UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TEXAS TEXARKANA DIVISION
LANE McNAMARA, ROBERT McBEY, § JOHN QUICK, JOHN and MARIAN § McCARTHY, PATRICIA HUNT, § SCOTT WILDING, REUVEN RANDALL § SINGER, MELVIN B. MILLER, § MEISSNER MUSIC PRODUCTIONS, INC., § NEW MADRAS LIMITED PARTNERSHIP, § ALAN HIRSCH, BENJAMIN KEMPER, § DEBORAH L. FOSS, and DONALD LYTLE, § on behalf of themselves and § others similarly situated, § § Civil Action No. 597CV159 Plaintiffs, § § (Jury Trial Demanded) v. § § BRE-X MINERALS LTD., § BRESEA RESOURCES LTD., § JOHN B. FELDERHOF, § DAVID G. WALSH, § JEANETTE WALSH, § T. STEPHEN McANULTY, § JOHN B. THORPE, § ROLANDO C. FRANCISCO, § HUGH C. LYONS, § PAUL M. KAVANAUGH, § J.P. MORGAN & CO. INC., § P.T. KILBORN PAKAR REKAYASA, § KILBORN ENGINEERING PACIFIC LTD., § SNC-LAVALIN INC., § NESBITT BURNS, INC., § LEHMAN BROTHERS, INC., and § BARRICK GOLD CORPORATION, § § Defendants. §
SECOND AMENDED CLASS ACTION COMPLAINT Plaintiff
Lane McNamara makes the following allegations for his amended complaint, joined by the other plaintiffs listed above. The allegations specifically pertaining to plaintiffs and their counsel are made upon knowledge. The other allegations are made upon information and belief, based on the investigation undertaken by plaintiffs’ counsel, including analysis of publicly available news articles and reports, public filings, press releases, and other matters of public record. Plaintiffs believe that further substantial evidentiary support will exist for the allegations set forth below after a reasonable opportunity for discovery.
Nature of the Action
1. This is a class action on behalf of persons who purchased the common stock of Bre-X Minerals Ltd. (“Bre-X” or the “Company”) and/or Bresea Resources Ltd. (“Bresea,” which held as its primary asset approximately 25% of the shares of Bre-X and was under the control of Bre-
X insiders) between January 17, 1994, and May 2, 1997, inclusive (the “Class Period”). Plaintiffs are pursuing remedies under the Securities Exchange Act of 1934 (the “Exchange Act”) and state law.
2. Bre-X became the star of investors in the gold industry after defendants convinced the investing public that Bre-X owned 90 percent of a massive and uniquely profitable gold deposit -- perhaps the largest ever discovered -- located in the Busang area of East Kalimantan,
Indonesia. Defendants’ descriptions of gold-laden drill samples purportedly extracted from Bre-X’s properties were accepted as proof of the Company’s claims until independent drilling and analysis revealed the massive deception perpetrated by defendants. The Bre-X saga is now being called the gold fraud of the century.
3. More specifically, after making repeated statements that between 70 and 200 million ounces of gold were available for extraction at Busang, Bre-X shocked investors by announcing on March 26, 1997, that an interim report provided to it by its independent mining consultant had concluded that there was “a strong possibility” that prior estimates concerning the
-2- quantity of gold at Busang “have been overstated because of invalid samples and assaying of these
samples.” That same day, Freeport McMoRan Gold & Copper, Inc. (“Freeport”), which had recently
been announced as Bre-X’s partner in the Busang project, reported that its own due-diligence
analyses of seven core samples “indicate insignificant amounts of gold.” That news came one week
after the announced death of Bre-X’s chief geologist Michael de Guzman, who reportedly fell to his
death from a helicopter while traveling to Busang to meet with Freeport representatives to discuss
Freeport’s assay results.
4. Although for a time certain Bre-X insiders attempted to deny the fraud, Bre-X
thereafter acknowledged that the numerous public statements it had made touting the tens of millions
of ounces of gold resources at Busang were a sham -- completely baseless, the product of outright
fraud supported by bogus test-drilling reports. That conclusion was confirmed in a final report from
Bre-X’s independent mining consultant, which became known to the market on May 3, 1997, at the
end of the Class Period. It soon emerged that any knowledgeable gold analyst or mining expert,
performing any diligent assessment of Bre-X core samples from Busang, would have determined that
the samples had been fraudulently adulterated by addition of gold from other sources.
5. Following the March 26 announcement, trading in Bre-X stock was halted on
the U.S. and Canadian markets. Upon resumption of trading, Bre-X’s stock price plummeted 83
percent, resulting in a market loss of approximately $2 billion (U.S.). Bresea common stock, which
closely tracked Bre-X in market performance, followed suit. Bre-X insiders already had profited,
however, because they had sold millions of dollars worth of stock with full knowledge of the fraud.
6. According to James R. “Jim Bob” Moffett, Freeport’s Chief Executive Officer, as quoted in a Fortune magazine article dated June 9, 1997, there were outstanding “yellow flags”
-3- that were obvious to Bre-X’s engineers and experts (such as defendant J. P. Morgan and the Kilborn
Defendants, as defined below) and gold analysts (such as those employed by defendants Nesbitt Burns and Lehman Brothers) who visited Busang and had access to core samples taken from the area.
According to Moffett, these warning signs included:
[1] Crushing all the samples as opposed to saving a slab -- that’s never done. Generally, you save half the core so that when you’re gettin’ ready to build a mill, you can do a survey and find out how you’re gonna have to build the mill to be able to crush the sample and chemically get the gold out. And not to save any of the sample -- we’d never seen that before.
[2] They said they thought this gold was in the nuggets and if you didn’t take the whole core, you might miss one big nugget in the half that you cut off. That’s bullshit. Igneous gold deposits don’t come in nuggets. Nothing we ever saw did.
[3. Also,] there was no gold at the surface. None. All my deposits have gold at the surface. They said it was because of humic acid destroying the gold. And we said, “That’s bullshit.”
7. Defendants Bre-X and Bresea, acting through the corporate insiders sued in this action (Felderhof, the Walshes, McAnulty, Thorpe, Francisco, Lyons, and Kavanaugh, collec- tively referred to herein as the “Insider Defendants”), intentionally deceived the investing public about
Bre-X’s supposed gold resources in order to reap tremendous profits from selling their Bre-X stock at artificially inflated prices.
8. Defendant J.P. Morgan & Co. Inc. was retained in or about September 1996 as Bre-X’s financial advisor. J.P. Morgan, acting through its agents, including David Neuhaus and
Doug McIntosh, who were both trained geologists and/or engineers, visited the Busang drill site, and, as admitted by J.P. Morgan, reviewed prefeasibility and feasibility studies prepared by Kilborn, engineering consultants for Bre-X (as described below). For months, J. P. Morgan worked with and
-4- assisted Bre-X executives and employees in Indonesia, Canada, and the U.S. As a result, J.P. Morgan knew the adverse facts that were kept from the public by Bre-X, including the inconsistencies between the properties of the type of gold purportedly found in Busang and the test results in
Kilborn’s prefeasibility and feasibility studies. J.P. Morgan nevertheless made public statements touting the gold resources at the Busang site.
9. The Kilborn Defendants (defendants P.T. Kilborn, Kilborn Engineering, and
SNC-Lavalin) provided engineering services to Bre-X and issued written reports calculated to substantiate Bre-X’s claims concerning Busang. The Kilborn Defendants intentionally withheld critical information from their reports: most importantly, that independent testing performed by other laboratories, pursuant to Kilborn feasibility studies and prefeasibility studies in 1995 and 1996, indicated that the gold appearing in Bre-X’s samples was completely different, in shape, size and degree of weathering, from gold that would be found in volcanic hard-rock formations like Busang; and that tests performed by independent firms revealed that the gold in the Bre-X samples was of an origin that was not the underground hard-rock source in Busang. The Kilborn Defendants also intentionally withheld their knowledge that Bre-X’s core samples had been crushed on site in Busang, rather than being sent whole to test labs, and had languished for weeks in open bags at the Bre-X office in Samarinda and in an open warehouse in Loa Duri, Indonesia, leaving the samples susceptible to the tampering that obviously occurred.
10. Defendant Nesbitt Burns, Inc., a large Canadian stock brokerage, was a leading underwriter of Bre-X’s public stock offerings and syndicator of Bre-X’s private stock placements. Nesbitt Burns, acting through its agents, including Egizio Bianchini, regarded as a leading gold analyst, followed and analyzed Bre-X stock during the Class Period. Bianchini visited
-5- the Busang drill site and was in constant communication with and closely associated with Bre-X,
Bresea, and its top officers. As a result, Nesbitt Burns knew that verified core samples from the
Busang site had never been independently collected and independently tested, and knew that statements made by Bre-X, Bresea, and the Kilborn Defendants lacked any legitimate basis. Nesbitt
Burns made substantial profits from providing sales and brokerage services for customers purchasing
Bre-X and Bresea stock during the Class Period.
11. Defendant Lehman Brothers, Inc., a leading United States brokerage and investment firm, followed and analyzed Bre-X stock during the Class Period. Lehman Brothers, acting through its agents, including Daniel McConvey, its lead gold analyst, visited the Busang site and was in frequent communication with and closely associated with Bre-X and its top officers. As a result, Lehman Brothers knew that verified core samples from the Busang site had never been independently collected and independently tested, and knew that statements made by Bre-X and the
Kilborn Defendants lacked any legitimate basis. Lehman Brothers issued several influential and extremely positive reports concerning gold at the Busang site, commencing in November 1996, and made substantial profits from providing sales and brokerage services for customers purchasing Bre-X stock during the Class Period.
12. Defendant Barrick Gold Corporation (“Barrick”) participated in the fraud by making materially false public statements and omissions of fact about Bre-X and Busang’s gold resources. During the Class Period, Barrick was involved in extensive negotiations with Bre-X and the Indonesian Government in connection with a proposed joint venture to develop the Busang prospect. Barrick had unique access to adverse information about the Busang prospect as a result of due diligence performed in connection with the proposed joint venture, including the results of
-6- tests performed in the Fall of 1996 on core samples which revealed an absence of gold. Nevertheless,
Barrick made public statements falsely touting the gold resources at the Busang site, and indicating
that any joint venture to develop the Busang prospect would be “fair” to Bre-X shareholders. In
disseminating and failing to correct materially false public statements and omissions of fact, Barrick
acted with knowledge or in reckless disregard of the truth.
13. In short, the defendants named in this amended complaint knew or recklessly
disregarded that statements touting Bre-X’s supposed gold resources and future mine in Busang were
misleading or altogether insupportable, and intentionally avoided taking steps that would have
conveyed to regulators, Bre-X and Bresea shareholders, and the investing public the elementary
insights later reported by Jim Bob Moffett -- that Bre-X’s core samples from the Busang site had been
fraudulently adulterated through the addition of gold taken from other sources.
Jurisdiction and Venue
14. This action arises under Sections 10(b) and 20(a) of the Exchange Act, 15
U.S.C. § § 78j(b) and 78t(a), and Rule 10b-5 promulgated pursuant to Section 10(b) by the SEC, 17
C.F.R. § 240.10b-5; and state law.
15. This Court has jurisdiction over the subject matter of this action pursuant to
28 U.S.C. §§ 1331, 1337 and 1367, and Section 27 of the Exchange Act, 15 U.S.C. § 78aa.
16. Venue is proper in this District pursuant to Section 27 of the Exchange Act,
15 U.S.C. § 78aa; and 28 U.S.C. § 1391(b) and (c). Substantial acts in furtherance of the alleged fraud and/or its effects have occurred within this District.
17. In connection with the acts and omissions alleged in this complaint, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce,
-7- including but not limited to the mails, interstate telephone communications, and the facilities of the national securities markets.
Parties
Plaintiffs
18. Plaintiff Lane McNamara is a resident of this District. He purchased Bre-X common stock during the Class Period and was damaged thereby.
19. Plaintiffs, Robert McBey, John Quick, John and Marian McCarthy, and
Patricia Hunt, purchased shares of Bre-X and/or Bresea common stock during the Class Period and were damaged thereby.
20. Plaintiff Scott Wilding purchased shares of Bresea common stock during the
Class Period and was damaged thereby.
21. Plaintiff Reuven Randall Singer purchased Bre-X common stock during the
Class Period and was damaged thereby.
22. Plaintiff Melvin B. Miller purchased Bre-X common stock during the Class
Period and was damaged thereby.
23. Plaintiff Meissner Music Productions, Inc. purchased Bre-X common stock during the Class Period and was damaged thereby.
24. Plaintiff New Madras Limited Partnership purchased Bre-X common stock during the Class Period and was damaged thereby.
25. Plaintiff Alan Hirsch purchased Bre-X common stock during the Class Period and was damaged thereby.
-8- 26. Plaintiff Benjamin Kemper purchased Bre-X common stock during the Class
Period and was damaged thereby.
27. Plaintiff Deborah L. Foss purchased Bre-X common stock during the Class
Period and was damaged thereby.
28. Plaintiff Donald Lytle purchased Bre-X common stock during the Class Period and was damaged thereby.
Defendants
29. Each of the defendants named in this amended complaint is liable as a participant in a fraudulent scheme and course of business that operated as a fraud and deceit on purchasers of Bre-X and Bresea common stock, by disseminating materially false and misleading statements and/or concealing material adverse facts. The scheme: (i) deceived the investing public regarding Bre-X’s business, its resources, and properties and the intrinsic value of Bre-X’s and
Bresea’s common stock; (ii) caused plaintiffs and other members of the Class to purchase Bre-X and
Bresea common stock at artificially inflated prices; and (iii) caused damage to plaintiffs and other members of the Class, as confirmed by the plunge in the market prices of Bre-X and Bresea stock when the truth about the Busang “gold discovery” was finally revealed.
Defendant Bre-X
30. Defendant Bre-X is incorporated under the laws of the Province of Alberta,
Canada, and has its principal place of business at the Bre-X Building 119 14th Street, N.W., Calgary,
Alberta, T2N126 Canada. The Company also maintained offices in Indonesia. Bre-X purports to be in the business of acquiring, exploring and evaluating mineral properties and developing those properties, if appropriate.
-9- 31. Bre-X common stock was actively traded on the Alberta Stock Exchange at all times during the Class Period. On April 23, 1996, the stock began trading on the Toronto Stock
Exchange. On August 19, 1996, the stock was listed and began actively trading on the NASDAQ
National Market, a United States national securities exchange, under the ticker symbol “BXMNF.”
The stock started trading on the Montreal Stock Exchange in September 1996. During the Class
Period, Bre-X was registered with the SEC as a foreign issuer of its common stock and was subject to filing requirements pursuant to Section 12 of the Exchange Act, 15 U.S.C. § 78e. The stock was available for purchase and was purchased through those exchanges and markets during the Class
Period. The market for Bre-X common stock was open, well-developed, and efficient at all relevant times. As of March 29, 1996, the Company reported that it had outstanding in excess of 22 million shares of common stock (220 million shares following a 10-for-1 split effective on May 24, 1996).
(In this amended complaint, share figures are stated on a post-split basis.)
Defendant Bresea
32. Defendant Bresea is a holding company, which holds as its primary asset approximately 49 million shares of Bre-X, or approximately 25% of the Company. During the Class
Period, Bresea and Bre-X shared three out of four directors, and four officers, in common. Bresea has its headquarters at the Bre-X Building, 119 14th Street, N.W., Calgary, Alberta, T2N 126,
Canada. Bresea shares were publicly traded on the Montreal Stock Exchange under the symbol
“ME:BSR” and over-the-counter, unlisted, in the United States under the symbol “BSEAF.” During the Class Period, Bresea stock rose and fell in tandem with Bre-X stock.
The Insider Defendants
-10- 33. Defendant John B. Felderhof was, at all relevant times, Senior Vice President,
Chief Geologist, and Vice Chairman of the Board of Directors of Bre-X. In those capacities,
Felderhof received substantial compensation and other benefits from the Company. Felderhof sold
477,900 shares of Bre-X stock, worth at least Can.$33.4 million, during 1996.
34. Defendant David G. Walsh (“Walsh”) was, at all relevant times, Chief
Executive Officer, President, and Chairman of the Board of Directors of Bre-X. In those capacities,
Walsh received substantial compensation and other benefits from the Company. Walsh sold 300,000
shares of Bre-X stock, worth at least Can.$7.7 million, during 1996.
35. Defendant Jeannette Walsh (“J. Walsh”) was, at all relevant times, Secretary
of Bre-X. In this capacity, J. Walsh received substantial compensation and other benefits from the
Company. J. Walsh sold 450,200 shares of Bre-X stock, worth at least Can.$19.4 million, during
1996. J. Walsh is the wife of defendant Walsh.
36. Defendant T. Stephen McAnulty was, at all relevant times, Vice President of
Investor Relations and a director of Bre-X. In those capacities, McAnulty received substantial compensation and other benefits from the Company. McAnulty sold 245,000 shares of Bre-X stock, worth at least Can.$6.2 million, during 1996.
37. Defendant John B. Thorpe was, at all relevant times, Vice President of
Administration and Treasurer of Bre-X. In those capacities, Thorpe received substantial compensation and other benefits from the Company. Thorpe sold 60,700 shares of Bre-X stock, worth at least Can.$1.46 million, during 1996.
38. Defendant Rolando C. Francisco was, at all relevant times, Executive Vice
President, Chief Financial Officer, and a director of the Company. In those capacities, he received
-11- substantial compensation and other perquisites from the Company. Francisco sold 50,000 shares of
Bre-X common stock, worth at least Can.$1.25 million, during 1996.
39. Defendant Hugh C. Lyons was, at all relevant times, a director of Bre-X.
40. Defendant Paul M. Kavanaugh was, at all relevant times, a director of Bre-X.
41. Because of the Insider Defendants’ positions with the Company, they had access to the adverse undisclosed information about Bre-X’s business, operations, resources, business practices, finances, and present and future business prospects, as alleged in this amended complaint, via access to internal corporate documents (including the Company’s internal engineering data and reports and gold assay reports), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors meetings and committees thereof and via reports and other information provided to them in connection therewith.
42. It is appropriate to treat the Insider Defendants as a group for pleading purposes and to presume that the false, misleading and incomplete information conveyed in the
Company’s public filings, press releases and other publications as alleged herein are the collective actions of the narrowly defined group of defendants identified above. Each of the above officers and/or directors of Bre-X, by virtue of his/her high-level positions with the Company, directly participated in the management of the Company, was directly involved in the day-to-day operations of the Company at the highest levels and was privy to confidential proprietary information concerning the Company and its business, resources, operations, and practices, as alleged herein. Said defendants were involved in drafting, producing, reviewing and/or disseminating the false and misleading statements and information alleged herein, were aware (or recklessly disregarded) that false and
-12- misleading statements were being issued regarding the Company and approved or ratified these state- ments, in violation of the federal securities laws.
