Bresea/MacDonald Oil/MFC Bancorp/Sasamat article - Dec21
Financial Post
Cash liberator on trail of Bresea riches
Bre-X's sister company still holds $27-million in cash
Sean Silcoff
Financial Post
Frank Smeenk was getting desperate. In August, 1998, 11 years after leaving a law career
to seek his fortune, Mr. Smeenk found himself heading a pair of cash-strapped junior
exploration firms and running out of options.
So he turned to an unlikely source of funds: Bre-X Minerals Ltd. More precisely, the
London, Ont.-native began eyeing two of the defunct Bre-X's sister companies -- Bro-X
Minerals Ltd. and Bresea Resources Ltd. Both had been left in limbo by the Bre-X
bankruptcy and the death of disgraced founder David Walsh. But they each had
something Bre-X lacked: real assets.
Bro-X's bank account contained close to $1-million; Bresea had $27-million in cash and
still owned the Calgary building that once housed Bre-X.
Taking a run at Bro-X and Bresea would be no small feat. Both had been in receivership
since the Bre-X fraud was exposed in May, 1997, subject to cease-trading orders and
delisted from Canadian exchanges.
Shareholder lawsuits were claiming billions of dollars.
But that didn't stop Mr. Smeenk. First he tried to take over Bro-X. Then he launched a
bid for Bresea. And a second. And a third.
His persistence led to an unlikely three-way bidding war early this year that resembled a
dollar-store version of Barbarians at the Gate.
His perseverance also attracted the attention of regulators, who eventually took away
his job and his right to trade stocks.
Mr. Smeenk would lose the battle for Bresea to MFC Bancorp Ltd., a mysterious merchant-banking operation based in
Ireland, registered in the Yukon, traded on the Frankfurt Exchange and run by a Swiss-based British citizen. MFC's most
profitable asset is a stake in a Newfoundland iron ore mine.
If all goes according to plan, an MFC-controlled Bresea could be trading again by spring, with a new name, most of its assets,
and all of its troubles behind it.
But Bresea's new management still has one problem: Frank Smeenk. In recent months, the 54-year-old Mr. Smeenk and his
company, MacDonald Oil Exploration Ltd., have made every possible legal move to torpedo the MFC takeover. "There are
some things you should do because they should be done, and that's how my partners feel about it," says Mr. Smeenk. "And
I'm not about to quit on them."
- - -
It was early 1996 and Frank Smeenk was the toast of Cuba. In three years, he had taken control of the dormant MacDonald
Mines Exploration Ltd. and turned it into a "Cuba play" by picking up a 2,000-square-kilometre gold concession.
He then spun out a new company, MacDonald Oil, which picked up its own Cuba concession.
"It was obvious there were opportunities," he says. "The place was crying out for investor capital."
Mr. Smeenk was rubbing shoulders with Cuban officials and sitting on an international trade advisory board. In 1996,
MacDonald Mines found gold in its first drill hole; the stock shot up to $3.15 from 45¢ in one day, and Mr. Smeenk was
worth, on paper, $25-million.
For Mr. Smeenk, the eldest of nine children, it was vindication time. A soft-spoken man described by friends and colleagues
as affable and reasonable, he chose to study law at his hometown University of Western Ontario in the early 1970s, but was
never really happy with his decision.
"In the back of my mind I was always looking for an opportunity to do business," he says. "In the perfect world Labatt
would have plucked me out of my law practice and made me president."
In the mid-1980s, a friend invited him to help turn around financially troubled Deak Perrera Inc., a New York-based currency
and commodities trading firm. Mr. Smeenk moved to Toronto and used his knowledge of insolvency law to help in the
restructuring but was soon drawn to the company's dormant Canadian mining interests. By 1993, he was in control of one of
them, MacDonald Mines.
"I like the whole idea of mining," he says. "You're taking something God put in the ground and turning it into [something of]
value." And, he adds, there's always the "the bonanza potential."
But the bonanza in Cuba never came. The second drilling program yielded disappointing results. Then, in February, 1996,
Cuba shot down two American planes, leading to harsher economic sanctions from the U.S. Gold prices fell and the Bre-X
fraud sent the junior exploration market into deep freeze. MacDonald Oil signed away most of its Cuban claims after a
fruitless drilling program. MacDonald Mines wasn't faring any better.
