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, § § Plaintiffs, § § v. § Civil Action No. 597CV159 § (Jury Trial Demanded) BRE-X MINERALS LTD., § BRESEA RESOURCES LTD., § JOHN B. FELDERHOF, § ESTATE OF DAVID G. WALSH, § JEANETTE WALSH, § T. STEPHEN McANULTY, § JOHN B. THORPE, § ROLANDO C. FRANCISCO, § HUGH C. LYONS, § PAUL M. KAVANAUGH, § J.P. MORGAN SECURITIES, INC., § P.T. KILBORN PAKAR REKAYASA, § KILBORN ENGINEERING PACIFIC LTD., § SNC-LAVALIN INC., § NESBITT BURNS, INC., § LEHMAN BROTHERS, INC., and § BARRICK GOLD CORPORATION, § § Defendants. §

FOURTH AMENDED CLASS ACTION COMPLAINT Table of Contents

Page

I. NATURE OF THE ACTION...... 2

II. JURISDICTION AND VENUE...... 7

III. PARTIES...... 7

A. Plaintiffs ...... 7 B. Defendant Bre-X ...... 9 C. Defendant Bresea ...... 10 D. Insiders Defendants...... 10 E. Defendant J.P. Morgan & Co., Inc...... 14 F. The Kilborn Defendants ...... 15 G. Defendant Nesbitt Burns ...... 17 H. Defendant Lehman Brothers, Inc...... 20 I. Defendant Barrick Gold Corporation...... 21

IV. CLASS ACTION ALLEGATIONS ...... 22

V. FACTUAL ALLEGATIONS ...... 25

A. Bre-X, Bresea, and the Insider Defendants 1. Background ...... 25 2. Misrepresentations ...... 26 3. The Truth Begins to Emerge ...... 42

B. J.P. Morgan 1. Background ...... 60 2. Misrepresentations ...... 61 3. Scienter...... 65 4. Summary of Scienter...... 81

C. Kilborn Defendants 1. Background ...... 84 2. Misrepresentations ...... 86 3. Role of Each Kilborn Defendant...... 93 4. Scienter...... 98 5. Summary of Scienter...... 105

D. Nesbitt Burns

-i- 1. Background ...... 108 2. Misrepresentations ...... 110 3. Scienter...... 119 4. Summary of Scienter...... 124

E. Lehman Brothers 1. Background ...... 125 2. Misrepresentations ...... 126 3. Scienter...... 134 4. Summary of Scienter...... 138

F. Barrick Gold Corporation 1. Background ...... 140 2. Misrepresentations ...... 141 3. Scienter...... 143 4. Summary of Scienter...... 173

VI. FALSITY OF DEFENDANTS’ STATEMENTS ...... 174

VII. FRAUD-ON-THE-MARKET DOCTRINE...... 177

VIII. NO SAFE HARBOR...... 177

IX. CAUSES OF ACTION...... 178

-ii- 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, § § Plaintiffs, § § v. § § Civil Action No. 597CV159 BRE-X MINERALS LTD., § BRESEA RESOURCES LTD., § (Jury Trial Demanded) JOHN B. FELDERHOF, § ESTATE OF DAVID G. WALSH, § JEANETTE WALSH, § T. STEPHEN McANULTY, § JOHN B. THORPE, § ROLANDO C. FRANCISCO, § HUGH C. LYONS, § PAUL M. KAVANAUGH, § J.P. MORGAN SECURITIES, INC., § P.T. KILBORN PAKAR REKAYASA, § KILBORN ENGINEERING PACIFIC LTD., § SNC-LAVALIN INC., § NESBITT BURNS, INC., § LEHMAN BROTHERS, INC., and § BARRICK GOLD CORPORATION, § § Defendants. §

FOURTH 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 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.

I. 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) 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 a star of investors after defendants convinced the investing public that Bre-X owned 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 extracted from Bre-X’s properties were accepted as proof of the Company’s claims, until independent analysis and drilling revealed the massive deception perpetrated by defendants. The Bre-X saga is now being called the gold fraud of the century.

3. After making repeated statements that between 70 million and 200 million ounces of gold were available for extraction at Busang, Bre-X shocked investors by announcing on

March 26, 1997 that a reputable mining consultant had concluded that there was “a strong possibility” that prior estimates concerning the quantity of gold at Busang “have been overstated because of invalid samples and assaying of these samples.” That same day, Freeport McMoRan

-2- Gold & Copper, Inc. (“Freeport”), which had been announced as Bre-X’s partner in the Busang project, reported that its analyses of seven core samples “indicate insignificant amounts of gold.”

That news came one week after the announced death of Bre-X chief geologist Michael de Guzman, who reportedly fell from a helicopter while traveling to Busang to meet with Freeport representatives to discuss their assay results.

4. For weeks, Bre-X insiders vehemently denied the fraud. Ultimately, however, even Bre-X acknowledged that the numerous public statements it had made touting millions of ounces of gold at Busang were 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 mining consultant, which became known to the market on May 3, 1997. It soon emerged that -- as any knowledgeable gold analyst or mining expert assessing Busang would have readily determined -- the samples had been adulterated with gold from other sources.

5. Following the March 26, 1997 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. Bresea stock, which tracked Bre-X in market performance, followed suit. But Bre-X insiders already had profited, having sold millions of dollars worth of stock with 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” that were obvious to Bre-X’s engineers and experts (such as J.P. Morgan and Kilborn) and gold analysts (such as those employed by Nesbitt and Lehman) who visited Busang and had access to core samples taken from the area. According to Moffett, these warning signs included:

-3- • 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.

• 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.

• [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 (the

“Insider Defendants”) -- intentionally deceived the investing public about Busang in order to reap tremendous profits from selling their Bre-X and Bresea stock at artificially inflated prices.

8. Defendant 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 reviewed numerous reports and studies prepared by engineering consultants for Bre-X concerning Busang. After it was engaged as a “financial advisor” by Bre-X in September 1996, J.P.

Morgan worked closely with and assisted Bre-X executives and employees in Indonesia, Canada, and the U.S.

9. As a result, J.P. Morgan learned critical adverse facts that were kept from the public by Bre-X. These facts included the fundamental inconsistencies between the type of gold purportedly found in Busang, on the one hand, and the test results in the reports and studies prepared

-4- by Kilborn and other Bre-X consultants, and Barrick’s due diligence testing, on the other. J.P.

Morgan nevertheless made unqualified public statements touting Busang.

10. Defendants P.T. Kilborn, Kilborn Engineering, and SNC-Lavalin (the

“Kilborn Defendants”) provided engineering services to Bre-X and issued written resource estimates that falsely substantiated Bre-X’s claims concerning Busang. They provided these estimates knowing that Bre-X and Bresea would publish them to the investing public. The estimates omitted critical information, however, including that independent testing performed by other laboratories indicated that the gold in Bre-X’s samples was different in shape, size and degree of weathering from what would be found in volcanic formations like Busang and that the gold was of an origin that was not the underground hard-rock source in Busang.

11. The Kilborn Defendants also chose not to disclose that Bre-X’s unusual sample preparation procedures including sending whole core samples to test labs. It was unusual not to perform sample preparation on site for such a large project because of the cost of shipping whole core samples rather than small, crushed representative samples. It was even more unusual to allow samples to languish 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.

12. Defendant Nesbitt, a large Canadian brokerage firm, was a leading underwriter of Bre-X’s public stock offerings and syndicator of its private stock placements. Acting through its agents, including Egizio Bianchini, who rose to prominence as a gold analyst, Nesbitt followed and analyzed Bre-X and Bresea stock during the Class Period. Bianchini visited the Busang drill site and was in constant communication with and closely associated with the Insider Defendants.

-5- 13. As a result, Nesbitt knew of numerous irregularities in the Busang operations, including that verified core samples were neither independently collected nor tested. It knew that statements of massive gold resources at Busang by Bre-X, Bresea, and the Kilborn Defendants could be materially overstated or even wholly false.

14. Defendant Lehman, a leading U.S. brokerage and investment firm, followed and analyzed Bre-X stock during the Class Period. Acting through its agents, including Daniel

McConvey, a gold analyst, Lehman visited the Busang site and was in frequent communication with and closely associated with the Insider Defendants.

15. As a result, Lehman knew of numerous irregularities in the Busang operations, including that verified core samples were neither independently collected nor tested. It knew that statements of massive gold resources at Busang by Bre-X, Bresea, and the Kilborn Defendants could be materially overstated or even wholly false.

16. Defendant Barrick participated in the fraud by making false public statements and concealing important facts about Busang. During extensive negotiations with Bre-X and the

Indonesian Government over a proposed joint venture to develop Busang, Barrick learned materially adverse information about Busang from its own due diligence tests performed in late 1996, which revealed an absence of gold, and in early 1997, which revealed the presence of the wrong type of gold. In addition, Barrick learned, as a result of retaining an expert who analyzed data derived from core samples taken from Busang, that Bre-X’s reported gold values were fundamentally flawed and that Bre-X’s public statements concerning Busang were highly suspect.

17. Nevertheless, Barrick knowingly and falsely touted to the investing public the

“gold” and future mine at Busang.

-6- 18. In short, defendants knew or recklessly disregarded that their statements about the gold resources and future mine in Busang were unsubstantiated, misleading, or altogether false, and they chose not to divulge to the investing public even the elementary insights later reported by

Jim Bob Moffett. Their statements and omissions directly mislead investors and concealed the indisputable facts they knew or recklessly chose not to acknowledge: Bre-X’s core samples had been fraudulently adulterated with gold from other sources.

II. JURISDICTION AND VENUE

19. 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.

20. 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.

21. 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.

22. In connection with the acts and omissions alleged in this complaint, defendants directly or indirectly used the means and instrumentalities of interstate commerce, including the mails, interstate telephone communications, and the facilities of the national securities markets.

-7- III. PARTIES

A. Plaintiffs

23. Plaintiff Lane McNamara is a resident of this District. He purchased Bre-X common stock during the Class Period and was damaged thereby.

24. 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.

25. Plaintiff Scott Wilding purchased shares of Bresea common stock during the

Class Period and was damaged thereby.

26. Plaintiff Reuven Randall Singer purchased Bre-X common stock during the

Class Period and was damaged thereby.

27. Plaintiff Melvin B. Miller purchased Bre-X common stock during the Class

Period and was damaged thereby.

28. Plaintiff Meissner Music Productions, Inc. purchased Bre-X common stock during the Class Period and was damaged thereby.

29. Plaintiff New Madras Limited Partnership purchased Bre-X common stock during the Class Period and was damaged thereby.

30. Plaintiff Alan Hirsch purchased Bre-X common stock during the Class Period and was damaged thereby.

31. Plaintiff Benjamin Kemper purchased Bre-X common stock during the Class

Period and was damaged thereby.

-8- 32. Plaintiff Deborah L. Foss purchased Bre-X common stock during the Class

Period and was damaged thereby.

33. Plaintiff Donald Lytle purchased Bre-X common stock during the Class Period and was damaged thereby.

Defendants

34. Each defendant 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 stock. They each disseminated materially false and misleading statements and/or concealed material adverse facts.

35. The Defendants’ scheme deceived the investing public regarding Bre-X’s business, resources, and properties and the intrinsic value of Bre-X’s and Bresea’s common stock; it caused plaintiffs and other members of the Class to purchase Bre-X and Bresea stock at artificially inflated prices; and it 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 Busang was finally revealed.

B. Defendant Bre-X

36. Bre-X is incorporated under the laws of the Province of Alberta, Canada and had its principal place of business at the Bre-X Building, 119 14th Street, N.W., Calgary, Alberta,

Canada. The Company also maintained offices in Indonesia. Bre-X purported to be in the business of acquiring, exploring and evaluating mineral properties and developing those properties if appropriate.

37. 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

-9- Exchange. On August 19, 1996, the stock began trading on the NASDAQ National Market, a U.S. securities exchange, under the ticker symbol “BXMNF.” The stock began trading on the Montreal

Stock Exchange in September 1996.

38. 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.

39. 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 complaint, share figures are stated on a post-split basis.)

C. Defendant Bresea

40. Bresea is a holding company, which holds as its primary asset approximately

49 million shares or 25% of the Company. During the Class Period, Bresea and Bre-X shared three of four directors, and four officers, in common. Bresea had its headquarters at the Bre-X Building,

119 14th Street, N.W., Calgary, Alberta, Canada.

41. Bresea shares were publicly traded on the Montreal Stock Exchange under the symbol “ME:BSR” and over-the-counter, unlisted, in the U.S. under the symbol “BSEAF.” During the Class Period, Bresea stock rose and fell in tandem with Bre-X stock.

D. The Insider Defendants

42. 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,

-10- Felderhof received substantial compensation and other benefits from the Company. Felderhof sold shares of Bre-X stock worth at least C$71.2 million during the Class Period.

43. David G. Walsh (“Walsh”), now deceased, 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 shares of Bre-X stock worth at least C$25 million during the Class Period.

44. 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 shares of Bre-X and Bresea stock worth at least C$31.9 million during the

Class Period.

45. J. Walsh was the wife of Walsh. Together they sold C$57 million worth of

Bre-X and Bresea stock during the Class Period.

46. 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 shares of Bre-X and Bresea stock worth at least C$13.8 million during the Class Period. His wife sold an additional

C$11 million worth during this period.

47. 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 shares of Bre-X and Bresea stock worth at least C$10.5 million during the Class Period.

-11- 48. Defendant Rolando C. Francisco was, at relevant times, Executive Vice

President, Chief Financial Officer, and a director of the Company. In those capacities, he received substantial compensation and other perquisites from the Company. Francisco sold shares of Bre-X stock worth at least C$1.25 million during the Class Period.

49. Defendant Hugh C. Lyons was, at all relevant times, a director of Bre-X. He sold shares of Bresea stock worth at least C$2 million during the Class Period.

50. Defendant Paul M. Kavanaugh was, at all relevant times, a director of Bre-X.

He sold shares of Bre-X stock worth at least C$500,000 during the Class Period.

51. 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.

52. 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 this narrowly defined group of defendants.

53. By virtue of his/her high-level positions with the Company, each Insider

Defendant 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

-12- information concerning the Company and its business, resources, operations, and practices. Each

Insider Defendant was involved in drafting, producing, reviewing, or disseminating false and misleading statements and information alleged herein, aware (or recklessly disregarded) that false and misleading statements were being issued regarding the Company, and approved or ratified these statements, in violation of the federal securities laws.

54. 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.

55 The Insider Defendants participated in the drafting, preparation, 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.

56 Because of their Board membership and/or executive and managerial positions with Bre-X, 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

-13- 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.

57 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 had the ability and opportunity to prevent their issuance or cause them to be corrected.

58 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.

E. Defendant J.P. Morgan

59 J.P. Morgan Securities, Inc. 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 offers financial services to a wide range of institutional and private clients. It or its affiliates offer loans, advise on mergers, acquisitions and privatizations, underwrite debt and equity issues, and deal in government-issued securities worldwide.

60 J.P. Morgan was retained as “financial advisor” to the Company in September

1996. Through its employees, including David Neuhaus, Leslie Morrison, and Doug McIntosh, J.P.

Morgan issued or made false and misleading reports, recommendations, and other statements to the investing public regarding Bre-X during the Class Period, while knowing or recklessly disregarding

-14- that their contents were materially false and misleading. J.P. Morgan’s misrepresentations and omissions operated as a fraud and deceit on purchasers of Bre-X and Bresea common stock.

61 J.P. Morgan’s duty of disclosure and liability derives from, among other things, its knowledge obtained through its position as the lead Bre-X advisor, as well as visits to

Busang where its agents Neuhaus, McIntosh, and Morrison learned that Bre-X was violating customary gold mining industry standards with respect to sampling and assaying procedures. J.P.

Morgan reviewed Kilborn’s pre-feasibility studies and feasibility studies in 1996, as well as other reports prepared by expert consultants. J.P. Morgan also possessed data derived from core samples tested by Indo Assay and Lakefield Research Ltd. which demonstrated, according to work performed by an expert retained by defendant Barrick, that Bre-X’s reported gold values were fundamentally flawed and that Bre-X’s public statements concerning were highly suspect. In addition, J.P. Morgan was aware of secret due diligence test results by Barrick which confirmed the absence of gold at

Busang. From this information alone, J.P. Morgan possessed material adverse facts that directly contradicted the existence or veracity of Bre-X’s purported gold discovery.

62 J.P. Morgan knew investors would be relying on its statements and position as lead adviser to the Company when purchasing Bre-X and Bresea stock. J.P. Morgan intended to and did profit from its association with Bre-X. It believed that its business would benefit because of, among other reasons, the prestige of advising a highly-publicized gold company with potential operations in Southeast Asia, as well as investor access to and trading based on J.P. Morgan’s statements regarding Bre-X.

-15- 63 Because of their close association with the Insider Defendants, Neuhaus,

McIntosh, and Morrison had frequent, open access to Bre-X and its internal corporate information, including the adverse information concealed from investors by the Insider Defendants.

F. The Kilborn Defendants

64 Defendant P.T. Kilborn Pakar Rekayasa (“P.T. Kilborn”) is an Indonesian company headquartered in Jakarta, Indonesia. During the Class Period, it performed resource estimation, geostatistical analyses, mine feasibility studies, and other services for Bre-X concerning

Busang.

65 Defendant Kilborn Engineering Pacific Ltd. (“Kilborn Engineering”) is a

Canadian corporation headquartered in Vancouver, British Columbia. During the Class Period, it performed geostatistical resource analyses, mine feasibility studies, and other services for Bre-X concerning Busang.

66 Defendant SNC-Lavalin Inc. is a Canadian corporation headquartered in

Montreal, Quebec. It does business in the U.S. and throughout the world. SNC-Lavalin is the indirect corporate parent of Kilborn Engineering and P.T. Kilborn.

67 The Kilborn Defendants provided written resource reports for Busang, knowing that Bre-X and Bresea were distributing those reports and their contents to the investing public, during the Class Period.

68 The Kilborn Defendants knew or recklessly disregarded that the reports were materially false and misleading, including because they concealed material adverse facts. They intentionally misrepresented or failed to disclose that the gold in Bre-X’s samples was not of the shape, size, or unweathered state of gold indigenous to volcanic hard-rock deposits, which was the

-16- type purportedly found in Busang. Nor did they disclose 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. Even after sending sent samples for independent metallurgical and 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 highly troubling results. Among other findings, the results showed that the gold in 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.

Finally, the Kilborn Defendants’ resource estimates were derived from core samples tested by Indo

Assay, which defendant Barrick had easily determined, through the use of standard sampling techniques, were riddled with gross inconsistencies.

69 The Kilborn Defendants’ duty of disclosure and liability derives from, among other things, their knowledge that Bre-X and Bresea were distributing the Kilborn resource reports to the investing public and investors were relying on the reports in purchasing Bre-X and Bresea stock.

The Kilborn Defendants intended to and did profit from their association with Bre-X. They believed that their business would benefit because of, among other reasons, the prestige of consulting for what was then the most highly-publicized gold exploration company in the world, as well as investor access to their resource reports regarding Busang.

G. Defendant Nesbitt

70 Defendant Nesbitt, Inc. is a Toronto-based corporation organized under the laws of Canada. Its head office is located at 1 First Canadian Place, Toronto, Ontario, Canada. It is a subsidiary of the Bank of Montreal, Canada’s third-largest bank.

-17- 71 Nesbitt claims to be Canada’s largest full-service investment firm and to have the largest distribution network across Canada. As such, Nesbitt wields significant market clout and influence. Due to its position and reputation, an endorsement by Nesbitt lends instant legitimacy to an otherwise obscure company.

72 Nesbitt profited directly from its relationship with Bre-X and Bresea. It acted as an agent for Bre-X during 1996 by assisting in raising $30 million of capital through a private placement of stock. It also directly profited from its relationship with Bre-X as a market maker in its common stock. In addition, Nesbitt attempted to profit, and did profit, indirectly from its relationship and extensive coverage of Bre-X, as set forth elsewhere herein.

73 Bianchini is a Nesbitt senior analyst. At all relevant times, he acted as an agent of Nesbitt, which is responsible for his conduct. It is a controlling person of Bianchini within the meaning of § 20(a) of the Exchange Act.

74 Bianchini specializes in analysis and recommendation of the stocks of gold- mining companies. During the Class Period, Bianchini became 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. This began as early as September 1995, when Bianchini first issued a “buy” recommendation for Bre-X common stock.

75 In part due to his constant hype of its 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, interviewing Bre-X geologists and observing the procedures used at the assay lab where core sample “tests” were conducted. Bianchini was given a private tour

-18- 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.

76 Bianchini became such a favorite of Bre-X that his research reports were often posted on Bre-X’s Internet web site. His 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.”

77 Nesbitt 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 stock. Nesbitt knew that, 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 decisions for Bre-X and

Bresea stock.

78 Nesbitt intended to benefit and profit, and did benefit and profit, from its ties to Bre-X. Nesbitt 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 attempted to exploit and capitalize on the early “success” experienced by the increasing price of Bre-X stock, with Bianchini in particular attempting to increase his prestige, power, and client base by taking credit as the stock analyst who essentially “discovered” Bre-X.

79 During the Class Period, Nesbitt distributed 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 material adverse facts. Its duty of disclosure and liability derives from, among other things,

-19- 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.

80 Nesbitt knew investors would be relying on its statements when purchasing

Bre-X and Bresea stock. It intended to and did profit from its association with Bre-X and believed that its business would benefit because of, among other reasons, the cache and prestige of being a lead underwriter of a high-flying junior gold company, as well as investor access to and trading based on its statements and reports regarding Bre-X.

81 Nesbitt had a duty to ascertain that it had a legitimate basis for the statements, recommendations, estimates, and predictions it made regarding Busang and Bre-X. The reports and statements issued by Nesbitt in this respect, however, while presented as disinterested and objective professional investment analyses based on in-depth research, were in reality substantially false and misleading. Nesbitt knew or recklessly disregarded the corrupt nature of its statements.

82 By adopting in its own reports and statements the descriptions promotional and language used by the Insider Defendants regarding the gold at Busang, Nesbitt willingly provided a necessary component of a successful fraud that Bre-X itself lacked: credibility and legitimacy. Due to the benefits and profits it expected from the Bre-X situation, however, Nesbitt undertook activity and conduct that made it an integral participant in the ongoing scandal.

-20- H. Defendant Lehman

83 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, New York.

Lehman is engaged in the business of providing investment banking and other financial services. It serves a wide range of clients, including institutional, corporate, governmental, and individual customers.

84 Lehman issued false and misleading research reports which operated as a fraud or deceit on purchasers of Bre-X and Bresea stock during the Class Period. Lehman participated in this scheme to enhance its retail brokerage business, through which it made a market in Bre-X securities.

85 In disseminating false reports, Lehman acted with knowledge or in reckless disregard of the truth. In connection with participating in offerings of the Company’s securities,

Lehman conducted due diligence investigations of Bre-X. In addition, the Lehman analyst who authored most of the research reports, Daniel R. McConvey, had access to negative nonpublic information about the “gold” mine at Busang. Experienced in geology, McConvey had been the comptroller of Barrick for six years prior to joining Lehman. He visited Busang in June or July of

1996 and had access to the Company’s engineers, assayers, and other employees and contractors.

From this, 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, which had conducted sample testing of Busang, and learned of its negative and troubling test results.

-21- 86 During the Class Period, Lehman 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 adverse material facts.

Lehman’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, and its participation in the Bre-X securities offerings. Lehman knew investors would rely on its statements when purchasing Bre-X securities. It 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.

87 Because of McConvey’s close association with the Insider Defendants, he had frequent, open access to Bre-X’s internal corporate information, including material adverse information concealed from the public.

I. Defendant Barrick

88 Defendant Barrick Gold Corporation 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, Toronto, Canada. Barrick is in the business of mining and producing gold.

89 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.

90 Barrick was involved in extensive negotiations with Bre-X, J.P. Morgan, and the Indonesian Government in connection with a proposed joint venture to develop Busang. Barrick

-22- had unique access to adverse information about Busang as a result of its own due diligence, including the results of tests performed in late 1996 and early 1997 on core samples revealing an absence of gold or the wrong kind of gold. In addition, Barrick had learned through an expert it had hired in late 1996 that the data which served as the basis for Bre-X’s reported gold values and its purported gold “find” were inherently unreliable. Nevertheless, Barrick made public statements falsely touting the gold and future mine at Busang. In disseminating those false public statements,

Barrick acted with knowledge or in reckless disregard of the truth.

91 Barrick’s duty of disclosure and liability derives from, among other things, its knowledge of adverse test results obtained from core samples from Busang. Barrick knew that investors would rely on both its statements and its position as an acquiror or joint venture partner when purchasing 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 positive public statements about Busang and Bre-X.

92 Barrick is liable as a participant in a fraudulent scheme and course of business that defrauded purchasers of Bre-X and Bresea stock. Barrick disseminated materially false and misleading statements and concealed material adverse facts. The scheme had the objectives 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; to cause plaintiffs and other members of the Class to purchase Bre-X and Bresea stock at artificially inflated prices; and 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 was finally revealed.

IV. CLASS ACTION ALLEGATIONS

-23- 93 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 during the Class Period, between

January 17, 1994, through May 2, 1997, inclusive, and who were damaged thereby. Excluded from the Class are defendants, members of the immediate family of each of the Insider Defendants, any subsidiary, 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.

94 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 North America. As of May 1996, there were reportedly more than 220 million shares of Bre-X common stock outstanding 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.

95 Plaintiffs’ claims are typical of the claims of the other members of the Class.

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.

-24- 96 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.

97 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:

a. whether the federal securities laws or related state law were violated by defendants’ acts and omissions as alleged herein;

b. whether defendants participated in and pursued the common course of conduct complained of herein;

c. 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, Bresea, and/or Busang;

d. 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, Bresea, and/or Busang;

e. 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

f. to what extent the members of the Class have sustained damages and the proper measure of damages.

98 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

-25- 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.

V. FACTUAL ALLEGATIONS

A. Bre-X, Bresea, and the Insider Defendants.

1. Background Prior to the Class Period

99 Walsh founded Bre-X in 1988, after leaving his position as a stock broker, and began operations out of the basement of his home. Bre-X began trading on the Alberta Stock

Exchange in July 1989. Its operations soon languished, as Walsh was unable to secure sufficient 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.

100 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.

101 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 publicly announced its acquisition of an 80 percent

-26- 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).”

102 Thereafter, beginning at varying times, defendants embarked on a course of conduct calculated to condition the market to believe that Busang was one of the richest gold fields ever discovered and that profits from the discovery would be enormous. The scheme was marked by periodic publication of ever-increasing amounts of gold purportedly discovered in Busang. Due to this scheme, during the Class Period, the price of Bre-X shares rose from pennies to a high of C$280 per share (before a 10 for 1 split). The price rise of Bresea stock was equally steep.

103 At times relevant to this action, defendants publicly (and falsely) represented, through press releases, reports to investors, statements to reporters, and other public communications or documents, that Bre-X owned 80-90 percent of Busang; that significant amounts of gold were located at Busang; and 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 the purported Busang gold resources and future mine profits to Bre-X.

2. Misrepresentations by Bre-X, Bresea, and the Insider Defendants

104 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.

