Wall Street Crime And Punishment: Bre-X Minerals And The Gold Mine That Never Was

Does crime pay?

Wall Street Crime and Punishment is a weekly series by Benzinga's Phil Hall chronicling the bankers, brokers and financial ne’er-do-wells whose ambition and greed take them in the wrong direction.

On March 23, 1997, the decomposed body of geologist Michael de Guzman was found in the middle of a jungle near the Busang River on the Indonesian island of Borneo. Four days earlier, de Guzman fell from a helicopter while traveling over the tropical region and local police later determined his death was a suicide.

Three years before his gruesome demise, de Guzman was the center of global attention when he emerged from the same jungle with extraordinary news: the discovery of core samples of gold on property that had been purchased one year earlier by Bre-X Minerals, a hitherto obscure Canadian mining company.

The initial estimates based on de Guzman’s discovery pointed to more than 136,000 pounds of gold buried beneath the jungle and one year later, de Guzman upped that estimate with a forecast of more than 2 million pounds of gold awaiting excavation.

Bre-X’s Indonesian property became the most sought-after gold mining location since the California gold rush of the 1850s. The company’s stock went from trading at 30 cents a share to $250 per share, and it expanded beyond the Toronto Stock Exchange to gain access on the Nasdaq.

But there was a problem: The claims made by de Guzman were a complete and utter lie. Shortly after his death, the truth about Bre-X’s Indonesian gold bonanza became known and investors who poured their money into the company realized they were victims of the greatest mining fraud in history.

Bungle In The Jungle: The Calgary-based Bre-X was founded in 1989 by David Walsh, a Canadian energy industry executive. Walsh listed the firm on the Alberta Stock Exchange to finance his initial goal of mining for minerals in Canada’s Northwest Territories.

For its first four years, Bre-X was not profitable. In 1993, Walsh acted on the advice of Dutch-born Canadian geologist John Felderhof to buy a parcel of the jungle on Borneo, the largest island in Indonesia.

Borneo is rich in natural resources including oil, gas, lumber and coal, but gold was never found except in some isolated and insignificant amounts. The area that Felderhof recommended had previously been explored by 12 different mining companies and all rejected the territory as being absent of any major gold resources.

Felderhof, who was previously responsible for finding the largest gold mine on Papua New Guinea, hired the Philippines-born de Guzman as the project manager for the Borneo operation.

While the two men had worked together before, it is not certain if Felderhof was aware of de Guzman’s bizarre private life — he had four wives and families, none of whom were aware of each other, and at the time of his death, he reportedly attempted to secure the fifth marriage but was turned down by his would-be bride.

Four years earlier, de Guzman was fired from a mining company job when it was discovered he was using the company’s funds to keep one of his paramours entertained.

Despite living a life that seemed more suited for sitcoms, de Guzman was a respected professional in his field. But once he arrived in Borneo, he realized he was on an impossible mission and feared losing his Bre-X job after his first two attempts to locate gold came up empty. De Guzman later acknowledged that Walsh considered selling the property in order to stem his losses from the unproductive gold searches.

The Man With The Midas Touch: De Guzman managed to fool his employer by salting his core samples with gold dust that he created with shavings from his wedding ring. Encouraged by this deception, Walsh directed de Guzman to continue his work. For the next two-and-a-half years, de Guzman produced thousands of core samples salted from locally panned gold that he acquired for $61,000.

While de Guzman was salting his core samples, Walsh went into overdrive pitching Bre-X to institutional and retail investors across Canada, and he manipulated the Canadian media into reporting wildly positive stories about how a Calgary company found itself owning an unimaginable gold fortune. His salesmanship was peerless — he attracted 40,000 investors and moved Bre-X to the Toronto Stock Exchange.

Walsh also had his eye on American money and in August 1996 he secured a spot on the Nasdaq. This was no mean feat — unlike the relatively lightly regulated Toronto Stock Exchange, Bre-X had to satisfy an eight-month investigation by the U.S. Securities and Exchange Commission. (SEC) that its Borneo gold discovery was legitimate.

An unnamed SEC official would later tell the Wall Street Journal that the regulator was “pretty vigilant” in studying Bre-X’s application because “junior mining companies are highly speculative — they’re something we keep our eyes on.”

Alas, the SEC’s vigilance did not pay off, as the company latched itself into a U.S. public listing with only a few very minor changes in its application — for example, a statement about “proved” gold reserves was rewritten to describe the supposed holdings as “mineralized deposits.”

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Three’s A Crowd: By 1996, Bre-X kept inflating the size of its potential treasure, with Walsh telling a reporter, “We all find it hard to believe that we’re responsible for the largest gold discovery probably in the history of the world.”

But what Walsh did not anticipate was that someone wanted to share in his good fortune – Suharto, the Indonesian president whose concept of capitalism and democracy was very different from what Walsh experienced in his native Canada.

