down a securities position (a convertible debenture with warrants attached) in Technigen which had delisted from the Vancouver Stock Exchange (VSE) in 1989 after the company's president was called to a hearing before the British Columbia Securities Commission (BCSC). Between April 1987 and August 1989, Technigen had been widely revealed in Canada as an outrageous stock market fraud. (This stock market and tax grants scandal was so elevated as to be raised repeatedly in the Legislature of two provinces, B.C. and Saskatchewan.) The company's management had repeatedly made false claims about the status of its operations and sales of its product - a computerized golf driving range. In November 1989, as a result of various misrepresentations, the BCSC banned Technigen's president, Larry Nesis, from the B.C. securities market for three years. After being thoroughly exposed as a scam in Canada, Technigen's trading and misrepresentations carried on, primarily through the U.S. over-the-counter market. (Just last month, the U.S. Securities and Exchange Commission issued a complaint against Technigen that outlined a scheme of stock manipulation and corporate misrepresentations that the SEC alleges was carried out between January 1992 and May 1993.) Pratecs/YBM Magnex principal Robert Ventresca was based in Fountainville, Pennsylvania and, from consideration of the public record, it was just as possible that he had been in the role of an innocent investor, perhaps even a victim, rather than a perpetrator or facilitator, of the Technigen swindle.

The same could not be said of Ventresca's fellow Pratecs director, Michael Schmidt. Schmidt, then identified as a friend of Technigen's president, Larry Nesis, had been an original "seed stock" shareholder in Technigen. For years, straddling both the Canadian and American promotional eras of the company, Schmidt had been in charge of "Investor Relations" for Technigen. Schmidt helped distribute and defend the company's misrepresentative literature. A Financial Post article of February 24 1989 - entitled "Technigen is a disgrace to the VSE" - captured Schmidt failing in an attempt to mislead Diane Francis about the distribution of promotional materials to an U.S. investor. Michael Schmidt's last Canadian media appearance came in July 1989 when he could be found explaining to Globe and Mail reporters why Technigen's purported employees were not visible on a tour of the plant. It was lunch hour, he said.

It was not even my lunch hour yet, and my review of YBM Pratecs - its history and principals - was already creating a disquieting feeling in my stomach.

By the time I reached just the seventh and eighth entries in the Canada Stockwatch database of the company's own press releases my original level of concern was significantly heightened. I wondered what independent investigations may have been conducted by the brokerage analysts at Nesbitt Burns, First Marathon and Griffiths McBurney in connection with this most unusual of announcements.

On June 22 1995 trading in Pratecs shares was halted on the ASE and the company issued a vague public statement about unspecified "information… regarding a subsidiary company associated with its proposed major transaction." The following month, in an obliquely worded announcement, Pratecs (soon to be renamed YBM) disclosed that the lengthy trade halt was the result of "allegations made in London, England against two individual shareholders of YBM Magnex." According to this Pratecs/YBM press release: "The allegations were aimed at two companies in the UK and the attorneys of these two companies. The companies are in no way related to YBM or its subsidiary, Arigon. However, because the companies are owned by an employee and a former director of Arigon, and the companies' monetary affairs were handled by the same solicitors that Arigon used in the past, it had put Arigon also under scrutiny."

An announcement like this is a yellow flag that calls for follow-up review. I decided to skip lunch and keep digging. Mutual fund gurus and brokerage house analysts were enthusiastically touting Pratecs/YBM stock to their clients. What depth of due diligence had they carried out into solving those mysteries surrounding YBM subsidiary, Arigon?

End of Part 2 - 13/05/98 -

VSE brass magnetized by ASE shell success

Not too many years ago the shell business on Howe Street enjoyed a negative reputation. It wasn't just the media, most infamously Forbes magazine which crowned the Vancouver Stock Exchange "Scam Capital of the World" in 1989, but even local market supporters such as ex-Superintendent of Brokers Rupert Bullock were highly critical of the "flood of paper" swamping the VSE.

From the mid-1980s to the early 1990s, numerous observers pointed out that by allowing a preponderance of shells, companies with no significant assets or business operations, to remain on its board, the VSE was open to continuing abuses. To raise standards and restore some of its lustre as the world's "venture capital capital" the VSE proposed a crack down on the trade in shells - promotional vehicles that have no real value apart from their listing status on a public exchange - and to focus on listing genuine junior companies with assets.

But the VSE has lost much of its Canadian market share since the golden days of Hemlo and other mining successes. Long before Michael Johnson became president and brought his talk of "zero tolerance" to the exchange, the VSE's importance, relative to the country's other exchanges, had dwindled. In the early 1980s, the VSE captured 40 to 50 percent of Canada's overall share trading volume and between six and 11 percent of total value. By 1995 these numbers had shrunk to less than half, as the VSE accounted for 20 to 25 percent of overall volumes and only three to four percent of aggregate value. Even in the boom times of recent years, while markets worldwide have hit successive record highs, the VSE index has only managed to reach a level 35 percent below its previous peak of more than 2000 points. Today the index sits at only 621 points.

Johnson has said that his exchange is not in competition with other markets such as the similarly speculative Alberta Stock Exchange, and that each has their own special niche. Still, the tremendous loss of business suffered by the VSE as new companies choose the ASE, TSE, Nasdaq and other forums over it, has not been welcomed by VSE brass and member brokers.

In an effort to win back some of the business that now flows steadily elsewhere, especially over the Rocky Mountains to the ASE, the VSE now proposes to return to the shell game in a big, and better, way. Although some Vancouver Exchange officials have been told not to speak about it, a major initiative has been underway for some time to adopt Alberta's Junior Capital Pool program locally.

The Alberta experiment with JCPs, or "blind pools", began auspiciously in 1986 with Audit Resources. Audit was a shell company that shared brokers and promoters with VSE-listed Hi Peg Resources. Both companies were fraudulent vehicles that met sorry ends, bringing down with them an Alberta brokerage firm, First Commonwealth Securities, and a good old boy from Arkansas, Floyd Leland Ogle, who did jail-time for his part in manipulating Audit shares on the ASE.

But since the days of Audit the JCP program has brought the Alberta exchange and its members more dollars than dishonour. With a trend of Canada's western markets toward viewing with pride their roles as "stepping stone" exchanges - leaving stars such as Bre-X Minerals to graduate to the TSE and Bay Street once they've found their legs as juniors - the Junior Capital Pool concept is especially appealing.

By giving entrepreneurs a chance to launch blind pools in BC, the VSE hopes to attract many new companies that would not satisfy its present listing standards. A JCP is a legally incorporated entity that has no significant assets or business and no agreement in place to acquire any such assets or business. Such a structure, in the view of VSE brass today, provides entrepreneurs with unique opportunities to enter the marketplace. This is the same characteristic that used to worry market officials and observers.

But the lure of Junior Capital Pool monies is a powerful magnet. Eyeing the success of their counterparts at the ASE, the VSE takes the position that shell quality can be maintained by ensuring that management has a successful history of involvement with public companies. In essence, the VSE believes, the successful track records of JCP directors will be the only assets upon their listing of these good-for-business shells. A look at how this formula has succeeded with Alberta JCPs is a mighty powerful argument in their favour for some.

One of the latest stock market winners to swim out of the ASE's shell-cluttered pool is YBM Magnex International, originally incorporated as Pratecs Technologies. On July 18, 1994 Pratecs became a Junior Capital Pool corporation under the regulations of the Alberta Securities Commission. On July 27, just nine days later, Pratecs entered into a letter of intent to merge with YBM Magnex and its subsidiaries. Under Alberta rules a JCP has up to 18 months to complete its "Major Transaction" and gain assets but the quick-out-of-blocks team at Pratecs/YBM were on course before their shares began public trading on the ASE on August 3, 1994.

YBM's history exemplifies the benefits of having directors on board with a background in junior public companies. While most of the original Pratecs directors were initiates to the world of penny stock promotions, the company started out with two directors that boasted a public company track record and remain with YBM today as the magnet/bicycle/diesel oil and more venture climbs to the $1 billion market cap level on the TSE.

YBM director Michael Schmidt is described in the company's literature and on its web-site as an "independent businessman." An original director of Pratecs, Schmidt, a resident of Burnaby, BC, honed his public company skills through handling investor relations for a Saskatchewan-rooted VSE promotion, Technigen Corp. Technigen was a VSE high-flier that reached $16 a share in 1987 based upon the company's false claims to have sold more than $100 million in computerized golf-driving ranges to a Swiss entity, Corporacion Relacio S.A. It turned out that the Swiss company was really the front for a Panamanian-registered shell whose only known representative was an ex-convict stock swindler from Maple, Ontario, named David Charles Stuart. Schmidt appeared at Technigen's 1997 AGM at a Vancouver hotel most upset with press reports questioning the company's legitimacy. At that time he presented himself as an independent shareholder. Technigen's president, Larry Nesis, was subsequently banned from the BC market by securities regulators over his golf machine lies. Mike Schmidt became Technigen's investor relations representative after the stock promotion was exposed publicly as a fraud. By the time he joined Pratecs board years later, Technigen stock was trading OTC in the US for pennies a share.

YBM's other director with a track record upon the JCP being listed is Kenneth Davies, a citizen of the world identified by the company as "Principal Montello Resources Ltd." In 1993 Kenneth Davies and his wife, Ann, were the original shareholders of something called the International Diamond Syndicate which failed to sparkle in efforts to locate or develop diamond prospects in the Northwest Territories through arrangements with various VSE listings. Also in the early 1990s, Davies, along with his daughter Jeannine, was aboard VSE-listed Golden Rainbow Resources which failed in ugly fashion to become a producer and marketer of "quality hair care and beauty aid products." During this time, the entrepreneurial Kenneth Davies billed himself as the representative of Pacific Coast Fish Oil, Processing and Sales Inc. of Blaine, Washington and a specialist in "Real Estate Acquisition, Financing & Development."

YBM Magnex specializes in sales of products to unidentified end-users in Eastern Europe (and, in particular, Russia and the Ukraine). Perhaps the experience most relevant to Kenneth Davies' YBM post, and certainly the only one mentioned by YBM on its web-site, is his years acting as a consultant to controversial Montello Resources. Davies was involved with ASE-listed Montello in the early 1990s when the company was hyping plans to acquire an interest in an airplane manufacturing entity in Europe identified as Promovia SA. Financing for Promovia, described as a maker of trainer jets and other aircraft, was to be helped along by Salim Rana, an associate of Kenneth Davies who was also involved with Golden Rainbow's botched hair care enterprise. (At last public report, Rana was under R.C.M.P investigation in connection with an alleged theft and fraud involving GHK Resources Ltd. - see Canada Stockwatch dated April 12 1996). The Promovia affair (with a daisy-chain of links stretching from Tortola, BVI to Dublin, Ireland and beyond, including Swiss nominees Incagest and Univalor S.A.) proved to be extraordinarily messy and required lengthy public explanations by the company when it became grounded. By 1993 Montello stock was trading down to $0.02. The company was suspended by the ASE and trading was not allowed to resume for a full year. The dubious aircraft interests were sold to a former Montello principal "for nominal consideration" and the company took up mineral prospecting. Since returning to public trading in 1994, Montello has kept a lower profile and stock price and Kenneth Davies has added YBM to his resume.

Whatever quality directors a JCP can initially attract, a successful shell like Pratecs/YBM can entice even more high profile figures to its board once the promotion is up and running. In the tradition of past juniors such as Harvard International, the french fry finagle that had Canada's ex-Prime Minister John Turner on board when it fried investors, the magnet merchants have attracted ex-Ontario Premier David Peterson to their stable. In April of 1996, Peterson was granted options on 50,000 YBM shares exercisable at a price of $3.23 each. At todays closing price for YBM, David Peterson is enjoying a paper profit of more than $800,000.

When such rich rewards can be possible from a JCP, it is small wonder that VSE members would be anxious to get with the program. Whether Vancouver-spawned JCPs will more closely resemble Audits or YBMs only time will tell. - 16/03/98 -

Unusual corporate affairs leave YBM Magnex analysts and investors happy

YBM Magnex is the sort of success story that makes legends of shell creators on the Vancouver and Alberta stock exchanges. YBM's journey from Junior Capital Pool to today's $20 share price level has been a fascinating trip.

For over a year, the company and a supporting cast of Canadian brokerage analysts have been commenting upon YBM's rapid penetration of the North American permanent magnet market. A recent audit, however, has shown this penetration to be non-existent. Apparently, neither, this awkward fact, nor other curious elements of the successful promotion, has tempered anyone's enthusiasm. On Monday March 9 the company's shares closed at an all-time high of $19.90 on the Toronto Stock Exchange - giving YBM a market capitalization of close to $900 million.

In August 1996, YBM's vice president of business development, James Held, told Dow Jones News Service that U.S. revenue totalled U.S. $5 million for the first six months of the year alone. This was up sharply from U.S. $2.9 million for all of 1995. Held added that YBM was working on "several significant contracts" in the U.S. and Mexico and was close to securing a U.S. $2 million deal in Canada although he declined to provide specifics. Held pointed out that YBM does not provide earnings forecasts but the spokesman said he had no trouble with the numbers being churned out by brokerage industry analysts. Kaan Oran of First Marathon Securities gushed to Dow Jones: "The company has beat my estimates for the last three quarters."

Then, in October 1996, James Held reported that "YBM's strong results are due to a number of factors, including the continued penetration of the North American permanent magnet market which contributed approximately 15% of total sales through nine months, compared to 5% for the year 1995." YBM's 1996 annual report, (dated March 4 1997), again highlighted this significant growth in the North American market. The company's Philadelphia accountants, Parente, Randolph, Orlando, Carey and Associates, certified statements showing that YBM's N.A. sales had more than doubled between 1994 and 1995, from U.S. $1.4 million to U.S. $2.9 million, and then jumped to U.S. $13.6 million by year end 1996. According to these figures, since 1994, (when YBM began public life through an Alberta Junior Capital Pool RTO), and 1996, operating profit for North America had increased from just U.S. $7,000 to over U.S. $3 million. The only other region to experience such exponential growth in sales was the Middle East, where YBM reported 1996 sales of U.S. $3.3 million and operating profit of U.S. $1.2 million. Unfortunately, many of the figures were bogus.

Last fall, in order to satisfy Canadian securities regulators and clear the path for a large YBM prospectus financing, Deloitte & Touche LLP was called in for an audit. The company and its analyst promoters have been quick to point out that the review by Deloitte & Touche resulted in no adjustments to overall sales numbers, which is true. The rest of the truth, so far, is the explanation for "certain adjustments" that resulted from the audit.

Perhaps most significant among the unusual notes to the Deloitte & Touche audit has been the "reclassification" of the company's vaunted North American sales. Instead of U.S. $13.6 million sales in this market as originally reported by the company, YBM actually sold just $1.8 million in 1996 - a drop from the 1995 numbers. Similarly, N.A. operating profit has devolved - shrinking from a reported U.S. $3 million down to $600,000. Contrasting with previously published reports, the company's growing Middle Eastern sales and operating profit has been identified as U.S. $0.

Where did the sales go?

According to YBM management, this bizarre circumstance is the result of "certain geographic sales information previously reported based upon the location of the company's distributors" being restated "to reflect the "ultimate end user." When YBM executive James Held was touting major developments in North American sales deals to the press, apparently, he should actually have been talking about more sales in two of the world's most inhospitable business climates: the notoriously murky arenas of Russia and the Ukraine where the company concentrates the bulk of its activities.