-27- 105 Subsequently, 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 publicly 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 publicly announced positive results from its expanded drilling program into the Southeast Zone.

106 These statements were false and misleading because Busang contains 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 is “virtually no possibility of an economic gold deposit in . . . Busang” 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 most likely the result of fraudulent “seeding” or “salting” of the samples.

107 On March 25, 1994, Bre-X publicly 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.”

108 On or about April 13, 1994, Bre-X issued a press release publicly reporting additional drill results from the Central Zone. In the release, Walsh compared Busang to the Kelian

Mine, located some 200 miles from Busang: “It is noteworthy that our grades to date are

-28- significantly higher than the Kelian Mine old deposit which contains a resource of 5M oz Au located

200 km southwest of Busang.”

109 On June 27, 1994, Bre-X publicly 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.

110 On or about September 20, 1994, Bre-X issued a press release publicly announcing a “significant update from three Indonesian mineral projects.” The release said 22 of the

31 drill holes completed at Busang intersected “significant widths of gold mineralization.” In an interview from the Company’s Jakarta office, Felderhof publicly 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.” His representation, if true, would have translated to 3-6 million ounces of gold.

111 On November 21, 1994, the Company publicly announced that additional drilling had returned “significant” results at the Busang site, including “significant mineable widths of gold mineralization.” A Dow Jones news report dated November 24, 1994 quoted Walsh as stating, “We 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.”

-29- 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.

112 On February 22, 1995, Bre-X publicly 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.

113 On April 12, 1995, Bre-X publicly reported continuing positive gold results.

“With more gold mineralization being encountered than anticipated, an additional 1,500m (4920 ft) of drilling is required over the Central Zone”; “results from the first infill holes BRH-63, -64 and -65 from the eastern end of the Central Zone are extremely encouraging.”

114 On May 10, 1995, Walsh and Felderhof were interviewed and publicly stated:

“By 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 Southeast Zones.”

115 By October 17, 1995, Bre-X stock had risen to C$18.25 per share. That day,

Bre-X publicly announced the results of drilling in the Southeast Zone and an updated calculation of

-30- resources in the Central Zone, which reportedly contained over 2.75 million ounces of gold.

Felderhof publicly indicated that the Southeast Zone had the potential to possess even greater amounts of gold, 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.”

116 This news release reported the ownership of the Southeast Zone as 90% by

Bre-X and 10% by the Indonesian joint venture partners and the Central Zone as 80% by Bre-X and

20% by the Indonesian joint venture partners. Bre-X’s statements regarding its ownership interest in

Busang were false and misleading at the time they were made. The Company’s prior statements that it owned 90% of Busang were “never practical reality” and it “never imagined it would be able to hold onto 90 per cent of the deposit,” Walsh later admitted.

117 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.

118 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.”

119 Sparked by the announcement that the Central Zone contained 2.7 million ounces of gold, Bre-X shares soared C$5 3/4 to a new 52 week high of C$29 1/4.

120 On November 20, 1995, Bre-X publicly reported results from eight additional drill holes on the Southeast zone: “two missed; six return excellent results.”

-31- 121 On December 15, 1995, Bre-X issued a year-end update on mineral properties in Indonesia. Regarding Busang, Felderhof publicly stated that the “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.”

122 In its Annual Report for 1995, Bre-X outlined ownership for Busang as

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.

123 In total, during 1995, as a result of defendants’ misleading statements, Bre-X’s stock price rose from C$2.85 to C$53.

124 For the same period, Bresea stock rose from C$1.40 as high as C$55, at which time its shareholders approved a 10-for-1 split. Bresea stock closed at C$5.62 for the year.

-32- 125 A Bre-X press release dated January 15, 1996 publicly reported results from five additional drill holes from the Southeast Zone of Busang. Felderhof touted the seemingly positive results of the tests: “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.” Such a 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 operated by Freeport in Indonesia, which holds 51 million ounces.

126 On or about February 20, 1996, Bre-X publicly 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.

“Geostatistical 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.

127 In the spring of 1996, Walsh and other Bre-X officials continued to represent publicly that Bre-X owned 90% of Busang. For example, responding to reports that its Indonesian partner 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.”

128 Responding to criticism regarding Bre-X’s testing methods, in a Bre-X press release dated March 28, 1996, Felderhof publicly defended the methods employed by Bre-X:

-33- 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.”

Bre-X then represented that its assay methods actually understated the gold resources present:

In addition, metallurgical testwork conducted by internationally recognized Kilborn Engineering, as part of their recently completed prefeasibility 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%.

129 The March 28, 1996 Bre-X press release also stated:

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 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)

-34-

2) Busang II (Northwest Block) East Kalimantan (90% Bre-X - 10% Indonesian)

130 On March 31, 1996, Felderhof publicly described Busang as a “monster.”

Another Bre-X spokesman estimated “30 million, plus, plus, plus.”

131 A Bre-X press release dated April 4, 1996 publicly reported that as a result of additional testing, “Bre-X’s technical team remains confident that 30 million ounces of gold are readily attainable.”

132 On April 17, 1996, Walsh publicly 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.

133 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

C$50+ to nearly C$200. 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 C$28 mark.

134. Market reaction in reliance on these statements and announcements was extremely positive, as intended. Several industry analysts improved their recommendations on Bre-

X stock to “Buy” or even “Strong Buy.”

-35- 135. On May 15, 1996, the Company filed its Annual Report on Form 20-F with the Securities and Exchange Commission (“SEC”), 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.

136. 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.

137. A press release dated June 20, 1996, titled “Bre-X . . . 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.”

138. Just one month later, a press release dated July 22, 1996, titled “Bre-X . . .

Announces A 7.77 Million Ounce Increase In The Busang Gold Project Southeast Zone I Resource

Calculation,” publicly stated that as a result of additional calculations conducted by the Kilborn

Defendants, there were 46.92 million ounces of gold in Busang.

139. On August 13, 1996, Bre-X filed a Form 6-K (Report of a Foreign Issuer) with the SEC, which attached as exhibits the Company’s press releases, issued from January 1, 1996

-36- through July 31, 1996. These press releases -- which touted the Busang gold resources -- were materially false and misleading at the time they were made.

140. 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 publicly quoted in The Financial

Post as touting that the Company was developing “the largest purely gold deposit in Indonesia.”

141. 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.

142. Following its NASDAQ listing, Bre-X, on or around August 28, 1996, filed a

Form 6-K with the SEC. It 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 publicly announce a new resource calculation, “independently verified by Kilborn Engineering,” for 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.

To date, only 25% of the entire Busang property has been explored

and the extent of the mineralization has not been fully delineated.

143. This statement was false and misleading. It suggests that Kilborn Engineering independently sampled and assayed the Bre-X results when, in reality, Kilborn used assay results provided by Bre-X.

-37- 144. In a Form 6-K dated September 5, 1996, Bre-X publicly stated that it had hired

J.P. Morgan as its “financial advisor.”

145. On September 26, 1996, Bre-X issued a press release publicly announcing that it would be seeking a partner to help develop Busang. The press release also was filed on Form 6-K with the SEC; it 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.

146. On October 4, 1996, Bre-X issued a press release concerning the claims of certain Indonesian parties concerning ownership of the Busang site. The press release also was filed on Form 6-K with the SEC; it was signed by Walsh. The press release publicly responded to news reports that an Indonesian partner of the Company who held an interest in Busang I believed it was 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.

147. 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

-38- October 25, 1996, McAnulty was publicly quoted in Reuters Financial Service as stating: “We feel we’ll be free to pick our own partner.”

148. On November 26, 1996, Bre-X issued a press release concerning a communication received from the Indonesian government. The press release also was filed on Form

6-K with the SEC. In the press release, defendants publicly revealed that they had been advised by the Indonesian government of its concern about the “immediate development” of Busang and that it had arranged a deal for its development:

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.

149. On 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 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.

-39- Bre-X further stated, “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.”

150. 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. It reiterated the July 1996 Kilborn calculation of 46.92 million ounces of gold at Busang.

151. 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.

152. On December 3, 1996, Bre-X issued a press release titled “Bre-X . . .

Announces a 10.4 Million Ounce Increase In The Busang Gold Project Resource Calculation.” The press release also was filed on Form 6-K with the SEC. It reported that Kilborn had updated its calculation to 57.33 million ounces and that based on the current drill program Bre-X anticipated a

60 million ounce estimate by early 1997. Furthermore, the cost of producing gold in Busang was calculated to be $96 per ounce, substantially lower than the then average cost worldwide.

153. 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 reporting an ungraded Kilborn resource calculation for

Busang of 57.33 million ounces of gold, using a cutoff grade of .47 g/t. The release stated: “The

-40- figures below represent recoverable grades as cyanide extraction was used in the analysis”; “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).”

154. During early 1996, as a result of these false and misleading statements, Bre-

X’s stock price rose from C$53 to C$224.75. Thereafter, it split 10 for 1, and maintained a price in the C$20 range thereafter.

155. During the same period, Bresea stock (post-split) rose from C$5.62 to

C$10.85.

156. In a Form 6-K dated January 13, 1997, signed by McAnulty, Bre-X again publicly stated that the Busang site contained 57.33 million ounces.

157. On January 14, 1997 Bre-X issued a press release concerning an unsolicited tender offer from Placer Dome, Inc. The press release also was filed on Form 6-K with the SEC.

158. Barrick responded to the Placer tender offer 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.”

159. 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

-41- the government will have full right to further manage Busang II and III.

160. 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.

161. On February 17, 1997, Bre-X issued a press release publicly 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.”

162. Two days later, on February 19, 1997, in a conference call with stock 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, publicly stating that he believed that the deposit’s size was

200 million ounces.

163. 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.”

-42- 164. On February 26, 1997, Bre-X issued a press release attaching a letter sent by

Walsh to Bre-X shareholders. The press release also 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 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.

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.

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

-43- 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.

Walsh 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.

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 undertake satisfactory due diligence to confirm Bre-X’s findings.

-44- 3. The Truth Begins To Emerge

165. These deceptions then began to unravel. On March 19, 1997, Bre-X announced that Michael de Guzman, its chief geologist, had fallen 800 feet to his death from a helicopter as he was returning to the drill 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 C$17.25, which was down C$.40.

166. Trading in Bre-X stock was temporarily halted on Friday, March 21, 1997.

This occurred, according to the New York Times, “after word circulated of a report in . . . an

Indonesian newspaper, that Freeport believed the size of the deposit had been overstated.” In response, Bre-X issued a press release, publicly stating that due diligence efforts at the Busang site were still being conducted.

167. That day, Bre-X’s stock price closed at C$15.25 per share, down C$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 million Bre-X shares were traded on the combined Toronto and NASDAQ exchanges.

168. Over the weekend, Bre-X sought to reassure investors. According to a

March 23, 1997 Dow Jones news release, Felderhof publicly 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 Financial Times dated March 24, 1997, it was reported that the “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.”

-45- 169. 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.

170. On March 24, 1997, an article in 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 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 C$15.70 on the

Toronto Exchange.

171. In an article in the London Edition of 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 C$15.50 in Toronto on

March 25, 1997.

-46- 172. Bre-X’s attempted denial of the emerging truth regarding Busang was crushed when Freeport issued the following press release:

NEW ORLEANS--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 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

-47- 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.

173. 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.

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

recommendation and has advised Strathcona to immediately proceed

with this audit program.

174. Thereafter, the truth regarding the Busang site continued to unfold. Trading of

Bre-X stock was again suspended on both the Toronto Stock Exchange and on the NASDAQ

Exchange, as a result of the devastating news concerning the size and value of the Busang project.

-48- Bre-X shares remained at C$15.50 in Toronto and at $11.37 on NASDAQ on March 26, 1997. A

New York Times 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.

175. In a press release issued on March 27, 1997, the Company publicly 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.”

176. 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

177. Freeport’s unmasking of the fraud was neither complicated nor time- consuming. According to interviews with members of the Freeport team published in the June 1998 edition of the Engineering & Mining Journal, the Freeport team concluded there were serious problems before they saw a single drill result from Busang. “We knew there were things wrong with the project pretty well immediately,” stated Colin Jones, Freeport’s then-vice president of exploration in Indonesia.

-49- 178. Among the warning signs identified by the Freeport team were Bre-X’s negligence in logging core samples, a huge backlog in assays to be tested, a total lack of mining activity by locals in the area, lack of both surface mineralization and visible gold, and a pervasive lack of professionalism at the site. Freeport’s Colin Jones stated the obvious: “It is mind-bogglingly amazing to me that no one had spotted any of this before.”

179. After trading resumed on the afternoon of March 27, 1997, Bre-X stock plunged. It lost 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.” The article quoted the Indonesian minister of mines as stating: “We need more time, more explanations and concrete data.”

180. 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).

181. 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

-50- suspended. Similarly, Bre-X closed at C$2.69 on the Toronto Stock Exchange, dropping C$12.81 from the previous close before trading was suspended. Bresea shares also fell sharply on the news, from a close of C$6.90 on March 24, 1997, to a close of C$2.70 on March 27, 1997. A March 28,

1997 Wall Street Journal article noted, “By 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.”

182. 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.”

183. 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.

184. 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

-51- 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 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.

185. 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.

-52- 186. 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.”

187. In a Form 6-K issued by Bre-X on May 12, 1997, Bre-X stated that it had received an interim report from Strathcona Mineral Services Ltd. dated May 3, 1997. The report indicated that “the Busang II reserve was based on falsified data.” The cover letter to Walsh stated there was “virtually no possibility of an economic gold deposit” at Busang:

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.

188. Strathcona made the following recommendations to the Board of Directors and management of Bre-X:

• 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.

-53- • 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.

• All exploration work on the Southeast Zone at the Busang

property should cease immediately.

189. Retained by the Bre-X board in March 1997, Strathcona was charged with investigating conditions at Busang in the aftermath of Freeport’s negative test results. According to its top executive, Graham Farquharson, Strathcona discovered twenty “significant” red flags during its audit assignment, all of which pointed in the “same direction” -- no gold. Farquharson outlined these key red flags as follows:

1. No gold geochemical anomaly over the Southeast Zone.

2. No gold in outcrop samples -- “it had been leached.”

3. Location of new drill holes was never influenced by results of previous drilling.

4. Busang geologists never went to drill sites.

5. Drill core not split -- all 14 kilograms of core from each two-metre sample “required for accurate assays.”

6. Selected intervals designated visually as “mineralized” and received different sample treatment.

7. In over 60,000 metres of core logging, no reports of visible gold.

8. The geology of the 10-centimetre “skeletons” from reported high-grade intervals did not appear to support such assays.

-54- 9. No gold identified in 103 petrographic samples selected to represent the deposit.

10. An excellent sample preparation facility at Busang was under-utilized despite large backlog of core waiting to be sampled.

11. Only “in-fill samples” designated as “non- mineralized” could be prepared at Busang.

12. All sample bags delivered to Samarinda had to be opened to “check for bag breakage” and “confirm core logging description.”

13. Despite a large accumulation of samples at Samarinda and assaying capacity available at Indo Assay, no samples were shipped unless Michael de Guzman or Cesar Puspos released the samples.

14. Poor reproducibility of assays.

15. Screen analyses of sample rejects indicate almost all gold in plus 106 microns (150 mesh) fraction.

16. Mineralogical studies identified gold in metallurgical samples as being “coarse, rounded and with gold-rich rims.”

17. Metallurgical testwork indicated more than 90 percent gold recovery in gravity concentrates of one percent to six percent of feed.

18. Metallurgical recovery was independent of fineness of grind.

19. Request for drill holes exclusively for metallurgical testwork was denied.

20. Could one deposit contain as much as eight percent of the known gold resources of the world?

While “lesser flags” could also have been added to his list, the red flags described above were the

“more significant ones,” said Farquharson. As such, they “could have been identified at some stage by the many others that preceded us to visit and report on Busang.”

-55- 190. On May 8, 1997, Bre-X announced that it 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.

4. Scienter

191. As alleged herein, Bre-X, Bresea, and the Insider Defendants acted with scienter. They knew that the public documents and statements issued or disseminated by, in the name of, or concerning the Company and Bresea were materially false and misleading. They knew or recklessly disregarded that such statements or documents would be issued or disseminated to the investing public. And they knowingly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents, making them as primary violators of the federal securities laws.

192. By virtue of their receipt of information reflecting the true facts regarding Bre-

X, its business practices and its resources, their control over and receipt of Bre-X’s materially misleading misstatements or their associations with the Company which made them privy to confidential information concerning Bre-X and Busang, as well as their experience in and knowledge of the gold industry, these defendants were active and culpable participants in the fraudulent scheme alleged herein. They knew or recklessly disregarded the false and misleading nature of the information about Bre-X and Busang which they 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.

-56- 193. The Insider Defendants engaged in such a scheme to inflate the price of Bre-X and Bresea securities in order to protect and enhance their executive positions and compensation and prestige they obtained thereby; enhance the value of their personal holdings of Bre-X and Bresea securities and options; and facilitate their massive insider sales of Bre-X and Bresea common stock.

194. In addition, these defendants’ “well-timed” insider selling is highly probative of their scienter and is part of their scheme, artifice to defraud, or acts, practices, or course of business in violation of Section 10(b) and Rule 10b-5. While they were issuing false favorable statements about the Company’s business, resources, and properties, and concealing or obscuring negative information, despite access to confidential information and knowing the truth about the

Company and its resources, these defendants were benefitting from the illegal course of business or course of conduct described in this complaint by selling large blocks of the Company’s and Bresea’s securities at artificially inflated prices without disclosing the material adverse facts 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 and Bresea securities by the Insider Defendants imposed upon them duties of full disclosure of the material facts alleged in this complaint.

195. The following table shows the heavy insider selling by the defendants of

Bre-X stock during the Class Period (all dollar amounts are in Canadian dollars):

John Thorpe Shares Price Proceeds 06/15/95 4,500 $5.375 $ 24,188

10/13/95 5,500 $25.875-$26.00 $ 142,738

10/18/95 10,000 $35.125-$38.25 $ 356,650

10/24/95 5,000 $43.375-$43.50 $ 217,125

11/02/95 5,000 $55.25 $ $276,250

-57- 11/09/95 5,000 $55.00 $ 275,200

01/04/96 5,000 $60.00 $ 300,000

08/01/96 20,000 $25.15 $ 503,000

08/02/96 400 $25.10 $ 10,400

08/12/96 19,600 $24.20 $ 474,320

08/18/96 700 $24.00 $ 16,800

08/22/96 20,000 $25.00 $ 1,504,502

Total: $ 4,109,973

David Walsh Shares Price Proceeds

11/01/95 28,000 $53.00-$54.50 $ 1,493,638

11/02/95 110,000 $54.50-$57.25 $ 6,117,138

11/06/95 6,900 $53.00-$53.50 $ 368,150

11/07/95 12,100 $53.00-$53.625 $ 647,038

11/08/95 9,200 $53.00-$53.625 $ 490,700

11/10/95 11,800 $54.625-$54.75 $ 645,200

12/05/95 40,000 $51.00-$51.25 $ 2,040,863

12/11/95 54,000 $51.625-$53.625 $ 2,866,175

12/12/95 6,000 $54.00 $ 324,000

01/11/96 40,000 $64.00-$64.375 $ 2,560,225

08/08/96 50,000 $24.55 $ 1,227,500

08/19/96 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

08/26/96 51,300 $25.00 $ 1,282,500 11,400 $25.05 $ 285,570 1,600 $25.10 $ 40,160

-58- 08/27/96 1,300 $25.05 $ 32,565 29,400 $25.00 $ 735,000

Total: $ 25,018,512

J. Walsh Shares Price Proceeds

07/24/95 10,000 $12.125 $ 121,250

01/11/96 55,400 $64.50-$65.00 $ 3,586,000

01/12/96 14,600 $65.00 $ 949,000

02/22/96 1,200 $166.00 $ 199,200

04/23/96 3,500 $191.42 $ 699,970

04/18/96 1,500 $170.80 $ 256,200

04/23/96 3,500 $191.48 $ 670,180

05/01/96 - 05/02/96 37,200 $205.32 $ 7,637,904 7,800 $205.12 $ 1,599,936

08/20/96 79,100 $24.95 $ 1,973,545 20,900 $24.90 $ 540,410

08/22/96 85,000 $25.00 $ 2,125,000 15,000 $25.05 $ 375,750

08/23/96 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

-59-

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

Total: $ 30,605,010

John Felderhof Shares Price Proceeds

12/29/94 400 $2.85$ 1,140

12/30/94 200 $2.85$ 570

01/10/95 900 $2.85$ 2,565

03/29/95 100 $2.50$ 250

03/31/95 1,400 $2.50$ 3,500

05/15/95 2,000 $4.10$ 8,200

07/24/95 4,000 $12.00 $ 48,000

07/28/95 1,000 $14.00 $ 14,000

08/18/95 7,000 $16.00 $ 112,000

10/25/95 11,000 $44.00-$44.25 $ 485,250

10/26/95 10,000 $42.00 $ 420,000

10/30/95 4,000 $42.00-$42.125 $ 168,038

11/01/95 25,000 $50.875 $ 1,271,875

12/04/95 1,000 $48.875 $ 48,875

01/02/96 5,000 $53.00 $ 265,000

01/03/96 95,000 $53.875-$56.50 $ 5,226,314

01/08/96 78,000 $64.25-$64.75 $ 5,027,775

02/23/96 10,000 $150.00-$160.00 $ 1,501,000

02/26/96 10,000 $150.00 $ 1,500,000

04/10/96 - 45,000 $156-$188.00 $ 7,675,555 04/25/96

05/01/96 - 91,000 $196-$229.00 $ 19,388,250 05/16/96

-60-

07/17/96 - 136,500 $24.40-$24.85 $ 3,348,125 07/19/96

08/29/96 778,600 $24.40-$25.20 $ 19,465,000

09/9/96 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

09/10/96 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: $ 71,211,417

Stephen McAnulty Shares Price Proceeds

11/09/95 4,600 $54.625-$54.75 $ 251,550

11/10/95 10,000 $54.75-$54.625 $ 546,175

12/07/95 23,900 $54.375-$54.625 $ 1,302,675

02/22/96 1,500 $160.25-$162.00 $ 242,825

02/23/96 11,400 $149.00-$156.00 $ 210,525

02/26/96 5,100 $149.00-$149.25 $ 760,350

02/27/96 7,000 $149.50 $ 1,046,500

02/28/96 5,000 $153.75 $ 768,750

05/27/96 15,000 $28.00 $ 420,000

05/29/96 10,000 $25.95 $ 259,000

05/30/96 25,000 $25.90 $ 647,500

06/28/96 15,200 $22.75 $ 345,800 4,800 $22.65 $ 108,720

07/02/96 15,000 $22.37 $ 335,550

07/05/96 300 $21.05 $ 6,315

-61- 09/18/96 14,700 $28.25 $ 415,275 17,000 $28.35 $ 481,950 3,000$28.40 $ 85,000

Total: $ 8,234,460

Rolando Francisco Shares Price Proceeds

08/01/96 50,000 $25.09 $ 1,254,500

Paul Kavanagh Shares Price Proceeds

03/15/96 1,500 $157.00 $ 235,500

12/20/96 11,500 $24.00 approx. $ 276,000

Total: $ 511,500

196. The following table shows the heavy insider selling by the defendants of

Bresea stock during the Class Period (all dollar amounts are in Canadian dollars):

J. Walsh Shares Price Proceeds

02/22/96 12,500 $16.00 $ 200,000

03/01/96 1,400 $16.00 $ 22,400

03/05/96 1,600 $16.00 $ 25,600

03/18/96 2,500 $16.00 $ 40,000

03/20/96 10,000 $16.00 $ 160,000

05/13/96 500 $16.30 $ 4,890

05/16/96 31,500 $17.00-$17.10 $ 537,070

05/17/96 20,000 $17.00 $ 340,000

Total: $ 1,329,960

Stephen McAnulty Shares Price Proceeds

02/14/96 224,800 $11.375-$11.875 $ 2,602,525

02/15/96 50,200 $13.125-$13.375 $ 665,175

02/22/96 25,000 $16.375 $ 409,375

-62- 02/23/96 60,500 $14.875-$15.50 $ 910,662.50

02/26/96 39,500 $14.50-$14.875 $ 577,750

06/03/96 9,900 $16.40 $ 162,360

06/04/96 20,000 $16.25 $ 325,000

Total: $ 5,652,848

John Thorpe Shares Price Proceeds

09/25/95 6,500 $17.75 $ 115,374

10/12/95 5,000 $22.50 $ 112,500

10/13/95 3,500 $25.125 $ 87,938

11/02/95 5,000 $45.00 $ 225,000

02/01/96 10,700 $9.75$ 104,325

02/02/96 39,300 $9.75-$10.375 $ 400,050

02/12/96 25,000 $10.875-$11.00 $ 272,625

02/13/96 16,300 $11.375 $ 185,413

02/14/96 13,900 $11.375-$11.875 $ 134,613

02/15/96 44,800 $11.875-$13.00 $ 560,125

02/16/96 25,000 $13.125-$13.375 $ 328,225

02/19/96 12,400 $13.50-$13.625 $ 167,488

02/22/96 10,000 $16.625 $ 166,250

04/16/96 52,600 $15.00-$15.10 $ 790,760

05/02/96 50,000 $16.50-$16.60 $ 826,200

05/21/96 50,000 $16.00 $ 800,000

06/19/96 27,800 $13.05-$13.20 $ 366,345

06/20/96 8,500 $13.45-$13.50 $ 114,500

06/28/96 50,000 $13.50 $ 675,000

Total: $ 6,432,732

-63- Hugh Lyons Shares Price Proceeds

01/25/94 33,700 $0.60-$0.65 $ 21,105

02/05/94 5,000 $0.50$ 2,500

05/19/94 5,000 $0.80$ 4,000

05/24/94 9,000 $0.80$ 7,200

05/26/94 5,000 $0.92$ 4,600

05/27/95 5,000 $0.96$ 4,800

11/08/95 4,100 $53.29 $ 218,489

11/09/95 5,600 $54.88 $ 307,328

11/10/95 4,700 $54.44 $ 255,868

11/13/95 2,000 $54.38 $ 108,760

11/14/95 2,700 $51.13 $ 138,051

11/15/95 6,300 $48.86 $ 307,818

11/16/95 6,500 $49.85 $ 324,025

11/20/95 4,000 $51.75 $ 207,000

11/22/95 2,000 $56.00 $ 112,000

Total: $ 2,023,544

B. J.P. Morgan

1. Background

197. In promotional material distributed to Bre-X in February 1996, J.P. Morgan presented itself as “one of the leading mining banks in the world.” The material lists numerous mining-related transactions handled by J.P. Morgan from 1983 to 1995, including the Kelian gold mine located near Busang.

198. Doug McIntosh, a J.P. Morgan vice president, was the lead senior J.P. Morgan technical representative in connection with the Bre-X project. He was involved with certain Insider

-64- Defendants, the Kilborn Defendants, and various other Bre-X consultants on a day-to-day basis and was intimate with Busang’s operations and technical matters.

199. McIntosh is a trained mining engineer and highly experienced in the technical evaluation of mining projects worldwide. He attended the Colorado School of Mines in Golden,

Colorado in 1962-66 and received an Engineer of Mines Degree upon his graduation. While at the

Colorado School of Mines, he took courses in geology, mineralogy, structural geology, chemistry, physics, rock mechanics, mineralogy, surveying, and mine evaluation.

