Another sad chapter was written in the life of John Paterson in mid-January, with the 62-year-old disgraced founder and former CEO of Southwestern Resources receiving a sentence of six years in prison for creating hundreds of bogus assay results at the company’s Boka gold project in China’s Yunnan province, resulting in a string of 25 misleading press releases.
Paterson’s scam helped make Southwestern one of the darlings of the Toronto Stock Exchange in the mid-1990s, propelling the company to a $200-million market capitalization before company directors finally caught wind of the scheme in July 2007 and the stock plunged. The courts determined Paterson was responsible for a loss of $55.5 million to Southwestern Resources and at least $205 million to investors in a deception that started small, but escalated over time.
Of 446 assay results at Boka, Paterson had inflated 433, and then spent $500,000 to recruit on-site project manager John Zhang to help him conceal the fraud and obstruct any investigators.
In December 2010 Paterson was arrested in his Salt Spring Island home (from where he’d even been defrauding his fellow Salt Spring islanders), and formally charged with fraud after a three-and-a-half year investigation involving police in Vancouver, Hong Kong and mainland China.
He had already admitted in mid-2009 to charges by the British Columbia Securities Commission that he had falsely inflated the gold values in drill results at Boka, and sold shares just prior to issuing a share-damaging press release that corrected many of the false results.
In September 2012, just as his criminal proceedings were getting underway in Vancouver’s provincial courts, Paterson formally pleaded guilty to four counts of defrauding investors.
While the crown prosecutor was looking for sentences of 10 years for each of the counts, to be served concurrently, the sentence ended up at six years for each of the four counts, to be served concurrently. Paterson may be eligible to apply for parole in six months.
After the scam broke, Southwestern went back and recalculated the gold resource at Boka, and it fell to just 337,000 oz. gold, down from 3 million oz. The company also later settled a related class-action lawsuit for $15.5 million — over half of which came from Paterson and his wife.
Southwestern eventually sold Boka to a Chinese company for US$9.4 million. In early 2009, Hochschild Mining bought Southwestern for $22.5 million for its Peruvian assets.
Unlike to bacchanalian exploits of Bre-X Minerals’ Filipino geologists during the final days of the Bre-X scam (hunkering down for a week with Romanian strippers in Toronto during their final PDAC convention), Paterson’s life during and after the scam is drenched in pathos.
During the recent sentencing hearing, the Vancouver Sun’s David Baines described Vancouver Provincial Court Judge Harbans Dhillon as noting that Paterson “was raised in an environment of illness and tragedy,” with a remote and demanding father dying when John was 13, and his mother suffering from depression and assigned to an institution when he was 10. She later committed suicide, as did Paterson’s brother-in-law..
John Paterson also attempted suicide in 1999 over bad drill results prior to the Boka project, and has battled severe clinical depression throughout his adult life.
After the Boka scam exploded, he was similarly institutionalized for clinical depression and anxiety attacks.
Baines quotes Judge Dhillon as saying that Paterson was not primarily driven by greed, but rather a “combination of factors, including his underlying mental health problems and his fear of failure. He held the belief that lying about the early poor results would be overcome by better results through drilling.”
Dhillon also commented that “fraud may start in small steps — the hand in the till, one forged cheque and one altered accounting entry or, as here, one altered assay result — and remaining undetected, continues to build to a greater level of sophistication.”
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