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Faked gold, a Russian godfather and other things The Globe has found on Bay Street’s shadier side

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It was surely one of the clumsiest attempts ever to rewrite history.

In 1996, Calgary-based Bre-X Minerals Ltd. spent months assuring investors it owned most of Busang, a mammoth gold deposit in Indonesia. But the following February, CEO David Walsh flipped the script. “Some have mistakenly thought that we somehow owned 90 per cent of this property,” Walsh said at the time. “This was never the practical reality, nor was it ever a basis for the valuation of Bre-X stock.”

Hogwash. Bre-X’s previous assertions that it owned 90 per cent of the bonanza were exactly what juiced its stock. And when The Globe and Mail reported five months earlier that Bre-X had lost its grip on Busang, Walsh repeatedly denied the story, doubling down on his majority-stake narrative. It wasn’t until the Indonesian government forced Bre-X into a development deal that left the miner with a 45-per-cent stake that Walsh contradicted himself. But ownership issues were just the tip of Bre-X’s $6-billion fraud.

Business journalism is often derided as boring – or worse, sycophantic. But an independent financial press is fundamental to the efficient functioning of free markets. Reporters are an important check on corporations, analysts and regulators by ensuring a free flow of information that enables ordinary people to make informed investing decisions.

The role of the press in exposing corporate malfeasance is particularly vital in Canada, where constitutional divisions of power have prevented the creation of an effective national securities regulator. And, in a time when many workers must manage their own retirement investments, we need more than ever a functioning press able to identify and call out Ponzi schemes, deceptive practices and other forms of corporate fraud.

After all, the next time the press alerts investors to financial wrongdoing, one of those investors could be you.


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According to Bre-X, the Busang gold fields in Indonesia, shown in 1997, held millions of ounces of metal that it could extract with the right partners. But soon The Globe began to reveal holes in those claims, including whether Bre-X owned Busang at all.Gatra Magazine-Beawiharta/Reuters

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Bre-X’s senior vice-president John Felderhof and CEO David Walsh attend a Toronto function in 1996.Edward Regan/The Globe and Mail

In retrospect, it seems unfathomable that a rinky-dink miner run by a rag-tag cast of characters fooled so many people into believing it had the world’s biggest gold find.

Walsh and his wife Jeannette created Bre-X in 1988, and by the following year it was trading as a penny stock on the Alberta Stock Exchange. But it wasn’t until 1993 that a chain-smoking Canadian geologist named John Felderhof helped the company acquire its first stake in Busang, and recruited Michael de Guzman, a Filipino geologist, to join his crew.

Bre-X initially told investors that Busang could contain one million ounces of gold. But over the years that estimate ballooned to a whopping 200 million ounces. In 1996, the company’s stock migrated to the Toronto Stock Exchange’s flagship 300 index of leading companies. And when the company announced there was too much gold to mine on its own, Barrick Gold and Placer Dome were among those who competed fiercely to become its partner.

“It got adulation from Bay Street and, above all, from Wall Street – virtually without exception,” recounts Douglas Goold, a former Globe journalist who co-authored the book The Bre-X Fraud with colleague Andrew Willis.

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Geologist Michael de Guzman, right, goes with colleagues to survey the gold deposits in Borneo.Gatra Magazine/The Associated Press

Retail investors, too, became seduced by gold fever. In St. Paul, Alta., a town about 200 kilometres northeast of Edmonton with a population of 5,200 at the time, an estimated one in 50 residents owned shares of Bre-X. “I’ve got the contract to build a 20-storey building for everyone to jump off of when Bre-X crashes,” Jack Kindermann, a local electrical contractor, quipped to a Globe reporter in March, 1996.

In fact, people everywhere were hanging on every twist and turn of the Bre-X story. “I was stopped in the street all the time and asked, ‘What do you think is going to happen?’” Goold says.

The Globe’s scoops – which included revelations that Bre-X no longer had a valid exploration permit or clear title to Busang – helped the public separate fact from corporate fiction. But not everyone appreciated the newspaper’s unflinching coverage. “Your paper is anti-Bre-X,” Felderhof told Goold in an interview in Jakarta on Feb. 28, 1997.

Less than two weeks later, the Bre-X fraud began to unravel with shocking speed. U.S.-based Freeport-McMoRan Inc., which conducted its own sampling, couldn’t square its findings with Bre-X’s results. It called on de Guzman, who was in Toronto, to return to Busang to provide answers.

While travelling to the site on March 19 of that year, de Guzman fell out of a helicopter. His badly decomposed body was found four days later, and conspiracy theories began to swirl online suggesting the 41-year-old geologist had faked his own death because he knew the jig was up.

It would later be revealed that de Guzman was running from the truth in his personal life too, after secretly marrying four wives. His health was also deteriorating because of malaria, typhus and hepatitis B.