43. As officers and/or directors and controlling persons of a publicly held company whose common stock was registered with the SEC pursuant to the Exchange Act, traded on the NASDAQ National Market, and governed by the provisions of the federal securities laws, the
Insider Defendants each had a duty to disseminate promptly accurate and truthful information with respect to the Company’s financial condition and performance, facilities, operations, business practices, resources, management, and present and future business prospects, and to correct any previously-issued statements that had become materially misleading or untrue, so that the market price of the Company’s publicly traded securities would be based upon truthful and accurate information. The Insider Defendants’ misrepresentations and omissions during the Class Period violated these specific requirements and obligations.
44. The Insider Defendants participated in the drafting, preparation, and/or approval of the various public and shareholder and investor reports and other communications complained of herein and were aware of or recklessly disregarded the misstatements contained therein and omissions therefrom, and were aware of their materially false and misleading nature. Because of their Board membership and/or executive and managerial positions with Bre-X, each of the Insider
Defendants had access to the adverse undisclosed information about Bre-X’s resources, properties, business practices and prospects, as particularized herein, and knew or recklessly disregarded that these adverse facts rendered the positive representations made by or about Bre-X and its resources issued or adopted by the Company materially false and misleading.
-13- 45. The Insider Defendants, because of their positions of control and authority as officers and/or directors of the Company, were able to and did control the content of the various SEC filings, press releases and other public statements pertaining to the Company during the Class Period.
Each Insider Defendant was provided with copies of the documents alleged herein to be misleading prior to or shortly after their issuance and/or had the ability and opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of the Insider Defendants is responsible for the accuracy of the public reports and releases detailed herein and is therefore primarily liable for the representations contained therein.
Defendant J.P. Morgan & Co. Inc.
46. Defendant J.P. Morgan is a corporation organized under the laws of
Delaware, with its principal place of business at 60 Wall Street, New York, N.Y. 10260. J.P.
Morgan, through its subsidiaries, offers financial services to a wide range of institutional and private clients. J.P. Morgan offers loans, advises on mergers, acquisitions and privatizations, underwrites debt and equity issues, and deals in government-issued securities worldwide.
47. J.P. Morgan was retained as financial advisor to the Company in or about
September 1996. As alleged more fully below, J.P. Morgan, through its employees, including David
Neuhaus, an analyst, and Leslie Morrison and Doug McIntosh, investment bankers, issued or made false and misleading written analysis reports, recommendations, and other statements to the investing public regarding Bre-X during the Class Period, while knowing or recklessly disregarding that their contents were materially false and misleading. J.P. Morgan, particularly through its retail brokerage, finance, and investment banking operations, intended to and did profit from its association with Bre-
-14- X, but its misrepresentations and omissions operated as a fraud and deceit on purchasers of Bre-X and Bresea common stock.
48. J.P. Morgan’s duty of disclosure and liability derives from, among other things, its knowledge obtained through its position as the Company’s financial advisor and visits to
Busang where its agents Neuhaus, McIntosh, and Morrison learned that Bre-X was violating customary gold mining industry standards. As admitted by J.P. Morgan, it reviewed Kilborn’s pre- feasibility studies and feasibility studies in 1995 and 1996. Therefore, J.P. Morgan was in the possession of material, adverse facts regarding Bre-X’s purported gold discovery. J.P. Morgan knew investors would be relying on its statements and position as adviser to the Company when purchasing and/or selling Bre-X and Bresea stock. J.P. Morgan intended to and did profit from its association with Bre-X and believed that its business would benefit because of, among other reasons, investors’ access to and trading based on J.P. Morgan’s statements and reports regarding Bre-X and the potential for further business from Bre-X.
49. Because of Neuhaus’s, McIntosh’s and Morrison’s close association with Bre-
X and the Insider Defendants, Neuhaus, McIntosh and Morrison had frequent, open access to Bre-X and its top executives, and they had access to Bre-X’s internal corporate information, including the adverse information concealed by Bre-X, Bresea, and the Insider Defendants.
The Kilborn Defendants
50. Defendant P.T. Kilborn Pakar Rekayasa (“P.T. Kilborn”) is an Indonesian company headquartered in Jakarta, Indonesia. During the Class Period, P.T. Kilborn performed geostatistical analyses and mine feasibility studies, among other services, for Bre-X concerning
Busang.
-15- 51. Defendant Kilborn Engineering Pacific Ltd. (“Kilborn Engineering”) is a
Canadian corporation headquartered in Vancouver, British Columbia. During the Class Period, it was hired by Bre-X to perform geostatistical resource analyses and mine feasibility studies, among other services, for Busang.
52. Defendant SNC-Lavalin Inc. is a Canadian corporation headquartered in
Montreal, Quebec, Canada. It does business in the United States, Canada and throughout the world.
SNC-Lavalin is the ultimate parent company of Kilborn Engineering.
53. As alleged more fully below, the Kilborn Defendants provided their written resource reports to Bre-X, knowing that Bre-X and Bresea were distributing those reports and their contents to the investing public, during the Class Period. The Kilborn Defendants knew or recklessly disregarded that the reports were materially false and misleading, including because they concealed material facts as described herein. The Kilborn Defendants intentionally misrepresented and/or failed to disclose: (a) that the gold purportedly found in Bre-X’s samples was not of the shape, size and/or unweathered state of gold indigenous to volcanic hard-rock deposits, which was the type purportedly found in Busang; (b) that after Bre-X’s samples were extracted they sat for weeks unsupervised at the Bre-X offices in Samarinda and in open bags in a warehouse in Loa Duri, Indonesia, thereby compromising the security and integrity of the samples; and (c) that when Kilborn finally sent samples for independent mineralogical studies in 1995 and 1996, to Normet, Pty. Ltd. (in Australia), Hazen
Research Inc. (in Colorado), and Roger Townend & Associates (in Australia), it did not reveal or disclose the results, which, among other findings, showed that the gold extracted from the Bre-X samples did not have the geological characteristics that would be evident if the gold had actually been extracted from the Busang site.
-16- 54. The Kilborn Defendants’ duty of disclosure and liability derives from, among other things, their knowledge that Bre-X and Bresea were distributing the assay studies and methodologies of the Kilborn Defendants to the investing public and that investors would be relying on the statements made therein when purchasing and selling Bre-X and Bresea stock. The Kilborn
Defendants intended to and did profit from their association with Bre-X and believed that their business would benefit because of, among other reasons, investors’ access to their statements and reports regarding Bre-X and the potential for further business from Bre-X.
Defendant Nesbitt Burns
55. Defendant Nesbitt Burns, Inc. is a Toronto-based corporation organized under the laws of Canada. Its head office is located at 1 First Canadian Place, P.O. Box 150, Toronto,
Ontario, Canada, M5X 1H3. Nesbitt Burns is a subsidiary of the Bank of Montreal, Canada’s third- largest bank. Formed as the result of the 1994 merger between Nesbitt Thomason, Inc. and Burns
Fry Ltd., Nesbitt Burns claims to be Canada’s largest full-service investment firm and to have the largest distribution network across Canada. As such, Nesbitt Burns wields significant market clout and influence. Due to its position and reputation, an endorsement by Nesbitt Burns can lend instant legitimacy to otherwise obscure companies. Nesbitt Burns reported record profits in 1996 of $150 million, up from $53 million in 1995.
56. As alleged more fully below, Nesbitt Burns profited directly from its relationship with Bre-X and Bresea. It acted as an agent for Bre-X during 1996 by assisting Bre-X in raising $30 million of capital through a private placement of Bre-X stock. It also directly profited from its relationship with Bre-X as a market maker in Bre-X common stock. In addition, Nesbitt
-17- Burns attempted to profit, and did profit, indirectly from its relationship and coverage of Bre-X, as set forth elsewhere herein.
57. Egizio Bianchini is a Nesbitt Burns senior analyst. At all relevant times, he acted as an agent of Nesbitt Burns, which is responsible for his conduct. Nesbitt Burns is a controlling person of Bianchini within the meaning of § 20(a) of the Exchange Act.
58. Bianchini specializes in analysis and recommendation of the stocks of gold- mining companies. For much of the Class Period, Bianchini was recognized as Canada’s top-ranked gold analyst. Considered one of Bre-X’s most ardent and influential cheerleaders, Bianchini was credited with giving Bre-X its initial credibility and luster, beginning as early as September 1995 when
Bianchini first issued a “buy” recommendation for Bre-X common stock. In part due to his constant and enduring hype of Bre-X stock, Bianchini was given unparalleled access to Bre-X management and the remote Busang site. Starting in late 1995, Bianchini personally visited the site on several occasions, talking with Bre-X geologists and observing the procedures used at the assay lab where the tests on Busang core samples were conducted. Bianchini was given a private tour of the Busang site by Bre-X’s lead geologists, Felderhof and the deceased Michael de Guzman, and he made a videotape during one visit. He became such a favorite of Bre-X that his research reports were often posted on Bre-X’s internet site. Bianchini’s reports and recommendations were so glowing that Bre-
X began to refer to one portion of the Busang site, purportedly containing significant gold mineralization, as “the Bianchini zone.”
59 Nesbitt Burns, through Bianchini, issued materially false and misleading research reports and public comments concerning Bre-X during the Class Period, which operated as a fraud and deceit on purchasers of Bre-X and Bresea common stock. Nesbitt Burns knew that,
-18- because of its resources and reputation, investors and the investment community in general would credit and rely on its research reports and other public statements regarding Bre-X and Busang when making purchase and/or sale decisions for Bre-X and Bresea common stock. Moreover, Nesbitt
Burns intended to benefit and profit, and did benefit and profit, from its association with and ties to
Bre-X. Nesbitt Burns believed that its business would benefit from its coverage and touting of Bre-X stock, through making a market in the stock and providing investment banking services to Bre-X itself. Specifically, Nesbitt Burns attempted to exploit and capitalize on the early “success” experienced by the increasing price of Bre-X common stock, with Bianchini in particular attempting to increase his prestige, power and client base by taking credit as the person who essentially
“discovered” Bre-X.
60 During the Class Period, Nesbitt Burns distributed its written analyses, recommendations and other statements to the investing public while knowing or recklessly disregarding that their contents were materially false and misleading because they failed to disclose certain material facts as set forth herein. Nesbitt Burns’s duty of disclosure and liability derives from, among other things, knowledge obtained by Bianchini’s visits to Busang, where he learned that Bre-X was violating customary gold mining industry standards, and by review of independent reports illustrating the fundamental inconsistencies regarding the nature of the gold purportedly discovered in Busang. Nesbitt Burns knew investors would be relying on its statements when purchasing and/or selling Bre-X and Bresea stock. Nesbitt Burns intended to and did profit from its association with
Bre-X and believed that its business would benefit because of investors’ access to and trading based on its statements and reports regarding Bre-X.
-19- 61 Nesbitt Burns had a duty to ascertain that it possessed a reasonable basis for the statements, recommendations and predictions it made regarding Bre-X. The reports and statements issued by Nesbitt Burns with respect to Bre-X, however, while purporting to be disinterested and objective professional investment analyses based on in-depth current research, were in reality substantially false and misleading. Nesbitt Burns knew and/or recklessly disregarded the falsity of those statements.
62 By incorporating into its own reports and statements the descriptions offered by Bre-X management regarding the purported gold discovery at the Busang site, Nesbitt Burns willingly provided Bre-X and Bresea with a necessary component of a successful fraud that they could not provide themselves: a stamp of credibility and legitimacy. Due to the benefits and profits expected by Nesbitt Burns from the Bre-X situation, however, Nesbitt Burns undertook activity and conduct that made it an integral participant in perpetrating the fraud.
Defendant Lehman Brothers, Inc.
63 Defendant Lehman Brothers, Inc. is a corporation organized under the laws of Delaware with its principal place of business at 3 World Financial Center, New York, N.Y. 10285.
Lehman Brothers is engaged in the business of investment banking and other financial services.
Lehman Brothers serves a wide range of clients, including institutional, corporate, governmental and individual clients and customers.
64 As described more fully below, Lehman Brothers issued false and misleading research reports on Bre-X which operated as a fraud or deceit on purchasers of Bre-X and Bresea common stock during the Class Period. Lehman Brother participated in this scheme to enhance its
-20- retail brokerage business. Lehman Brothers made a market in Bre-X securities during the Class
Period.
65 In disseminating those false reports, Lehman Brothers acted with knowledge or in reckless disregard of the truth. In connection with participating in offerings of the Company’s securities, Lehman Brothers conducted due diligence investigations of Bre-X. In addition, the
Lehman Brothers analyst who authored most of the false research reports, Daniel R. McConvey, had access to information revealing the true conditions at the “gold” mine at Busang. Experienced in geology, McConvey had been the comptroller of Barrick Gold Corp. for six years prior to joining
Lehman Brothers. He visited Busang in June or July of 1996 and had access to the Company’s engineers, assayers, and other employees and contractors, where he learned or recklessly disregarded the fact that Bre-X was violating gold mining industry standards and customs. Furthermore, he communicated with his former employer, Barrick Gold, which had conducted sample testing of
Busang in the fall of 1996 and learned of its negative test results of samples taken from Busang.
66 During the Class Period, Lehman Brothers distributed its written analyses, opinions, and other statements to the investing public while knowing or recklessly disregarding that their contents were materially false and misleading because they failed to disclose certain material facts, as set forth herein. Lehman Brothers’s duty of disclosure and liability derives from, among other things, its knowledge obtained through McConvey’s visits to Busang, communications with
Bre-X and Barrick Gold, and its participation in the Bre-X securities offerings. Lehman Brothers knew or recklessly disregarded that investors would rely on its statements when purchasing and/or selling Bre-X securities. Lehman Brothers intended to and did profit from its association with Bre-X, and believed that its business would benefit from distributing its reports about Bre-X to investors.
-21- 67 Because of McConvey’s close association with Bre-X, Bresea, and the Insider
Defendants, McConvey had frequent, open access to Bre-X’s internal corporate information, including the adverse information concealed from the public investors by Bre-X, Bresea, and the
Insider Defendants.
Barrick
68 Defendant Barrick is incorporated under the laws of the Province of Ontario,
Canada, and has its principal place of business at Royal Bank Plaza, South Tower, Suite 2700, 200
Bay Street, P.O. Box 119, Toronto, Canada M5J2J3. Barrick purports to be in the business of
mining and producing gold.
69 During the Class Period, shares of Barrick stock were actively traded on
various exchanges, including the New York Stock Exchange. Barrick was registered with the SEC
as a foreign issuer of its common stock and was subject to filing requirements pursuant to Section
12 of the Exchange Act, 15 U.S.C. § 78e.
70 As more fully detailed herein, Barrick was involved in extensive negotiations
with Bre-X and the Indonesian Government in connection with a proposed joint venture to develop
the Busang prospect. Barrick had unique access to adverse information about the Busang prospect
as a result of due diligence performed in connection with the proposed joint venture, including the
results of tests performed in the Fall of 1996 on core samples revealing an absence of gold.
Nevertheless, defendants made public statements falsely touting the gold resources at the Busang site.
In disseminating those false public statements, defendants acted with knowledge or in reckless
disregard of the truth.
-22- 71 Barrick’s duty of disclosure and liability derives from, among other things, its
knowledge of adverse test results obtained from core samples taken by Bre-X at Busang. Barrick
knew that investors in Bre-X and Bresea would rely on both its statements and its position as a
proposed joint venture partner of Bre-X when purchasing and/or selling Bre-X and Bresea stock.
Barrick intended to profit from its relationship with Bre-X and believed that its business and the
market price of its stock would benefit as a result of their positive public statements about Busang
and Bre-X.
72 Barrick is liable as a participant in a fraudulent scheme and course of business
that defrauded purchasers of Bre-X and Bresea common stock. Barrick disseminated materially false
and misleading statements and/or concealed material adverse facts. The scheme had the following
objectives: (i) to deceive the investing public regarding Bre-X’s business, resources, properties, and
the intrinsic value of Bre-X’s and Bresea’s common stock; (ii) to cause plaintiffs and other members
of the Class to purchase Bre-X and Bresea common stock at artificially inflated prices; and (iii) to cause damage to plaintiffs and other members of the class, as confirmed by the plunge in the market prices of Bre-X and Bresea stock when the truth about the Busang gold “mine” was finally revealed.
Class Action Allegations
73 Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf of a Class, consisting of persons who purchased or otherwise
acquired Bre-X common stock and/or Bresea common stock between January 17, 1994, through May
2, 1997, inclusive (the “Class Period”), and who were damaged thereby. Excluded from the Class
are defendants, members of the immediate family of each of the Insider Defendants, any subsidiary,
-23- affiliate, or employee of any defendant, or any entity in which any excluded person has a controlling interest, and the legal representatives, heirs, successors and assigns of any excluded person.
74 The members of the Class are so numerous that joinder of all members is impracticable. While the exact number of Class members is unknown to plaintiffs at this time and can only be ascertained through appropriate discovery, plaintiffs believe that there are thousands of members of the Class located throughout the United States and Canada. As of March 20, 1996, there were reportedly more than 22 million shares of Bre-X common stock outstanding (pre-May 24, 1996
10-for-1 split) and more than 65 million shares of Bresea common stock issued and outstanding.
Throughout the Class Period, Bre-X and Bresea common stock were actively traded on several public markets. Record owners and other members of the Class may be identified from records maintained by Bre-X and/or Bresea and/or their transfer agents and may be notified of the pendency of this action by mail, using a form of notice similar to that customarily used in securities class actions.
75 Plaintiffs’ claims are typical of the claims of the other members of the Class as all members of the Class were similarly affected by defendants’ wrongful conduct in violation of federal law and state law that is complained of herein.
76 Plaintiffs will fairly and adequately protect the interests of the members of the
Class and have retained counsel competent and experienced in class and securities litigation.
77 Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are:
i whether the federal securities laws or related state law were violated by defendants’ acts and omissions as alleged herein;
-24- ii whether defendants participated in and pursued the common course of conduct complained of herein;
iii whether documents, press releases, and other statements disseminated to the investing public and the Company’s and Bresea’s shareholders during the Class Period misrepresented material facts about the business, resources, properties, financial condition, value, and prospects of Bre-X and/or Busang;
iv whether statements made by defendants to the investing public and the Company’s and Bresea’s shareholders during the Class Period misrepresented and/or omitted to disclose material facts about the business, resources, operations, business practices, value, and prospects of Bre-X and/or Busang;
v whether the market prices of Bre-X and Bresea common stock during the Class Period were artificially inflated due to the material misrepresentations and failures to correct the material misrepresentations complained of herein; and
vi to what extent the members of the Class have sustained damages and the proper measure of damages.