Instead of showing an accelerating trend toward sales in U.S., Canada and Mexico, YBM's audited results show how the company remains dependent upon unstable and inflationary regions. For year end 1996 net sales were reported as being U.S. $90.3 million. YBM previously stated that European markets accounted for 81%, North America was at 14%, and the Middle East accounted for 4% of this total. In truth, North America accounted for just 2%, and Europe represented 98%. The Middle East figure was zero. Of the European amount claimed, 79% of sales were centred in the wild-west financial environment that exists in Russia and the Ukraine today.

How the company managed to mistake U.S. $15 million in Russian and Ukrainian sales is anything but clear. Nor is it evident what may be driving a tremendously multiplying demand for the company's magnets in Eastern Europe. Regardless, YBM management and Canada's financial analysts covering the high-flying stock, are confident that the North American thrust will be successful in future.

Likewise, some of the other jarring notes from the Deloitte & Touche report are billed as signs of past problems. The audit uncovered a "weakness in inventory controls" that YBM says can be avoided in future by "the implementation of a corporate wide information system" to "assist management in centralizing accounting controls." Triggering this recognition was a "non-cash adjustment to inventory and cost of sales of U.S. $5.2 million." The magnet company explains this circumstance came about after it provided US$5.2 million in diesel oil inventory to an unidentified distributor. "The contract called for payments to be made to the Company as such time as the diesel was consumed by end users and profits were realized." Company management blames its credit-good-to-the-last-drop of oil on the decentralized nature of its international operations and on its rapid growth.

As at December 31, 1996, YBM "had $3,000,000 of uninsured deposits in a Russian financial institution." But if this or any other financial notes should give pause to the casual reader of corporate statements, there's a stack of enthusiastic brokerage research reports that tell investors why YBM stock is about to break the $1 billion market cap level.

In a February 3 1998 buy recommendation, First Marathon Securities analyst Kaan Oran described how YBM had come "out of the forensic study by Deloitte and Touche with flying colours." That's a perspective likely shared by others. Vice president and director of First Marathon, Robert Owen Mitchell, also sits on the board of YBM Magnex.

As the company continues to report ever-increasing sales and earnings, the YBM bandwagon has become increasingly crowded of late. Early boosters included Rob McConnachie of Canaccord Capital (now with Scotia Capital Markets), Peter Sklar of Nesbitt Burns and Mike Middleton of Griffiths McBurney Partners. But in today's over-heated mutual fund driven market, there's always room for one more voice telling people what stock to buy. - 10/03/98 ============================================

vancouversun.com

Vancouver Sun
May 16, 1998
(7) Documents link YBM to Russian mafia
Company is under investigation by various U.S. agencies and the Ontario Securities Commission.
David Baines, Sun Business Reporter, with files from Adrian du Plessis Vancouver Sun

While it was going public on the Alberta Stock Exchange in 1995, YBM Magnex International Inc. was linked to alleged money-laundering operations with the Russian mafia. But after a six-week trading halt, ASE officials cleared the company to resume. The stock price soared and the company moved to the Toronto Stock Exchange where it became a favorite of some of Canada's top analysts, underwriters and mutual fund managers.

The love affair came to a crashing halt Wednesday when about 60 agents from the Federal Bureau of Investigation, U.S. customs and immigration service and the Internal Revenue Service raided the company's headquarters in Newton, Pa. The Ontario Securities Commission -- citing the raid and evidence of criminal activity uncovered by the company's auditors -- issued a cease trade order, freezing nearly $650 million worth of YBM stock certificates.

The purpose of the U.S. investigation has not been officially revealed, but the Philadelphia Inquirer quoted an unnamed law enforcement officer as saying it relates to allegations of money-laundering, securities fraud, and customs and immigration violations.

According to documents obtained by The Vancouver Sun, the founders of YBM and its subsidiary companies are alleged to be high-ranking members of Russia's most notorious mafia gangs. Their current links, if any, to the company are not known. YBM vice-president James Held said Friday he is "not knowledgeable enough" on YBM's original shareholders to comment. He said he would make inquiries and call back, but did not respond by press time.

According to disclosure documents filed with the Alberta Securities Commission, YBM went public in 1995 by acquiring an ASE-listed shell company called Pratecs Technologies Inc. The transaction was structured in two stages. First, Pratecs would acquire Canadian rights to distribute products of YBM Magnex Inc. of Pennsylvania. Then it would acquire all of YBM's outstanding shares.

According to disclosure documents, YBM owned Arigon Company Ltd. of the Channel Islands which, in turn, owned Magnex RT of Budapest and Arbat International of Russia. Magnex was the main operating company. According to unaudited statements, it had sold $20.6 million US worth of magnets in 1993 and earned $1.8 million US in net income. Of this amount, $4.3 million US, or about one-fifth of the company's sales, was said to have been generated in Canada. There was, however, no evidence that any sales had actually been made in Canada. To complete both stages of the transaction, Pratecs would issue 110 million shares at a deemed price of 20 cents to the shareholders of YBM, putting them firmly in control of the public company.

According to disclosure documents, the largest shareholder would be Jacob Bogatin, then YBM's group vice-president and now YBM's president and CEO. Bogatin purportedly holds two science doctorates from universities in Russia. Others YBM shareholders who would receive large blocks of Pratecs stock included Semeon, Titania and Mila Mogilevitch. Together they would receive 16.5 million of the 110 million shares. According to a May 1995 FBI report. Mogilevitch is a high-ranking member of the Russian mafia.

"Semion (Note: Russian names are often spelled differently when translated to English) Mogilevitch 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 centerpiece of his operations in Europe," the report states.

The report notes that Eurasian criminal organizations use false documentation "to facilitate travel or residency in furtherance of criminal activities. Many of Semion Mogilevitch's lieutenants and Mogilevitch himself hold Israeli citizenship and carry Israeli passports."

More crucially for YBM shareholders, the report also linked Mogilevitch to Arigon:
"A number of individuals associated with Semion Mogilevitch in the Los Angeles area received wire transfers from Arigon Ltd. The use of individuals to receive small deposits may be a method by which Mogilevitch is disguising larger transactions from criminal proceeds. The use of residential addresses for a number of front companies in Los Angeles is another indication of money laundering."

Other YBM shareholders who received large blocks of Pratecs stock included Semion's ex-wife, Galina Grigorieva; Konstantin Karat; Anatoly and Tania Kulachenko; and Alexei and Valentina Alexandrov. No background information on these people was provided.

The transaction, which would turn the shell company into an active business, was sponsored by Yorkton Securities in Calgary. Signing on behalf of Yorkton was Michael Prew, a Yorkton vice-president and former chair of the ASE board of governors.

On June 22, 1995, before the second stage of the transaction was completed, Pratecs "voluntarily" halted trading due to information it had received on an unnamed subsidiary company. The nature of that information was not disclosed to shareholders.

Days earlier, CTK National News Wire (a Czech news agency) reported that members of two Russian gangs -- Solntsovskaya, based in Moscow, and Solomonskaya, operating in Ukraine and Israel -- had met in the U Holubu restaurant in Prague on May 31, 1995 to celebrate the birthday of a high-ranking gang member.

The wire service said the restaurant "is the seat of Arigon Cs., daughter company of Arigon Ltd." It said Czech police raided the meeting because it had received an anonymous tip that Mogilevitch, described as boss of one of the gangs, was to be murdered. Police said that two large refrigerating vans had been parked outside the restaurant, possibly for the removal of dead bodies. Two hundred people were detained during the raid, but all were eventually released without indictment.

The wire service said a team of British police specialists subsequently went to Prague: "Their stay was connected with the arrest of British lawyer Charles Churchwald in May who was suspected of laundering $80 million gained by the Russian organized crime by means of the British Arigon Ltd. company."

On June 6, 1995, the High Court of Justice in London issued orders freezing the assets of Arigon and several people who were allegedly shareholders of Arigon. They were Adrian Churchward (correct) and YBM shareholders Galina Churchward (nee Galina Grigorieva, who was reportedly Mogilevitch's former wife), Mogilevitch and Konstantin Karat. There were also allegations that two other YBM shareholders -- Anatoly Kulachenko and Alexei Alexandrov -- had criminal convictions in the Ukraine.

It was this court action that caused ASE officials to halt trading, but the allegations were eventually dropped, the freeze orders lifted and trading in the ASE company resumed without any public disclosure of disclosure of what the allegations were about or who was involved.

As part of its corporate reorganization, Pratecs consolidated its shares on a five-for-one basis, then proceeded with a stock offering of 7,075,000 shares at $2 each underwritten by First Marathon Securities and Griffiths McBurney & Partners.

Four months later, First Marathon vice-president Owen Mitchell, who certified the prospectus on behalf of his firm, became a director of YBM. That prospectus contained audited statements for 1992, 1993 and 1994. Those statements revealed that during 1993 the company hadn't sold any magnets in Canada. This contradicted the company's earlier assertion that Canadian sales had totalled $4.3 million US. There was no attempt to resolve that discrepancy.

On Nov., 3, 1995, the company announced that the acquisition of YBM Magnex and stock offering had been completed. That meant that Mogilevitch and the other YBM shareholders had received their 110 million shares (22 million post-consolidation).

On Nov. 26, 1995, Edinburgh-based Scotland on Sunday, published an article entitled, "Western businesses bought as front for Russia mafia." "In a bid to widen its share of western markets," the article stated, "the Russian mafia has moved is forward money-laundering operational bases to central Europe, flooding laundered money from criminal activities into the new democracies."

"According to Budapest police officers investigating the affairs of the Magnex electronics firm, Budapest and Prague have become the focal point of Russian mafia money-laundering operations because of easy access, the weakening of traditional institutional structures and the great protection afforded to the depositors by commercial banks," said Scotland on Sunday.

"Police also claim that Mogilyevich (correct) has several 'action men' who worked mafia operations in Central and western Europe. One of them was named as Igor Anatolyevich Tkacsenko, who has been linked to a series of serious crimes in region, but as the witnesses observe the rule of 'omerta' (code of silence), he cannot be brought to book."

The article continued: "According to both Budapest and Moscow police, one of the key figures behind the money-laundering is Sergei Mikhailov (who is) head of Moscow's dominant crime syndicate, the Solntsevo gang."

In November 1996, a well-regarded Russian magazine, Ogonyok, published the names of Russian "godfathers," known to be living in Budapest, who have been accused of money laundering and other crimes by the Russian authorities.

One was Mikhailov, who was said to have helped establish Arigon, Magnex and Arbat. Mikhailov was arrested in Geneva on Oct. 15, 1996, and charged with money-laundering, visa violations, illegal real estate dealings and being a member of a criminal organization. He has been in custody ever since.

After YBM went public, it reported rapidly increasing sales. Last year, the OSC raised questions about the company's 1996 audited financial statements and asked for a re-audit to confirm its reported sales and the identity and ultimate location of its customers. That re-audit, conducted by Deloitte & Touche in Pennsylvania, confirmed the total sales figures but found that instead of selling $13.6 million US worth of magnets in North America, as previously reported, it had sold only $1.8 million US. The re-audit also discovered that YBM had given $5.2-million US worth of diesel oil to an unnamed party. Payment was not to be made until the oil had been consumed by end users. Why the company made such an arrangement, or why it was dealing in diesel oil was never explained.

These adjustments did not deter analysts such Nesbitt Burn's Peter Sklar or First Marathon's Kaan Oran, who continued to recommend the stock. In March, the company issued unaudited statements showing that 1997 sales had jumped 53 per cent to $138 million US and net income nearly doubled to $25.6 million.

The stock soared to a high of $19.90, raising the company's total stock market value to $900 million. Then, on May 8, the company announced it would seek a 45-day extension in filing its 1997 audited statements. The stock crumbled to $14.35 by Wednesday.

Then, 23 minutes after the FBI raid began, the company asked the TSE to halt trading. Later that day, the OSC issued a cease-trade order revealing that Deloitte had uncovered evidence of criminal activity within the firm and had suspended its audit.
============================================================

The Toronto Star
26Aug93
(8) Boris knows everyone . . . Head of firm embroiled in Russian controversy moves with high, mighty
BY JACK LAKEY AND CAL MILLAR TORONTO STAR

Boris Birshtein moves with powerful people, and always travels first class.

He's met with Brian Mulroney, stayed at the luxury Moscow villa reserved for the likes of Henry Kissinger and Fidel Castro and served as a key adviser to the president of the independent Russian state of Kyrgyzstan. But today, Birshtein, international chairman of The Seabeco Group, is unlikely to be warmly received in Russia.

Seabeco, which was formed in Toronto in 1985, has been caught up in allegations that have shaken the Boris Yeltsin government and led to the resignations or firings of several senior cabinet ministers. Accusations in Moscow involve key Russian politicians, Swiss bank accounts, 7 million tons of oil and billions of dollars in laundered money.

There is no evidence of any wrongdoing by Seabeco, either in Canada or elsewhere. However, Seabeco has been fingered by Yeltsin forces as a key player in backroom export dealings. Russia's justice minister says Seabeco "is looming like a terrible shadow over this country."

Until the corruption scandal broke out, it seemed Birshtein, a 45-year-old Lithuanian emigre, had everything going his way. Like many of his former Forest Hill neighbors, he's used to the trappings of wealth. He roams the world in his private jet - a 28-seat, twin-engine model with the name of his multinational corporation, Seabeco, emblazoned in gold on white - cutting business deals on his state-of-the-art satellite telephone.

In Russia, he'd whisk through customs like a head of state - greeted with respect and munificence by men who have grasped power in the freewheeling chaos of the new democracy. Police cars with wailing sirens and flashing lights escorted his limousine motorcade to his magnificent villa in the Lenin Hills of Moscow, patrolled by heavily armed guards in Russian military uniforms.

In Canada, as "economic adviser" to the president of Kyrgyzstan, he had an entree to Canada's political elite, meeting with Mulroney and key members of his former cabinet, such as then-trade minister Michael Wilson and external affairs chief Barbara McDougall.

Mulroney's executive assistant Paul Smith said yesterday the former prime minister has had no contact with Birshtein since that February, 1992, meeting.

The grand style in which Birshtein did business impressed Liberal MPP Monte Kwinter, who was enlisted to help develop a market economy plan for Kyrgyzstan. "When you first see it, it's bizarre," Kwinter said. "But you accept it. That's the way it is over there. It was like he was a senior government official himself."

Birshtein, a Lithuanian native who came here in 1985, sold his posh, $ 1 million Forest Hill Rd. house last month and left Canada.

Seabeco is winding down its headquarters at 95 St. Clair Ave. W. It is now headquartered in Zurich. Seabeco officials have refused to comment on the allegations being made in Russia. Birshtein has not returned messages from The Star or responded to requests for interviews.

But Birshtein's name surfaced two weeks ago after someone fired three shots from a .45-calibre gun at the Bridle Path-area home of Dmitri Iakoubovski, a former Russian government official now living in Metro. Birshtein's name was mentioned in an unsigned threatening note tossed over the gates of Iakoubovksi's $ 5 million mansion.

Seabeco, which specializes in business ventures in Russia, has made incredible inroads since the Soviet Union began crumbling in 1989.

Birshtein was appointed by Askar Akaev, Kyrgyzstan's president, to lead the country's Committee for Reconstruction and Development in 1991. Akaev also empowered Birshtein to serve as the country's foreign trade representative and reportedly released Seabeco from any tax obligations.

It is unclear what Birshtein has received in return for helping Kyrgyzstan, but senior Kyrgyze officials have recently said Seabeco is no longer involved in any enterprises in that country.

Russian enterprises spawned by Seabeco reportedly include a joint venture with Moscow's former chief of police, steel and fertilizer partnerships, a joint venture with a huge labor union and the formation of its own Russian bank, called Seabank.

