Defence begins for Bre-X’s Felderhof

The defence began to build its case on Wednesday in an effort to exonerate John Felderhof, Bre-X Minerals’ former chief geologist who was with the company from its illustrious beginnings through to its dismal collapse.

And while the defence will present a steady stream of witnesses running well into December, the long parade to the stand began in the Toronto courtroom with Dr. Phillip Hellman. Hellman is a geologist with 25 years of experience who evaluated samples at Bre-X’s Busang property once the validity of its gold resources were called into question.

Hellman testified that the warning signs or “red flags” of tampering with drill results were not as obvious as others have stated – in part because such tampering was done to such a level of expertise that altered samples were, “what one would expect in a real deposit,” Hellman said.

Felderhof faces eight criminal charges of insider trading and misleading investors. The Ontario Securities Commission has accused him of improperly selling $84-million in Bre-X shares between April and October, 1996, while in possession of undisclosed information. More than $5 billion in market value was lost with Bre-X’s collapse.

Hellman, who was flown in from Australia, testified he believed Felderhof to be sincerely miffed by 1997 drill results that ran counter to Bre-X’s findings until then. The drilling by potential partner Freeport-McMoRan Copper & Gold (FCX-N) – some of which was done just a metre and a half from Bre-X holes – returned almost no gold. Based on Bre-X’s drilling Felderhof had touted Busang as potentially having 200 million oz. of gold.

Hellman’s testimony gave insight into the scene at the Sheraton hotel in Perth Australia in April 1997. It was shortly after the Freeport results were released and at the beginning of the unravelling of Bre-X. According to Hellman, Felderhof argued that Freeport’s result must have been the product of mistakes in the lab.

“At the time there was a lot of paranoia,” Hellman said of the atmosphere in the room. “People were just looking for some guidance.”

Hellman testified that he told Felderhof and those in attendance that he believed Freeport’s results pointed to salting – the process of tampering with samples to give the appearance of higher gold grades – in Bre-X’s prior results.

“I couldn’t imagine why Freeport would tamper (with assays),” Hellman said. “The logical explanation was that there was tampering (on the Bre-X results).”

After what Hellman described as a “robust” debate with Felderhof over whose results were correct, Hellman was contracted for the Sheraton Project, a consultation group assembled by Bre-X to further investigate the reasons behind the differing results coming out of Busang.

And while the Sheraton Report was never fully completed – the plug was pulled when Bre-X collapsed after the release of Strathcona Mineral Services report – Hellman did spend time in Busang examining samples.

In a written report prepared by Hellman and submitted to the court by the defence, Hellman writes: “I came to the same conclusion as Strathcona over a similar amount of time. Unlike Strathcona, however, I have never claimed that there were red flags ignored by those associated with the project because I do not believe that to be true.”

The existence of such “red flags” – or warning signs that something was terribly amiss – are an essential part of the Strathcona report.

But Hellman testified that he found the “salted” samples to be so expertly done that they would fool most experienced geologists.

“I might have been arrogant before handthinking how can anyone let this go on for so long,” Hellman said. “It was only when I looked at the details that I had an understanding of the degree of precision that the perpetrators went to pull this off.”

Defence attorney Joseph Groia said other witnesses to be called will include Terry Leach, a geologist who also evaluated the Busang project; Redwan Mahumud, an Indonesian expert; Paul Semple a geologist for Kilborn Engineering Pacific; and Barrick Gold‘s (ABX-T, ABX-N) chairman Peter Munk and other Barrick executives.

While Bre-X was at the height of its market fanfare, Barrick became embroiled in a hotly contested battle for a stake in the Busang area.

The defence gave no indication as to whether or not Felderhof would leave his Cayman Island home to testify at his trial.