Suharto was not convinced that Bre-X could handle the excavation of such a tremendous gold reserve and demanded the company to partner with a larger company that could handle this great task. He also wanted Indonesia to profit from the unexpected treasure found beneath its soil.

Bre-X balked at the demands and Suharto withdrew the company’s excavation permits and, not surprisingly, Bre-X changed its mind.

Thus, Bre-X was strong-armed into a new deal where it wound up owning 45% of the endeavor, with the Indonesian government pocketing 40% and Freeport-McMoRan, a New Orleans company brought in to dig up the gold, taking the remaining 15%.

While Suharto created a financial crimp in Bre-X’s plans, Freeport-McMoRan created existential angst for de Guzman.

A fire in Bre-X’s Borneo field office occurred in January 1997 shortly before the new company began its work. This fire destroyed many of de Guzman’s sampling records — while the cause of the fire was not determined and de Guzman was never accused of arson, the timing of the blaze and the items that were destroyed seemed more than a bit suspicious.

In February 1997, Freeport-McMoRan conducted due diligence drilling near the site where de Guzman reported his findings, but it came up empty. Confused by the results from the drilling, Freeport-McMoRan summoned de Guzman to the Borneo site to discuss his findings.

De Guzman arrived in Borneo in March while dealing with a recent diagnosis of hepatitis B. On March 19, 1997, he boarded a helicopter chartered by Bre-X to take him to the mining site, but while in flight he unlocked one of the helicopter’s doors and jumped to his death. In notes that he left behind, he defined his suicide as an escape from the pain created by hepatitis, writing, “God bless you all. No more stomach pains!! No more back pains!!”

Freeport-McMoRan made its findings of a nonexistent gold reserve public in May 1997.

Bre-X attempted damage control by hiring a third-party mining company, Strathcona Mineral Services, to audit the Borneo property. Strathcona not only confirmed what Freeport-McMoRan found, but added that the de Guzman core samples were clearly salted.

Suharto reacted to the news by canceling Bre-X’s permits and expelling the company’s employees from Indonesia. But that was the least of Bre-X’s problems.

Race Among The Ruins: Bre-X’s downfall was swift and the company took its investors on a rapid tumble. Among the institutional investors that lost substantial sums were the Ontario Teachers Pension Plan ($100 million), the Quebec Public Sector Pension fund ($70 million) and the Ontario Municipal Employees Retirement Board ($45 million).

When Freeport-McMoRan announced there was no gold in the Borneo property, Bre-X’s shares on the Toronto Stock Exchange crashed by 97%, with the excessive volume caused the exchange’s computer system to break down. Nasdaq halted all trading for Bre-X, citing “concerns raised over the legitimacy of company claims.” The company would later be delisted by both exchanges.

Bre-X declared bankruptcy in November 1997. The company dribbled on until eventually shutting down in 2003. The Royal Canadian Mounted Police (RCMP) began an investigation into the fiasco and discovered that Walsh and Felderhof each sold $25 million in Bre-X before de Guzman’s death — both men insisted they were unaware that de Guzman produced phony core samples.

While the RCMP investigation was underway, Walsh relocated to the Bahamas. In May 1998, two masked gunmen broke into his home, tied him up and threatened to kill him unless he gave them his money. While Walsh was not injured in the assault and the gunmen were apprehended, this added strain on Walsh’s health was too great and he died three weeks after the attack from a brain aneurysm.

The RCMP investigation ended in 1999 without criminal charges being filed against anyone within the Bre-X organization. Later that year, the Ontario Securities Commission (OSC) charged Felderhof with insider trading, despite acknowledging there was no evidence that he knew de Guzman’s findings were fraudulent.

The trial began in 2001, was interrupted in 2003 when the OSC tried to have the presiding judge removed, and resumed in 2005 before ending two years later with a not guilty ruling. Felderhof relocated to Manila and died in October 2019.

Bre-X was also the subject of a class-action lawsuit, but that was discontinued in 2014 when Ontario Superior Justice Paul Perrell ruled there was “no reasonable prospect of recovery from any of the defendants, even if the outstanding actions were successful.”

The attorneys for the plaintiffs asked the court to distribute the remaining $3.5 million held by Bre-X’s bankruptcy executors and owed to the claimants be given to charity since a recovery effort would only result in claimants receiving two cents each. Perrell divided the sum between the Access to Justice Fund and the Telfer School of Management at the University of Ottawa.

The Bre-X story was dramatized in a 2016 film called “Gold” starring Matthew McConaughey. The film followed in Bre-X's footsteps and was a flashy money-losing production.

Rumors that de Guzman faked his death percolated over the years, but no evidence was ever presented to confirm that story. Prior to his death, Walsh looked back sourly at the gold mine that never was.

“Four-and-a-half-years of hard work and the pot at the end of the rainbow is a bucket of slop,” he said.

Photo: PxFuel.