Commentary: R. vs. Felderhof: an industry post-mortem — part 2 of 2

This is the second of two parts of a commentary on the verdict in R. v. Felderhof, the Bre-X securities violation case. The first appeared on August 8.

On the question of hindsight, it is instructive to look at how some professionals, including Felderhof, reacted to the low assay results from the Freeport drill holes. Colin Jones of Freeport recalled that he and geologist David Potter recognized problems with the Bre-X database even before they had put holes in the ground. Bre-X, the laboratory, and Kilborn all had databases with differing numbers of samples, and moreover, check assays on crushed samples showed variability so extreme that Freeport concluded the results were unusable: all this before the “hindsight” of twin drill holes that found low gold values. If Kilborn, doing “their test work at a high industry standard” knew this at all — the technology is called “counting” — they didn’t make much of it.

Once Freeport had its twin-hole results, it sent them to Bre-X, who called in Strathcona. And while Freeport and Strathcona were uncovering a fraud — and Hellman suspected one too — the professionals in whose competence Judge Hryn set such store were missing it entirely, even with the same facts in front of them. Consider:

• Kilborn, called back to manage a Bre-X scientific counterattack, sent crushed (and salted) core around to Indo Assay and two Canadian laboratories as a belated check. Naturally, three honest and competent labs got comparable results. Kilborn, however, didn’t note that a whole chain of custody from the drill to the crusher ran the risk of salting, at a time when there was already reason to suspect that samples were being salted well before the laboratory got its hands on them.
• Normet’s managing director, Phillip Hearse, while professing to be “mystified as everyone else” by the “extraordinary turn of events” since the results of the Freeport holes came out, told the Calgary Sun that “If I had stock in Bre-X I’d certainly be hanging on to it.”
• Hellman records that representatives from both Kilborn and Normet, in meetings held after the Freeport announcements with Felderhof, Hellman, Leach, and Bre-X’s dishonest metallurgist Jerry Alo, shared “the belief that the gold mineralization at Busang was real,” even when Hellman himself advanced salting as “the most likely explanation for the Freeport results.”
• Bre-X issued a press release of its own on April 22, fully a month after Freeport gave it “the benefit of hindsight.” Results from 16 holes showed mineralization at grades near the resource grade, over those typical wide Busang intervals. Having been warned in advance — by both Freeport and Strathcona — that the company could not trust its own results, Bre-X management, including Felderhof and director Paul Kavanagh, disclosed those results anyway. (There were six holes that came up without significant gold, too: perhaps another bucketload of hindsight, poured over their heads, would have let them see that as a clue of sorts.)
• Judge Hryn also relied on testimony from Paul Kavanagh, and notes in his judgment that Kavanagh “continued to believe that there was a substantial amount of gold at Busang until Strathcona’s negative results” — about six weeks after the Freeport results that provide Judge Hryn’s “hindsight.” Kavanagh, like Kilborn and Normet, appears not to have derived much benefit from contact with the facts.

Graham Farquharson and Strathcona

Judge Hryn found Graham Farquharson’s testimony, as an expert for the Securities Commission, less believable than the experts for the defence. That is a direct function of defence counsel Joseph Groia’s very aggressive cross-examination. Groia jumped on phrases, inconsistencies, and vaguely related statements, and his cross-examination made Farquharson and Strathcona out to be partisan, inexperienced, Monday morning quarterbacks. They aren’t; but when it suits the defence to make you look like that, the defence will do its best, and Groia’s best was very, very good.

Groia savaged Farquharson for talking just like everyone else in the mineral industry talks. For example, when he said there was “no gold there,” that was taken literally; it is standard in this business to say “no gold” when what is meant is no atypical, anomalous, or significant gold. The concession that what was meant was no “economic” gold was too generous; economics of a gold grade doesn’t enter into a discussion until there is some proof of prospective grade (call it enriched, anomalous or atypical if you like). That left the impression of inconsistency when what was really there was plain talk.

Lesson 1: we in this business have to stop talking about “no gold” when we mean “no more gold than you’d find in your backyard,” which is something even a judge might understand.

There seems to have been much made of Farqhuarson’s co-operation with the Securities Commission, as the role of an expert witness is expected to be more like a friend of the court. (The Commission levelled the same charge at defence experts, with considerably less effect.) Groia went after a memo from Strathcona geologist Henrik Thalenhorst that talked about how to “de-claw” a report on the Busang exploration project by MRDI, which had said the exploration standards at Busang were high. The effect was to paint Strathcona as partisans for the Commission and further undermine Farquharson’s credibility.

