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  Geotimes - October 2007 - Bre-X scandal ends with acquittal

Science and Society
Bre-X scandal ends with acquittal

One of the mining industry’s biggest scandals — the Bre-X gold scam that preceded the company’s collapse 10 years ago — came to a close on July 31 with the acquittal in a Canadian criminal court of Bre-X’s former vice-chairman and chief geologist John Felderhof. After a six-year trial, Judge Peter Hryn of the Ontario Court of Justice found Felderhof not guilty of four counts of insider trading and four counts of authorizing the distribution of misleading press releases.

About a decade ago, Calgary-based Bre-X claimed to have discovered a huge gold deposit in the jungles of Borneo in Indonesia. The news sent the company’s stocks skyward, but soon after the initial excitement, an independent mining consultant discovered that Bre-X had “salted,” or sprinkled with gold dust, its drill core samples, vastly overstating their value (see Geotimes, December 2002). Investors lost about $6 billion when the fraud came to light.

Felderhof’s acquittal closes the case, as he was the only person who faced criminal charges in connection with the scandal. The other senior executives died since the company disintegrated: Geologist Michael de Guzman died after falling out of his helicopter in 1997 and Bre-X’s former CEO David Walsh was found dead after suffering a brain aneurysm in 1998.

According to Judge Hryn, the Bre-X scandal opened a new chapter in the history of mining fraud. “The tampering was unprecedented,” he said in his decision. That was part of the reason why neither Felderhof nor anyone else became suspicious sooner, he said. “The mining industry did not suspect that such sophisticated tampering on such a scale could occur and was not actively looking for it.”

In the years since the Bre-X scam, Canada has adopted a host of new regulations that govern how mineral exploration companies go about their business. These require, for example, a review by an independent agency or consulting geologist immediately after a discovery is announced. “In the Bre-X case, it took months until an independent company was brought in to conduct a review of the site,” says Jim Franklin, former chief geoscientist of the Geological Survey of Canada. “Now this has to be done right away.” That’s particularly important in the gold business, Franklin adds, because gold itself is generally not visible in the ore. “That’s why it’s absolutely critical that an analysis is re-done by an independent group,” says Franklin, who is now a consulting geologist and adjunct professor at the University of Ottawa and Queen’s and Laurentian Universities.

Canada’s new regulations also set much more rigorous standards for conducting and reporting exploration activities, including a host of quality control measures. For example, all samples have to be delivered in sealed bags and only a laboratory that has no financial relationship with the company is allowed to perform an analysis, Franklin says. And, geologists now have to be professionally registered (see Geotimes, September 2007). That includes passing exams that test knowledge in business law and understanding of the new regulations.

These requirements go a long way toward the goal of preventing fraud cases such as the Bre-X scam from happening again in the future, Franklin says. “It’s an entirely different world from Bre-X times.” However, that’s not to say that a fraud couldn’t still be perpetrated, he adds. “But it would have to be extremely carefully thought through.”

Nicole Branan
Geotimes contributing writer

"The tricky business of reserve estimation," Geotimes, December 2002 
"A License to Practice Geology," Geotimes, September 2007 

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