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A guard adjusts the altar beside de Guzman’s coffin at a Jakarta military hospital in 1997.Enny Nuraheni/REUTERS

On March 26, Bre-X finally conceded that its gold estimates may have been overstated, tanking its shares. But rather than scrutinizing the company’s increasingly unsustainable claims, the Ontario Securities Commission’s acting chairman, Jack Geller, rushed to Bre-X’s defence, lashing out at the media for creating a “feeding frenzy” that also hurt the TSE. He specifically criticized The Globe and the Financial Post, accusing them of engaging in an “orgy of speculation, printing, and even encouraging, the wildest surmises so as to keep the story on the front burner.”

“I think the biggest challenge with Bre-X was the sort of home-team challenge,” says Paul Waldie, who was one of the reporters covering the story. “Any time you wrote something negative about Bre-X at the peak of its market cap, you were sort of dissing Canada somehow.”

On May 4, an independent audit by Strathcona Mineral Services Ltd. determined that Bre-X’s samples were subject to widespread tampering. A separate report would later name de Guzman and four other Filipino workers as the culprits who salted the samples with grains of gold. “The fraud itself was so primitive,” explains Willis. “They were grinding apart wedding rings and using that to salt the samples early on. Then they were buying river gold and throwing it in the bags.”

Two days later, a Globe editorial called for the creation of a national securities commission, arguing that junior companies like Bre-X needed proper vetting before being included on benchmark stock indexes: “The first and last line of defence for investors is information. The more investors have, and the quicker they have it, the better off they will be.”

Provincial governments, jealously guarding their jurisdictional turf, refused to cede that authority to Ottawa, though regulators did change some rules for junior miners.

Bre-X succeeded in bilking investors around the world with its bogus claims of bullion in Busang. It also earned Canada infamy as the Wild West of investments regulation.


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The sun sets over Toronto’s financial district, as seen from The Globe’s King Street headquarters. Keeping an eye on Bay Street’s inner doings can be a challenge for journalists and investors, who have no national securities watchdog to aid in the task.Fred Lum/The Globe and Mail


The Bre-X affair was by no means the first time that a flagrant fraud caught securities regulators and the TSE flat-footed. Back in 1964, there was an embarrassing scandal involving Windfall Oils and Mines – another junior company turned stock-market darling.

Windfall exaggerated claims about mineral finds, including copper, in Northern Ontario, and then rode a wave of market speculation. Its shares soared from 56 cents to $5.60 on the TSE, then cratered after the company came clean.

In that sense, Bre-X was simply a new spin on an old-fashioned mining fraud. But because Bay Street’s minders rejected other proposed reforms to tighten oversight, another scandal soon erupted on their watch. YBM Magnex International Inc. – an industrial magnet maker that once had a stock market capitalization of nearly $1-billion – collapsed in the spring of 1998 after revelations the company had links to Russian organized crime.

YBM started out as a Channel Islands company with alleged ties to Sergei Mikhailov, a suspected Russian crime godfather. After a complex series of mergers and combinations, the company emerged on the Alberta Stock Exchange in 1995 as YBM Magnex International Inc., migrating to the TSE the following year. Former Ontario premier David Peterson joined YBM’s board, which bolstered the company’s credibility and helped fuel a cultish following among institutional investors and analysts.

But it all came to an end on May 13, 1998, when the FBI raided YBM’s Pennsylvania head office after the company’s auditors raised concerns about alleged criminal activities, forcing the OSC to issue a cease-trade order.

That same month, Globe journalists Karen Howlett and Waldie, after digging deep into YBM’s past, linked the company to another Russian mob boss, Semion Mogilevitch, who owned almost one-third of its shares, along with five of his associates. What’s more, British police had been investigating Mogilevitch’s alleged mob activities since at least 1994, and securities regulators in Alberta were aware of that probe. “It spoke to how naive Canadian capital markets were at that time,” Waldie says. “Americans were all over it, the British were all over it and the Canadians did nothing.”

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The Ontario Securities Commission came under increasing scrutiny in the 1990s as word got out about how it had handled the YBM affair.Melissa Tait/The Globe and Mail

In December, 1998, The Globe reported details about YBM’s money-laundering operation and, in February, 1999, the paper published another bombshell: The OSC and TSE received damning information about YBM from the RCMP more than a year before the FBI raid. On April 18, 1997 – the very day that YBM was added to the TSE 300 index – the Mounties warned regulators that YBM’s financial statements appeared to be bogus. YBM’s stock continued to trade even as the OSC received reams of corroborating information, including from a company whistle-blower.

The OSC sat on that intelligence and kept investors in the dark for 13 months while squabbling with the TSE about who should lead the investigation. What’s worse, regulators also gave their blessing for YBM to raise $100-million from investors. “It was a real black eye for our securities regulators,” Howlett says. “They actually had information handed to them on a platter.”

The YBM case – which should have been a watershed moment for securities-law enforcement – ended with five of the company’s eight former directors getting a slap on the wrist. Peterson was among those who escaped sanction.

Today, most corporate fraud remains undetected because of relatively low levels of enforcement in Canada, says Alexander Dyck, a professor of finance at the University of Toronto’s Rotman School of Management. “A national securities regulator would help,” he says. The financial press plays a critical role in uncovering corporate fraud, he adds, noting that the reflex of CEOs, directors and even some external auditors is to keep misrepresentations under wraps.