78 A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual Class members in some instances may be relatively small, the expense and burden of individual litigation make it impossible for members of the Class to individually redress the wrongs done to them. There will be no difficulty in the management of this suit as a class action.
Factual Allegations
A. Company Background Prior to the Class Period
79 Walsh founded Bre-X in 1988, after leaving his position as a stock broker, and began operations out of the basement of his home. Although Bre-X began trading on the Alberta
Stock Exchange in July 1989, its operations soon languished, as Walsh was unable to secure sufficient
-25- funding for exploration of the various mineral claims acquired by the Company. As a result, Walsh spent most of 1992 and 1993 in personal bankruptcy.
80 In 1993, Walsh paid $80,000 for mineral rights to 475,000 acres near Busang, a rain forest and rugged mountain area on the Island of Borneo, which is located in the East
Kalimantan province of Indonesia.
81 Busang consisted of three properties -- Busang I (Central Zone), in which
Bre-X purportedly acquired an 80 percent interest; Busang II (Southeast Zone), in which Bre-X purportedly acquired a 90 percent interest; and Busang III (Northwest Zone), in which Bre-X purportedly acquired a 90 percent interest. Bre-X announced its acquisition of an 80 percent interest in the Central Zone property in a press release dated July 19, 1993. That press release also announced commencement of a drilling program that would delineate the potential productivity of
Busang, “which is believed to contain an open pittable resource of 20 million tonnes @+2 gm/tonne gold (1,000,000 ounces of gold).”
82 Thereafter, defendants embarked on a scheme and course of conduct to condition the market to believe that Busang was one of the richest gold fields ever discovered and that Bre-X’s profits from the gold discovery would be enormous. Defendants also deceived the market by claiming immense ownership and exploration rights to Busang. Defendants’ scheme was marked by continuing publication of ever increasing amounts of gold purportedly discovered in
Busang. Based on this scheme, during the Class Period, the price of Bre-X shares rose from pennies to a high of $250(Can.) per share (before a 10 for 1 split). The price rise of Bresea stock was equally steep.
-26- 83 At all times relevant to this action, defendants publicly (and falsely) represented, through company press releases, reports to investors, statements to reporters, and other public communications or documents, that: (i) Bre-X owned 80-90% of Busang, when they knew that such representations were false and misleading, as they were later forced to acknowledge; (ii) that significant amounts of gold were located at Busang; and (iii) that Busang would support a world-class mine of extraordinary profitability. Such statements could not have been further from the truth.
Defendants purchased and sold Bre-X stock with knowledge that the public and market were unaware of the false, misleading, incomplete and unreliable nature of Bre-X’s ownership interests, of the purported gold resources, and of the future mine profits.
Barrick’s Need for More Gold Reserves
84 Barrick had a pressing need to participate in Busang. Since its inception,
Barrick represented that it was one of the fastest growing gold producing companies in the world.
Barrick’s predecessor company, American Barrick Resources Corp., was formed in 1983. During the next decade, Barrick enjoyed extraordinary growth through a strategy predominantly based on acquisitions. The market reacted favorably to Barrick’s success, as Barrick’s stock price rose from a low of $13.63 per share on January 18, 1993 to a high of $32.13 on February 6, 1996.
85 In the summer of 1993, American Barrick Resources Corp. was involved in discussions with Bre-X regarding pursuing a joint venture to develop and mine Busang. Bre-X had sought to obtain additional financing to enable it to explore and develop the Busang prospect. On
January 24, 1994, American Barrick Resources Corp. offered to acquire a stake in Bre-X and secure property joint venture options. However, Barrick and Bre-X were unable to arrive at an agreement.
-27- As a result, Bre-X discontinued its search for a partnership with a major mining company to develop
the site, but Barrick remained interested in acquiring rights to Busang.
86 By 1995, Barrick, who had become one of the largest gold producing
companies in the world, faced severe pressures to increase and maintain reserve levels and production
rates. In response, Barrick embarked on a campaign to preserve its public image as a growing
company that would dominate the gold producing industry. To accomplish its goal, Barrick launched
an aggressive program in 1995 to locate highly prospective geological targets that were relatively
unexplored.
87 Barrick also began to make public statements emphasizing its growth and
stressing the success of its program. In its 1995 Annual Report, dated February 29, 1996, Barrick
represented that it was the third largest and most profitable gold producer in the world, and the
world’s leading gold producer outside of South Africa. The 1995 Annual Report stated:
[Barrick] now ranks as the world’s most profitable producer outside South Africa. Today gold reserves exceed 43 million ounces and annual production is over 3 million ounces. Barrick has 10 producing mines and two mines in development, one of which will enter production late in 1996. Through an aggressive development program, the Company is building a strong and growing presence in North and South America, Asia and West Africa. . . .
First Barrick became the leading gold company in North America. Now we are expanding our frontiers. We have the people, the financial strength and the corporate culture to excel worldwide.
88 In the same report, Barrick also emphasized that it had “succeeded in producing record earnings and cash flow.” Stressing its competitive edge, Barrick proclaimed: “We are proud to report that no other company in the gold industry makes more money for its shareholders than Barrick.” Nevertheless, Barrick also admitted that it continued to face pressure
-28- to increase reserve levels, stating that it was pursuing its aggressive program to locate new prospects and acquisition targets. In his letter to shareholders accompanying the Annual Report, Barrick CEO
Peter Munk pledged that “our new development program . . . will firmly secure Barrick’s position of dominance among gold companies.” By the summer of 1996, Barrick was desperate to obtain an interest in Bre-X and its widely-heralded discovery at Busang in order to achieve its publicly stated goals of increasing its reserves and becoming the predominant gold producing company in the world.
B. Materially False And Misleading Statements and Omissions Issued During The Class Period
89 Beginning on January 17, 1994, Bre-X made positive statements to the investing public about the size, magnitude, nature, and extent of the gold deposits in the Busang properties. On that date, Bre-X publicly announced that drilling in Busang revealed significant assay results with favorable gold mineralization.
90 Subsequent to that announcement, Bre-X issued a series of press releases that described the results of drilling in Busang in positive terms. For example, on January 19, 1994, Bre-
X announced the results of six newly drilled holes. Bre-X billed the holes as “the highest grade reported to date and for the first time a drill hole location map is made available for the asking.” The press releases announced ever-increasing calculations of gold resources in the Central Zone. During this time, Bre-X also announced that it had expanded its drilling program into the Southeast Zone.
91 These statements were false and misleading because at all relevant times,
Busang contained insignificant amounts of gold. Furthermore, as reported by Strathcona Mineral
Services Limited, an independent engineering firm (retained during the final weeks of the Class
Period), there was “virtually no possibility of an economic gold deposit in . . . Busang property” and
-29- “the gold recovered in samples submitted by Bre-X ‘has originated from a source other than the
Southeast Zone of the Busang Property’” and “resulted in falsification of many thousands of samples.” Accordingly, these assay results were most likely the result of fraud -- most likely through the fraudulent “seeding” or “salting” of the assay results.
92 On March 25, 1994, Bre-X announced that the first of a ten-hole drill program at the Busang site “returned economic gold mineralization from 33 feet to 99 feet over a continuous intercept of 66 feet, averaging 0.12 ounces a ton, including a 40-foot interval averaging 0.19 ounces a ton.”
93 On or about April 13, 1994, Bre-X issued a press release reporting additional drill results from the Central Zone. In the press release, Walsh compared Busang to the Kelian Mine.
He stated: “It is noteworthy that our grades to date are significantly higher than the Kelian Mine old deposit which contains a resource of 5M oz Au located 200 km southwest of Busang.”
94 On June 27, 1994, Bre-X reported that two holes drilled in a new area returned encouraging results (2 to 4 grams per ton (“g/t”) gold over 5 meters) and announced that a program was undertaken to drill 25 new holes on the main Busang zone.
95 On or about September 20, 1994, Bre-X issued a press release announcing a
“significant update from three Indonesian mineral projects.” According to Bre-X, 22 of the 31 drill holes completed at Busang intersected “significant widths of gold mineralization.” In an interview from the Company’s Jakarta office, defendant Felderhof stated: “We are confident that an open pittable resource ranging between 30 million ton to 60 million ton at an average grade better than 3g
Au/t . . . can be attained at Busang.” Felderhof’s representation, if true, would have translated to 3 to 6 million ounces of gold.
-30- 96 On November 21, 1994, the Company announced that additional drilling had returned “significant” results at the Busang site, including “significant minable widths of gold mineralization.” A Dow Jones news report dated November 24, 1994 quoted defendant Walsh as stating “[w]e reckon that we’ll have a drill-indicated reserve of two to two-and-a-half million ounces by year end.” The news report continued:
Completed drill results to 150 meters below surface at Bre-X’s Busang property on the Indonesian island of Borneo indicate a gold reserve of about 1.5 million ounces of gold, Walsh says. Current deeper drilling results “are proving to ourselves that there’s another million ounces at 150 to 300 meters,” he says. “So we’ll have one super open pit.”
Walsh says the grade of the gold is about three grams, or 0.09 ounce, per metric ton, and Bre-X’s break-even level when production begins is about 1 gram per tonne.
Walsh says he believes further drilling next year will indicate more gold reserves at Busang. “We intend to have two rigs drill off another kilometer, another two-and-a-half million ounces” by the fall of 1995 he says. The surface mineralization of the areas to be drilled next year is identical to what the company is currently drilling, Walsh says. “If everything goes according to plan, we would be confident of five million ounces by this time next year, at which time we go into a feasibility study,” which will take six months, he adds.
97 On or about August 14, 1995, Bre-X engaged Kilborn to perform resource calculations and mining feasibility studies for Busang. In all subsequent resource calculation announcements, Bre-X specifically identified Kilborn, with Kilborn’s full knowledge, cooperation, and consent, as the party performing the calculations.
98 Each and every one of defendants’ stream of positive statements concerning the magnitude of the gold resources present at Busang after August 14, 1995, were materially false and misleading, at the time they were made, because, inter alia:
-31- (a) The resource calculations were not based on the industry-accepted method for sample testing. The accepted method for testing mineral samples involves, among other things, extracting a core sample and then splitting it into two half-samples: one half of the sample is tested while the remaining half is preserved for future reference. This split sample testing is the accepted standard used throughout the mining industry because it insures accurate results by permitting further cross-analysis of the remaining sample. Bre-X, however, did not employ split sample testing, and all defendants knew this. Rather, the Company used a method in which it crushed each 2-metre length of core, in some instances on the base camp site. The sample was almost completely exhausted through the testing process, leaving inadequate or no remains for independent analysis to confirm initial results. Furthermore, the Kilborn Defendants would have needed portions of the whole samples to do grindability and other metallurgical tests as part of their feasibility studies.
(b) Furthermore, to ensure integrity of the gold ore samples after they are extracted and logged by geologists, it is customary to place the samples in numbered plastic bags that are sealed and dispatched as quickly as possible to an independent laboratory for assaying. This is done to minimize tampering. Bre-X did not follow this procedure. To the contrary, according to
Bre-X workers, Bre-X took its time with its samples. Sometimes the rock samples from Busang sat for weeks in open bags at the Bre-X offices in Samarinda and its warehouse in Loa Duri, Indonesia.
Furthermore, often geologists and metallurgists working for Bre-X blended the pulverized rock samples with reddish, white and gold-colored powders. According to the Strathcona report issued at the end of the Class Period, “We can only suggest that somewhere en route, probably at
Samarinda, there has been a ‘laboratory’ or facilities established that have allowed very precise additions of the foreign gold.”
-32- (c) When the Kilborn Defendants finally sent samples of ore purportedly extracted by Bre-X from Busang for independent mineralogical studies in 1995 and 1996, to Normet, Pty. Ltd.
(in Australia), Hazen Research Inc. (in Colorado), and Roger Townend & Associates (in Australia), they did not reveal or disclose the results, which were inconsistent with the geological nature of the purported Busang deposit. According to Strathcona (after the Class Period), “Although one could expect to see such exceptional recoveries in a gravity circuit for material coming from an alluvial deposit, we have never before seen such a response for material coming from a primary deposit [such as Busang was represented to be].” These reports were not disclosed to the public by the defendants.
(d) The gold found in Bre-X’s samples was alluvial in nature, not from a primary deposit. Thus, for example, the gold was mainly in grains 0.1 to 0.4 mm in diameter. Gold from volcanic hard-rock deposits -- like the type that would have been found in Busang -- is usually much smaller. Furthermore, the gold which Bre-X purportedly discovered did not have a wiry or fibrous shape typical of volcanic hard-rock deposits, but was round, beaded and oxidized, suggesting that the grains had been abraded and weathered. Round, beaded and weathered gold is usually found in streams. According to Strathcona (after the Class Period), “[w]ith the very coarse liberated gold of up to 400 microns reported in this study, one would have expected to see visible gold somewhere in the many thousands of metres of drill core from Busang. However, there is no mention of visible gold in any of the documentation that we have seen with the Kilborn feasibility study or resource estimate, or in the drill logs prepared by Bre-X geologists, other than in the mineralogical studies done on the concentrate samples.”
(e) No gold was found in unadulterated samples. As stated in a comprehensive petrographic report prepared for Bre-X and the Kilborn Defendants in 1996 by PetraScience
-33- Consultants Inc. (“PetraScience”) of Vancouver, Canada, in which PetraScience reviewed the characteristics of alteration and mineralization from 103 samples from Busang, “Gold is assumed to occur dominantly as free grains,” but “no unequivocal gold was observed in this study, either as grains or in other studies.” This study was not disclosed by defendants to the public. Commenting on this study after the Class Period, Strathcona stated that: “It is again remarkable that in a deposit where so much coarse gold has been observed in samples submitted for assaying that none was observed in the 103 samples that were selected to represent the full range of rock types and associated alteration in the Busang deposit.”
(f) In short, at all relevant times, Busang contained insignificant amounts of gold.
As reported by Strathcona, there was “virtually no possibility of an economic gold deposit in the .
. . Busang property” and “the gold recovered in samples submitted by Bre-X ‘has originated from a source other than the Southeast Zone of the Busang Property’” and “resulted in falsification of many thousands of samples.” Accordingly, these assay results were the result of fraud -- most likely through the “seeding” or “salting” of the assay results.
99 On February 22, 1995, Bre-X announced .97 million ounces of gold had been discovered at Busang at a cut-off grade of 1 g/t and 1.07 million ounces of gold at a cutoff grade of
15 g/t.
100 On April 12, 1995, Bre-X reported continuing positive gold results. Bre-X stated, “[w]ith more gold mineralization being encountered than anticipated, an additional 1,500m
(4920 ft) of drilling is required over the Central Zone” and “results from the first infill holes BRH-63,
-64 and -65 from the eastern end of the Central Zone are extremely encouraging.”
-34- 101 On May 10, 1995, defendants Walsh and Felderhof were interviewed and stated: “[b]y October this year the Company anticipates being in position to announce 6 to 8 million ounces gold in several reserve categories from the Central and Southwest Zones.”
102 Bianchini’s cheerleading for Bre-X began in September 1995, when he first issued his prestigious “Buy” recommendation for the stock. Due to his position as Canada’s top- ranked gold analyst at the time, Bianchini’s opinions and recommendations carried a great weight in the investment community.
103 By October 17, 1995, Bre-X stock had risen to $18.25 per share. That day,
Bre-X publicly announced the results of drilling in the Southeast Zone, and an updated calculation of resources in the Central Zone. According to defendants, the Central Zone contained in excess of
2.75 million ounces of gold. However, Felderhof indicated that the Southeast Zone had the potential to possess even greater amounts of gold than the Central Zone, stating that the Central Zone “pales in comparison” to the potential of the Southeast Zone. Touting the size of gold deposits in the
Busang properties, he stated that “the Busang project in its entirety has the potential of becoming one of the world’s great gold orebodies.” The news release reported the ownership of the Southeast
Zone as 90% by Bre-X and 10% by the Indonesian government and the Central Zone as 80% by Bre-
X and 20% by the Indonesian government.
104 Bre-X’s statements regarding its ownership interest in Busang were false and misleading at the time they were made. As defendants have admitted, the Company’s prior statements that it owned 90% of Busang were “never practical reality” and that investors and others
“mistakenly thought that we somehow owned 90% of this property” and that the Company “never imagined it would be able to hold onto 90 per cent of the deposit.”
-35- 105 The next day, October 18, 1995, McAnulty told Reuters he was comfortable with estimates that Busang could contain more than 30 million ounces of gold.
106 On November 1, 1995, Bre-X issued a statement addressing the sharp rise in the Company’s stock. According to a Dow Jones news report of the same date, “the company suggested the rise might be related to investor enthusiasm over assay results from the Busang deposit released two weeks ago.”
107 Sparked by the announcement that the Central Zone contained 2.7 million ounces of gold, Bre-X shares soared $5 3/4 to a new 52 week high of $29 1/4.
108 On November 20, 1995, Bre-X reported results from eight additional drill holes on the Southeast zone: “two missed; six return excellent results.”
109 In a report issued by Nesbitt Burns on December 8, 1995, Bianchini stated:
Our recent visit to [Bre-X’s] Busang property confirmed our view the
deposit will likely grow to become one of the largest gold deposits in
the world. The first observation we made was the ability of the
geologists on site to visually inspect the core and be able to accurately
judge high grade from low grade. This is important for future
releases. We are also very impressed by the quality of the ground
work and of the assay lab in Balikpapan.
When Nesbitt Burns made this statement, Bre-X shares were trading at $53.50, and Nesbitt Burns set a twelve month target price for Bre-X shares of $70.
110 These statements were false and misleading at the time they were made because, among other things, Nesbitt Burns misrepresented and/or failed to disclose material adverse
-36- facts obtained, from among other sources, through visits to Busang where it learned that Bre-X was violating customary gold mining industry standards.
111 On or about December 15, 1995, Bre-X issued a year-end update on mineral properties in Indonesia. Regarding Busang, defendant Felderhof stated that “[t]he Busang Deposit is very likely to become a gold mine of elite world class status. Our current objective is to drill out
30 million ounces by early fall 1996.”
