Bre-X: the unvarnished
HEADLINE Company not a lone wolf preying on sheep:
Analysis: Bre-X a product of a well-honed system that exploits investors, enriches insiders.
BYLINE David Baines, Sun Business Reporter
SOURCE Vancouver Sun
...
The move is on to dismiss Bre-X Minerals Ltd. as an anomaly, a freak virus that has infected an otherwise healthy securities industry.
Last week, Barrick Gold chair Peter Munk called Bre-X a ``rogue'' company, a ``single deviant member'' of the mining fraternity.
On Monday, Ontario Securities Commission chair Jack Geller portrayed the commission as a victim. ``I don't know of any way to keep people from committing criminal offenses. You can make it tougher, but you can't prevent it,'' he said.
Even prime minister Jean Chretien, engaging in his own damage control, dismissed Bre-X off as one of those uncontrollable events that can occur anywhere, anytime. ``There's always unfortunately bad apples in any sector,'' he said Monday while campaigning in Northern Ontario.
All of these comments ignore the fundamental truth which permeates the Bre-X affair: The company was not a lone wolf preying on sheep who dared to stray from the flock, but rather the product of a well-honed system that exploits investors and enriches insiders and brokers.
During the past 18 months, the Alberta Stock Exchange -- where Bre-X was given the breath of life -- has suffered two other assay scandals, Naxos Resources and Timbuktu Gold. Predictably, ASE officials dismissed these episodes as the work of a few bad apples, thereby missing a golden opportunity to review the underlying reasons for such debacles.
If they had taken a closer look, they would have found a system where brokers underwrite companies without exercising sufficient due diligence.
They would have seen a system that permits brokers to personally buy stock in deals that they are underwriting and recommending to their clients, creating horrendous conflicts of interest.
They would have found a system where otherwise sober mutual fund managers, desperate to earn higher returns, get into bed with promoters and load up on highly speculative issues.
They would have found analysts who are all too eager to abandon normal analytical methods and regress into cheerleading roles.
They would have found a financial press which does little original research, and instead relies on recycled information from brokers, analysts and mutual fund managers.
And if they looked in the mirror, they would find regulators who
abdicate their regulatory responsibility to the exchanges and their broker members.
Stocks like Bre-X were once the exclusive domain of Vancouver and Calgary, but the lure of big money was too much for Bay Street to resist. Substituting speculation for investment, Toronto-based investment dealers such as Nesbitt Burns took Bre-X into their fold. The Toronto Stock Exchange -- home of the Royal Bank, BCE Inc. and CIBC-- gave Bre-X membership to the club. And respected mutual fund managers had long lunches at Winston's with penny stock promoters.
The foxes didn't have to sneak into the hen house. They were invited.
There were warning cries, such as those voiced by Doug Goold of the Globe and Mail and Bill Reidl of Fairvest Securities, but the hard clang of money drowned them out.
Naxos and Timbuktu were pop-gun salt jobs which had relatively little impact on investors. By comparison, Bre-X was a nuclear bomb which had a devastating impact on investors.
The TSE and the OSC no doubt realized this on March 27, when Freeport McMoRan announced it could find no economic amounts of gold on Bre-X's property. At that point, it was game over. The TSE should have delisted the stock. What's the point of allowing an outright fraud to trade freely on a legitimate exchange?
But by that time, the TSE and its broker-members had a huge public relations problem on their hands, not to mention barrels of Bre-X stock in client accounts. They had to let this baby down gently. So they reinstated trading and presided over a six-week orgy of speculation. It was an ugly sight. Despite its blue-chip pretensions, the TSE's members willingly engaged in the stock market equivalent of mud wrestling.
Even now that a fraud has been confirmed, there is no indication that regulators will address the structural problems which gave rise to it.
As Stockwatch editor John Woods predicted: ``There will be a huge public relations blitz, a bunch of inquiries and much soul searching, all with the one intention of finding [Bre-X geologist] Michael de Guzman as the bad apple in the barrel. If it goes much beyond that I'll be pleasantly surprised.''
But there is one wild card lurking in the wings that may force the exchanges and their members to re-examine their methods: the possibility of massive class action lawsuits. That sort of Armageddon would create a financial imperative for reform, which until now has been conspicuously absent.
If this gold bust has a silver lining, that would be it.
============================ |
