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Wall Street History
https://www.gofundme.com/s3h2w8
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09/30/2005
Bre-X, Part III
It’s March 1997, as we wrap up our story of Bre-X, one of the
biggest stock swindles in history. On March 12, Freeport-
McMoran chairman James Moffett phoned Bre-X CEO David
Walsh and his geologists to tell him that Freeport’s own work on
the Busang, Indonesia property, which was being hyped as the
largest gold find in the world, revealed there was no gold.
Bre-X chief geologist Michael de Guzman was to meet with his
Freeport counterparts on site as soon as possible. He never
showed.
On March 19, de Guzman leaped to his death, 600 feet, from a
helicopter taking him to Busang. A suicide note was found,
explaining he couldn’t bear to live as a carrier of Hepatitis B
anymore, which struck some as strange since he had an entirely
treatable form of Hepatitis and had previously weathered 14
bouts of malaria. [Canadian Broadcasting Corp.]
Supposedly, a body ripped up by wild pigs was found in the
jungles near where he jumped and it was later identified as de
Guzman. But had he faked his death? To date, the
circumstances surrounding his demise remain a mystery, though
as I noted in part I of our story, one of his four wives is now
claiming she has been in contact with him twice, including this
past February, and that she suspects he’ll reveal himself shortly.
Continuing with the coverage of the day, from the Wall Street
Journal, March 25, 1997
“Bre-X Minerals Ltd. took to the offensive Monday in support of
its battered share price, issuing a statement reaffirming its
confidence in the level of gold at its Busang deposit in East
Kalimantan and warning those who have questioned it.
“The slide in Bre-X’s share price was sparked by media
allegations last Friday that Busang’s reserves were less than the
Canadian company had previously reported. The drop was also
facilitated by the apparent suicide last week of Bre-X geologist
Michael de Guzman, whose body Indonesian search and rescue
officials said Monday they have recovered .
“ ‘The company’s board of directors has absolute confidence in
the integrity and accuracy of the assay results and resource
calculations reported by the company for the Busang gold
deposit since inception of exploration in 1993,’ Bre-X’s
president and chief executive officer, David G. Walsh, stated in a
news release.
“This statement by Bre-X follows last Friday’s report by the
Indonesian newspaper, Harian Ekonomi Neraca, which claimed
that initial core samples taken by Bre-X’s joint-venture partner at
Busang, Freeport-McMoran, were less than the 71 million
ounces Bre-X reported existed there .
“Friday’s report caused a substantial sell-off in Bre-X shares
both in Canada and New York. On Friday, Bre-X’s share price
tumbled to [$11 on Nasdaq, off $1.625.] Monday, the shares
closed at $11.375 in New York.
“The Indonesian government also appears to have grown uneasy
about the status of Busang following the media report and Mr. de
Guzman’s death.”
But Freeport had already flown all its initial core samples from
Busang back to the U.S. for inspection, making a full
government investigation virtually impossible.
“Amid this recent turmoil, the discovery of Mr. de Guzman’s
body is expected to damp at least some of the uncertainty in
Busang. Few either in Indonesia or Canada could understand
why Mr. de Guzman, apparently at the top of his profession as a
result of the Busang find, would end his life at this juncture, so
close to the mine being developed.”
On March 26, Freeport-McMoran announced: “To date, analyses
of these cores, which remain incomplete, indicate insignificant
amounts of gold,” adding “there appears to be a strong possibility
that the potential gold resources on the Busang project have been
overstated because of invalid samples and assaying of those
samples.” Trading was halted in Bre-X shares.
On March 27, trading resumed and shareholders dumped Bre-X
in a “wholesale panic.” The stock plummeted to $2.50. A week
earlier it was $17.45. After being silent on the 26th, David Walsh
offered an independent audit would prove Bre-X was telling the
truth. “I’m holding onto my shares,” he said.
From the Wall Street Journal, April 8, 1997
“Bre-X Minerals Ltd.’s shares fell 22% Monday in heavy trading
amid continued concerns about the amount of gold at the
company’s Busang property in Indonesia.
“Investors were largely focused on an article published Friday in
a mining-industry newspaper, the Northern Miner, which raised
doubts about Bre-X’s rock-sampling methods and the company’s
descriptions of the gold at Busang.”
The shares, which had ‘rallied’ to $3.00, fell back to $1.84 on
Nasdaq.
From the Wall Street Journal, May 7, 1997
“Bre-X Minerals Ltd. shares staged a spectacular collapse to
near-worthless levels in frantic trading as investors reacted to
news that the company’s supposedly huge gold discovery is
really a highly engineered fraud.
“Bre-X shares plunged 3.145 Canadian dollars (US$2.28), or
97%, to 8.5 Canadian cents on the Toronto Stock Exchange,
where heavy volume again temporarily overwhelmed the
exchange’s computer system and interrupted Bre-X trading for
about an hour Tuesday. More than 58 million shares changed
hands as investors stampeded for the exits.”
