This has very little to do with Inco but it is an interesting spin on part of the history of the Voisey's Bay project. Alhtough this is ancient history, so is the trade of Babe Ruth to the Yankees.
Frank Mersch and His Friend, Peter the Pancake-Eater
by Adrian du Plessis
The current roar of publicity surrounding the activities of top mutual fund and brokerage industry players was kick-started by a series of investigative articles published in The Globe and Mail newspaper this past summer. The series (and in particular "The insiders' game" Parts I and II features of June 27/28 1996) highlighted how a "team of brokers at First Marathon Securities Ltd." had "amassed enormous personal fortunes by orchestrating a series of penny stock promotions and obtaining some well-timed assistance from a select group of prominent mutual funds." The Globe found "pervasive conflicts" in First Marathon brokers "playing multiple roles as major investors, promoters and underwriters of volatile junior mining and technology stocks."
The penny stock racket in Canada, it was observed, had been elevated to "a lucrative art form by combining Bay Street clout with Howe Street hucksterism."
Frank Mersch, Canada's most prominent mutual fund manager and his employing firm, Altamira Management Ltd., found themselves cited at a few points in "The insiders' game". But, for Mersch and Altamira, the potential impact of this coverage, focused as it was on the activities of First Marathon brokers, appeared, outwardly, to be localized -- until issues arising from a story that would break two months later compounded matters and the fund group publicly announced it would implement tighter in-house rules with respect to personal trading by employees.
In August 1996 The Globe's team of Karen Howlett and Jacquie McNish revealed that, in April 1993, as part of an insiders' group private placement of stock, DASS No. 25 (an off-the-shelf numbered company registered in British Columbia) had purchased 25,000 units (comprising one share plus one warrant convertible into an additional share) of a Vancouver-listed shell company called Rutherford Ventures Corp. at a price of only $0.15 per unit. In a filing with the B.C. Securities Commission, Altamira "guru" Frank Mersch certified that he was the principal of DASS No. 25. (The celebrity of Mersch, routinely referred to as Canada's top mutual fund "guru", has been likened by one exuberant writer to that of a rock star. While it may not be that hard to imagine some leather-clad money managers forming the industry equivalent of Def Leppard or Metallica, the comparatively bookish Mersch seems more suited to the role of a Brian Epstein, the man who helped make The Beatles' stars shine so brightly.)
Rutherford, originally listed on the VSE as Carolina Gold Resources Ltd., had undergone a name change and 2:1 share consolidation in October 1992. Share trading in Rutherford had been halted (last at $0.18) for months prior to the April 1993 cheap stock placement to allow for the reorganization of the company under the directing mind of penny stock promoter Robert Friedland.
Friedland, his Texas partner Jean Boulle, and brokers at First Marathon and Yorkton Securities Inc. set about arranging various asset acquisitions and cheap private share placements. Following the 2:1 share consolidation, Rutherford had less than one million free trading shares outstanding. Once the private cheap share deals and property vend-ins had been effected, Canada Stockwatch calculated that the insiders' group held a "profitably structured 96%" of the company's stock. Such a share structure can reap tremendous windfall profits for insiders -- even if the public company is unsuccessful in its mining or high tech pursuits. And should any venture(s) actually pan out, the share price returns can be astronomical.
The day after DASS No. 25 and others participated in Rutherford's 3.75 million unit private placement at $0.15, the company's name was changed to Diamond Fields Resources and its stock was brought back for public trading by the VSE. The first trade was at $3.20 per share and the stock closed the day at $3.65. By the end of the first day of Diamond Fields' public trading the $3,750 purchase made by DASS No. 25 had a market value of $182,500 (fully exercised) -- an increase of 2,433% literally overnight.
(N.B. exercise of warrants for the additional shares at this stage would require further payment of $3750.00 -- thereby making the value per each 25,000 share block $91,250.)
Some six weeks later Altamira stepped in as the largest single participant in another Diamond Fields private unit placement (of one share plus one share purchase warrant) -- this time priced at $2.85 per unit. Altamira bought 490,000 units at $2.85 each for a total stake of Cdn. $1.4 million. By late May 1996 when Altamira and others picked up the $2.85 units, Diamond Fields stock was being bought and sold in the VSE public market at prices between $9.00 and $10.00 per share. By this point DASS No. 25's position was up by a phenomenal 6,666%. (For trivia buffs, the DASS nominee is created from combining the initials of David Anfield and Steve Sobolewski, two jovial,
long-time, Vancouver securities lawyers who keep a store of numbered companies on the shelf for those occasions when a client need should arise.)
Especially fortuitous for all concerned, Diamond Fields turned out to be that rarest of speculative deals, one that actually finds or creates something of real worth. With the spectacularly successful Voisey's Bay base metal find that would later occur, the $0.15 stock buy made in Mersch's name had its paper value increase from $3,750 to over $8 million (fully exercised) -- a rise of more than 100,000 %.
Even more amazingly, Diamond Fields didn't announce that "a potentially significant occurrence of base metal mineralization containing nickel, copper, and cobalt has been discovered by the company in Labrador" until November 1994. During 1993 when Diamond Fields stock was already creating huge paper profits for insiders and their associates, the company's primary focus was on such questionable assets as a controversial diamond prospect located in an Arkansas state park and off-shore Namibian alluvial diamond prospects -- a vendor of which was ex-convict Texan Jim Bob Hodge (who had been jailed in 1986 in connection with a money-laundering scheme involving a Chilean diplomat).
Until great fortune befell it at Voisey's Bay, Diamond Fields represented a classic example of how share structure and stock promotion can be elemental factors to consider when measuring small cap speculative stock prices. With the major mineral find the already high-flying penny stock was launched into the stratosphere.
