Judgment day: the Bre-X saga unfolds
John Gray
From the September 11-24, 2006 issue of Canadian Business magazine
Nearly a decade after investors in Bre-X Minerals Ltd. lost an estimated $6 billion in the most notorious stock swindle in Canadian history, the trial of the sole company official charged with wrongdoing has finally drawn to a close. The fate of John Felderhof, former vice-chairman and chief geologist, is now in the hands of the judge.
Felderhof has pleaded "not guilty" to eight charges brought by the Ontario Securities Commission that include illegal insider trading and permitting misleading press releases. He is accused of selling $84 million worth of Bre-X stock in 1996 while possessing information that was not disclosed to the market. If found guilty, Felderhof faces penalties ranging from a fine of as much as $1 million to two years in prison, plus additional financial penalties of up to three times any profits from the insider trading.
Felderhof is not charged with deliberately tampering with the gold samples that are at the heart of the Bre-X scandal. The Calgary-based junior mining company rose from a penny stock to a height of more than $280 per share (split adjusted) after it reported finding what would have been one of the world's richest gold mines, at its Busang property in Indonesia. But the fraud began to unravel in March 1997 when Michael de Guzman, the company's local geologist, apparently committed suicide by jumping from a helicopter into the Indonesian jungle. Then, Freeport McMoRan, a U.S. firm brought in to help develop the mine, issued a press release stating: "To date, analyses of these cores, which remain incomplete, indicate insignificant amounts of gold." A later independent analysis of the Bre-X discovery revealed that it was nothing but a hoax; the rock samples on which the company had based its claims were salted with loose gold.
Procedures at the Bre-X exploration site were so shoddy that Felderhof should have recognized the possibility that those samples could have been tampered with and taken steps to try to prevent it, said OSC lawyer Emily Cole in her closing arguments late last month. "Mr. Felderhof did not need to foresee the scale and complexity of the salting, but it was reasonable to expect him to foresee the possibility of tampering and to take simple steps to prevent it," Cole told Mr. Justice Peter Hryn.
The Toronto trial began in October 2000 without Felderhof present. Over 157 days of testimony, the court heard from former Bre-X officials, consultants, independent geologists and even Peter Munk, chairman of Barrick Gold Corp., which had been in a bidding war to take over Bre-X prior to the scandal. Felderhof did not testify at the trial and made only brief appearances to watch the proceedings last year. He is reportedly living in the Cayman Islands or Indonesia.
The Bre-X trial stands as the longest and perhaps most complex in OSC history. It was also one of the most raucous: defence lawyer Joseph Groia and then-OSC lawyer Jay Naster frequently argued about the huge volume of evidence and often accused each other of misconduct. The trial was halted in April 2001 when the OSC attempted to have judge Hryn removed from the case, accusing him of bias. An Ontario court dismissed the application along with a subsequent appeal, ending a three-and-a-half-year delay.
The Bre-X case did produce a huge amount of evidence. On the last day of the trial, nearly half of the courtroom seats were filled with boxes containing the case's 1,687 exhibits and 15,000 pages of transcripts. "If I read all day, five days a week, it would still take me four or five months just to get through just the transcript," Hryn said at the conclusion of the trial.
The verdict is expected on Feb. 2, 2007. Then, investors will learn whether the OSC has proven its case against Felderhof, or whether all that evidence and volumes of trial transcripts are as worthless as their Bre-X shares.
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