112 In its Annual Report for 1995, Bre-X outlined ownership for Busang as follows: Central Zone - 80% Bre-X, 20% Indonesian; Southeast Zone - 90% Bre-X, 10%
Indonesian; and Busang III (Northwest Zone) - 90% Bre-X, 10% Indonesian. The Annual Report also quotes generously from press sources that describe Busang as a world class deposit. The Report also states:
Surface exploration and drilling results to date have confirmed the Southeast Zone as the most favorable gold rich zones, with economic grade mineralization at Southeast Zone I drilled along a 3.5 km strike length, over width of 50 to 625m and 490m vertical extent. Total potential composite length of the three zones is 14km over composite widths of 100 to 700m. Geostatistical calculations for the Central Zone and Southeast Zone I, based upon 42,000 m (1995) of drilling data and results to date, indicate an open-pittable in-situ resource in excess of 30 million ounces averaging 3 grams per ton.
***
The objectives set approximately 30 months ago by David Walsh and John Felderhof of building BRE-X into a major presence in the world of mining are rapidly unfolding. With initial limited financial resources, followed by two relatively small equity financings during 1994 and 1995, your Company is on the threshold of proving up the world’s largest gold deposit ever to be discovered.
113 In total, during 1995, as a result of defendants’ misleading statements, Bre-X’s stock price rose from $2.85 to $53.
-37- 114 For the same period, Bresea stock rose from $1.40 as high as $55, at which time its shareholders approved a 10-for-1 split. Bresea stock closed at $5.62 for the year.
115 A Bre-X press release dated January 15, 1996 reported results from five additional drill holes from the Southeast Zone of Busang. Defendant Felderhof touted the seemingly positive results of the tests stating: “A resource of 30 million ounces [at Busang] can be readily attained in view of the recent results and visuals of the outstanding four holes.” The 30 million ounce resource, if true, would have put Busang in the top four largest gold finds in the world. In fact, the world’s largest gold deposit is the Grasberg copper and gold mine of Freeport in Indonesia, which holds 51 million ounces.
116 On or about February 20, 1996, Bre-X announced an updated resource calculation, including an initial calculation by the Kilborn Defendants for the Southeast Zone, pegging the total indicated and inferred gold resource for Busang at over 15 million ounces. According to
Bre-X, “[g]eostatistical analyses and resource calculations for the Southeast Zone 1 . . . confirmed and outlined significant mineralization.” These results, as calculated by the Kilborn defendants, were represented to be based on accepted geological principles, as issued by the U.S. Bureau of Mines and the U.S. Geological Survey. Company officials continued to state publicly that 30 million ounces of gold were readily attainable.
117 On February 21, 1996, Nesbitt Burns stated:
We are increasing our estimate of total resources on the Busang
property to 42.6 million ounces. As a result we are increasing our 12-
month target price to $180 per share and our 18-month target price
to $220 per share. In our view, the Busang discovery represents one
-38- of the most prolific and soon-to-be-profitable gold discoveries over
the past 20 years.
118 In March 1996, Nesbitt Burns acted as co-agent in a private placement of
250,000 shares of Bre-X common stock priced at $120 per share.
119 Also in March 1996, Nesbitt Burns released a research report on the gold mining industry, which contained a company profile on Bre-X prepared by Bianchini. In the report,
Bianchini continued to tout and legitimize Bre-X, stating that Bre-X “has had spectacular success on its Busang project. . . . Despite its relative youth, the company’s technical expertise is first class.”
Bianchini went on the increase his target price for the stock, basing the increase on a total resource estimate raised to 42.6 million ounces of gold. To ensure there was more room for the hype to run, however, Bianchini stated: “our estimate does not include any mineralization which may be contained on the Southeast zone #3 or on section lines greater than 69 on the Southeast zone #1. Also, it does not included any mineralization below the 300 metre level or mineralization between Southeast zone
#1 and Southeast zone #2.” Bianchini concluded the Nesbitt Burns report proclaiming “Bre-X is destined to become one of the largest producers in our sector.”
120 Furthermore, according to The Financial Post (May 7, 1997), in a report
Bianchini issued in early 1996, wherein he raised his 18 month target for Bre-X stock to $225,
Bianchini made one of his most astonishing pronouncements regarding Busang: “I know for a fact there’s more gold. I’ve seen it.”
121 In the spring of 1996, Walsh and other Bre-X officials continued to represent that Bre-X owned 90% of Busang. For example, responding to reports that its Indonesian partner
-39- had changed its ownership interest, Bre-X issued a press release on or about March 6, 1996, stating that it was not aware of any such change and, in any event, “Bre-X has a 90% interest.”
122 Responding to criticism regarding Bre-X’s testing methods, in a press release dated March 28, 1996, Felderhof vigorously defended the methods employed by Bre-X:
Responding to questions regarding recent press concerning assay
methods employed by Bre-X on core sampling at Busang, John
Felderhof, Senior Vice President, in an interview from Jakarta, stated
“A little knowledge can be more dangerous than none at all on any
subject. I strongly suggest that those individuals commenting on the
reliability of the cyanide leach assay method go back to school. I do
not have the time to educate them on the various grade determination
methods for gold commonly used on a global basis in the mining
industry.”
Defendants then represented that the assay methods employed by Bre-X actually understated the resources present:
In addition, metallurgical testwork conducted by internationally recognized Kilborn Engineering, as part of their recently completed prefeasability study on Busang, resulted in their determining that Bre- X’s current and previously reported gold assay results are in fact understated by as much as 12.9%.
123 The March 28, 1996, press release also stated, in relevant part:
Bre-X. . . is pleased to announce that all four of its applications for 6th Generation Contracts of Work (COW) lodged with the Government of Indonesia have been initialed jointly by the Indonesian Department of Mines and Energy, Bre-X Minerals Ltd., and Bre-X’s Indonesian partner. Despite the fact that the 6th Generation COW provides the foreign company (Bre-X) the opportunity to retain a
-40- 100% interest in each project, [Bre-X’s] Indonesian partner was invited into each contract area selected by Bre-X’s technical team. The partner’s interest in each case is free carried to the production stage, and is fixed as to percentage.
The COW’s referenced above are as follows:
1) Busang II (Southeast Zones) East Kalimantan (90% Bre-X - 10% Indonesian)
2) Busang II (Northwest Block) East Kalimantan (90% Bre-X - 10% Indonesian)
124. On March 31, 1996, Felderhof described Busang as a “monster.” Another
Bre-X spokesman estimated “30 million, plus, plus, plus.”
125. A Bre-X press release dated April 4, 1996 reported that as a result of additional testing, “Bre-X’s technical team remains confident that 30 million ounces of gold are readily attainable.”
126. On April 17, 1996, Walsh announced that an initial resource calculation had been completed by the Kilborn Defendants on certain sections of Busang, which indicated that there were an additional 9.16 million ounces of gold resource. The press release also announced a resource calculation for two sections of the Southeast Zone. Based on the calculation, Busang contained a total of 24.87 million ounces of gold, a 60 percent increase over the previous estimate.
127. The market was awestruck by developments in the spring of 1996.
128. By the Spring of 1996, Barrick was desperate to obtain an interest in Bre-X and its widely-heralded discovery at Busang in order to achieve its publicly stated goals of increasing its reserves and becoming the predominant gold producing company in the world.
129. On April 17, 1996, Barrick again approached Bre-X to discuss a possible deal relating to Busang, but its efforts were initially rejected.
-41- 130. On April 22, 1996, Bre-X stated that it would “start to look for a partner this summer for Busang.” Barrick was reported to be a “contender” for that position.
131. On or about April 23, 1996, Bre-X began trading on the Toronto Stock
Exchange. Within minutes of the opening of trading, the price of Bre-X stock skyrocketed from
$50+ to nearly $200 (Canadian). Within a month, shareholders had approved a 10-for-1 split in Bre-
X stock, which took effect on May 22, 1996. Share prices continued to rise after the split, at one point eclipsing the $28 (Canadian) mark.
132. Market reaction in reliance on defendants’ statements and announcements was extremely positive, as they undoubtedly intended. Several industry analysts improved their recommendations on Bre-X stock to “Buy” or even “Strong Buy.”
133. On May 15, 1996, the Company filed its Annual Report on Form 20-F with the Securities and Exchange Commission, for the fiscal year ended November 30, 1995. This report contained the representation that:
Geostatistical calculations for the Central Zone and Southeast Zone
I, based upon 42,000m (1995) of drilling data and results to date,
indicate an open-pittable in-situ resource in excess of 30 million
ounces averaging 3 grams per ton.
134. Over the next several months, just prior to Bre-X’s opening on the NASDAQ
Exchange in New York, defendants’ public disclosures concerning Busang grew more and more extraordinary. The Company’s resource calculations were increasing by millions of ounces.
135. Unable to achieve a friendly deal, Barrick began to develop political ties to enable it to exert political pressure on Bre-X to permit Barrick to gain an interest in Busang. On June
-42- 17, 1996, Barrick CEO Munk made a formal presentation to the Indonesian Mines and Energy
Minister Ida Bagus Sudjana and other key officials concerning the development of Busang.
According to Barrick’s director of corporate communications David Wynn-Jones, “We told them we had the 1.5 billion dollars to develop the mine, we had the mining expertise - and we could do it fast.
. . . Frankly, I think these were the answers the Indonesians wanted to hear.”
136. On June 18, 1996, after a recent site visit to Busang by Bianchini, Nesbitt
Burns increased its gold estimates from 30 million to 62 million ounces. As stated in the June 18,
1996 edition of The Financial Post, Bianchini credited the increase to changes in estimates relating to an area in the Southeast Zone known as lines 44 to 64. He stated that, “the current drill program will allow for a significant portion of the resources to have been drilled with sufficient density to qualify as proven and probable [reserves] by yearend.” Bianchini further added that the program would, “significantly enhance valuation levels.” On another occasion, Bianchini stated, “we continue to be of the view that the Busang deposit [in Indonesia] will become one of the largest gold deposits, if not the largest, in the world.” It was rumored that an area of Busang was renamed by the Company as the “Bianchini Zone.”
137. A press release dated June 20, 1996, titled “Bre-X Minerals Ltd. . . .
Announces A 14 Million Ounce Increase In The Busang Gold Project Southeast Zone I Resource
Calculation,” stated that as a result of additional tests conducted by the Kilborn Defendants, there were 39.15 million ounces of gold residing at Busang. Bre-X publicly declared its “objective to outline 50 million ounces in the measured/indicated resource category by the end of 1996.”
-43- 138. As reported on June 26, 1996, Barrick also recruited the assistance of
Airlangga Hartarto, son of Indonesian Coordinating Minister for Production and Distribution
Hartarto, and friend of Adnan Gunzo, an influential advisor of Indonesian President Sudjana.
139. Just one month later, a press release dated July 22, 1996, titled “Bre-X
Minerals Ltd. . . . Announces A 7.77 Million Ounce Increase In The Busang Gold Project Southeast
Zone I Resource Calculation,” bullishly stated that as a result of additional calculations conducted by the Kilborn Defendants, there were 46.92 million ounces of gold in Busang.
140. On July 23, 1996, Nesbitt Burns released a morning research report parroting and legitimizing new drill hole data released by Bre-X. According to the report:
Yesterday’s release of new drill hole data and revised resource
estimate is further confirmation that the Busang deposit is among the
two or three largest gold deposits in the world. . . . At this point, our
review of all the drill and resource data confirms our view that Busang
contains a resource of more than 62 million ounces. As a result of the
size of the underlying resource, we continue to be of the opinion that
Bre-X shares remain significantly undervalued both in the short and
the long term. We reiterate our strong buy recommendation for Bre-
X.
In the report, Nesbitt Burns also misleadingly implied that an outside third-party acted as a check for the authenticity of Bre-X’s reported results: “The resource estimate was done by Kilborn SNC
Lavalin and is categorized as drill indicated (25%) and inferred (95%).”
-44- 141. According to The Financial Post, on July 23, 1996, David Neuhaus, a J.P.
Morgan analyst who had just returned from a tour of the Busang site, stated that Busang could easily contain 150 million ounces of gold. According to Neuhaus, “I’d say 150 million ounces is a conservative guess as to what Bre-X will ultimately come up with.” At the time Neuhaus made these bullish statements, J.P. Morgan was engaged in a “beauty contest” for an opportunity to become Bre-
X’s financial advisor. Furthermore, as reported after the Class Period, during Neuhaus’s visit to the
Busang site, he and other analysts were given core samples from Busang. When the core samples were independently tested, they revealed no traces of gold.
142. The energy and resources that Nesbitt Burns expended in promoting Bre-X stock was extraordinary. During the summer of 1996, Nesbitt Burns put on a show to promote itself and Bre-X stock. It was later reported in the Ottawa Citizen as follows:
Clients who packed a Toronto hotel ballroom were told by an enthusiastic Nesbitt team -- not only from sales, but from the economics and research departments -- of the incredible opportunities to be found in the booming junior mining sector.
Nesbitt’s superstar gold analyst, Egizio Bianchini, and its senior mining analyst, Julian Baldry, made glowing presentations about the fortunes to be made while Nesbitt’s chief economist Sherry Cooper provided an overview.
Mr. Bianchini was introduced as the man who recommended Bre-X when it was at $2.40 per share.
143. On August 13, 1996, Bre-X filed a Form 6-K (Report of a Foreign Issuer
Pursuant to 13A-16 or 15D-16 of the Exchange Act) with the SEC, which attached as exhibits the
Company’s press releases, issued from January 1, 1996 through July 31, 1996. These press releases,
-45- as more fully set forth above -- which touted the Busang site and the gold resources supposedly residing there -- were materially false and misleading at the time they were made.
144. During the Summer of 1996, Barrick’s Executive Vice President Neil
MacLachlan met with Siti Hardijanti Rukmana (known as Tutut), daughter of President Suharto.
Barrick thereafter hired Tutut’s firm, Citra Lamtoro Gund Groups, to advise it in connection with the
Busang property. Shortly thereafter, on August 15, 1996, Bre-X’s Letter of Permit for Preliminary surveys, a key document which had been used by Bre-X to establish security of tenure with North
American stock exchanges, was withdrawn.
145. On August 19, 1996, Bre-X common stock was listed and began trading on the NASDAQ National Market System. On that same day, Walsh was quoted in The Financial Post as touting that the Company was developing “the largest purely gold deposit in Indonesia.”
146. In its Form 20-F/A-2 filed with the SEC on August 19, 1996, Bre-X stated that the Company was aware that as of March 29, 1996 (prior to the time its shares were listed on
NASDAQ) there were 2,290,318 common shares held by registered holders in the United States.
147. Following its NASDAQ listing, Bre-X, on or around August 28, 1996, filed a Form 6-K with the SEC, which was signed by Thorpe, and attached an “Interim Report to
Shareholders and Financial Statements for the seven months ended June 30, 1996.” The Interim
Report stated the following with respect to the Busang site:
An updated resource calculation subsequent to the end of June 1996 from drilling results at Busang Gold Project increased the total gold resource by 44.3 million ounces to 46.9 million ounces, compared to a total gold resource of 2.6 million ounces at November 30, 1995. This resource calculation has been independently verified by Kilborn Engineering, engineering consultants.
-46- To date, only 25% of the entire Busang property has been explored
and the extent of the mineralization has not been fully delineated.
148. This statement was false and misleading, because, by using the term “verified”,
this statement suggests that the Kilborn Defendants independently sampled and assayed their results
when, in reality, they used false assays provided by Bre-X.
149. In a Form 6-K dated September 5, 1996, defendants stated that the Company had hired J.P. Morgan as financial advisor to the Company.
150. Barrick used its extensive high level contacts to apply additional political pressure on Indonesia. On September 20, 1996, former United States President George Bush, a member of Barrick’s international advisory board, wrote to President Suharto indicating that Barrick was interested in “certain property” and had the “resources and assets to do a reputable job.” Former
Canadian Prime Minister Brian Mulroney also applied pressure on the Indonesian Government to advance Barrick’s interests. In the Fall of 1996, Messrs. Bush and Mulroney made telephone calls to senior Indonesian government officials to enhance Barrick’s negotiating position with Bre-X.
151. On or about September 26, 1996, Bre-X issued a press release announcing that it would be seeking a partner to help develop the Busang site. A copy of the press release was filed on Form 6-K with the SEC and was signed by Walsh. The press release stated:
Because of the size of reserves and geological potential at Busang, the
Company’s market capitalization and anticipated development costs,
Bre-X will shortly seek the participation of a major mining company
to facilitate expeditious development of the deposit and enhance its
value.
-47- 152. By creating the impression that it was poised to acquire a significant interest in Busang, Barrick sought to generate positive press and inflate the market price of its stock. Thus, defendants made public statements emphasizing Barrick’s interest in what the public was conditioned to believe was one of the largest gold discoveries in history. For example, in a speech delivered at a Denver Gold Show on October 2, 1996, Barrick’s Executive Vice President Hill stressed the success of the company’s aggressive acquisition program, stating, “Under this program, we are pursuing — and we expect to find and acquire — many of the best and the biggest ore bodies around the world.”
153. The pressure on Barrick to report positive results as a consequence of its potential interest in Bre-X continued to mount as it experienced failures in other ventures that comprised portions of its aggressive acquisition program, its stock price was lagging, and it was forced to report disappointing financial results during October of 1996. On September 30, 1996,
Barrick’s stock price had fallen to a per share annual low of $25.13, from a high of $32.13 on
February 6, 1996. The next day, on October 1, 1996, Barrick publicly announced that it did not plan to proceed with the development of its Cerro Corona project in Peru because exploration revealed that the mine did not contain sufficient mineralization to meet Barrick’s development criteria. As a result, the company indicated that it would take a $38 million charge against income. Barrick’s
Executive Vice President Hill stated that Barrick would channel its efforts into other promising properties.
154. On or about October 4, 1996, Bre-X issued a press release concerning the claims of certain Indonesian parties concerning ownership of the Busang site. A copy of the press release was filed on Form 6-K with the SEC and was signed by Walsh. The press release responded
-48- to news reports that an Indonesian partner of the Company who holds a 10% interest in Busang I believes it is entitled to a similar participation in Busang II and III. The press release stated:
Bre-X has undertaken a thorough review and investigation of the facts
and circumstances relating to this matter and has sought the advice of
one of the leading law firms in Indonesia. This law firm has also
advised Bre-X that the assertion by the Indonesian partner is without
substance.
155. Due to the substantial charge, on October 25, 1996, Barrick reported disappointing financial results when it filed its interim report for the third quarter ended September
30, 1996. For the quarter, Barrick reportedly earned only $21 million, compared with prior year levels of $67.7 million.
