RECEIVER PROBING ROYAL OAK ACTIONS
Allegations of 'fraudulent' and 'questionable' transactions in
PricewaterhouseCoopers' court-filed report
Friday, May 21, 1999
PETER KENNEDY
British Columbia Bureau
Vancouver -- The receiver hired to oversee Royal Oak Mines Inc. is probing a series of alleged "fraudulent" and "questionable" transactions involving the insolvent gold producer's former chief executive officer Margaret Witte and four other executives, The Globe and Mail has learned.
A series of damning allegations -- including selling shares to a Royal Oak subsidiary at vastly inflated prices to pay off loans, and collapsing insurance policies -- are contained in PricewaterhouseCoopers' report to an Ontario court.
The receiver has taken steps it hopes will force Ms. Witte and the executives to repay about $4-million (U.S.) it believes they owe Royal Oak's U.S. subsidiary, Arctic Precious Metals Inc.
PricewaterhouseCoopers said in its report that it considered the share deals "to be inappropriate and fraudulent transactions by Canadian standards."
Based in Kirkland, Wash., Royal Oak is a high-cost gold producer that filed for protection under the Companies' Creditors Arrangement Act in February with debts of more than $600-million (Canadian) that it is unable to repay.
A wholly owned subsidiary of Royal Oak, Arctic owns all of the firm's U.S. operations including its Kirkland, Wash., head office.
In a report filed with the Ontario Superior Court, formerly the General Division, PricewaterhouseCoopers, which was named receiver last month, said the transactions include:
Extinguishing or forgiving $1.5-million (U.S.) in employee loans from Arctic during the week before the appointment of the receiver.
Authorizing Arctic to release its interest in employee life insurance policies, enabling Ms. Witte and the executives to cancel the policies and transfer the entitlement of the remaining residual value to themselves.
After being ordered to cancel the policies, an insurance company, which the receiver didn't name, transferred $2.6-million to Ms. Witte, chief operating officer Edmond Szol, spokesman Graham Eacott, exploration vice-president Ross Burns, and senior vice-president John Smrke.
Ms. Witte wrote letters to two unnamed employees stating that their housing loans, each worth $25,000, had been forgiven for their cumulative efforts while they were working for the company.
Ms. Witte, Mr. Smrke and Mr. Eacott were able to pay off their employee loans from Arctic by selling their shares in Royal Oak at huge premiums to the market value of the shares at the time of the sale.
For example, Ms. Witte sold 759,867 Royal Oak shares to Arctic on April 12 for $1.78 (U.S.) a share, and used the proceeds to pay off her $1.3-million loan to the U.S. affiliate.
Given that Royal Oak shares had already been delisted in the United States, and were trading at 10 cents (Canadian) on the Toronto Stock Exchange at the time of the transaction, PricewaterhouseCoopers said it considers the share transactions to be inappropriate and fraudulent by Canadian standards.
"Since all of the transactions occurred in the U.S., it is up to a U.S. court of law to determine whether the executives should or should not have done what they did," said Craig Bushell, a partner with PricewaterhouseCoopers in Vancouver.
Mr. Bushell said the transactions may not be fraudulent in a criminal sense but they could be considered fraud under Canada's Bankruptcy Act.
Mr. Smrke, who lives with Ms. Witte outside Seattle in Medina, Wash., denied any wrongdoing and said the executives have retained U.S. lawyers to deal with the matter.
"My only comment is that none of the executives or the board did anything inappropriate or illegal," Mr. Smrke said.
Ms. Witte and the other executives could not be reached for comment.
Mr. Bushell said the receiver wasn't aware the transactions had taken place until after it was appointed last month. That was because Arctic's assets were excluded when Royal Oak filed for bankruptcy protection in February and the courts had only limited access to Arctic's books.
He said the receiver has taken steps to reverse the transactions by taking control of Arctic, and removing Ms. Witte, Mr. Burns and another Royal Oak executive, William Sheridan, from the company's board.
They have since been replaced by a U.S. bankruptcy trustee who has directed the company to file for bankruptcy protection in the United States.
In its report, PricewaterhouseCoopers said the U.S. trustee intends to use whatever remedies are available to challenge the transactions and search for any more that may have occurred without its knowledge.
PricewaterhouseCoopers said it is also attempting to obtain more information relating to the insurance policies in order to make a conclusive assessment of the transactions.
The receiver is also working with investment firm Credit Suisse First Boston to find buyers for Royal Oak's Kemess mine in British Columbia as well as its Pamour mine near Timmins, Ont., and Giant mine near Yellowknife, NWT.
PricewaterhouseCoopers has said it hopes to have the operations sold by the end of August.
THREE TRANSACTIONS
On April 12, 1999, the week prior to the appointment of Royal Oak Inc.'s interim receiver, the management of wholly owned Royal Oak subsidiary Arctic Precious Metals Inc. entered into agreements with executives at Royal Oak that saw $1.5-million (U.S.) in employee loans from Arctic being either extinguished or forgiven for no valuable consideration, alleges a report filed in the Ontario Superior Court of Justice.
1. Margaret Witte sells 759,867 Royal Oak shares to Arctic for $1.78(U.S.) each in full satisfaction of her employee loan from Arctic.
2. John Smrke sells 39,912 Royal Oak shares to Arctic for $1.78(U.S.) each in full satisfaction of his employee loan from Arctic.
3. Arctic's board cancels a loan to Graham Eacott in return for 26,000 Royal Oak shares. As a result, Royal Oak effectively purchased Mr. Eacott's shares for $2.18(U.S.) each.
VERBATIM
From the May 10 interim receiver's report:
"On April 29, 1999, the Interim Receiver appointed James T. Hunter, a U.S. bankruptcy trustee, as the sole officer and director of Arctic. Mr. Hunter then directed the filing of a Chapter 11 petition for Arctic. The purpose of the Chapter 11 filing was to:
Obtain control of Arctic and to stabilize the relationship with the head office employees;
Establish a process for all of the claims against Arctic to be dealt with in an orderly manner;
Reduce the quantum of allowable severance claims against Arctic; and
Establish greater powers to attack the questionable transactions that Ms. Witte and the group of executives executed.
The U.S. trustee has indicated that he intends on using remedies similar to the ones available in Canada to challenge the questionable transactions set out above. In addition, the U.S. trustee along with the Interim Receiver will perform a search for additional questionable transactions that may have occurred."
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