Saturday, July 4, 1998
Bre-X insiders sold $45M in
stock as salting dwindled
By SANDRA RUBIN
The Financial Post
The salting of core samples at Bre-X Minerals
Ltd. trickled to a halt six months before the
gold fraud was exposed -- but not before one last orgy of
selling by some of the firm's top insiders.
Holes drilled after September 1996 started coming up blank,
painting a troubling picture of a huge empty zone at the heart
of one of the world's richest gold strikes.
Investors pouring their savings into the stock were not told.
In fact, the company bumped up the estimated size of the
Busang find twice more before the scam was exposed at the
end of March 1997.
Bre-X exploration chief John Felderhof, its late chairman
David Walsh, corporate secretary Jeannette Walsh and
vice-president Stephan McAnulty all have said they had no
clue anything was amiss at the Indonesian site.
But court documents show the four dumped $45 million in
shares in the 10 weeks before the salting scheme started
spluttering to a halt.
There's no record of any of them except Jeannette Walsh
ever selling Bre-X stock again.
The team carrying out due diligence for Freeport-McMoRan
Copper & Gold Inc., which exposed the fraud, said in a
recently published paper there was a change in the salting
pattern after Sept. 15. Its investigators found the number of
samples Bre-X sent to the lab for assaying "dropped off
markedly."
"There's no question that's when the salting appears to have
stopped," said Colin Jones, who led Freeport's on-site due
diligence. "We don't know why it stopped, but it did."
Filipino geologists Michael de Guzman, Cesar Puspos and
Jonathan Nassey exercised $2.6 million in options on Bre-X
stock Sept. 16.
Of 94 holes drilled after that, only 25 were sent for testing.
Two-thirds -- 16 -- came back showing absolutely no gold.
Jones said the other nine contained at least small amounts.
Investigative geologist Keith McCandlish said the Freeport
paper and the record of insider trading viewed together
suggest a deliberate plan to bring the stock price down
gently.
"This makes me conclude the whole thing may have been
even more carefully orchestrated than everybody thinks at
the moment, and that this was the beginning of an exit
strategy," said McCandlish of Associated Consultants in
Calgary.
"They were probably planning to release results showing a
few unmineralized areas, and then a few more, and let the
air out of the stock price slowly."
But Bre-X never published the negative results, possibly
because of a disagreement over whether it was time to end
the fraud. So North American investors were not alerted to
what Freeport geologists called "a large, unmineralized
volume of rock in the centre of the ore body."
On the contrary, markets were told the deposit was larger
than announced. The resource estimate was hiked to 57
million ounces on Dec. 4 and ratcheted up again to 71 million
ounces eight weeks later, on Feb. 17.
The last estimates were prepared by SNC-Lavalin Inc.'s
Kilborn Engineering unit using drill results available as of Jan.
15, Bre-X said in its original announcement.
McCandlish said Kilborn's revised resource estimates raise a
lot of questions.
"What I question is how they could not know those holes
had been drilled, and did they use them in the new resource
estimate or did they just ignore them," he asked.
"How could they produce a new resource estimate which
gives more contained gold in the ground? They must have
known about the new holes, yet did they not ask for those
logs?"
SNC spokesman Robert Racine said Kilborn carried out the
work it was hired to do.
"Our PT Kilborn subsidiary worked on the basis of
information provided to it by Bre-X," he said. "The only way
to check any accuracy was to do an independent drilling
program, which was certainly not our mandate."
While not addressing the question of whether it had access
to the dud drill results, SNC said later in a faxed statement it
is "not a regulatory agency."
"PT Kilborn was in no way negligent, and there is no causal
link between PT Kilborn and Bre-X shareholders or their
alleged damages."
Nonetheless, the rapidly rising resource estimates helped
turn the once-tiny exploration firm into a star on the Toronto
Stock Exchange by that fall, with a market capitalization
closing in on $6 billion and a stock price heading toward
historic highs at $280 on a pre-split basis.
But behind the scenes, Bre-X was stripped of a key
exploration permit by the Indonesian government and was
being pressured to take Barrick Gold Corp. as a development
partner.
Felderhof sold $28 million in shares between early July and
mid-September, according to an affidavit filed in the
Bahamas by Deloitte & Touche, Bre-X's bankruptcy trustee.
He declined to comment on the blank tests, or why he sold
so much stock that summer, after reviewing a list of
questions with his Canadian and U.S. lawyers.
"Really, that goes to the area that's at the centre of the
litigation," said Toronto lawyer Joseph Groia. "We're not
going to litigate this in the press."
The court documents show David Walsh unloaded about
$8.7 million in Bre-X stock while Jeannette Walsh dumped
$7.5 million over the same period. McAnulty ditched about
$1.32 million worth.
Alan Lenczner, who has been representing all three, did not
return repeated calls.
All, including SNC-Lavalin, have been named in huge class
action lawsuits filed by investors who lost money in the
securities swindle.
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