Question

In April 1997, Bre-X Minerals, a Canadian company, was supposedly one of the most valuable companies in the world. Bre-X had convinced numerous mining experts that they had rights to one of the largest gold deposits ever discovered. It was hailed as the mining find of the century. The gold mine, located on a remote island in the East Kalimantan Province of Indonesia, supposedly had so much gold that the actual price of gold on the open market dropped significantly due to the anticipation of an increased gold supply. Within a few months, thousands of Canadians—big-time investors, pension and mutual fund, managers and many small investors, including factory workers—got caught up in “Bre-X fever.” The company’s stock price shot from pennies to more than $250 per share before a 10-for-1 stock split was announced. Thousands of investors believed they were on the verge of becoming millionaires.

The story took a sudden turn for the worse when Michael de Guzman, Bre-X’s chief geologist and one of only a handful of company insiders entrusted with the mine’s core samples, apparently committed suicide by jumping out the back of a helicopter. Guzman’s suicide was reported around the time that an independent consulting firm reported that samples from the mine had been tampered with. The firm concluded that the core samples were made to appear to be rich in gold by adding a relatively small amount of gold to the samples. In essence, the firm concluded that Bre-X was a scam of epic proportions!

LIQUIDITY RATIOS	6	12/31/15	CHANGE	PERCENT CHANGE	INDUSTRY AVERAGE
Current ratio
(current assets/current liabilities)					1.21
Quick ratio
[(current assets inventory prepaid expenses)/current liabilities]					0.35
Sales/Receivables
[net sales/net ending receivables]					23.42
Number of days sales in A/R
[(net ending receivables/(net sales/365)]					15.58
Inventory turnover
(cost of sales/average inventory)					1.29

As the scam came to light, it was unclear who was behind the tampering. While fingers were pointed at senior Bre-X personnel, others blamed geologists in the field. Bre-X’s President, David Walsh, was shocked at the news of the tampering and vowed to conduct an investigation. As is the case with many frauds of this type, numerous class-action lawsuits were filed against Walsh and other Bre-X executives, alleging that they misled shareholders. Walsh and other company officials received profits of over $50 million from selling some of their Bre-X stock the year before the tampering came to light. In the end, many people lost money as the gold find of the century turned out to be a massive hoax.

Questions:

1. How were the gold industry and Canadian stock markets affected by this fraud?

2. Some of the aspects of the perfect fraud storm that were discussed in the chapter were also present in the Bre-X scandal. Which elements were common to both the perfect fraud storm and the Bre-X’s scandal?

3. What were some of the perpetrators’ motivations to commit fraud?

Answer 1

Answer 1:

The fraud of Bre-X Minerals affected both the Canadian stock market and Gold industry in the country. However, the affects were much more visible and damaging for the gold industry as the initial news affected the gold price and reduced the price to new low. Consequent upon the discovery about the fraud, the operations in the gold industry were badly hampered. The stock market in the country were also affected with the news of fraud as the share price of all companies operating in fold and mineral industry touched new lows. In-fact it took significant amount of time for the major gold and mineral companies to recover from the shock effects of the fraud.

Answer 2:

There are mainly three primary elements that motivate more or less all the frauds, these are perceived pressure from the peers, industry, executive, owners; presence of opportunity and the ability to make it rationalize. In this case, apart from the perceived pressure other two elements of perfect fraud storm were present in the Bre-X Mineral fraud. The executive and employees of the company saw an opportunity to make significant amount of money at the expense of the stakeholders and they did everything in their capacity to make it rationalize by using the fake report of a geologist even.

Answer 3:

The following are the perpetrators’ motivations to commit fraud:

1. To increase the share price at a go.
2. To make personal gain at the expense of the company and the industry.
3. To improve the financial forecasting of the company.
4. To window dress the financial position of the company for the future.
5. To gain from selling the shares at relatively higher price than the actual value of the shares.