Brokers' lawyers ask Texas court to throw out claims
By SANDRA RUBIN
The Financial Post
TEXARKANA, Tex. - Canadian investors in Bre-X Minerals Ltd. should not be allowed into a huge Texas-based class action lawsuit because they can pursue damages in Canada, lawyers for three blue-chip brokerages told a U.S. judge yesterday.
Any damage award from a Canadian court would almost certainly be smaller than a potential U.S. jury award.
The lawyers argued their clients, J.P. Morgan & Co., Lehman Brothers Inc. and Nesbitt Burns Inc., played only an incidental role in the multibillion-dollar scandal and didn't do anything wrong. All have filed motions asking the case against them be thrown out for lack of jurisdiction or rewritten exclusively for U.S. shareholders.
Bre-X exploration chief John Felderhof, SNC-Lavalin Group Inc. and its Kilborn Pacific engineering unit are also asking in motions that claims against them be dismissed.
"The courts in this country are not available to foreign investors who invested in a foreign company on a foreign exchange," said Lewis Kaden, J.P. Morgan's New York lawyer. "And our view is that about 90% of all trading in Bre-X was by Canadian investors buying on a Canadian exchange.
"Now maybe they don't like some of the precedents in Canada, but we'll see, maybe this will be the first big case to go forward in Canada."
Calgary lawyer Clint Docken and Vancouver lawyer David Klein, who are co-counsel in the Texas-based class action suit, were among those in the full courtroom.
Klein told the court Canadians don't have proper recourse under the Canadian legal system.
"My colleagues and I represent about 700 ordinary folks who lost their savings on Bre-X," he told U.S. Federal Court Judge David Folsom. "The remedies available to my clients are very limited in Canada."
Nesbitt Burns' U.S. counsel, Dan Murdoch, urged the court not to be swayed by the fact Canadian lawyers have joined the action led by Houston litigator Paul Yetter. "Several Canadian attorneys associated with Paul Yetter not because they think there is jurisdiction here, but because they think there's more money at the end of the rainbow," Murdoch said.
He argued the U.S. is not the right jurisdiction, that most of Nesbitt's Bre-X trading was in Canada and the fraud was pretty well entirely carried out in Canada and Indonesia.
But Yetter countered the U.S.-based companies - Nesbitt has operations in Chicago and New York - were an essential element in the swindle and that puts them under the mantle of U.S. securities law. "Part of the Bre-X scheme was to tap into U.S. markets to sell stock," he said. "They did that by hiring some of the bluest of the blue-chip firms and had them stand by their side."
He said they ignored a whole variety of "red flags" such as the presence of river gold in what was supposed to be a bedrock deposit and an absence of independent drilling. "The defendants knew the red flags were flying. Bre-X was like a pathological criminal. They wanted to be caught. They left clues everywhere."
He told the judge the brokerage research reports and even their very presence helped investors decide to take a flyer on the Bre-X shares, and they should have to answer for their actions. "None of these defendants lost everything," he said gesturing to the table where the defendants' lawyers were sitting. "None of these defendants went bankrupt. These defendants made millions of dollars off this scheme."
He also rebuffed arguments that nothing happened in the U.S. that directly affected the fraud.
Aside from all the U.S. Securities & Exchange Commission filings and stories in U.S. newspapers from 1995 on, U.S. mutual funds were the largest holders of Bre-X stock outside management. That alone sent the Canadian share price soaring, because they couldn't buy the stock in the U.S. until August 1996.
"These U.S. funds were not only supporting the price in Canada, they were driving the price in Canada. They helped escalate that price to artificially high levels."
Folsom took their arguments under advisement. He said he will rule on the motions as soon as possible.
Also yesterday, Barrick Gold Corp. denied allegations it failed to warn investors about the Bre-X fraud five months before the scandal came to light. U.S. lawyers behind the Texas-based class action last week added Barrick to the list of defendants they say played a role in the fraud.
