Many investors are painfully aware of securities fraud allegations that seem to consistently attract media attention and challenge legal teams, security regulators and forensic accountants. Unfortunately, the perpetrators rarely seem to face justice; and the multiple victims including the general capital markets, never have restitution fully paid or confidence rebuilt.
By Dave Brown - Exclusive to Gold Investing NewsMany investors are painfully aware of the securities fraud allegations that seem to consistently attract media attention and challenge legal teams, security regulators and forensic accountants. Some involve conspiracies, clandestine meetings as well as “smoke and mirror” accounting that can make for compelling revelations in the most noteworthy schemes. In the battle against securities fraud, information is the investor's best tool. Often the headlines that grab the most attention in the popular news copy read more like a spy novel, than simply the Securities and Exchange Commission (SEC) suspending trading temporarily. Nevertheless, such headlines are necessary for enhancing transparency in an era of declining corporate governance. Bre-X: Historical Context The most notorious mining fraud case is the Bre-X scandal, in which the infamous company reported possession of an enormous gold deposit at Busang, Indonesia. Bre-X had acquired this Borneo site in March 1993 and by October 1995 had already announced the discovery of significant amounts of gold, sending its stock price soaring. Originally, the exploration company was a penny stock, but by May 1996 its stock price peaked at $286.50. The fraud began to unravel rapidly on March 19, 1997 when the company geologist Michael de Guzman suspiciously died, falling from a helicopter over dense rainforest terrain. Within a week an American prospective partner in the project announced that its own due-diligence core samples showed "insignificant amounts of gold" resulting in a major sell off for Bre-X shares. By early May 1997, an independent source published confirmation that the Busang ore samples had been salted with gold dust and tests showed that gold in one hole had been shaved off gold jewelry. The losses for the investment community were in the billions, and exposure spread to pension funds, institutional investors, and even the Toronto Stock Exchange, leading to a tumultuous realignment of the Canadian stock exchanges with prolonged effects that are currently still relevant.