There's one born every minute. (Swindles).

Once upon a time, there was a small exploration company in Calgary. It was founded in 1988 and run by a man called David Walsh, a once-bankrupt stock promoter. In 1991, an investor with a high tolerance for risk could have bought shares in the company for just four cents apiece. The company hadn't done much of anything until Mr. Walsh met up with John Felderhof. That was in 1993, and David Walsh's company was called Bre-X.

Mr. Felderhof was a geologist--a well-respected one. He persuaded Mr. Walsh to use his last $10,000 to buy the mineral rights to a patch of jungle on the Indonesian island of Borneo. Mr. Felderhof and his fellow geologist Michael de Guzman thought there was a good chance this property, called Busang, had gold on it. Core drilling began. Through this technique a hollow drill cuts out solid tubes of rock. This "core" is brought to the surface for analysis.

Not many weeks went by before gold was reported to have been found at the site. The core samples were analyzed and found to contain very rich gold reserves. Mr. Felderhof explained that a volcano had essentially "collapsed back onto itself" three million years ago. This had caused such a massive build-up of heat and pressure that it created a miraculous treasure. The Busang site was going to yield some 71 million ounces of the yellow metal, worth $25 billion. John Felderhof became even more optimistic: he said he was "comfortable" with 200 million ounces--far more than the California gold rush of 1849.

Fellow geologists, engineers, financial analysts, business journalists, the world's largest mining companies, government officials, even former U.S. President George Bush caught the gold fever. By early 1994, Bre-X stock was changing hands for $1.45 a share.

Bre-X was listed on the Alberta Stock Exchange and the price of its shares started to rise. Word was spreading fast that Bre-X had found the world's biggest gold deposit. Barrick Gold, the second largest gold company in the world was trying to buy Bre-X. Some of Canada's most respected financial companies became cheerleaders for Bre-X. At Nesbitt Burns Inc., star mining analyst Egizio Bianchini was one of Bre-X's biggest boosters on Bay Street. Following his advice, 10,000 Nesbitt customers bought and sold Bre-X shares through the brokerage.

Through 1995 and 1996, Bre-X shares were zooming upwards in value, boosted by strong recommendations to buy from big brokerages such as Scotia-McLeod and McLean McCarthy. In June 1995, it was selling at $7.75 a share and investors were being told by their financial advisers it was grossly undervalued. In May 1996, Bre-X shares split ten-for-one; each investor now received 10 shares worth $28.65 each for every share they owned. Some people were getting very, very rich by selling shares bought earlier, among them David Walsh, Michael de Guzman, and John Felderhof.

The news from the drilling site just kept getting better and better. Bre-X was now listed on the Toronto Stock Exchange. It was even moved into the TSX 300, the group of the Toronto exchange's most prestigious companies. Bre-X had a market capitalization of $6 billion; it had grown in value 100,000% in three years.

The party ended in March 1997.

Another company, Freeport-McMoRan, got into a partnership with Bre-X. It began drilling but couldn't duplicate Bre-X's gold finds. On 26 March, Freeport announced its study had found insignificant amounts of gold. A month later, Strathcona Mineral Services, hired to review what had happened at Busang, reported to Bre-X that there was no gold. The whole thing was an elaborate, and very clever, hoax. Taking advantage of the remoteness of the site, gold had been carefully added to selected bags of crushed drill core. The scam is called "salting," and it fooled some of the smartest people in the investment industry.

Just before the public announcement of Freeport's stunning news, Michael de Guzman fell, was pushed, or jumped from a helicopter over Borneo's jungle. What was left of his body was found a few days later. But, was it his body? It's hard to believe that having pulled off the swindle and made an enormous fortune, Mr. de Guzman didn't also have a scheme for getting away with it untouched by the law.

Some of the world's foremost experts in gold mining had been taken in; so had banks, stockbrokers, and thousands and thousands of small investors. There were some big casualties too: the Ontario Teachers Pension Plan lost $100 million; the Ontario Municipal Employees Retirement Board lost $45 million; and, the Newfoundland Public Sector Pension Plan lost $5 million. Those holding Bre-X stock when the music stopped lost everything.

David Walsh died in 1998 from a brain haemorrhage. John Felderhof moved to the Cayman Islands, a tax haven in the Caribbean, to live in luxurious retirement.

It's easy to say that those who got burned only have themselves to blame. Small, gold-mining companies are always a bit risky. Having your gold mine in one of the world's most corrupt countries, Indonesia, adds greatly to the risk.

So, stick with dull, boring stocks such as banks. Good advice unless you happen to be one of the folks caught in the RT Capital Management fiddle in July 2000. RT Capital was the pension-fund management arm of Canada's biggest bank, The Royal. The bank has since sold RT Capital.

Senior managers at RT Capital and a whole bunch of stockbrokers were playing a game called "high closing." The brokers worked for companies such as Merrill Lynch, Toronto-Dominion Securities, and CIBC World Markets. This is an illegal activity in which a stock is traded late in the business day in order to artificially boost its price. The price manipulation raised the value of RT Capital's own portfolios by about $38 million. This artificially improves the look of the pension fund managers' performance and pads their commission cheques as well.

The Ontario Securities Commission handed out the punishments. Nine employees of RT Capital were banned from trading and/or holding company directorships for periods ranging from a month to lifetime. Most resigned, probably because the only other option was to be fired. A variety of fines were doled out including a $3 million penalty against RT Capital.

