Many Fools’ Gold

May 5, 1997 Headlines:
Bre-X Minerals Limited was a “Canadian mining exploration company that falsified the gold strike (in Indonesia) and then hyped its stock price to the heavens” from Wall Street Journal. The Washington Post headlines read “A Lode of Lies: How Bre-X Fooled Everyone No Deposit, No Return”. The Calgary Sun, home city of Bre-X in Canada headlines read “Bre-x: There’s No Gold – MASSIVE FRAUD”.

Two days earlier, before the story had broke, I had arrived in Calgary to attend a meeting in the boardroom of Bre-X the next day with David Walsh, the company’s CEO and members of the Board, Management and Counsel. We were sitting and waiting. On the phone from Grand Cayman was another management member, also waiting, John Felderhof.

The door opened and Graham Farquharson, a mining engineer entered the room, sat down with his report entitled “Busang Technical Audit-Interim Report” and read slowly, “The magnitude of the tampering with core samples that we believe has occurred and the resulting falsification of assay values at Busang, is of a scale and …to our knowledge, is without precedent in the history of mining anywhere in the world”.

We then set about preparing a press release and starting our investigation.

To be present when such a ‘fraud realization’ event occurs is an ever-lasting memory in the study of human behavior. It was also my largest ever retainer: $1,000,000.

Read the May 3, 1997 Interim Report of Farquharson

Read the May 4 Press Release.

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A Personal Pension?

The internal auditor for this Fortune 100 Company raised kickback allegations involving someone in management responsible in Europe for investments made with the company’s pension fund. Counsel retained me to conduct an investigation in the Netherlands. When company documents were examined, it became apparent that these allegations had been raised without considering alternative explanations and situations that, in the end, did answer the issues. However, to be safe, the investigation was extended to include meetings with certain brokers used extensively by the pension director. There was no foundation for the allegations.

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Argosy and the Backward Horse

This $24 million fraud case was the largest ever mortgage fraud case in Canada, catching 1,600 investors who had placed their funds into syndicated mortgages with Argosy Financial Group of Canada Ltd. Argosy started in 1975 and in 1980 it was placed into receivership. Most of the investors were from the province of Ontario with the real estate projects located in Ontario, Alberta and Florida. John David Carnie, the President of the company eventually pled guilty and received a 6 ½ year sentence.

It was fun to piece this case together, while at the same time, your sixth sense agonizes over many questions, one being why did management buy a piece of property for an apartment that was located beside a chemical plant and next to the main train railyard in some faraway small town in the province of Alberta.

Big cases are big puzzle games with volumes of documents. The challenge is to make paper talk. This is the fun of being a forensic accountant. Figure it out!

The formula was simpler than it sounds: Argosy acquires the above property in Alberta, obtains a syndicated mortgage from investors in Ontario for more than the cost and applies the excess mortgage proceeds to pay the interest on outstanding mortgages in its portfolio.

But Carnie had two problems! No exit strategy and a lot of pride. Human nature is anxious to show success and stupidity. For example, Carnie proceeded to take some excess mortgage proceeds and buy a racehorse in the United Kingdom. But there was one problem: in the UK, the horses run clockwise unlike North American where it is counter-clockwise.

If you were really smart, would you not develop an exit strategy? This is another example of the ‘low class’ fraudster; they think their scam will go on forever and they spend everything.

Read Case in Teaching Format

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Buy Stock and Rent a Corner Gas Station

Robert Keyser was the President of Aquablast Inc., and pled guilty to conspiracy to defraud European investors in a stock promotion involving a water blast industrial cleaning system in March 1977.

While renting a corner gas station in Toronto, Aquablast boasted in Europe that it had a paper value of $5 million.

My role was that of a consultant and not a witness. Accordingly, I was able to examine financial records seized in Switzerland by the RCMP from John Pullman who was the apparent moneyman for Meyer Lansky, a notorious mobster based in Florida with operations as well in New Orleans and Cuba. While their source of funds may be questionable, their use was most conservative with multi-million dollar stock holdings in blue chip NYSE companies. Like most people, these men were cautious with their investments.

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