Bre-X was a group of Canadian companies created by David Walsh in 1989. The company was involved in one of the most notorious scandals in the mining sector when it was discovered that its gold samples were fraudulent.
The American businessman and broker David Walsh created Bre-X, a company of very little value that was classified as a “penny stock”. However, the company’s history would be turned upside down when geologist John Felderhoff became associated with the company in 1993.
in search of gold
Felderhoff’s reputation preceded him, for he had long ago stumbled upon a gold mine in Papua New Guinea. As an experienced gold prospector, he approached the company to buy land in Borneo, where he claimed to have found significant amounts of the precious metal.
Felderhoff, who in his business career held the vice presidency of the Bre-X company, relied on the work of Michael de Guzmán, also a geologist, who claimed that there were even huge amounts of gold in the Busang mine (Borneo). In 1997 he even stated that up to 5 million tons of gold could be found and, at a JP Morgan symposium, he raised the amount of said precious metal to 13 million tons.
Such claims made the Busang deposit the largest gold reserve in the world. All this caused the value of what had been an insignificant company like Bre-X to increase stratospherically to reach 6,000 million dollars.
Everything seemed to be going from strength to strength for the mining company, which, in August 1996, made the leap to prestigious stock market indices such as the Nasdaq.
The largest gold deposit in the world?
In the midst of that context, mining companies obtained licenses to operate in places like Peru or on land in the former Soviet republics. There was no doubt that the supposed success of Bre-X had sparked a new gold rush.
However, by 1996, the Indonesian dictator Suharto wanted a substantial share of the profits from the Bre-X field in Borneo. Despite the temporary stoppage of works, Suharto finally reached an agreement to keep part of the profits. Meanwhile, the mining company Freeport would take over the supervision of the deposits.
When Freeport inspected the Busang deposit on the island of Borneo, it was discovered that the astronomical amounts of gold did not exist. It was all a lie. And it is that, the geologist Michael de Guzmán had falsified the gold samples.
It is true that, prior to the Freeport inspection, geologists already doubted De Guzmán’s samples, since there was no reliable way of verifying their veracity.
A great scandal was about to break out.
The fraud comes to light
Despite the fact that in February 1997 the Indonesian government, Freeport and Bre-X had formed a partnership through a joint venture, there was no gold in Busang.
Michael de Guzmán himself committed suicide by jumping from a helicopter. However, there is significant controversy over the circumstances of his death.
The scandal ended up exploding before the eyes of public opinion, leaving John Felderhoff and Michael de Guzmán as the main culprits. In fact, it was especially striking that Felderhoff, shortly before the fraud came to light, sold Bre-X shares for an amount of 80 million dollars.
New Yorker David Walsh (creator of Bre-X) and his wife also got rid of the company’s shares, selling them throughout 1996 for substantial amounts.
The savers, the great victims
Bre-X had built a great reputation and presented itself as a solid company offering great returns. Proof of this was that the company was listed on the prestigious Canadian TSE-300 index.
But when the great lie of the Borneo deposit was discovered, the company fell apart. All this dragged down many Canadian savers. Investment managers and pension funds that had invested in the mining company suffered devastating losses.
An avalanche of legal suits, many of which were brought by shareholders, fell on the company. Even big investment banks like Lehman Brothers and JP Morgan have faced lawsuits for advising them to invest in Bre-X.
In the midst of an unsustainable situation and with a deposit in which there was no gold, Bre-X ended up going bankrupt in December 1997.
For his part, David Walsh, who went to live in the Bahamas, died of a heart attack in 1998, while Felderhoff was acquitted by the courts. The court also determined that it was not possible to sue the brokers who advised them to acquire Bre-X shares.