But, industry watchers agreed that most of the punishments were little more than slaps on the wrist. The $3 million fine represents 0.18% of the Royal Bank's profit for 1999.

Unfortunately, this does not appear to be an isolated case; just a few rogue traders escaping the notice of inattentive managers. Altamira Management, which operates a score of mutual funds, was fined in 1997 for playing the "high closing" game. Other names in the world of financial institutions have been caught doing shady stuff by the Ontario Securities Commission--Gordon Capital (fined $6 million in 1993), First Marathon Securities ($4 million in 1998).

FACT FILE

Regulators say convictions in insider trading are hard to come by; the accused will always say they were trading on rumours or a hunch.

In early March 1997, the prestigious Prospectors and Developers Association of Canada gave its highest award, the 1997 Explorationist of the Year, to geologist John Felderhof.

In Canada's largest insider trading settlement, Laidlaw Inc. founder Michael DeGroote was fined $23 million in 1993 for allegedly trading on inside information.

Website

System for Electronic

Disclosure by Insiders--http://www.sedi.ca/

PRIVILEGED INFORMATION

Insider trading is against the law and it goes on all the time. An insider is anyone who owns 10% or more of a company's shares or works at the company's senior levels, including the board of directors, president, vice-presidents, or general manager. Insiders are also people who may have a special relationship with the company, including a spouse or relative of insiders, or a lawyer or accountant employed by the company. Such people are not supposed to trade shares in their own companies based on information available only to them.

Insiders can still buy and sell shares any time they want. But, they must report their trading to the provincial securities commission within a set period, generally by the 10th day of the following month. The trading is legal as long as they report it. Reported insider trading is usually published in business newspapers each month: a lot of it goes unreported though.

The Chief Financial Officer (CFO) of Black Pearl will be the first to know how well the company is doing. As he tallies up sales and expenses for the end of the quarter he can see whether the news will be good or bad. If the news looks exceptionally bad, will he hold on to his shares or sell them before they plummet when the bad news hits the street?

The temptation to sell is too much for many to resist.

Michael Cowpland, founder and former CEO of the Ottawa-based software company Corel Corp., is involved in an Ontario Securities Commission (OSC) case over insider trading allegations. A company Mr. Cowpland controlled sold $20 million of Corel shares five years ago, just before Corel posted poor earnings. The OSC has rejected a proposed settlement that would have seen Mr. Cowpland pay a $575,000 fine and his company pay a $1 million fine.

Another chief executive on the hot seat is K.Y. Ho, Chairman of ATI Technologies, a Canadian company that makes graphics cards for personal computers. In May 2000, ATI issued a warning that its profits were down sharply. This triggered a 42% decline in the value of the company's shares. The OSC alleges that Mr. Ho and five other senior ATI executives and their spouses sold company stock just prior to the profit warning.

Again, seemingly not isolated cases. The Globe and Mail investigated insider trading in 1999. The newspaper looked at 28 friendly mergers or acquisitions announced between July 1998 and July 1999, and reported that, "The study reveals a significant increase in share prices and trading volumes preceding public disclosure of deals, suggesting that a tight circle of insiders shares corporate secrets and people are illegally profiting from that information."

CON-ARTIST GLOSSARY

Some terms you won't find in textbooks about stock markets.

Churn 'em and Burn 'em--When a broker operates a client's account by frequent trading thereby generating large commissions and shrinking the value of the account.

Greater fool theory--The idea behind this is that even if you paid too much for a stock there is always a greater fool somewhere out there to whom you can sell that stock at a profit. Don't count on it; it is only a theory.

Greenmailing--Buying large quantities of shares in a company to create the threat of a takeover. The management of the target company, facing the loss of their jobs, can then be persuaded to buy the shares back at two to three times what was originally paid for them.

Painting the tape--Increasing the price of a stock by using unscrupulous methods (such as breaking up a large stock purchase into multiple small purchases to give the illusion of a buying frenzy).

Pump and dump--When a stockbroker, analyst, or shareholder encourages investors to buy a particular stock in an effort to raise its share price, and then to sell what he owns of the stock at the higher price.

Sucker's Rally--During a bear market the value of shares sometimes stops falling and gains are made encouraging investors to start buying stocks. But, the improvement in prices is brief and the general market decline resumes. Sometimes also called a "dead cat bounce."

Wash-trading--The buying and selling of shares under fictitious names. The seller and buyer are often the same person and the aim is to drive a share price up or down in order to make a profit.

ROBBING PETER TO PAY PAUL

There are those who say investing in the stock market is nothing more than a giant Ponzi scheme. They are referring to one Carlo Ponzi, an Italian swindler of the early 20th century. Signor Ponzi invented the pyramid scheme, which to work requires an ever increasing number of people to put money into it. In 1918, he set up the Securities Exchange Company in Boston, Massachusetts. The pitch was simple: Money invested in the exchange would pay 50% interest in 90 days. Mr. Ponzi was overwhelmed with money from potential investors. During one three-hour period, he took in $1,000,000. Some initial interest payments were made to early investors to entice new investors to come in. The high rate of interest was paid from the money put in by later investors. So, at a minimum, the Exchange had to double its number of investors every 90 days. Carlo Ponzi's scheme lasted two years before the pyramid toppled over because he could not find enough new suckers to come in to pay the interest to the suckers already there. Signor Ponzi scooped up $15 million at a time when you could buy a restaurant meal far a quarter. But, he lost it all and went to jail. Ponzi schemes, usually now called "pyramid schemes," are still being pulled today.