Columns

A dynamic duo decamps

Deirdre McMurdy August 2 1999
Columns

A dynamic duo decamps

Deirdre McMurdy August 2 1999

Pursuing Bre-X billions

Business

Victims of the huge gold fraud fight an uphill battle for redress

Kimberley Noble

Gaston Rajakaruna is the epitome of a cautious investor. The Calgary accountant prides himself on making no rash moves; a federal civil servant, Rajakaruna says he has never bought anything that looked in the least speculative. “I’m always careful,” he says. So much so that after Rajakaruna decided to buy shares in high-flying Bre-X

Minerals Ltd. back in the spring of 1996, he kept reassessing his exposure.

He read constantly and collected an enormous pile of promotional literature—including a 20-page booklet published byTD Securities Inc. in the

fall of 1996, setting forth the reasons why TD’s brokerage clients should load up on Bre-X stock. Rajakaruna says he had been thinking of selling his

Of course they would. And they wouldn’t be alone. These days, all the players in the Bre-X scandal are doing their best to pretend that the biggest stock market fraud in history didn’t happen—or, if it did, that they weren’t responsible for any of it. The investment dealers who promoted the stock, the big gold producers who fought to become Bre-X’s partner,

Bre-X shares at that time—and taking a 50-per-cent profit— but, heeding the advice in the booklet, he increased his holdings instead, until he had invested what he will only say was “over $10,000.” “Listen to this,” Rajakaruna says, reading from the booklet: “ We are initiating our coverage of BXM (Bre-X) with a BUY and recommend the company.Bre-X is “the next high-quality, highly liquid gold producer.” The Busang gold find on the Indonesian island of Borneo “is a worldclass gold deposit which we expect to be developed into one of the largest, lowest-cost gold-mining operations in the world.” Rajakaruna chuckles. “I think,” he says, “they would like to disown this document.”

and even the officers and directors of the now-bankrupt Calgary company have all spent the past two years putting maximum distance between themselves and everything that occurred in Indonesia in those years when Bre-X stock went from selling for pennies to hundreds of dollars a share, before falling back to pennies again.

This is natural corporate behaviour. Who wouldn’t want to cover their butt? What disturbs former Bre-X investors is how well all the big players seem to be succeeding. Events of the past few weeks—from stymied criminal investigations to setbacks in civil cases—have left Rajakaruna and others like him fearing that the hoax will be blamed entirely on Bre-X geologist Michael de Guzman, and possibly chief executive and chairman David Walsh, both dead. Everyone else walks away scot-free, leaving the victims holding an empty bag.

It is not just investors who are frustrated. The complications arising from efforts to investigate and prosecute perpetrators of the Bre-X scandal are becoming almost as much of a maze as the original fraud. Big money and even bigger reputations are at stake—and everybody involved with this massive, expensive, time-consuming tangle has a different theory about the best way to proceed. “This is a very large, very delicate, complex situation,” says John Campion, lawyer for the Bank of Montreal’s Nesbitt Burns Inc. “It has enormous

financial industry consequences.”

Lawyers and investigators estimate that thousands of victims have lost somewhere between $1 billion and $3 billion as Bre-X shares tumbled from a high of $286.50 in May, 1996, to 9 cents when the Toronto Stock Exchange delisted Bre-X a year later.

Windsor, Ont., litigation lawyer Harvey Strosberg, who is spearheading a Canadian class-action lawsuit, says he has met investors who have lost anywhere from $2,500 to hundreds of thousands of dollars. “I have talked to people who have lost $8,000 when that was all they had to lose,” Strosberg says. “Plus, you have to remember,” he adds, the people behind the fraud “robbed every pension fund in the country that invested in Bre-X.”

