With its tale of fool’s gold and mysterious death, the Bre-X story is on its way to becoming a Hollywood remake of The Treasure of the Sierra Madre. The book contracts have been signed, the movie rights sold. But the story is only beginning for the hundreds of investors suing to recover their lost fortunes. Investors claim they were duped by the Canadian company and, in one case, the brokerage and analyst that promoted its stock to stratospheric levels.
Bre-X Minerals was a tiny minerals exploration company whose market capitalization had soared to $5 billion before collapsing into bankruptcy last month when its promise of the largest-ever gold discovery, in the jungles of Indonesia, was exposed as a fraud. Bre-X geologists had created the illusion by taking gold from other mines and placing them in ore samples from their Busang gold mine.
Shares in Bre-X, whose initial public offering was underwritten by respected Canadian brokerage Loewen Ondaatje McCutcheon, went from a listing on the tiny Calgary Stock Exchange to the more prominent Toronto Stock Exchange, where the company became a constituent of the TSE 800 index.
In August, after filing the requisite financials with the US Securities & Exchange Commission, Bre-X was listed on over-the-counter market Nasdaq. Its fabulous story drew in such big institutional investors as Fidelity Investments and American Express Financial Advisors.
A number of important Canadian and US financial institutions got caught up in the gold fever too. Among the biggest were Nesbitt Burns, the brokerage owned by the Bank of Montreal, and US investment banks JP Morgan and Lehman Brothers.
Nesbitt Burns gold mining analyst Egizio Bianchini had been an early supporter of Bre-X and stayed bullish until the bitter end when he told investors “the gold is there,” criticizing reports by joint-venture partner Freeport-McMoran Copper & Gold that indicated little gold was present.
Nesbitt Burns was also one of the underwriters on a $29 million private placement of equity in Bre-x in March 1996, which was sold to both Canadian and US institutions, bringing US gold funds into the stock for the first time. Neither Bianchini nor his employer would comment on the pending litigation.
Canadian attorney Harvey Strosberg, who is representing investors in a hoped-for class-action suit there, promises more institutions and analysts will be named, but declines to say which ones. Though he says his suits will be restricted to Canadian institutions, he adds: “It wouldn’t surprise me if the financial institutions in the US will be sued in due course.” Lawsuits have been filed in New York, California and Texas. As Euromoney went to press, the US suits had not named any financial institutions as plaintiffs.
But financial institutions are bracing themselves for legal trouble, if only because their deep pockets contrast so markedly with Bre-X’s bankrupt status. The most prominent of these is JP Morgan, which was hired by Bre-X to find a strategic partner to help develop its alleged gold mine a year ago.
JP Morgan introduced the company to US company Freeport-McMoran Copper & Gold, which signed on to be a joint-venture partner with Bre-X and the Indonesian government, which jointly owned the land. But the deal was scrapped in early May after an independent geological survey confirmed months of speculation that there was no gold at the Indonesian site. That led to Bre-X’s bankruptcy filing and exchange delistings.
JP Morgan’s former gold mining analyst, David Neuhaus, who has recently gone to work for Toronto Dominion Bank’s securities brokerage in New York, says he did not follow the stock because of JP Morgan’s advisory role. But Neuhaus, who visited the Indonesian property last summer, admits he was “pretty impressed” afterwards. Neuhaus was quoted in Candian newspapers as saying that the ultimate size of the gold deposits found would be much larger than estimates at that time.
Though JP Morgan declined to comment on the Bre-X matter, sources close to Morgan say that its role lent credence to Bre-X’s claims. “The bank was not recommending that anybody buy or sell or do anything, and they were not there to provide due diligence for anybody, but there was always an aura of ‘If JP Morgan is involved, they must have checked these guys out,'” says one source.
The only public record of the bank’s comment on Bre-X is a conference call between Bre-X officials and JP Morgan bankers to the investment community last year, shortly after the deal with Freeport was agreed upon. In that call, JP Morgan investment bankers Leslie Morrison and Doug McIntosh spoke favourably about Bre-X.
However, the bank thinks it has no liability because those bankers were only quoting Bre-X’s engineering reports, never offering their own opinion, according to sources close to JP Morgan. They say the biggest concern for JP Morgan is the possible damage to its reputation its proximity to the gold hoax might create.
If JP Morgan was not out pumping the stock, plenty of others were. In early March, just before the Bre-X story started to unravel, there were 18 analysts’ buy recommendations on the stock. One of the most visible analysts recommending it was then-Lehman Brothers analyst Daniel McConvey, who had written a 40-page report on Bre-X in December. This argued that “Bre-X’s gold discovery is enormous.” McConvey rated the company a buy, estimating that the stock would be worth between US$20 and US$22 a share to an acquiror. At that time the stock was trading at around US$13, and only got as high as US$18 before starting its downward slide in February.
When the controversy about Bre-X’s claims in recent months was heightened by reports of the mysterious helicopter death of one of its top geologists, Michael de Guzman, McConvey downgraded the stock from a buy to a hold. Shortly thereafter, he left to work as an analyst for Goldman Sachs. (Neither Lehman nor McConvey returned calls for comment.)
One of the earliest analysts promoting the company was Robert van Doorn, who worked for Loewen Ondaatje when Bre-X first went public. Van Doorn later went to work as a gold analyst for Morgan Stanley in New York. Van Doorn recently left Morgan Stanley to start his own gold fund in Canada.
Another analyst who recommended the stock in the US was Vahid Fathi, an analyst at Chicago-based Everen Securities. Neither Van Doorn nor Fathi could be reached for comment.
Yet long-time gold mining analysts who didn’t get in on the action say they were sceptical all along. One such US analyst, who requested anonymity, says there were a “number of factors overlooked and errors made”. He says that since the alleged Indonesian gold mine was the company’s only asset, “there should have been more safeguards” required by the various securities regulators involved. He says Bre-X was known to be using unconventional methods of analyzing its gold samples, there were questions regarding its ownership of the land, and there were “very long delays” confirming the status of both. “The Ontario Securities Commission, Nasdaq and the SEC should have asked more questions,” he says.
The SEC did require Bre-X to change a statement that it had “proven reserves” to “mineralized deposits” before authorizing a US listing.
Since 1995, Bre-X reported the composition of its board of directors. Four of the six were insiders. “That should have rung an alarm bell. Here was a tiny company worth billions of dollars in market capitalization, and they’ve got management overseeing management,” says Bill MacKenzie, vice-president of Fairvest Securities, a Toronto firm that is a corporate governance watchdog for institutional shareholders.
The company had “no cashflow and no operations,” he notes. In addition, he says, Bre-X’s sister company, a holding company called Bresea Resources, was the biggest holder of Bre-X shares, through stock options for management. Both practices suggested “greed and self dealing,” says MacKenzie. Long before the stock’s collapse, Bre-X directors were already under investigation for insider trading. They sold shares last autumn before the Indonesian government’s announcement that it would retain a 50% ownership of the property. Michelle Celarier