200. Since 1968, McIntosh has been a member of the Society for Mining,

Metallurgy and Exploration, Inc., the national professional society for mining engineers.

201. Leslie Morrison, a J.P. managing director, was the lead senior J.P. Morgan deal strategist, client contact, and negotiator in connection with the Bre-X project. He was involved with certain Insider Defendants and Barrick, among others, on a regular basis and was knowledgeable about Bre-X’s operations, both financially and with regard to Busang.

2. J.P. Morgan’s Misrepresentations

202. On July 23, 1996, David Neuhaus, a J.P. Morgan analyst who had just returned from a private tour of the Busang site, was interviewed by a respected mining reporter at

Canada’s Financial Post business newspaper. In the resulting article, titled “Bre-X could have 150M ounces of gold: analyst,” a half-dozen crucial representations by the J.P. Morgan analyst were broadcast to potential investors across Canada and elsewhere:

• “Neuhaus believes the property [Busang] could contain two or three times that amount [47 million ounces, as estimated by Bre-X]. ‘I’d say 150 million ounces is a conservative guess as to what Bre-X will ultimately come up with,’ he said.”

-65- • “Neuhaus said his view is based on the ‘impressive geology’ at Busang. . . .”

• “Neuhaus says size is no longer the key issue facing Busang.”

• “He said U.S. analysts are now looking three to four years ahead to what Bre-X and Busang will look like once the project comes into production.”

• “From a standing start, Neuhaus said, Busang will emerge as a huge open gold mine with production in excess of 2.5 million ounces and cash costs of around US$200 an ounce.”

• “His preliminary estimates are that Busang will be a low-cost mine generating US$500 million in annual cash flow.”

At the time Neuhaus made the statements, J.P. Morgan already had been working for five months to be hired as Bre-X’s investment banker.

203. On February 19, 1997, J.P. Morgan bankers Morrison and McIntosh participated in a Bre-X teleconference call with analysts. During the call, J.P. Morgan was asked by

Walsh “to make a statement” about matters of interest to investors. After explaining the terms of the

Freeport agreement, Morrison turned over the presentation to McIntoch, to outline “the salient technical characteristics of the [Busang] deposit,” including the “economics of the Busang project.”

204. According to a written transcript of the call, which was promptly made available to investors by Bre-X, the false and misleading statements made by McIntosh included the following:

(a) “We expect the cash costs [of production] to be significantly less than the

$96/ounce estimate” in the November 1996 intermediate feasibility study

completed by “Kilborn SNC-Lavalin.”

-66- (b) The “resources are estimated to be 71 million ounces,” adopting the estimate

earlier made by the Kilborn Defendants and publicly announced by Bre-X,

“most of which we expect will be converted to reserves within the open pits.”

(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 1/2 of

the gold will probably be recovered in a gravity circuit quite inexpensively

and quite efficiently.”

(d) “I think you are looking at more or less North American costs on the mining .

. . I’d say something well below a dollar a tonne.”

(e) “The ore is not abrasive. It’s a very coarse grind. We’re looking at a PAD of

150 microns. And that’s one reason for needing the gravity site circuit . . .

[to] recover the coarse gold.”

(f) “The simple thing . . . is generally, you can see the alteration of the rock and

see where there aren’t sulfides and where there isn’t sulfides it doesn’t carry

any gold.”

(g) “I would say that certainly we can expect [mine] production in the year

2000.”

(h) “[T]here shouldn’t be much variability [in mining costs] through time. What

we’re seeing is pretty consistent [ore] grade.”

Morrison also added these false and misleading statements to the J.P. Morgan presentation:

(i) “The fact is . . . this project is so very profitable . . . .”

-67- (j) “Back of the envelope work that I’ve done would indicate [production costs]

something closer to $75 an ounce,” not the of $96/ounce estimated by

Kilborn SNC-Lavalin.

(k) “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.”

Morrison even commented on J.P. Morgan’s view of the value of Bre-X common stock:

(l) [J.P. Morgan’s valuation] is a lot higher than today’s share price. I will tell

you it’s higher than the share price before the share price fell.”

205. As set forth below, those statements made by Morrison and McIntosh during the February 19, 1997 conference call were false and misleading. They had visited the Busang site, reviewed the Kilborn Defendants’ prefeasibility and feasibility studies, knew that Barrick had found no gold in Bre-X’s samples tested in late 1996, and were privy to many other discussions and technical reports regarding irregularities at Busang.

206. J.P. Morgan knew of material adverse facts concealed from the public by the

Insider Defendants, including the inconsistencies between the properties of the gold purportedly found in Busang and the test results in the Kilborn and Barrick studies. J.P. Morgan nevertheless made unqualified public statements touting the gold and future mine at Busang.

207. Despite knowing that statements concerning the existence of gold at Busang lacked a credible basis, J.P. Morgan failed to correct its own public statements concerning the

-68- existence of gold at Busang, including Neuhaus’ July 23, 1996 estimate of 150 million ounces.

Ironically, Neuhaus himself attended the February 1997 Bre-X teleconference, as a representative of a new stock brokerage firm after having left J.P. Morgan.

3. J.P. Morgan’s Scienter

208. J.P. Morgan was intimately familiar with all technical aspects of the Busang mine development. Documents produced by the Bre-X bankruptcy trustee show that J.P. Morgan was in fact provided technical documentation about Busang and that internal technical correspondence was routinely copied to McIntosh. These same documents contain notes of technical meetings attended by McIntosh and documents reflecting his comments and questions concerning technical issues.

209. Because of the unique access it enjoyed at Busang, J.P. Morgan was familiar with the concerns and problems that Bre-X consultants had raised about the non-standard sampling and assaying methodologies used in determining gold resources at Busang, the physical characteristics of the gold in the samples, and the poor repeatability of the assay data.

210. As a financial advisor to the mining industry, J.P. Morgan is typically retained by its clients to determine the fair market valuation of mining projects at all stages of development.

This work requires the highest standard of technical and property due diligence and expertise.

211. To accurately calculate the fair market value of an undeveloped mineral deposit, one must determine: (a) the volume of economically recoverable mineral reserves of the deposit; (b) the volume of non-economic material to be moved during the life of the project; (c) the mining excavation method to be employed to recover the minerals; (d) the milling and metallurgical processing technologies to be utilized to efficiently separate and concentrate the minerals to be

-69- recovered; (e) the optimum pit design and mine plan to mine and process ore on a daily basis and over the life of the mine; (f) a life of the mine mineral production schedule; (g) the capital and operating costs of the mine; (h) the markets and expected commodity price to be received for the processed mineral over the life of the mine; (i) the fiscal terms of the mining concession; and (j) the security of ownership of the mining rights.

212. To accomplish this analysis, the necessary information is compiled by the mine owner, usually with the assistance of contractors and specialist consultants. If the mine owner is not a well-staffed “major” company, it will typically rely almost entirely on outside experts due to the highly technical nature of mining. There must be a high degree of confidence in the empirical data on which the mine evaluation is based, in view of the high capital costs of mine development and the value of the resource to its owners. Accordingly, for such a formal valuation, the highest standard of sampling and assaying methodologies and technical due diligence must be maintained in order to confirm the results of company testwork.

213. The first step in the evaluation process -- determination of the volume and grade of the mineral resource -- is based on a core drilling program and mineral assays of the largely intact core samples recovered by the drilling program. The handling, processing, and assaying of core samples must be tightly controlled and systematic and must follow generally accepted mining industry practices in order to be credible. These procedures are especially important to mining companies and mine financiers who might be invited to participate in the mine development, as well as to individuals who invest in the mine owner’s securities.

214. The empirical results of the core assays must be repeatable for the same intervals sampled, within an acceptable statistical range, in order to verify the assay data. Assays are

-70- normally prepared by independent contractors. Periodically, samples from the same core interval are assayed several times and also routinely sent to multiple assaying laboratories to verify the

“repeatability” of the assay using the same and different assaying techniques. Poor “repeatability” within the same core interval causes concern because it usually indicates a problem with either the sampling protocols or the assay procedures.

215. A high level of confidence in the veracity of assay results is probably the most important factor in the evaluation of an undeveloped mineral property. Historically, the gold mining industry has been victimized by fraudulent assay data resulting from the “salting” of core samples with gold from an external source. Salting is a means to create a false value for an otherwise non- existent or non-commercial mineral deposit and to inflate artificially the share price of a small gold mining or exploration company. The gold industry is particularly vulnerable to “salting” schemes because a small amount of added gold can translate into the appearance of a tremendously valuable deposit.

216. Since a core drill hole is an expensive undertaking, core data is collected on drill hole spacing adequate to establish a “resource” and then with later, narrower, infill spacing to convert the “resource” into a “reserve.” Drill hole spacing is also typically patterned to provide adequate data for the development of a preliminary engineering mine plan for prefeasibility evaluation. Thereafter, a statistical analysis is prepared on the basis of the geological and assay data to determine the nature and continuity of the data in the rock between the drillholes. An estimation of the mineral resource in place is made by determining the volume of rock between the drill holes, the average density of the rock, and the average concentration of the mineral (“grade”) from the mineral assays.

-71- 217. Both J.P. Morgan, an experienced mining bank, and its employee McIntosh, a mining engineer with geological education and training, were intimately familiar with the due diligence required for a thorough mining project evaluation and with the consequences of utilizing unreliable data and poor due diligence. J.P. Morgan knew, for example, from its many years of experience in the mining industry that splitting core samples and retaining half of the core for later re-testing was standard industry practice. Indeed, J.P. Morgan knew this from its involvement at the

Kelian mine, where core samples were split.

218. As described below, J.P. Morgan failed to perform adequate due diligence and consciously disregarded multiple red flags and other warning signs that Busang was a fraud of unparalleled proportions.

a. Early on, J.P. Morgan Witnessed Red Flags.

219. J.P. Morgan lobbied for over ten months to get Bre-X’s business:

· On November 7, 1995, Neuhaus asked defendant McAnulty to fax him information concerning Bre-X.

· Two days later, Neuhaus met with defendant Kavanaugh for what Kavanaugh called a “good meeting.”

· In early December 1995, Morrison spoke directly with defendant Walsh and attempted to arrange a meeting between Bre-X and Australian mining conglomerate CRA/RTZ about a potential partnership between the two.

· On December 19, 1995, Morrison called and proposed a meeting with Walsh during the week of January 17.

· On February 23, 1996, Morrison wrote to Walsh and thanked him for meeting him in Toronto. In his letter, Morrison summarized various fee arrangements and described the services J.P. Morgan was prepared to provide, including “a full evaluation of Bre-X and the Busang project” and an

-72- “opinion as to the fairness of a particular transaction to Bre-X shareholders.” In closing, Morrison observed “you have a tremendous story to tell.”

· On March 5, 1996, Walsh sent additional information concerning Bre-X to McIntosh at his home in Summit, New Jersey.

· In July 1996, Neuhaus was one of a select group of ten analysts (including Lehman’s McConvey) permitted to tour Bre-X’s mine site at Busang.

· In late July 1996, McIntosh confirmed a trip to Busang for August 1996.

· On August 24-27, 1996 McIntosh visited Busang accompanied by Richard Ward of Republic National Bank and by David Walsh’s son, Bret. On his visit, McIntosh was given a comprehensive tour of Busang: the base camp, the Central Zone, and Southeast Zones I and II.

220. During his trip to Busang, McIntosh observed numerous anomalies. According to his August 29, 1996 memorandum to Michael De Guzman, McIntosh reviewed in considerable detail Bre-X’s sampling techniques, drill hole data, and resource estimates during his stay in Busang.

Based on his review, McIntosh concluded that the sampling techniques and statistical methodology used by Bre-X and Kilborn to determine Busang’s gold reserves were nonstandard, incomplete, and possibly inaccurate.

221. As a result, McIntosh recommended that Bre-X retain Mineral Resource

Development Inc. (“MRDI”) of San Mateo, California, a reputable geostatistical consultant, for the purpose of recalculating Bre-X’s estimates using a more reliable methodology. In his words,

MRDI’s charge was “to review the Busang sampling and drill hole spacing data with a view to opining on the adequacy of the drill-hole spacing and recomputing the resource/reserve with

-73- appropriate kriging techniques.” McIntosh further wrote, “Given the significant NW-SE trend of the mineralization and the near vertical mineralized structures in the Southeast Zone, geostatistical techniques should produce a much more accurate resource estimate than inverse-distance-squared weighting.” Dr. Harry M. Parker was identified by McIntosh as the contact person at MRDI in charge of geology and geostatistics.

222. McIntosh’s memorandum demonstrates that, even prior to execution of a formal engagement letter with Bre-X, J.P. Morgan was aware that the sampling techniques and resource estimates of Bre-X were incomplete and possibly inaccurate. As a trained mining engineer,

McIntosh was also aware that any differences in the reserves would have a major impact on Busang’s economics.

223. McIntosh’s advice concerning MRDI’s retention was followed. On September

6, 1996, Emmanuel Puspos, Bre-X Mine Planning Manager, notified MRDI that Bre-X intended to hire MRDI to prepare an analysis of the Bre-X drill data.

224. Effective September 3, 1996, J.P. Morgan and Bre-X executed an agreement whereby J.P. Morgan was engaged to act as Bre-X’s financial advisor “with respect to any sale, merger, consolidation or any other business combination.” In the agreement, J.P. Morgan agreed to perform the following services:

• performing a valuation of the Busang development (“the Project”);

• assisting Bre-X in preparing an offering memorandum describing Bre-X and the Project, its operations, historical performance, and future prospects;

• identifying and contacting selected qualified partners acceptable to you;

-74-

• arranging for potential partners to conduct business investigations;

• assisting Bre-X in negotiating the final aspects of any proposed transaction; and

• delivering an opinion to the Bre-X Board of Directors, if requested, as to the fairness of any proposed transaction.

225. The agreement further provided that J.P. Morgan would be highly paid for its services. It would receive a monthly retainer fee of $50,000, an additional $250,000 for a written valuation of the Busang project, another $500,000 for a fairness opinion, and a success fee of

$3 million upon the closing of any transaction involving Bre-X. Contemporaneously, J.P. Morgan executed a confidentiality agreement with Bre-X.

226. On September 5, 1996, Bre-X publicly announced that J.P. Morgan had been hired by Bre-X as its “financial advisor” and that Republic National Bank had been retained as its

“corporate advisor.”

b. J.P. Morgan Receives the Kilborn Pre-Feasibility Study Report,.

227. On September 10, 1996, Felderhof authorized the release of Busang technical data to J.P. Morgan. A day later, Bre-X sent key technical data to McIntosh, including:

· Volume 1 of Kilborn’s Pre-Feasibility Study, dated February 15, 1996 (also known as the “Executive Summary”);

· Volume 2 of Kilborn’s Pre-Feasibility Study, dated February 23, 1996 (also known as the “Main Report”);

· Bre-X monthly progress reports 1, 2, 3, and 4; and

· Busang Project process flow sheets.

-75- 228. Volumes 1 and 2 of Kilborn’s Pre-Feasibility Study contain summaries of Bre-

X’s geology, drilling, sampling procedures, assay test data, and ore processing test data. Kilborn also included resource estimates in their studies. The two volumes also contain a mining and mineral processing plan, capital and operating cost estimates, projected cash flows, and net present values under different sensitivities. Finally, Kilborn recommended that certain additional work be performed.

229. The Pre-Feasibility Report alerted J.P. Morgan and McIntosh to the following inescapable and crucial red flags:

· the core sampling and cyanide leach assay procedures at Busang were not standard practice;

· Bre-X’s assay results had chronic problems with variance and repeatability problems;

· the rates of recovery from simple coarse grinding were extraordinarily high, indicating that the gold particles were not embedded in the host rock;

· simple coarse grinding yielded large free gold grains, which were strongly atypical of a primary rock deposit where gold particles were embedded in the host rock;

· the absence of gold in the composite mineralized samples initially examined by Mintek;

· the gold in Bre-X’s samples was unusually large for a primary deposit like Busang -- 86.3% of the Busang gold was larger than 106 microns; and

· Kilborn believed that a higher confidence level in the test results was needed.

These significant red flags compelled comprehensive additional due diligence to confirm the purported huge preliminary Bre-X gold resource estimates for the Busang deposit.

-76- 230. The Pre-Feasibility Study also referenced earlier “problems” with Bre-X assay results. Section 5.2.4 noted, “The initial preliminary metallurgical work showed significant discrepancies between head assays from fire assaying and calculated heads from gravity and cyanide leach test work. This is consistent with assay problems experienced by Indo Assay Laboratories in the initial assay work on Busang.”

231. The Pre-Feasibility Study also discussed Bre-X’s unorthodox sampling techniques, including the following: the assaying of only mineralized zones; the use of whole cores in assaying rather than split cores; the retention of only 10 centimeters of each core meter for future reference; and the use of cyanide leach process assays rather than conventional fire assay technique.

232. The Pre-Feasibility Study recommended further metallurgical test work to be undertaken, including statistical analysis of assay variability and examination of sampling technique to determine if the head grade assays of the ore body were dependent on sample size. A review of such materials by a mining engineer such as McIntosh should have immediately alerted him and his employer J.P. Morgan to red flags which, if pursued, would have led to the revelation that Busang was a sham.

233. Two weeks later, on September 25, 1996, Bre-X held a meeting of its board of directors at the offices of J.P. Morgan, with McIntosh, Morrison, and Kevin Crowley present on behalf of J.P. Morgan. At the meeting, J.P. Morgan presented the following chart, which summarized its conclusions:

· Busang is the most attractive gold project known in the world today.

· J.P. Morgan values Bre-X in the range of US$4.5 billion to US$4.9 billion.

-77-

· Bre-X needs a major mining company to develop and operate the mine in order to maximize Busang’s value and to provide confidence to the Indonesian authorities.

· Due to Busang’s size, capital requirements, and geographic location, only about six companies are qualified to be Bre-X’s partner.

· J.P. Morgan judges the offers received so far to be inadequate.

· J.P. Morgan recommends that Bre-X:

--Provide a counter-proposal to Barrick Gold which preserves the value of Bre-X shareholders’ investment.

--Make contact with high-level Indonesian authorities quickly to explain and justify its position.

--Continue preparing for a partner-selection process.

234. According to minutes of the meeting, Bre-X directors questioned the J.P.

Morgan representatives closely concerning their presentation. They specifically inquired about “the validity of the grade averages used in the report, certain other assumptions about the size of the

Busang deposits, [and] the potential mining methods and related issues.” In response, McIntosh stated that he was “familiar with the preliminary conclusions from the initial feasibility study by

Kilborn SNC Lavalin” and that “there would be further due diligence required with Kilborn at the

Busang deposits.”

235. On October 2, 1996, Bre-X and J.P. Morgan (represented by McIntosh) held a conference call with representatives of Barrick during which technical concerns with Busang’s resource estimates were reviewed. According to notes of the call, the conversation identified the following red flags:

-78- · the gold at Busang was “coarse” in nature, indicative of alluvial gold and inconsistent with gold from a primary rock deposit;

· Bre-X’s assay results could not be repeated with any degree of confidence; and

· abnormally high percentage of recovery of gold after simple grinding.

c. The Kilborn Intermediate Feasibility Study Raises More Red Flags.

236. On October 18, 1996, Kilborn presented a draft of its Intermediate Feasibility

Study Executive Summary to Bre-X and its advisors, including J.P. Morgan. This study was of crucial importance to the company -- and to investors -- because a gold deposit is of little value unless it can be produced economically and quickly.

237. According to minutes prepared by Kilborn, a meeting was held on October 20-

21, 1996 with McIntosh, four Kilborn representatives (three of whom were employed by defendant

Kilborn Engineering), and members of Bre-X’s Indonesian drilling team. The purpose of the meeting was to review Kilborn’s Intermediate Feasibility Study and to address questions raised by

J.P. Morgan and Bre-X.

238. At the meeting, Kilborn agreed to do additional sample test work for the design of the grinding circuit. This decision confirms that the questionable results of prior sample results were discussed at that meeting -- particularly the recovery of 90 percent of gold through simple early-stage crushing, as well as the poor repeatability of the sample assays.

239. J.P. Morgan and Kilborn also discussed presentation of Kilborn’s resource calculations. At the meeting, Kilborn presented two cases for making the “pit estimate and production schedule” for Busang: the “Base Case,” which evaluated a mine plan based solely on

-79- traditional “measured and indicated” standards; and “Case A,” which added speculative “inferred” resources to the total, which for Busang was a huge figure that Kilborn deduced based on unverified geological assumptions regarding extremely widely-spaced drill holes. According to a later Bre-X press release, the original Base Case used an estimate of 23.03 million ounces of gold at Busang, while Case A added an additional 34.30 million ounces of inferred resources. Adding these speculative figures ballooned the total by 149 percent to 57.33 million ounces.

240. In response, J.P. Morgan insisted that only the (larger) resource numbers in

Case A be used and that the Base Case be redefined to incorporate these figures. Kilborn objected because the figures would not be “bankable.” Any bank which would finance a mine would “only recognize measured and indicated resources.”

241. Astonishingly, J.P. Morgan overruled the objections. In Kilborn’s words,

“J.P. Morgan explained that the purpose of this report was not for presentation to the banks.”

242. The plain implication of J.P. Morgan’s point was that the report, and the use of only the larger 57-million ounce resource estimate, was calculated to influence the investing public and/or potential partners. This aggressive treatment by J.P. Morgan of speculative resource numbers as basically equivalent to measured and indicated calculations -- indeed, as so reliable that

Kilborn was making Busang mine cost and output conclusions based on the inferred numbers -- was a fundamental part of the overall market deception.

243. J.P. Morgan’s “non-bankable” spin on the resource numbers went directly to investors.

244. On December 3, 1996, Bre-X published to the world a press release that touted

“an updated resource calculation . . . by Kilborn SNC Lavalin” totaling over 57 million ounces for

-80- Busang. The publication also “highlights” the Intermediate Feasibility Study completed by Kilborn

SNC Lavalin, which evaluated a so-called “mineable resource” of 45.53 million ounces and concludes that it will be produced at “$US 96 per ounce of gold,” an extremely low cost, at an annual rate of 1.9 million ounces or “significantly beyond.”

245. At prevailing gold prices, this translated into yearly sales of at least $600 million and operating profits of $425 million.

246. The impact of J.P. Morgan’s redefined Base Case was tremendous because it applied operating statistics typically associated with reserves (e.g., cost per ounce, ounces per year, etc.) to very large, speculative resource estimates without any explanation to investors.

d. The Hazen Report

247. The draft executive summary and later Intermediate Feasibility Study contains results from a report titled “Metallurgical Test Program for Busang Gold Project,” prepared by

Hazen Research, Inc. of Golden, Colorado. This report was prepared as part of the Kilborn mine feasibility study.

248. Like earlier reports from consultants, the Hazen report describes a series of red flags, all of which were consistent with earlier warnings:

· Gold particles from Busang samples were “relatively coarse nuggets” and were “typically very compact and often nearly spherical in shape.” Hazen’s description was plainly one of gold that was alluvial in nature, not the primary gold deposit Bre-X claimed existed at Busang.

· The report describes processing results typical of gold that was not from a primary rock deposit. Hazen found a recovery rate of over 93 percent -- an unprecedented rate for gold that was supposed to be embedded in its underground host rock.

-81- · There was an abundance of “coarse” and “free” gold in the samples: “determination of overall gold extraction or the rate of gold extraction is problematic when leaching whole ore, due to the presence of coarse free gold and the difficulties with sampling such ores and residues.”

· The gold grains were often nearly spherical in shape. This “coarse nugget effect” is completely inconsistent with the primary deposit Bre-X claimed existed at Busang, and it caused wide variation in the assay and processing test results.

e. The MRDI Report and Recommendations

249. MRDI commenced its work some time after McIntosh’s recommendation in

August 1996. By late November 1996, Parker and John Cottle, a consultant working on the MRDI report, had completed a draft.

250. On November 26, 1996, de Guzman faxed his comments on MRDI’s draft report to Parker and Cottle. De Guzman’s comments, which were copied to McIntosh, addressed sampling procedures and check assays. According to the fax, a follow-up discussion was planned.

251. On December 2, 1996, Parker and Cottle sent a letter to Felderhof and de

Guzman along with MRDI’s final report, which was entitled “Busang Hardrock Gold Project.” In the report, Parker and Cottle stated that, “Our approach in making recommendations to you is to prepare the Busang geological and sampling data to meet industry standards for large mining projects which will be joint ventured and/or financed by commercial lenders.”

252. Like other Bre-X consultants had done, MRDI cataloged its own list of red flags:

· “[M]ost of the rest of the world relies on fire and screened fire assays. A routine check program using these methods is mandatory.”

-82- · MRDI was critical of Bre-X’s practice of not saving full split core reference samples and of assaying only mineralized portions of core.

· MRDI recommended that a statistical study of assay variability be performed.

· “The current Kilborn resource models are adequate for scoping/pre-feasibility study efforts internal to Bre-X. They are not adequate for a feasibility study which will be used by external lenders and investors.”

· MRDI denigrated Bre-X’s sampling procedures to the point of stating that they were not suitable for submission to joint venture partners and financing sources.

· The 1 kilogram samples used by Bre-X for gold assays-- and relied upon by Kilborn -- were cited by MRDI as “useless.”

253. MRDI’s recommendations were broad ranging. They included changing sampling procedures, using finer grinds, split core sampling, fire assay checks, preparing a report on previous fire assay and cyanide leach assay data, drilling “opposite” check holes, and establishing a

“clean” database and dataroom. MRDI also made specific recommendations regarding changes in the Bre-X sampling and processing techniques which it believed would result in statistically reliable assay data and greater control over the assay process.

254. None of the MRDI recommendations were implemented. In its report of

May 3, 1997, Strathcona specifically cited MRDI’s recommendations concerning half-core sampling to permit later checks and crushing to 177 microns before sample splitting in order to solve the

“considerable problem of assay (un)repeatability.” Strathcona also commented on the use of the cyanide leach assay process, and concurred with the recommendation of MRDI that, “a much stricter

-83- regime of check assaying using a fire screen assay . . . would have ensured a more rigorous quality control of the entire assaying process.”

255. McIntosh was involved in the discussions arising from MRDI’s work, and he was provided de Guzman’s comments to statements made in the draft report. He almost surely received both draft and final copies of the MRDI report. Having orchestrated MRDI’s retention, J.P.

Morgan nevertheless ignored the red flags that had been highlighted by its chosen expert.

f. Barrick Found No Gold in Its Samples From Busang.

256. The Bre-X Board of Directors held a meeting on December 15, 1996 to discuss matters related to the proposed transaction with Barrick. Present on behalf of J.P. Morgan were McIntosh and Morrison.

257. At that meeting, John Sabine, Bre-X’s chief outside legal counsel, advised of stunning news from Pat Garver, Barrick’s General Counsel. Garver had informed him that, in the course of its due diligence, Barrick had taken 135 core samples from Busang and sent them for independent analysis. The assay lab, Lakefield Research, reported that 130 of the 135 samples contained no discernible gold. Barrick was demanding to do further due diligence work on the

Busang site.