The involvement of Altamira mutual fund manager Frank Mersch and DASS No. 25 in this scenario surfaced in a Globe and Mail article of August 16 1996. When questioned about his regulatory filing certifying he was the purchaser of DASS No. 25's $0.15 units, Mersch stated that he couldn't specifically recall the document. He signed so many documents, he said, that statutory declaration must have been signed in error. He told the paper that things were not at all as they appeared -- rather than him personally purchasing stock for pennies just weeks before his fund bought in at several dollars a piece, it was a friend of his, named Peter Cunti, who really owned DASS No. 25. "Peter I've known since Grade 4. He used to come over to my house and eat pancakes. He wanted a stock tip. I facilitated. I thought it was a good opportunity to make money," he explained.
Even in Canada -- land of Mounties, lumberjacks and maple syrup -- Mersch's Peter the Pancake Eater explanation was unique. More significantly, if true, it meant that his earlier regulatory filing was false. As the Globe noted: "When Mr. Mersch identified himself as a shareholder of DASS 25 in April 1993, his signature rested 2 « centimetres below a boldface warning that it is an offence under the B.C. Securities Act to make a misrepresentation."
Whether or not the metric system was at all to blame, regulators in B.C. and Ontario stated they were ignorant of the facts until being apprised of them by the media. Still, they were quick to offer their regulatory insights. "The end result is the public has been misled about who the real buyer is.
That's a potential problem," said Dean Holley, Executive Director (formerly known as the Superintendent of Brokers or SOB) of the B.C. Securities Commission (BCSC). The OSC's Ed Waitzer contributed his almost patented response that "it's troublesome when professional people don't take compliance with the rules that govern the industry seriously."
As for Peter the Pancake Eater, being a resident of Scarborough Ontario, he was not legally entitled to buy any of the $0.15 Rutherford/Diamond Fields units. Under securities laws the purchase of such stock was restricted to B.C. residents. Still, with respect to the private placement units for which Frank Mersch signed as beneficial owner, but which the Altamira executive says really belonged to his pal Peter Cunti, the fact that a distant relative of Cunti's was a resident of B.C. and a director of DASS No. 25 was relied upon as legitimizing the transaction. An 83-year-old retired postal worker, related by marriage to Cunti, had been asked to serve on the board of the private company whose name he couldn't recall. As for Diamond Fields, the post-postie disclosed he had never heard of the company and had never "seen a cent of the money" from any share trading in it.
Despite the admission from a top industry professional that he had filed a false document with the BCSC to aid a pancake eating friend, and the further evidence that Peter the Pancake Eater himself had apparently used an out-of-the-loop relative to circumvent securities laws in order to purchase Diamond Fields' cheap stock, both Ontario's Waitzer and B.C.'s Holley said it was too early to say whether or not they would review the dealings of Mersch and Dass No. 25 with Diamond Fields. Whether it was too early in the day, too early in the year or just too early in the maple-tapping season they were not asked to elaborate.
And while the investing public waits patiently to learn what, if anything, these serious-minded regulatory professionals will do about this rule-breaking by Mersch, Canada's top male fund manager, another exemplary case of rule-breaking, this one a violation involving Canada's top female mutual fund manager, is now sparking headlines.
(N.B. Although the Globe's 1996 articles first documented an explicit rule violation by Frank Mersch, an indication that interesting things were going on with Altamira funds and speculative penny stocks originally came in mid-1993 when Canada Stockwatch detailed, in a four part news series as well as several market summaries, the curious trading patterns of Mersch's Altamira portfolio(s) in another Friedland penny stock venture, Venezuelan Goldfields Ltd. Vengold, as it become known, was originally a VSE shell called Mt. Grant Mines, the share structure and metamorphosis of which had been organized in part by two known VSE stock-riggers, brothers Daniel and David Hunter, then both brokers with Yorkton Securities in Vancouver. While not exhibiting the 96% lock on shares by insiders as calculated in the Rutherford/Diamond Fields scenario, Mt. Grant/Vengold was, nonetheless, what's admiringly referred to in Howe Street parlance as a "very tight shell".
In fact, just prior to Robert Friedland gaining control of this shell in mid-1992, trading in Mt. Grant stock had been suspended by the VSE because the company failed to meet the Exchange's public share distribution requirements. But after the issuance of only 250,000 shares priced at $0.25 each the stock was allowed to return to public trading by VSE officials thus setting the stage for the Vengold promotion. By early 1993 Vengold stock was climbing to a high of $14.00 per share on the VSE on the basis of strong institutional investment support and what may be the priciest llama pasture on the globe. Backers of Canadian junior companies have long been recognized for their enthusiastic promotion of the figurative moose pasture -- large tracts of land in the forbidding north, where dreams of riches lie buried under terrain that may prove friendlier to moose than to man or woman.
With the significant shift in focus toward South American exploration in recent times, naturally, there need be a new species of ruminant that comes to represent this timeless quest. Friedland's Vengold, capitalizing on its broker contacts at Gordon Capital, First Marathon and Yorkton, was able to raise huge amounts of money through a host of mutual funds, including Canada's Altamira group and AGF's Growth Equity Fund. Along the way it paid cash and shares valued at over Cdn. $50 million to a variety of offshore interests and nominees in exchange for unproven Venezuelan gold prospects on which the company had spent only $119,000 in carrying out very preliminary exploration work by the end of June 1993. In the Vancouver market such surreal situations can almost seem standard, and, in any event, the subsequent major success at Voisey's Bay by Diamond Fields understandably directed attention away from Friedland's extraordinary and costly Venezuelan escapade.) |