156. In the interim report, Barrick’s Chief Operating Officer Carrington acknowledged that “our worldwide development program is having a near-term effect on earnings.”
However, he insisted that “our rising gold reserves ensure the Company will repeat its North
American success on a global basis.”
157. During this period, Barrick conducted due diligence in connection with the proposed joint venture to develop Busang. Barrick was given access to 135 waste core samples from
Busang, which had not been used for assay testing. Tests demonstrated that of the 135 samples tested, 130 contained no gold. Based on its testing of core samples, Barrick knew that Bre-X’s claims about Busang were false. Nevertheless, Barrick issued public statements (detailed below) directed to actual and potential shareholders of Bre-X, which lent credibility to Bre-X’s false statements about the gold prospect at Busang.
-49- 158. Furthermore, Barrick provided access to the negative test results to Daniel R.
McConvey, its former Comptroller and a securities analyst with the investment banking firm Lehman
Brothers, Inc. Despite having access to this negative information, Lehman issued a series of positive analyst reports about Bre-X, most of which were written by McConvey. Rather than revealing the adverse test results, McConvey portrayed Barrick’s results in a positive light, to lend further credibility to false claims about the size of the deposit at Busang. Throughout the Class Period, as detailed herein, Lehman continued to make positive statements about Busang, but defendants failed to reveal to investors the adverse information that they had discovered.
159. On November 14, 1996, Munk, together with Airlagga Hartarto and Madame
Yoke, and representatives of Bre-X, including David Walsh, John Felderhof and Rolando Francisco, met with Sudjana regarding Busang. Sudjana informed the parties that the Indonesian government wanted Barrick to receive 75% and Bre-X to receive 25% of Busang. Sudjana imposed a deadline of November 20, 1996 for the parties to reach an agreement.
160. The next day, on November 15, 1996, representatives of Barrick and Bre-X met to negotiate a deal.
161. In an effort to diffuse market speculation as to its control over the Busang site,
Bre-X and the Insider Defendants issued statements affirming its ownership position. On or about
October 25, 1996, McAnulty was quoted in Reuters Financial Service as stating: “We feel we’ll be free to pick our own partner.”
162. Lehman Brothers commenced its coverage of Bre-X on November 18, 1996.
In a report written by McConvey and issued by Lehman Brothers on that date, Lehman Brothers declared that Bre-X “looks to have made the gold discovery of the century.” Touting the size of the
-50- gold deposit, Lehman Brothers stated: “Although there is a lot of drilling to prove up Busang’s reserves, the size of this deposit, which currently has a resource . . . of almost 50 million ounces, could turn out to be in excess of 100 million ounces.” Furthermore, Lehman Brothers expressed a belief that ownership disputes with a minority partner and resultant delays in obtaining a government permit “will be resolved.” Consequently, according to Lehman Brothers, “there will be a significant rebound in Bre-X’s share price” and “share price will soar.” Lehman Brothers also fueled the rumor that “one or more major mining companies could make a bid for all of Bre-X,” concluding that “by the end of this year, we expect Bre-X to have done a deal with a major mining company capable of putting Busang into production.”
163. On November 21, 1996, Lehman Brothers raised its rating of Bre-X stock from neutral to buy. In a report issued on that date, Lehman Brothers fueled takeover speculation and touted the size of the Company’s resources. The report, written by McConvey, stated:
BRE-X TAKEOVER MAY BE IMMINENT. BUY THIS STOCK TODAY. . . .
Based on Bre-X’s tremendous reserves, we believe that a C$28-C$30 share price is supportable. . . .
[W]e have reread more closely a recent paper by Bre-X Exploration Manager Michael de Guzman, whom we well respect. The paper had been reviewed by Bre-X’s Senior Vice President John Felderhof. When referring to an annual production rate of 2.5 million ounces, de Guzman insinuates that the mine may well have a 50-year life, which would require a deposit in excess of 100 million ounces. Other things in the paper gave us some flavor that, in the lack of any property related press release since July, the deposit continues to look better.
Other sources, including a recent presentation by Bre-X Director Paul Kavangh [sic], confirm that (1) everything being done on the resource delineation is indicating positive results on the quality of the work being done; (2) inferred resource estimates in the main area of focus
-51- are coming in as expected with the infill drilling; and that (3) the resource may be growing.
In short, further work has further supported our aggressive valuation
assumption that we discussed in our note of Monday. We believe that
this property is worth C$28 to C$30 to an acquiring company.
At the time, Bre-X shares were trading at a price of $17.50 per share.
164. The next day, Lehman issued another report written by McConvey, which stated:
We believe chances are good that Bre-X will likely be taken over by a major mining company, subject to due diligence, sometime in the next four weeks. . . . [W]e still believe that Bre-X will not receive its COW without having to select a major mining company as its partner or acquiror.
We believe that the ultimate price for an acquisition of Bre-X will be in the $27-$30 range.
165. On or around November 26, 1996 Bre-X issued a press release concerning a communication received from the Indonesian government. A copy of the press release was filed on
Form 6-K with the SEC. In the press release, defendants revealed that they had been advised by the
Indonesian government of its concern about the “immediate development” of the Busang site and that it had arranged a deal for the development of the Busang site. Defendants stated:
Although Bre-X has received from several major mining companies expressions of interest in negotiating a transaction with Bre-X, the Indonesian Government has given guidance to Bre-X to finalize a joint venture between Bre-X and Barrick Gold Corporation on the basis of 25% to Bre-X and 75% to Barrick. . . . The Indonesian Ministry of Mines and Energy has also advised that the Indonesian Government would appreciate it if the parties could consider a 10% participation being given to the Indonesian government.
-52- 166. In a report issued on November 27, 1996, Lehman Brothers continued to rate Bre-X stock a buy, emphasizing that a takeover by Barrick would result in a fair deal to Bre-X stockholders. The report, written by McConvey, stated:
Bre-X has likely found the gold discovery of the century. . . .
Barrick is, however, in the driver’s seat, and, if it can reach an agreement with Bre-X that is fair and acceptable to Bre-X shareholders, a lot of negative investor perception of the current situation may go away.
We believe that the current Bre-X share price depression is temporary.
. . . [W]e believe that Bre-X is worth, conservatively, $20 to $22
(C$27 to C$30) in a competitive market situation, and our best guess
is that Barrick will pay close to such a price to take control of this
deposit subject to doing some due diligence and gaining assurance on
the tenure issues.
At the time, Bre-X shares were trading at a price of $15.63.
167. In another report written by McConvey and issued on the same day, Lehman
Brothers continued to stress that a deal with Barrick would be favorable to Bre-X shareholders, stating: “This is fabulous deposit and it deserves appropriate compensation.”
168. On or about November 26, 1996, reports began to appear in the press indicating that Barrick was in a position to obtain a substantial majority interest in Busang. On that date, Bre-X announced that it:
has been advised by the Indonesian Ministry of Mines and Energy that the Indonesian government is very concerned about the immediate development of the Busang gold deposit. Although Bre-X has received expressions of interest from several major mining companies in negotiating a transaction with Bre-X, the Indonesian government
-53- has given guidance to Bre-X to finalize a joint venture between Bre-X and Barrick Gold on the basis of 25% to Bre-X and 75% to Barrick. Bre-X has written to the Indonesian Ministry of Mines and Energy to seek clarification as to whether certain other forms of transactions would be acceptable. Bre-X has not received a response.
Bre-X further stated that “The Indonesian Ministry of Mines and Energy has also advised that the
Indonesian government would appreciate it if the parties would consider a 10 per cent participation
being given to the Indonesian government.”
169. The next day, the press reported that Barrick was in a position to acquire
Busang. For example, the Globe and Mail stated that Barrick would “inherit Bre-X riches”. The
price of Barrick shares rose $1.75 to $28.88 per share in response to these reports.
170. On December 2, 1996, Bre-X filed with the Ontario Securities Commission
an interim quarterly report for the third quarter ended September 30, 1996. This report contained
a November 28, 1996, press release mailed to shareholders on November 29, 1996. This press
release reiterated the July 1996 calculation by the Kilborn Defendants of 46.92 million ounces of gold
at Busang.
171. In the weeks following the issuance of this press release, Bre-X’s woes
concerning the ownership of Busang continued. Its Indonesian partner in Busang I filed suit in
Canada hampering Bre-X’s negotiations with the Indonesian government. Finally, Bre-X struck a
deal with the son of the president of Indonesia in an attempt to influence government decision-making
and resolve the ownership issues. Ultimately, as described below, Freeport came into the Busang
project as Bre-X’s partner.
172. On or around December 3, 1996, Bre-X issued a press release titled “Bre-X
Minerals LTD. . . . Announces a 10.4 Million Ounce Increase In The Busang Gold Project Resource
-54- Calculation.” A copy of the press release was filed on Form 6-K with the SEC. The press release
reported that Kilborn had updated its calculation to 57.33 million ounces and that based on the
current drill program they anticipated a 60 million ounce estimate by early 1997. Furthermore, the
cost of producing gold in Busang was calculated to be $96 per ounce, which was substantially lower
than the average cost worldwide.
173. On December 3, 1996, Lehman issued another report that did not disclose the
negative results of Barrick’s tests of the Bre-X gold samples, but instead implied that Barrick had
confirmed Bre-X’s findings. The report, written by McConvey, stated:
Although the stakes may be up, Barrick is still, we believe, in the driver’s seat to reach a deal with Bre-X. It has done its homework well. . . .
We could see a major lobbying effort by several international mining companies to pressure the Government of Indonesia to open up the Bre-X bidding process. . . .
Placer’s press release answered a question for us. We had a very hard time believing that the world’s major gold mining companies were going to sit idly by and watch what we believe is the gold find of the century disappear from their grasp without a fight. . . . We now feel more confident in believing that there are more fighters out there. However, we don’t believe that anyone wants this project as much as Barrick. And, it would appear that Barrick has so far done its homework the most thoroughly.
This news is clearly excellent news for the shareholders of Bre-X.
174. The next day, Lehman issued another report, written by McConvey, recommending Bre-X stock, indicating that “there is 50% upside from current share price,” which was $13.78.
175. On December 4, 1996, representatives of Bre-X and Barrick met with Dr.
Umar Said, Secretary General of the Ministry of Mines and Energy. Bre-X reported that “Although
-55- agreement has been reached on the matters raised by the [Ministry], . . . several points remain outstanding.”
176. On that date, Lehman issued a report, written by McConvey, which stated:
* Bre-X announced (and Barrick has confirmed with us) that it had agreed on some issues concerning a Joint Venture Agreement with Barrick.
* Announcement is positive in that Barrick, Bre-X and Merukh ( a minority interest partner who is disputing his share) are all jointly requesting an extension to the December 4 deadline set by the Indonesian Ministry last week.
We believe that the extension will be granted. . . .
* No mention exists on pricing, but we believe any deal Barrick makes with Bre-X will have to approximate a deal that would have been struck in a more competitive situation.
177. On December 5, 1996, Barrick publicly stated that to pay for its interest in
Busang, it would offer Bre-X shareholders a package that might include a combination of cash and
Barrick stock and debentures.
178. Also on December 5, 1996, Bresea filed with the Ontario Securities
Commission an interim quarterly report for the third quarter ended September 30, 1996. This report contained a December 4, 1996 press release. The press release reported an ungraded resource calculation, completed by the Kilborn Defendants, for Busang, of 57.33 million ounces of gold, using a cutoff grade of .47 g/t. The release stated: “The figures below represent recoverable grades as cyanide extraction was used in the analysis” and “The classification of resources was based on the
‘Principles of a Resource/Reserve Classification for Minerals’ by the U.S. Bureau of Mines and the
U.S. Geological Survey (Geological Survey Circular 831).”
-56- 179. On December 6, 1996, Barrick spokesman Vince Borg confirmed that Barrick
was negotiating with Bre-X in good faith and its status as the government proposed joint venture
partner of Bre-X had not changed.
180. On December 9, 1996, it was reported publicly that Barrick and Bre-X had
accepted the guidance offered by the Indonesian Government, which provided for Barrick and Bre-X
to obtain, respectively, a 75% and 25% interest in Busang, and for the Indonesian Government to
obtain a 10% interest in Busang. At the time, Busang was reported to contain 57 million ounces of
gold, and was valued at more than $21 billion.
181. In December 1996, Lehman Brothers, through McConvey, strongly
recommended buying Bre-X, stating that Busang was “the gold discovery of the century”, the gold
discovery in Busang “is enormous” and that it expects the Bre-X “growth story to continue in a major
way for the rest of this decade.” Furthermore, Lehman Brothers stated that Busang “looks to be not
only a geologist’s dream but a metallurgical dream.”
182. On December 13, 1996, Lehman issued another report, written by McConvey, which stated:
There are three possible outcomes we see here. The first, which is not a main scenario but a possible one, is that Bre-X is expropriated. We think that this is highly unlikely and would give it a chance of less than 10%. We were told last week by a government official that he was sure that this would not happen. . . .
The second scenario is that Bre-X, under the directive of the Indonesian government, does do a deal with Barrick. Barrick has said repeatedly that any deal it does with Bre-x would be fair to the shareholders of both companies.
183. On December 16, 1996, Barrick reported that it had made a submission with
Bre-X to the Indonesian Government indicating that the companies could work together if the
-57- Indonesian Government could meet certain requests. In response to this announcement, Barrick’s stock price rose C$1.45 to close at C$40.25 per share.
184. Thereafter, Barrick repeatedly represented that it would treat Bre-X shareholders in a “fair” manner. For example, on December 16, 1996, Barrick spokesman Vince
Borg was quoted by Reuters as stating that “Barrick has an established track record of being “fair” in transactions, and the proposed deal with Bre-X would be no different. Likewise, on December 21,
1996, The Financial Post reported that former U.S. President George Bush had written a letter to a
Bre-X shareholder indicating that investors in Bre-X would be treated fairly by Barrick. Similarly, on December 23, 1996, Barrick spokesman Borg was quoted in The Northern Miner as stating: “All
I can say, in a general sense, is that Barrick has a track record of being fair in these kinds of transactions.” These materially false and misleading statements were made notwithstanding Barrick’s unique access to adverse information about the gold resources at Busang.
185. During early 1996, as a result of defendants’ false and misleading statements,
Bre-X’s stock price rose from $53 to $224.75. Thereafter, it split 10 for 1, and maintained a price in the $20 range thereafter.
186. During the same period, Bresea stock (post-split) rose from $5.62 to $10.85.
187. On January 7, 1997, Lehman Brothers issued a report, written by McConvey, regarding gold prices for 1997 and ratings for gold producing companies. While Lehman Brothers substantially downgraded most gold stocks, it singled out three companies whose stock it recommended: Bre-X, Barrick Gold, and Placer Dome.
188. Two days later, on January 9, 1997, Lehman Brothers further distinguished
Bre-X stock, stating: “In a bearish gold bullion market, we believe this is one gold stock that will
-58- perform well in 1997.” Emphasizing that Lehman Brothers had “follow[ed] this story very closely,”
Lehman Brothers indicated, in a report written by McConvey, that “things are looking better for Bre-
X” and “the price of this stock will go up significantly from current levels.”
189. In a Form 6-K dated January 13, 1997, signed by McAnulty, Bre-X again stated that the Busang site contained 57.33 million ounces.
190. In a report written by McConvey and issued on January 13, 1997, Lehman
Brothers touted the purported “spectacular drill results”, stating:
The spectacular drill results are a reminder of what makes this discover[y] so unique. The above discussed hole (SEZ 66.5) indicates high grade mineralization going right from the surface. . . .
We continue our 1-Buy rating on Bre-X.
191. On or around January 14, 1997 Bre-X issued a press release concerning an unsolicited tender offer by Placer Dome, Inc., received by the Company. A copy of the press release was filed on Form 6-K with the SEC, which was signed by McAnulty.
192. Barrick responded by insisting that it had “reached an agreement with Bre-X within parameters set by the government and that agreement is now before the government. Placer is floating a trial balloon.”
193. On January 15, 1997, Nesbitt Burns estimated that Busang could contain up to 92 million ounces of gold.
194. On January 20, 1997, Lehman Brothers raised its target price of Bre-X stock from $19 to $22 per share, and reiterated its buy rating. At the time, Bre-X stock was trading at a price of $17.69 per share.
-59- 195. On January 20, 1997, Reuters reported that the Indonesian Government had sent a letter to Barrick and Bre-X stating:
In one month, your companies should be able to settle a partnership agreement with your legal partners and then should with your respective partners report in writing to the government of Indonesia that you have reached an agreement without government intervention. If in that one month that agreement mentioned is not achieved, then everything that had been discussed previously will be canceled, and the government will have full right to further manage Busang II and III.”
196. Barrick characterized the letter publicly as reaffirming the government’s support for its participation in developing Busang and that Barrick was moving ahead with the development of the site. For example, on January 21, 1997, Barrick spokesman Borg was quoted by Reuters as stating, “the main thing here is that the government has reaffirmed its support of
Barrick’s participation. . . . This is a very significant step forward.” Borg was also quoted on January
22, 1997 by the Calgary Herald as stating, “We’re going to work with Bre-X to finalize the arrangements and we’re confident that can be achieved within the time frame” imposed by the
Indonesian Government.
197. Barrick also issued a press release on or about January 22, 1997 attributing
Barrick’s participation in the development of Busang to its reputation for expertise and financial strength. The press release quoted Munk as stating: “The [Indonesian] support for Barrick’s participation reflects our unique development capabilities and financial strength. Barrick is the only company that has ever developed an open pit gold mine producing over two million ounces per year.”
198. Also on January 22, 1997, Lehman issued a report, written by McConvey, which stated:
-60- We continue to believe that Barrick is likely to be successful in completing the deal with Bre-X and, on balance, we continue to believe that any deal that is done will be fair to Bre-X shareholders.
199. Another Lehman report, written by McConvey and issued on January 27,
1997, insisted:
Barrick . . ., in our view, is still in the driver’s seat for completing a deal with Bre-X.
200. At the end of January, Bre-X continued to entertain additional offers from competitors of Barrick, insisting on January 29, 1997 that the Indonesian Government had not insisted on a deal with Barrick.
201. On February 1, 1997, Nesbitt Burns continued to raise the hopes and hype
surrounding Bre-X and Busang, and announced yet another incredible increase to its resource
estimates:
The Company has increased the resource estimate to 70 million
ounces. We have reviewed the new estimates and previously
announced drill data, and developed a new potential resource estimate
of 89.4 million ounces. We expect that throughout 1997 the total
resource will grow substantially, perhaps even beyond our estimate.