258. The minutes for the meeting note, in remarkable understatement, that “neither

Mr. Felderhof nor Mr. McIntosh had any idea of why the results were so disappointing.” Instead of investigating these devastating (and accurate) test results, however, Morrison of J.P. Morgan counseled avoidance. He “stressed that there should be no condition in favor of Barrick on being satisfied with its due diligence and on particular assay results. Barrick had maintained from the onset

-84- of negotiations that it did not require due diligence and it should not now be permitted to add such a condition.”

259. This attempt to gloss over the no-gold results obtained by Barrick, despite the numerous other red flags that J.P. Morgan knew existed, demonstrates its scienter. Accuracy and full disclosure -- to bidders or investors -- were not J.P. Morgan’s objective. Closing a joint venture deal was. With the closing, even if the bidder was forced to commit without adequate due diligence, would come J.P. Morgan’s $3.25 million success and fairness opinion fees.

260. Not coincidentally, after hearing about Barrick’s test results at the

December 15, 1996 meeting, the Bre-X Board unanimously adopted a resolution establishing a

$5 million officer and directors’ indemnity fund in the Channel Islands. McIntosh and Morrison were present for this action and the attendant discussions.

261. On December 15, 1996, Garver forwarded to Sabine three pages of assay data from Barrick’s due diligence on the Busang deposit. The Barrick data indicated negligible gold values where Bre-X had claimed significant gold existed.

262. According to a letter sent by Garver to Sabine later that day, Bre-X was to work with Barrick “so that we can promptly confirm Bre-X’s view that the results that were recently obtained from Barrick’s independent assays are anomalous.” Garver understood that J.P. Morgan

(through McIntosh) would be contacting him “to follow up on this.”

263. The results of Barrick’s second round of testing were just as alarming as the first. The new testing showed that the gold in the samples were unusually big and that smaller particles were entirely absent.

-85- 4. Summary of J.P. Morgan’s Scienter

264. As a result of J.P. Morgan’s several visits to Busang, the geological and mining expertise of McIntosh, and review of detailed studies concerning Busang ore and Bre-X’s procedures, J.P. Morgan recklessly disregarded the following red flags:

(a) As J.P. Morgan well knew, including from its many years of mining experience

(including its involvement in the nearby Kelian mine), the accepted method for testing mineral samples involves extracting a core sample and then splitting it into two half-samples; one half is tested while the other is preserved for future reference. Without a doubt, split sample testing is the accepted standard in the mining industry. It insures accurate results by permitting further cross-analysis of the remaining sample. From its visits to the Busang site, J.P. Morgan knew firsthand that Bre-X did not employ split sample testing. It crushed each 2-metre length of core, leaving the sample almost completely exhausted through the testing process, with inadequate or no remains for independent analysis to confirm initial results.

(b) To ensure integrity of the 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 minimizes the opportunity for tampering. As a result of its visits to Busang, J.P. Morgan knew firsthand that Bre-X did not follow this procedure. Bre-X took its time with the samples. Sometimes the samples, crushed on site from Busang, sat for weeks in open bags at the Bre-X offices in Samarinda and warehouse in

Loa Duri, Indonesia. There, presumably, they were salted. According to the Strathcona report, 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.

-86- (c) Independent test results on Bre-X samples were directly inconsistent with the geological nature of the purported Busang deposit. J.P. Morgan knew firsthand of the inconsistencies from its review of these reports, including those prepared by Hazen and MRDI. These reports revealed the presence of alluvial gold, a type of gold not present in a primary deposit such as Busang. Alluvial gold is eroded from exposed rock and found mixed with gravel in the beds of rivers and streams. It shows evidence of erosion; it is typically rounded, smooth, and has oxidized rims. Gold from a primary deposit, in contrast, is intruded into hard bedrock by mineralizing solutions from deep inside the earth. It is readily distinguished by its irregular shape and association with generally unoxidized sulfide minerals. Primary gold also differs from alluvial gold in how it is mined and concentrated. It is difficult to separate primary gold from its host rock; at a minimum, multi-stage crushing is required to separate the two. This was not the case for the Busang deposit, however, where 90 percent of the gold was separated with a single crushing and gravity separation. According to Strathcona,

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.

(d) The Kilborn Pre-Feasibility Study and Feasibility Study contained a host of red flags. From these reports, J.P. Morgan knew that Bre-X’s sampling and cyanide leach assay procedures were non-standard; simple grinding of Bre-X samples yielded an unusually high recovery rate; and the gold in Bre-X’s samples was much too large to be from a primary rock deposit of the Busang type.

(e) From inspecting Busang core samples, J.P. Morgan knew that no gold was visible. This was highly irregular given the size and coarseness of the gold nuggets in the Bre-X assay samples. According to Strathcona, With the very coarse liberated gold of up to 400 microns

-87- 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.

(f) J.P. Morgan knew that Barrick had tested Busang core samples and that 130 of those samples (96+ percent) had shown a complete absence of gold. J.P. Morgan was also responsible for coordinating subsequent Barrick testing at Busang. The results of the second tests were equally irregular, albeit in a different way. Instead of reflecting no gold, these tests showed gold unusually large (106 microns and larger) to be from a primary rock deposit of the Busang type.

(g) As Bre-X’s investment banker, and close advisor, J.P. Morgan knew that no independent verification of Busang’s resources had been performed.

(h) J.P. Morgan and its representatives (McIntosh and Morrison) had access to data derived from core samples tested by Indo Assay and Lakefield Research Ltd. On the basis of that data, Barrick had learned, through the services of its expert Merks, that Bre-X’s reported gold values were fundamentally flawed and that Bre-X’s public statements concerning Busang were highly suspect. These same conclusions were equally available to J.P. Morgan, but it elected to ignore the data. See ¶¶ 510-11.

-88- C. The Kilborn Defendants

1. Introduction: The Kilborn Defendants and Busang

265. On October 12, 1995, P.T. Kilborn entered into a contract with Bre-X to perform geostatistical analyses and mine feasibility studies concerning Busang. P.T. Kilborn agreed to

perform or cause to be performed such research and investigation as may be required by the Client relating to the economic development of the Project and shall furnish a pre-feasibility report with

Kilborn’s opinion as to same.

266. This work included on-site inspections, resource calculations, and mining feasibility studies, with the goal of confirming the existence and amount of gold at Busang. P.T.

Kilborn, Kilborn Engineering, and SNC-Lavalin were all involved in various aspects of the work.

267. P.T. Kilborn is a subsidiary of Kilborn Engineering, which in turn is an indirect subsidiary of SNC-Lavalin.

268. SNC-Lavalin is one of the world’s largest construction and engineering companies. In 1996, SNC-Lavalin acquired Kilborn Holdings, Inc., a holding company which owned both P.T. Kilborn and Kilborn Engineering. Thereafter, SNC-Lavalin actively and closely directed and supervised the work of P.T. Kilborn and Kilborn Engineering with respect to the high-profile Busang project. They acted as agents of SNC-Lavalin with respect to the project.

269. With respect to the Busang project, each of the Kilborn Defendants’ businesses and activities were inextricably interwoven with those of the others. In many instances, due to the intentional ambiguity of Bre-X’s press releases, the extent of participation, specific responsibilities, and exact division of work among the Kilborn Defendants is unclear, and such clarification thus awaits further discovery. Where possible, this complaint hereafter identifies each

-89- individual Kilborn Defendant’s specific role in the fraud; otherwise, the reason such information is not available is given.

270. P.T. Kilborn and Kilborn Engineering were hired by Bre-X because they are part of a well known mining services company with a solid reputation in the industry, especially in

Canada. On May 17, 1997, Roger Pooley, who had performed consulting work for Bre-X at Busang before the Kilborn Defendants were hired, stated that “Bre-X clearly wanted reports written by a high profile Canadian firm whose credibility would be accepted without hesitation by the market.”

271. According to their recent promotional materials, the Kilborn Defendants have been involved in over 200 mining projects in the past ten years. The Kilborn Defendants hold themselves as being experts in the areas of mine audits and property evaluation due diligence.

272. Bre-X placed great confidence in the Kilborn Defendants:

Walsh, the Bre-X CEO and founder, swore in a May 20, 1998 affidavit filed in Bahamian litigation brought by the Bre-X bankruptcy trustee that Kilborn had been hired to independently analyze Busang. Specifically, it was “contracted to provide independent analysis of the Busang properties.” Their work included “the performance of resource calculations” and “studies . . . [of] samples and assay information,” all of which required “months of on-site inspections.” After the inspections, emphasizes Walsh, Kilborn did not report “any irregularities in the procedures at the site or even any suspicion of any irregularities.” Just like investors, Walsh attests that he (as “a nongeologist”) was “comforted” by Kilborn’s work, such as its “substantial” feasibility studies “which confirmed the results and methodologies being pursued by Bre-X at Busang.

• Bre-X’s Comptroller, Bryan Coates, stated on August 26, 1997 (during a post-scandal investigation conducted by Bre-X) that when he joined Bre-X in late 1996 the fact that “the Kilborn name” was attached to the resource calculations lent credence to Bre-X’s claims concerning Busang.

-90-

Francisco, the Bre-X CFO and a director, stated on August 29, 1997 (during the same investigation) that he got a very high level of comfort from the fact that personnel employed by Kilborn were on site at Busang working with Bre-X technical personnel.

On August 26, 1997 (during the same investigation), McAnulty, the Bre-X investor relations executive, expressed disbelief that the Kilborn did not know about the fraud: “Busang was theirs for a period of over two years . . . . I can’t believe that this set of people being there for so long and having that much exposure would not . . . pick up that this was a fraud.”

273. The Kilborn Defendants’ reputation carried great weight with the investment community. In a conference call held on March 24, 1997, Nesbitt analyst Bianchini sought to assuage growing investor anxiety by citing the role of Kilborn:

Kilborn to my knowledge has audited the process from drill casing all the way down to getting the final assay number . . . . Kilborn’s reputation stands behind the process.

274. It was the task of the Kilborn Defendants to estimate periodically the amount of gold in the Busang deposit based on core sample assays provided by Bre-X. In all resource calculation announcements, Bre-X specifically identified one or more of the Kilborn Defendants (usually as nothing more than Kilborn SNC-Lavalin ) with their full knowledge, cooperation, and consent, as the consulting group performing the resource calculations.

2. Misrepresentations by the Kilborn Defendants

-91- 275. On October 17, 1995, Bre-X publicly announced the results of drilling in the

Southeast Zone, and an updated calculation of resources in the Central Zone. Bre-X reported that an updated resource calculation completed by Kilborn Engineering show that the Central Zone contained in excess of 2.75 million ounces of gold. The press release presented Kilborn’s results in terms of “measured,” “indicated,” and “inferred.” The same press release claimed 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.

276. On December 15, 1995, Bre-X issued a year-end update on its mineral properties in Indonesia. As a result of the work of “Kilborn Engineering,” Bre-X was optimistic about the mine’s progress: “Based on preliminary results available to Bre-X, a pre-feasibility study also undertaken by Kilborn Engineering and scheduled for release in February is expected to be very favorable.” In addition, the release went on to state in the next sentence that

results from recently completed metallurgical testwork indicate the preferred option for ore processing appears to be a conventional CIL (Carbon in Leach) circuit coupled with a gravity recovery circuit. The pre-feasibility testwork has shown the following extremely positive factors:

• Calculated headgrades tend to be higher than the Company’s assayed grades.

• Ore is amenable to lower cost SAG (Semi Autogenous Grind) milling.

• A gravity circuit can recover a large percentage (86%) of the gold.

• The 33 hour period for leach recoveries of 93% can be substantially reduced by the addition of activated carbon.

-92- 277. A Bre-X press release dated January 15, 1996 reported results from five additional drill holes from the Southeast Zone of Busang. Felderhof publicly touted the 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.” A 30 million ounce resource would have put Busang in the top four largest gold finds in the world.

278. On February 20, 1996, Bre-X publicly announced an updated resource calculation “completed by Kilborn Engineering” pegging the total measured, indicated, and inferred gold resource for the Central Zone at nearly 15 million ounces. According to Bre-X, “Geostatistical analyses and resource calculations for the Southeast Zone 1 . . . confirmed and outlined significant mineralization.” These results were represented to be based on accepted resource classification principles, as issued by the U.S. Bureau of Mines and the U.S. Geological Survey.

279. Responding to criticism regarding Bre-X’s testing methods, in a press release dated March 28, 1996, Felderhof publicly defended his methods:

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.”

Felderhof publicly represented that the assay methods employed by Bre-X actually “understated” the

Busang resources, attributing this conclusion to “internationally recognized Kilborn Engineering”:

In addition, metallurgical testwork conducted by internationally recognized Kilborn Engineering, as part of

-93- their recently completed prefeasibility 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%.

280. On April 17, 1996, Bre-X publicly announced that an initial resource calculation had been “completed by Kilborn SNC-Lavalin” on certain sections of Busang. It indicated an additional 9.16 million ounces of measured, indicated and inferred gold resources. The press release also included a resource calculation for two other sections, in 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. Again, these results were represented to be based on accepted resource classification principles, as issued by the U.S. Bureau of Mines and the U.S. Geological

Survey.

281. On May 15, 1996, the Company filed its Annual Report on Form 20-F with the SEC for the fiscal year ended November 30, 1995. This report contained the public 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.

282. In a press release dated June 20, 1996, titled “Bre-X . . . Announces A 14

Million Ounce Increase In The Busang Gold Project Southeast Zone I Resource Calculation,” Bre-X stated that an updated resource calculation had been “completed by Kilborn SNC Lavalin.” It resulted in a total estimate of 39.15 million ounces of measured, indicated and inferred gold at

Busang. These results were represented to be based on accepted resource calculation principles, as issued by the U.S. Bureau of Mines and the U.S. Geological Survey.

-94- 283. This press release quoted from the “Kilborn report,” which was provided to

Bre-X by the Kilborn Defendants, and formed the basis of the release, as follows:

As of June 15, a total of 52 diamond drill holes yielding 21,383m of core were completed and assayed on sections 44, 49, 54, 59 and 64. This compares to the previous estimate of January 1996, which was based on a total of 21 holes utilizing data from sections 49 and 54 exclusively.

284. In a press release dated July 22, 1996, titled “Bre-X . . . Announces A 7.77

Million Ounce Increase In The Busang Gold Project Southeast Zone I Resource Calculation,” Bre-X stated that as a result of additional calculations conducted by “Kilborn SNC Lavalin,” there were

46.92 million ounces of measured, indicated and inferred gold in Busang. The resource estimates were presented as in accordance with U.S. Bureau of Mines standards and the U.S. Geological

Survey, Geological Survey Circular 831.

285. The next day, on July 23, 1996, Nesbitt released a morning research report parroting new drill hole data released by Bre-X based on the work of the Kilborn Defendants.

According to the Nesbitt 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.

286. On August 28, 1996, Bre-X 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

-95- 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.

To date, only 25% of the entire Busang property has been explored and the extent of the mineralization has not been fully delineated.

287. This statement was false and misleading. It suggests that the Kilborn

Defendants “independently” sampled, assayed, or otherwise “verified” the results when, in reality, they used false assays provided by Bre-X.

288. 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. This release reiterated the July 22, 1996 resource calculation by Kilborn of 46.92 million ounces of gold at Busang.

289. In a press release dated December 3, 1996, Bre-X publicly announced an updated resource calculation “completed by Kilborn SNC-Lavalin.” It estimated the size of the mine at 57.33 million measured, indicated, and inferred ounces. The release further stated that “An

Intermediate Feasibility Study completed by Kilborn SNC Lavalin was received on November 15 and has been under review by the technical staff of Bre-X, Kilborn and J.P. Morgan, Bre-X’s financial advisors.” The press release was filed on Form 6-K with the SEC. The release also stated,

“The figures below represent recoverable grades as cyanide extraction was used in the analysis,” and

-96- “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).”

290. 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 the

December 3, 1996 press release, including the updated resource calculations prepared by the Kilborn

Defendants.

291. On February 17, 1997, Bre-X issued a press release publicly announcing that the Busang resource calculation performed by “Kilborn SNC Lavalin” had been increased by 13.6 million ounces and now stood at 70.95 million ounces. These results, like their predecessors, were represented as being in accordance with the classification standards set forth by the U.S. Bureau of

Mines and the U.S. Geological Survey.

292. In a press release issued on February 21, 1997, the Company publicly 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 measured, indicated and inferred ounces of gold,” Walsh stated that “Felderhof and the Bre-X technical team have been, to date, accurate in their projections.” These statements relied on the resource calculations made by the one or more of the Kilborn Defendants, which were provided to

Bre-X for public release.

293. When the Busang fraud began to unravel in late March 1997, the Kilborn

Defendants issued self-serving explanations of their involvement at Busang. In a statement made not

-97- through Bre-X but directly to the public, SNC-Lavalin, which directed the work done by the Kilborn

Defendants at Busang, attempted to reassure investors that the work performed by its agents was valid.

294. In a press release dated March 26, 1997 disseminated over Business Wire,

SNC-Lavalin publicly ratified, vouched for, and indeed repeated the resource estimates its affiliates had made:

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.

295. In the same release, SNC-Lavalin sought to downplay its pervasive involvement in the Bre-X operations at Busang; moreover, it publicly disclosed, for the first time, that the original tests conducted by the Kilborn Defendants, which spurred enthusiasm for Busang in the first place, were not based on their own independent drilling and assaying:

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.

-98-

At no point did SNC-Lavalin or the other Kilborn Defendants disclose the truth about Busang, as reflected in the several studies and reports known to them, such as from Hazen and MRDI.

296. Bre-X and Bresea stock continued to trade for several weeks after this false and misleading press release from SNC-Lavalin.

3. Participation by Each Kilborn Defendant

297. Each of the Kilborn Defendants -- P.T. Kilborn, Kilborn Engineering, and

SNC-Lavalin -- were active participants in the Bre-X scandal.

298. Both P.T. Kilborn and Kilborn Engineering were involved in the preparation of the Pre-Feasibility Study issued in February 1996 and the Intermediate Feasibility Study issued in late 1996. SNC-Lavalin was involved in or directed the preparation of the Intermediate Feasibility

Study.

299. On March 7, 1996, Paul Semple, on behalf of Kilborn Engineering, issued a memorandum addressed to “To Whom It May Concern” stating that the Pre-Feasibility Study had been prepared for Bre-X by “P.T. Kilborn Pakar Rekayasa and Kilborn Engineering Pacific Ltd.”

Semple’s memorandum was sent on letterhead bearing the name “Kilborn.” Obviously, Semple’s memorandum was intended for distribution outside of the Bre-X decision-making group (including

J.P. Morgan), most likely to interested joint venture partners, finance sources, and other investors, and was to represent written confirmation that the “Kilborn” name and group of companies stood behind the Pre-Feasibility Study.

300. Both the Pre-Feasibility Study and the Intermediate Feasibility Study refer to

Kilborn Engineering’s active participation. Appendix 5 to the Pre-Feasibility Study states that the

-99- computer mine model data sheets were “Licenced for use by Kilborn Engineering Pacific Ltd. -

Vancouver BC.” In addition, the Introduction to Appendix 6 of the Pre-Feasibility Study states:

In order to finalize the pre-feasibility study, Bre-X approved Kilborn Pacific Ltd. (Kilborn) to review and comment on the metallurgical and process plant sections of the pre-feasibility study. Kilborn’s comments on these sections are contained in this report.

Likewise, the proposal for the Intermediate Feasibility Study states that the second stage of the metallurgical testwork will be “supervised by Kilborn in Vancouver.”

301. Bre-X publicly trumpeted the involvement of Kilborn Engineering and SNC-

Lavalin in the Busang project. Bre-X’s press releases dated August 14, 1995 and December 15, 1995, for example, state that Kilborn Engineering was responsible for the preparation of the pre-feasibility study, making no mention of P.T. Kilborn. Other Bre-X releases -- such as those dated January 13,

1997 and November 28, 1996 -- use the name “Kilborn SNC-Lavalin” as the source for new resource estimates in which Bre-X’s stock market value was based.

302. Representatives of Kilborn Engineering, particularly Paul Semple and Sophie

Ashby, performed services with respect to the development of the Busang mine. Ashby and Semple, for example, attended meetings on October 20-21, 1996 at Busang to review a draft of the

Intermediate Feasibility Study with Bre-X and J.P. Morgan.

303. SNC-Lavalin was actively involved in the Busang project work by its agents,

P.T. Kilborn and Kilborn Engineering.

304. Shortly after its acquisition of Kilborn in mid 1996, SNC-Lavalin aggressively moved to play an active role in the Busang project. In a July 18, 1996 letter to Walsh, James Booker,

PT Kilborn’s President, explained the kind of role the newly merged company wanted to play at Busang:

-100- Kilborn SNC-Lavalin has considered all requirements to take the project from its present stage through into commercial operations, and believe that we can provide the expertise necessary to design, build, commission and operate the complete facilities without the need for participation of a major mining company.

305. Booker’s proposal touted the fact that Kilborn was owned by SNC-Lavalin, and he promised that SNC-Lavalin, the largest engineering construction company in Canada, would be actively involved in the project:

Kilborn SNC-Lavalin effectively combines Kilborn’s acknowledged expertise in the design, construction and operation of gold-processing facilities with SNC-Lavalin’s experience in the development of major industrial and infrastructure projects in the international market.

The letterhead on which Booker wrote featured the SNC-Lavalin logo and described P.T. Kilborn as a

member of the SNC-Lavalin Group.

306. In March 1997, the Kilborn Defendants issued to Bre-X a study entitled

Busang Gold Project: Check Assay Program -- March 1997. The purpose of the study was to verify the assay results produced by Indo Assay Laboratories. According to the study, the collection of samples for the program was supervised by Ashby, the Kilborn Engineering employee. The study was issued on letterhead bearing the name Kilborn SNC-Lavalin.

307. SNC-Lavalin also made statements to the public concerning the Kilborn work on the Busang project. Thus, for example, on March 26, 1997 SNC-Lavalin issued a press release supporting the Kilborn feasibility studies:

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.

-101- 308. On April 13, 1997, SNC-Lavalin issued another press release explaining the role of P.T. Kilborn in checking the assay results of its subcontractor, Indo Assay Laboratories:

P.T. Kilborn Pakar Rekayasa did not receive data reflecting two separate assays on these rock samples for this purpose.

Failure to properly understand this fact has led such press reports to misinterpret our Bre-X Minerals Ltd. Busang Gold Project Check Assay Program-March 1997 report.

These statements were made in SNC-Lavalin’s capacity as the principal directing the activities of its agents, the other Kilborn Defendants, and sought to defend and explain their work. In so doing, SNC-

Lavalin claimed ownership of the report.

309. Once the fraud was exposed, SNC-Lavalin quickly turned to damage control.

For example, in a news report in the Financial Post dated July 25, 1998, SNC-Lavalin confirmed that its engineers were on site during the Class Period. Its spokesperson conceded that the firm had engineers on site, on and off, from 1995 until the scheme was uncovered. Exactly which Kilborn

firm employed or directed the engineers is information under the exclusive control of these defendants and a matter for discovery.

310. On July 28, 1998, SNC-Lavalin also issued a press release in response to a court filing by Walsh. In his affidavit filed with the Bahamian court, Walsh stated that the scope of the work the Kilborn Defendants were hired to perform included verification of the existence of gold at

Busang. Walsh swore that they were contracted to provide independent analysis of the Busang properties. In its release, SNC-Lavalin took the offensive by attacking Bre-X, its then co-defendant

Walsh, plaintiffs’ counsel, and the media.

311. Kilborn SNC-Lavalin was held out to the public as having participated in the preparation of the resource reports and other studies in issue. Who this was intended to mean -- the

-102- holding company, Kilborn Engineering, P.T. Kilborn, or all of the them -- is unclear. Both SNC-

Lavalin and Kilborn Engineering had established reputations in the mining industry. Thus, the ambiguity had the (surely intended) effect of giving Bre-X the benefit of the weight of both company names behind the representations. Bre-X issued these press releases with the acquiescence of the

Kilborn Defendants.

312. By making no attempt to distinguish among their roles in the preparation of the resource calculations, and allowing Bre-X to mold their identities in one (using the “Kilborn

SNC-Lavalin” combined name), the Kilborn Defendants effectively represented and confirmed that the work on Busang was a collective effort and backed by each of them.

4. Scienter of the Kilborn Defendants

313. The Kilborn Defendants allowed their names to be used by Bre-X because association with the “gold find of the century” would enhance their group’s reputation as a leader in the construction and mining industries. In addition, as demonstrated by the proposal that the Kilborn

Defendants assume the primary role in developing and operating the mine, they intended that their work at Busang lead to considerable additional revenue.

314. The Kilborn Defendants were intimately familiar with all aspects of the Busang operations. In a memo to Mike de Guzman dated April 2, 1996, Sean Walter, an engineer employed by

Kilborn Engineering, describes his visit to Busang in detail:

INDO ASSAY LAB The Indo Assay facility had suitable assay equipment that appeared to be in satisfactory condition. The facility was clean, orderly, and appeared to be well run. John Irvin has been operating this lab for approximately seven years and the lab has a good reputation for quality assay work. John will

-103- expedite the metallurgical samples to NORMET in Australia and Hazen in the United States.

METALLURGICAL SAMPLE PREPARATION AND COMPOSITING AT SAMARINDA

Upon arrival at Samarinda on March 26 a meeting was held with Mike de Guzman and Mr. Jerome Alo of Bre-X, Mr. Tony Showell of NORMET and myself to discuss the metallurgical samples. The procedures as previously defined in correspondence were confirmed and Mike supplied a list of samples available for testwork

I arrived at the Bre-X sample preparation and storage facility on March 27, 1996 and worked there each day through Saturday March 30, 1996.

The facility was new, large, well equipped, clean, orderly and very satisfactory for the duty required. Indonesian employees were present to start work immediately.

The samples prepared were crushed drill core (minus 1 4) inch and are to be used primarily for metallurgical testwork. . . . . The required sample preparation program was completed on Saturday, March 30. The samples were placed in large plastic drums and forwarded to Indo Assay in Balikpapan.

BUSANG SITE VISIT Tony Showell and I arrived at the Busang project site on March 31, 1996 and returned to Samarinda on April 2, 1996.

The campsite and project facilities were excellent. The handling of drill core from delivery at the camp through storage appeared very satisfactory. The sample preparation facility was large, well equipped, clean, orderly, and very satisfactory for the duty required. Again I was very impressed with the project facilities and the project appeared to be very organized and well supervised.

Walter also sent a copy of his memo to John Robertson, P.T. Kilborn’s resident manager, and Paul

Semple, who was the vice president and general manager of Kilborn Engineering in Vancouver. As a

-104- result of their firsthand inspection of the Busang operations, these men were fully apprised about the handling and storage of core samples and the organization and supervision of the facilities.

315. The Kilborn Defendants also had direct responsibility for monitoring and overseeing the conduct of metallurgical tests. In fact, from Bre-X’s perspective, Kilborn was the

Metallurgical Manager. In an August 5, 1996 memo from Rodolfo Vega to Jerry Alo regarding the

Metallurgy Meeting of August 1, 1996, Vega described the role of Kilborn :

Hazen Research Laboratory will handle the Phase II metallurgical testworks. Normet on the other hand will be an independent body and will run parallel metallurgical testworks as a check to Hazen’s results. Kilborn as the Metallurgical Manager will oversee the conduction sic of the testworks by Hazen and coordinate with Normet.