In 1990, Birshtein was named chairperson of the Canada-Poland Business Council, formed to help Canadian companies take advantage of market opportunities evolving in newly democratic Poland.

During a four-day visit to Canada in 1992, the Kyrgyzstan president and Birshtein met Mulroney, McDougall, Wilson and former citizenship minister Gerry Weiner. Birshtein brought Kwinter and economist Charles McMillan, a former aide to Mulroney, on board to develop an economic game plan for Kyrgyzstan, a country of 4.6 million people that was part of the former Soviet Union.

Kwinter, Ontario's former trade minister, said Birshtein was personally involved in all the meetings between Akaev and senior members in the Mulroney cabinet. "You talk about being at the foot of the president, well, those two were inseparable," Kwinter said of Birshtein's relationship with Akaev.

On the same trip, Birshtein also met Hal Jackman, Ontario's Lieutenant-Governor, during a tour of Queen's Park in Toronto. A letter to a Seabeco official from Pierrette Lucas, chief of protocol in the external affairs department, notes that most of the visit was arranged by Seabeco.

"My office will arrange for courtesy customs and immigration clearance . . . and will liaise with the RCMP for appropriate security," Lucas wrote.

According to Kwinter, Birshtein, his wife Nathalia and two children did not have an ostentatious lifestyle in Forest Hill although they lived very comfortably. The couple had a relaxed, charming way with guests, said Kwinter, who was once invited to Birshtein's for dinner with his wife.

Birshtein's neighbors saw things differently. They told The Star that the Canadian Security Intelligence Service (CSIS) and RCMP officers began asking about the limousines and luxury cars that began stopping outside Birshtein's home shortly after he moved in. "We called them the KGB," one neighbor said, noting that nobody at the Birshtein residence seemed very friendly or interested in fitting into the community. "You'd see limousines with drivers in them parked outside for hours at a time. There were always guys in suits shuffling in and out with briefcases."

Birshtein carries a satellite telephone with him when he travels, so he can keep in touch with business contacts worldwide and Seabeco offices in Zurich, Moscow, New York, Toronto, Brussels, Rome and Santiago. When they were in Metro, Birshtein and his wife both drove Mercedes-Benzes with matching vanity licence plates.

The Metro dentist who eventually bought Birshtein's Forest Hill home said that when he inspected it, he was surprised to find a special phone system equipped with six separate lines. "They seemed like nice enough people to me," the dentist said.

Kwinter first met Birshtein while on a trade mission to Ukraine with Ontario business people in 1988 or 1989. Birshtein made a strong first impression, Kwinter said, because he was able to get things done that other people couldn't, and solved a problem for the visiting Ontario delegation.

He and Birshtein later met informally a few times in Canada, but their relationship grew closer in 1991, after the Ontario Liberal government was defeated and he was no longer trade minister.

As head of Kyrgyzstan's economic restructuring committee, Bershtein asked Kwinter for advice in developing a new economic game plan for the country. Kwinter recommended Charles McMillan, a business professor at York University who had served as an aide to Mulroney during his first term.

Within 10 days of agreeing to help, Kwinter said he and McMillan were provided with airline tickets to Zurich. From there, they flew with Birshtein to Moscow.

In Moscow, Kwinter said he was stunned by the reception Birshtein received. "He was obviously a very important guy," Kwinter recalled. "People were there to greet him. We were escorted to his villa in a motorcade with police cars and flashing lights, armed guards."

"He always has an entourage of people around him, wherever he is, talking in Russian. You can be in the middle of a meeting and somebody will just walk in and start talking to him, like you're not there. And he was constantly on the phone. "You don't have a meeting with Birshtein, you have an audience with him."

Birshtein surrounded himself with many people with impressive titles, including Kwinter, who had been given business cards that said he was "vice- chairman" of the firm. But Birshtein was always firmly in charge, Kwinter said. "Boris Birshtein is Seabeco. If it doesn't happen with Boris, it doesn't happen."

Kwinter insists he never held any formal position with Seabeco. "He wanted it to be perceived that all the work was being done by Seabeco," Kwinter explained. "I was nothing to the Russians. He just wanted it to seem that I was on the Seabeco team." "He wasn't trying to sell our services, he was trying to sell Seabeco."

Before boarding an Aeroflot flight to Bishkek, Kyrgyzstan's capital, the group stayed in the luxury villa Birshtein had rented in Moscow. Kwinter said the walled compound was guarded by what appeared to be Russian military personnel.

In Bishkek, they met Nisardin Issanov, Kyrgyzstan's prime minister, and flew with him to a remote part of the country for an Aeroflot helicopter tour of rich gold deposits.

After spending the night in a village, the group was about to fly back to Bishkek when they were grounded by fog, Kwinter said. Instead of waiting, they decided to make the 10-hour trip by car in a convoy escorted by a police cruiser.

During the drive, a large truck appeared to lose control, veered across the road and slammed into the car carrying Birshtein and prime minister Issanov. The car flipped twice and landed on its roof in a ditch. Birshtein was badly shaken, but unhurt. The prime minister was pulled from the car "moaning and groaning and holding his head," Kwinter said. Issanov was rushed to a nearby hospital by his bodyguards.

A short time later, the prime minister was pronounced dead.

"I was surprised that the extent of his injuries could be life-threatening," Kwinter said. "I mean, this was a strong, robust man in his early 40s, and his injuries definitely did not appear to be life-threatening."

McMillan worked out an economic strategy for Kyrgyzstan that was adopted by the Kyrgyzstan parliament, Kwinter said. In a letter dated Dec. 31, 1991, McMillan advises the Kyrgyzstan president that "Prime Minister Mulroney has asked for a briefing on the documents."

Kwinter stressed that neither he nor McMillan were paid any money, but had their expenses paid for through a contract between the Kyrgyzstan government and Seabeco. "If I made some money, I'd tell you," Kwinter said. "It wouldn't have been illegal. I wasn't a cabinet minister at the time."

Kwinter and McMillan went on to help the Kyrgyzstan government form an international school of management and business in Bishkek, which they are still involved in as advisers. "One thing we can be proud of is the economic plan and the business school," Kwinter said.

Seabeco is a joint-venture partner with a large Russian fertilizer company called Agrochim, and a steelmaking company known as Tsvetmetexport. Both are owned by the Russian government. "Seabeco was part of big things over there, so I had no reason to question where these guys were getting their money from," said Kwinter. "If they were joint-venture partners in these two huge enterprises, it had to be generating a staggering amount of money."

Added McMillan: "I find the whole thing, the accusations back and forth, a complete mystery. But anyone who knows anything about Russia knows everyone is at everyone else's throat. "There's an element of bluster in everything that's said in Russia."


GRAPHIC: 2 color photos: Entrepreneur Boris Birshtein, right, with former prime minister Brian Mulroney in Ottawa during February, 1992, visit of Kyrgyzstan's president: CONNECTIONS: MPP Monte Kwinter, left, and former Brian Mulroney aide Charles McMillan pose with Aeroflot pilot before flight from Moscow to Kyrgyzstan. 4 photos: FATAL CRASH: As Charles McMillan looks on, Boris Birshtein is helped from wrecked car during tour of remote area of Kyrgyzstan. The country's prime minister died in the crash

BUSINESS SCHOOL: MPP Monte Kwinter, top, and Charles McMIllan helped develop a business school in Kyrgyzstan, housed in the former Communist party headquarters, below: PRIVATE JET: Boris Birshtein, shown on company brochure, used Seabeco's 28-passenger jet extensively. Map: territory of former Soviet Union, showing Kyrgyzstan.
====================================================

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From: StockDung
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YBM MAGNEX INTERNATIONAL INC.,

IN THE MATTER OF THE SECURITIES ACT
R.S.O. 1990, c.S.5, as amended

AND

YBM MAGNEX INTERNATIONAL INC.,
HARRY W. ANTES, JACOB G. BOGATIN, KENNETH E. DAVIES,
IGOR FISHERMAN, DANIEL E. GATTI, FRANK S. GREENWALD,
R. OWEN MITCHELL, DAVID R. PETERSON, MICHAEL D. SCHMIDT,
LAWRENCE D. WILDER, GRIFFITHS MCBURNEY & PARTNERS,
NATIONAL BANK FINANCIAL CORPORATION
(formerly known as First Marathon Securities Limited)






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IN THE MATTER OF THE SECURITIES ACT
R.S.O. 1990, c.S.5, as amended

AND

YBM MAGNEX INTERNATIONAL INC.,
HARRY W. ANTES, JACOB G. BOGATIN, KENNETH E. DAVIES,
IGOR FISHERMAN, DANIEL E. GATTI, FRANK S. GREENWALD,
R. OWEN MITCHELL, DAVID R. PETERSON, MICHAEL D. SCHMIDT,
LAWRENCE D. WILDER, GRIFFITHS MCBURNEY & PARTNERS,
NATIONAL BANK FINANCIAL CORPORATION
(formerly known as First Marathon Securities Limited)

STATEMENT OF ALLEGATIONS OF STAFF OF THE ONTARIO SECURITIES COMMISSION

Staff of the Ontario Securities Commission (the "Commission") make the following allegations:

I. The Respondents

1. YBM Magnex International Inc. ("YBM" or the "Company") was incorporated on March 16, 1994, in Alberta, Canada as Pratecs Technologies Inc. On October 5, 1995 the Company changed its name to YBM. YBM became a reporting issuer in Ontario on January 22, 1996. YBM shares were listed and posted for trading on The Toronto Stock Exchange on March 7, 1996. On May 13, 1998 the Commission issued a temporary cease trade order in respect of YBM shares, which order remains in effect. On December 8, 1998, pursuant to an order of the Court of Queens Bench of Alberta, a Receiver was appointed respecting the present and future assets, property and undertaking of YBM.

2. During the period May 1, 1996 to May 13, 1998 (the "material time"), there were eight members of the YBM Board of Directors (the "Directors"), two of whom were officers of the Company. The remaining six directors were not officers of YBM. The Directors were:

a) Harry W. Antes ("Antes"), Chairman of the Board of YBM and a member of the YBM Audit Committee; appointed director on April 29, 1996; a retired Vice President of a technology company;

b) Jacob G. Bogatin ("Bogatin"), President and Chief Executive Officer of YBM; appointed director on April 4, 1994;

c) Kenneth Davies ("Davies"), appointed director on April 4, 1994; a principal of a mineral exploration company;

d) Igor Fisherman ("Fisherman"), Chief Operating Officer of YBM; appointed director on April 29, 1996;

e) Frank S. Greenwald ("Greenwald"), a member of the YBM Audit Committee; appointed director on April 29, 1996; a retired Vice President of an engineering company;

f) R. Owen Mitchell ("Mitchell"), a member of the YBM Audit Committee; appointed director on January 26, 1996; a Vice President and Director of First Marathon Securities Limited (now known as National Bank Financial Corporation),

g) David R. Peterson ("Peterson"), appointed director on April 29, 1996; a partner with a Toronto-based law firm; and

h) Michael D. Schmidt ("Schmidt"), appointed director on April 4, 1994; an independent businessman.

3. Daniel E. Gatti ("Gatti") was the Vice President of Finance and Chief Financial Officer of YBM during the material time, appointed an officer on January 26, 1996.

4. Lawrence D. Wilder ("Wilder") is a partner with the law firm Cassels Brock and Blackwell which was the Canadian general counsel to YBM during the material time. Wilder had primary responsibility for the YBM engagement which commenced on or about September 1995 and ended on August 19, 1998.

5. On or about May 6, 1997, YBM entered into an agreement with two Canadian securities dealers to act as co-lead underwriters (the "Co-Lead Underwriters") for a financing being contemplated at that time by YBM. The Co-Lead Underwriters, and the percentage of the YBM offering each was ultimately obligated to purchase, were:

a) National Bank Financial Corp., known during the material time as First Marathon Securities Limited ("FMSL") which during the material time was, and continues to be, registered under the Securities Act as a Broker and Investment Dealer (35%); and

b) Griffiths McBurney & Partners ("GMP") which during the material time was, and continues to be, registered under the Securities Act as a Broker and Investment Dealer (35%).

6. In addition to FMSL and GMP, there were three "junior" members of the underwriting syndicate for YBM's 1997 public offering, which in accordance with the terms of an Underwriting Agreement dated November 17, 1997 were obligated to purchase the remaining 30% of the YBM offering.

7. During the material time when Mitchell acted as a Director of YBM, he was also the principal representative of FMSL in the underwriting syndicate.

II. Overview of Staff's Allegations

8. There are six specific allegations being advanced by Staff of the Ontario Securities Commission ("Staff"), which may be summarized as follows:

a) that YBM filed a preliminary prospectus dated May 30, 1997, and a final prospectus dated November 17, 1997, that failed to contain full, true, and plain disclosure of all material facts relating to the securities offered; specifically, material facts respecting the mandate, information obtained by and findings of the Special (Independent) Committee created by the YBM Board of Directors on August 29, 1996;

b) that the Directors, Chief Executive Officer and Chief Financial Officer of YBM authorized, permitted or acquiesced in YBM filing a preliminary prospectus dated May 30, 1997 and a final prospectus dated November 17, 1997 that failed to contain full, true and plain disclosure of all material facts relating to the securities offered; specifically, material facts respecting the mandate, information obtained by and findings of the Special (Independent) Committee created by the YBM Board of Directors on August 29, 1996;

c) that the Co-Lead Underwriters signed a certificate to a preliminary prospectus dated May 30, 1997 and a final prospectus dated November 17, 1997 which prospectuses, to the best of their knowledge, did not contain full, true and plain disclosure of all material facts relating to the securities offered; specifically, material facts respecting the mandate, information obtained by and findings of the Special (Independent) Committee created by the YBM Board of Directors on August 29, 1996;

d) that YBM failed to comply with its continuous disclosure obligations by not issuing a news release forthwith disclosing the nature and substance of a material change in the affairs of YBM; specifically, that the auditor for YBM, Deloitte & Touche LLP (U.S.) ("D&T"), had advised YBM by no later than April 20, 1998 that it would not perform any further services for YBM, including the rendering of an audit opinion in respect of YBM's 1997 annual financial statements, until YBM had completed an in-depth forensic investigation addressing specific concerns to the satisfaction of D&T;

e) that the members of the YBM Audit Committee (Antes, Greenwald and Mitchell), the Chief Executive Officer (Bogatin), the Chief Financial Officer (Gatti) and the Chief Operating Officer (Fisherman) of YBM authorized, permitted or acquiesced in YBM failing to comply with its continuous disclosure obligations by not issuing a news release forthwith disclosing the nature and substance of a material change in the affairs of YBM; specifically, that the auditor for YBM, D&T, had advised YBM by no later than April 20, 1998 that it would not perform any further services for YBM, including the rendering of an audit opinion in respect of YBM's 1997 annual financial statements, until YBM had completed an in-depth forensic investigation addressing specific concerns to the satisfaction of D&T; and

f) that Wilder made statements to Staff of the Commission during the course of Staff's review of YBM's preliminary prospectus that, in a material respect and at the time and in the light of the circumstances under which the statements were made, were misleading or untrue or did not state a fact that was required to be stated or that was necessary to make the statements not misleading; specifically, statements contained in a letter from Wilder to Staff dated July 4, 1997 concerning the results of due diligence conducted in respect of YBM.