Poonam Puri, research chair in corporate governance at York University, agrees that “an independent financial press is of utmost importance” in holding corporate Canada to account. Governments and regulators have multiple obligations. Retail investors have little time to scrutinize potential investments. “Business reporters fill this gap,” she says. “They combine the expertise, capacity and reputational heft needed to get to the bottom of scandals.”


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A Cessna 400 belonging to Gerald Cotten, co-founder of QuadrigaCX, sits at the Truro Flying Club in Debert, N.S., in mid-February, 2019. Weeks earlier, Mr. Cotten’s death led to the collapse of his cryptocurrency exchange, and intensified questions about what had happened to investors’ money.Darren Calabrese/The Globe and Mail


Technological innovations are shaking up the investment industry. Online platforms enable retail investors to bypass go-betweens such as investment advisers and brokers, while digital technologies have given rise to new asset classes, including cryptocurrencies. But securities regulators are still struggling to catch fraudsters who hide in plain sight, as illustrated by the collapse of QuadrigaCX – formerly Canada’s largest cryptocurrency exchange.

Launched in 2013 by Gerald Cotten and Michael Patryn, the Vancouver-based exchange billed itself as an easy-to-use platform for people to buy bitcoin and other high-flying crypto assets. Quadriga attracted customers from Canada and abroad, some turning over their life savings. In 2018, Cotten boasted to The Globe that Quadriga had 350,000 users. Who knows if he was telling the truth?

The Globe and other media, however, had already started reporting on signs of trouble. Clients faced lengthy delays in retrieving their money, which the exchange initially played down. By October of that year, Globe capital markets reporter Alexandra Posadzki had the backstory: The Canadian Imperial Bank of Commerce had frozen several accounts belonging to Quadriga’s payment processor, Costodian Inc., sequestering $28-million because it was unclear who owned the money.

After reporting this revelation, Posadzki became the target of a SIM-swap scam; criminals hijacked her cellphone number to access her online accounts. “People assumed maybe I had crypto as well,” she says. “But I did not have any crypto and they didn’t get anything.”

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Gerald Cotten co-launched Quadriga in 2013.Facebook / Remembering Gerry Cotten

Undeterred, she, Joe Castaldo and other reporters stayed on the story as Quadriga’s financial crisis spiralled. After bitcoin’s price crashed that November, there was a full-blown run on the exchange. Then in December, Cotten died suddenly at age 30 from complications of Crohn’s disease while on his honeymoon in India. By Feb. 5, 2019, Quadriga was no more.

In the end, more than 76,000 former clients received only a pittance of what they were owed. The OSC later determined that Cotten operated Quadriga like a Ponzi scheme, plundering client accounts to fund his posh lifestyle and fraudulent trading that resulted in steep losses.

This time, the OSC didn’t chastise the press for exposing a homegrown fraud. Globe journalists broke scoop after scoop about this made-in-Canada scam, including the fact that Patryn was a convicted criminal formerly known as Omar Dhanani, who served 18 months in a U.S. prison for his role in an online identity-theft ring; and that Cotten flogged get-rich-quick schemes since he was a 15-year-old high school student in Belleville, Ont. “It was such a wild story because the characters were kind of larger than life,” says Posadzki, who was one of three Globe reporters featured in a Netflix documentary about Quadriga.

As with Bre-X’s de Guzman, there’s been no shortage of online conspiracy theories suggesting that Cotten faked his own death. The Globe sent then-Asia correspondent Nathan VanderKlippe to India to piece together Cotten’s final hours. He gleaned exclusive details from the doctor who treated Cotten and the police officer who ruled out foul play.


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The Globe visits the medical college in Jaipur, India, where Mr. Cotten was embalmed, as part of its investigation of his death and the fate of Quadriga.Nathan Vanderklippe/The Globe and Mail


Bre-X, YBM Magnex and Quadriga are cautionary tales about the dangers of undetected corporate frauds. The Globe has covered many more over the years, including Livent, Nortel, Sino-Forest and others. The common theme in all these scandals is that people lose their money, but no one goes to jail or is otherwise seriously punished for deceiving the investing public.

Although The Globe’s journalism has spurred regulatory changes over the years, Canada still doesn’t have a national securities regulator, which impedes enforcement. And whistle-blowers have insufficient incentives to report corporate malfeasance. Meanwhile, Canadian companies seek growth in overseas markets and the internet is blurring international borders – trends that demand better oversight and risk management.

Against that backdrop, a retirement-savings crisis looms. As workplace pensions become less generous, ordinary people are shouldering more responsibility to manage their money, including through investments. Retail investors in the digital age may have a wealth of information at their fingertips, but that hasn’t made them less susceptible to scams.

Accountability journalism is needed like never before, even as the ranks of business reporters are shrinking across the country. “I worry very much about the deteriorating economics of the business press,” Dyck says. “Our capital markets are better because you exist.”

Rita Trichur is a columnist for Report on Business.

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