It actually has magnets in the corners to use in conjunction with the Amazon Hinge case. They made it so the back stays against the Kindle instead of flapping loose, and I think the magnets also help to hold it closed since there's no latch or button. As for how it works, there's some sort of gyro something-or-other sensor in it that I imagine works a lot like a gyroscope and it just triggers different sensors to tell the screen which way the Kindle is being held and viola!
And yeah, I doubt the magnets even inside are that strong. I wouldn't get it near say a harddrive magnet or something of the sort. Though someone using a magnet on a Kindle screen kind of makes me think of those old road games they used to have that I loved to play with when I was a kid. They had all these horribly dangerous metal shavings held in a clear plastic display over a cardboard picture of a bald guy's face and you used a magnet to move them around and give him hair and a beard and such. I just realized right this minute how dangerous those could be. They're as easy to open up as any kid's action figure is today and imagine a kid not wanting to swallow a bunch of metallic flakes... mmm... shiny pixie stick dust!