316. In addition, one or more of the Kilborn Defendants was involved in directly taking core samples. In a memo to Steve McAnulty dated April 1, 1997, Bre-X manager Greg

MacDonald explains an occasion in which Kilborn collected core samples:

The only time that Kilborn collected core samples was during March 25 to April 3, 1996 when they, together with Normet, collected 10cm 1 2 core sections every 2 metres over a typical ore section from 4 holes.

317. Besides free and open access to Bre-X’s operations at Busang, the Kilborn

Defendants were provided reports prepared by independent contractors and consultants. Without exception, these reports contained evidence of serious inadequacies in Bre-X’s procedures and red flags concerning the legitimacy of Busang.

318. When first hired in October 1995, the Kilborn Defendants were given copies of core assay reports prepared by Indo Assay Laboratories, who had previously performed assay

-105- work for Bre-X. These reports were replete with comments questioning the validity of the testing process. Two examples are representative:

· On December 11, 1993, Indo Assay found that “possible visible gold was observed megascopically,” indicating a concern about the inability to observe gold in whole core samples. Given the high gold assays, visible gold would be expected as a common occurrence.

· Normally, the fire-assay technique results in higher gold recovery than the cyanide method. On October 2, 1995, an Indo Assay report concluded, however, that “this batch again showed seriously lower Au [gold] results from the FA [fire assay] checks compared to the AuCN [cyanide leach].” Most of what appeared to be “problem batches” were prepared “on- site.”

319. An article in the Financial Post dated March 23, 1996 titled “Skepticism over its test methods could delay Bre-X’s development,” raised serious technical issues concerning the accuracy of the testing, including use of the cyanide leach technique and the destruction of whole core for assays rather than saving half. The article concluded, “Their methodology is not accurate enough to correctly tell you what you are investing in.” The Kilborn Defendants, given their substantial expertise in this specialized business and due to their work on Busang, had access to this article and should have heeded its warnings.

320. The Kilborn Defendants were also provided reports prepared by Normet Ltd., the metallurgical firm based in Burswood, West Australia. Normet’s reports were filled with red flags. Normet found, for example, that more than 90 percent of the gold in the Busang samples could be recovered in a gravity concentrate representing about 6 percent of the weight of the feed.

As Strathcona subsequently remarked, this is unprecedented. “Although one could expect to see

-106- such exceptional recoveries in a gravity circuit for material coming from an alluvial [river-bed] deposit, we have never before seen such a response from a primary deposit.”

321. Normet’s descriptions of the gold in its samples raised yet another red flag.

According to Normet, Bre-X’s gold was in the form of “particle shapes . . . mostly rounded with beaded outlines,” shaped, in other words, like alluvial gold found in riverbeds. Normet continued that some particles “show distinct gold rich rims with argentian core, other particles are of uniform colour of varying silver content.” After reviewing Normet’s report, the Freeport due diligence team declared that the description by Normet was “possibly the best description of alluvial grain gold ever written.”

322. In February 1996, the Kilborn Defendants issued their Pre-Feasibility Study to

Bre-X. As set forth in the executive summary, the purpose of the study was “to determine the viability of the project.”

323. The Pre-Feasibility Study was based on the Kilborn Defendants’ inspection of the Busang site. In connection with the preparation of the study, Kilborn Engineering provided Bre-

X a certificate executed by Ashby, the senior mining engineer employed by Kilborn Engineering.

She certified that “this Report is based on an inspection of the subject property, study of the available reports, information and conversations with technical personnel familiar with the area.” Reflecting the importance of the study, Ashby also certified that “this Report may be used as a submission to government agencies.”

324. The Kilborn Defendants’ open access to Busang and Bre-X’s personnel enabled it to document a host of red flags, including these:

-107- · the use of the cyanide leach assay technique rather than the industry-accepted fire assay method;

· failure to follow the customary procedure of splitting and saving half of core samples;

· the presence of gold that was much larger than would be in a deposit of this type; and

· the absence of gold in samples originally tested by Mintek Services, a consultant working under Kilborn’s supervision. The juxtaposition of the absence of gold in the Mintek samples with the presence of unusual gold found in later samples was a red flag that the Kilborn Defendants knew or recklessly disregarded.

325. As the Kilborn Defendants knew, others had observed serious “assay problems” at Busang. In Section 5.2.4, of the Pre-Feasibility Study, the Kilborn Defendants stated:

The initial preliminary metallurgical work showed significant discrepancies between head assays from fire assaying and calculated heads from gravity and cyanide leach test work. This is consistent with assay problems experienced by Indo Assay Laboratories in the initial assay work on Busang.

326. A report prepared by Hazen Research, Inc., which was included as part of the

Intermediate Feasibility Study, also alerted the Kilborn Defendants to red flags at Busang. Hazen’s report stated that the gold particles from the Busang samples were “relatively coarse nuggets,” “very compact,” and “often nearly spherical in shape.” Each of the Kilborn Defendants (indeed, any competent mining engineer) knows that the nature and shape of the gold particles described by

Hazen were wholly inconsistent with the size and shape of gold found in a deposit such as Busang.

327. Another consultant told the Kilborn Defendants that their resource models were not adequate for use by investors. In November 1996, they were provided a report by MRDI, the consulting firm retained on J.P. Morgan’s recommendation. MRDI stated: “The current Kilborn resource models are adequate for scoping/pre-feasibility study efforts internal to Bre-X. They are not

-108- adequate for a feasibility study which will be used by external lenders and investors.” MRDI even concluded that one-kilogram samples, which constituted the bulk of the Kilborn Defendants’ assay work, were statistically “useless.”

328. MRDI raised a number of other red flags as well, including:

· “[Most”] of the rest of the world relies on fire and screened fire assays. A routine check program using these methods is mandatory.”

· MRDI was critical of Bre-X’s practice of not saving full split core reference samples and of assaying only mineralized portions of core.

· MRDI recommended that a statistical study of assay variability be performed.

· MRDI denigrated Bre-X’s sampling procedures to the point of stating that they were not suitable for submission to joint venture partners and financing sources.

329. The Kilborn Defendants admitted to J.P. Morgan that discrepancies in existing testwork mandated additional work. At meetings held at Busang on October 20-21, 1996, representatives from Bre-X, the Kilborn Defendants, and J.P. Morgan discussed the status of the exploration program and the Intermediate Feasibility Study. Present on behalf of the Kilborn

Defendants were Robertson, manager of their operations in Indonesia; Walter, Project Metallurgist from Kilborn Engineering; Semple, General Manager from Kilborn Engineering; and Ashby, Senior

Mining Engineer from Kilborn Engineering. As a result of the meeting, a decision was reached to perform additional sample test work because the existing data and tests had not achieved a level of reliability.

-109- 330. In late 1996, the Kilborn Defendants were provided pictures that showed the gold in Bre-X’s samples was alluvial in origin. A December 7, 1996 report prepared by Normet stated that no gold grains less than 150 microns had been detected. The report included actual photographs of the gold particles, which were disc-shaped and rounded. This is consistent with alluvial gold, not the type of gold that would have been found at a site like Busang. The Kilborn

Defendants received this report as part of their feasibility study work.

331. In March 1997, the Kilborn Defendants issued to Bre-X a study entitled

Busang Gold Project: Check Assay Program. The purpose of the study was to verify the assay results produced by Indo Assay, whose results were used by Kilborn in its resource calculations. Kilborn was requested to perform the following tasks:

select random samples from among the samples which have been collected and stored by Bre-X;

supervise preparation of these random samples;

select two independent laboratories to complete the check assays; and perform a statistical analysis of the results and report the findings to Bre-X.

332. Kilborn selected its samples in January 1997. In addition to samples randomly selected by Kilborn, Bre-X selected other samples whose previous assay results appeared anomalous.

The collection of the samples was supervised by Ashby who was at the site for the first two days until the Indonesian crew had gained enough experience to perform a satisfactory job. The samples were then shipped to Vancouver to be assayed by one of two assay laboratories.

-110- 333. The results of these tests alerted the Kilborn Defendants to the same red flags, including poor repeatability ( there is a relatively large variance in assays for individual samples ); the need for testing from larger samples; and the presence of coarse free gold.

5. Summary of the Kilborn Defendants’ Scienter

334. The calculations made by the Kilborn Defendants were provided to Bre-X with the knowledge that they promptly would be distributed to the investing public. Based on the information available to the Kilborn Defendants, as described above, they knew or recklessly disregarded that their resource calculations and Bre-X’s press releases could be (and in fact were) false. The Kilborn Defendants knew or recklessly disregarded the following:

(a) As an expert in the mining industry, the Kilborn Defendants knew that standard industry practice was to split core samples into half-samples. Instead of following regular industry practice, Bre-X crushed the entire sample, rendering later verification impossible.

(b) As the Kilborn Defendants had witnessed from their inspection of the Busang site, Bre-X did not promptly process its core samples, nor did it seal crushed samples in plastic bags in a timely fashion. Standard industry custody and control procedures are that under no circumstances are sample bags opened prior to acceptance at the assay laboratory. Bre-X’s handling of core samples was a gross breach of industry custom.

(c) From their review of reports prepared by Normet and Hazen, the Kilborn

Defendants knew that Bre-X recovered an abnormally high rate of gold from simple, early-stage crushing of its samples. Such a high recovery rate meant that the gold was not embedded in the host rock and was in fact mixed loosely throughout the samples. Gold not attached to host rock is inconsistent with a primary rock deposit, which is what Bre-X claimed Busang was.

-111- (d) From their review of reports prepared by Hazen and Normet, as well as from their own Pre-Feasibility Study, the Kilborn Defendants knew that gold particles found in Bre-X’s samples were relatively coarse nuggets, compact, and spherical in shape. From their experience in the mining industry, they knew a primary rock deposit such as Busang does not have any of these appearances.

(e) As the Kilborn Defendants knew from their inspection of actual core samples and from the numerous reports in their possession, gold was not visible in Bre-X’s core samples.

Based on the fact that Bre-X’s gold was not embedded in the host rock and the fact that the gold was

nuggety, gold should have been visible to the naked eye.

(f) Much of the assaying work described in the Kilborn Defendants’ reports and feasibility studies was based on one-kilogram samples. They knew, however, that samples of that size were useless from a statistical standpoint based on the size of the gold and grind being used for the Bre-X tests. This was a major criticism made in the MRDI report, of which Kilborn received a copy.

(g) The Kilborn Defendants knew that Bre-X relied upon the non-standard cyanide leach assaying technique instead of the reliable, industry-accepted fire assay technique.

(h) Based on their review of reports prepared by Indo Assay, Normet, and Hazen, the Kilborn Defendants knew that wide discrepancies existed in the amount of gold for the same core intervals by different laboratories. In addition, they knew that Bre-X’s sample tests suffered from

“repeatability” problems, meaning that it was difficult to duplicate assay results from the same core sample.

-112- (i) The Kilborn Defendants knew that there was no basis for publicly representing that “measured,” “indicated,” or “inferred” gold resources existed at Busang. The U.S. Bureau of

Mines and the U.S. Geological Survey, Geological Survey Circular 831, defines “Measured

Resources” as follows:

The sites for inspection, sampling, and measurement are spaced so closely and the geological character is so well defined that size, shape, depth, and mineral content of the resource are well established.

The definition for “Indicated Resources” states that:

The degree of assurance, although lower than that for measured resources, is high enough to assume continuity between points of observation.

Labeling any of the resource either “measured” or “indicated” was false and misleading. The

Kilborn Defendants knew that, given the unreliability of the samples and procedures upon which the calculations were based, the resources could not be considered “well established” under the industry definition of “Measured Resources.” Likewise, with respect to the category of “Indicated

Resources,” the “degree of assurance” was not “high enough to assume continuity.” Labeling the resources “inferred” was also false and misleading. According to Circular 831’s definition, resources may be labeled “inferred” when “estimates are based on an assumed continuity beyond measures and indicated resources for which there is geologic evidence.” Here, the Kilborn Defendants knew that the “geologic evidence” was unreliable or undercut the legitimacy of the Busang deposit.

(j) The Kilborn Defendants based their resource estimates on data derived from core samples tested by Indo Assay. The data relied upon by the Kilborn Defendants, however, was riddled with gross inconsistencies, which were easily determinable on the basis of standard sampling

-113- techniques commonly used in the gold mining industry. Indeed, defendant Barrick had learned through the services of its expert Merks that Bre-X’s reported gold values were fundamentally flawed and that Bre-X’s public statements concerning Busang were highly suspect. These same conclusions were equally available to the Kilborn Defendants, but they elected to ignore the data.

See ¶ 522.

D. Defendant Nesbitt Burns

1. Background: Nesbitt and Busang

335. Defendant Nesbitt Burns, Inc., through its employee Bianchini, issued materially false and misleading research reports and public comments concerning Bre-X during the

Class Period, in particular with respect to Bre-X’s Busang site, which operated as a fraud and deceit on purchasers of Bre-X common stock. Because of their resources and reputations, Nesbitt and

Bianchini knew investors would give great weight to and rely on their research reports and other public statements regarding Bre-X and Busang when purchasing Bre-X and Bresea stock.

336. Nesbitt employs professional securities analysts to evaluate companies and their prospects. It publicly touts the high quality of its research. According to its promotional materials, Nesbitt is “recognized for its top-ranked research department” and “is the recognized leader in economic and equity research, with the most top-ranked individual analysts and analyst teams of any Canadian investment firm.” Even after the disclosure of the Bre-X fraud, its Chief

Operating Officer stated in a company memorandum that Nesbitt is known for, among other things,

“the excellence and exceptional track record of its research and is proud of its research department.”

337. Nesbitt is also Canada’s foremost investment banker. According to promotional materials provided to Bre-X, Nesbitt is the “number one mergers and acquisitions

-114- franchise in Canada” and, as of the mid 1990s, had completed more than 250 transactions with an aggregate value of $70 billion over the prior five years. Many of these transactions were in the mining industry, including Nesbitt’s representation of Western States in its sale of the Goldstrike

Property in Nevada to Barrick and its representation of TVX Gold in its divestiture from Inco Ltd.

338. Nesbitt provided underwriting services to Bre-X. On May 15, 1995, Nesbitt, together with other underwriters, was retained by Bre-X to sell 1,350,000 common shares of Bre-X at $3.75 per share. In March 1996, Nesbitt also acted as co-agent in a private placement of 250,000 shares of Bre-X common stock priced at $120 per share.

339. Nesbitt emphasizes its prowess in the mining industry. According to promotional materials provided to Bre-X during its search for an investment banker, Nesbitt has the

“largest dedicated mining group in North America with extensive industry knowledge through its strong corporate finance, institutional equity and research capabilities.”

340. As of the mid 1990s, Bianchini had nine years experience in the mining industry as a geologist and mining research analyst. His work experience includes employment at

Echo Bay Mines as a financial analyst in both the Planning and Corporate Development area and the

Treasury Department. Bianchini holds a Geology degree and a Master of Business Administration from the University of British Columbia.

341. Bianchini’s clout is recognized by the companies he covers. For example, when the stock price of Euro-Nevada Mining Corp., Ltd., jumped sharply on July 5, 1995, increasing over 11 percent on the day, Euro-Nevada’s CEO directly attributed the rise to a favorable report the previous day by Bianchini. According to the July 6, 1995 edition of the Financial Post, Euro-

Nevada’s CEO noted, “He [Bianchini] is very bullish.”

-115- 342. Bianchini also had a strong financial interest in insuring Bre-X’s success.

According to Bre-X: The Inside Story, Bianchini personally held one million Bre-X shares.

2. Nesbitt’s Misrepresentations

343. Bianchini’s cheerleading for Bre-X began in earnest in September 1995.

That’s when he first issued his prestigious “Buy” recommendation for the stock. In the report, which placed a target price of $21 for shares of Bre-X, Bianchini publicly stated that Busang “is likely to evolve into a world-class gold mining project,” based on his own review of “all the drill data”:

Our recommendation is based on the view that the resource found on the company’s Busang project in Indonesia will exceed six million ounces and that ultimately the resource can be converted to a reserve of approximately 4.5 to 5 million ounces. We note that this valuation does not take into account any value for any of the company’s other assets in Indonesia. After reviewing all the drill data and all available cross-sections for Busang, we have developed the view that the project is likely to evolve into a world-class gold mining project.

Bianchini went on to vouch for the technical “competen[ce]” of Bre-X management and its financial strength:

The management is very competent technically and has a long track record of exploration and development in the Pacific Rim. Bre-X is financially strong with C$9.3 million in working capital which can be augmented to $15.8 million on a fully diluted basis. At this point, all warrants and options are in the money. Bre-X is debt free.

344. On October 8, 1995, Nesbitt issued a new research report as a result of further drilling results announced by Bre-X. In its report, Nesbitt increased its one-year target price for the shares to $50, almost double the price of Bre-X shares at the date of the report ($29.50). It also noted that Kilborn Engineering had done an independent audit on the resource. Nesbitt publicly

-116- stated, again, that “Busang will become one of the elite world class ore bodies,” based on Nesbitt’s own review of “all the available technical data”:

We must say explicitly that if we were to give full valuation to BXM based on the dimensions given by the company, we would have a target price that would be a multiple of our new target price.

We have reviewed all the available technical data and as stated above, the dimensions seem reasonable.

Conclusion: At this early stage of the development of the Southeast zone, there remains many meters of drilling required to be done in order to make a conclusive statement on the size of the Busang deposit(s). However, given the consistent geology and the relative high degree of tonnage predictability based on surface testing, we are prepared to say that Busang will become one of the elite world class ore bodies both in size and in profitability. Our view is that management has a very high degree of competence in developing the deposit.

345. After a visit by Bianchini to Busang in the fall of 1995, Nesbitt issued a revised report on November 21, 1995. It repeated its recommendation of Bre-X as a “Buy,” raised its target price to $70, and estimated that Bre-X had 30 million ounces of resources:

In our view the most recent drill results put out by BXM demonstrate that Busang prospect is very likely to contain a gold deposit which can only be categorized in the elite class of deposits around the world. The continuity of the mineralization is truly impressive. Despite the two “blank” holes and the lower than expected grade the drill results continue to confirm a very large continuous orebody, with simple metallurgy, more than reasonable infrastructure and compelling economics. In addition there are at least four areas of upside in our resource estimate. They include the down dip potential, the strike potential to the southeast, the potential of the North zone and four other prospects on the property.

-117- 346. In a December 8, 1995 research report, Nesbitt and Bianchini authoritatively declared Busang’s likely status as “one of the largest gold deposits in the world”:

Our recent visit to the Busang property confirmed our view the deposit will likely grow to become one of the largest gold deposits in the world.

In a remarkable “observation”, highlighted as “important” for the future, Nesbitt lauded the Bre-X geologists’ “ability” to separate high grade from low grade cores:

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 were also very impressed by the quality of the ground work and of the assay lab in Balikpapan.

Nesbitt set a 12-month target for the stock of $70; at the time, Bre-X traded at $53.50.

347. On January 4, 1996, Nesbitt and Bianchini opined that “the resource will ultimately be above 30 million ounces and that the ultimate mineable reserve at a minimum will be in the area of 30 million ounces.”

348. On January 16, 1996, Nesbitt and Bianchini revised the target price for the shares of Bre-X to $110. “We anticipate that drilling and ongoing surface work will continue to expose what will likely become one of the two or three largest gold ore bodies in the world.”

349. On February 21, 1996, Nesbitt and Bianchini issued another report, bumping up “our estimate of total resources”:

We are increasing our estimate of total resources on the Busang property to 42.6 million ounces [of gold]. 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 of the most prolific and soon-to-be profitable gold discoveries over the past 20 years.

-118-

350. In March 1996, Nesbitt released a lengthy research report on the gold mining industry. It contained a company profile on Bre-X prepared by Bianchini. In the report, Bianchini continued to tout and legitimize Bre-X and its management, stating it “has had spectacular success on its Busang project . . . . Despite its relative youth, the company’s technical expertise is first class.”

351. Bianchini went on to increase his target price for the stock, basing the increase on a total resource estimate raised to 42.6 million ounces of gold. Bianchini even left room for more hype: “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 include any mineralization below the 300- metre level or mineralization between Southeast zone #1 and

Southeast zone #2.” The report concluded, “Bre-X is destined to become one of the largest producers in our sector.”

352. On April 8, 1996, Nesbitt and Bianchini issued a new research report in which they, predictably, strongly recommended the purchase of Bre-X. They again raised their target price, this time to $230 (the price was then $159.75). In this report, Nesbitt and Bianchini labeled their estimate as “conservative”:

The release of the latest drill results, revised geological interpretation, and a revised estimate of the size of the alteration “footprints,” has provided a package of additional information on Busang’s resource potential. We have increased our overall estimate of the Busang I and II resource to potential from 42.6 million ounces to 46 million ounces. Our new estimate is more than likely to be conservative.

-119- 353. According to the May 7, 1997 edition of the Financial Post, in a report Nesbitt and Bianchini issued in early 1996, raising his 18 month target for Bre-X stock to $225, he made one of his most brazen pronouncements regarding Busang: “I know for a fact there’s more gold. I’ve seen it.”

354. On May 28, 1996, Bre-X stock reached a new high of $26.10 per share (post- split). On the same day, Nesbitt gave a presentation to clients in the packed grand ballroom of

Toronto’s Sheraton Centre. Bianchini told the gathering that Bre-X was “a double”:

I still think it’s a buy here, but the really easy money has been made, and all we have left now is a double. I remember when doubles used to be great.

355. After another visit by Bianchini to Busang in June 1996, Nesbitt released a report which again increased the estimate of Busang’s total resource potential. This time it pegged an amazing 62 million ounces of gold. The Nesbitt recommendation was compelling:

The current drill program will allow for a significant portion of the resources to have been drilled with the sufficient density to qualify as proven and probable by year end. This will significantly enhance evaluation levels. . . . We continue to be of the view that the Busang deposit will become one of the largest gold deposits in the world. Over the next 12-24 months, we anticipate a continuous increase in resources and ultimately reserves. We continue to recommend the purchase of Bre-X shares.

356. In a June 17, 1996 research report, Nesbitt and Bianchini began to talk of

Busang as perhaps the largest gold deposit ever:

We continue to be of the view that the Busang deposit will become one of the largest gold deposits, if not the largest, in the world. . . . Over the next 12-24 months, we anticipate a continuous increase in resources and ultimately reserves which should result in a progressive increase in share price.

-120-

357. During the summer of 1996, Nesbitt and Bianchini (now a “superstar gold analyst”) put on a show to promote themselves and Bre-X stock. As was later reported in the Ottawa

Citizen,

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.

358. Nesbitt and Bianchini released a morning research report on July 23, 1996, 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.

359. In a “Red Book” of stock ratings for September 1996, Nesbitt and Bianchini reiterated their estimate that the total reserve potential for the Busang property was 62 million ounces of gold. Leaving room for a positive upside to the hype, however, they also stated that “recent drilling and mapping indicates that our estimate may be significantly underestimating the size of the

-121- deposit.” Their report also stated that: “Drilling over the past two years has outlined a deposit which is likely to be one of the three largest deposits in the world.”

360. On February 1, 1997, Nesbitt continued its tireless promotion of Bre-X and

Busang and announced yet another incredible resource estimate:

The Company has increased the resource estimate to 70 million ounces. We have reviewed the new estimates and previously announced drill data, and have 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.

361. The close relationship between Bianchini and Bre-X, and the reliance which he placed on information provided to him by insiders at Bre-X, was evidenced during the conference call on February 19, 1997. Included in the conference call were Walsh, Felderhof, Francisco, J.P.

Morgan, members of the press, and investment analysts, including Bianchini. The following is one of the more insightful interplays between Felderhof and Bianchini, demonstrating the inappropriately close relationship of Bianchini and the Insider Defendants:

Felderhof: Egizio, can I just add one point? I think what happened here, we found too much gold, so it therefore becomes an issue of national interest. If we had found a lot less, this would have never happened.

Bianchini: I totally agree with you, John. But again, you know how the shareholders feel, John, you’re one of them, and I think we’re just going to have to look at Indonesia in a much different light than they have presented themselves at conferences and around the world at their road shows. So I think a lot of you out there would agree that you just have to look at it a lot different than it used to be.

Felderhof: Yes, I’m a bit disappointed, but you’ve also got to appreciate this is a very unique situation. Even with 45

-122- percent, I feel that Bre-X could end up with 90 million ounces. That’s my feeling. And that’s a pretty good mine.

Bianchini: From your lips to God’s ears, John. Thank you. 362. Even in the face of serious concerns regarding Bre-X’s ownership rights to the

Busang site, Bianchini still could not resist putting a positive gloss on the situation and serve to keep hopes flying high. In a Nesbitt research report issued in March 1997, Bianchini stated:

Resources should be over 100 million ounces by April. The ultimate resource for 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.

363. Indeed, even after word began to leak out in late March 1997 of the Busang fraud, Bianchini and Nesbitt continued to tout the stock and defend Busang’s potential. On

March 21, 1997, Nesbitt proclaimed “confiden[ce]”:

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.

364. In response to rumors that Freeport’s due diligence on the Busang property was failing to validate Bre-X’s resource estimates, on March 24, 1997, Nesbitt held a conference call with investors. Bianchini was designated to explain away the discrepancies between Freeport’s and

Bre-X’s findings. He even declared, “The gold is there.”

I’m going to explain this . . . cyanide leach is the method that gives you the best representation of what is in the -- in the -- in the rock . . . If Freeport has indeed used fire assay as opposed to cyanide leach guess what? They are not going to get accurate results. . . . Freeport probably had some problems in their sample prep process re-assaying certain consultations with Bre-X and, maybe perhaps re-assaying certain parts of

-123- their initial assays, I think that they can -- I think that they can rectify any problems that they may have had. Therefore, my recommendation does not change . . . The gold is there. There’s no question about it . . . So to those of you that -- that -- you know, that the core was salted or that somehow the samples were salted or somehow that the numbers were jigged, I mean it is so preposterous I just -- I just -- I’m not even going to address the possibility of that happening because I just -- it’s just infinitesimal. So our conclusions remain that, you know, the deposit is as it’s represented . . . This deposit, and when it is shown once again that it is as represented in the market right now, is going to be bigger than -- Well, the deposit itself will be bigger than the whole North American gold mining industry when measured on proven and probable reserves.

365. On March 25, 1997, Bianchini responded to increasing evidence of the fraud by challenging the independent testing of the Busang site:

Egizio Bianchini, an analyst with Nesbitt in Toronto said it’s hard to believe tests conducted by independent engineering firms for Bre-X could be so off the mark.

“This thing has been drilled like Swiss cheese,” he said in a conference call with other analysts.

He also scoffs at speculation Bre-X has been pulling a fast one.

“If this was some sort of scam,” he said, “these guys would have been gone a long time ago.”

According to Bianchini, Freeport’s trouble verifying Bre-X’s estimates “was likely related to different techniques in assay procedure.” Bianchini continued to recommend the stock as a “buy” and insisted: “The gold is there! Therefore, we continue to recommend the purchase of Bre-X shares.”

-124- 366. Following Bre-X’s tacit acknowledgment of fraud, on March 26, 1997 Nesbitt and Bianchini issued the following terse message:

As a result of the announcements made today by Bre-X Minerals and Freeport-McMoRan which call into question previously announced drill results, we are suspending our S5 (highest buy) rating. An investment rating is no longer appropriate due to the extremely high level of uncertainty.

