Bre-X's sister company still holds $27-million in cash
Sean Silcoff. Financial Post. Published in the
National Post. Canada, December 21,
2001.
Frank Smeenk was getting desperate. In August, 1998, 11 years after leaving
a law career to seek his fortune, Mr. Smeenk found himself heading a pair of
cash-strapped junior exploration firms and running out of options.
So he turned to an unlikely source of funds: Bre-X Minerals Ltd. More
precisely, the London, Ont.-native began eyeing two of the defunct Bre-X's
sister companies -- Bro-X Minerals Ltd. and Bresea Resources Ltd. Both had been
left in limbo by the Bre-X bankruptcy and the death of disgraced founder David
Walsh. But they each had something Bre-X lacked: real assets.
Bro-X's bank account contained close to $1-million; Bresea had $27-million
in cash and still owned the Calgary building that once housed Bre-X.
Taking a run at Bro-X and Bresea would be no small feat. Both had been in
receivership since the Bre-X fraud was exposed in May, 1997, subject to
cease-trading orders and delisted from Canadian exchanges.
Shareholder lawsuits were claiming billions of dollars.
But that didn't stop Mr. Smeenk. First he tried to take over Bro-X. Then he
launched a bid for Bresea. And a second. And a third.
His persistence led to an unlikely three-way bidding war early this year
that resembled a dollar-store version of Barbarians at the Gate.
His perseverance also attracted the attention of regulators, who eventually
took away his job and his right to trade stocks.
Mr. Smeenk would lose the battle for Bresea to MFC Bancorp Ltd., a
mysterious merchant-banking operation based in Ireland, registered in the Yukon,
traded on the Frankfurt Exchange and run by a Swiss-based British citizen. MFC's
most profitable asset is a stake in a Newfoundland iron ore mine.
If all goes according to plan, an MFC-controlled Bresea could be trading
again by spring, with a new name, most of its assets, and all of its troubles
behind it.
But Bresea's new management still has one problem: Frank Smeenk. In recent
months, the 54-year-old Mr. Smeenk and his company, MacDonald Oil Exploration
Ltd., have made every possible legal move to torpedo the MFC takeover. "There
are some things you should do because they should be done, and that's how my
partners feel about it," says Mr. Smeenk. "And I'm not about to quit
on them."
- - -
It was early 1996 and Frank Smeenk was the toast of Cuba. In three
years, he had taken control of the dormant MacDonald Mines Exploration Ltd. and
turned it into a "Cuba play" by picking up a
2,000-square-kilometre gold concession.
He then spun out a new company, MacDonald Oil, which picked up its own Cuba
concession.
"It was obvious there were opportunities," he says. "The
place was crying out for investor capital."
Mr. Smeenk was rubbing shoulders with Cuban officials and sitting on an
international trade advisory board. In 1996, MacDonald Mines found gold in its
first drill hole; the stock shot up to $3.15 from 45¢ in one day, and Mr.
Smeenk was worth, on paper, $25-million.
For Mr. Smeenk, the eldest of nine children, it was vindication time. A
soft-spoken man described by friends and colleagues as affable and reasonable,
he chose to study law at his hometown University of Western Ontario in the early
1970s, but was never really happy with his decision.
"In the back of my mind I was always looking for an opportunity to do
business," he says. "In the perfect world Labatt would have plucked me
out of my law practice and made me president."
In the mid-1980s, a friend invited him to help turn around financially
troubled Deak Perrera Inc., a New York-based currency and commodities trading
firm. Mr. Smeenk moved to Toronto and used his knowledge of insolvency law to
help in the restructuring but was soon drawn to the company's dormant Canadian
mining interests. By 1993, he was in control of one of them, MacDonald Mines.
"I like the whole idea of mining," he says. "You're taking
something God put in the ground and turning it into [something of] value."
And, he adds, there's always the "the bonanza potential."
But the bonanza in Cuba never came. The second drilling program
yielded disappointing results. Then, in February, 1996, Cuba shot down
two American planes, leading to harsher economic sanctions from the U.S. Gold
prices fell and the Bre-X fraud sent the junior exploration market into deep
freeze. MacDonald Oil signed away most of its Cuban claims after a fruitless
drilling program. MacDonald Mines wasn't faring any better.
