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. Last Updated: 07/27/2016

Mobsters Masquerade as Capitalists

WASHINGTON -- A few years ago, British intelligence and law enforcement agencies began investigating the money-laundering activities of Russian organized crime in Britain. At the center of their concerns was Semyon Yukovich Mogilevich, a man described by British authorities in one classified report as "one of the world's top criminals, who has a personal wealth of $100 million."

His money came from "large-scale extortion, prostitution, arms dealing and drug trafficking," and it was laundered through a London bank with the help of a lawyer there, the report said.

The British shut down the operation in 1995, prompting Mogilevich to begin laundering his illicit profits into a new venture: a U.S. company listed on the Canadian stock exchange that sold its stock to investors throughout North America.

Current and former U.S. officials say Mogilevich is the harbinger of a disturbing new trend: the Russian mobster masquerading as crack financial markets capitalist. It is also a new twist in how international criminals turn their illegally obtained cash into legitimate assets.

Mogilevich's move into the North American equity markets began with a company he set up in suburban Philadelphia called YBM Magnex.

Its primary business was the manufacture of industrial magnets at a factory in Hungary and later at a factory the company bought in Kentucky. YBM attracted a blue-ribbon board, its books were audited by two prominent American accounting firms, it issued glossy annual reports and it had its own web site.

All of this turned out to be a sophisticated cover for what was also a vast money-laundering operation, American intelligence and law enforcement officials say. They add that it is far from a unique case and that Russian organized crime, which has acquired devastating power in much of Eastern Europe and the former Soviet Union in the last decade, has made inroads into America's highly regulated financial markets.

"This is the first public demonstration of the manipulation and infiltration of world financial markets by Russian organized crime," said a senior Clinton Administration official whose responsibilities include following Russian organized crime groups.

Last month, in a negotiated agreement, YBM pleaded guilty to securities fraud in the Federal District Court in Philadelphia. The criminal investigation is continuing, and officials said it is focusing on the role that Mogilevich and two associates played in setting up and running the company.

While American officials believe they have shut down Mogilevich, or at least curtailed his activities, they fear there are similar schemes waiting to be exposed.

"This is just one case, but there are others like it throughout the world," said Jim Moody, a retired FBI agent who headed the organized crime section for many years and was one of the first agents to begin working with the Russian police after the collapse of the Soviet Union.

In the three years between the British action and the American authorities' penetration of YBM's corporate fa?ade, the company had raised $114 million (Canadian) on Canada's capital markets. Helped by glowing false claims about sales and profits, YBM's stock soared, and Mogilevich and some of his associates sold their shares for millions of dollars in profits.

The shares were traded in Canada, attracting some American investors, while the company awaited approval for listing on the Nasdaq exchange in the United States.

A public portrait of Mogilevich's criminal empire first appeared in May 1998 in The Village Voice in an article by Robert Friedman, who had access to classified FBI and Israeli intelligence reports. After the article appeared, Mogilevich put out a contract on Friedman's life, a threat that was picked up during a telephone intercept by the Central Intelligence Agency, law enforcement and intelligence officials said.

Mogilevich started as a small-time thief and counterfeiter in the 1970s, officials say, then made millions in the 1980s from Jews leaving the Soviet Union. He took their art, jewelry and other valuables, promising to sell them and send the money. He kept most of the proceeds, officials say.

Not long after the Berlin Wall came down and the Soviet Union collapsed, making travel easier, Mogilevich set up operations in Budapest, where he ran a prostitution ring out of a topless bar called the Black and White Club, European and American officials say.

Mogilevich, who carries Israeli citizenship but is believed to spend most of his time these days in Budapest and Moscow, could not be located for this article.

In putting together YBM, Mogilevich, now 53, used offshore locales where secrecy prevails over disclosure, sophisticated financial

transactions and wire transfers to move money quickly and beyond the prying eyes of regulators.

It all began with a company, Arigon, which Mogilevich set up in the Channel Islands in 1991. This was his original conduit for laundering money, the British report said.

Eventually, Arigon acquired control of YBM Magnex. To finance YBM's first public offering, in Canada, Mogilevich sent $2.4 million from Arigon's bank accounts in the Channel Islands.

YBM's glowing claims propelled its stock from a few cents at the time of the first offering in 1994 to $5 (Canadian) in early 1996, to more than $20 two years later. In its 1996 annual report, for example, the company boasted of "record sales and earnings," with sales up 79 percent over the previous year. It also claimed that revenues from buying and selling crude oil increased from $13.6 million (Canadian) to $20.4 million.

YBM's books were audited for 1996 by Parente, Randolph, Orlando, Carey & Associates in Philadelphia. The firm reported that the financial statements "present fairly in all material respects" the company's financial position.

In the summer of 1997, when YBM was preparing for another public offering, Ontario securities regulators asked Deloitte & Touche to conduct a "high risk" audit. In the securities world, this means that the authorities were suspicious and wanted the accounting firm to apply extra scrutiny and diligence.

Deloitte & Touche gave YBM a clean bill of health.

One Canadian analyst who issued a "buy" recommendation noted that the company had emerged from the Deloitte audit "with flying colors." And in November 1997, YBM completed a public offering of 3.2 million shares, at $16.50 (Canadian) each, bringing in a total of nearly $53 million.

Both accounting firms are defendants in a class-action lawsuit filed in Philadelphia by investors in YBM.

Parente, Randolph did not respond to several phone calls asking for comment.

A spokeswoman for Deloitte & Touche, Ellen Ringel, said that the company had carried out the audit "in accordance with applicable professional standards" and that it would "vigorously defend" itself against the suits. She added that in June 1998, the company resigned as YBM's auditors after it became concerned about "questionable transactions."

But the auditors had missed a few things. Consider the oil sales that YBM said had done so much for its profits: a 1998 audit by Miller Coffey Tate, a Philadelphia accounting firm, found that the company had never had any oil to sell.

Miller, Tate also raised questions about transactions involving a related Cayman Islands-registered company called United Trade. The accountants concluded United Trade was involved in money-laundering. For example, several companies involved in a series of wire transactions - those in Lithuania, Hungary and the United States - all had the same address, that of a lawyer's office in Buffalo, New York.