367. On May 1, 1997, Nesbitt’s chief operating officer praised Bianchini in a internal memo to Nesbitt staff. The memo stated:

Nesbitt 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.

368. This effort to distance themselves from Bre-X fooled no one. A May 10, 1997 article in the Financial Post noted that Bianchini had “become synonymous with Bre-X.” According to a Financial Post article dated April 19, 1997, “few boosted Bre-X as much as did Nesbitt’s gold analyst, Egizio Bianchini.” John Woods, of Canada Stockwatch (a Vancouver-based outfit that tracks junior mining companies in western Canada) called Nesbitt’s conduct “vigorous drum- beating”:

“We’ve never seen a blue-chip brokerage firm promote a penny mine stock so vigorously as did Nesbitt and several others.”

Nesbitt was the loudest of the cheerleaders. This was not just a dispassionate view from the analysts. It was vigorous drum- beating.

-125- 3. Nesbitt’s Scienter

369. Both Nesbitt and Bianchini have extensive geological expertise. As part of their courtship of Bre-X, Nesbitt paraded its stellar mining team before Bre-X in September 1995.

The team included three geologists, two exploration and mining geologists, and a mining engineer.

These professionals had more than 61 years of experience in the mining industry.

370. This geological experience enabled Nesbitt to perform its own resource calculations for Busang. On October 18, 1995, Bianchini forwarded his latest calculations to Walsh:

I have enclosed my morning comments on Bre-X and my thoughts regarding potential resources and reserves. As you can, we are very bullish on the prospects for the company. I think that you should review the “Egizio” calculations for resources. This is what I think will ultimately be discovered and proved on the property to fence line #59.

371. Beyond their considerable geological experience, Nesbitt and Bianchini were given unparalleled access to Bre-X and its Busang project site. On at least three occasions, Bianchini personally visited Busang, and on at least one occasion he videotaped the sample handling process and the sample preparation laboratory. On at least two occasions, Bianchini visited the laboratories of Indo Assay, the primary assayer for Bre-X, and interviewed the facility’s manager and toured the premises. His visits to the Busang property are reflected in internal Bre-X documents, including memoranda from Walsh to Bianchini and itineraries for each visit, and comments made by Bianchini during a March 24, 1997 conference call.

372. Bianchini’s first visited Busang during September 23-30, 1995. Consistent with his close association with Bre-X, Bianchini was the first analyst to visit the Busang site.

According to his itinerary, he spent the entire day of September 25 at the Busang site, toured Bre-X’s

-126- exploration office in Manado on September 29, and visited Bre-X’s office in Jakarta on September

30. In contrast, many analysts were denied access to the site or were given limited access, far short of that enjoyed by Bianchini.

373. According to an internal Bre-X memorandum, Bianchini returned to Busang during November 11-16, 1995. On this visit, he was treated to a private tour of the property by

Michael de Guzman and Cesar Puspos, Project Manager.

374. After Bianchini departed, de Guzman wrote to Felderhof summarizing the results of the visit. De Guzman praised the “Nesbitt-led group of analysts” as the “most professionally open-minded” that Bre-X had ever encountered. He also informed Felderhof that

“Over-all corporate plans, strategy were discussed to their optimum satisfaction.” Bianchini’s group was obviously impressed by those plans because de Guzman also reported that “some of these guys even signified to follow Bre-X’s ‘footsteps’ in acquiring/exploration areas in Indonesia.”

375. On April 24, 1996, Bre-X delivered a copy of Kilborn’s Pre-Feasibility Study to Bianchini’s home address. From his review of Kilborn’s Pre-Feasibility Study, Bianchini was alerted to the following red flags at Busang:

· the core sampling and cyanide leach assay procedures at Busang were not standard practice;

· Bre-X’s assay results had chronic problems with variance and repeatability problems;

· the rates of recovery from simple coarse grinding were extraordinarily high, indicating that the gold particles were not embedded in the host rock;

· simple coarse grinding yielded large free gold grains, which were strongly atypical of a primary rock deposit where gold particles were embedded in the host rock;

-127-

· the absence of gold in the composite mineralized samples initially examined by Mintek;

· the gold in Bre-X’s samples was unusually large for a primary deposit like Busang -- 86.3% of the Busang gold was larger than 106 microns; and

· Kilborn believed that a higher confidence level in the test results was needed.

On the basis of these significant warnings, Bianchini knew that comprehensive additional due diligence was required at Busang to confirm the purported huge preliminary Bre-X gold resource estimates.

376. While Bianchini was broadcasting to investors news of the “world’s largest gold deposit,” mining industry experts were examining the doubtful reliability of studies done by

Bre-X. According to a the Financial Post article dated March 23, 1996, “technical experts watching the methods that Bre-X is using to estimate the amount of gold at Busang warn that no large mining company would consider investing in the project without a lot more data.” Howard Stockford, executive vice-president of one of Canada’s most successful mining companies, also cast doubt on the reliability of Bre-X’s studies:

“Their methodology is not accurate enough to correctly tell you what you are investing in.” Stockford warned that resource estimates for Busang’s rich Southeast Zone One are based on drill holes spaced 250 meters apart. “That’s about the length of two football fields . . . . crews will have to do a lot more drilling to be sure the gold is continuous between these holes.” In addition to Bre-X’s drilling techniques, the articles goes on to question the assaying techniques used to measure the amount of gold in the rock.

-128- 377. Internal Bre-X documents show that in response to the Financial Post article,

Bianchini told Walsh that he would personally vouch for Bre-X’s assaying method. Walsh wrote to

Felderhof on March 23, 1996:

Someone’s trying to do a number on us and its really starting to piss me off. Egizo is also pissed off at Peter Kennedy [the author of the Financial Post article] who he refuses to talk to ever. He’s off to Chile for a week with other analysts but will call his office Monday morning and explain that our assaying method is a world recognized standard technique for grade determination and that Glen Clark [the consulting engineer who was questioning Bre-X’s numbers] is B.S.

378. Bianchini also offered to blunt the effect of the Financial Post article by contacting institutional buyers and urging them to buy Bre-X stock. Walsh wrote to Felderhof: “He

(Eggizo) [sic] also will call all the institutions to buy the stock if it sells off.”

379. The response of Bre-X, Walsh, and Nesbitt to this article is significant proof of the collusive nature of the relationship among these defendants; the extent to which they went to avoid detection of their fraudulent conduct; and the lack of due diligence by Nesbitt with regard to the serious questions concerning the Bre-X studies and assay results. Their response was simply to bad mouth engineers, reporters, or anyone else questioning the value of Busang, without spending any effort to determine whether the criticisms were valid.

380. On March 26, 1996, the Alberta Stock Exchange revealed it would require companies to use standard “fire” assaying techniques when disclosing results of precious metals analyses. In 1995, however, Bre-X had switched from the more standard fire assaying technique to the cyanide leach method. According to Glen Clark, a Toronto-based engineering consultant,

“Cyanide leaching is more commonly used to evaluate gold processing methods rather than the

-129- orebody itself. Since it also involves the destruction of the original drill core, interested buyers will want to check Bre-X’s numbers by doing more drilling on the property. That’s just good due diligence.”

381. Bianchini again returned to Busang on June 9-10, 1996. On this visit, he made his own personal video of the sample preparation facility and specific sample bags. He was also given a personal tour by de Guzman and Jerry Alo, including a question and answer session concerning the sample preparation laboratory and Bre-X’s procedures for crushing and pulverizing core samples. Alo later explained to Bianchini how Bre-X prepared sample bags prior to shipping to

Indo Assay, what was involved in the check assay process, and the procedure for preparing mineralized core samples. (These facts are confirmed by the report prepared by Forensic

Investigative Associates, including an extensive interview of Jerry Alo on September 16, 1997, in which Alo informed investigators about Bianchini’s visit.)

4. Summary of Nesbitt’s Scienter

382. As a result of Bianchini’s visits to Busang, his review of the Kilborn Pre-

Feasibility Study, as well as his and Nesbitt’s considerable geological experience, they knew of numerous red flags at Busang. These red flags all pointed in the same direction -- reports of a massive gold discovery at Busang were a hoax. Nesbitt and Bianchini were specifically aware of the following red flags:

(a) Bre-X did not split its core samples into two half-samples, which is accepted industry practice. Bre-X crushed the entire sample, rendering subsequent re-testing impossible.

-130- (b) After crushing, Bre-X samples were neither processed in a timely manner nor promptly sealed in plastic bags, as is industry custom. Instead, Bre-X samples were allowed to sit in open bags for weeks on end, both at Bre-X’s offices in Samarinda and its warehouse in Loa Duri.

(c) Bre-X claimed an extraordinarily high recovery rate of gold from early stage crushing of its samples. Such a high recovery rate meant that the gold was not embedded in the host rock and was in fact mixed loosely throughout the samples. Gold not attached to host rock is inconsistent with a primary rock deposit, which is what Bre-X claimed Busang was.

(d) The “looseness” of the gold in Bre-X’s samples also meant that the gold should have been visible in samples. Nevertheless, when Nesbitt employees inspected Bre-X samples at Busang, they did not see any gold (despite Bianchini’s statements to the contrary).

(e) From its vast experience in the mining industry, Nesbitt knew that fraud was endemic to the industry, particularly with respect to Canadian junior mining companies who have been notorious for such conduct. Nesbitt also knew that Walsh and Felderhof had at best mixed business reputations. In fact, Walsh had been involved with selling stolen securities on two occasions and had just emerged from bankruptcy. And Nesbitt knew that, while comprehensive independent due diligence was essential for Bre-X, none had been performed.

(f) Bianchini also knew from his visits to Busang that the sample preparation facility was under-utilized, with a large backlog of core waiting to be sampled.

-131- E. Defendant Lehman Brothers

1. Background

383. On behalf of his employer, Lehman Brothers, Inc., Daniel McConvey authored

29 research reports concerning Bre-X. He has extensive experience in geology. He visited Busang in July 1996 and had access to Bre-X’s engineers, assayers, and other employees and contractors, as well as to Barrick, his former employer.

384. McConvey joined Lehman in 1994 as a vice president in its equity research department, covering precious metals and mining companies. He has established himself as a leading gold stock analyst in the U.S. On June 29, 1999, the Wall Street Journal named McConvey as its top gold stock analyst for 1998, during which his stock picks generated a return of 23 percent, compared to a 3 percent loss for the median analyst. McConvey was the Wall Street Journal’s number two gold stock analyst for 1995.

385. McConvey came to Lehman after seven years with American Barrick

Resources, a predecessor to Barrick. He was operations controller at Barrick. Prior to that, he was with Peat Marwick Thorne. He is currently employed with the Toronto office of Goldman Sachs &

Co.

386. During his employment with Barrick, McConvey was regarded as a senior officer whose duties and responsibilities entitled him to lucrative compensation. In 1993, McConvey netted approximately $282,000 as a result of exercising an option to purchase 20,000 Barrick shares at below-market prices. In 1994, McConvey netted another $325,550 as a result of exercising an option to purchase 10,000 Barrick shares at below-market prices. After those sales, he still held another 50,000 Barrick options.

-132- 2. Lehman’s Misrepresentations

387. Lehman commenced its coverage of Bre-X on November 18, 1996. In a report written by McConvey and issued by Lehman on that date, it declared that Bre-X “looks to have made the gold discovery of the century.” Touting the size of the gold deposit, Lehman 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.”

388. In the same report, Lehman expressed a belief that ownership disputes with a minority partner and resultant delays in obtaining a government permit “will be resolved.”

Consequently, “there will be a significant rebound in Bre-X’s share price,” and “share price will soar.” Lehman 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.”

389. On November 21, 1996, Lehman raised its rating of Bre-X stock from neutral to buy. In a report issued on that date, it talked of an “imminent” takeover 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

-133- 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 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.

390. The next day, Lehman issued another report written by McConvey:

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.

391. In a report issued on November 27, 1996, Lehman continued to rate Bre-X stock a buy. It emphasized 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.

-134- 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.

392. In another report by McConvey issued on the same day, Lehman 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.”

393. On December 3, 1996, Lehman issued another report by McConvey. It proclaimed “excellent news” for shareholders of Bre-X, a company that “we believe [has] the gold find of the century”:

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.

-135- 394. On December 3, 1996, Lehman issued a 50-page report on Bre-X. It boasted that Busang was “the gold discovery of the century,” the gold discovery in Busang “is enormous,” and Lehman expected the Bre-X “growth story to continue in a major way for the rest of this decade.”

395. McConvey then identified for investors, as seemingly positive characteristics of Busang, what were in fact (as any trained mining professional would know) a series of red flags:

· unlike gold found in a primary deposit which is embedded in the host rock, the gold at Busang was “coarse,” “loose,” “powder like,” and “free” in nature;

· because gold particles in Bre-X’s samples were not attached to their host rock, they could be separated with astounding ease -- gravitational circuit recoveries were 75-85 percent in the Central Zone to 83-93 percent in the Southeast Zone;

· although fire assaying was “standard assay process,” Bre-X was using cyanide leaching process; and

· Bre-X crushed the entire core sample.

396. On December 4, 1996, Lehman issued two reports, both written by

McConvey. In the first, it recommended Bre-X stock, indicating that “there is 50% upside from current share price,” which was $13.78. In the second, it again argued that any Barrick deal would be favorable:

· 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.

-136- 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.

397. On December 13, 1996, Lehman issued another report, written by McConvey.

Again, it emphasized Barrick’s oft-repeated assurance to Bre-X investors that any deal would be

“fair”:

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.

398. On January 7, 1997, Lehman issued a report, written by McConvey, regarding gold prices for 1997 and ratings for gold producing companies. While Lehman substantially downgraded most gold stocks, it singled out three companies whose stock it recommended: Bre-X,

Barrick, and Placer Dome.

399. Two days later, on January 9, 1997, Lehman further distinguished Bre-X stock. “In a bearish gold bullion market, we believe this is one gold stock that will perform well in

1997.” Emphasizing that it had “follow[ed] this story very closely,” Lehman 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.”

-137- 400. In a report written by McConvey and issued on January 13, 1997, Lehman touted the purported “spectacular drill results” at Busang:

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.

401. On January 20, 1997, Lehman 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.

402. Also on January 22, 1997, Lehman issued a report, written by McConvey, which repeated the “fair” deal theme it had followed for weeks:

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.

403. Another Lehman report, written by McConvey and issued on January 27,

1997, insisted that

“Barrick . . ., in our view, is still in the driver’s seat for completing a deal with Bre-X.”

404. On February 19, 1997, Bre-X and J.P. Morgan conducted a conference call with stock analysts, including McConvey. The following day, Lehman issued a report concerning the call, written by McConvey, stating:

* Bre-X Minerals management conducted its first company conference call yesterday and included its investment bankers

-138- 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.

405. On March 14, 1997, Lehman upgraded its rating of Bre-X stock in the face of the negative announcements about the Company, portraying the market’s reaction as excessive. In a research report written by McConvey, Lehman described the stock as “attractive,” since “Busang may end up possessing more gold . . . than is currently known to exist in the entire State of Nevada”:

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.

-139- 406. On March 20, 1997, Lehman issued a report that dispelled questions about the veracity of earlier Company and Lehman statements, despite indications to the contrary. The report, written by McConvey, discounted de Guzman’s death:

* 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.

407. Even in the face of public disclosures that Busang did not contain the gold resources previously claimed, Lehman continued to support earlier estimates about the deposit. It also vouched for the Insider 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.

408. In a report written by McConvey on March 24, 1997, Lehman assured investors, “we believe the deposit exists”:

[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

-140- 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. 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.

409. 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. McConvey’s name was not on the report.

3. Lehman’s Scienter

410. In addition to being a financial analyst, McConvey spent six years as the operations controller of Barrick. He was completely familiar with all aspects of gold mining operations.

411. McConvey’s technical knowledge was well known among institutional investors and analysts. For example, an article from the November 5, 1995 edition of Institutional

Investor reported that Victor Flores, a gold fund manager at United Services Advisors, referred to

McConvey’s “in-depth research on gold stocks,” including Bre-X.

-141- 412. McConvey’s geological and metallurgical expertise and technical sophistication is also reflected in the questions he posed during Bre-X’s conference call on

February 19, 1997. During the call, he questioned Bre-X insiders on highly technical issues relating to the planned mining operations at Busang, including the calculated throughput rates, the effect of internal waste on the grade calculations (the effect of mixing unmineralized host rock with mineralized ore), acid rock drainage the (the creation of sulfuric acid when rain is mixed with an exposed sulfide ore body), and the sulfide content of waste material.

413. In addition, Lehman’s December 3, 1996 report, written by McConvey specifically stated that “we believe that it is important for potential investors to understand the geological situation to put things in perspective.” McConvey then presented a five-page “simplified summary” of the relevant geology and a three-page analysis of the assaying techniques used by

Bre-X at Busang, both of which reflect a firm grasp of the complexities of gold mining.

414. McConvey’s geology “summary” reported his detailed views of Busang’s volcanic hard-rock formations. He claimed that Busang was a “Diatreme” deposit created by magma intrusion into underwater surface rocks over millions years. He specified that Busang was a particular type of Diatreme deposit, one known as a dome Diatreme deposit, where waters flowing through fractures in the rock cools the magma and prevents a magma eruption, better trapping minerals into the hard rock. Indeed, he touted his knowledge of these deposits, stating at one point in the report that the Diatreme dome deposit “is a type that is foreign to even many geologists.” The report even includes a photograph of de Guzman showing McConvey the indications of the Diatreme dome deposit.

-142- 415. McConvey’s analysis of Bre-X’s assaying techniques displayed similar technical sophistication. For example, he explained in the report that, while fire assaying of a split core was the “standard assay process,” Bre-X used a cyanide leaching process without splitting the core. He explained that Felderhof decided not to split because the gold “falls off like dust.” He also explained the differences between the fire assay and cyanide leaching processes, including how the results from the two processes must be analyzed differently.

416. In his December 3, 1996 report, McConvey admitted he had studied the

Normet report. “Bre-X cross checked its sample results with other laboratories including Normet . . . whose June 5, 1996 report we have reviewed.” To an experienced mining professional like

McConvey, even a casual reading of Normet’s report highlighted a number of red flags at Busang, including:

· More than 90 percent of the gold in the Busang samples could be recovered in a gravity concentrate. Recovery rates of such a magnitude are inconsistent with a primary deposit and are indicative of alluvial gold.

· The gold particles photographed by Normet were disc-shaped and rounded. Because primary deposits are embedded in their host rock, they appear to be wiry. “Rounded” gold is alluvial in origin.

417. When McConvey visited Busang and met with de Guzman and Felderhof in

1996, he was no layman. He was a sophisticated analyst with a technical knowledge of the relevant geological and metallurgical issues.

418. McConvey visited Indonesia during July 12-19, 1996. He spent July 13-14,

1996 with de Guzman and Felderhof touring in and around Busang.

-143- 419. McConvey also visited the assay labs of Indo Assay Laboratories in the town of Balikpapan on July 13, 1996. Accompanied by de Guzman and Felderhof, he was given a tour of the facility by the lab’s chief chemist, Jamie Ordona, who showed McConvey how Bre-X’s core samples were assayed. McConvey’s access to the assay labs was significant in light of certain news articles published in March 1996 that questioned Bre-X’s cyanide leaching assay process.

420. During his visit to Busang, McConvey was shown Bre-X’s “core yard” where core samples were stored for prolonged periods of time while awaiting processing. He saw, for instance, that Bre-X was drilling cores far in excess of their ability to process the cores, and it was dumping the unprocessed core samples in the core yard. In fact, the December 3, 1996 report includes a photograph of the core yard filled to the brim with unprocessed cores. This first-hand observation of Bre-X’s practice of storing core samples in an open warehouse, and not processing the core samples in a timely manner, would raise a red flag of the likelihood of tampering, for any experienced mining professional like McConvey.

421. McConvey, a former senior officer of Barrick, also was told about or provided the results of its due diligence testing in late 1996. Barrick’s first tests revealed a striking lack of gold at Busang. Likewise, when Barrick tested again, in early 1997, the samples contained the wrong type of gold particles -- ones that were much too large to be from a primary rock deposit such as Busang.

422. McConvey’s source concerning the Barrick test results may well have been one of the participants at the December 15, 1996 meeting of the Bre-X Board of Directors. At the meeting, Morrison stated that J.P. Morgan was prepared to sign a fairness opinion with respect to the pending Barrick transaction. Bre-X did not inform the public of J.P. Morgan’s opinion. Five days

-144- after the board meeting, however, McConvey disclosed in a research report that J.P. Morgan had informed Bre-X that it was willing “to sign a fairness opinion on the current agreement with

Barrick.” At the same board meeting, Barrick’s negative test results were discussed in great detail.

423. McConvey later acknowledged knowing about Barrick test results. In his

March 24, 1997 report, he wrote that Barrick “has done its own checks.” At the time of this report,

Barrick’s testing had not been publicly disclosed. He had to have been advised privately about the tests.

4. Summary of Lehman’s Scienter

424. As a result of McConvey’s visit to Busang, his review of the Normet report, his knowledge of the Barrick test results, and his considerable geological experience, he and his employer Lehman knew of numerous red flags at Busang. These red flags all pointed in the same direction -- reports of a massive gold discovery at Busang were a hoax. Lehman and McConvey were specifically aware of the following red flags:

(a) Bre-X did not split its core samples into two half-samples, which is accepted industry practice. It crushed the entire sample, rendering subsequent re-testing impossible.

(b) After crushing, Bre-X samples were not promptly sealed in plastic bags, as is industry custom. Instead, Bre-X samples were allowed to sit in open bags for weeks on end, both at

Bre-X’s offices in Samarinda and its warehouse in Loa Duri.

(c) From the Normet report, McConvey and Lehman knew that Bre-X claimed an abnormally high recovery rate of gold from early-stage crushing of its samples. Such a high recovery rate meant that the gold was not embedded in the host rock and was in fact mixed loosely throughout

-145- the samples. Gold not attached to host rock is inconsistent with a primary rock deposit, which is what Bre-X claimed Busang was.

(d) From pictures taken by Normet of the Busang samples, McConvey knew that

Bre-X’s gold was disc-shaped and rounded in appearance, like alluvial gold, not wiry as a primary deposit should have been.

(e) Lehman reported to the investing public that the gold in Busang’s cores was powder-like and fell off like dust. The purported “looseness” of the gold in Bre-X’s samples meant that the gold should have been visible in samples. Given that 80 percent of the gold in Bre-X- prepared samples came from coarse particles, it is inconceivable that Lehman or McConvey observed

“powder-like” particles or gold “dust.” An expert retained by defendant Barrick observed incredulously: “Were [Lehman’s] representatives ever shown high grade core? After all, [large] gold particles ought to be clearly visible in whole core.” See ¶ 560.

(f) McConvey knew that Barrick’s due diligence testing had shown either an absence of gold or the wrong kind of gold in Busang core samples.

(g) As a seasoned professional in the mining industry, McConvey knew that fraud was endemic to the mining industry, particularly with respect to Canadian junior mining companies.

He also knew that Walsh and Felderhof had mixed business reputations. In fact, Walsh had been involved with selling stolen securities on two occasions and had just emerged from bankruptcy. And

McConvey knew that, while comprehensive independent due diligence was essential for Bre-X, none had been performed.

(h) McConvey knew from his visit to Busang that the sample preparation facility was under-utilized, with a large backlog of core waiting to be sampled.

-146- (i) Lehman’s hyperbolic reports on Busang were an extreme departure from the standards of ordinary care. For example, its December 3, 1996 report proclaimed that Busang was a

“geologist’s and metallurgist’s dream” and that the gold discovery in Busang was “enormous.”

Other defendants privately marveled at Lehman’s recklessness. Jan Merks, an expert retained by defendant Barrick, told his employer that Lehman’s public pronouncements were “confounding” and

that “only the drilling of additional holes near the glory holes” could lend sufficient support to

Lehman’s statements. See ¶ 544.

F. Defendant Barrick

1. Background

425. Barrick Gold Corporation participated in the fraud by making materially false public statements and material omissions of fact about Bre-X and Busang’s gold resources.

426. During the Class Period, Barrick was involved in extensive negotiations with

Bre-X, J.P. Morgan, and the Indonesian Government in connection with a proposed joint venture to develop Busang. Barrick had unique access to truthful, adverse information about Busang, as a result of due diligence performed in connection with the proposed joint venture. This information included the results of tests by Barrick itself in late 1996 which documented an absence of gold and tests in early 1997 which revealed the wrong type of gold in the samples. In addition, Barrick’s expert Merks concluded that data derived from core samples taken from Busang was filled with serious and highly irregular results.

427. In fact, the results of the second round of Barrick tests were so damning that

Strathcona designated them the “first red flag,” one that was it easily discovered from its offices in

Toronto.

-147- 428. Despite its knowledge that Busang could be a hoax, Barrick deliberately made public statements falsely touting the gold and future gold mine there. At the same time Barrick was making these unqualified and (to investors) reassuring statements, which it knew were at least misleading and could well be false, Barrick was promising that it would treat Bre-X investors

“fairly.” This was a promise it never intended to keep.

429. Instead, Barrick chose to conceal from the public the results of its own Busang tests -- results that were at best troubling and in fact were proof that Busang was a scam.

430. Why did Barrick make any public statements about Busang or the gold or a future gold mine, knowing it had negative tests results in its hands? No other potential joint venture partner made such comments. And why did Barrick assure Bre-X investors that it would be “fair” to them, knowing it never would willingly disclose the critical results of its tests?

431. The answer is simple. Barrick’s CEO, Peter Munk, had told the investment community that he would make his company the largest gold producer in the free world. Busang was an opportunity to reach that goal. He was adamant that Barrick -- and not its competitors -- secure whatever gold existed at Busang. He feared losing Busang, lest the hype be true; but more important, he knew Barrick risked nothing by locking up Bre-X in a joint venture deal. Quite simply, Barrick would have plenty of time to prove up any Busang reserves after the deal was done and long before any real capital costs were incurred for a mine.

432. In other words, the deal with Bre-X was a no-risk, free option on Busang. If there was 50+ million ounces of gold there, Munk was a genius. If there was less gold, it still could be an acceptable deal. If there was no gold -- and Barrick knew this was a possibility -- it risked embarrassment but no money would be lost.

-148- 433. Barrick chose to speak to shareholders of Bre-X about Busang gold and fair deals specifically to calm the investor waters to facilitate a deal. It was a calculated risk.

Unfortunately for investors, Barrick’s strategic moves put them at risk and, in the end, they lost. For that deliberate conduct, plaintiffs seek recompense from Barrick for investor losses.

2. Barrick’s Misrepresentations

434. While negotiating the proposed joint venture with Bre-X in late 1996, Barrick received non-public information indicating that serious problems existed at Busang, including the possibility that there was either no or negligible gold at Busang.

435. Despite its knowledge, Barrick continued to make statements concerning Bre-

X and Busang that it either knew could be false or that were made with reckless disregard for their truth or falsity. Those statements made by Barrick include the following:

· Stunningly positive assay results disclosed by Bre-X in January 1997, which were projected to provide a “significant increase” in the size of the deposit from its then current level of 57 million ounces, were “consistent with our [Barrick’s] understanding of the property” and that “you would expect infill results like these,” as reported in the January 14, 1997 edition of the Globe & Mail.