Then in July, 1998, he read an article about Bro-X, which had been founded
by Mr. Walsh at the height of the Bre-X frenzy. Mr. Smeenk learned Bro-X had
$1-million in the bank, and the court-appointed receiver was trying to find
somewhere to invest it. Bresea had even more cash.
"There wasn't any money around for exploration," he says. "This
looked like a perfect opportunity."
Bre-X, Bresea and Bro-X all sought protection from creditors the day after
the Busang gold find was revealed to be a hoax. Their publicly owned shares were
stopped from trading and delisted. And the lawsuits piled up.
But Bro-X and Bresea were still solvent. (The Alberta Court of Appeal ruled
Bresea had too much cash to be petitioned into bankruptcy and ordered
PricewaterhouseCoopers LLC to stay on as interim receiver.) The Walsh family and
Bre-X trustee Deloitte and Touche remained the biggest of Bresea's 8,000
shareholders, with 19% and 12% of the stock, respectively.
Kurt Bonokoski, PriceWaterhouseCoopers's (PWC) president, realized early on
that Bresea could probably strike a deal with litigants that would let the
company keep most of its cash. Mr. Smeenk thought so, too.
"He has a sort of natural intellectual curiosity about him; I think
that's what got him into this," says of friend of Mr. Smeenk's who works on
Bay Street. "That, and he's an eternal optimist. In hindsight, it's easy to
say he was naive."
Once Mr. Smeenk got the idea of liberating the cash from Bro-X and Bresea,
he wouldn't let go.
"It was a deal that we could do, it was there to be done," he
says.
In September, 1998, MacDonald Oil signed a letter of intent with Bro-X's one
remaining director to merge the two companies. But PWC nixed the idea and the
offer expired.
That same month, MacDonald Mines proposed a similar merger deal with Bresea.
PWC objected on the grounds there were "several outstanding actions against
Bresea which remain to be resolved." It too expired.
One week, two failed offers. It was only the beginning. On June 8, 1999,
MacDonald Oil announced its second takeover bid for Bresea, a share swap with no
money changing hands. A takeover circular was sent to shareholders.
But PWC said the offer wasn't in the best interests of shareholders. "We
just had some concerns about the asset base of the company," Mr. Bonokoski
says. "It was basically an empty shell, except for some holdings in Cuba,
which were highly speculative."
But regardless of their merits, takeover offers are supposed to be put to
boards of directors, not receivers. Bresea's last director, Mr. Walsh, had died
the previous year, and PWC hadn't appointed a new board or filed any financial
statements.
Meanwhile, shareholders responded favourably to the bid. By July 12, they
had tendered 22 million shares out of 65.5 million shares outstanding.
Ontario and Alberta securities regulators swooped in to end the confusion,
slapping a cease trade order on the offer. All shares tendered to MacDonald Oil
had to be sent back.
Mr. Bonokoski realized PWC had to get Bresea's house in order before another
bidder came calling. He organized an advisory committee of shareholders, which
told him to settle the lawsuits, call a shareholders meeting and find a business
opportunity for Bresea.
In October, 2000, PWC reached a tentative settlement to end all litigation
against Bresea, which would payout $10-million of Bresea's cash and create new
shares to be given to claimants. The deal would go to a vote at a shareholder
meeting in early 2001.
The day after PWC announced the tentative deal, MacDonald said it would bid
for Bresea a third time. Behind the scenes, however, OSC and ASC enforcement
officials were preparing to bring the hammer down on Mr. Smeenk. After his
previous Bresea offer, the regulators became concerned with disclosure problems
in the circular and decided to investigate further. They found Mr. Smeenk had
failed to file more than two dozen insider trading or early warning reports
since 1995. MacDonald Oil had also failed to file financial statements for two
years and to meet disclosure requirements during a 1997 rights offering.
Mr. Smeenk had been working with the commissions to clear up the problems
for the past year, but they told him it wasn't enough. If he wanted to make
another bid he would have to sign a settlement agreement, or they might issue
another cease-trade order against him. "It was clear [a new cease-trade
order] was an option we would consider if a settlement with regulators was not
approved," says OSC spokesman Frank Switzer.
