Saturday, April 5, 1997 Proof of tampering would rock Bay Street
Bre-X haunted by spectre of 'salting'
Time line of Busang story
By SANDRA RUBIN
The Financial Post
Any tampering of Bre-X Minerals Ltd.'s ore samples or assay results would rock the Canadian brokerage community and hand angry investors added ammunition in their quest for billions of dollars in compensation, experts say.
Bre-X is already under investigation by the Ontario Securities Commission, Toronto Stock Exchange and the Alberta Securities Commission. Nasdaq refused to confirm yesterday that, it too, has started an inquiry, saying it never discusses such matters.
But evidence mounted on Friday that tampering with the Busang ore samples to add more gold would not have been as difficult as first thought because there is so much placer mining in area rivers.
If it turns out there was tampering, as persistent rumors suggest, the Bay Street brokerage community could find itself on the hook along with Bre-X and its officers, said former OSC chairman Ed Waitzer.
"If it turns out there was fraud, there will be questions as to whether brokers, particularly those that participated in raising financing -- whoever signed those prospectuses -- whether they did everything they should have reasonably done to satisfy themselves that everything was OK," Waitzer said from Boston.
"The same thing with analysts, and analysts' reports. And I suspect if brokers recommended the stock, knowing about the fraud, there would be remedy."
Bre-X's first two financings, in 1994, were led by Loewen Ondaatje McCutcheon Ltd. Its third trip to market, raising $30 million last year, was backed by Nesbitt Burns Inc., FirstMarathon Securities Ltd., L‚vesque Beaubien Geoffrion Inc. and ScotiaMcLeod Inc.
Furious Canadian shareholders have already launched a $3.1-billion class-action suit against Bre-X, and six separate lawsuits have been filed in the U.S.
Any confirmation that the ore samples were "salted" with outside gold would only help crank up the damage awards, said Glenn Zakaib, a class-action specialist with Cassels Brock & Blackwell in Toronto.
"It would significantly affect [investors'] ability to show there was high-handed, reckless, vindictive conduct," Zakaib said. "That might generate an award of aggravated, punitive or exemplary damages.
"There is precedent for punitive damages in Canada, but so far the awards have not been anywhere what we've seen in the United States."
It would also help make the case in both countries more solid, he said.
"It'll go to the crux of the share values and whether they drove up the price by creating a false or misleading promise of returns."
Proven salting would also certainly mean millions of dollars in fines -- and jail time -- for the guilty party or parties.
"The Securities Act doesn't address salting, as such," said securities lawyer Philip Anisman. "It deals with disclosure.
"If there's a material misrepresentation in a required disclosure document made by the company, it's subject to fines of up to $1 million."
Anyone making such a statement, or any director or officer that "authorizes, permits or acquiesces" in a material misrepresentation is also subject to fines of up to $1 million -- plus two years in prison.
But the prison term could be harsher under criminal law.
Larry Waite, the OSC's director of enforcement, said it is up to the heavy-hitting Securities Enforcement Review Committee to decide if a fraud should be treated as a criminal matter.
The committee is made up of the OSC, the Ontario attorney general's office, the RCMP, Ontario Provincial Police, Metropolitan Toronto Police, the TSE and the Investment Dealers Association.
"We would decide which police force, or which regulatory body, would do the investigation," said Waite. "We've done joint investigations with the RCMP in the past. We've done joint investigations with the OPP. It depends on the nature of the case."
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