III. YBM's Corporate Structure During the Material Time

9. Although YBM was a Canadian company during the material time, as of May 1, 1997 it had no Canadian operations. YBM's head office was located in the United States, the location of its wholly-owned subsidiary YBM Magnex Inc ("YBM Inc."). YBM Inc. controlled 100% of the "ordinary" shares of Arigon Company Ltd. ("Arigon"), an Alderney, Channel Islands company, with offices in Budapest, Hungary. YBM Inc. also controlled 100% of the "ordinary" shares of United Trade Limited ("UTL"), a Cayman Islands company. On or about April 1, 1996, Arigon assigned its assets and business to UTL, also with offices in Budapest, Hungary. The assets and business assigned to UTL included approximately 99.9% of the shares of Magnex RT ("RT"), a Hungarian corporation also located in Budapest, Hungary. On April 1, 1996 YBM divested itself of another subsidiary, Arbat International, Inc. ("Arbat"), a Russian trading company. On or about August 22, 1997, YBM completed the acquisition of Crumax Magnetics, a magnet manufacturer located in the United States.

10. According to YBM's public disclosure as of May 1, 1997, YBM was a manufacturer and distributor of magnets. YBM also bought and sold oil. YBM's magnet manufacturing process was conducted by RT which owned manufacturing facilities in Budapest, Hungary. Pursuant to agreements entered into between RT and Arigon in September 1992, Arigon transferred to RT machinery and equipment necessary for the manufacture of magnets. Arigon also became responsible for securing all applicable clearances for production purchases and delivery of materials and supplies to RT. Arigon also became responsible for arranging for the marketing, sale and distribution of the products manufactured by RT as well as the marketing, sale and distribution of products manufactured by others. Arigon was also responsible for the purchase and sale of oil. On or about April 1, 1996, these responsibilities were assumed by UTL. Fisherman, who was the President of Arigon, and other officers and directors of Arigon, resigned their positions at Arigon and assumed the same appointments with UTL.

11. On April 29, 1996, the newly constituted Board of Directors of YBM (elected by the YBM shareholders at the annual meeting held earlier that day) held a meeting attended by all of the Directors and YBM's Canadian general counsel. During the meeting the Directors discussed the reasoning for the divestiture of Arbat and the relocation of Arigon. The minutes of the meeting record the following:

The Chairman [Bogatin] updated the board as to various other matters including the Company's plans to sell Arbat International Inc. to a group of arm's length purchasers for consideration equal to approximately (US) $250,000. The Chairman indicated that the rationale for the sales [sic] was that the Company's operations in Eastern Europe were difficult to supervise and exposed it to certain potential liability. The Chairman confirmed that Arbat will continue to render services to the Company but only on a contractual basis.

The Chairman also advised the board of a proposal to relocate the Company's wholly-owned subsidiary, Arigon Co. Ltd. from the Channel Islands U.K. to the Cayman Islands. The Chairman explained that the rationale for such move was to bring Arigon's operations closer to the Company's North American headquarters. The Chairman advised that the Royal Bank of Canada was assisting the Company and Arigon in this move. The Chairman also advised that upon completion of such move, Arigon's name will most likely be changed to United Trade Limited. The Chairman advised that this move would be accomplished by way of a tax free reorganization of assets.

IV. The Alleged Failure to Make Full, True and Plain Disclosure of All Material Facts

i) What Was Disclosed by YBM?

12. On May 30, 1997 YBM filed a short-form preliminary prospectus with the Commission.

13. The preliminary prospectus contained a Certificate which was signed by Bogatin and Gatti in their capacity as CEO and CFO respectively, and by Antes and Peterson on behalf of the Board of Directors. The Certificate stated that:

The foregoing together with documents incorporated herein by reference, constitutes full, true and plain disclosure of all material facts relating to the securities offered by this prospectus as required by the securities laws of the provinces of...Ontario...

14. The preliminary prospectus also contained a Certificate signed by each of the underwriters (including the Co-Lead Underwriters) stating that:

To the best of our knowledge, information and belief, the foregoing, together with the documents incorporated herein by reference, constitutes full, true and plain disclosure of all material facts relating to the securities offered by this short form prospectus as required by the securities laws of the provinces of...Ontario...

15. YBM's Annual Information Form, dated May 1, 1997 ("AIF"), was incorporated by reference in the preliminary prospectus. The AIF stated, in part, under the heading "Business Risks, Risks Associated with Activities in Eastern Europe", that:

The Company's manufacturing operations are located in Hungary. Additionally, 47% of consolidated net sales are concentrated in Eastern Europe. Economic, political and general business conditions in these regions are highly inflationary and are potentially unstable.

The evolving market economies in Eastern Europe are characterized by a high level of cash transactions as well as less rigorous financial controls. The Company has and continues to implement recommendations made by independent public accountants and others with expertise in these regions to improve the Company's operations in these regions.

Over the last two years the Company became aware of concerns that had been expressed in the media and by government authorities generally concerning companies doing business in Eastern Europe and, particularly, in Russia. To this end, the Company has taken a number of steps to address these concerns, including:

1. The divestiture in the first quarter of 1996 of Arbat International Inc. ("Arbat"), the Company's Russian trading company which distributed a variety of consumer goods and materials through Eastern Europe and Russia. Upon a review of Arbat's operations, management was not satisfied that adequate customer and sales representative acceptance procedures could be implemented, including monitoring the propriety of sales commissions paid to sales representatives; and

2. the establishment of an independent committee of the Board of Directors who retained experts knowledgeable with political, social and economic issues in Eastern Europe to review the Company's operations to ensure that they are consistent with the standards applicable to Canadian public companies. Recommendations resulting from such review are being implemented by the Company. The Board of Directors, through the Audit Committee, will monitor ongoing compliance by the Company with such recommendations.

16. On June 3, 1997 a meeting was held between Staff responsible for the review of the preliminary prospectus, Canadian general counsel for YBM, counsel for the underwriters (Fogler, Rubinoff) and senior officers of the Co-Lead Underwriters. The purpose of the meeting was to discuss the time frame for Staff's review of the preliminary prospectus. During the course of the meeting Staff was informed that YBM had hired The Fairfax Group, a firm located in the United States, to look into rumours and innuendo surrounding the Company. Staff was informed at this meeting that Fairfax could not find any evidence to substantiate the rumours. Staff was also informed that YBM's Canadian general counsel did not look into whether the authorities in the United States had any concerns with the Company, but understood that the United States Justice Department approved the Crucible [Crumax Magnetics] transaction which gave Canadian general counsel comfort.

17. Staff issued its first comment letter in respect of the preliminary prospectus on June 16, 1997. Among the comments made by Staff in respect of the AIF was the following:

On page 6, under the heading "Risks Associated with Activities in Eastern Europe", reference is made to new standards for business practices being implemented by the Board. Please describe the circumstances respecting the review [by the Independent Committee of the Board of Directors referred to in the AIF] of the Company's operations. What recommendations are being implemented? Describe the "standards applicable to Canadian companies". [emphasis added]

18. On June 18, 1997 YBM, through their Canadian general counsel, in a letter copied to counsel for the underwriters, responded to Staff's first comment letter and, in connection with Staff's request for information in respect of the "Circumstances Surrounding the Review of the Company's Operations", stated as follows:

Over the past year, the Company has had some difficulty in being issued certain business visas for employees. As a result, the Company decided to investigate this further in order to resolve the problem. The Company's efforts confirmed that U.S. law enforcement agencies had placed a priority on uncovering infiltration of organized crime from the former Soviet Union into U.S. businesses. Given the roots of the Company and its affiliates in Russia, and the involvement of former Russian nationals as shareholders and managers of the Company, the Company believes that it may have been examined as part of any such investigation. The visas which prompted the concerns were subsequently issued by the U.S. Government without comment.

As noted in the AIF, the Company took a number of steps to address any possible concerns, including the divestiture in the first quarter of 1996 of Arbat International Inc., the Company's Russian trading company, and the establishment of a special committee of the board to review the operations of the Company in Eastern Europe.

Special Committee Recommendations

The Special Committee made the following recommendations which have been or are being implemented by the Company's management:

- Establishment of improved cash controls at the Company's Hungarian facilities;

- Establishment of more detailed customer and agent approval criteria;

- Establishment of a more accurate data base on these customers and agents;

- Establishment of new management information systems; and

- Consolidation of accounting control at the Company's Newtown, Pennsylvania, head office through establishment of integrated information systems at each site of the Company's operations.

Standards Applicable to Canadian Companies

The reference in the AIF to "standards applicable to Canadian companies" refers to internal controls and financial reporting requirements normally found in diversified Canadian public companies. [emphasis added]

19. On June 24, 1997 Staff requested that YBM undertake an independent audit of YBM's income statement for the year ended December 31, 1996 and requested that the assignment be performed by a "Big Six" accounting firm. In response to Staff's proposal, by letter dated July 4, 1997, Wilder informed Staff as follows:

As discussed above, the Confirming Accountant will be in a position to deliver its report to you no later than Tuesday, July 8, 1997. Based upon the results reported to date, we believe that the report will represent a continuation of the series of favourable due diligence results pertaining to the business of YBM conducted by independent parties. This stands in stark contrast to the rumors and innuendo to which YBM has been subject and which , based upon the information provided to us to date, have not been subject to any outside scrutiny or independent verification whatsoever.

As discussed previously, the Company, its advisors, as well as the underwriters and their advisors have made every effort to address each concern raised to date in order to complete this financing and allow the Company to complete its acquisition transaction which is crucial to its continued success. Needless to say, YBM's inability to proceed with this financing despite the efforts of all the parties concerned and referenced herein would have serious and lasting negative consequences to the Company and its shareholders. We respectfully submit that such an occurrence would not be in the public interest in view of the extensive due diligence completed to date and the uniformly positive results thereof. [emphasis added]

20. On October 13, 1997 D&T issued an unqualified audit opinion in respect of YBM's financial statements as of December 31, 1996. The audited financial statements formed part of a material change report issued by YBM dated November 13, 1997.

21. On November 17, 1997 Bogatin and Gatti, in their capacity as CEO and CFO respectively, and Antes and Peterson, on behalf of the Board of Directors, signed the Certificate to YBM's final prospectus representing that the prospectus, together with the documents incorporated by reference therein, constituted full, true and plain disclosure of all material facts. Each of the underwriters (including the Co-Lead Underwriters) signed a Certificate representing that, to the best of their knowledge, information and belief, the prospectus and the documents incorporated by reference therein, constituted full true and plain disclosure of all material facts.

22. On November 20, 1997 YBM received a receipt for the final short-form prospectus dated November 17, 1997. Pursuant to the final prospectus YBM distributed 3.2 million common shares for gross proceeds of $52.8 million. In addition, the final prospectus qualified the distribution of an additional 4 million common shares issuable upon the conversion of $48 million of secured convertible notes which YBM had previously distributed, on a prospectus-exempt basis, on or about August 21, 1997. The underwriters' fee, exclusive of any over-allotment option, was $2,376,000. In addition, subsequent to the closing of the public offering, YBM paid to FMSL and GMP $600,000 each for advisory services rendered in connection with the $48 million private placement noted above.

23. The final prospectus continued to incorporate by reference YBM's AIF. Also incorporated by reference was the November 13, 1997 material change report. In respect of the review of the Company's operations conducted by the independent committee of the YBM Board of Directors and experts retained by it, as referred to in the AIF, the only additional disclosure contained within the final prospectus, or any document incorporated by reference therein, was the following, as stated in the final prospectus:

In order to address the special risks inherent in carrying on business in Hungary in particular and Eastern Europe in general, YBM:

(a) has established improved cash controls at its Hungarian facilities;

(b) has developed more detailed end user and distributor approval criteria;

(c) is in the process of establishing a more accurate database respecting its distributors and end users;

(d) is in the process of implementing new management information systems; and

(e) is in the process of improving and centralizing controls over all of its international accounting activities at its Newtown, Pennsylvania head office.

The intent of the foregoing initiatives is to ensure that despite the fact that YBM carries on a substantial portion of its activities in Eastern Europe, its internal controls and financial reporting standards will be in accordance with those otherwise generally applicable to Canadian public companies...

ii) What Was Not Disclosed?

24. On August 15, 1996 the Board of Directors of YBM held a meeting at the YBM offices in Newtown, Pennsylvania. All of the Directors were in attendance along with Gatti, Wilder, and YBM counsel from the United States ("U.S. Counsel"). According to the minutes of the August 15, 1996 meeting, the following was discussed:

Jacob Bogatin and Daniel Gatti discussed the largely publicized interest of the United States government in companies doing business in Eastern Europe. They indicated that it is likely that the United States government has an interest in YBM because of the degree of scrutiny employees receive traveling to and from YBM's Hungarian operations and because of comments made to management in pursuing reasons for such delays. In addition, YBM Magnex has sponsored a number of employees (Hungarian and Russian nationals) in obtaining visas and has assisted many of them with US Immigration Laws. They informed the board that management in the past six months, had tried to establish closer ties to U.S. embassys [sic] abroad. They also indicated that the U.S. government, probably as a matter of policy, looks at any company with ties to Eastern Europe. Management does not believe such interest will be alleviated until the market economies in Eastern Europe are fully developed and business relationships between the East and West become routine. [emphasis added]

25. Among the "comments made to management in pursuing reasons for such delays" were comments made by U.S. Counsel for YBM to Bogatin on August 2, 1996. U.S. Counsel reported on inquiries made of the United States Attorney for the Eastern District of Pennsylvania, stating as follows:

Peter called the U.S. Attorney and requested a meeting and offered the Company's full cooperation. The U.S. Attorney returned Peter's call and said he could not meet with us [YBM]. He confirmed that the Department of Justice was conducting a "highly sensitive" criminal investigation of YBM Magnex and that it would be inappropriate to meet with us. He told Peter that nothing we could offer would be appropriate at this time. He said he could not discuss the nature of the investigation because it is "especially sensitive".

In view of the fact that, for the first time, we have a confirmation that YBM Magnex is the target of a federal criminal investigation, we must advise that this information be immediately made known to the Board of Directors. Peter and I are willing to meet with your Board and make a full report, if you believe it would be helpful. The Board may wish to consider undertaking a full internal investigation, although we have previously discussed the difficulties of investigating when we are unaware of the nature of the specific allegations against the Company.

I believe we have exhausted our efforts to obtain information about the nature of the concerns that the federal government has about YBM Magnex. We have no idea how long this cloud may continue to linger over the Company. We do know, however, that the situation is serious. [emphasis added]

26. On August 29, 1996 a Special Meeting of the YBM Board of Directors was held in Toronto. Minutes of this meeting have not been identified. Attending this meeting were: Antes, Davies, Greenwald, Mitchell, Peterson, Wilder and U.S. Counsel for YBM. The Board concluded that a Special (Independent) Committee should be formed to investigate the situation. It was further decided that no further discussions would be held or attempted with U.S. authorities until the Special Committee provided a final report. Members of the Board appointed to the Special Committee were Mitchell (Chair), Davies and Schmidt.

27. On November 1, 1996 the Board of Directors held a meeting via conference call. No minutes or notes of this meeting have been identified. However, the Special Committee prepared an Interim Report entitled "Report of the Special Committee to the Board of Directors" (the "Interim Report") on or about November 1, 1996. The Interim Report included the following comments:

In August 1996, the management of [YBM] were made aware of a pending investigation of the Company and its activities through the U.S. Attorney's office in Philadelphia. The focus of the investigation was not disclosed, however, discussions with counsel confirmed that U.S. law enforcement agencies had placed a priority on uncovering infiltration of Organized Crime from the Former Soviet Union into U.S. business. Given the roots of YBM and its affiliates in Russia and the involvement of former Russian nationals as shareholders and managers of the Company it was viewed to be a reasonable expectation that this would be the basis of such investigation.

