Paterson Admits To Boka Fraud

VANCOUVER — The former president and CEO of Southwestern Resources has finally admitted to fraud and illegal insider trading.

In settling with the British Columbia Securities Commission (BCSC), John Paterson admitted that he committed fraud when he entered false assay results for the Boka gold project, in China’s Yunnan province, into the company’s database. He also admitted to reporting those false numbers in 24 news releases over four years.

“While some of the discrepancies were minor, in at least 60 instances Southwestern had reported significant gold findings where the actual assay result was negligible (less than 0.1 gram gold per tonne),” read an agreed statement of facts signed by Paterson and the BCSC. Later, the statement said that, in fact, “. . . actual gold grades were low enough to make the Boka project unlikely to be economic.”

In the statement, Paterson also admitted to illegal insider trading. On July 16, 2007, Paterson sold 50,000 Southwestern shares at $5.96 apiece for net proceeds of $298,240. He sold the shares knowing the company was about to issue a news release explaining the discovery of tampering and correcting many of the false assay results. The day the news was released, Southwestern’s share price fell to $2.90, which means Paterson avoided a loss on that day alone of $153,000.

For his actions, the BCSC has banned Paterson from ever acting as a qualified person again. He is also permanently banned, with limited exceptions, from trading securities or acting as a director or officer of a public company. Finally, Paterson is permanently prohibited from engaging in investor relations activities or acting in a management or consultative capacity for a public company.

Southwestern explored Boka from 2003 to 2007. The company and its investors thought the exploration efforts had proven up a 3-million- oz. gold resource at the project, and by late 2006, Southwestern shares were trading near $14.

Then in mid-2007, the company detected deliberate, manual changes to its assay database, many of which inflated gold grades by 10%. Paterson, who was not only president and CEO but also acted as Southwestern’s qualified person under National Instrument 43- 101 regulations, immediately left his job. A court injunction froze his assets.

Southwestern’s share price started to fall immediately, then plunged to below $1 when a new estimate pegged the actual Boka resource at just 337,000 oz. gold. Southwestern accused Paterson of fraud, breach of fiduciary, statutory, and contractual duties, and illegal insider trading. Near the same time, angry investors brought a class-action lawsuit against Paterson, his wife, and the company, demanding as much as $320 million in compensation.

The company managed to negotiate a settlement with its investors, who received $15.5 million. Slightly more than half of the settlement came from Paterson and his wife. Paterson has now contributed all of his assets in settlement of lawsuits and is “unable to pay the approximately $3.5 million to the British Columbia Securities Commission that would have been required in this matter,” according to the statement.

In 2008, Southwestern sold Boka to a Chinese company for US$9.4 million plus a 2.7% net smelter return. Then, earlier this year, Hochschild Mining (HOC-L) took over Southwestern in a $22.5-million deal.

Paterson has suffered from severe clinical depression for more than 10 years and said his condition affected his judgment.