Investors seek tighter
regulations in wake of
fraud
The quality of analysts' assessments of the
Bre-X find is called in question, particularly by
over-extended investors
By SUSANNE CRAIG
Securities Industry Reporter The Financial Post
Some of Canada's largest brokerage houses are now under
fire from retail and institutional investors for supporting Bre-X
Minerals Ltd.
The Caisse de d‚p“t et placement du Qu‚bec, the country's
largest institutional investor, said yesterday that although its
position in Bre-X is small, it invested in the Calgary junior
mining company based on the recommendation of Canada's
10 largest brokerage firms.
"Canadian stock exchanges should consider demanding a
valuation [on core samples] be performed by an entity that is
totally independent from mining companies," the Caisse said.
Several Bay Street firms, most notably Nesbitt Burns Inc.,
First Marathon Securities Ltd. and L‚vesque Beaubien
Geoffrion Inc. were big backers of the stock.
Securities lawyers and industry observers contacted
yesterday agree if it is proved fraud was involved in the
Bre-X assay results, it will be almost impossible to place
blame anywhere but with the company.
When trading in the stock was halted in late March, many
retail investors with margin accounts were left owing millions
to brokerage firms. If the investment does not fit their risk
profile, they may have recourse against the brokerage firm
that sold them the security.
"This was a high-risk stock with no proven assets," said
Victor Lazarovici, an analyst with New York-based Smith
Barney Inc. who visited the Busang site in spring 1996.
If the investor was not categorized as "high-risk," that could
spell trouble for brokers.
Some investors yesterday pointed the finger at brokerage
analysts.
"We rely on guys on the Street who are getting paid to
analyse these things," said Colin Kelleher, a private Toronto
investor who bought and sold Bre-X shares during its
dramatic rise.
"You can't rely on anyone any more," Kelleher said.
Among the reputations on the line is that of Nesbitt Burns
and its star gold analyst, Egizio Bianchini. While Bianchini
wasn't taking phone calls yesterday, his boss, president John
MacNaughton, stood behind him.
Bianchini was "a very thorough analyst. He works hard on all
the situations. What we appear to have here is a fabrication
of unprecedented proportions."
MacNaughton said analysts "take publicly available
information and assess it and formulate an opinion."
However, many question whether Bianchini should have
continued to recommend the stock after it became clear the
size of the Busang deposit was in question.
In late March, after news reports from Indonesia began to
question the size of the deposit, Bianchini released a report
saying the reports were "very likely erroneous."
He wasn't the only analyst who supported Bre-X through its
ups and downs. For instance, First Marathon's Kerry Smith
and Michael Fowler of L‚vesque Beaubien were also strong
backers.
The company's third private placement, which raised $30
million, was backed by Nesbitt Burns, First Marathon,
L‚vesque Beaubien and ScotiaMcLeod Inc.
Bre-X never filed a prospectus with regulatory officials,
leaving analysts and investors to make decisions based only
on public information.
That has prompted many investors to now demand tougher
disclosure regulations, an issue that will be addressed by a
joint task force established by the Ontario Securities
Commission and the Toronto Stock Exchange.
Garrett Herman, chairman and chief executive of Loewen,
Ondaatje, McCutcheon Ltd., handled Bre-X's first two
private placements, done in May 1994 and May 1995.
Private placements are sold only to sophisticated investors.
Herman said these placements were done early on and no
assay results were provided by Bre-X.
He said there has been a lot of pressure on brokerage
houses who were left out of the money when Diamond Fields
Resources Inc. hit pay dirt in 1994 with its discovery of the
rich nickel-copper deposit in Voisey's Bay, Labrador.
As a result, many brokerage houses have hired more mining
analysts to look for the next big find.
-- with files from Barry Critchley/FP
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