28. The Interim Report described the mandate of the Special Committee as being to "independently investigate possible areas of concern" and to "report back to the Board on findings and recommended further actions". The Interim Report also indicated that the Special Committee "was given clear authority to undertake any independent actions or investigations which it felt were appropriate". Among the further actions proposed by the Special Committee was to engage a "professional East European investigator to provide [the Special Committee] with a background dossier on certain individuals who were original shareholders of YBM and/or who have acted as commissioned salespeople receiving material compensation from the Company".

29. On or about November 8, 1996, at the recommendation of Peterson, YBM retained the services of an independent company, The Fairfax Group, Ltd. ("Fairfax"). Fairfax, now known as Decision Strategies/Fairfax International LLC, is an international investigative and security firm that conducts corporate investigations. The Fairfax officials responsible for the YBM investigation consisted of three senior officials: a lawyer who was a former Special Prosecutor; a forensic accountant; and a retired U.S. Ambassador and former senior official with the U.S. State Department. A Retainer Agreement was entered into on or about November 14, 1996 signed on behalf of YBM by Mitchell. Fairfax's initial assignment was to "assist the client by undertaking a due diligence and internal investigation of YBN [sic] Magnex, International located in Philadelphia and Hungary".

30. In conducting its investigation, Fairfax performed extensive background checks on various persons and companies associated with YBM relying on various data bases and a network of sources located throughout the world. They also attended at offices of YBM and its subsidiaries in Philadelphia and Budapest, spoke with members of senior management, reviewed company records and met with some of the original shareholders of YBM. In the period December 1996 to March 21, 1997 Fairfax regularly briefed Mitchell on the status of its investigation, including an extensive briefing on March 3, 1997 at a meeting in Chapel Hill, North Carolina during which Mitchell informed Fairfax that he would write a report reflecting the information provided by Fairfax.

31. On March 21, 1997 Fairfax reported orally on the results of its investigation to date at a meeting in Toronto. Participating in this meeting on behalf of YBM were Mitchell and Wilder in person, and Antes and Schmidt via telephone. At the conclusion of Fairfax's presentation, Mitchell requested Fairfax to make the same presentation at a meeting in Philadelphia the following day. Participating in the March 22, 1997 meeting on behalf of YBM were Mitchell, Antes, Bogatin, Gatti, Wilder and YBM's U.S. Counsel.

32. Among the information conveyed by Fairfax during the meetings on March 21 and 22, 1997 was the following:

a) that reliable Fairfax sources in several agencies of the United States Government had indicated that the visa problems being experienced by YBM personnel were due to issues involving national security and organized crime;

b) that the original shareholders of YBM were confirmed as being members of the same Russian organized crime syndicate (the "Organization"), with interests in Europe (East and West), the Middle East and North America;

c) that among the companies which reliable sources had identified as being owned or controlled by the Organization were Arbat in Russia, Arigon in the United Kingdom and "Magnek" in Hungary;

d) that a review of YBM records had revealed that sales commissions in excess of $2.5 million had been paid by Arigon to a principal leader of the Organization and his chief assistant in the years 1993 to 1996;

e) that the equipment sold by the original shareholders to RT for approximately $14 million may have been overvalued, the equipment having been purchased for one-tenth of the value recorded on the books of RT, and that the records documenting this transaction may be false;

f) that the sale of Arbat on or about April 1, 1996 for $250,000 (of which only $150,000 was received by YBM) was to two persons who were identified as being members of the Organization and as having received sales commissions from Arigon/UTL in 1996 totaling in excess of $150,000;

g) that UTL was using a bank account, in the name of a company which was not part of YBM's publicly disclosed corporate structure, as its main operating account; that transactions involving millions of dollars went through the account; and that this account was controlled by one of the YBM original shareholders who was neither an officer nor an employee of UTL;

h) that there were indications that certain books and records had been falsified;

i) that in the opinion of Fairfax all of the "ingredients" were present for YBM to be used for money laundering activities; and

j) that in respect of companies with which YBM was doing business, some of these companies were shells, others were shells within shells, others did not exist, and still others were owned by persons who had received sales commissions from Arigon/UTL.

33. At both the March 21 and 22, 1997 meetings, Fairfax made it clear that in their view the key issue confronting YBM was that there were a number of organized crime figures involved in the operations in Hungary and that this was a serious problem. Fairfax made a number of recommendations for YBM's consideration.

34. On April 9, 1997 Mitchell sent to Fairfax for their review and comment a document, drafted by Mitchell and Wilder, entitled "Report of the Special Committee to the Board of Directors YBM Magnex International Inc. April 2, 1997". Fairfax had significant reservations respecting the contents of this document which included a section entitled "Results of the Fairfax Review". Fairfax provided their comments to Mitchell in a telephone conference call on April 10, 1997. Fairfax informed Mitchell that the report was inaccurate and that it did not reflect Fairfax's findings and the information which had been conveyed to Mitchell. Subsequently, Fairfax did not receive any further information as to what, if anything, Mitchell may have reported to the YBM Board of Directors.

35. On April 13, 1997 at the request of YBM, Fairfax attended a meeting in Philadelphia. Bogatin, Gatti and Mitchell attended this meeting on behalf of YBM. At this meeting Bogatin attempted to refute the information provided by Fairfax indicating that there was no clear proof. Fairfax stood by its findings. Mitchell indicated that Fairfax might receive a call from certain underwriters.

36. At no time prior to May 13, 1998 was Fairfax contacted by anyone to discuss the work which they undertook on behalf of YBM. In particular, Fairfax was not contacted by any Director of YBM who did not participate in the meetings noted above. Nor was Fairfax contacted by any person identifying themselves as a representative of the underwriters. At no time did Fairfax express to YBM or its advisors any reluctance to speak with underwriters or any other third parties at the direction of YBM.

37. A copy of the "Report of the Special Committee to the Board of Directors YBM Magnex International Inc. April 2, 1997" was provided to FMSL and to counsel for the underwriters. The word "Draft" is written on the upper right-hand corner of the document. According to counsel for the underwriters, the contents of this report were fully and fairly described by Mitchell at a meeting attended by a representative of GMP. Information contained within this report may be summarized as follows:

a) U.S. Counsel for YBM was advised "off the record" by the U.S. Attorney's Office that there was an "ongoing investigation" involving YBM; while unable to uncover further particulars counsel confirmed that U.S. law enforcement agencies had placed a priority on uncovering infiltration of organized crime from the former Soviet Union into U.S. business; on August 15, 1996 YBM management informed the Board of Directors of its discussions, through counsel, with the U.S. Attorney's Office;

b) on August 29, 1996 a Special Committee was formed to investigate the situation; counsel for YBM advised that due to a lack of clarity surrounding the matter, public disclosure should not be made at that time;

c) the mandate of the Special Committee was to independently investigate possible areas of concern arising out of the Company's business operations to attempt to determine the basis for any investigation and to recommend further action to address any problems or potential problems uncovered;

d) the initial review of the Special Committee focused on shareholder and employees/commissioned salespeople, and on contractual arrangements with customers; these two areas were chosen as a focus "because the greatest threat to the Company would be an investigation which questioned the legitimacy of its core business";

e) the Special Committee reviewed the original shareholders list; this review did not raise any concerns, but the Special Committee nevertheless undertook a further review;

f) there is no evidence that the existence of any investigation has impacted on trading whatsoever; "Accordingly, the Committee assumes that, to date, in accordance with the strict direction of the Board, the information has not been disclosed to parties outside the Company, its Board and advisors";

g) the initial review of the Special Committee identified very substantial commission payments paid by Arbat which seemed inconsistent with Arbat's business;

h) the Special Committee was concerned about one set of parallel records which showed substantial payments to a person on one set and the exact same payments to a corporate entity with a different name on another; later a third version was identified and had different amounts and payees; management of YBM had no explanation for this;

i) on November 1, 1996 the Special Committee reported to the Board on the initial review recommending that further investigation of the original shareholders be undertaken and that commissions paid also be reviewed; it was recommended that experts in this type of investigation be engaged as soon as possible;

j) the Special Committee retained Fairfax, a large U.S. consulting organization operated by former senior Justice Department, State Department and F.B.I. officials; Fairfax came highly recommended and exhibited a strong track record with respect to dealings in Eastern Europe;

k) Fairfax was requested by the Special Committee to: discover more details respecting the "ongoing investigation"; do background checks on management and the original shareholders; do background checks on recipients of commissions; randomly examine business transactions recorded in the records of the Company to ascertain if bona fide; and review YBM operations and make recommendations regarding improved controls;

l) the Results of the Fairfax review [as reported in the "Report of the Special Committee to the Board of Directors YBM Magnex International Inc. April 2, 1997" which was provided to FMSL] included the following:

i) initial background checks on management showed no concerns regarding Bogatin or other managers located in the United States; in Eastern Europe, however, a number of concerns arose; recipients of Arbat commissions in 1993-95 had clear ties to Russian organized crime; another recipient of commissions from Arbat was incarcerated in Switzerland; the basis of these payments appears to be unsupportable; even though Arbat was sold it was under the operating control of one of the original shareholders; Arbat was identified as an alleged vehicle for criminal acts;

ii) the original transaction respecting the acquisition of the equipment "was not as originally described"; prices paid were not as recorded on invoices; invoices were prepared well after the fact; the price paid by original shareholders for the equipment "is a fraction of the face value taken back by the original shareholders in preferred shares";

iii) "A second area of concern raised by Fairfax was the commingling of the business activities of Magnex RT, United Trade (the offshore sales arm of YBM) and those of the original shareholders resident in Budapest. The same office building was being used to transact activities for all the businesses and [one original shareholder] in particular was actively involved in activities related to United Trade and Magnex RT despite not being an officer or employee of either company. There was a bank account (since terminated) through which Company business was transacted to which [this original shareholder] was a signing officer. Management has already taken steps to relocate office activities and ensure proper separation"; this same original shareholder has a long-standing friendship with YBM's Chief Operating Officer; "foreign sources also connect the original shareholders with criminal activities including prostitution although none have been convicted or are wanted by authorities";

iv) there were a substantial number of cash transactions, in particular payment of salaries and commissions; there was a large volume of cash on hand; management has already taken steps to severely restrict the use of cash payments; and

v) the customer lists were reviewed and it was very difficult to establish end users for the products because of the use of intermediate agents for most sales;

m) the Conclusions of the Special Committee included the following:

i) there is no evidence that "senior management of YBM is in any way involved in any illegal or improper activities";

ii) that in respect of the questions surrounding the original shareholders, "it is not surprising that allegations should be made at successful businessmen of Russian origin trading between the Former Soviet Union and the West";

iii) the original shareholders, in aggregate, control over 40% of YBM common stock; "the existence of this block of shareholders is of concern to the Committee. This concern will be reduced following the completion of the equity issue to fund the Crucible acquisition..."; and

iv) the Committee directed management to eliminate any ties to the original shareholders in the "day-to-day operations of the Company";

n) the Recommendations of the Special Committee were as follows:

"a) Provide the Board with an action plan to address each of the following areas:

- Elimination of commingling of business activity with that of Company shareholders in Europe;

- Establish operational controls to ensure that management remains operationally independent from the founding shareholders;

- Establishment of improved cash controls in Hungary;

- The setting of more detailed customer and agent approval criteria;

- The establishment of an accurate data base on these customers and agents;

- Consolidation of accounting control in Newtown; and

- Engage a major accounting firm for the completion of future audits.

b) Establish a permanent subcommittee of the Board or the Audit Committee to supervise compliance with these recommendations and other issues surrounding corporate ethics in the future.

c) Advise the underwriters financing the acquisition of Crucible as to the background and results of this investigation.

d) Consider the establishment of a voluntary escrow of the Original Shareholders' shares until the completion of the acquisition and the clearance of the associated Special Warrants." [emphasis added]

38. On April 25, 1997 there was a meeting of the YBM Board of Directors held in Toronto. The meeting was attended by all of the Directors with the exception of Fisherman. Among others in attendance were Gatti and Wilder. Among the items on the agenda for this meeting was the "Report of Special Committee", which discussion was to be led by Mitchell.

39. Mitchell has indicated that a version of the report marked "BOARD DISCUSSION DRAFT", substantially similar to the version of the report provided to FMSL summarized above, was presented to the Directors at the April 25, 1997 Board meeting. Approved minutes of this meeting have not been identified.

40. One set of draft minutes of t

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YBM MAGNEX INTERNATIONAL INC.,

IN THE MATTER OF THE SECURITIES ACT
R.S.O. 1990, c.S.5, as amended

AND

YBM MAGNEX INTERNATIONAL INC.,
HARRY W. ANTES, JACOB G. BOGATIN, KENNETH E. DAVIES,
IGOR FISHERMAN, DANIEL E. GATTI, FRANK S. GREENWALD,
R. OWEN MITCHELL, DAVID R. PETERSON, MICHAEL D. SCHMIDT,
LAWRENCE D. WILDER, GRIFFITHS MCBURNEY & PARTNERS,
NATIONAL BANK FINANCIAL CORPORATION
(formerly known as First Marathon Securities Limited)






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IN THE MATTER OF THE SECURITIES ACT
R.S.O. 1990, c.S.5, as amended

AND

YBM MAGNEX INTERNATIONAL INC.,
HARRY W. ANTES, JACOB G. BOGATIN, KENNETH E. DAVIES,
IGOR FISHERMAN, DANIEL E. GATTI, FRANK S. GREENWALD,
R. OWEN MITCHELL, DAVID R. PETERSON, MICHAEL D. SCHMIDT,
LAWRENCE D. WILDER, GRIFFITHS MCBURNEY & PARTNERS,
NATIONAL BANK FINANCIAL CORPORATION
(formerly known as First Marathon Securities Limited)

STATEMENT OF ALLEGATIONS OF STAFF OF THE ONTARIO SECURITIES COMMISSION

Staff of the Ontario Securities Commission (the "Commission") make the following allegations:

I. The Respondents

1. YBM Magnex International Inc. ("YBM" or the "Company") was incorporated on March 16, 1994, in Alberta, Canada as Pratecs Technologies Inc. On October 5, 1995 the Company changed its name to YBM. YBM became a reporting issuer in Ontario on January 22, 1996. YBM shares were listed and posted for trading on The Toronto Stock Exchange on March 7, 1996. On May 13, 1998 the Commission issued a temporary cease trade order in respect of YBM shares, which order remains in effect. On December 8, 1998, pursuant to an order of the Court of Queens Bench of Alberta, a Receiver was appointed respecting the present and future assets, property and undertaking of YBM.

2. During the period May 1, 1996 to May 13, 1998 (the "material time"), there were eight members of the YBM Board of Directors (the "Directors"), two of whom were officers of the Company. The remaining six directors were not officers of YBM. The Directors were:

a) Harry W. Antes ("Antes"), Chairman of the Board of YBM and a member of the YBM Audit Committee; appointed director on April 29, 1996; a retired Vice President of a technology company;

b) Jacob G. Bogatin ("Bogatin"), President and Chief Executive Officer of YBM; appointed director on April 4, 1994;

c) Kenneth Davies ("Davies"), appointed director on April 4, 1994; a principal of a mineral exploration company;

d) Igor Fisherman ("Fisherman"), Chief Operating Officer of YBM; appointed director on April 29, 1996;

e) Frank S. Greenwald ("Greenwald"), a member of the YBM Audit Committee; appointed director on April 29, 1996; a retired Vice President of an engineering company;

f) R. Owen Mitchell ("Mitchell"), a member of the YBM Audit Committee; appointed director on January 26, 1996; a Vice President and Director of First Marathon Securities Limited (now known as National Bank Financial Corporation),

g) David R. Peterson ("Peterson"), appointed director on April 29, 1996; a partner with a Toronto-based law firm; and

h) Michael D. Schmidt ("Schmidt"), appointed director on April 4, 1994; an independent businessman.