202. Barrick continued to express publicly its intention to close a deal with Bre-X
shortly. On February 4, 1997, Barrick made another offer regarding Busang.
-61- 203. By February 14, 1997, Barrick discontinued its efforts to obtain an interest in
Busang. However, Barrick did not disclose -- and still has not disclosed -- its findings based on earlier tests which revealed an absence of gold at Busang. Instead, Munk reiterated that Barrick’s proposal was “fair.” For example, the Extel Examiner on February 17, 1997 quoted Munk as stating:
We believe our proposal for Busang was fair and equitable to Bre-X and its partners, and provided for significant economic and social benefits for Indonesia. We offered a very good economic deal for all concerned but to go beyond that in the circumstances would not have been in the best interests of our shareholders.
204. On or around February 17, 1997, Bre-X issued a press release announcing that the Busang resource calculation had been increased by 13.6 million ounces and now stood at 70.95 million ounces. Bre-X explained that “much of the increase . . . [came] in the measured and indicated category.”
205. Two days later, on February 19, 1997, in a conference call with analysts and reporters, Walsh admitted that the Company’s prior statements that the Company owned 90% of
Busang were false. It was “never practical reality”, he said; rather, investors and others “mistakenly thought that we owned 90% of this property” and that the Company “never imagined it would be able to hang on to 90 per cent of the deposit.” In the same call, Felderhof increased the Company’s calculation of Busang’s gold resources, stating that he believed that the deposit’s size was 200 million ounces.
206. Also present during the February 19, 1997 Bre-X conference call were two
J.P. Morgan investment bankers, Morrison and McIntosh. During the call, McIntosh was asked to outline “the salient technical characteristics of the [Busang] deposit,” including the “economics of the
Busang project.” Among the false and misleading statements made by McIntosh were:
-62- (a) “We expect the cash costs [of production] to be significantly less than the
$96/ounce estimate in the [November 1996] Kilborn intermediate feasibility study.”
(b) “[T]he resources are estimated to be 71 million ounces.”
(c) “The metallurgy at Busang is relatively simple because of the nature of the assaying being cyanide soluble values rather than total gold. We expect metallurgical recovery to be in excess of 95% of contained gold. Over ½ of the gold will probably be recovered in a gravity circuit quite inexpensively and efficiently.”
(d) “I think you are looking at more or less North American costs of mining . . .
I’d say something well below $1 a tonne.”
(e) “[T]here shouldn’t be much variability [in mining costs] through time. What we’re seeing is pretty consistent [ore] grade.”
(f) “If you look at the cash flows of this [project], it pays off at any reasonable gold price [and even at] unreasonably low gold prices. In a period of time which is way, way shorter than any mining project I’ve ever seen, the margins are so huge that it is relatively insensitive to either higher costs or lower gold prices. . . [The project] clearly kicks off a lot of cash flow.”
207. Those statements were false and misleading at the time they were made, because J.P. Morgan’s agents had visited the Busang site and had admittedly reviewed Kilborn’s prefeasibility and feasibility studies. As a result, J.P. Morgan knew the adverse facts that were kept from the public by Bre-X and the Insider Defendants, including the inconsistencies between the properties of the gold purportedly found in Busang and the test results in Kilborn’s prefeasibility and feasibility studies. J.P. Morgan nevertheless made public statements touting the gold reserves at the
Busang site.
-63- 208. The day after Bre-X and J.P. Morgan conducted a conference call with analysts, on February 20, 1997, Lehman Brothers issued a report, written by McConvey, stating:
* Bre-X Minerals management conducted its first company conference call yesterday and included its investment bankers from JP Morgan who were involved in their recent negotiations. It was in our view, bullish. . . .
* John Felderhof, Bre-X’s Vice [C]hairman and de facto chief geologist, believes that he can prove up 200 million ounces (Bre-X’s share 90 million) of gold reserves over the next year. We believe he means it. . . .
The production rates discussed on the conference call were consistent
with our December 3rd Bre-X report.
209. In a press release issued on February 21, 1997, the Company emphasized that
Felderhof’s statement “that he would ‘feel very comfortable with a potential of 200 million ounces’” was based, among other things, on “his assessment of the drilling results to date.” While asserting that the Company’s official resource calculation remained at “70.95 million ounces of gold,” Walsh stated that “Felderhof and the Bre-X technical team have been, to date, accurate in their projections.”
210. On or around February 26, 1997, Bre-X issued a press release attaching a letter sent by Walsh to Bre-X shareholders. A copy of the press release was filed with the SEC on
Form 6-K, which was signed by McAnulty. In the letter, Walsh continued to tout the resources of the Busang site and the relatively cheap price at which the gold could be produced:
Based on the latest resource calculations, the Busang property contains at least 70.95 million ounces of gold -- making it the largest and richest gold mine in the world. At today’s price of approximately US $350 an ounce, the Busang property has a gross economic value of US $24.8 billion. Further, production costs in Indonesia are estimated to be approximately US $75 to $95 an ounce versus US $200 an ounce as a world average.
-64- Busang Indonesian Gold JV assigns ownership at BRE-X, 45%; Indonesian partners, 30%; Republic of Indonesia, 10%; and Freeport- McMoRan Copper and Gold, Inc., 15%.
Based on Bre-X’s 45% ownership, the Company’s currently estimated gross economic value in the property is U.S. $11.2 billion. While we are confident that this figure could be substantially higher, any such estimate is based on potential and remains speculative.
Ironically, BRE-X was handicapped by the strict disclosure rules of our regulatory environment. Each time we released a higher resource calculation, we attracted the attention of modern-day “claim jumpers” who wanted to share in our find.
Defendant Walsh then again admitted that the Company’s prior representations about its ownership rights in Busang were false:
We could not lose sight of the fact that we are guests in Indonesia. Nonetheless, in the months leading up to the final agreement, various third parties conducted negotiations with the Indonesia authorities, from which BRE-X was excluded, which introduced a percentage ownership mind-set that significantly reduced our ultimate negotiating leverage. Even though we discovered the gold fields of Busang, they are of such extraordinary richness that the final deal had to include a 40% share for Indonesians to be competitive with the offers put forth by other major mining entities and to satisfy domestic political requirements. At the end of the day, the arrangement that BRE-X reached with its partners and the Government of Indonesia was the best reflection of the political, economic and social environment in that country.
The letter then commented on the fact that the Company would be working with Freeport on developing Busang:
As an exploration company, we have always acknowledged that a
large, experienced partner was critical for the success of the Busang
project. Our local partner, Mr. Mohamad “Bob” Hasan, nominated
Freeport-McMoRan for this role, and BRE-X seconded this choice.
-65- They were an excellent choice given their extensive operating
experience in Indonesia. Freeport has the infrastructure, expertise and
technology to manage the exploration, engineering, environmental and
social challenges of working in a remote Indonesian jungle. Freeport
will provide 25% of the cost (US$400 million for its interest and
arrange US$1.2 billion in project financing from Chase Manhattan
Bank) for a relatively modest 15% ownership. Those skills and
Freeport’s international financial reputation will allow the Busang
Joint Venture, with Freeport as operator, to speed Busang into
production.
Under the terms of its agreement with Bre-X, Freeport was to test the deposits at the Busang site to confirm Bre-X’s findings.
211. Even in the face of serious concerns regarding Bre-X’s ownership to rights to the Busang site, Nesbitt Burns still could not resist putting a positive gloss on the situation and serve to keep hopes flying high. In a research report issued in March 1997, Nesbitt Burns stated:
Resources should be over 100 million ounces by April. The ultimate
resource of the property could be up to double that amount. There
may be more ounces attributable to Bre-X at a 45% interest than we
had originally estimated when Bre-X had a 90% interest.
212. On March 14, 1997, Lehman Brothers upgraded its rating of Bre-X stock in the face of the negative announcements about the Company, portraying the market’s reaction as excessive.
-66- In a research report written by McConvey, Lehman Brothers stated:
AT $12 ½, BRE-X’S STOCK APPEARS OVERLY DEPRESSED; UPGRADE TO 2-OUTPERFORM
* Bre-X’s share price has fallen to attractive levels. Although there are still some uncertainties, we believe that this stock will be at significantly higher levels a year from now. . . .
* We believe that Bre-X’s 45% interest in Busang, clear of Merukh, is worth $18 per share. All else being the same, if Bre-X can resolve the Merukh issue and obtain its CoW’s, we will upgrade our rating to 1-Buy.
* The size and richness of Busang continues to look better every month. . . .
Whether Bre-X stays independent or is taken over, we believe there
is value in Bre-X’s current share price. Investors must remember it is
quite possible that Busang may end up possessing more gold (and
much more profitable gold) than is currently known to exist in the
entire State of Nevada.
C. The Truth Begins To Emerge
213. In March 1997, defendants’ deceptions began to unravel. On March 19, 1997,
Bre-X announced that Michael de Guzman, chief geologist at the Busang gold project, had fallen approximately 800 feet to his death from a helicopter as he was returning to the mine site. Thereafter, according to news reports, the Indonesian police found a suicide note in de Guzman’s possessions.
Mr. de Guzman was heavily involved in originally identifying and exploring the Busang site. Shares of Bre-X closed on March 19, 1997 at $17.25 (Canadian), which was down $.40.
-67- 214. On March 20, 1997, Lehman Brothers issued a report that dispelled questions about the veracity of earlier Company and Lehman Brothers statements, despite indications to the contrary. The report, written by McConvey, stated:
* The death of Senior Bre-X Geologist Michael de Guzman, who fell from a helicopter yesterday over Kalimantan, may raise questions as to the integrity of the geological data relating to the Busang Gold resource.
* We are not overly concerned. While we are not geologists,
everything we have seen and heard makes us believe that the work
done in the determination of the resource was done in a respectable
way.
215. On March 21, 1997, Nesbitt Burns commented:
Our work and our discussions with the company and others leaves us confident that the gold is there and that the economics are as they have been portrayed. The question has been and remains - how big is the deposit. Our latest estimate is 96 million ounces with plenty of upside.
216. On March 22, 1997, The New York Times reported that trading was temporarily halted on Friday, March 21, 1997, “after word circulated of a report in Harian Ekonomi
Neraca, an Indonesian newspaper, that Freeport believed the size of the deposit had been overstated.”
In response, Bre-X issued a press release, essentially stating that due diligence efforts at the Busang site were still being conducted. On March 21, 1997, Bre-X’s stock price closed at $15.25 (Canadian) per share, down $2.20. On the NASDAQ Exchange, Bre-X fell $ 1.625 to $ 11 after hitting a
52-week low earlier of $ 10.25. More than 10.7 million shares were traded on the combined Toronto and NASDAQ Exchanges.
-68- 217. Over the weekend after the March 21, 1997 drop in Bre-X’s stock price,
Bre-X sought to reassure investors. According to a March 23, 1997 Dow Jones news release,
Felderhof stated on March 22, 1997: “I’m getting tired of all these stories, [. . .] And I’m 110% confident the gold is there.” In an article published in the London Edition of The Financial Times dated March 24, 1997, it was reported that “[t]he senior geologist [Felderhof] at Canadian exploration company Bre-X Minerals has dismissed as ludicrous doubts about the size and commercial viability of what is claimed to be the world’s largest gold deposit.” Continuing, the article reported: “Mr. Felderhof suggested last month that Busang’s reserves could be as much as 200m ounces. He declined to comment further.”
218. Also on March 24, 1997, Bre-X issued the following press release, in a statement by Walsh, on behalf of the Bre-X Board of Directors:
President and Chief Executive officer, David G. Walsh, stated March 23 that ‘the company’s Board of Directors has absolute confidence in the integrity and accuracy of assay results and resource calculations reported by the company for the Busang Gold deposit since inception of exploration in 1993. Unfortunately, when the first ounce of gold is poured at Busang, I am sure the naysayers will complain about the colour.’ The company’s technical team, under the direction of John B. Felderhof, has arrived in Jakarta to ensure continuity of the process that will secure the expeditious development of the Busang Gold Deposit.
The continuing proliferation of falsehoods and misinformation based on unsubstantiated allegations by unnamed sources, as well as recent personal attacks on Bre-X management, has prompted the management of Bre-X to consider legal action against certain parties and publications, due to the erosion of share value which has resulted from these reports.
219. On March 24, 1997, an article in The Wall Street Journal repeated the story of the Jakarta article and noted that a “Bre-X official said Thursday [March 20, 1997] that Mr. de
-69- Guzman committed suicide because he was distraught after learning he had hepatitis B, following several bouts of malaria.” The stock price closed at $ 11.375 on the NASDAQ exchange and $15.70
(Canadian) on the Toronto Exchange on March 24, 1997.
220. Even in the face of public disclosures that Busang did not contain the gold resources or reserves previously claimed, Lehman Brothers continued to support earlier estimates about the deposits. Lehman Brothers also vouched for Bre-X and the individual defendants and supported the assay techniques used, insisting that no one, including Barrick, had found fault with them, and discounted Freeport’s due diligence findings. In a report written by McConvey on March
24, 1997, Lehman Brothers stated:
[The press reported] that according to an internal Freeport report that it had seen, Freeport believes that there is far less than the 70 million ounce reserve that Bre-X has quoted and that the deposit may not be economic. While such a shocking conclusion seems unlikely in only three weeks of due diligence, and while the report could not be confirmed, it was disconcerting. . . .
Until we hear substantive news to the contrary, we will continue on the premise that Busang contains more than 70 million ounces of gold. . . . [W]e are not changing our target price at this time. . . .
[W]hile shaken and wondering what in the world is going on, we believe the deposit exists. We believe that John Felderhof and his team are solid, knowledgeable, and honorable professionals. The assay lab techniques being used, while not common place, have been looked at and reviewed by knowledgeable professionals. Kilborn has reviewed the procedures. JP Morgan, Bre-X’s investment bankers have, we understand, reviewed the procedures, and Barrick Gold . . . has done its own checks. No one has, to our knowledge, questioned the premise of the deposit to date.
Freeport may be having some early disappointments in its due diligence. However, it apparently has drilled only a few holes and it would appear to us to be extremely early for the company to make any broad-based comments on the viability of the project as indicated by the press report. One area of difficulty may for example be assaying.
-70- Assaying Busang ore is not easy. The gold is coarse (which is the reasons for its expected high recovery rates from a gravity circuit), and if cores and samples are not handled delicately and carefully, large amounts of gold could be lost and missed in assay sampling.
221. In an article in the London Edition of The Financial Times dated March 25,
1997, it was reported that “Mr. I.B. Sudjana, [Indonesia’s] mines and energy minister, said Indonesia would take ‘firm action’ if reports suggesting Busang was smaller than Bre-X’s estimates turned out to be true.” The stock price closed at $11 on the NASDAQ exchange and $15.50 (Canadian) in
Toronto on March 25, 1997.
222. On March 25, 1997, after de Guzman’s mysterious death and rumors that Bre-
X’s statements had been false, Nesbitt Burns stated that “the gold is there” and rated Bre-X a “buy”.
223. Bre-X’s attempted denial of the emerging truth regarding Busang was crushed when, on March 26, 1997, Freeport issued the following press release:
NEW ORLEANS--(BUSINESS WIRE)--March 26, 1997-- Freeport-McMoRan Copper & Gold Inc. (FCX) has been in the process of undertaking due diligence activities with regard to the previously announced transaction with BRE-X Minerals LTD (BRE-X) and Indonesian interests whereby, subject to due diligence, FCX has agreed to acquire a 15 percent interest in two Indonesian companies that are expected to be granted Contracts of Work (COWs) to explore and develop the mining rights in the Busang II and Busang III areas of East Kalimantan, Indonesia.
During the past three weeks, FCX has drilled seven core holes within the Busang II project area to confirm the results of core holes previously drilled by BRE-X. To date, analyses of these cores, which remain incomplete, indicate insignificant amounts of gold.
FCX informed BRE-X of these findings. Representatives of BRE-X met with FCX’s technical term in Jakarta, Indonesia on March 26, 1997, at which time all information available to FCX was presented to the BRE-X representatives. Today, FCX was informed by BRE-X that, based on the recommendation of BRE-X’s independent technical consultants, BRE-X was undertaking a review that includes drilling
-71- additional core holes in the Busang II area. In addition, BRE-X advised FCX that its independent technical consultants had informed BRE-X that there appears to be a strong possibility that the potential gold resources on the Busang project as previously reported by BRE-X have been overstated because of invalid samples and assaying of these samples.
FCX will monitor and cooperate with the on-going review and drilling at the Busang project. Under the terms of its agreement with BRE-X and Indonesian interests, FCX has the right to participate as a 15 percent owner of the Busang project by paying 25 percent of the total cost of delineating a proven reserve and constructing the initial Busang complex, up to $400 million, subject to the completion of due diligence satisfactory to FCX. FCX will elect to participate in the development of the Busang project only if development is, in FCX’s opinion, economically feasible.
[Emphasis added.]
224. Then, on the same date, Walsh acknowledged the emerging truth about
Busang and issued the following statement on behalf of the Bre-X Board of Directors:
BRE-X MINERALS LTD., (T-BXM, ME-BXM, NASDAQ- BXMNF), a member of the BRE-X Minerals Group of Companies, announced today it has advised the Ontario Securities Commission and The Toronto Stock Exchange that, earlier today, Bre-X was advised by Strathcona Mineral Services Limited, an independent Canadian mining industry consultant, that there appears to be a strong possibility that the potential gold resources on the Busang project in East Kalimantan, Indonesia have been overstated because of invalid samples and assaying of those samples. [Emphasis added.]
Late last week, the Board of Directors of Bre-X retained Strathcona to review, audit and comment on the technical programs carried out to date by Bre-X and the results of those programs on the Busang project and to review the due diligence program being conducted by Freeport-McMoRan Copper & Gold Inc. (FCX).
Strathcona has recommended to Bre-X that an audit be conducted of the drilling and sampling programs done by both Bre-X and FCX. This audit will include the drilling of further core samples and will take approximately four weeks. Bre-X has accepted Strathcona’s
-72- recommendation and has advised Strathcona to immediately proceed with this audit program.
225. It was also revealed by the Kilborn Defendants for the first time that their original tests, which had calculated the Busang gold resource at 70.95 million ounces, were not based on their own independent drilling and assaying:
Bre-X Minerals Ltd. issued a press release earlier today in which it states: ‘that there appears to be a strong possibility that the potential gold resources on the Busang project in East Kalimantan, Indonesia have been overstated because of invalid samples and assaying of those samples.’
