Canadian microcap stock manipulation often escapes detection

Guest columnist Paul Garside, CFE, says that Canadian businesses can be surprised by stock-price manipulation schemes. Here he details the basics of this fraud and provides some ways to detect it. As the former officer in charge of the Royal Canadian Mounted Police (RCMP) Integrated Market Enforcement Team (IMET) in Montreal, he investigated market crimes, including Project Carrefour — a substantial microcap stock manipulation case. — Tim Harvey, "Global Fraud Focus" editor

In 1993, the owner of a Canadian penny-stock mining company, Bre-X Minerals Ltd, a Calgary-based mining company, purchased the rights to some land in the middle of the jungles of Borneo. He bought the land on the advice of a geologist and explorer, John Felderhof, who estimated that it contained gold deposits.

Over the years, Felderhof's estimations grew, and in 1997, he told investors from J.P. Morgan in a conference call that the land could contain more than 13 million pounds of gold. And as his estimations grew, so did Bre-X's stocks. When Bre-X purchased the Borneo land, its stock was selling for around 30 cents apiece. By 1997, the share price had gone up to more than a CAD$250 and market capitalization of CAD$4.4 billion. One problem: the gold didn't exist in the Borneo land. (See The $6 Billion Gold Mine That Wasn't There, by Eric Grundhauser, Slate, Aug. 21, 2015.)

When the fraud was finally exposed, the share price quickly decreased, which left retail investors and numerous pension and investment funds with significant losses. To make matters worse, consequent criminal, regulatory and civil suits all eventually fizzled out with little justice for the thousands of individual and corporate victims. This case became Canada's iconic stock manipulation example.

Although CFEs might not regularly come across microcap stock manipulation, it's important to be aware of the methods and motivations behind this significant criminal activity. (A microcap is a publicly traded company whose stock might be worth only pennies, which causes prices to be volatile and easier to manipulate.)