3. Daniel E. Gatti ("Gatti") was the Vice President of Finance and Chief Financial Officer of YBM during the material time, appointed an officer on January 26, 1996.

4. Lawrence D. Wilder ("Wilder") is a partner with the law firm Cassels Brock and Blackwell which was the Canadian general counsel to YBM during the material time. Wilder had primary responsibility for the YBM engagement which commenced on or about September 1995 and ended on August 19, 1998.

5. On or about May 6, 1997, YBM entered into an agreement with two Canadian securities dealers to act as co-lead underwriters (the "Co-Lead Underwriters") for a financing being contemplated at that time by YBM. The Co-Lead Underwriters, and the percentage of the YBM offering each was ultimately obligated to purchase, were:

a) National Bank Financial Corp., known during the material time as First Marathon Securities Limited ("FMSL") which during the material time was, and continues to be, registered under the Securities Act as a Broker and Investment Dealer (35%); and

b) Griffiths McBurney & Partners ("GMP") which during the material time was, and continues to be, registered under the Securities Act as a Broker and Investment Dealer (35%).

6. In addition to FMSL and GMP, there were three "junior" members of the underwriting syndicate for YBM's 1997 public offering, which in accordance with the terms of an Underwriting Agreement dated November 17, 1997 were obligated to purchase the remaining 30% of the YBM offering.

7. During the material time when Mitchell acted as a Director of YBM, he was also the principal representative of FMSL in the underwriting syndicate.

II. Overview of Staff's Allegations

8. There are six specific allegations being advanced by Staff of the Ontario Securities Commission ("Staff"), which may be summarized as follows:

a) that YBM filed a preliminary prospectus dated May 30, 1997, and a final prospectus dated November 17, 1997, that failed to contain full, true, and plain disclosure of all material facts relating to the securities offered; specifically, material facts respecting the mandate, information obtained by and findings of the Special (Independent) Committee created by the YBM Board of Directors on August 29, 1996;

b) that the Directors, Chief Executive Officer and Chief Financial Officer of YBM authorized, permitted or acquiesced in YBM filing a preliminary prospectus dated May 30, 1997 and a final prospectus dated November 17, 1997 that failed to contain full, true and plain disclosure of all material facts relating to the securities offered; specifically, material facts respecting the mandate, information obtained by and findings of the Special (Independent) Committee created by the YBM Board of Directors on August 29, 1996;

c) that the Co-Lead Underwriters signed a certificate to a preliminary prospectus dated May 30, 1997 and a final prospectus dated November 17, 1997 which prospectuses, to the best of their knowledge, did not contain full, true and plain disclosure of all material facts relating to the securities offered; specifically, material facts respecting the mandate, information obtained by and findings of the Special (Independent) Committee created by the YBM Board of Directors on August 29, 1996;

d) that YBM failed to comply with its continuous disclosure obligations by not issuing a news release forthwith disclosing the nature and substance of a material change in the affairs of YBM; specifically, that the auditor for YBM, Deloitte & Touche LLP (U.S.) ("D&T"), had advised YBM by no later than April 20, 1998 that it would not perform any further services for YBM, including the rendering of an audit opinion in respect of YBM's 1997 annual financial statements, until YBM had completed an in-depth forensic investigation addressing specific concerns to the satisfaction of D&T;

e) that the members of the YBM Audit Committee (Antes, Greenwald and Mitchell), the Chief Executive Officer (Bogatin), the Chief Financial Officer (Gatti) and the Chief Operating Officer (Fisherman) of YBM authorized, permitted or acquiesced in YBM failing to comply with its continuous disclosure obligations by not issuing a news release forthwith disclosing the nature and substance of a material change in the affairs of YBM; specifically, that the auditor for YBM, D&T, had advised YBM by no later than April 20, 1998 that it would not perform any further services for YBM, including the rendering of an audit opinion in respect of YBM's 1997 annual financial statements, until YBM had completed an in-depth forensic investigation addressing specific concerns to the satisfaction of D&T; and

f) that Wilder made statements to Staff of the Commission during the course of Staff's review of YBM's preliminary prospectus that, in a material respect and at the time and in the light of the circumstances under which the statements were made, were misleading or untrue or did not state a fact that was required to be stated or that was necessary to make the statements not misleading; specifically, statements contained in a letter from Wilder to Staff dated July 4, 1997 concerning the results of due diligence conducted in respect of YBM.

III. YBM's Corporate Structure During the Material Time

9. Although YBM was a Canadian company during the material time, as of May 1, 1997 it had no Canadian operations. YBM's head office was located in the United States, the location of its wholly-owned subsidiary YBM Magnex Inc ("YBM Inc."). YBM Inc. controlled 100% of the "ordinary" shares of Arigon Company Ltd. ("Arigon"), an Alderney, Channel Islands company, with offices in Budapest, Hungary. YBM Inc. also controlled 100% of the "ordinary" shares of United Trade Limited ("UTL"), a Cayman Islands company. On or about April 1, 1996, Arigon assigned its assets and business to UTL, also with offices in Budapest, Hungary. The assets and business assigned to UTL included approximately 99.9% of the shares of Magnex RT ("RT"), a Hungarian corporation also located in Budapest, Hungary. On April 1, 1996 YBM divested itself of another subsidiary, Arbat International, Inc. ("Arbat"), a Russian trading company. On or about August 22, 1997, YBM completed the acquisition of Crumax Magnetics, a magnet manufacturer located in the United States.

10. According to YBM's public disclosure as of May 1, 1997, YBM was a manufacturer and distributor of magnets. YBM also bought and sold oil. YBM's magnet manufacturing process was conducted by RT which owned manufacturing facilities in Budapest, Hungary. Pursuant to agreements entered into between RT and Arigon in September 1992, Arigon transferred to RT machinery and equipment necessary for the manufacture of magnets. Arigon also became responsible for securing all applicable clearances for production purchases and delivery of materials and supplies to RT. Arigon also became responsible for arranging for the marketing, sale and distribution of the products manufactured by RT as well as the marketing, sale and distribution of products manufactured by others. Arigon was also responsible for the purchase and sale of oil. On or about April 1, 1996, these responsibilities were assumed by UTL. Fisherman, who was the President of Arigon, and other officers and directors of Arigon, resigned their positions at Arigon and assumed the same appointments with UTL.

11. On April 29, 1996, the newly constituted Board of Directors of YBM (elected by the YBM shareholders at the annual meeting held earlier that day) held a meeting attended by all of the Directors and YBM's Canadian general counsel. During the meeting the Directors discussed the reasoning for the divestiture of Arbat and the relocation of Arigon. The minutes of the meeting record the following:

The Chairman [Bogatin] updated the board as to various other matters including the Company's plans to sell Arbat International Inc. to a group of arm's length purchasers for consideration equal to approximately (US) $250,000. The Chairman indicated that the rationale for the sales [sic] was that the Company's operations in Eastern Europe were difficult to supervise and exposed it to certain potential liability. The Chairman confirmed that Arbat will continue to render services to the Company but only on a contractual basis.

The Chairman also advised the board of a proposal to relocate the Company's wholly-owned subsidiary, Arigon Co. Ltd. from the Channel Islands U.K. to the Cayman Islands. The Chairman explained that the rationale for such move was to bring Arigon's operations closer to the Company's North American headquarters. The Chairman advised that the Royal Bank of Canada was assisting the Company and Arigon in this move. The Chairman also advised that upon completion of such move, Arigon's name will most likely be changed to United Trade Limited. The Chairman advised that this move would be accomplished by way of a tax free reorganization of assets.

IV. The Alleged Failure to Make Full, True and Plain Disclosure of All Material Facts

i) What Was Disclosed by YBM?

12. On May 30, 1997 YBM filed a short-form preliminary prospectus with the Commission.

13. The preliminary prospectus contained a Certificate which was signed by Bogatin and Gatti in their capacity as CEO and CFO respectively, and by Antes and Peterson on behalf of the Board of Directors. The Certificate stated that:

The foregoing together with documents incorporated herein by reference, constitutes full, true and plain disclosure of all material facts relating to the securities offered by this prospectus as required by the securities laws of the provinces of...Ontario...

14. The preliminary prospectus also contained a Certificate signed by each of the underwriters (including the Co-Lead Underwriters) stating that:

To the best of our knowledge, information and belief, the foregoing, together with the documents incorporated herein by reference, constitutes full, true and plain disclosure of all material facts relating to the securities offered by this short form prospectus as required by the securities laws of the provinces of...Ontario...

15. YBM's Annual Information Form, dated May 1, 1997 ("AIF"), was incorporated by reference in the preliminary prospectus. The AIF stated, in part, under the heading "Business Risks, Risks Associated with Activities in Eastern Europe", that:

The Company's manufacturing operations are located in Hungary. Additionally, 47% of consolidated net sales are concentrated in Eastern Europe. Economic, political and general business conditions in these regions are highly inflationary and are potentially unstable.

The evolving market economies in Eastern Europe are characterized by a high level of cash transactions as well as less rigorous financial controls. The Company has and continues to implement recommendations made by independent public accountants and others with expertise in these regions to improve the Company's operations in these regions.

Over the last two years the Company became aware of concerns that had been expressed in the media and by government authorities generally concerning companies doing business in Eastern Europe and, particularly, in Russia. To this end, the Company has taken a number of steps to address these concerns, including:

1. The divestiture in the first quarter of 1996 of Arbat International Inc. ("Arbat"), the Company's Russian trading company which distributed a variety of consumer goods and materials through Eastern Europe and Russia. Upon a review of Arbat's operations, management was not satisfied that adequate customer and sales representative acceptance procedures could be implemented, including monitoring the propriety of sales commissions paid to sales representatives; and

2. the establishment of an independent committee of the Board of Directors who retained experts knowledgeable with political, social and economic issues in Eastern Europe to review the Company's operations to ensure that they are consistent with the standards applicable to Canadian public companies. Recommendations resulting from such review are being implemented by the Company. The Board of Directors, through the Audit Committee, will monitor ongoing compliance by the Company with such recommendations.

16. On June 3, 1997 a meeting was held between Staff responsible for the review of the preliminary prospectus, Canadian general counsel for YBM, counsel for the underwriters (Fogler, Rubinoff) and senior officers of the Co-Lead Underwriters. The purpose of the meeting was to discuss the time frame for Staff's review of the preliminary prospectus. During the course of the meeting Staff was informed that YBM had hired The Fairfax Group, a firm located in the United States, to look into rumours and innuendo surrounding the Company. Staff was informed at this meeting that Fairfax could not find any evidence to substantiate the rumours. Staff was also informed that YBM's Canadian general counsel did not look into whether the authorities in the United States had any concerns with the Company, but understood that the United States Justice Department approved the Crucible [Crumax Magnetics] transaction which gave Canadian general counsel comfort.

17. Staff issued its first comment letter in respect of the preliminary prospectus on June 16, 1997. Among the comments made by Staff in respect of the AIF was the following:

On page 6, under the heading "Risks Associated with Activities in Eastern Europe", reference is made to new standards for business practices being implemented by the Board. Please describe the circumstances respecting the review [by the Independent Committee of the Board of Directors referred to in the AIF] of the Company's operations. What recommendations are being implemented? Describe the "standards applicable to Canadian companies". [emphasis added]

18. On June 18, 1997 YBM, through their Canadian general counsel, in a letter copied to counsel for the underwriters, responded to Staff's first comment letter and, in connection with Staff's request for information in respect of the "Circumstances Surrounding the Review of the Company's Operations", stated as follows:

Over the past year, the Company has had some difficulty in being issued certain business visas for employees. As a result, the Company decided to investigate this further in order to resolve the problem. The Company's efforts confirmed that U.S. law enforcement agencies had placed a priority on uncovering infiltration of organized crime from the former Soviet Union into U.S. businesses. Given the roots of the Company and its affiliates in Russia, and the involvement of former Russian nationals as shareholders and managers of the Company, the Company believes that it may have been examined as part of any such investigation. The visas which prompted the concerns were subsequently issued by the U.S. Government without comment.

As noted in the AIF, the Company took a number of steps to address any possible concerns, including the divestiture in the first quarter of 1996 of Arbat International Inc., the Company's Russian trading company, and the establishment of a special committee of the board to review the operations of the Company in Eastern Europe.

Special Committee Recommendations

The Special Committee made the following recommendations which have been or are being implemented by the Company's management:

- Establishment of improved cash controls at the Company's Hungarian facilities;

- Establishment of more detailed customer and agent approval criteria;

- Establishment of a more accurate data base on these customers and agents;

- Establishment of new management information systems; and

- Consolidation of accounting control at the Company's Newtown, Pennsylvania, head office through establishment of integrated information systems at each site of the Company's operations.

Standards Applicable to Canadian Companies

The reference in the AIF to "standards applicable to Canadian companies" refers to internal controls and financial reporting requirements normally found in diversified Canadian public companies. [emphasis added]

19. On June 24, 1997 Staff requested that YBM undertake an independent audit of YBM's income statement for the year ended December 31, 1996 and requested that the assignment be performed by a "Big Six" accounting firm. In response to Staff's proposal, by letter dated July 4, 1997, Wilder informed Staff as follows:

As discussed above, the Confirming Accountant will be in a position to deliver its report to you no later than Tuesday, July 8, 1997. Based upon the results reported to date, we believe that the report will represent a continuation of the series of favourable due diligence results pertaining to the business of YBM conducted by independent parties. This stands in stark contrast to the rumors and innuendo to which YBM has been subject and which , based upon the information provided to us to date, have not been subject to any outside scrutiny or independent verification whatsoever.

As discussed previously, the Company, its advisors, as well as the underwriters and their advisors have made every effort to address each concern raised to date in order to complete this financing and allow the Company to complete its acquisition transaction which is crucial to its continued success. Needless to say, YBM's inability to proceed with this financing despite the efforts of all the parties concerned and referenced herein would have serious and lasting negative consequences to the Company and its shareholders. We respectfully submit that such an occurrence would not be in the public interest in view of the extensive due diligence completed to date and the uniformly positive results thereof. [emphasis added]

20. On October 13, 1997 D&T issued an unqualified audit opinion in respect of YBM's financial statements as of December 31, 1996. The audited financial statements formed part of a material change report issued by YBM dated November 13, 1997.

21. On November 17, 1997 Bogatin and Gatti, in their capacity as CEO and CFO respectively, and Antes and Peterson, on behalf of the Board of Directors, signed the Certificate to YBM's final prospectus representing that the prospectus, together with the documents incorporated by reference therein, constituted full, true and plain disclosure of all material facts. Each of the underwriters (including the Co-Lead Underwriters) signed a Certificate representing that, to the best of their knowledge, information and belief, the prospectus and the documents incorporated by reference therein, constituted full true and plain disclosure of all material facts.

22. On November 20, 1997 YBM received a receipt for the final short-form prospectus dated November 17, 1997. Pursuant to the final prospectus YBM distributed 3.2 million common shares for gross proceeds of $52.8 million. In addition, the final prospectus qualified the distribution of an additional 4 million common shares issuable upon the conversion of $48 million of secured convertible notes which YBM had previously distributed, on a prospectus-exempt basis, on or about August 21, 1997. The underwriters' fee, exclusive of any over-allotment option, was $2,376,000. In addition, subsequent to the closing of the public offering, YBM paid to FMSL and GMP $600,000 each for advisory services rendered in connection with the $48 million private placement noted above.