Over the past three years, P.T. Kilborn Pakar Rekayasa carried out resource studies and modeling based on geological data, sample and assay information provided to it by Bre-X. The conclusions and recommendations provided in the various studies are believed to be prudent and reasonable and are founded on calculations and observations that were performed to accepted industry standards. The resulting resource calculations showed that the gold resources at Busang, in all categories, were 889 million tonnes at an average grade of 2.48 grams gold per tonne for a total of 70.95 million ounces of gold.
However, these calculations are dependent on the validity of the samples. P.T. Kilborn Pakar Rekayasa did not drill, did not take their samples nor did it assay those samples. The scope of its mandate from Bre-X relates to resource studies and modeling. [Emphasis added.]
226. On March 26, 1997, Lehman replaced McConvey as its analyst of Bre-X. In response to Bre-X’s admission of the strong possibilities that gold resources at Busang had been overstated, Lehman issued a report on that date expressing concerns about the short-term risks of
Bre-X stock.
227. Thereafter, the truth regarding the Busang site continued to unfold rapidly. An article in the The New York Times of March 27, 1997, reported that trading of Bre-X stock was again suspended the previous day on both the Toronto Stock Exchange and on the NASDAQ
-73- Exchange, as a result of the devastating news concerning the size and value of the Busang project.
Bre-X shares remained at $15.50 (Canadian) in Toronto and at $11.37 on NASDAQ on March 26,
1997, as both exchanges suspended trading. The same article, in recounting the developments since
the strange death of de Guzman, noted that “[t]here were also reports from Indonesia that a fire in
January destroyed much of his [de Guzman’s] work” concerning the Busang site.
228. In a press release issued on March 27, 1997, the Company confirmed that the
samples drilled by Freeport -- parallel to and just 1.5 meters from the Bre-X drill sites -- “indicated insignificant amounts of gold in those samples” [emphasis added].
229. The results of Freeport’s testing results in comparison to Bre-X’s results were
startling:
Hole No. Grams Per Ton Ounces Per Ton Bre-X Freeport Bre-X Freeport 1 4.39 0.01 0.13 0.00 2 1.33 0.02 0.04 0.00 3 3.23 0.06 0.09 0.00 4 5.68 0.01 0.17 0.00 5 n/a <0.01 n/a 0.00 6 n/a <0.01 n/a 0.00 7 n/a 0.02 n/a 0.00
-74- 230. Finally, an article in The New York Times on March 28, 1997, reported that after trading resumed on the afternoon of March 27, 1997, the stock plunged, losing more than 80 percent of its value, on further news that the Indonesian government “was suspending the [Busang] project by withholding the mining rights and work contracts that are necessary for mining to begin.”
[Emphasis added.] The article quoted I.B. Sudjana, the Indonesian minister of mines, as stating:
“[w]e need more time, more explanations and concrete data[.]”
231. The same article noted:
[I]n the first minutes after its stock resumed trading, more than seven million shares changed hands. When the price slumped to $2.50 (Canadian), down from $15.50 (Canadian) at the close of trading on Tuesday, the Toronto Stock Exchange was forced to again suspend trading.
The article continued:
But a number of top company officials, including Mr. Walsh and Mr. Felderhof, had already made large profits on the stock selling blocks of their shares last year when prices were high and realizing millions of dollars worth of gains. As prices peaked with the company’s gold find, Mr. Walsh sold 300,000 shares, worth more than $5 million (United States), according to the Washington Service, a firm that tracks activity by company insiders. Mr. Felderhof sold 477,900 shares from April through September last year, with a value of about $24 million (United States).
232. According to an article in The Wall Street Journal on March 28, 1997, the
Company’s stock closed on March 27, 1997 on the NASDAQ Exchange at $ 1 31/32, dropping $9
13/32 or 83% of its value from the previous close before trading was suspended. Similarly, Bre-X closed at $2.69 (Canadian) on the Toronto Stock Exchange, dropping $12.81 (Canadian) from the previous close before trading was suspended. Bresea shares also fell sharply on the news, from a close of (Can) $6.90 on March 24, 1997, to a close of (Can) $2.70 on March 27, 1997. The article
-75- noted that “[b]y the end of the day, Bre-X’s total market capitalization had fallen to $435 million, far from the peak of $4.5 billion it hit last year.” The stock had risen “from pennies in 1994 to a high of
20 1/4 on NASDAQ in the middle of last year.”
233. In an article in The New York Times on March 31, 1997, the dismal results of Freeport’s testing at the Busang site were reported in more detail:
[F]rom the start, Freeport found something amiss. Holes that Bre-X indicated should be chock-full of gold were coming up almost empty, they said. In some samples, Bre-X reported finding four or five grams a ton. Freeport said it found 0.01 gram, what it called “insignificant.”
234. Press reports confirmed that, at all relevant times, the testing conducted by
Bre-X was flawed and not performed in compliance with industry standards. A report in Bloomberg
Business News stated the following:
When the Canadian gold mining company said three years ago that it found a “significant” amount of gold on the Indonesian island of Borneo, it relied largely on the judgment of just three geologists: Senior Vice President John Felderhof, Chief Geologist Michael de Guzman and Cesar Puspos, who worked under de Guzman.
And although Bre-X later had the geologists’ soil sample from the site, known as Busang, tested through a number of labs, it didn’t bring in any independent experts to do their own drilling and sampling -- contrary to practice elsewhere in the mining industry.
[Emphasis added.]
235. The same report also described how the Busang deposit was found:
The company’s own recounting of its history noted that it had just five employees in 1993, including the three geologists. The others were President David Walsh and his wife, Jeanette, who served as corporate secretary.
Felderhof, who’s now on Borneo assisting Freeport with its studies of Busang, has prospected for gold in Asia for 20 years. He was part of
-76- the team that discovered the Ok Tedi deposit in Papua New Guinea, the second largest copper and gold deposit in the world.
“Felderhof’s one of these people that’s struck with gold fever,” said Tim Scott, exploration manager for Barrick Gold Corp.’s Indonesian operation. Barrick, based in Canada, was interested in buying into Busang as recently as last year.
The team led by Felderhof determined the location of the deposit, drilled holes on the site, and tested the resulting ore samples to assess the amount of gold that each contained.
The first sign there could be trouble with the Busang deposit surfaced last week, when de Guzman died in a fall from his helicopter into the Borneo jungle. Local authorities said the death was a suicide.
236. Furthermore, the report confirmed that Bre-X never took any industry- accepted steps to verify the true amount of resources at the Busang site:
Bre-X’s reliance on a few key people to handle the work that led to those estimates was at odds with mining exploration industry practice. Kilborn wasn’t asked to do its own drilling or assaying to confirm Bre-X’s results.
“Any person who is not looking for trouble would send their own sampling crews,” said Baki Yarar, metallurgy professor at the Colorado School of Mines in Golden, and an independent mining consultant.
Freeport, for instance, has at least 20 full-time geologists based at its Irian Jaya site in eastern Indonesia -- the location is the world’s largest copper and gold deposit -- and another 10 elsewhere checking on their work, according to people familiar with the company’s operation.
It wasn’t until last week that Bre-X hired an independent industry consultant, Strathcona Mineral Services, to do checking. Strathcona concluded there was “a strong possibility” that Bre-X’s most recent estimate of 70 million ounces at Busang is wrong, Bre-X said in a statement.
237. Nevertheless, in an interview on April 5, 1997, Walsh proclaimed: “I’m 120 percent confident that the gold is there and this has been a colossal screw up.”
-77- 238. On April 12, 1997, it was disclosed that a Nesbitt Burns analyst, while on a
trip to Busang, had filmed Bre-X employees during operations at the base camp, including crushing,
pulverizing, and homogenizing ore samples at the Company’s sample preparation facility before the
samples were tested.
239. Nevertheless, on or around May 1, 1997, Nesbitt Burns’s chief operating
officer, Aubrey Baille, praised Bianchini in a internal memo to Nesbitt Burns staff. The memo stated:
Nesbitt Burns is known for the excellence and exceptional track
record of its research and is proud of its research department and
Egizio Bianchini, the analyst following the Bre-X story . . . As part of
his research, Egizio spent time on the Busang property with the
company’s geologists, visited the assay lab, took note of its
procedures, and considered the results of well-known and respected
assaying firms and other information published by both the company
and other industry sources.
[Emphasis added.]
240. According to John Woods of Canada Stockwatch, a Vancouver based organization that tracks “junior” mining companies in western Canada:
We’ve never seen a blue-chip brokerage firm promote a penny mine
stock so vigorously as did Nesbitt Burns . . . Nesbitt Burns was the
loudest of the cheerleaders. This was not just a dispassionate view
from the analysts. It was vigorous drum-beating.
-78- 241. In a Form 6-K issued by Bre-X on May 12, 1997, Bre-X stated that a Board member of Bre-X received an interim report from Strathcona Mineral Services Limited dated May
3, 1997. The shocking interim report indicated that the “Company’s belief about the Busang II reserve was based on falsified data.” The cover letter to Walsh stated:
We very much regret having to express the firm opinion that an economic gold deposit has not been identified in the Southeast Zone of the Busang property, and is unlikely to be. We realize that the conclusions reached in this interim report will be a great disappointment to the many investors, employees, suppliers and the joint-venture partners associated with Bre-X, to the government of Indonesia, and to the mining Industry everywhere. However, the magnitude of the tampering with core samples that we believe has occurred and resulting falsification of assay values at Busang, is of a scale and over a period of time and with a precision that, to our knowledge, is without precedent in the history of mining anywhere in the world. . . As a consequence, we believe there to be virtually no possibility of an economic gold deposit in the Southeast Zone I south of the Busang property. . . The gold recovered in samples submitted by Bre-X has originated from a source other than the Southeast Zone of the Busang Property and has resulted in falsification of many thousands of samples with consequent and subsequent erroneous estimates of gold resources.
[Emphasis added.]
242. Strathcona made the following recommendations to the Board of Directors and management of Bre-X:
1. Those authorized and qualified to carry out investigations into the fraudulent activities that we believe to have occurred should be contacted immediately and requested to pursue the matters that we are bringing to the attention of Bre-X and any other parties concerned. We are ready to assist in whatever manner we can in carrying out these investigations.
2. All core and samples that have not yet been assayed and all documentation pertaining to the Busang property should be placed under tight security until the investigations recommended are completed.
-79- 3. All exploration work on the Southeast Zone at the Busang
property should cease immediately.
243. On May 8, 1997, Bre-X announced that they had sought and received court protection under the Companies Creditors Arrangement Act and the Alberta and Canadian Business corporation acts. Bre-X also announced that Felderhof had resigned from the Bre-X Board and was no longer employed by Bre-X.
244. The market for Bre-X and Bresea common stock was open, well-developed and efficient at all relevant times. As a result of these materially false and misleading statements and failures to disclose, Bre-X and Bresea common stock traded at artificially inflated prices during the
Class Period until the fact that Bre-X’s Busang project was not as represented and publicly believed was finally communicated to and understood by the securities markets. Plaintiffs and other members of the Class purchased or otherwise acquired Bre-X and Bresea common stock relying upon the integrity of the market price of Bre-X and Bresea stock and market information relating to Bre-X and have been damaged thereby.
245. Defendants’ statements prior to May 2, 1997, concerning Busang that are identified in the preceding paragraphs were materially false and misleading at the time they were made. Bre-X has admitted that it never really owned a 90% interest in Busang because it would have to give up a substantial portion of the project to bring it into production and that it has overstated the size of the Busang deposit. Information developed and disseminated by third parties (including the
Kilborn Defendants) has revealed that Bre-X’s and the Kilborn Defendants’ statements identified in the preceding paragraphs, were not based on accepted engineering principles and practices with regard to drilling, sampling and assaying methods as well as analyzing and determining measured,
-80- indicated and inferred gold resource levels (terms which are understood in the industry and which convey to investors the true extent of a company’s resources). Because Bre-X’s and the Kilborn
Defendants’ resource calculations had not, in fact, been determined in accordance with minimum acceptable industry practices and because the Kilborn Defendants’ feasibility studies contained many contradictory facts regarding the Busang project, statements based thereon by these parties, as well as statements made by J.P. Morgan, Nesbitt Burns, and Lehman Brothers, were inherently suspect and misleading and without a reasonable basis at the time they were made.
246. During the Class Period, defendants materially misled the investing public, thereby inflating the price of Bre-X and Bresea common stock, by publicly issuing false and misleading statements and omitting to disclose material facts necessary to make defendants’ statements, as set forth herein, not false and misleading. Said statements and omissions were materially false and misleading at the time they were made, in that they failed to disclose material adverse information and misrepresented the truth about the Company, its business, resources and operations, including, among other things:
(a) that the Company had grossly overstated the amount of recoverable gold existent at Busang;
(b) that the assay methods employed by the Company to evaluate Busang were flawed;
(c) that the Company’s ownership interest in Busang was uncertain and subject to change at any time; and
(d) that the Company’s estimates, projections and opinions as to the recoverable gold resources and their expected value were lacking in reasonable basis at all relevant
-81- times, because among other things, mineralization results from tests performed by independent third parties were inconsistent with the type of gold supposedly indigenous to Busang.
247. At all relevant times, the material misrepresentations and omissions particularized in this Complaint directly or proximately caused or were a substantial contributing cause of the damages sustained by plaintiffs and other members of the Class. As described herein, during the Class Period, all defendants made or caused to be made a series of materially false or misleading statements about Bre-X’s business, resources, and operations. These material misstatements and omissions had the cause and effect of creating in the market an unrealistically positive assessment of Bre-X and its business, resources and operations, thus causing the Company’s
(and Bresea’s) common stock to be overvalued and artificially inflated at all relevant times.
Defendants’ materially false and misleading statements during the Class Period resulted in plaintiffs and other members of the Class purchasing the Company’s common stock at artificially inflated prices, thus causing the damages complained of herein.
248. Barrick’s statements, as detailed above, were materially false and misleading, and omitted to state material facts, because they failed to reveal the results of testing performed in connection with Barrick’s due diligence in October of 1996. Barrick’s positive statements about the fairness of the proposed deal to Bre-X’s shareholders, and its failure to reveal the adverse test results, created the impression that Busang contained the resources publicly claimed by Bre-X. Because of
Barrick’s position as a leading gold producer, defendants’ positive statements, combined with its failure to disabuse investors about the test results, lent credibility to Bre-X’s claims. Furthermore,
Barrick provided McConvey and Lehman with access to its test results, and was indifferent to the false positive statements made by Lehman about Barrick’s test results and the size of the Busang
-82- deposit. Throughout the Class Period, Barrick failed to correct its false and incomplete statements, or the false positive statements and omissions issued by Lehman, in violation of its duties to the investing public.
249. Only on July 27, 1997 did Barrick spokesman Borg finally acknowledged that its testing demonstrated a lack of gold, stating, “Yes, we tested some core samples that showed negative.”
D. Applicability of Presumption of Reliance: Fraud-on-the-Market Doctrine
250. At all relevant times, the markets for Bre-X and Bresea common stock were efficient markets for the following reasons, among others:
(a) Bre-X common stock met the requirements for listing, and was listed and actively traded, on the NASDAQ National Market, the Toronto Stock Exchange and the
Montreal Exchange, all highly efficient and automated markets; Bresea traded on the Montreal Stock
Exchange and over the counter in unlisted U.S. Trading. Due to the affiliation between Bre-X and
Bresea, the two stocks rose and fell in tandem based on the same disclosures concerning Bre-X.
(b) As a regulated issuer, Bre-X filed periodic public reports with the SEC and the NASD; and
(c) Bre-X regularly issued press releases which were carried by, among other media, national newswires and on the Internet. Each of these releases was publicly available and entered the public marketplace.
251. As a result, the market for Bre-X and Bresea common stock promptly digested current information with respect to Bre-X from all publicly-available sources and reflected such information in Bre-X’s and Bresea’s stock price. Under these circumstances, all purchasers of
-83- Bre-X and Bresea’s common stock during the Class Period suffered similar injury through their purchase of stock at artificially inflated prices and they are entitled to a presumption of reliance for the purpose of class certification as well as ultimate proof of their claims on the merits.
E. No Safe Harbor
252. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the allegedly false statements pleaded in this complaint.
The specific statements pleaded herein were not identified as “forward-looking statements” when made. Nor was it stated with respect to any of the statements forming the basis of this complaint that actual results “could differ materially from those projected.” To the extent there were any forward- looking statements, there were no meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the purportedly forward-looking statements. Alternatively, to the extent that the statutory safe harbor does apply to any forward- looking statements pleaded herein, defendants are liable for those false forward-looking statements because at the time each of those forward-looking was made the particular speaker knew that the particular forward-looking statement was false, and/or the forward-looking statement was authorized and/or approved by an executive officer of Bre-X who knew that those statements were false when made.
F. Scienter Allegations
-84- 253. As alleged herein, defendants acted with scienter. Defendants knew that the public documents and statements issued or disseminated by, in the name of, or concerning the
Company and/or Bresea were materially false and misleading; knew or recklessly disregarded that such statements or documents would be issued or disseminated to the investing public; and knowingly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violators of the federal securities laws. As set forth elsewhere herein in detail, defendants, by virtue of their receipt of information reflecting the true facts regarding Bre-X, its business practices and its resources, their control over and/or receipt of Bre-X’s allegedly materially misleading misstatements and/or their associations with the Company which made them privy to confidential information concerning Bre-X, as well as their experience in and knowledge of the gold industry, were active and culpable participants in the fraudulent scheme alleged herein. Defendants knew or recklessly disregarded the falsity and misleading nature of the information about Bre-X which they caused to be disseminated to the investing public. This case does not involve allegations of false forward-looking statements or projections but instead involves false statements of fact concerning the Company’s then existing and past business, operations and resources.
254. The Insider Defendants engaged in such a scheme to inflate the price of Bre-X securities in order to: (i) protect and enhance their executive positions and the substantial compensation and prestige they obtained thereby; (ii) enhance the value of their personal holdings of
Bre-X securities and options; and (iii) facilitate massive insider sales of Bre-X common stock as described below.
