EDITORIAL & OPINION — Regulators will have to do better — A failure of will

Pity poor Larry Ryckman. The one-time market player found it necessary to issue a press release charging that the Alberta Securities Commission was politically motivated in publicizing its suit to recover costs of a January 1996 enforcement action, in which Ryckman was found to have manipulated the stock price of Westgroup Corporation. Ryckman evidently finds the ASC’s pursuit to be a little overzealous.

Not so the former directors of Naxos Resources, who came away unscathed from an ASC hearing called to examine allegations of improper disclosure, late filing and insider trading offences. A panel of ASC board members found that charges against four former directors could not be proved, and also made no findings against the company itself.

The only complaints the panel sustained were those against Naxos’s former chairman and president, Jimmy John, who was found to have “issued press releases that contained exaggerated language, misleading information and omissions of unfavourable results.” That ASC zeal that put such a spark in Ryckman’s cylinder appears to have been enjoying the March break.

What did Naxos, and by implication its directors, do? Oh, little enough. They just claimed to have a significant gold showing at Franklin Lake in the California desert, when in fact they had no such thing. Between 1995 and 1997, Naxos issued no fewer than 13 news releases over the signature of one Jimmy John, reporting substantial gold grades in samples from the Franklin Lake property — typically 0.1 to 0.2 oz. per ton. There was supposed to be silver, too, and in one release in early 1996, the company even threw in assays of six platinum-group metals as a sweetener. And the evidence from controlled geological investigations on the Franklin Lake property is that every one of the assays Naxos released during that period was false.

It was in February, 1996, that the Alberta Stock Exchange demanded “clarification” of Naxos’ assaying methodology, which was being developed by black-box assayers in the southwestern United States and by Ledoux & Company, a New Jersey-based precious metal assayer. Even so, when the Vancouver Sun reported the ASE’s demand, Naxos sued the paper — first claiming defamation, and then making an unsupported and probably defamatory claim that Sun reporter David Baines had profited by short-selling stock and then writing negative stories. (The company did not proceed further with its suit, and it is worth noting that Baines and the Sun sued successfully when a similar accusation was levelled by newsletter writer George Chelekis.)

The Exchange forced an independent technical audit of the project on a recalcitrant and dilatory Naxos, which finally took part in a drilling project by independent consultants that September. Associated Mining Consultants, which provided a report on the program to the Exchange, concluded that “the Naxos samples do not contain gold in concentrations above 0.005 oz. per ton. This can be confirmed by all the methods used in this study, including Naxos’ own methods.” In other words, reproducible experiments on the samples proved Naxos’ claims of precious metals were false.

AMC further noted that assayer Ray Steele refused to have his methods scrutinized by competent scientists and that the company’s assaying method “changes continuously, which suggests that there is no proprietary process as claimed by Naxos.” And the report said the earlier Naxos results — the ones with the goodies in them — could only be explained by “natural contamination in a gold-rich environment, poor-quality chemicals, or deliberate salting.”

Naxos attempted a rebuttal of the consulting firm’s report, relying heavily on results that Ledoux & Company had obtained from splits of the samples. Yet Naxos itself had to concede that the samples analyzed by the assayers at Ledoux came from containers that had been opened for “preparation” the day before Naxos and ASE representatives witnessed the assay process. And, more damning still, Naxos revealed in August 1998 that samples sent to Ledoux from the company’s 1998 drilling program had turned out to have been contaminated — precisely what AMC had said of Ledoux in its 1996 report.

The fact is that the Naxos burlesque show has been the clearest possible confirmation that the company’s unassayable-gold story is nothing but a falsehood. Competent science proved the Franklin Lake gold deposit was phony; yet the ASC’s panel preferred to see the dispute between real science and Naxos’ pseudoscience as a disagreement between experts — a cop-out that took away the Commission’s chance of doing something useful with the money and time that the Exchange, its consultants, and the ASC’s own enforcement staff, had spent on calling Naxos to account.

Non-specialists can’t be blamed for finding that much of the testimony in the Naxos hearings went over their heads. But in a 27-day hearing, they had plenty of time to get solid advice on the scientific elements of the case had they really wanted to make the effort. Now, instead of having been shown up as a fake in a public forum, Naxos has a ruling it can wave in front of critics, insisting that the ASC’s panel found it did nothing wrong.

The only reason we can see for the ASC’s failure to examine whether Franklin Lake samples were salted is a shortage of regulatory spine. The mining industry, and its regulatory overseers, will only recover the investing public’s trust when they are seen to be chasing down cases of possible fraud, not eyeing those cases with a delicate distaste and then turning away.