Then in July, 1998, he read an article about Bro-X, which had been founded by Mr. Walsh at the height of the Bre-X frenzy.
Mr. Smeenk learned Bro-X had $1-million in the bank, and the court-appointed receiver was trying to find somewhere to
invest it. Bresea had even more cash.
"There wasn't any money around for exploration," he says. "This looked like a perfect opportunity."
Bre-X, Bresea and Bro-X all sought protection from creditors the day after the Busang gold find was revealed to be a hoax.
Their publicly owned shares were stopped from trading and delisted. And the lawsuits piled up.
But Bro-X and Bresea were still solvent. (The Alberta Court of Appeal ruled Bresea had too much cash to be petitioned
into bankruptcy and ordered PricewaterhouseCoopers LLC to stay on as interim receiver.) The Walsh family and Bre-X
trustee Deloitte and Touche remained the biggest of Bresea's 8,000 shareholders, with 19% and 12% of the stock,
respectively.
Kurt Bonokoski, PriceWaterhouseCoopers's (PWC) president, realized early on that Bresea could probably strike a deal
with litigants that would let the company keep most of its cash. Mr. Smeenk thought so, too.
"He has a sort of natural intellectual curiosity about him; I think that's what got him into this," says of friend of Mr. Smeenk's
who works on Bay Street. "That, and he's an eternal optimist. In hindsight, it's easy to say he was naive."
Once Mr. Smeenk got the idea of liberating the cash from Bro-X and Bresea, he wouldn't let go.
"It was a deal that we could do, it was there to be done," he says.
In September, 1998, MacDonald Oil signed a letter of intent with Bro-X's one remaining director to merge the two companies.
But PWC nixed the idea and the offer expired.
That same month, MacDonald Mines proposed a similar merger deal with Bresea. PWC objected on the grounds there were
"several outstanding actions against Bresea which remain to be resolved." It too expired.
One week, two failed offers. It was only the beginning. On June 8, 1999, MacDonald Oil announced its second takeover bid
for Bresea, a share swap with no money changing hands. A takeover circular was sent to shareholders.
But PWC said the offer wasn't in the best interests of shareholders. "We just had some concerns about the asset base of the
company," Mr. Bonokoski says. "It was basically an empty shell, except for some holdings in Cuba, which were highly
speculative."
But regardless of their merits, takeover offers are supposed to be put to boards of directors, not receivers. Bresea's last
director, Mr. Walsh, had died the previous year, and PWC hadn't appointed a new board or filed any financial statements.
Meanwhile, shareholders responded favourably to the bid. By July 12, they had tendered 22 million shares out of 65.5
million shares outstanding.
Ontario and Alberta securities regulators swooped in to end the confusion, slapping a cease trade order on the offer. All
shares tendered to MacDonald Oil had to be sent back.
Mr. Bonokoski realized PWC had to get Bresea's house in order before another bidder came calling. He organized an advisory
committee of shareholders, which told him to settle the lawsuits, call a shareholders meeting and find a business opportunity
for Bresea.
In October, 2000, PWC reached a tentative settlement to end all litigation against Bresea, which would payout $10-million of
Bresea's cash and create new shares to be given to claimants. The deal would go to a vote at a shareholder meeting in early
2001.
The day after PWC announced the tentative deal, MacDonald said it would bid for Bresea a third time. Behind the scenes,
however, OSC and ASC enforcement officials were preparing to bring the hammer down on Mr. Smeenk. After his previous
Bresea offer, the regulators became concerned with disclosure problems in the circular and decided to investigate further.
They found Mr. Smeenk had failed to file more than two dozen insider trading or early warning reports since 1995.
MacDonald Oil had also failed to file financial statements for two years and to meet disclosure requirements during a 1997
rights offering.
Mr. Smeenk had been working with the commissions to clear up the problems for the past year, but they told him it wasn't
enough. If he wanted to make another bid he would have to sign a settlement agreement, or they might issue another
cease-trade order against him. "It was clear [a new cease-trade order] was an option we would consider if a settlement with
regulators was not approved," says OSC spokesman Frank Switzer.