255. In addition, these defendants’ “well-timed” insider selling is highly probative of defendants’ scienter and is part of defendants’ scheme, artifice to defraud or acts, practices or
-85- course of business in violation of Section 10(b) and Rule 10b-5. As set forth above, while defendants were issuing false favorable statements about the Company’s business, resources and properties and concealing or obscuring negative information, Insider Defendants, who had access to confidential information and were aware of the truth about the Company and its resources, was benefitting from the illegal course of business or course of conduct described in this complaint by selling large blocks of the Company’s stock at artificially inflated prices without disclosing the material adverse facts about the Company to which they were privy. Such sales were unusual in their amount and in their timing. The numerous and repeated insider sales of Bre-X stock by Insider Defendants imposed upon them duties of full disclosure of all of the material facts alleged in this complaint. The following table shows the heavy insider selling of the defendants during the Class Period (all dollar amounts are in
Canadian dollars):
Shares Price Proceeds
John B. Thorpe
8/18/96 700 $24.00 $ 16,800 8/22/96 20,000 $25.00 $ 500,000
Total: $ 516,800
David Walsh
8/19/96 3,500 $24.55 $ 85,925 25,000 $24.60 $ 615,000 15,200 $24.65 $ 374,680 6,300 $24.70 $ 155,610 45,000 $25.00 $1,125,000 17,500 $25.05 $ 438,375 27,500 $25.10 $ 690,250 15,000 $25.15 $ 377,250
8/26/96 51,300 $25.00 $1,282,500 11,400 $25.05 $ 285,570
-86- 1,600$25.10 $ 40,160
8/27/96 1,300$25.05 $ 32,565 29,400 $25.00 $ 735,000
Total: $ 5,547,635
J. Walsh
8/20/96 79,100 $24.95 $ 1,973,545 20,900 $24.90 $ 520,410
8/22/96 85,000 $25.00 $ 2,125,000 15,000 $25.05 $ 375,750
8/23/96 74,400 $25.00 $ 1,860,000 10,600 $25.05 $ 265,530 15,000 $25.15 $ 377,250
10/1/96 1,700$26.55 $ 45,135 18,300 $26.50 $ 484,950 10,000 $26.65 $ 266,500 10,000 $26.70 $ 267,000 10,000 $26.80 $ 268,000
10/17/96 20,000 $20.50 $ 410,000 5,000$20.60 $ 103,000
10/18/96 10,000 $20.55 $ 205,500 5,000$20.90 $ 104,500 5,000$21.00 $ 105,000 2,500$21.10 $ 52,750 2,500$21.25 $ 53,125
10/21/96 7,500$20.90 $ 156,750 6,700$20.95 $ 140,365 5,000$21.15 $ 105,750 200 $21.30 $ 4,260
10/22/96 5,000$20.35 $ 101,750 10,000 $20.40 $ 204,000 5,000$20.45 $ 102,250 10,600 $20.50 $ 217,300
-87- Total: $10,995,370
John Felderhof
9/9/96 24,000 $25.55 $ 613,200 39,000 $25.50 $ 994,500 1,000 $25.45 $ 25,450 7,400$25.60 $ 189,440 4,000$26.00 $ 104,000 10,000 $26.05 $ 260,500
9/10/96 29,500 $25.25 $ 744,875 5,000 $25.30 $ 126,500 46,100 $25,35 $ 1,168,635 8,900$25.40 $ 226,060 15,500 $25.45 $ 394,475 15,000 $25.50 $ 382,500
Total: $ 5,230,135
Stephen McAnulty
9/18/96 14,700 $28.25 $ 415,275 17,000 $28.35 $ 481,950 3,000$28.40 $ 85,200
Total: $ 982,425
256. Barrick engaged in the wrongdoing described herein in order to inflate artificially the market price of its stock. In making and failing to correct its false public statements,
Barrick acted with gross recklessness or indifference to the information it possessed about Busang based its own testing.
-88- FIRST CLAIM
(For Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder)
257. Plaintiffs repeat and reallege the allegations set forth above as though fully set forth herein. This claim is asserted against all defendants.
258. During the Class Period, defendants, and each of them, carried out a plan, scheme and course of conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing public, including plaintiffs and other Class members, as alleged herein; (ii) artificially inflate and maintain the market prices of Bre-X and Bresea common stock; and (iii) cause plaintiffs and other members of the Class to purchase Bre-X and Bresea common stock at artificially inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions set forth herein.
259. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material fact and/or omitted to state material facts necessary to make the statements not misleading; and (c) engaged in acts, practices, and a course of business which operated as a fraud and deceit upon the purchasers of the Company’s securities in an effort to maintain artifi- cially high market prices for Bre-X and Bresea common stock in violation of Section 10(b) of the
Exchange Act and Rule 10b-5. All defendants are sued as primary participants in the wrongful and illegal conduct charged herein. The Insider Defendants and Bresea also are sued as controlling persons of Bre-X, as alleged below.
-89- 260. In addition to the duties of full disclosure imposed on defendants as a result of their making of affirmative statements and reports, or participation in the making of affirmative statements and reports to the investing public, all defendants had a duty to promptly disseminate truthful information that would be material to investors in compliance with the integrated disclosure provisions of the SEC as embodied in SEC Regulation S-X (17 C.F.R. § 210.01 et seq.) and S-K (17
C.F.R. § 229.10 et seq.) and other SEC regulations, including accurate and truthful information with respect to the Company’s operations and performance so that the market prices of the Company’s publicly traded securities would be based on truthful, complete and accurate information.
261. Defendants, individually and in concert, directly and indirectly, by the use of means or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of conduct to conceal adverse material information about the business, resources, properties, business practices, finances, financial condition, performance, operations, value and future prospects of Bre-X as specified herein. Defendants employed devices, schemes and artifices to defraud, while in possession of material adverse non-public information and engaged in acts, practices, and a course of conduct as alleged herein in an effort to assure investors of Bre-X’s value and performance and continued substantial growth, which included the making of, or the participation in the making of, untrue statements of material facts and omitting to state material facts necessary in order to make the statements made about Bre-X and its business, resources, properties, operations and future prospects in the light of the circumstances under which they were made, not misleading, as set forth more particularly herein, and engaged in transactions, practices and a course of business which operated as a fraud and deceit upon the purchasers of Bre-X and Bresea common stock during the Class Period.
-90- 262. Each of the Insider Defendants’ primary liability, and controlling person liability, arises from the following facts: (i) each of the Insider Defendants was a high-level executive and/or director of the Company during the Class Period and/or was a member of the Company’s senior management; (ii) each of the Insider Defendants, by virtue of his/her responsibilities and activities as a senior executive officer and/or director of the Company, was privy to and participated in the preparation of the Company’s financial statements and reporting of the Company’s financial condition, operations and performance; (iii) the Insider Defendants enjoyed significant personal contact and familiarity with each other and were advised of and had access to other members of the
Company’s management team, internal reports, and other data and information about the Company’s resources at all relevant times; and (iv) the Insider Defendants were aware of the Company’s dissemination of information to the investing public which they knew or recklessly disregarded was materially false and misleading.
263. The defendants had actual knowledge of the misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and to disclose such facts, even though such facts were available to them. Such defendants’ material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and effect of concealing Bre-X’s operating condition, resources, properties, finances, business practices, value and future business prospects from the investing public and supporting the artificially inflated price of its stock. As demonstrated by defendants’ misstatements of the Company’s business, resources, and finances throughout the Class Period, defendants, if they did not have actual knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain such
-91- knowledge by deliberately refraining from taking steps to discover whether those statements were false or misleading.
264. As a result of the dissemination of the materially false and misleading information and failure to disclose material facts, as set forth above, the market prices of Bre-X and
Bresea common stock were artificially inflated at all relevant times. In ignorance of the fact that the market prices of Bre-X and Bresea common stock were artificially inflated, and relying directly or indirectly on the false and misleading statements made by defendants, or upon the integrity of the market in which the securities trade, and the truth of any representations made to appropriate agencies as to the investing public, at the times at which any statements were made, and/or on the absence of material adverse information that was known to or recklessly disregarded by defendants but not disclosed in public statements by defendants during the Class Period, plaintiffs and the other members of the Class acquired Bre-X and Bresea common stock during the Class Period at artificially high prices and were damaged thereby.
265. At the time of said misrepresentations and omissions, plaintiffs and other members of the Class were ignorant of their falsity, and believed them to be true. Had plaintiffs and the other members of the Class and the marketplace known of the true business practices, properties, prospects and resources of Bre-X, which were not disclosed by defendants, plaintiffs and other members of the Class would not have purchased or otherwise acquired their Bre-X and Bresea common stock during the Class Period, or, if they had acquired such securities during the Class
Period, they would not have done so at the artificially inflated prices which they paid.
266. By virtue of the foregoing, defendants have violated Section 10(b) of the
Exchange Act, and Rule 10b-5 promulgated thereunder.
-92- 267. As a direct and proximate result of defendants’ wrongful conduct, plaintiffs and the other members of the Class suffered damages in connection with their purchases of the Company’s securities during the Class Period.
SECOND CLAIM
(For Violation of Section 20(a) of the Exchange Act Against the Insider Defendants and Bresea)
268. Plaintiffs repeat and reallege the allegations set forth above as if set forth fully
herein. This claim is asserted against the Insider Defendants and Bresea.
269. The Insider Defendants and Bresea acted as controlling persons of Bre-X
within the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-
level positions, participation in and/or awareness of the Company’s operations and/or intimate
knowledge of the Company’s financial condition, products and the actual progress of its development
and marketing efforts, the Insider Defendants and Bresea had the power to influence and control and
did influence and control, directly or indirectly, the decision-making of the Company, including the
content and dissemination of the various statements which plaintiffs contend are false and misleading.
Each of the Insider Defendants and Bresea was provided with or had unlimited access to copies of
the Company’s reports, press releases, public filings and other statements alleged by plaintiffs to be
misleading prior to and/or shortly after these statements were issued and had the ability to prevent
the issuance of the statements or cause the statements to be corrected.
270. In particular, each of the Insider Defendants and Bresea had direct involvement in the day-to-day operations of the Company and, therefore, is presumed to have had the power to control or influence the particular transactions giving rise to the securities violations as
alleged herein, and exercised the same.
-93- 271. Pursuant to Section 20(a) of the Exchange Act, by virtue of their positions as controlling persons, the Insider Defendants and Bresea are liable jointly and severally with and to the same extent as the Company for the Company’s aforesaid violations of Section 10(b) of the Exchange
Act and Rule 10b-5 promulgated thereunder. As a direct and proximate result of defendants’ wrongful conduct, plaintiffs and other members of the Class suffered damages in connection with their purchases of the Company’s securities during the Class Period.
THIRD CLAIM
(For Negligent Misrepresentation Against All Defendants)
272. Plaintiffs repeat and reallege each and every allegation contained above.
273. This Count is brought by plaintiffs against all the defendants based upon common law principles of negligent misrepresentation.
274. Defendants made and participated in the making of representations of fact to plaintiffs and other members of the Class by means of various documents and statements as alleged herein.
275. In making said misrepresentations and statements, as alleged above, defendants failed to state material facts necessary (i) in order to make the statements made, in light of the circumstances under which they were made, not misleading, and (ii) in order that prospective investors in Bre-X and Bresea common stock would have all of the material facts necessary for an informed decision. Among the direct and proximate causes of said misrepresentations and omissions to state material facts was the negligence and carelessness of defendants, and the absence of any reasonable basis for belief in the truth of such statements.
-94- 276. At the time of said misrepresentations and omissions, plaintiffs and the other
members of the Class were ignorant of their falsity, and believed them to be true. In reliance, directly
and/or indirectly, on said misrepresentations and in reliance upon the superior knowledge and
expertise of defendants, plaintiffs and the other members of the Class were induced to and did
purchase Bre-X and Bresea common stock. Had plaintiffs and the other members of the Class known
the truth, they would not have made such purchases or purchased at the price they did. By reason
thereof, plaintiffs and the other members of the Class have been damaged.
FOURTH CLAIM
(For Common Law Fraud Against All Defendants)
277. Plaintiffs repeat and reallege each and every allegation contained above.
278. This Claim is brought by plaintiffs against all the defendants based upon common law principles of fraud.
279. Each of the defendants owed to purchasers of Bre-X and Bresea common stock, including to plaintiffs and the other members of the Class, a duty of full disclosure, honesty, and complete candor, as well as a duty to exercise reasonable care and to make a reasonable and diligent investigation of the statements contained in the public statements regarding Bre-X, including annual and interim reports and other publicly disseminated statements and information during the
Class Period.
280. For the purpose of inducing public investors including plaintiffs and the other members of the Class to purchase Bre-X and Bresea common stock, and with knowledge, the intent to deceive, or reckless indifference to such investors, the defendants employed a scheme and conspiracy to defraud as a part of which said defendants made, or participated in the making of,
-95- material misrepresentations of fact to plaintiffs and other members of the Class, and as a further part of which defendants concealed the true facts, and being bound to disclose, omitted to state material facts as set forth above. Those representations and statements were not true and defendants did not believe them to be true. Said acts by defendants were fraudulent, oppressive and malicious.
281. Plaintiffs and the other members of the Class, at the time of said representations and omissions, were ignorant of the falsity of these statements, and believed them to be true. In reliance, directly and indirectly, upon said misrepresentations, the integrity of the market and the fidelity, integrity and superior knowledge of defendants, and in ignorance of the true facts, plaintiffs and the other members of the Class were induced to and did purchase Bre-X and Bresea common stock at artificially inflated prices. Had plaintiffs and the other members of the Class known the true facts, they would not have taken such action. By reason thereof, plaintiffs and the other members of the Class have been damaged.
WHEREFORE, plaintiffs pray for relief and judgment, as follows:
i) Determining that this action is a proper class action and certifying plaintiffs as class representatives under Rule 23 of the Federal Rules of Civil Procedure and their counsel as Lead Counsel;
ii) Awarding compensatory damages in favor of plaintiffs and the other Class members against all defendants, jointly and severally, for all damages sustained as a result of defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;
iii) Awarding plaintiffs and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and
iv) Such other and further relief as the Court may deem just and proper.
-96- Dated: April 8, 1998 Respectfully submitted,
Damon Young R. Paul Yetter State Bar No. 22176700 State Bar No. 22154200 John M. Pickett Autry W. Ross Young & Pickett Yetter & Warden, L.L.P. 4122 Texas Boulevard 600 Travis, Suite 3800 Texarkana, Texas 75504 Houston, Texas 77002 (903) 794-1303 (713) 238-2000
Attorney-in-Charge for Plaintiffs
Charles Edward Miller H. Lee Godfrey State Bar No. 14062000 State Bar No. 0805400 A. Paul Miller Charles R. Eskridge, III State Bar No. 14056050 James T. Southwick Miller, James, Miller, Wyly & Hornsby Susman Godfrey L.L.P. 1012 Olive 1000 Louisiana, Suite 5100 Texarkana, Texas 75501 Houston, Texas 77002 (903) 794-2711 (713) 651-9366
Lead Counsel for Plaintiffs Of Counsel:
Michael C. Spencer U. Seth Ottensoser Milberg Weiss Bershad Hynes & Lerach LLP One Pennsylvania Plaza, 49th Floor New York, New York 10119
(212) 594-5300
Sandy A. Liebhard New York, New York 10016 Mel E. Lifshitz (212) 779-1414 Bernstein Liebhard & Lifshitz 274 Madison Avenue Stuart H. Savett
-97- Robert P. Frutkin Savett Frutkin Podell & Ryan, P.C. Mark C. Gardy 325 Chestnut Street, Suite 700 James S. Notis Philadelphia, Pennsylvania 19106-2614 Abbey, Gardy & Squitieri, LLP (215) 923-5400 212 East 39th Street New York, New York 10016 Martin D. Chitwood (212) 889-3700 Christi C. Mobley Chitwood & Harley Steven J. Toll 2900 Prominad II Matthew J. Ide 1230 Peachtree St., N.W. Cohen Milstein Hausfeld & Toll, P.L.L.C Atlanta, Georgia 30309 The First Interstate Building (404) 873-3900 999 Third Avenue, Suite 3600 Seattle, Washington 98104 Richard D. Kranich (206) 521-0080 Law Offices of Richard D. Kranich 120 Broadway, Suite 1016 Robert I. Harwood New York, New York 10271 Matthew M. Houston (212) 608-8965 Frederick W. Gerkens, III Wechsler Harwood Halebian & Feffer, L.L.P. Jeffrey G. Smith 805 Third Avenue Ira P. Lustbader New York, New York 10022 Wolf Haldenstein Adler Freeman & Herz LLP (212) 935-7400 270 Madison Avenue New York, New York 10016 Burton H. Finkelstein (212) 545-4600 Kendall L. Satterfield Victor J. Cosentino Robert C. Schubert Finkelstein, Thompson & Loughran Juden Justice Reed 1055 Thomas Jefferson Street, N.W., Schubert & Reed, L.L.P. Suite 601 Two Embarcadero Center, Suite 1050 Washington, D.C. 20007 San Francisco, California 94111 (202) 337-8000 (415) 788-4220 Thomas R. Ajamie W. Mark McNair State Bar No. 00952400 James F. Humphreys & Associates, L.C. Schirrmeister & Ajamie, L.L.P. 1919 Pennsylvania Avenue, N.W., Suite 800 711 Louisiana, Suite 2150 Washington, D.C. 20006 Houston, Texas 77002 (202) 736-2191 (713) 229-9808 Stephen D. Oestreich Wallace A. Showman Francine B. Goodman Wolf Popper LLP 845 Third Avenue New York, New York 10022 (212) 759-4600
-98- Andrew L. Barroway Curtis V. Trinko Schiffrin & Craig, Ltd. Law Offices of Curtis V. Trinko, L.L.P. Three Bala Plaza East, Suite 400 310 Madison, Suite 1401 Bala Cynwyd, Pennsylvania 19004 New York, New York 10017 (610) 667-7706 (212) 490-9550 Norman Berman Douglas A. McGillivray Berman, DeValerio & Pease, LLP Burnet, Duckworth & Palmer One Liberty Square 350 7th Avenue, S.W., Suite 1400 Boston, Massachusetts 02109 Calgary, Alberta T2P 3N9 (617) 542-8300 Canada (403) 260-0100 Clint G. Docken, Q.C. Docken & Co. David A. Klein 215 Atrium II Klein Lyons 840 Sixth Avenue, S.W. 805 West Broadway Calgary, Alberta T2P 3E5 Vancouver, British Columbia V5X 1K1 Canada Canada (403) 269-3612 (604) 874-7171 Rodney J. Gillis, Q.C. Ronald D. Manes Gilbert, McGloan, Gillis Darryl T. Mann 55 Union Street, Suite 710 Torkin, Manes, Cohen & Arbus Saint John, New Brunswick E2L 4S6 151 Yonge Street, Suite 1500 Canada Toronto, Ontario M5C 2W7 (506) 634-3600 Canada (416) 863-1188 Certificate of Service
I hereby certify that on this ___ day of ______, 1998, a copy of the foregoing was served on all counsel of record by facsimile, hand-delivery, and/or certified mail, return receipt requested.
Damon Young
COMPLAINT2WP.DOC -99-