Southwestern’s Paterson arrested

Vancouver – After a three-and-a-half year investigation involving police in Vancouver, Hong Kong, and China, John Paterson, founder and former CEO of Southwestern Resources, has been arrested and charged with nine counts of criminal fraud.

Paterson is accused of falsely inflating the gold values in drill results from the company’s Boka project in China. In negotiating settlements with the British Columbia Securities Commission (BCSC) and a group of shareholders who launched a class-action lawsuit against him, Paterson already admitted to the charges.

In mid-2009 he told the BCSC that he committed fraud by entering false assay results into the company’s Boka database. He also admitted to reporting those false numbers in 24 news releases over four years.

Paterson also admitted to improper insider trading, saying he sold 50,000 Southwestern shares at $5.96 apiece knowing the company was about to issue a new release explaining the inflated gold-value discovery and correcting many of the false results. The news pushed Southwestern’s share price down to $2.90 in a day.

Once the magnitude of the tampering was understood, Southwestern recalculated the gold resource at Boka and it fell to just 337,000 oz. gold, down from 3 million oz. Angry investors brought a class-action lawsuit against Paterson, his wife, and Southwestern, demanding as much as $320 million in compensation.

Southwestern negotiated a settlement with the investors, who received $15.5 million. Just over half of the amount came from Paterson and his wife, comprising all of their assets.

Now, 18 months after it seemed it was all over, the Boka story has become news again. RCMP arrested Paterson on Saturday, Dec. 18, at a Saltspring Island home in southern B.C, charging him with nine counts of fraud. The 60-year old geologist has suffered from severe clinical depression for more than 10 years and has said his depression affected his judgment.

Southwestern eventually sold Boka to a Chinese company for US$9.4 million. In early 2009 Hochschild Mining (HOC-L) bought Southwestern in a $22.5-million deal.