Saturday, December 27, 1997
The Bre-X yarn unfolds
Whether it was a gripping whodunnit or a Shakespearian tragedy, it was pure
fiction
By DIANE FRANCIS
Editor The Financial Post
Neighbors of John Felderhof, former vice-chairman of bankrupt Bre-X Minerals Ltd.,
report that he spends his days on his private beach on Grand Cayman Island,
entertaining friends with a constant flow of silver trays brought by servants.
Meanwhile, his partner, Bre-X founder and chairman David Walsh, is enjoying a
newfound existence in the Bahamas. Walsh and his wife have busied themselves supervising millions of
dollars worth of renovations to their island estate.
But as Felderhof and Walsh live like royalty in the Caribbean, back in cold Canada legions of
investors, brokers, mining professionals, regulatory investigators, lawyers, police and forensic
accountants are trying to clean up the mess the Bre-X principals, and others, left behind.
Walsh and Felderhof presided over the company that may go down in history
as the purveyor of the world's biggest gold swindle.
"There are 200 million ounces," Felderhof said earlier this year of the
company's find in Indonesia's Busang region. If true, it would have represented the largest discovery in
history, an amount equivalent to the total reserves of Canada's four biggest gold producers.
It's little wonder that Bre-X had been the darling of Canada's stock markets for three years. Making
allowances for a 10-for-one stock split in May 1996, the company's shares rose from a low of 1› in
1993 to a high of $28.65 in 1996.
The stock was the talk of the country and, during the first quarter of 1997, represented as much as
10% of all trading on the Toronto Stock Exchange.
But on May 4, the world discovered Bre-X's boast about finding the world's richest gold deposit was
complete fiction.
And, ironically enough, the facts of the Bre-X story have also proved to be the stuff of fiction.
Through 1997, newspaper readers were treated to a motherlode of fraud, death, sex, greed, wealth,
corruption and outright stupidity.
Most Bay Street and many Wall Street brokers were sucked in. Some of the world's most
sophisticated investors were duped, as were the biggest mining outfits in North America and Europe.
Regulators, the financial press and the Indonesian government also fell victim to the hoax.
Needless to say, mining stocks have suffered ever since.
At the centre of the story was a latter-day Romeo, Filipino geologist Michael de Guzman. A
womanizer with three secret wives in Indonesia, he was responsible for the fraud. Along with geologist
accomplices he added gold dust to rock samples for 3 1/2 years and fooled the world, according to
investigators hired by Bre-X management, as well as RCMP sources.
The Bre-X tragedy was played out in two parts this year. The story during the first quarter centred on
the struggle over control of the supposed Busang ore body. Big mining companies and Indonesian
interests fought over its presumed largesse.
By February, Indonesian interests had prevailed over Barrick Gold Corp. and other mining giants.
Companies representing President Suharto's six children, his billionaire golfing buddy Bob Hasan and
U.S. miner Freeport McMoRan Copper & Gold Inc. of New Orleans scooped up 55% of the
massive deposit without paying a penny of compensation.
Part two began on March 19 when Bre-X's chief geologist, Michael de Guzman, fell to his death from
a helicopter over the Borneo rainforest. He was on his way to be questioned about drilling results by
Bre-X's shotgun-marriage partner, Freeport McMoRan.
As part of its due diligence, the U.S. mining company began drilling at Busang and, to its dismay,
found absolutely nothing.
The same day de Guzman died, Bre-X hired independent drilling consultant, Strathcona Mineral
Services Ltd., to double check Freeport's drilling results, in case they were wrong. Because Freeport's
results were preliminary, Bre-X kept a lid on them.
But on March 21, word leaked out and a Jakarta financial newspaper reported Freeport had found
nothing. When news hit Canada, the revelation sparked a dramatic drop in Bre-X's share price.
"I don't know where they could have gotten this from," said Felderhof in an interview in Jakarta.
"There isn't any truth to [the report] at all."
In the days that followed, mining analysts continued to recommend the stock. Toronto's Gordon
Capital Corp. issued an analyst's report that boldly stated: "Buy this undervalued asset." Nesbitt Burns
Inc. analyst and Bre-X booster Egizio Bianchini sent a fax to clients and brokers which targeted a
price of $29 for Bre-X stock, then trading at $15.70.
But on March 26, Bre-X confessed Freeport had found nothing and there had been irregularities in de
Guzman's procedures.
It also admitted it had hired Strathcona and that its preliminary report found "a strong possibility that
the potential gold resources ... have been overstated because of invalid samples and assaying of those
samples."
Bre-X stock was halted on the TSE at $15.50.
The next day, the company begged exchanges to keep the stock halted, but it re-opened at 3 p.m. in
Toronto. In 45 minutes it plummeted to $2.50 from $15.50 on a volume of 10,276,503 shares, in the
process crashing the exchange's computer system.