· In its reports to the Indonesian government, Barrick stressed that it was the “most suitable and qualified operator” of the Busang mine and that Barrick understood the “gold being in their hands,” as reported in the February 15, 1997 edition of the Financial Post.

· Barrick was, in the words of Munk, “the only team” that could put on stream “a mine operation the scale of Busang,” as reported in the February 18, 1997 edition of the Globe & Mail.

· Barrick would be “fair” to Bre-X shareholders, as reported on numerous occasions, including by Reuters on December 16,

-149- 1996, by the Financial Post on December 21, 1996, and by the Northern Miner on December 23, 1996.

436. Barrick knew that its public statements regarding Bre-X and Busang were misleading, in light of its own independent tests. Barrick had learned that there could be no gold at

Busang or, at best, that the gold was inconsistent with what sound geology said could be there.

Accordingly, Barrick knew that it had no basis for speaking publicly of any “gold” or a “mine” at

Busang, and it knew it was not being at all “fair” to Bre-X investors.

3. Barrick’s Scienter

a. Barrick’s Role at Busang

437. 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.

Its 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 its 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.

438. In the summer of 1993, American Barrick was involved in discussions with

Bre-X regarding a joint venture to develop Busang. Bre-X had sought to obtain additional financing to enable it to explore the area. On January 24, 1994, American Barrick 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. 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.

-150- 439. By 1995, Barrick, which 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, it 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 around the globe that were relatively unexplored.

440. Barrick also began to make public statements emphasizing its growth internationally and stressing the success of its development 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.

[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.

441. 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, it also admitted that it continued to face pressure to increase reserve levels, stating that it was pursuing its aggressive program to locate new prospects

-151- and acquisition targets. In his letter to shareholders, Munk pledged that “our new development program . . . will firmly secure Barrick’s position of dominance among gold companies.”

442. On August 15, 1996, Barrick announced that Canadian junior mining company

Arequipa Resources, which controlled the Pierina prospect in Peru, had agreed to a preemptive and unsolicited “friendly” buyout offer from Barrick of $1.1 billion. The acquisition was notable for its aggressiveness because assays from only 34 holes were in hand after only an eight-month exploration program and no reserves had been established. Moreover, the offer was apparently not subject to due diligence, as would be typical in the industry.

443. The pressure on Barrick to report positive results continued to mount. It experienced failures in other aspects of its aggressive acquisition program, its stock price was lagging, and it was forced to report disappointing financial results during 1996. On September 30,

1996, its stock price had fallen to a low of $25.13, from a high of $32.13 in February.

444. The next day, on October 1, 1996, Barrick publicly abandoned plans to develop its Cerro Corona project in Peru, because exploration revealed that the mine did not contain sufficient mineralization. As a result, the company announced a $38 million charge against income.

Barrick proclaimed it would channel its efforts into other promising properties.

445. Due to the substantial charge, on October 25, 1996, Barrick reported disappointing financial results when it filed its interim report for the third quarter. For the quarter,

Barrick earned only $21 million, compared with prior year levels of $67.7 million.

-152- 446. In the interim report, Barrick’s Chief Operating Officer 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.”

447. Barrick was determined to obtain an interest in Bre-X and its widely-heralded discovery at Busang, in order to achieve its publicly-stated goals of expanding its reserves and becoming the dominant gold producing company in the world.

448. To that end, on April 17, 1996, Barrick again approached Bre-X to discuss a possible deal relating to Busang. Its efforts were initially rejected. 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 the position.

449. Unable to achieve a friendly deal, Barrick began to exert political pressure on

Bre-X to permit Barrick to gain an interest in Busang. On June 17, 1996, Munk made a formal presentation to the Indonesian Mines and Energy Minister, Ida Bagus Sudjana, and other key officials concerning Busang. According to Barrick spokesman David Wynn-Jones, as reported in the

December 24, 1996 edition of the Vancouver Sun, “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.”

450. As reported on June 26, 1996, Barrick also recruited the assistance of

Airlangga Hartarto, the son of Indonesian Coordinating Minister for Production and Distribution, and a friend of Adnan Gunzo, an influential advisor of Indonesian President Suharto.

-153- 451. During the summer, Barrick Executive Vice President Neil MacLachlan met with Siti Hardijanti Rukmana (known as Tutut), a daughter of President Suharto. Barrick hired

Tutut’s firm, Citra Lamtoro Gund Groups, to advise it in connection with the Busang property.

452. Shortly thereafter, on August 15, 1996, Bre-X’s Letter of Permit for

Preliminary Surveys, a key document from the Indonesian government which had been used by Bre-

X to establish security of tenure with North American stock exchanges, was withdrawn.

453. Barrick used its extensive high level contacts to apply additional political pressure in Indonesia. On September 20, 1996, former 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.

454. Barrick’s political connections produced results. On November 14, 1996,

Sudjana met in Jakarta with Munk and a group of Bre-X executives and their advisors, including

Walsh, Felderhof, Francisco, and J.P. Morgan. Sudjana informed the group that the Indonesian government had determined that Barrick would receive 75 percent of Busang and that Bre-X would receive the remaining 25 percent. The group was also informed that the government would

“appreciate” a 10 percent interest. In addition, Sudjana imposed a November 20 deadline for the parties to conclude a joint development agreement.

455. On November 15, 1996, representatives of Barrick and Bre-X met to negotiate a deal.

-154- 456. On November 26, 1996, reports began to appear in the press indicating that

Barrick was in a position to obtain a 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 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.”

457. The next day, the press reported that Barrick was in a position to acquire

Busang. For example, the Globe & Mail stated that Barrick would “inherit Bre-X riches.” The price of Barrick shares rose over 6 percent in response to these reports.

458. According to a November 27, 1996 memorandum by John Robertson of

Kilborn, Barrick was provided a copy of Kilborn’s Intermediate Feasibility Study. Included in that study was a report prepared by Hazen Research, Inc., which contained several glaring red flags:

· Gold particles from Busang samples were “relatively coarse nuggets” and were “typically very compact and often nearly spherical in shape.” Hazen’s description was plainly one of gold that was alluvial in nature, not the primary gold deposit Bre-X claimed existed at Busang.

· The report describes processing results typical of gold that was not from a primary rock deposit. Hazen found a recovery rate of over 93

-155- percent -- an unprecedented rate for gold that was supposed to be embedded in its underground host rock.

· There was an abundance of “coarse” and “free” gold in the samples: “determination of overall gold extraction or the rate of gold extraction is problematic when leaching whole ore, due to the presence of coarse free gold and the difficulties with sampling such ores and residues.”

· The gold grains were often nearly spherical in shape. This “coarse nugget effect” is completely inconsistent with the primary deposit Bre-X claimed existed at Busang, and it caused wide variation in the assay and processing test results.

459. On December 4, 1996, representatives of Bre-X and Barrick met with Dr.

Umar Said, Secretary General of the Indonesian Ministry of Mines and Energy. Bre-X reported that

“Although agreement has been reached on the matters raised by the [Ministry], . . . several points remain outstanding.”

460. On December 4, 1996, Business Week reported that “there seemed little doubt” that Barrick would prevail. According to an unnamed Barrick spokesman, it landed the deal because

“we clearly are qualified to get the mine in production.”

461. On December 5, 1996, Barrick publicly stated in the Financial Post, through spokesman Vince Borg, 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.

462. On December 7, 1996, it was reported in the Calgary Herald 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 percent and 25 percent interest in Busang, and for the

Indonesian Government to obtain a 10 percent interest. At the time, Busang was reported to contain

57 million ounces of gold and was valued at more than $21 billion.

-156- 463. On December 16, 1996, Barrick publicly reported, through various North

American media outlets (including Bloomberg, Vancouver Sun, and Montreal Gazette) that it had made a submission with Bre-X to the Indonesian Government indicating that the companies could work together if the 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.

464. Thereafter, Barrick repeatedly represented that it would treat Bre-X shareholders in a “fair” manner. For example, on December 16, 1996, Borg was quoted by Reuters that Barrick has an established track record of being “fair” in transactions, and the proposed deal with Bre-X would be no different. On December 21, 1996, the Financial Post reported that former

President 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, Borg was quoted in 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.” Considering Barrick’s unique access to adverse information about Busang, these statements were materially misleading.

465. 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 own stock.

Thus, it made public statements emphasizing its 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 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.”

-157- 466. On 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.

467. Barrick responded through spokesman Borg. He told the Vancouver Sun, as reported in its January 14, 1997 edition, that Barrick 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.”

468. On January 13, 1997, Bre-X released new assay results. Based on 25 drill holes, the results indicated especially rich gold zones. A January 14, 1997 article in the Globe &

Mail described the results as “stunning,” quoting a mining analyst that, “These results are absolutely staggering.”

469. A day later, Barrick spokesman Borg told the Globe & Mail that “you would expect infill results like these.” He went on to emphasize that “from our point of view they are consistent with our understanding of the property.” This was a direct, unqualified, and unequivocal representation by Barrick about gold at Busang. Indeed, it was an assurance that Bre-X’s assay results were “consistent” with Barrick’s own “understanding” of Busang, and that a knowledgeable professional like Barrick “would expect” extraordinarily rich “infill results” like those announced by

Bre-X. None of these statements was even remotely true, and Barrick knew that.

470. 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

-158- 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.

471. Barrick characterized the letter publicly as reaffirming the government’s support for its participation in developing Busang and said it was moving ahead with 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 government.

472. Barrick also issued a press release on January 22, 1997 attributing its 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.” This was misleading at best, since Barrick knew of test results that were flatly inconsistent with “an open pit gold mine” ever being built at Busang.

473. On February 5, 1997, Munk boasted that only Barrick could construct the

“mine” required to develop Busang. According to a February 18, 1997 article in Globe & Mail,

Munk told mining analysts on February 5 that Barrick has a “unique mine development team -- the only team, the only team, gentlemen -- that can point to putting on stream a mine operation the scale of Busang . . . from scratch, on budget, on time, without a single hitch.” Again, this statement was

-159- nothing less than misleading, since Munk knew of test results that were inconsistent with there ever being any “mine operation” at Busang.

474. By February 14, 1997, Barrick discontinued its efforts to obtain an interest in

Busang. It did not disclose them -- and still has not disclosed -- its findings based on earlier tests for gold at Busang. Instead, Munk continued to insist 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.

475. As late as February 15, 1997, Barrick continued talk about the “gold” at

Busang. In commenting on the contents of a report Barrick intended to file with the Indonesian

Government, spokesman Borg told the Financial Post: “We’ll tell them we believe we’re the most suitable and qualified operator. We understand the gold being in their hands, its their decision.”

b. Results of Barrick’s Independent Due Diligence

476. Throughout the time period that Barrick was negotiating a joint venture with

Bre-X and making positive statements about Busang’s gold, Barrick possessed adverse, non-public test results that belied and contradicted its public statements.

477. In late November 1996, after signing a confidentiality agreement with Bre-X,

Barrick received from Bre-X the results of assays performed for Bre-X by Indo Assay Laboratories on 148 core samples from Busang. Barrick also obtained actual samples of the “library core” for the

148 original samples.

-160- 478. Library core -- sometimes called skeleton core -- is an uncrushed segment of the original drill core sample that is used for possible future reference, identification, or testing.

Since library core is not crushed or otherwise “prepared” by the exploration company’s personnel, it provides essentially pristine samples of the ore.

479. The library core was obtained by Barrick employees on site at Busang. The core samples, as well as the test data by Indo Assay, correlated to drill holes in Busang II, a/k/a the

Southeast Zone, which according to Bre-X was the richest sector of the entire deposit. Included with the data for the 148 samples was “check assay” data, also generated by Indo Assay, relating to thirteen of the 148 samples. All of the Indo Assay data was generated using cyanide bottle roll tests, which Barrick knew was not standard assay procedure at this stage of a mining project.

480. The library core samples and the Indo Assay data on the corresponding core samples were invaluable to Barrick. Together they allowed Barrick to independently test actual samples of the supposedly gold-rich Busang ore to see what amount of gold it contained and, if there was gold, to determine whether the samples had grades of gold comparable to publicly-announced test results for the exact same drill core.

i. Barrick’s First Round of Tests

481. Barrick promptly sent off the Busang library core samples to a reliable independent lab, Lakefield Research Ltd., located in Lakefield, Ontario, and had the samples assayed. Lakefield performed its tests using industry-accepted fire assay techniques.

482. By mid December 1996, Barrick received the new test data from Lakefield.

Barrick immediately knew it had a serious problem: the Lakefield results indicated no appreciable gold for almost every one of the library core samples tested. In fact, Lakefield’s tests showed that

-161- only five of the samples had even a minimal value of gold -- at least one gram per metric tonne

(“g/t”) -- and that the average over the entire set of tested samples was a mere 0.25 g/t.

483. Lakefield’s results were in stark contrast to the values reported by Indo Assay for the same drill core. For the corresponding samples, Indo Assay had reported gold content averaging 6.32 g/t, with thirty of the samples returning extraordinarily rich values in excess of 10 g/t.

Likewise, the thirteen check assays done by Indo Assay had shown an average of 5.61 g/t.

484. The negative Lakefield test results raised serious concerns for Barrick, which its executives expressed directly to Bre-X representatives. According to the minutes for the

December 15, 1996 Bre-X board meeting, Pat Garver, general counsel to Barrick, advised Bre-X’s outside counsel that the negative results “had raised concern with Barrick.” As a result, Barrick was

“pressing to perform further due diligence on the site.” It was also insisting that successful results be a condition for concluding a transaction. Morrison of J.P. Morgan, who was present for the board meeting advised Bre-X against the request and “stressed” that there should be no condition in favor of Barrick being satisfied with its due diligence or particular assay results.

485. With political pressures and uncertainties rising, potentially jeopardizing any deal, Barrick acquiesced to J.P. Morgan’s position. Rather than delay progress of the announced

Bre-X/Barrick joint venture, Barrick said it would “rely on public disclosures made to date by Bre-

X,” according to Barrick’s letter to Bre-X dated December 15, 1996.

486. Barrick knew that it would have the opportunity to conduct more due diligence before making any capital investment in Busang, even if it signed the joint venture agreement. As its spokesman Vincent Borg recently told the Canadian newspaper Globe & Mail (on

January 24, 2000), Barrick would have made an investment in Bre-X or the deposit only after it had carried out its own drilling program.

-162- 487. Nevertheless, shaken by the obvious import of the negative Lakefield test results, Barrick quickly sought out a well-known expert in mineral sampling to review and statistically analyze the profoundly divergent data.

488. On December 16, 1996, Barrick’s Executive Vice President of Corporate

Development, Alan R. Hill, who had responsibility for Busang and other international Barrick projects, contacted Jan Merks by telephone to secure his advice and expertise.

489. Merks is President of Matrix Consultants Ltd. and is a widely respected mineral sampling specialist based in Coquitlam, British Columbia, a suburb of Vancouver. His specific expertise is in the field of metrology -- the science of measurement -- particularly as it applies to dynamic stochastic systems such as ore when sampled during processing or transfer, and to static stochastic systems such as in-situ ore. Merks is renowned for his utilization of applied statistics to the field of mineral exploration. Although Merks had not done work for Barrick previously, he would go on to perform more work for Barrick even after the Busang fiasco.

490. On behalf of Barrick, Hill asked Merks if he was available for an unspecified assignment, and if he was willing to sign a confidentiality agreement. Although such agreements during the exploratory stage of a purported deposit are somewhat unusual, Merks agreed to the request and told Hill he was available to help. Hill then faxed the agreement to Merks, which was actually a November 24, 1996 confidentiality agreement prepared by Bre-X and signed by Barrick in connection with its own due diligence on Busang.

491. The agreement provided that Barrick was to maintain the confidentiality of any information concerning Busang furnished by Bre-X. By its terms, the agreement terminated on its third anniversary. By adding his own signature to the agreement, Merks understood that he was likewise bound to a three-year confidentiality period. (The period recently expired, allowing Merks

-163- to discuss his role and findings.) Merks signed the agreement on December 16, 1996 and faxed it back to Hill that afternoon.

492. Like other mining professionals at the time, Merks was well aware of the supposed “world’s largest” gold deposit at Busang and Barrick’s efforts to secure the right to develop it. He was equally aware that the mineral exploration business has a history of scams, and (like most of his colleagues in the business) he tended to cast a critical eye at claims of extraordinarily large deposits, such as Busang was represented to be. As a result, Merks was quite interested to learn the nature of his assignment for Barrick.

493. The next day, December 17, 1996, Hill phoned Merks and outlined the project. He explained the testing to date and asked Merks to evaluate and statistically compare the test data from Indo Assay and Lakefield. Hill followed up the conversation by faxing Merks a cover letter and a table of data: original assay results of 148 samples (performed by Indo Assay); check assays on thirteen of the 148 samples (also by Indo Assay); and check assays on library core for the

148 samples (by Lakefield).

494. Hill’s letter confirmed to Merks that the 148 samples were assayed by cyanide bottle roll tests conducted for Bre-X by Indo Assay, as were the thirteen check assays performed by

Indo Assay. The data on the 135 samples came from fire assay tests performed by Lakefield for

Barrick, in test samples prepared from “a solid portion taken as a library sample of the original core.”

In other words, the three sets of test data were all based on the same drill core sections. There was a total of 135 “paired” data points, because Lakefield reported “NA” (not applicable) for several of the

148 library cores.

-164- 495. Hill also informed Merks that Barrick had obtained another 2,200 sets of assay and check assay data from Bre-X’s “full suite of drilling” at Busang and could provide that data if necessary.

496. Merks immediately analyzed the data from Indo Assay and Lakefield. He performed a “Student’s t-test” on the paired assay results. This test is used to determine whether two means (i.e., the average values) are statistically identical or whether they differ significantly. Here,

Merks compared the mean of the Lakefield assays with the mean of the corresponding 135 (of the

148) assays from Indo Assay.

497. Merks was aghast at what he found. The results of this commonly-applied calculation indicated to a near certainty that the library core (tested by Lakefield) and the originally sampled core (by Bre-X/Indo Assay) never formed part of the same core section -- that is, they simply did not match up. The two pieces of sample core and library core either were not from the same original core section (even though Bre-X specifically said they were) or the sample core must have been altered (e.g., salted). Either scenario suggested a strong likelihood of deliberate deception by Bre-X.

498. Merks did additional calculations. He performed analysis of variance both between and within the two core sample populations, which he determined by calculating the coefficient of variation (“CV”). A working definition for CV is the standard deviation expressed as a percentage of the measured value (here, the measured value being the mean). The higher the calculated CV, the worse it is, since it means that the data does not match up well.

499. The CV between the Indo Assay and Lakefield assay results was an absolutely incredible 191 percent, Merks found. In contrast, the highest CV that he recalled seeing previously

-165- for a bona fide gold deposit was about 55 percent. In most cases, the CV is much lower (25 percent or less).

500. In a restrained and careful memo faxed late that very day, December 17,

Merks informed Barrick (through its executive, Hill) of his disturbing findings.

501. Merks began by emphasizing that his test results were not due to chance or accident. He pointed out that it was “highly improbable” that the difference between the means of

6.32 g/t for the Bre-X/Indo Assay tests and 0.25 g/t for the Lakefield assays -- “an astounding 2,442 relative percent” -- was due to “random variations” in the respective test processes. Rather, he concluded, the difference was “most probably (much more than 99.9%) due to a bias or systematic error of unknown origin.”

502. Merks then pointed to a glaring anomaly in the test results. He found that

“133 out of 135 large cores [tested by Indo Assay] exhibit higher gold grades than library cores

[tested by Lakefield] do.” The probability of such an event is “close to 10 -40,” Merks stressed, odds that “do indeed stretch the imagination.” It would be like tossing a coin and getting heads 133 out of

135 flips.

503. Merks expressed a similar reaction concerning the CV comparisons he had done. Quite simply, “the observed CV of 191% is extraordinarily high,” he wrote in his memo.

504. Diplomatically, Merks told Barrick, “My observations support a number of inferences most of which conflict with the premise that the original bottle roll tests [by Indo Assay] are unbiased.” In contrast, he “accept[ed] that Lakefield’s fire assays for gold in library core are unbiased and precise.” Recognizing that the aberrant results arose from core that was prepared by

Bre-X and assayed by Indo Assay, Merks doubted that analyzing the additional 2,200 pairs of assays

-166- (all done by Indo Assay) would be fruitful. Since all of the data emanated from Bre-X/Indo Assay, no analysis of that data could ever “dispel your [Barrick’s] doubts.”

505. Instead, Merks suggested that additional uncrushed library samples be assayed by Lakefield. He also wanted Barrick to examine any remaining portions of the Bre-X crushed samples to see “which particle size fraction contains most of the gold.” In other words, he asked Barrick to find out whether the gold in the samples prepared by Bre-X was primarily in the form of large particles. This would be inconsistent with an igneous deposit, like Busang was supposed to be.

506. Notwithstanding Merks’ carefully chosen words in his December 17 memo, the specter of salting was clear. Indeed, he specifically brought up his prior experience investigating

“a case of fraudulent gold assays.” There, he had applied an analysis to determine the degree of continuity (or “spatial dependence”) of gold mineralization between grades of contiguous core sections, which had revealed the likely existence of fraud, and he pointedly suggested that a similar analysis be undertaken for Busang.

507. The ominous conclusion of Merks’ memo to Barrick spoke volumes: “I have carefully examined the sets of test results transmitted with your letter of December 17th, and submit that extreme caution is in order. I trust that my interpretation will assist you in assessing how to proceed.” (Emph. added.)

508. The die was cast. “Biased” test results, “astounding” and “extraordinarily high” disparities, “fraudulent gold assays,” “extreme caution” -- these were the words that Barrick’s mineral sampling specialist used one day after being hired and after seeing only part of the data in

Barrick’s hands. At this point, on December 17, 1996, Barrick unquestionably knew it would be

-167- reckless to rely on Bre-X’s reported gold values and that, in all probability, Busang was not as represented.

509. Barrick knew this crucial information for almost five months while tens of millions of shares of Bre-X and Bresea stock continued to trade on the NASDAQ and elsewhere.

Despite this knowledge, Barrick made unqualified public statements about the gold and future mine at Busang, which statements were false or at best misleading to investors. Not once did Barrick even hint at the troubling evidence of fraud that it and its consultants had discovered.

510. By the same token, J.P. Morgan was equally aware of the assay results provided to Merks. Not only did its representatives (McIntosh and Morrison) have access to Indo

Assay data, they knew about the Lakefield results. In fact, according to Barrick’s December 15,

1996 letter, McIntosh was to contact its mining executives to “follow up” on getting Barrick “full access” to Busang and “otherwise work[ing] with [Barrick]” to address the concerns raised by the

Lakefield tests. (¶¶256-62)

511. Considering J.P. Morgan’s expertise, and its access to volumes of other red flag information about Busang and Bre-X (¶¶227-55), it should have drawn the same conclusions as

Merks, including that “extreme caution is in order.” Instead, J.P. Morgan chose to conceal the growing mountain of bad facts and join the chorus of Bre-X promoters.

ii. Barrick’s Second Round of Tests

512. On December 19, 1996, Hill faxed a letter to Merks to let him know that

Barrick was having Lakefield do a second round of tests.

513. “In the near future,” Hill wrote, Barrick would be receiving 789 “pulp samples” and two pallets of “hammer mill rejects” from Busang, which he intended to send to

-168- Lakefield for assaying. Hill also included his proposed instructions to Lakefield regarding the testing to be performed and asked Merks to “review . . . and comment on them.” One of Hill’s directions to

Lakefield was to give the work “top priority,” even if it meant deferring other important work for

Barrick on another project.

514. Merks reviewed the proposed assay procedures and responded by faxed memo on December 20, 1999. He made several suggestions, including that the test results from Lakefield on the new samples be grouped and evaluated by deposit (Busang I, II, and III). Merks made this point because he thought the previous data came from throughout the Busang site. What he did not realize (but which Barrick did know) was that the earlier sample data Merks had seen had all come from Busang II, the “richest” part of the entire deposit. When Merks learned this fact a few days later, it only exacerbated his alarm.

515. In his December 20 memo, Merks again stressed the importance of first screening the pulp samples (which had been prepared by Bre-X) at “150 mesh” (105 microns) and assaying the larger- and smaller-particle-sized portions separately. This simple test would reveal the nature and origin of the gold. Was the gold mostly found in the coarse particles that characterize alluvial gold or in the small flakes typical of gold found in igneous ore?

516. Although Merks remained diplomatic in the opinions he expressed to Barrick in writing, the earmarks of fraud were unmistakable. As such, he urged Barrick to take precautionary steps to safeguard Bre-X’s unprocessed (and thus unadulterated) library cores. They are “likely to become even more relevant at a later stage,” he warned in his memo. “The question is then whether it is easier to obtain at this stage than it would be later on. Perhaps all available library core [should] be requested without delay, and their integrity be insured between the source and final destination.”

-169- 517. Likewise, Merks counseled heightened scrutiny of the sampling procedures at

Busang. “Changes in procedures and equipment, and in personnel in particular, . . . should be recorded as soon as possible and preferably before memories fade.”

518. In short, by December 20, 1996, three days after being hired, this expert was urging Barrick in writing to take steps to investigate what was a potential billion-dollar case of fraudulent gold assays. As Merks had warned a few days before, “extreme caution is in order.”

519. Later on December 20, Hill responded to Merks by fax. In addition to giving

Merks permission to coordinate directly with Lakefield (“so long as I am kept up to date”), Hill sent a chart of the “downhole variograms” of more than 15,000 Bre-X assay results for the Busang deposit. (A variogram is a graph in which the variances of the ordered data are plotted against their spacing or “lag.” It is used to get a sense for the degree of continuity of the gold mineralization.)

Merks took one look at the variogram, calculated the CV, and immediately sent a fax to Barrick the same day, December 20.

520. Merks pointed out that the CV for the randomly distributed set (the samples represented on Barrick’s variogram) was 113 percent, and that the CV for duplicate test portions of the same samples was 108 percent. Thus, the two measurements were statistically identical. Because the two CVs were essentially the same, there was no “room” left in the measurement variance for any variance to be coming from the ground. Simply stated, it meant that virtually all of the gold found was in the samples, not in the ground. Nature, of course, is not so selective.

521. Merks’ analyses also confirmed the extreme variability of the assay data previously generated by Indo Assay for Bre-X. Normally, average variability between samples from the same piece of drill core is 10-20 percent. Here, the variability evident from Indo Assay test

-170- results on samples of the Bre-X prepared core was over 100 percent -- a sure sign of irregularities in the preparation or testing of the ore.

522. This same questionable data from Indo Assay was what P.T. Kilborn and

Kilborn Engineering were provided to prepare their resource estimates. Conducting even the most basic data variability checks, which is standard industry practice and which Merks was able to do in just a few hours, would have revealed the glaring problems with the data. According to Merks, it was inexcusable for reputable mining professionals like the Kilborn defendants, charged with preparing resource estimates for release to the investing public, to review the Busang assay results and fail to see -- or refuse to disclose -- the obvious problems with the numbers.