[Nasdaq had halted trading in the shares “due to concerns raised
over the legitimacy of company claims.” “We have no
obligation to trade companies that had admitted to fraudulent
claims,” said Nasdaq President Alfred Berkeley in a statement.]
“The last hopes of Bre-X investors that the company would find
commercial quantities of gold at Busang ended Sunday, after
Bre-X’s independent mining consultant, Strathcona Mineral
Services Ltd., said its drilling results at Busang show ‘virtually
no possibility of an economic gold deposit.’
“Investigators are now sorting out how Busang was ‘salted’ with
foreign gold, and who did it .
“The Strathcona report also said that ‘those involved in the
tampering process have had a very good understanding of the
geology of the Busang property.’
“John Felderhof, one of Bre-X’s top geologists, this week denied
involvement in the fraud from his seaside home in the Cayman
Islands, a tax haven with no extradition treaty with Canada. Mr.
Felderhof and Bre-X Chairman David Walsh made tens of
millions of dollars selling Bre-X shares over the past few
years .
“Freeport-McMoran this week confirmed Mr. de Guzman
knew Freeport was coming up empty at Busang before he
died .Several other Filipino geologists oversaw Bre-X’s rock-
sampling operations in Indonesia. Their whereabouts now are
unknown.”
Bre-X’s valuation had topped out at $4.5 billion. Now it stood at
$13 million.
The Wall Street Journal ran the following editorial on May 8,
1997
“The saga of Bre-X Minerals Ltd., the Canadian mining
exploration company that falsified the gold strike and then hyped
its stock price to the heavens, is a cautionary tale akin to those
found in Charles Mackay’s classic 1841 work ‘Extraordinary
Popular Delusions and the Madness of Crowds.’ We now know
with a fair degree of certainty that there aren’t 200 million
ounces, 70 million ounces, or even 30 million ounces of gold
waiting to be dug out of the ground at Busang, a remote spot in
the Borneo jungle. As one mining executive aptly put it, ‘All the
red flags were there but people wanted to believe.’ But unlike in
Mackay’s time, instead of putting the blame on the gullible and
greedy, we now will observe a search for scapegoats in the
regulatory world .
“But all the early clues that pointed to Bre-X’s fraud were missed
by investors themselves, who bear the ultimate responsibility to
understand the risks of their investments. Even before Bre-X
geological records were destroyed in a fire and the chief
geologist fell to his death from a helicopter there were other,
more mundane reasons for investors to be wary.
“For instance, there was no outside verification of the amazing
results from the Bre-X core samples. SNC-Lavalin Group Inc., a
firm that calculated the size of the reserve, and Barrick Gold
Corp., which bought into the site last year, both relied on Bre-X
samples. And the company was also using unorthodox methods,
like crushing its core samples rather than keeping half intact for
later verification. There were delays in sending samples to the
lab, which made fraud easier .
“Investors aren’t usually trained in geology, it’s true, and even
the experts were reluctant to cry foul because of the incredible
logistics behind the fraud. As the Journal reported laborers
sequestered in a secret facility worked day and night to skillfully
adulterate the rock samples. There were reportedly miles of core
samples from 260 holes to be ‘salted’ with minerals consistent
with the area’s geology .
“But even without geological know-how, investors should have
recognized the psychology Bre-X executives were employing.
Even as CEO David Walsh and his Vice Chairman John
Felderhof were selling their stocks during 1996, according to
reports now available, they drew in new investors to support their
stock price by revising ever upward the Busang reserves
estimates, based on new ‘evidence’ from the jungle. The two
reportedly extracted tens of millions of dollars while the stock
was near its peak. It is now alleged that they continued to sell
stock after learning that the Indonesian government was
questioning ownership of Busang, but before telling shareholders
of this news.”
---
Wall Street Journal, June 5, 1998
“David Walsh, founder of the disgraced Bre-X Minerals Ltd. that
attracted thousands of investors with tales of the greatest gold
find this century, died in a Bahamas hospital. He was 52 years
old.”
Walsh was living in a multimillion-dollar estate that he moved
into after the collapse.
And what of John Felderhof? He went on trial for insider-trading
and misleading investors back in 1999 and, ironically, I just saw
that on Sept. 27 his case was suspended until this coming
November 2. Yes, the same trial. The Ontario Securities
Commission alleges Felderhof cashed out about $55 million in
Bre-X shares before the company went under, and as far as I can
tell he is still in the Cayman Islands, though his assets are frozen.
Long ago, the Royal Canadian Mounted Police gave up their
search for evidence sufficient to bring criminal charges against
anyone involved in Bre-X, though the OSC had its own ideas.
[At least this is the best knowledge I have at this moment. I’ll try
and update you if this whole debacle ever reaches a conclusion.
And to my Canadian friends, if you become aware of any further
details, since they are likely to show up in your papers before
mine, I’d appreciate you passing it along.]
Sources for part III:
Wall Street Journal
Maclean’s
Canadian Broadcasting Corporation
Business Week
South China Morning Post
Wall Street History resumes next week.
Brian Trumbore
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