BCSC accuses analyst at Mt Kellett of improper insider trading

The B.C. Securities Commission is alleging that a Hong Kong-based analyst working for a global institutional investor in 2012 tipped his sister about information regarding a cost overrun that had not been publicly disclosed at Baja Mining’s (TSXV: BAJ; US-OTC: BAJFF) Boleo copper–cobalt–zinc–manganese project in Baja California Sur, Mexico.

In a notice of hearing issues on July 11, the BCSC alleges that Hon Seng Lum — also known as Victor Lum — instructed his sister May Lee Chan Lum to trade in shares of Baja Mining after he became aware of “material information that had not been generally disclosed regarding a cost overrun” at Boleo, while he was working for Mount Kellett Capital (Hong Kong), a research centre operated by Mount Kellet Capital Management LP, a global institutional investor.

“Hon Seng breached securities laws by using material information that had not been generally disclosed to trade securities,” the regulator said, noting that the analyst analyzed and evaluated natural resource investments for MK Hong Kong and was not allowed to trade in companies that he was evaluating.

Between May 15 and May 17, 2012, Hon Seng “participated in an on-site visit with management at the Boleo project,” the BCSC said in a press release. “Pursuant to a non-disclosure agreement, Hong Seng was allowed access to detailed information regarding the cost overrun that had not been publically disclosed.”

Baja Mining first disclosed a US$246-million cost overrun at Boleo on April 23, 2012. The project, on the east coast of Baja California Sur, is 900 km south of San Diego.  

According to the regulator, the analyst “determined that the actual cost overrun was more significant than had been initially disclosed,” and through “a series of text messages on May 18, 2012, Hon Seng told Mary Lum to place a ‘sell’ order on Baja shares, instructing her to ‘sell the baja shares tonite [sic] . . . so that half of our position is sold’ and stressing to her that he ‘was counting on u [sic].’”

That same day, BCSC alleges, May Lum sold half of their position in Baja Mining, or 182,500 shares.

“May Lum sold the shares through a Singaporean brokerage account of a British Virgin Islands company controlled by May Lum of which she was the sole beneficial account holder, thereby concealing Hon Seng’s connection to the trades,” the notice of hearing states. “Hon Seng also failed to report to his employer that he was trading in Baja shares.”

In addition, the BCSC alleges that Hon Seng sent other text messages to his sister between May and November that year “with instructions to trade in securities of companies in MK Capital’s portfolio of investments, some of which Hon Seng had been involved in assessing the investment potential.”

The BCSC’s notice of hearing about Hon Seng follows news that another analyst admitted that he sold shares of Baja Mining while he was in a special relationship with the company and “while in possession of material facts concerning a cost review that had not been generally disclosed,” the securities regulator said in press release on June 25.

Robert Launder — a chartered accountant and mining cost analyst — was the manager of project controls for Minera y Metalurgica del Boleo S.A. de C.V. (MMB), a Baja subsidiary, BCSC says, and “was integrally involved in the preparation of a cost review” for the mining company.

Baja Mining had implemented a trading blackout for its shares, including a blackout from April 10 to April 25, 2012, when insiders and employees of MMB, among others, were barred from trading in the company’s shares.

“Launder was aware of the trading blackout, and as a member of the team that developed the cost review, he knew about the cost overruns long before it was disclosed to the public,” the BCSC states. “He acknowledged that on April 20, 2012, while in a special relationships with Baja, and with knowledge of the cost review before such information was generally disclosed, he sold shares of Baja contrary to securities laws regarding insider trading.”

Launder has agreed to pay the BCSC $24,350.

Originally the Boleo project had been scheduled for copper commissioning in 2012, with copper production expected to start in the first half of 2013.  

Baja Mining was delisted from the Toronto Stock Exchange on March 14, 2014, and its shares started trading on the Toronto Venture Exchange on March 17.

As of March 31, 2014, Baja held a 10% interest in MMB. (Before Aug. 27, 2012, the company owned a 70% stake.)

The remaining 90% of MMB is indirectly owned by members of a Korean consortium consisting of Kores, LS-Nikko Copper, Hyundai Hysco, SK Networks and Iljin Materials. (The consortium acquired an initial 30% interest in June 2008.)

In a management discussion and analysis on May 13, 2014, Baja Mining announced that MMB is targeting first copper production, with first cobalt-and-zinc production at the beginning of September.