23. The final prospectus continued to incorporate by reference YBM's AIF. Also incorporated by reference was the November 13, 1997 material change report. In respect of the review of the Company's operations conducted by the independent committee of the YBM Board of Directors and experts retained by it, as referred to in the AIF, the only additional disclosure contained within the final prospectus, or any document incorporated by reference therein, was the following, as stated in the final prospectus:

In order to address the special risks inherent in carrying on business in Hungary in particular and Eastern Europe in general, YBM:

(a) has established improved cash controls at its Hungarian facilities;

(b) has developed more detailed end user and distributor approval criteria;

(c) is in the process of establishing a more accurate database respecting its distributors and end users;

(d) is in the process of implementing new management information systems; and

(e) is in the process of improving and centralizing controls over all of its international accounting activities at its Newtown, Pennsylvania head office.

The intent of the foregoing initiatives is to ensure that despite the fact that YBM carries on a substantial portion of its activities in Eastern Europe, its internal controls and financial reporting standards will be in accordance with those otherwise generally applicable to Canadian public companies...

ii) What Was Not Disclosed?

24. On August 15, 1996 the Board of Directors of YBM held a meeting at the YBM offices in Newtown, Pennsylvania. All of the Directors were in attendance along with Gatti, Wilder, and YBM counsel from the United States ("U.S. Counsel"). According to the minutes of the August 15, 1996 meeting, the following was discussed:

Jacob Bogatin and Daniel Gatti discussed the largely publicized interest of the United States government in companies doing business in Eastern Europe. They indicated that it is likely that the United States government has an interest in YBM because of the degree of scrutiny employees receive traveling to and from YBM's Hungarian operations and because of comments made to management in pursuing reasons for such delays. In addition, YBM Magnex has sponsored a number of employees (Hungarian and Russian nationals) in obtaining visas and has assisted many of them with US Immigration Laws. They informed the board that management in the past six months, had tried to establish closer ties to U.S. embassys [sic] abroad. They also indicated that the U.S. government, probably as a matter of policy, looks at any company with ties to Eastern Europe. Management does not believe such interest will be alleviated until the market economies in Eastern Europe are fully developed and business relationships between the East and West become routine. [emphasis added]

25. Among the "comments made to management in pursuing reasons for such delays" were comments made by U.S. Counsel for YBM to Bogatin on August 2, 1996. U.S. Counsel reported on inquiries made of the United States Attorney for the Eastern District of Pennsylvania, stating as follows:

Peter called the U.S. Attorney and requested a meeting and offered the Company's full cooperation. The U.S. Attorney returned Peter's call and said he could not meet with us [YBM]. He confirmed that the Department of Justice was conducting a "highly sensitive" criminal investigation of YBM Magnex and that it would be inappropriate to meet with us. He told Peter that nothing we could offer would be appropriate at this time. He said he could not discuss the nature of the investigation because it is "especially sensitive".

In view of the fact that, for the first time, we have a confirmation that YBM Magnex is the target of a federal criminal investigation, we must advise that this information be immediately made known to the Board of Directors. Peter and I are willing to meet with your Board and make a full report, if you believe it would be helpful. The Board may wish to consider undertaking a full internal investigation, although we have previously discussed the difficulties of investigating when we are unaware of the nature of the specific allegations against the Company.

I believe we have exhausted our efforts to obtain information about the nature of the concerns that the federal government has about YBM Magnex. We have no idea how long this cloud may continue to linger over the Company. We do know, however, that the situation is serious. [emphasis added]

26. On August 29, 1996 a Special Meeting of the YBM Board of Directors was held in Toronto. Minutes of this meeting have not been identified. Attending this meeting were: Antes, Davies, Greenwald, Mitchell, Peterson, Wilder and U.S. Counsel for YBM. The Board concluded that a Special (Independent) Committee should be formed to investigate the situation. It was further decided that no further discussions would be held or attempted with U.S. authorities until the Special Committee provided a final report. Members of the Board appointed to the Special Committee were Mitchell (Chair), Davies and Schmidt.

27. On November 1, 1996 the Board of Directors held a meeting via conference call. No minutes or notes of this meeting have been identified. However, the Special Committee prepared an Interim Report entitled "Report of the Special Committee to the Board of Directors" (the "Interim Report") on or about November 1, 1996. The Interim Report included the following comments:

In August 1996, the management of [YBM] were made aware of a pending investigation of the Company and its activities through the U.S. Attorney's office in Philadelphia. The focus of the investigation was not disclosed, however, discussions with counsel confirmed that U.S. law enforcement agencies had placed a priority on uncovering infiltration of Organized Crime from the Former Soviet Union into U.S. business. Given the roots of YBM and its affiliates in Russia and the involvement of former Russian nationals as shareholders and managers of the Company it was viewed to be a reasonable expectation that this would be the basis of such investigation.

28. The Interim Report described the mandate of the Special Committee as being to "independently investigate possible areas of concern" and to "report back to the Board on findings and recommended further actions". The Interim Report also indicated that the Special Committee "was given clear authority to undertake any independent actions or investigations which it felt were appropriate". Among the further actions proposed by the Special Committee was to engage a "professional East European investigator to provide [the Special Committee] with a background dossier on certain individuals who were original shareholders of YBM and/or who have acted as commissioned salespeople receiving material compensation from the Company".

29. On or about November 8, 1996, at the recommendation of Peterson, YBM retained the services of an independent company, The Fairfax Group, Ltd. ("Fairfax"). Fairfax, now known as Decision Strategies/Fairfax International LLC, is an international investigative and security firm that conducts corporate investigations. The Fairfax officials responsible for the YBM investigation consisted of three senior officials: a lawyer who was a former Special Prosecutor; a forensic accountant; and a retired U.S. Ambassador and former senior official with the U.S. State Department. A Retainer Agreement was entered into on or about November 14, 1996 signed on behalf of YBM by Mitchell. Fairfax's initial assignment was to "assist the client by undertaking a due diligence and internal investigation of YBN [sic] Magnex, International located in Philadelphia and Hungary".

30. In conducting its investigation, Fairfax performed extensive background checks on various persons and companies associated with YBM relying on various data bases and a network of sources located throughout the world. They also attended at offices of YBM and its subsidiaries in Philadelphia and Budapest, spoke with members of senior management, reviewed company records and met with some of the original shareholders of YBM. In the period December 1996 to March 21, 1997 Fairfax regularly briefed Mitchell on the status of its investigation, including an extensive briefing on March 3, 1997 at a meeting in Chapel Hill, North Carolina during which Mitchell informed Fairfax that he would write a report reflecting the information provided by Fairfax.

31. On March 21, 1997 Fairfax reported orally on the results of its investigation to date at a meeting in Toronto. Participating in this meeting on behalf of YBM were Mitchell and Wilder in person, and Antes and Schmidt via telephone. At the conclusion of Fairfax's presentation, Mitchell requested Fairfax to make the same presentation at a meeting in Philadelphia the following day. Participating in the March 22, 1997 meeting on behalf of YBM were Mitchell, Antes, Bogatin, Gatti, Wilder and YBM's U.S. Counsel.

32. Among the information conveyed by Fairfax during the meetings on March 21 and 22, 1997 was the following:

a) that reliable Fairfax sources in several agencies of the United States Government had indicated that the visa problems being experienced by YBM personnel were due to issues involving national security and organized crime;

b) that the original shareholders of YBM were confirmed as being members of the same Russian organized crime syndicate (the "Organization"), with interests in Europe (East and West), the Middle East and North America;

c) that among the companies which reliable sources had identified as being owned or controlled by the Organization were Arbat in Russia, Arigon in the United Kingdom and "Magnek" in Hungary;

d) that a review of YBM records had revealed that sales commissions in excess of $2.5 million had been paid by Arigon to a principal leader of the Organization and his chief assistant in the years 1993 to 1996;

e) that the equipment sold by the original shareholders to RT for approximately $14 million may have been overvalued, the equipment having been purchased for one-tenth of the value recorded on the books of RT, and that the records documenting this transaction may be false;

f) that the sale of Arbat on or about April 1, 1996 for $250,000 (of which only $150,000 was received by YBM) was to two persons who were identified as being members of the Organization and as having received sales commissions from Arigon/UTL in 1996 totaling in excess of $150,000;

g) that UTL was using a bank account, in the name of a company which was not part of YBM's publicly disclosed corporate structure, as its main operating account; that transactions involving millions of dollars went through the account; and that this account was controlled by one of the YBM original shareholders who was neither an officer nor an employee of UTL;

h) that there were indications that certain books and records had been falsified;

i) that in the opinion of Fairfax all of the "ingredients" were present for YBM to be used for money laundering activities; and

j) that in respect of companies with which YBM was doing business, some of these companies were shells, others were shells within shells, others did not exist, and still others were owned by persons who had received sales commissions from Arigon/UTL.

33. At both the March 21 and 22, 1997 meetings, Fairfax made it clear that in their view the key issue confronting YBM was that there were a number of organized crime figures involved in the operations in Hungary and that this was a serious problem. Fairfax made a number of recommendations for YBM's consideration.

34. On April 9, 1997 Mitchell sent to Fairfax for their review and comment a document, drafted by Mitchell and Wilder, entitled "Report of the Special Committee to the Board of Directors YBM Magnex International Inc. April 2, 1997". Fairfax had significant reservations respecting the contents of this document which included a section entitled "Results of the Fairfax Review". Fairfax provided their comments to Mitchell in a telephone conference call on April 10, 1997. Fairfax informed Mitchell that the report was inaccurate and that it did not reflect Fairfax's findings and the information which had been conveyed to Mitchell. Subsequently, Fairfax did not receive any further information as to what, if anything, Mitchell may have reported to the YBM Board of Directors.

35. On April 13, 1997 at the request of YBM, Fairfax attended a meeting in Philadelphia. Bogatin, Gatti and Mitchell attended this meeting on behalf of YBM. At this meeting Bogatin attempted to refute the information provided by Fairfax indicating that there was no clear proof. Fairfax stood by its findings. Mitchell indicated that Fairfax might receive a call from certain underwriters.

36. At no time prior to May 13, 1998 was Fairfax contacted by anyone to discuss the work which they undertook on behalf of YBM. In particular, Fairfax was not contacted by any Director of YBM who did not participate in the meetings noted above. Nor was Fairfax contacted by any person identifying themselves as a representative of the underwriters. At no time did Fairfax express to YBM or its advisors any reluctance to speak with underwriters or any other third parties at the direction of YBM.

37. A copy of the "Report of the Special Committee to the Board of Directors YBM Magnex International Inc. April 2, 1997" was provided to FMSL and to counsel for the underwriters. The word "Draft" is written on the upper right-hand corner of the document. According to counsel for the underwriters, the contents of this report were fully and fairly described by Mitchell at a meeting attended by a representative of GMP. Information contained within this report may be summarized as follows:

a) U.S. Counsel for YBM was advised "off the record" by the U.S. Attorney's Office that there was an "ongoing investigation" involving YBM; while unable to uncover further particulars counsel confirmed that U.S. law enforcement agencies had placed a priority on uncovering infiltration of organized crime from the former Soviet Union into U.S. business; on August 15, 1996 YBM management informed the Board of Directors of its discussions, through counsel, with the U.S. Attorney's Office;

b) on August 29, 1996 a Special Committee was formed to investigate the situation; counsel for YBM advised that due to a lack of clarity surrounding the matter, public disclosure should not be made at that time;

c) the mandate of the Special Committee was to independently investigate possible areas of concern arising out of the Company's business operations to attempt to determine the basis for any investigation and to recommend further action to address any problems or potential problems uncovered;

d) the initial review of the Special Committee focused on shareholder and employees/commissioned salespeople, and on contractual arrangements with customers; these two areas were chosen as a focus "because the greatest threat to the Company would be an investigation which questioned the legitimacy of its core business";

e) the Special Committee reviewed the original shareholders list; this review did not raise any concerns, but the Special Committee nevertheless undertook a further review;

f) there is no evidence that the existence of any investigation has impacted on trading whatsoever; "Accordingly, the Committee assumes that, to date, in accordance with the strict direction of the Board, the information has not been disclosed to parties outside the Company, its Board and advisors";

g) the initial review of the Special Committee identified very substantial commission payments paid by Arbat which seemed inconsistent with Arbat's business;

h) the Special Committee was concerned about one set of parallel records which showed substantial payments to a person on one set and the exact same payments to a corporate entity with a different name on another; later a third version was identified and had different amounts and payees; management of YBM had no explanation for this;

i) on November 1, 1996 the Special Committee reported to the Board on the initial review recommending that further investigation of the original shareholders be undertaken and that commissions paid also be reviewed; it was recommended that experts in this type of investigation be engaged as soon as possible;

j) the Special Committee retained Fairfax, a large U.S. consulting organization operated by former senior Justice Department, State Department and F.B.I. officials; Fairfax came highly recommended and exhibited a strong track record with respect to dealings in Eastern Europe;

k) Fairfax was requested by the Special Committee to: discover more details respecting the "ongoing investigation"; do background checks on management and the original shareholders; do background checks on recipients of commissions; randomly examine business transactions recorded in the records of the Company to ascertain if bona fide; and review YBM operations and make recommendations regarding improved controls;

l) the Results of the Fairfax review [as reported in the "Report of the Special Committee to the Board of Directors YBM Magnex International Inc. April 2, 1997" which was provided to FMSL] included the following:

i) initial background checks on management showed no concerns regarding Bogatin or other managers located in the United States; in Eastern Europe, however, a number of concerns arose; recipients of Arbat commissions in 1993-95 had clear ties to Russian organized crime; another recipient of commissions from Arbat was incarcerated in Switzerland; the basis of these payments appears to be unsupportable; even though Arbat was sold it was under the operating control of one of the original shareholders; Arbat was identified as an alleged vehicle for criminal acts;

ii) the original transaction respecting the acquisition of the equipment "was not as originally described"; prices paid were not as recorded on invoices; invoices were prepared well after the fact; the price paid by original shareholders for the equipment "is a fraction of the face value taken back by the original shareholders in preferred shares";

iii) "A second area of concern raised by Fairfax was the commingling of the business activities of Magnex RT, United Trade (the offshore sales arm of YBM) and those of the original shareholders resident in Budapest. The same office building was being used to transact activities for all the businesses and [one original shareholder] in particular was actively involved in activities related to United Trade and Magnex RT despite not being an officer or employee of either company. There was a bank account (since terminated) through which Company business was transacted to which [this original shareholder] was a signing officer. Management has already taken steps to relocate office activities and ensure proper separation"; this same original shareholder has a long-standing friendship with YBM's Chief Operating Officer; "foreign sources also connect the original shareholders with criminal activities including prostitution although none have been convicted or are wanted by authorities";

iv) there were a substantial number of cash transactions, in particular payment of salaries and commissions; there was a large volume of cash on hand; management has already taken steps to severely restrict the use of cash payments; and

v) the customer lists were reviewed and it was very difficult to establish end users for the products because of the use of intermediate agents for most sales;

m) the Conclusions of the Special Committee included the following:

i) there is no evidence that "senior management of YBM is in any way involved in any illegal or improper activities";

ii) that in respect of the questions surrounding the original shareholders, "it is not surprising that allegations should be made at successful businessmen of Russian origin trading between the Former Soviet Union and the West";

iii) the original shareholders, in aggregate, control over 40% of YBM common stock; "the existence of this block of shareholders is of concern to the Committee. This concern will be reduced following the completion of the equity issue to fund the Crucible acquisition..."; and

iv) the Committee directed management to eliminate any ties to the original shareholders in the "day-to-day operations of the Company";

n) the Recommendations of the Special Committee were as follows:

"a) Provide the Board with an action plan to address each of the following areas:

- Elimination of commingling of business activity with that of Company shareholders in Europe;

- Establish operational controls to ensure that management remains operationally independent from the founding shareholders;

- Establishment of improved cash controls in Hungary;

- The setting of more detailed customer and agent approval criteria;

- The establishment of an accurate data base on these customers and agents;

- Consolidation of accounting control in Newtown; and

- Engage a major accounting firm for the completion of future audits.

b) Establish a permanent subcommittee of the Board or the Audit Committee to supervise compliance with these recommendations and other issues surrounding corporate ethics in the future.

c) Advise the underwriters financing the acquisition of Crucible as to the background and results of this investigation.

d) Consider the establishment of a voluntary escrow of the Original Shareholders' shares until the completion of the acquisition and the clearance of the associated Special Warrants." [emphasis added]

38. On April 25, 1997 there was a meeting of the YBM Board of Directors held in Toronto. The meeting was attended by all of the Directors with the exception of Fisherman. Among others in attendance were Gatti and Wilder. Among the items on the agenda for this meeting was the "Report of Special Committee", which discussion was to be led by Mitchell.