But after two years of interviewing witnesses in Canada, Indonesia and the Philippines—and scanning 600,000 documents into a state-of-the-art computer system—the Royal Canadian Mounted Police announced in May that it had failed to turn up enough evidence to lay criminal charges. It has trimmed its 11-member task force to a single inspector who will continue to conduct the occasional interview. RCMP Insp. Peter Macaulay, the remaining investigator, says there was no way around it. “We haven’t shut the file down,” he told Macleans. “But we’ve

None of the players in the Bre-X scandal will accept responsibility for investors’ losses

come to a dead end, and we’ve called it the way it is.”

The virtual suspension of the criminal investigation was greeted with howls of protest from Bre-X shareholders. “Obviously, the Mounties don’t always get their man any more,” says Jim Roache, a former Bre-X shareholder from Ottawa. “I am disappointed,” Macaulay responds. “But there is nothing I can do about it.” One of the biggest problems, he says, is all the civil lawsuits. Insiders who are not implicated in the criminal probe refuse to assist the RCMP on the grounds that their evidence could be used against them in the civil proceedings.

The Ontario Securities Commission has fared little better than the Mounties. It wound down its own investigation this spring by taking action against a single individual. Former Bre-X vice-chairman and top geologist John Felderhof has been charged with various counts of insider trading and securities fraud. Felderhof has repeatedly denied any wrongdoing.

This leaves Bre-X investors worldwide relying on civil rather than criminal prosecutions to provide them with some hope of justice. The original nine civil suits, of which five were filed in Canadian cities from Edmundston, N.B., to Vancouver, have been pared down to three major cases: the class action mounted by Strosberg, known in Canadian legal circles as “the

King of Torts”; a suit being handled by Calgary lawyer Clint Docken for 150 Alberta investors, including Rajakaruna; and a class action filed in Texarkana, Texas, a jurisdiction famous for juries who believe huge damages are an effective method of reminding big corporations of their obligations.

Because Bre-X itself is bankrupt, the shareholders have tried to look elsewhere for redress and compensation. The courts, however, are not making it easy for them. In Toronto, Ontario Court Judge Warren Winkler ruled that the class action cannot go after

brokerage or engineering firms for the role they played in establishing Bre-X’s credibility. In Texas, Federal Judge David Folsom has excluded Canadian investors from the U.S. lawsuit, although he is allowing their lawyers to provide him with additional information if they think it might change his mind. But that may not help. On July 13, Judge Folsom struck broker Nesbitt Burns, engineering giant SNC-Lavalin Inc. of Montreal, New York City investment bankers J. P Morgan & Co. Inc. and Lehman Brothers Inc., as well as Toronto-based Barrick Gold Corp. from the list of defendants. The Calgary lawsuit is on hold while Docken and his clients wait to see what happens in other jurisdictions.

This summers rulings—and flurries of appeals are being filed—mean that at the moment the only entities that the investors can pursue are Bre-X; its sister company Bresea Resources Ltd.; and the officers and directors, including Felderhof in the Cayman Islands and Walsh’s widow, Jeannette, in the Bahamas. Although the action has been stayed against Jeannette Walsh in Toronto, she is named in the Calgary and Texas suits. It remains to be seen which of the two most prominent lawOntario or Texas—will emerge as the main event.

Strosberg argues that his case is the only one with jurisdiction, but many Bre-X victims would rather see their case argued before a sympathetic Texas jury. “That, if anywhere, is where well get our money back,” says Rajakaruna. But he’s not optimistic. “Right now, I am holding out a one-per-cent hope.” Privately, he has resorted to a more practical method of reducing his loss. When the share price cratered, Rajakaruna’s TD bankers billed their client for $6,000—the amount needed to cover Bre-X trading losses in his TD Green Line account. He refused to cough up the cash. “I told them, ‘Look, let’s wait for the outcome, and then we can decided who should pay,’ ” he says. The bank filed suit against him. Rajakaruna countersued. TD then suggested they both drop their lawsuits. Again, Rajakaruna refused, deciding that this might be the closest he ever gets to forcing his bank to face up to its role in Bre-X. “It’s a matter of principle,” he insists. “We put a lot of trust in these people. And they got us into the biggest scam I have ever seen.” G3