523. Merks’ opinion was shared by the professionals that did Freeport’s on site due diligence in March 1997. (¶¶177-78) According to the article prepared by the Freeport team describing their work (Dkt. #403, Exh. 6 at 90-91), “‘Within-sample’ variability tests of the Bre-X

[assay] results showed that the variability relative to the original [assay] analyses was commonly greater than 100%.” Indeed, the Freeport team quickly realized that the “Busang database exhibited the opposite” variability characteristics from “the great majority of gold deposits.” (Emph. added.)

“It is mind-bogglingly amazing to me that no one had spotted any of this before,” one member of the team has said. ( ¶178)

524. Over the holidays, Merks continued studying the Barrick/Bre-X data he had been given. He next wrote to Barrick on January 6, 1997, conveying the results of his correlation regression analysis to Hill. (This test is used to check for “associative dependence” between paired data. If the results are negative, then the two samples did not come from the same core.)

-171- 525. The regression analysis supported the worrisome conclusions Merks already had forwarded to Barrick. He found that the coefficient of determination was basically non-existent -

- “zero for all practical purposes” -- which showed a complete lack of associative dependence. As

Merks explained to Barrick in his January 6 memo, this lack of associative dependence also conflicted with “the premise that the library cores and the test portions for the [Indo Assay] bottle roll tests once formed part of the same core sections.” The two sets of samples simply did not match at all.

526. Merks also performed correlation-regression analysis to measure the associative dependence between the original assays by Indo Assay and its thirteen check assays. He demonstrated to Barrick that the measurement variance was high, which indicated that there was virtually no variance left to be accounted for by gold in the ground. This point was first made by

Merks in his December 20, 1996 memo discussing his CV analysis.

527. In concluding his January 6, 1997 memo, Merks bluntly “question[ed] whether the library cores and the [original] test portions . . . could have come from the same core sections.”

After noting that this observation was “even more ominous” in light of certain other data he had generated, Merks closed with this note: “Since my message of December 20th I have contemplated many scenarios to explain the observed discrepancy but none are pretty.”

528. Barrick already knew those ugly scenarios. Faced in early December 1996 with the negative Lakefield test results, Barrick had confronted the Bre-X board about them. Barrick even had insisted on performing further due diligence on site at Busang and threatened to make successful results a condition precedent to concluding any transaction. Bre-X rejected the demands, however, and Barrick blinked, dropping its demand for more testing as a condition for a deal.

-172- 529. Barrick never shared these facts with Merks. In fact, Merks understood that

Barrick would be doing its own drilling program before it proceeded further. This was the only prudent course, in Merks’ opinion. In a memo to Barrick dated January 8, 1997, he “applaud[ed] your [Barrick’s] decision to drill additional holes in the Southeast Zone because it will provide the most reliable information (more reliable than library core).” At the same time, he reminded Barrick that “maintaining the integrity of all drill core is of critical importance.”

530. On January 8, 1997, Barrick delivered to Merks computer disks containing data it had received from Lakefield’s second round of testing, including assay results on the 789

Busang pulp samples. Merks went to work right away.

531. Merks faxed his preliminary results to Barrick on January 12, 1997. His analysis of the new data only deepened the concerns he had already shared with Barrick.

532. The results of Lakefield’s new tests of the pulps was generally consistent with the corresponding Indo Assay test results. This was not surprising. Lakefield was testing samples that had been crushed and prepared in Indonesia by Bre-X, not pristine library core, so it was merely assaying the same adulterated samples that Indo Assay had tested. To stress the point, Merks’

January 12 memo reminded Barrick that the first Lakefield assays (of library core) “did not give test results comparable with those of Indo Assay,” a fact that remained “a matter of grave concern.”

533. Merks stressed the potential for salting. “It became of even greater concern,” he wrote, if the “coarse” portion of the samples “prepared in Indonesia contain most of the gold.” A

“quick look” at the assays of this portion of the samples “did little to lessen my concern.”

534. What Merks was telling Barrick was clear, as Hill later acknowledged during a

January 20, 1997 meeting. If, after screening, the coarse portion of the samples contained most of

-173- the gold, it was unlikely the gold came from natural sources. Indeed, according to Merks, the fact that the measured gold overwhelmingly came from the coarse portion of samples prepared by Bre-X personnel was a dead give away that it was “gravity concentrate” or placer gold. These sorts of gold particles do not occur naturally in a deep hard-rock deposit such as Busang.

535. In closing his January 12 memo, Merks noted the “critical importance of

Barrick’s drill program.” (He still did not know Barrick’s demand for its own drilling had been abandoned before Merks even started his work.) He emphasized the importance of securing drill core samples: “I feel justified in reiterating that the integrity of all core must be ensured by handling it with even more care than a bullion shipment, and that core sections not even be crushed in

Indonesia.”

536. Merks sent a follow-up memo to Barrick on January 13, 1997. He relayed yet another damning fact from his analysis of the second round of Lakefield tests: “approximately 80%” of the gold in the Busang pulp samples was from coarse particles. This result, Merks wrote with characteristic understatement, was “quite extraordinary,” especially in light of the minuscule gold grades (0.25 g/t) found in the unprocessed library core previously tested by Lakefield.

537. With his memo, Merks gave Barrick a bar graph (“Figure BG07B”) that illustrated the unnaturally imbalanced allocation of gold between the larger-particle and smaller- particle portions of the samples. Merks had never seen a similar depiction so obviously problematic and implausible. The hard evidence of salting by Bre-X -- a concern that Barrick and Merks had shared for weeks -- merely continued to build.

538. On January 13, 1997, Bre-X publicly announced “stunning” new assay results that were projected to provide a “significant increase” in the size of the deposit from its current level

-174- of 57 million ounces. Incredibly, despite all of the foregoing, the January 14, 1997 edition of the

Globe & Mail quoted a Barrick spokesman as saying that, “from our [Barrick’s] point of view,” the results were “consistent with our [Barrick’s] understanding of the property,” and that “you would expect infill results like these.” (¶¶ 435, 468-69)

539. Less than a week later, on January 20, 1997, Merks met in person with Barrick executive Hill in Toronto, at the company’s headquarters. Also at the meeting was Rene Marion, a

Staff Mining Engineer for Barrick. The meeting lasted for over an hour. Much of the discussion centered on the remarkable bar graph that Merks had attached to his January 13 memo. Although the group tried to posit alternative scenarios that could justify the serious discrepancies, Merks made it plain that the only plausible explanation was salting.

540. This was not news to Barrick. Merks was not telling Hill and Marion anything they did not already suspect, and they acknowledged as much. The Barrick representatives did a lot of listening, and they never once challenged Merks’ conclusion that the Bre-X samples probably were salted.

541. On January 24, 1997, Merks followed up the Toronto meeting by sending a copy of his book, Sampling and Weighing of Bulk Solids (TransTech Pubs. 1985), to Marion. In his cover letter, Merks suggested further testing of the three library core samples (out of the 135) in which Lakefield had found some gold. As Lakefield had done on the 789 Bre-X-prepared pulp samples, Merks wanted to screen the samples with 150 mesh (105-micron) to see where the gold came from. If these tests showed the same wildly uneven distribution found in the pulps just tested by Lakefield, the presence of gold in even the three isolated samples of library core would be

-175- suspect. In any event, Merks observed, the testing “may well add some valuable information to the puzzle.”

542. On January 31, 1997, Merks faxed further comments to Barrick on Lakefield’s second round of test results. Noting that most of the gold in the pulps prepared in Indonesia came from coarse particles, he commented that such an “extraordinary distribution” would occur “if a high grade gravity concentrate . . . was added between the crushing and division stages” -- in other words, from salting with river-panned gold. Merks proposed further testing to confirm the “high” probability that “high grade concentrate was added during the sample preparation stage in

Indonesia.”

543. Merks then inquired about the recent Bre-X base camp fire. He was intrigued by whether the fire destroyed identification tags on the all-important library core. Merks noted his experience that “[u]ncommon events tend to occur when due diligence examinations are in progress.”

544. In the same January 31 memo, Merks noted that certain remarks in Lehman’s widely-published December 3, 1996 report on Bre-X were “confounding.” (Cf. ¶¶394-95) Contrary to Lehman’s statements describing Busang as a “geologist’s and metallurgist’s dream,” he wrote,

“[o]nly the drilling of additional holes near the glory holes” could lend sufficient support for such a notion.

545. With a February 1, 1997 memo, Merks forwarded to Barrick statistics underlying his previous memo. According to his analysis, Lakefield’s second round of tests showed a rich average grade of 11.66 g/t for 252 samples from four holes in Busang. The gold in these samples was 81.5 percent in coarse particles. Moreover, Lakefield’s test results for the Indo Assay

-176- 177 samples of seventeen holes showed that 78.8 percent of the gold was in coarse particles. Again, these findings only strengthened the likelihood of the salting scenario.

546. Tellingly, Merks’ findings foreshadowed the conclusions of Strathcona

Minerals Services Ltd. when its experts reviewed Lakefield’s second round of test results. Upon reviewing these same test results, before leaving for Jakarta to conduct its investigation, Strathcona observed “that almost all of the gold was in the plus 106 micron fraction.” They knew

“immediately” that the coarse gold was a “red flag.” Indeed, according to Strathcona, the anomalous size of the gold was “its first red flag.” Strathcona also observed that the same results suffered from

“poor repeatability.” Merks’ findings also paralleled the study prepared by Hazen Research Inc. that

Barrick had received from Bre-X earlier (even though Merks never even saw the report). (¶458)

547. On February 3, 1997, Merks wrote to Barrick about the fire at Busang. Recent media reports on the fire at Bre-X’s geology room “did little to dispel my concern.”

548. Merks sent a second memo to Barrick on February 3, 1997 concerning tests on hole SE198, a hole for which Bre-X had announced spectacular gold grades. He was looking to determine whether a significant degree of spatial dependence existed along core sections within this hole. He then was going to compare Lakefield’s test results for hole SE210, a directly adjacent hole with far less reported gold, to see if the results could be reconciled.

549. On February 5, 1997, Merks sent another memo to Barrick, reflecting his comparison of test results for holes SE198 and SE210. Although saying that “most of my worries would [have] disappear[ed]” if the gold grades for the holes (which were only 50 meters apart) were comparable, Merks found that the grades were widely dissimilar -- 1.15 g/t for hole SE210 versus

12.89 g/t for hole SE198. Thus, Merks concluded, “the observed difference in gold grade remains a matter of concern.”

-177- 550. He repeated his prior warnings. The best way to alleviate “my concern” was for Barrick to assay more library core for SE198 and to drill its own hole “within a few meters of

SE198.” More important, he said in his memo, this was necessary “to alleviate the concerns of

Barrick’s management.”

551. In a February 11, 1997 memo to Barrick, Merks commented on the results from more Lakefield testing of Bre-X-prepared samples, including the marked discrepancies between holes SE198 and SE210. The disparities were unprecedented in his experience. In addition,

Lakefield’s original assays of the library core samples were not “even remotely close” to the earlier

Indo Assay tests of the same core.

552. Merks offered three possible explanations:

• “Human error” • “Deliberate switch” • “Fraudulent act”

All three possibilities implicated fraud at the mining site, Merks observed. For example, because

“human error” and “deliberate switch” would have the same effect of derailing “expeditious due diligence,” each raised the “probability of a fraudulent act” as well as “scores of questions.”

Likewise, a “fraudulent act would inflate the reserves of the Southeast Zone.”

553. Merks was clear in his memo that the second round of Lakefield tests, which showed mainly coarse gold in the Bre-X-prepared samples, “does not rule out the probability that high grade gravity concentrate was added to crushed core” prior to the testing process. In so many words, he told Barrick that the Bre-X samples “probably” were salted with placer gold, and the second Lakefield tests provided no reason to accept the Busang deposit as real.

-178- 554. The only way to disprove the evident fraud scenario was drilling and more testing, a recommendation that Merks had made to Barrick in writing at least twice before. In Bre-

X’s case, the probability that riverbed gold had been added to crushed core could be “reduced, if not eliminated,” by assaying hole SE198’s unprocessed library core. Any refusal by Bre-X to make the library cores available, said Merks in his February 11 memo, “should be regarded with suspicion and trepidation.” Alternatively, a twin 1200-foot hole should be drilled “as close as possible” to SE198.

555. Six days later, Bre-X announced its joint venture deal with Freeport. At that point, February 17, 1997, Barrick instructed Merks to stop all work on his final report.

556. When forwarding his time sheet to Barrick on February 18, 1997, Merks sent an article from the Vancouver Sun (Feb. 14, 1997) regarding a bogus gold deposit in Oregon as to which he had played a key role in exposing the fraud. He added that he had examined “various scams and frauds” through the years, and he had become concerned about Busang “when the library core turned out to be a bust.” He continued, “Neither the test results for test samples and rejects

[nor] the test results for whole core did much to restore my confidence in the reported reserves.”

557. Merks was openly relieved that his client could not pursue Bre-X, adding in his memo (only half joking) that he would not charge for “any of my sleepless nights” during the project.

558. Merks echoed the same views in a second memo to Barrick that day. As he told Hill, “I believe that your Company will not regret this course of events [Freeport’s new role],” and he was “confident that your Company made the correct decision” in withdrawing from Busang.

Merks wryly noted that he presumed one of Barrick’s geologists “took a look at the [unsalted] library core of Hole SE198 and wondered where all the coarse gold was.” Diplomatic to the end, Merks

-179- complimented Barrick for the “discreet manner” in which it had defused “a sensitive and potentially explosive situation.”

559. In truth, Merks realized that, by outmaneuvering Barrick, Freeport unknowingly had bailed out Barrick from what was an obvious fraud -- one that, according to Merks,

“flashed more red flags than a Bolshevist parade.”

560. Given the discrepancies he and Barrick had discovered, Merks expressed disbelief about what others were saying about Busang. Unaware of the close relationship between

Barrick executives and Lehman’s mining analyst, Merks marveled at the reckless statements made by the brokerage firm. For example, Lehman had reported that the gold in Busang’s cores was powder- like and fell off like dust, (¶395), when in fact 80 percent of the gold in the Bre-X-prepared samples actually was from coarse particles. “Were [Lehman’s] representatives ever shown high grade core?,” he asked. “After all, [large] gold particles ought to be clearly visible in whole core.”

561. In concluding his February 18 memo, Merks asked Barrick about the duration of their confidentiality agreement with Bre-X: “Please let me know how long our confidentiality agreement will remain in force.” Barrick ignored his question.

iii. Barrick’s Cover-Up

562. Once the Bre-X scandal broke, and the truth emerged, Merks was anxious to assist authorities investigating the matter. He continued to press Barrick for permission to discuss his work for Barrick and his findings about the Busang deposit, specifically because he believed that

Canadian mining disclosure laws and standards were inadequate and needed to be strengthened.

563. Barrick refused to allow Merks to speak, out of fear of being held responsible to investors for the reckless statements of its executives. According to a September 22, 1997 letter

-180- from Barrick’s Executive Vice President and General Counsel, “there are multibillion dollar lawsuits pending with respect to the Bre-X matter, as well as a half dozen civil and criminal investigations.”

(Orig. emph.) For that reason, and even though Barrick “value[s] the services that you [Merks] provided to Barrick in respect of this matter,” the company “emphatically d[id] not consent” to his request to discuss his work.

564. Barrick redoubled its efforts to silence Merks after their confidentiality agreement with Bre-X expired in late 1999. “There should be no misunderstanding concerning this matter,” Barrick warned in a January 16, 2000 letter from its Toronto law firm. “You have no right or entitlement to disclose to third parties” any of the information Merks generated during his work in

1996-97. “Barrick intends to hold you accountable,” the Barrick lawyer threatened.

565. When threats failed, Barrick tried a new, ostensibly conciliatory tack. “I am writing to invite you to reconsider your position,” the Barrick attorney wrote in a January 31, 2000 letter to Merks. “I would be pleased to discuss this matter . . . with a view to reaching a consensus .

. . . It may be possible to address Barrick’s concerns without further expense or difficulties.” Even then, Barrick’s counsel closed the letter with a threat. “I must insist on receiving a satisfactory response from you” within four days, he wrote, “failing which Barrick will pursue its remedies.”

566. These efforts to avoid disclosure of the facts Barrick first learned in late 1996, and the grave concerns that these facts raised, are perhaps the strongest possible evidence of its culpability. Added to the “red flags” in the Kilborn materials that Barrick received (¶458), these facts were inescapable proof positive of the Busang fraud, revealed by the very experts that Barrick itself chose to rely upon.

-181- 567. These crucial facts were known to Barrick at a time when thousands of class members were investing in Bre-X and Bresea stock, based on Barrick’s unqualified statements to the media and others about:

• “expect[ed] infill results” at Busang; • “our [Barrick’s] understanding of the property”; • “an open pit gold mine” at Busang; • “a mine operation the scale of Busang”; • “get[ting] the mine into production”; and • “the gold [at Busang] being in their [the government’s] hands.”

(¶¶435, 460, 469, 472-73, 475) Of course, this was when Barrick also was publicly promising, over and over, that it would treat Bre-X shareholders “fairly.” (¶¶435, 464, 474)

568. On July 27, 1997 Barrick spokesman Vince Borg acknowledged that Barrick’s testing demonstrated a lack of gold: “Yes, we tested some core samples that showed negative.”

4. Summary of Barrick’s Scienter

569. 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 late 1996 and early 1997. Barrick’s positive statements about Busang gold and its fairness to Bre-X’s shareholders, and its failure to reveal its adverse test results, created the impression that Busang was what Bre-X publicly claimed. Despite its knowledge that there could be no or negligible gold at Busang, Barrick continued to make statements about

“gold” at Busang, including statements based on its “understanding of the property,” and construction of a mine at Busang. Because of Barrick’s position as a leading gold producer, these positive statements, combined with concealing its test results, lent credibility to Bre-X’s claims.

-182- 570. Barrick was also provided Kilborn’s Intermediate Feasibility Study. From the

Hazen report (which was included), Barrick knew of several red flags, including that the gold at

Busang was alluvial in origin.

571. Furthermore, Barrick provided McConvey and Lehman with information about or access to its test results. Barrick was indifferent to the false positive statements made by

Lehman about Barrick’s test results and the size of the Busang deposit. Barrick chose not 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, which arose from its deliberate representations about

Busang.

572. In making and failing to correct its false and misleading public statements,

Barrick acted with gross recklessness or indifference to the information it possessed about Busang based on its own testing.

VI. FALSITY OF DEFENDANTS’ STATEMENTS

573. 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.

574. 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.

-183- 575. 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 overstated the size of the Busang deposit. Information developed and disseminated by third parties (including the Kilborn Defendants) has revealed that Bre-X’s,

Bresea’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, 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, Bresea’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, and Lehman, were inherently suspect and misleading and without a reasonable basis at the time they were made.

576. During the Class Period, defendants materially misled the investing public, thereby inflating the price of Bre-X and Bresea common stock. They publicly issued false and misleading statements and omitted to disclose material facts necessary to make defendants’ statements, as set forth herein, not false and misleading. The 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:

-184- (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 estimates, projections, and opinions as to the recoverable gold resources and their expected value were lacking in reasonable basis at all relevant times, because, among other things, mineralogical and metallurgical results from tests performed by independent third parties were inconsistent with the type of gold supposedly indigenous to Busang.

577. 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. During the Class

Period, 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 and Bresea’s common stock at artificially inflated prices, thus causing then damages.

-185- VII. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE

578. 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 Busang.

(b) As a regulated issuer, Bre-X filed periodic public reports with the SEC and the NASD.

(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.

579. 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 Bre-X and Bresea’s common stock during the Class Period suffered similar injury through their purchase of stock at artificially inflated prices. 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.

VIII. NO SAFE HARBOR

-186- 580. 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. Defendants’ specific statements 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.”

581. 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 represented. 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 was made the speaker knew that the statement was false, and/or the forward-looking statement was authorized or approved by an executive of the

Defendant who knew that the statement was false when made.

IX. CAUSES OF ACTION

FIRST CLAIM

(For Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder)

582. Plaintiffs repeat and reallege the factual allegations above as though fully set forth herein. This claim is asserted against all defendants.

583. During the Class Period, defendants carried out a plan, scheme, and course of conduct which was intended to and, throughout the Class Period, did deceive the investing public, including plaintiffs and other Class members; artificially inflate and maintain the market prices of

Bre-X and Bresea common stock; and cause plaintiffs and other members of the Class to purchase

-187- Bre-X and Bresea common stock at artificially inflated prices. In furtherance of this unlawful scheme, plan, and course of conduct, defendants took the actions set forth herein.

584. Defendants employed devices, schemes, and artifices to defraud; made untrue statements of material fact or omitted to state material facts necessary to make the statements not misleading; and engaged in acts, practices, and a course of business which operated as a fraud and deceit upon the purchasers of the Company’s and Bresea’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. 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.

585. 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, 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. This included accurate and truthful information with respect to the Company’s operations and performance, so that the market prices of the

Company’s and Bresea’s publicly traded securities would be based on truthful, complete, and accurate information.

586. Defendants, individually and in concert, directly and indirectly, by the use of means or instrumentalities of interstate commerce or of the mails, engaged and participated in a continuous course of conduct to conceal adverse material information about the business, resources,

-188- properties, business practices, finances, financial condition, performance, operations, value, and future prospects of Bre-X. 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.

587. 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

-189- the Company’s dissemination of information to the investing public which they knew or recklessly disregarded was materially false and misleading.

588. 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. 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 knowledge by deliberately refraining from taking steps to discover whether those statements were false or misleading.

589. As a result of Defendants’ 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

-190- 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.

590. 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.

591. By virtue of the foregoing, defendants have violated Section 10(b) of the

Exchange Act and Rule 10b-5 promulgated thereunder.

592. 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 and Bresea’s securities during the Class Period.

SECOND CLAIM

(For Violation of Section 20(a) of the Exchange Act Against the Insider Defendants and Bresea)

593. 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.

594. 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

-191- 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.

595. 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.

596. 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.

-192- THIRD CLAIM

(For Negligent Misrepresentation Against All Defendants)

597. Plaintiffs repeat and reallege each and every allegation contained above.

598. This Count is brought by plaintiffs against all the defendants based upon common law principles of negligent misrepresentation.

599. 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.

600. In making said misrepresentations and statements, as alleged above, defendants failed to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, and 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.

601. 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

-193- 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)

602. Plaintiffs repeat and reallege each and every allegation contained above.

603. This Claim is brought by plaintiffs against all the defendants based upon common law principles of fraud.

604. 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.

605. 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, 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.

-194- 606. 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.

-195- PRAYER

WHEREFORE, plaintiffs pray for relief and judgment, as follows:

a. 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;

b. 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;

c. Awarding plaintiffs and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and

d. Such other and further relief as the Court may deem just and proper.

-196- Dated: June 14, 2000

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 75503 Houston, Texas 77002 (903) 794-1303 (713) 238-2000

Attorney-in-Charge for Plaintiffs H. Lee Godfrey State Bar No. 0805400 Charles Edward Miller Charles R. Eskridge, III State Bar No. 14062000 James T. Southwick A. Paul Miller Susman Godfrey L.L.P. State Bar No. 14056050 1000 Louisiana, Suite 5100 Miller, James, Miller, Wyly & Hornsby Houston, Texas 77002 1012 Olive (713) 651-9366 Texarkana, Texas 75501 (903) 794-2711 Lead Counsel for Plaintiffs Of Counsel:

Michael C. Spencer Steven J. Toll U. Seth Ottensoser Matthew J. Ide Milberg Weiss Bershad Hynes & Lerach LLP Cohen Milstein Hausfeld & Toll, P.L.L.C One Pennsylvania Plaza, 49th Floor The First Interstate Building New York, New York 10119 999 Third Avenue, Suite 3600 (212) 594-5300 Seattle, Washington 98104 (206) 521-0080 Mark C. Gardy James S. Notis Jeffrey G. Smith Abbey, Gardy & Squitieri, LLP Ira P. Lustbader 212 East 39th Street Wolf Haldenstein Adler Freeman & Herz LLP New York, New York 10016 270 Madison Avenue (212) 889-3700 New York, New York 10016 (212) 545-4600

-197- Robert I. Harwood (610) 667-7706 Matthew M. Houston Frederick W. Gerkens, III Richard D. Kranich Wechsler Harwood Halebian & Feffer, L.L.P. Law Offices of Richard D. Kranich 805 Third Avenue 120 Broadway, Suite 1016 New York, New York 10022 New York, New York 10271 (212) 935-7400 (212) 608-8965

Robert C. Schubert Stuart H. Savett Juden Justice Reed Robert P. Frutkin Schubert & Reed, L.L.P. Savett Frutkin Podell & Ryan, P.C. Two Embarcadero Center, Suite 1050 325 Chestnut Street, Suite 700 San Francisco, California 94111 Philadelphia, Pennsylvania 19106-2614 (415) 788-4220 (215) 923-5400

Sandy A. Liebhard Stephen D. Oestreich Mel E. Lifshitz Wallace A. Showman Bernstein Liebhard & Lifshitz Francine B. Goodman 274 Madison Avenue Wolf Popper LLP New York, New York 10016 845 Third Avenue (212) 779-1414 New York, New York 10022 (212) 759-4600 Burton H. Finkelstein Kendall L. Satterfield Curtis V. Trinko Victor J. Cosentino Law Offices of Curtis V. Trinko, L.L.P. Finkelstein, Thompson & Loughran 310 Madison, Suite 1401 1055 Thomas Jefferson Street, N.W., New York, New York 10017 Suite 601 (212) 490-9550 Washington, D.C. 20007 (202) 337-8000 Thomas R. Ajamie State Bar No. 00952400 Martin D. Chitwood Schirrmeister Ajamie, L.L.P. Christi C. Mobley 711 Louisiana, Suite 2150 Chitwood & Harley Houston, Texas 77002 2900 Prominad II (713) 229-9808 1230 Peachtree St., N.W. Atlanta, Georgia 30309 W. Mark McNair (404) 873-3900 James F. Humphreys & Associates, L.C. 1919 Pennsylvania Avenue, N.W., Suite 800 Andrew L. Barroway Washington, D.C. 20006 Schiffrin & Craig, Ltd. (202) 736-2191 Three Bala Plaza East, Suite 400 Bala Cynwyd, Pennsylvania 19004 Norman Berman

-198- Berman, DeValerio & Pease, LLP One Liberty Square Boston, Massachusetts 02109 (617) 542-8300 Clint G. Docken, Q.C. David A. Klein Docken & Co. Klein Lyons 215 Atrium II 805 West Broadway 840 Sixth Avenue, S.W. Vancouver, British Columbia V5X 1K1 Calgary, Alberta T2P 3E5 Canada Canada (604) 874-7171 (403) 269-3612 Ronald D. Manes Rodney J. Gillis, Q.C. Darryl T. Mann Gilbert, McGloan, Gillis Torkin, Manes, Cohen & Arbus 55 Union Street, Suite 710 151 Yonge Street, Suite 1500 Saint John, New Brunswick E2L 4S6 Toronto, Ontario M5C 2W7 Canada Canada (506) 634-3600 (416) 863-1188

Certificate of Service

I hereby certify that on this 14th day of June, 2000, a copy of the foregoing was served on all counsel of record by facsimile, hand-delivery, and/or certified mail, return receipt requested.

/S/

Damon Young

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