39. Mitchell has indicated that a version of the report marked "BOARD DISCUSSION DRAFT", substantially similar to the version of the report provided to FMSL summarized above, was presented to the Directors at the April 25, 1997 Board meeting. Approved minutes of this meeting have not been identified.

40. One set of draft minutes of t

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To: StockDung who wrote (954)4/28/2005 12:43:42 PM
From: Mighty_Mezz
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To: Mighty_Mezz who wrote (955)4/29/2005 6:22:51 PM
From: StockDung
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April 15, 2005 A newsletter writer has "fled" the United States to avoid being questioned by the SEC about alleged securities fraud by offshore investment firm Lines Overseas Management, it has been claimed. 64.233.161.104

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I'm writing you about a marvelous opportunity...

One no serious investor will want to pass up.

It's an opportunity to become part of a very select, very small circle of informed individuals who enjoy private access to recommendations derived from a predictive trading system that - until now - has only been available to a few institutional traders, money managers and brokers.

The impact this system can have on your wealth is nothing short of remarkable.

I believe you'll be as astonished by its amazing accuracy as I was. Its ability to rattle off one winner after another could forever change the way you invest from this day forward.

This is a trading technology that up until today has never been made available to every-day investors. Yet as you're about to discover, it's the very same technology the country's biggest brokerage firms use to add billions of dollars to their bottom line profits.

In fact, I'm so confident in this system's ability to at least double your invested money or better over the course of a year that I'll pick up the cost of an entire second year's subscription to the service on your behalf if you don't.

I'll tell you more about that in a moment...

But first, let me tell you about the exciting system that many have described as "their very own secret window to the future".

Automated Trading... Entirely Mathematical...
Nothing is Subjective

It's a computer-based predictive trading system that identifies real time, quantitative patterns in the historical price movement of equities - then uses a set of algorithmic "rules" to predict the future direction of a given stock.

Using vast amounts of historical data and complex programming code, this computer program is able to "forecast" which way a stock is most likely to move based on past trading patterns in similar market conditions - much like giant computers are able to track the future path of a hurricane based on the storm's history.

But that's not all.

It's able to take that data and calculate an astonishingly precise and accurate "buy in" price... as well as very specific "target profit prices" the investment is expected to reach... and the timeframe you can expect to wait for your profits.

Just the other day, for instance, the system predicted Petsmart would jump to $28.50 or higher once it reached the buy in "trigger" price of $27.50. Sure enough Petsmart shot to a high of $28.93 for a nice 5% gain - a mere 24 hours after hitting the prescribed "buy in" price.

This Petsmart success came fast on the heels of a very solid gain in PalmOne, where that stock soared from the buy in price of $22 to over $26.50 in a week - a solid 20% gain. And that's saying nothing about the money you could have made trading the recommended options...

No wonder people using this system say it's like having a window into the future of the markets. And it works with any equity investment - stocks, index funds, ETFs... you name it.

Just plug any equity into the system...

And it'll tell us with amazing accuracy what to buy... at what price... what price it's going to reach... and how quickly it's going to happen.

It's as simple as that...

There's absolutely nothing subjective about any pick.

Human emotion never enters the equation.

Aptly named the ESP Profit System ("ESP" for "EarlyWarning Stock Predictor), its uncanny ability to know precisely when a stock is about to move is this system's hallmark.

Up to 90% Gains In Two Hours!

Another great example is Biotech Holder's Trust just the other day. On March 14 the system detected some unique activity with the stock that suggested a substantial move was imminent. It issued a "buy" at $131.75.

Two hours later - the stock closed at $142.75 - a better than 7% gain.

Take a look at a BBH chart from that time frame...

But that's not all...

At the very same time the BBH stock recommendation was made, the system also urged traders to consider the BBH July $130 call option. Needless to say, that option soared - from $8.50 to over $16 in an hour... a better than 90% gain!

The very next day we were rewarded again, this time with Research in Motion, which the ESP Profit System recommended to buy when it reached the target price of $62. Five trading days after one of the "buy in" target opportunities was hit, Research in Motion stock zoomed to over $80 a share.

Again, the chart tells the story...

Best of all, it can identify a wide range of opportunities capable of producing a wide range of gains:

The short-term opportunities could produce 2% - 5% in a few days... like very recently when Amazon went from the entry price of $35.20 to over $37.50 in two trading days. That's a better than 7% gain on the stock - but the near-term options moved over 30% on the pop.

Mid-term recommendations could produce 10% to 20% gains on the stock, to over 70% on the options - like Quantum Corporation, which jumped from $2.20 to over $3 in three months. That's a 40% gain on the stock - and a roughly 110% gain on the 5-month call option.

The longer-term picks can generate substantial profits: 30%, 40% and 100% in a few weeks. Like El Paso Corporation, which rose from $7.95 to $11.19 over an eight-month period. And Canadian Natural Resources, which went from $30 to $46 over the same time frame. Gains like these have the potential to produce over 300% on an options play!

Skeptical? So Were We

Needless to say, a strategy this precise - this consistently accurate - is bound to produce skepticism. After all, as Executive Director of The Oxford Club, I meet a lot of financial "gurus" and see a lot of investment "systems". Very few live up to the hype or expectations. But this one was different. It was introduced to us by one of our most trusted and long-time options trading experts - who arranged for us to meet with the system's developer, Dean Albrecht.

What Does Predicting a Hurricane's Path
Have To Do With Your Future Wealth?

Plenty, Says the System's Creator...

Included in several ESP Profit System email recommendations we saw this past September were weather maps tracking Hurricane Charley's path across the Atlantic Ocean.

At first we just thought ESP founder Dean Albrecht was one of those avid storm trackers anxious to share his analysis with us. But we quickly learned it was more than that...

We learned that the very same forces forewarning us of Hurricane Frances's deadly storm track were the same ones working to make so many ESP Profit System subscribers rich.

"It's the same principle," Dean explains. "Weather forecasters are able to predict a storm's strength and direction by downloading data containing millions of instances of reoccurring storm patterns into very powerful computers, and assigning algorithms - sets of 'predictive' rules that say, 'if this did this before, then this is most likely to happen next.' And because today's lightning-fast, super-powerful computers and sophisticated software can process this information so quickly and accurately, forecasters are able to predict a storm's movement with so much more accuracy than they could 10 years ago."

So what does all this have to do with stocks and your getting rich? Dean explains:

"Nowhere is this type of analysis better suited than to the financial markets. After all, every stock... every index fund... every ETF has a definable and measurable history of data, whether over 5 minutes or 5 months. By marrying this information with the algorithms we've developed and refined specifically for the financial markets, we're able to predict with amazing accuracy not only which way a stock is going to move - but by how much… and how soon.

"The result is a system that's right a great deal of the time. Not because of any subjective ideas we or anyone else might have had about the stock... but because the system ran the data against the algorithms and came up with a clear and definitive track.

A great example of the predictive powers of this system is the recent BBH success. Even though the Biotech Holder's Trust soared in a matter of hours because of very positive industry news, the ESP Profit System was able to identify unusual activity - possibly from insiders - and match that activity up to other times the stock had soared... then issue a firm recommendation. Within hours, the stock jumped $10 a share - and the option gained 90%.

Watching the ESP Profit System really is like having your own private window to the future!

Dean - a self-professed "numbers geek" with an impressive financial background - was President and CEO of one of INC Inc.'s 500's fastest growing privately held companies in America. The company did financial research on behalf of giant brokerage houses and trading firms. It was there he learned of the enormous potential of quantitative research - and the power data and algorithms can have to uncover stock movement patterns and predict future advances and declines.

In 2003 he left to begin "building" his system. He began by gathering together a team of brilliant and eccentric computer programmers and statisticians - Ph.D.s in mathematics, computer science, physics, and so on.

Their task: build a "thinking" computer that could digest millions of facts, figures and data about the past movement of any given stock... and then predict where the stock is going to move next based on that information.

Naturally, we were skeptical when we first saw it.

But the successes were too numerous to ignore. So I asked several of our research directors to tear the system apart. I wanted them to look at all the past trade recommendations - and then go back and see if they moved in the direction the program said they would... how often they met the predicted profit targets... and how often they did it in the time frame predicted.

Of course, we weren't expecting perfection. But in a startlingly high number of situations - it was dead on. I'm talking about cases where the system was able to name a stock - even one in an obvious downward spiral - and know within hours when it was about to move the other way.

269% Potential Gains - In Just 16 Days

Case in point - a recent play on Starbucks Corporation...one of the many opportunities we watched develop from day one.

The system said to look for this coffee giant to end its month-and-a-half slide lower and move sharply higher very quickly. With the stock trading at $50.15, it issued three specific price targets: near-, mid- and longer-term. It hit the first one ($50.75) within the hour. It hit the second one ($51.13) within a week... and ran past the third target ($53) all the way to $54.75 in 16 trading days. See for yourself:

Had you bought the one-month-out $50 call option, you could have turned a $10,000 investment into as much as $36,923 - all in under three weeks' time. That's a 269% gain!

Amazing....

But Starbucks is just one example of just how powerful this system is... and how knowing which way a stock is going to move before it happens can make you rich. There are many more, as you will see throughout this letter.

And after watching the buy and sell triggers for the past six months now and let me say:

This is the closest thing to a "money switch" I have ever seen. Just flip it on and watch the profits begin to flow!

That's why I'm so willing to give you a full year of this service absolutely free if you don't at least double your invested money over the next 12 months. More on that a little later...

But first, let me tell you more about how and why this strategy could have such a profound impact on your wealth in the weeks and months to come.

It Works Very Simply

The technology that's at the heart of this system is nothing short of remarkable.

Powerful computers loaded with sophisticated, specially developed software scour the market, looking at millions of pieces of historical data on the markets mostly volatile stocks, index funds and Exchange Traded Funds (ETFs). By identifying certain movement patterns in the data, it's able to ask a series of algorithmic "what if" questions concerning the future movement of that stock. When an evolving trend is identified, the system issues an opportunity alert - and identifies the timeframe of the opportunity: short-term (1-7 days)... medium-term (1-4 weeks)... and long-term (1-6 months).

Imagine a system that can consistently tell you when a stock is about to move anywhere from 2% in a day to 100% in a matter of months! Consider the power - and the moneymaking opportunities - that gives you!

Steady, Consistent Gains

For instance, just the other day, the system predicted a sharp move higher in Level 3 Communications - and told investors to look for a move from $2.85 to $3.05 over the next three to seven days.

What happened?

Precisely what the system predicted - Level 3 popped to nearly $3.10 in four days, earning a 7% gain in less than a week. Had you instructed your broker to buy 10,000 shares at $2.85 (a $28,500 investment) - and sell the instant it hit $3.05 - you could have made a quick $2,000. Had you bought one of the short-term options your profits could have been even greater - in excess of 40%.

But that's not all...

Next it predicted a movement in a pair of Exchange Traded Funds - the S&P 500 Spider Index (SPY) and the Diamonds Trust (DIA). Right on cue, both ETFs zoomed higher. The SPYs leapt from the recommended buy price of $117.90 to the target price of $119.80 in three days, while the Diamonds jumped from $105.05 to $106.40 in just 4 days.

These are substantial moves for exchange funds to make in such a short period of time. Again, the associated options produced even better gains.

Not finished yet. Next recommendation said, "go long" in the XAL Airline and XLF Banking indexes. What happened? Within a few days, the XAL Airline index rose from 47.50 to 50.11 and the XLF Banking index popped from $29.75 to $30.32. Near-term options soared - as much as 35%.

A $25,000 investment in each of these stock plays could have produced more than $4,400 in profits in less than a week - while a mere $5,000 investment in the associated options could have made you up to $8,500.

As fast as these gains came, please understand that the ESP Profits System is not a day trading strategy. Many of the longer-term recommendations this system uncovers - and their associated option plays - can produce even bigger opportunities for profits.

An earlier play on Research in Motion jumped from the "buy" signal price of $56.27 to over $90 in two and a half months -a 60% gain. But look at the options. A $60 call option three months out costing $6 would have been worth over $30 - a 500% gain!

Millennium Pharmaceuticals popped from the $10.64 "buy" signal price to $14 in just under five weeks - a 32% gain. A $10 call option three months out costing $2 would have been worth over $4 - a 100% gain.

Amazon went from the "buy" signal price of $37.95 to over $43 a share a month later. That's a solid 13% gain. But again, the options soared. A $37.50 option three months out costing $2.50 could have been worth $5.50 or more - a 120% gain.

Then there's SanDisk Corporation, which went from a "buy" signal price of $22.30 all the way up to $31 in a month and a half, for a 39% gain. Options took off like a rocket. A $22.50 option trading three months out for around $2 soared to over $8.50 - a stunning 325% gain.
Up to $185,800 In Profits!

Let's face it, when you can know with near certainty which way a stock is heading and by how much - it's an opportunity to make a lot of money. A mere $5,000 investment in each of these option opportunities could have produced more than $185,800 in gains!

Of course not every trade comes out a winner. And it's important for me to tell you that I have seen a few recommendations hit their buy in price and go the other way. But because of the tight "stop" strategy Dean attaches to every play -- every recommendation has a fixed amount of risk, while the upside potential is virtually unlimited.

A case in point is the Starbucks play, which could have earned the system’s followers between 9% and 269% in 16 days – a depending on whether you played the stock or bought the option. That recommendation came with a 2.5% stop loss attached – which meant, if the stock ever fell 2.5% below the highest price reached by the stock, you’d be advised to get out of the play. Fortunately for us, Starbucks never fell 2.5% before reaching its profit targets...

But suppose the stock had moved the wrong way on us, the most you ever could have lost according to the Dean’s stop strategy was $250 on every $10,000 worth of shares you bought. Yet you could have stood to gain as much as $900!

Same capital preservation strategy applies to options. Typically there’s a 15% stop loss on most option trades – limiting your downside to $150 for every $1,000 worth of options you buy. Yet with our Starbucks recommendation, your upside potential for every $1,000 risked was $2,690 in potential gains!

No wonder this system has fast become the cherished secret of such a loyal circle of trading professionals.

This is an honest system that produces honest gains...

Click Here To Learn More...

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