Lesson 2: Expert witnesses can’t afford to be seen that way. More to the point, prosecutors can’t let them be seen that way.

Lesson 3: When you’re an expert witness in a criminal or quasi-criminal proceeding, aggressive cross-examination and literalism will be the game. Be ready to play it, and understand that your reputation in the industry you serve does not, and should not, live and die with a trial transcript.

The defence experts

Phillip Hellman’s stature is intact. He owned up to the salt scam, did not think there is a gold deposit in Busang’s southeast zone, and brought useful knowledge to the court that counteracted some of Farquharson’s evidence. However, if there’d been more technical expertise on the prosecution bench, some of his assertions might have been undermined more during cross-examination. But on the evidence that came out, Hryn was absolutely right in naming him as the most credible witness.

On the other hand, Terry Leach (who died last February) emphasized how prospective Busang looked, and apart from his concern about specific drill holes (like the improbable 396 metres grading 12.6 grams per tonne the salters created during the battles over development of Busang) evidently did not consider salting to be a possibility. He was also the only witness suspected of a falsification (a post-dated report), but this seems to have counted little. Judge Hryn misjudged Leach’s evidence, possibly because he was on the same side as an excellent and credible witness, Hellman, saying many of the same things.

Leach’s associate Greg Corbett, who was also present for the unmasking of the fraud, refused to appear for the defence. That may say something.

It also says something if Leach could simultaneously hold in his head the ideas that (1) a salt scam on that massive scale was nearly impossible, and (2) it is more possible that a twin-hole campaign, carefully documented to reproduce Bre-X’s own procedures, could come up with no gold. That way lies madness.

The Ontario Securities Commission

The insider trading charges against Felderhof probably never had a chance, having little or nothing to do with the actual fraud. It might be that they were brought with the intention of bringing about a heavy fine, but to have made charges that were not central to the actual scam half the weight of the case looks like a strategic mistake. This trial was always going to be about the salt fraud.

The Commission’s case in the misleading disclosure charges rested on whether Felderhof was sufficiently diligent, rather than on hitting him with what he knew and when. (Civil litigators may yet ha
ve a better opportunity to go after that.) The emphasis on diligence allowed the defence to throw up all the other people whose judgment of Busang turned out to be wrong and careless. Felderhof naturally looks better for missing the fraud when compared with professionals that also saw nothing.

The Commission was not as effective against the defence experts as Groia was against its witnesses. And the Commission failed to flood the zone: there were plenty of people who could have taken the stand to say they didn’t like Busang, and for good reason, without benefit of hindsight (Westralian geologists John Levings and Graeme Chuck; Teck geologists Wayne Spilsbury and James Oliver; statistician Jan Merks; Barrick’s vice-president Alex Davidson). At least their evidence would have clarified the difference between them and the people and firms that believed uncritically. Instead, the Commission put Paul Kavanagh, one of the last of Busang’s dead-end believers, on the stand.

But that’s all hindsight, isn’t it?

Joseph Groia

The bulldog defence lawyer lived up to his reputation. He was difficult, meticulous, and very, very effective. In a confrontation with an intelligent, informed, and fundamentally decent expert witness, he managed to find enough holes to damage the Commission’s case. A street fighter from Perth Avenue School came to land punches, and land them he did.

After the mid-trial appeal to get rid of Judge Hryn in this case, Groia was identified by Canadian Lawyer as “an epitome of (legal) incivility.” The case did, indeed, put some people’s tempers to the test, including Groia’s. But a tough attack on the Commission’s case is what Groia was getting paid for. Or, to be more precise, what he was billing for; he hadn’t been paid at last report.

I hope he gets it in full one day; he certainly earned it.

Judge Hryn

Judge Hryn got his head around many subtleties of the evidence rather well. He grasped a lot of the technical aspects of the case, and was good at compartmentalizing the questions at hand (distinguishing, for example, between the particulars of the four insider-trading charges). Any fair-minded reading of the decision puts to rest the Commission’s charge that he was biased.

That having been said, Hryn appears to have fallen (as many judges do) for the Argument from Repute; all these smart, rich, well-thought-of people that liked Busang, how could they have been inattentive; how could they have been less than diligent?

I think, based on some of the arguments above, that they could have, and were. Felderhof was no worse; and the verdict should tell them they were no better.