Court hears closing arguments in Seabright Resources lawsuit

Closing arguments were heard at the end of October in the $60-million Westminer Canada lawsuit against Seabright Resources’ former directors. Information disclosure and director liability are the central issues.

In January, 1988, Westminer paid $92 million for Seabright, a Nova Scotia gold exploration company. Within six months, Westminer announced that ore reserves at the Beaver Dam property did not meet original estimates. The lawsuit was filed later that year and the mine soon closed.

Seabright directors testified there was confusion in late 1987 about ambiguous and contradictory reports from outside consultants. Westminer alleged that Seabright directors Terance Coughlin and Jack Garnett conspired to withhold certain information that cast doubt on previous estimates for Beaver Dam.

Westminer’s lawyers argued that this new information should have been filed with the Ontario Securities Commission (OSC) by a formal notice of material change, and that the alleged non-disclosure amounted to fraud. Westminer contends the other directors also had a responsibility to ensure the public information was maintained accurately.

The OSC requires disclosure of all information that “significantly affects, or would reasonably be expected to have a significant effect on, the market price or value” of a company’s shares.

Small mining firms tend to publicize favorable news and downplay the negative. When consultant reports are inconclusive, disclosure is a tough judgment call for management. If management’s call is later challenged, as in the Seabright case, the ensuing litigation can include the directors. Coughlin spent 18 days on the stand, and Garnett five days. David Armstrong, mine manager at Beaver Dam during 1987, testified against his former employers.

The Halifax proceedings began March 4 and the decision is expected early next year. Legal and consultant fees for the defence alone are estimated to exceed $4 million.

A countersuit was launched by the Seabright directors against the board of Western Mining. The Seabright directors were served with the notice of suit the day after their liability insurance expired. Their countersuit alleges the timing was a deliberate attempt to undermine their ability to defend themselves in a costly lawsuit.