Lawsuits, hearings focus on disclosure, corporate conduct — Regulators and shareholders train sights on Crystallex, Naxos, Cartaway and First Marathon

As if to signal the end of the 1990s bull market for resource stocks, irate shareholders and vigilant securities regulators have taken aim at a powerful brokerage firm and several junior companies that are alleged to have made false and misleading statements about their projects and corporate activities.

In New York, a class action lawsuit was filed against Crystallex International (KRY-T) and its president and chief executive officer, Marc Oppenheimer. The suit alleges violations of U.S. securities laws, “by the dissemination of false and misleading statements” concerning the Cristinas 4 and 6 concessions in Venezuela.

Crystallex shares climbed to a high of $11.85 based on claims that it had filed a lawsuit to enforce “rights” to Las Cristinas, a gold deposit that was being developed by Placer Dome. These and other claims were also heavily promoted on the Internet by a variety of third parties.

The New York lawsuit alleges that Crystallex held no such “rights,” and that the stock was artifically inflated as a result of “false and misleading statements.” Crystallex says it intends to defend the action vigorously.

Crystallex shares plunged to $1 last month after a Venezuelan court ruled that the company’s subsidiary, Mael, did not have legal standing to sue the government and that, even if it had standing, it had no grounds because it never held title to anything in the first place. The ruling confirmed that the concessions had expired and reverted to the state before they were granted to Placer Dome and its Venezuelan partner.

The much ballyhooed gazetting of a purported transfer to Mael from Ramon Torres was described as an inapplicable argument and a separate matter to the subject dealt with in the procedings. It was merely a notice — a technical requirement that became effective “for the purposes of being subject to opposition by third parties” — rather than a legally binding transfer of title.

Meanwhile, in Alberta, securities regulators plan to resume a hearing into allegations of improper disclosure by Naxos Resources (NAXOF-OTC) on Sept.

16. The Alberta Securities Commission (ASC) alleges that Naxos failed to disclose negative reports and assay results from its Franklin Lake “gold” (and sometimes platinum) project in California.

A day or so later, Naxos issued a news release stating that independent check assays carried out at two separate labs had failed to confirm the presence of gold on chain-of-custody material beyond trace levels.

Naxos previously had reported high-grade results from its 1998 drilling at Franklin Lake, based on assays from Ledoux & Co. However, the company now says the two independent labs were not able to confirm these values in splits from the original samples, even when following a “protocol” devised by Ledoux for Franklin Lake’s purportedly unique mineralogical characteristics.

In a news release, Naxos President Sidney Kemp stated: “Upon inquiry by the company as to why Alfred H. Knight and Rocky Mountain Geochemical are not able to confirm their results, Ledoux & Co. stated that they determined that a problem with their assaying of the Naxos material existed, but Ledoux & Co. have not elaborated as to the nature and extent of the problem.” The negative report came days after newsletter writer Jay Taylor issued a positive report on Naxos and its Franklin Lake project, which he described as having “potential to contain large amounts of precious metals.” However, the normally bullish desert-dirt proponent cautioned that if independent labs were not able to confirm Ledoux’s results, “it would cast considerable doubt on the legitmacy of the numbers quoted [in the report].” This latest incident marks the second time independent testing has failed to confirm positive results reported by Naxos. In 1996, the company reported unusually high assay results using its own methods. The ASE was skeptical, halted trading and ordered Naxos to hire an independent consultant to audit its results. Associated Mining Consultants found no significant amounts of gold or platinum. The firm also found that the high values obtained by Ledoux “can be explained by the presence of gold in the wash fluxes [used in the assaying procedure].” A defiant Naxos launched a US$200-million lawsuit against the auditor and the exchange but eventually dropped both suits. The junior was de-listed from the ASE in the summer of 1997.

The ASC’s notice of hearing says Naxos officials released favorable results, even when they should have been aware of poor ones, and made misleading disclosures designed to influence the share price of Naxos, from which they benefited.

Meanwhile, Toronto Stock Exchange (TSE) officials concluded an investigation into the conduct of brokerage firm First Marathon — namely the cozy relationship of some of its insiders with Cartaway Resources (CWA-A) — by imposing penalties and costs totalling more than $4 million “for failure to supervise.” The settlement is still subject to ratification by a TSE hearing panel.

The investigation also involved the Alberta and British Columbia Securities Commissions. The latter is proceeding with a hearing against First Marathon, Cartaway and related parties on August 21. The BCSC is expected to seek additional penalties, including an order that the brokers disgorge their trading profits.

In a third action, the ASC issued a notice of hearing against First Marathon and three of its brokers. Also named were Cartaway President John Ivany and directors William DeJong, Charles Mitchell, Hugh Mogenson and Walter Nash.

The ASC alleges that the respondents failed to make proper disclosure of Cartaway’s affairs in news releases and filing documents. Nash and several others also face allegations of insider trading. A hearing has been set for Sept. 24.

Cartaway, which began life as a garbage container rental company, came to prominence in May 1996 when it claimed to have encountered massive sulphides at an exploration property in Labrador. The stock soared to $26, based on “eyeball assays” (visual estimates of sulphides in drill core) reported by exploration manager Walter Nash, and fueled by speculation that the discovery might have similarities to the nearby Voisey’s Bay deposit.

However, the subsequent assay results showed little mineral content; only a need for Cartaway’s geologists to invest in corrective eyewear. The stock plunged to $2.

It was later learned that First Marathon insiders had bought just under 50% of Cartaway in the fall of 1994 for 10cents per share. The same insiders were major players in subsequent financings and private placements, also at low prices, which boosted their position to 66% of the company. The brokers then acquired claims in Labrador, which they subsequently promoted to investors, without disclosing their obvious conflict of interest.

After Cartaway crashed and burned, an investigation was launched into First Marathon’s involvement with the junior, which later picked up the nickname “First Cartaway.”

The settlement agreement with the TSE relates to First Marathon’s “failure to supervise its business and employees in various areas during the period from 1992 through 1996,” in particular their involvement in Cartaway. TSE officials also cited “the general and systemic failures in the firm’s compliance program and its supervision of its business, and certain market activity.”

John Carson, senior vice-president of the TSE, said the case “establishes a strong precedent” on the obligation of securities firms to establish and implement a compliance program covering all aspects of their operations.

“This means that indicators of potential problems, or ‘red flags,’ must be identified and followed up,” he added.

First Marathon agreed to pay $3.5 million and investigative costs of $500,000. The firm’s insiders also were cited for various failures relating to the firm’s operation and involvement in Cartaway. President Lawrence Bloomberg agreed to a fine of $250,000, though he kept his job, while Vice-President Stuart Henry agreed to a fine of $485,000 (plus a 4-month suspension in all capacities and
a permanent suspension in a compliance capacity).

Vice-Chairman Robert Disbrow agreed to pay a $100,000 fine for failure to inform the head office of the participation of the Vancouver employees in Cartaway and “failing to question client and non-client involvement in purchases of Cartaway.” He also agreed to a 3-month suspension in all capacities and a permanent suspension from acting as branch manager. Charges against several other managers and employees remain unresolved.

In other legal news, the Supreme Court of British Columbia put an end to the long-running ownership dispute between Farallon Resources (FAN-T) and de-listed Summex Mines and its chief executive, John Torok.

Summex and Torok launched the case in order to advance a claim to have a joint venture with Farallon on the Campo Morado polymetallic concession in Mexico. However, the judge dismissed every claim advanced by Summex and Torok, thus confirming Farallon’s 100% title to Campo Morado.