The spectacular collapse made headlines because it represented a $3-billion paper loss, second only
to the $13-billion collapse of Philip Morris Cos. Inc. in April 1993 on the New York Stock Exchange.
For the next few weeks, the market awaited Strathcona's report. On May 4, its damning indictment
shocked the financial world. As its covering letter said: "The magnitude of the tampering with core
samples that we believe has occurred, and resulting falsification of assay values at Busang, is of a scale
and over a period of time and with a precision that, to our knowledge, is without precedent in the
history of mining anywhere in the world."
Immediately after that announcement, the RCMP launched an ambitious investigation, creating an
eight-person Bre-X task force to examine the massive fraud. Tens of thousands of documents, letters,
faxes, e-mails and other pertinent information seized by investigators had to be combed through to
determine whether charges would be laid. "The investigation will take at least a year, if not two, to
complete," said one source.
The Ontario Securities Commission and Washington's Securities & Exchange Commission stepped up
their probes on whether insiders such as Felderhof and Walsh broke securities laws involving
disclosure requirements or insider trading rules.
Then there was a spate of civil action, from bankruptcy motions to lawsuits, both individual and class
action. "The lawyers have not yet been born who will end up winning or losing these cases," quipped
one Toronto litigator.
Today, Bre-X's only remaining asset is a US$5-million indemnity fund set up offshore at the end of
1996 to cover directors' liabilities. Its related company, Bresea Resources Ltd. with 25% of Bre-X's
stock, has $26 million in cash, assets in Indonesia, a building in Calgary and subsidiaries in the
Netherlands.
Walsh, who owns 14% of Bresea, wants to keep that company alive, but other shareholders want
both companies bankrupted and their assets distributed.
So, next year, the Bre-X story moves into courtrooms in Canada and the U.S. The OSC should finish
its investigation, which will result either in a court case or a public hearing.
Two competing class action lawsuits, one in Canada and one in the U.S., will move into high gear.
Both Windsor lawyer Harvey Strosberg and Houston lawyer Paul Yetter allege Bre-X was a
top-to-bottom fraud, aided by negligence on the part of brokers, financial advisers and mining
consultants.
Both class actions must be certified in their respective jurisdictions before they can proceed. Yetter
leads a team of two dozen U.S. law firms and several Canadian firms, and must convince a U.S. court
that his action can include Canadian Bre-X shareholders. He expects a decision in early 1998.
None of the defendants has formally replied to accusations and their lawyers have refused to comment
publicly on the cases. But some defendants have asked a Texas court to throw out the case on the
basis that Texas is the wrong jurisdiction to try the fraud.
"There is a general consensus that shareholders fare better in American securities class actions," says
Vancouver lawyer David Klein, whose clients have joined the Texas lawsuit. "The concern is whether
Canadians will qualify for inclusion [as plaintiffs]. I don't care whether the case is heard in Toronto,
Texas or Timbuktu. I want it to be where my clients are going to get the most recovery."
The defendants in the various lawsuits read like a Who's Who of Bay and Wall Streets: Nesbitt Burns,
First Marathon Securities Ltd., SNC-Lavalin Group Inc., J.P. Morgan Securities Inc., Lehman
Brothers Inc., CIBC Wood Gundy Securities Inc., ScotiaMcLeod Inc., TD Securities Inc., Midland
Walwyn Capital Inc. and L‚vesque Beaubien Geoffrion Inc.
Class action lawsuits, if successful, will result in the distribution of proceeds to all shareholders of
record on the day the stock was delisted, minus the lawyers' contingency fees of up to 30%. But most
concede this will take years, even if successful, and may be too little too late for victims.
No matter what happens, the heart of the mystery remains as to how and why de Guzman died. He
was at the centre of the ill-fated plot and knew who was involved, when and why.
His death remains a question mark because his suicide notes, his behavior in the days leading up to his
death and his confidential medical records definitely do not point to suicide. Investigators are
convinced de Guzman is dead. So was he double-crossed into faking his suicide only to be murdered
instead?
Another question is why de Guzman and any accomplices would tamper with drilling cores for years,
knowing eventually they would be caught. The only plausible explanation is the salting was done to
keep money flowing for exploration until the conspirators found the gold they were convinced was
there.
As the salting continued and the size of the alleged ore body grew, the company continued to rebuff
attempts to buy it by Barrick and others. Finally, last February, Indonesia's Suharto intervened and
stole what he thought was the prize for his family and friends.
As drilling by Freeport began, de Guzman knew the jig was up and he'd run out of time to prove
Busang's potential. He leaped, or was pushed, and his body was found days later, face down in the
jungle, rotting.
Of course by that time, there were other Bre-X "bodies" all around, in the form of mining analysts,
pension funds, investors and the junior mining sector. The end was truly like a Shakespearean tragedy.
Diane Francis's latest book is Bre-X: The Inside Story, published by Key Porter Books. |
