2013-01-18 18:15 ET - Street Wire
by Mike Caswell
Geologist John Paterson has received a sentence of six years for rigging assay results in Southwestern Resources Corp. Provincial Court Judge Harbans Dhillon handed down the sentence on Friday morning, describing his scheme as a "large scale fraud" that inflicted losses of $260.5-million on investors. Judge Dhillon found that Mr. Paterson committed a breach of trust during four years in which he caused the company to report inflated gold figures.
The sentence comes four months after Mr. Paterson, 62, pleaded guilty to criminal charges stemming from the inflated results. Prosecutors claimed that he overstated as many as 443 figures in 25 news releases. The end result of his scheme was that Southwestern had to had to publicly state that all results from its Boka project in China could not be relied upon. The subsequent sell-off sent the stock to $2.90 from $6.34 in one day, and eventually wiped out $300-million in market capitalization, prosecutors said. Mr. Paterson, who had been the company's president since 1991, resigned just before the collapse.
Although the judge found Mr. Paterson responsible for substantial investor losses, she also said there were a number of mitigating factors, including three depressive episodes that Mr. Paterson suffered. The most recent occurred in 1999, after Southwestern reported poor drill results from a project in Peru. She found that Mr. Paterson's history of depression, combined with the loss of substantially all of his assets in investor lawsuits, weighed in favour of a lower sentence.
Other factors, including Mr. Paterson's personal trading profits of $5.63-million and the large scale of the fraud, called for a lengthier term, the judge found. She said he consciously altered assay results and did so in a manner that benefited himself both personally and financially. While he did not carry out the scheme purely for financial gain, it was a factor to consider in sentencing, the judge ruled.
One of the major issues at sentencing was the defence's position that depression played a part in the fraud. Defence lawyer Rod Anderson presented evidence that Mr. Paterson came from a difficult background, with his mother being institutionalized when he was 10 and his father dying of stomach cancer when he was 13. In 1978, his mother committed suicide.
The problems stayed with him into adulthood. Although he presented as a "hard-working, respectable geologist," he had a very private battle with mental illness, the judge found. He was vulnerable to bouts of depression that could be triggered by family or employment stress. These eventually affected him at work, with a health care professional diagnosing him with severe clinical depression in 1997 after a Peruvian partner terminated a joint venture with Southwestern.
He returned to work after the diagnosis, but in 1999 his depression reappeared. Southwestern reported poor drill results from Peru, leading Mr. Paterson to attempt suicide. He was hospitalized after the attempt. The hospital stay and subsequent recovery kept him away from work for four months, but upon his return he appeared to be normal. People he dealt with regularly did not notice anything out of the ordinary, and he kept his illness to himself.
The problems, as described by the judge, resurfaced within a few years. In 2003, facing what he testified was "intense pressure" to produce results, Mr. Paterson began falsifying assay figures. At first the inflated figures were somewhat random, but they grew into a "geologically plausible" model, the judge found. The falsified figures were "deliberately chosen" to show continuous mineralization in a manner that would not raise any suspicion.
The problem he faced was that with the successful results, Southwestern eventually had to produce a prefeasibility study. Such a study would involve independent verification of the company's assays, which would expose the inflated figures. Facing the discovery of his fraud, he undertook an effort to frustrate the study, the judge found.
He personally transferred $500,000 (U.S.) from an offshore account to a Southwestern employee in China named John Zhang. The judge found that Mr. Zhang's job was to "run interference" and keep any independent samples from leaving the project. Among other things, Mr. Zhang mixed, moved and misplaced drill core.
Ultimately this only delayed the discovery of the fraud. The company's other executives eventually suspected problems, and started comparing original assay certificates with the reported results. After Mr. Paterson resigned, they discovered that the results were substantially overstated.
Among the aggravating factors that Judge Dhillon considered were the large scale of the fraud and the fact that Mr. Paterson, as the company's qualified person, was in a position of trust. Also a factor was the fact that the deception covered 25 separate press releases, and that Mr. Paterson tried to cover up the fraud.
In mitigation, the judge found that he accepted responsibility fairly early on. When the assay problems became public, he suffered a mental breakdown and was hospitalized for six weeks. After that, he began the process of settling a case he faced from the B.C. Securities Commission and eventually lost substantially all his assets by paying $7.8-million to settle a class action lawsuit from investors. The judge also found that he was not motivated by greed, and had not lived a lavish lifestyle during the scheme.
Even with the six-year sentence, Mr. Paterson could receive parole in as little as one year. The judge found that he is entitled to be considered for parole under the rules that existed before the federal government abolished the accelerated parole review. This means that he can apply for parole after serving one-sixth of his sentence, or one year. (Under the new rules, he would have to serve one-third of his sentence, or two years.)
After receiving his sentence, Mr. Paterson quickly said goodbye to his wife and other family members before a Sheriff led him away.