The Bre-X Minerals scam sputtered to a conclusion in a Calgary court last week when a judge approved disbursement of the last assets of the bankrupt company. At the height of the scam, in early 1997, the company was claiming it had a mine in Indonesia that could yield 200 million ounces of gold. Investors were bidding up the price of the Toronto-listed stock until its market capitalization reached $6 billion. Further investigation in 1997 showed there was no gold mine. The investors lost their shirts, for which they will get a button or two returned to them from last week's settlement. Canadian stock markets were shown to be badly in need of better regulation.
The geologist who salted the Indonesian property with gold to produce fake assay results fell to his death from a helicopter. The president of the company died of a brain aneurysm soon after the scam was exposed.
The Ontario Securities Commission accused John Felderhof, Bre-X vice-president and general manager of its Indonesia project, of issuing false press releases when he announced the assay results that later proved fraudulent. The Ontario Court of Justice, however, found the press releases were issued by the company, not by Mr. Felderhof, and it was not proven he knew the estimates were false. He was therefore acquitted.
This was an excellent result for Mr. Felderhof. It was not such a good result for Canadian investors and for the operation of markets. It showed, under Canadian securities law, a company can issue false information essential to the evaluation of its prospects and yet the senior officer of the company who authorized issuance of the false information may bear no criminal liability.
Accurate information available equally to everybody is essential to the operation of markets. Different buyers and sellers reach different conclusions from the available information: some think it's time to buy and others think it's time to sell, and this creates a market. But when companies lie to the public about their business, rational evaluation is not possible and market integrity is defeated.
Because of Canada's fragmented non-system of securities regulation, accountability in the Bre-X case rested in the hands of the Ontario Securities Commission, the Ontario Securities Act and the Ontario Court of Justice. By those rules, the Bre-X scam was no crime. Ontario and the federal government have been urging the provinces for the last 20 years to establish a national securities regulation system which would provide better protection. The provinces have steadily refused. Each province makes its own rules and charges a toll to each company selling securities in the province. Rather than allow a national regulation system to protect investors and ensure market integrity, Manitoba and the other provinces cling to the rickety non-system that allowed the Bre-X scam.
The defrauded investors in Bre-X recognized long ago they could not recover much from the wreckage of the company. Canadians who dodged that bullet, however, should demand better service from their provincial governments. Every announcement by a Canadian company is clouded by the doubt raised in the Bre-X case. If the company is lying, will anyone be held accountable? If I am being defrauded, will a securities regulator defend my interests?
Every other advanced country has a national securities trading structure to protect market integrity. Canada alone leaves its investors at the mercy of a patchwork of ineffective provincial bodies. Sound schemes for national regulation were brought forward by the former Liberal government and, more recently, by Conservative Finance Minister Jim Flaherty. All have foundered on the rocks of provincial turf-guarding. The Bre-X disaster should encourage Mr. Flaherty to return to the charge and give it another try.