Last Jan. 12, Mr. Smeenk agreed to an order prohibiting him from acting as
an officer of MacDonald Oil for two years. He was also banned from trading in
securities for one year.
- - -
Just as MacDonald Oil was about to make its third bid, MFC Bancorp announced
in December it was offering 15¢ a share to Bresea shareholders.
MFC was once better known as Canadian Javelin Ltd, which had been run by
John C. Doyle, who died in Panama after skipping Canada to avoid facing 400
counts of defrauding his company in the early 1970s.
Canadian Javelin was taken over in the 1980s by an investor group led by
British mergers and acquisitions specialist Michael J. Smith, renamed three
times and spun out as publicly traded MFC in 1996. MFC, according to its most
recent annual report, now specializes in "advising and structuring business
enterprises involved in unstructured and novel situations where a strong
financial partner is needed and the traditional off-the-shelf solutions are not
workable." It also owns a Swiss bank.
Some of those off-the-shelf solutions have led to a spate of lawsuits.
Claims before courts in New York, Delaware and Pennsylvania allege that MFC,
some of its associated companies and Mr. Smith have committed fraud, breach of
contract, theft of control and in one case, "the looting and almost
complete gutting" of other public companies.
The claims have not been proven in court and "are unsubstantiated and
vigorously denied by MFC," says Roy Zanatta, an MFC director and secretary
of Bresea.
- - -
Mr. Bonokoski wasn't happy with Bresea's suitors. MacDonald was the same
shell company as before, offering shares, warrants and dreams for Bresea's real
assets. MFC's surprise offer seemed too cheap.
So Mr. Bonokoski found a white knight in Ronald Mathison, a Calgary
millionaire and partner of local business hero Murray Edwards. The receiver
reached an agreement with Mr. Mathison in early January and issued circulars
urging shareholders to reject the other two bids and accept his 21¢ per
share offer.
The cease-trade orders were partially lifted and the battle for Bresea was
on. MacDonald kept to its offer of MacDonald securities for Bresea shares; Mr.
Mathison and MFC bid each other up to 26¢ per share in cash. The Feb. 5
shareholders' meeting loomed.
Then, Mr. Mathison, deciding the bidding had gotten out of hand, dropped out
of the race. MFC entered into a voting agreement with the Walsh family. When the
votes were tallied, MFC had seized control of the Bresea board and taken up 12.9
million shares to MacDonald's 1.3 million.
Mr. Smeenk had lost Bresea after two years and three tries. As a final
insult, the Canadian Venture Exchange wrote Mr. Smeenk to say he could no longer
be an officer of any CDNX company because the settlement with the OSC and ASC "gives
us reason to question your ability to properly manage the affairs of an
exchange-listed company."
- - -
In the past few months, the new MFC-controlled Bresea board of directors has
renegotiated a new settlement agreement that would pay $9-million to settle all
outstanding lawsuits and issue millions of new shares to claimants. The Alberta
court signed off on the deal in late August. The Ontario Superior Court of
Justice, where the Canadian class-action Bre-X lawsuit is proceeding, followed
suit in October. Bresea is awaiting approval from the U.S. District Court in
East Texas -- where the U.S. class action Bre-X lawsuit is being heard -- before
the agreement can be finalized, the receiver discharged and applications made so
the stock can trade.
When that happens, shareholders will know Bresea by its new name -- Sasamat
Capital Corp., and its new mandate, which, according to Zanatta, is to "focus
on investing in unstructured, unusual or distressed situations where assets or
businesses can be acquired without paying a premium to their fundamental values."
But for Mr. Smeenk, and the new management of MacDonald Oil, the battle for
Bresea rages on. MacDonald has instituted proceedings before the Quebec Superior
Court asking that MFC's takeover and the election of its directors be declared
null and void, appealed the Alberta court's approval of the settlement, and
asked the Quebec Securities Commission to set aside a vote by shareholders last
August approving the proposed settlement agreement. The main contention is that
MFC's winning bid contravened securities laws because the deal with the Walshes
made it a related-party transaction, and inadequate disclosure was provided to
shareholders.
"Justice will prevail," Mr. Smeenk says. "I think at the end
of the day we'll get a fair hearing from the Bresea shareholders."
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