Last Jan. 12, Mr. Smeenk agreed to an order prohibiting him from acting as an officer of MacDonald Oil for two years. He
was also banned from trading in securities for one year.
- - -
Just as MacDonald Oil was about to make its third bid, MFC Bancorp announced in December it was offering 15¢ a share to
Bresea shareholders.
MFC was once better known as Canadian Javelin Ltd, which had been run by John C. Doyle, who died in Panama after
skipping Canada to avoid facing 400 counts of defrauding his company in the early 1970s.
Canadian Javelin was taken over in the 1980s by an investor group led by British mergers and acquisitions specialist Michael
J. Smith, renamed three times and spun out as publicly traded MFC in 1996. MFC, according to its most recent annual
report, now specializes in "advising and structuring business enterprises involved in unstructured and novel situations where
a strong financial partner is needed and the traditional off-the-shelf solutions are not workable." It also owns a Swiss bank.
Some of those off-the-shelf solutions have led to a spate of lawsuits. Claims before courts in New York, Delaware and
Pennsylvania allege that MFC, some of its associated companies and Mr. Smith have committed fraud, breach of contract,
theft of control and in one case, "the looting and almost complete gutting" of other public companies.
The claims have not been proven in court and "are unsubstantiated and vigorously denied by MFC," says Roy Zanatta, an
MFC director and secretary of Bresea.
- - -
Mr. Bonokoski wasn't happy with Bresea's suitors. MacDonald was the same shell company as before, offering shares,
warrants and dreams for Bresea's real assets. MFC's surprise offer seemed too cheap.
So Mr. Bonokoski found a white knight in Ronald Mathison, a Calgary millionaire and partner of local business hero Murray
Edwards. The receiver reached an agreement with Mr. Mathison in early January and issued circulars urging shareholders to
reject the other two bids and accept his 21¢ per share offer.
The cease-trade orders were partially lifted and the battle for Bresea was on. MacDonald kept to its offer of MacDonald
securities for Bresea shares; Mr. Mathison and MFC bid each other up to 26¢ per share in cash. The Feb. 5 shareholders'
meeting loomed.
Then, Mr. Mathison, deciding the bidding had gotten out of hand, dropped out of the race. MFC entered into a voting
agreement with the Walsh family. When the votes were tallied, MFC had seized control of the Bresea board and taken up
12.9 million shares to MacDonald's 1.3 million.
Mr. Smeenk had lost Bresea after two years and three tries. As a final insult, the Canadian Venture Exchange wrote Mr.
Smeenk to say he could no longer be an officer of any CDNX company because the settlement with the OSC and ASC "gives
us reason to question your ability to properly manage the affairs of an exchange-listed company."
- - -
In the past few months, the new MFC-controlled Bresea board of directors has renegotiated a new settlement agreement that
would pay $9-million to settle all outstanding lawsuits and issue millions of new shares to claimants. The Alberta court
signed off on the deal in late August. The Ontario Superior Court of Justice, where the Canadian class-action Bre-X lawsuit is
proceeding, followed suit in October. Bresea is awaiting approval from the U.S. District Court in East Texas -- where the
U.S. class action Bre-X lawsuit is being heard -- before the agreement can be finalized, the receiver discharged and applications
made so the stock can trade.
When that happens, shareholders will know Bresea by its new name -- Sasamat Capital Corp., and its new mandate, which,
according to Zanatta, is to "focus on investing in unstructured, unusual or distressed situations where assets or businesses can
be acquired without paying a premium to their fundamental values."
But for Mr. Smeenk, and the new management of MacDonald Oil, the battle for Bresea rages on. MacDonald has instituted
proceedings before the Quebec Superior Court asking that MFC's takeover and the election of its directors be declared null
and void, appealed the Alberta court's approval of the settlement, and asked the Quebec Securities Commission to set aside a
vote by shareholders last August approving the proposed settlement agreement. The main contention is that MFC's winning
bid contravened securities laws because the deal with the Walshes made it a related-party transaction, and inadequate
disclosure was provided to shareholders.
"Justice will prevail," Mr. Smeenk says. "I think at the end of the day we'll get a fair hearing from the Bresea shareholders."
*************************************************
Season's Greetings everyone and have a Happy New Year.
Visit my website for online classified ads.
spot4rent.com
Cheers, Lalit Jain |
