Court ruling clears way for appeal in Karpa Springs fraud convictions

Based on new technical evidence brought forward by a Perth mining engineer, three West Australian prospectors have been granted the right to appeal their convictions in the Karpa Springs salting scandal of the early 1990s.

Peter Foss, attorney general for Western Australia, referred the case to the Court of Criminal Appeal in early June after Michael McGowan brought forward information suggesting the prospectors could not have salted the samples in the way the Crown had suggested.

The prospectors were paid $6 million for a mining property that yielded spectacular drilling results in 1990. At the time, comparisons were made to the Hemlo gold discovery in Ontario, prompting Noranda and Australian partner Perilya Mines to acquire a toehold interest in the project.

Subsequent drilling found no commercial gold present. At the trial, evidence surfaced that the gold in the original drill-cuttings was alluvial in origin. Although they protested their innocence, the prospectors were convicted of fraud and conspiracy to defraud, and each served 13 months in prison.

McGowan also alleges that several aspects of the Karpa Springs case remain unsolved, including the identities of the shareholders who sold more than $7 million worth of shares at high prices before the fraud was discovered.

Also involved in the Karpa Springs project were Michael Novotny and Laurie Whitehouse, Australian promoter-prospectors who had worked alongside John Felderhof and Michael de Guzman in a gold exploration joint venture in Indonesia during the mid-1980s. (Felderhof and de Guzman went on to win notoriety as vice-chairman and geologist, respectively, of Bre-X Minerals.)

In 1990, Novotny asked Whitehouse to visit the Karpa Springs property and write a report. The favourable findings prompted Novotny and Whitehouse to form a syndicate to acquire the project from the prospectors. The other members were Bill Galbraith, Geoff Stokes, Andrew Winstanley and Peter Newton.

Perilya, acting as Noranda’s exploration arm in Australia, then struck a deal with Novotny’s syndicate to option the project, subject to due diligence. A confirmation drilling program returned high values, prompting Perilya to exercise its option despite the reservations of some of its technical staff.

Noranda then reached an agreement to acquire up to 70% of Perilya in a deal worth $15 million, to be paid in stages. A toehold 30% interest was acquired for $6 million, which was paid to the prospectors through Novotny’s syndicate. This money was recovered after Karpa Springs was exposed as a fraud.

In the mid-1990s, Novotny and Whitehouse formed companies that acquired huge tracts of ground surrounding the Busang project managed by Felderhof and de Guzman. These properties were then sold to Canadian juniors for cash or shares, or a combination of both.

In several cases, Novotny and Whitehouse became significant shareholders of the Canadian juniors active in the Busang-inspired exploration boom. After Busang went bust, most juniors relinquished or wrote down their Indonesian property acquisitions.