# Warning signs before Bre-X collapsed



## hlpme (Dec 3, 2017)

Bre-X was a major gold company that was involved in massive fraud in the late 1990s. I was not old enough to be in the stock market then. Wonder if there are old-timers who were in the vicinity then. What were some warning signs that investors could have heeded to avoid the Bre-X fraud or better still, sell before the share price collapsed?


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## Koogie (Dec 15, 2014)

hlpme said:


> Bre-X was a major gold company that was involved in massive fraud in the late 1990s. I was not old enough to be in the stock market then. *Wonder if there are old-timers who were in the vicinity then.* What were some warning signs that investors could have heeded to avoid the Bre-X fraud or better still, sell before the share price collapsed?



Speak up sonny, I can barely hear you. Hmm.. deaf already in my forties.:sorrow:


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## Batwanger (Jan 13, 2018)

*I Remember that*

My brother in-law lost some money in that and if I remember correctly the collapse of Bre X was rather quick. I dont think there were any warning signs. The gold from the core samples was NOT from the cores BUT it was instead found out that the gold was from riverbeds and put in the samples that were from the core. Once the very first few questions began to be asked I think management dropped everything and took off into hiding. I also believe that one of them was thrown out of a helicopter. You'll be able to easily Google that info I'm sure. Now, as far as warning signs leaked to the shareholders....I don't believe there were any at all as the collapse happened over a very short amount of time. 
Hope this helps.


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## AltaRed (Jun 8, 2009)

There are few warning signs of collapse of a company because either management was in on the fraud, or they lacked internal business controls, or there were other similar deficiencies in management style. One should always question the business model or management of a company that significantly out performs others in the same sector. Bre-X management did nothing to caution investors on the parabolic ramp up of their stock and the media feeding frenzy that existed with this stock. They just let it run without saying appropriate due diligence had not yet been completed. When the hairdresser and the taxi driver are cheerleading a stock, you know something is suspect.

Enron was an example of management fraud. I worked in the same business and none of us in the 'honest' companies marketing NG and electricity could understand how the Enron numbers could possibly work over a period of 5 years or more. There is no question some companies out perform others due to skill, strategy, etc. but not by the significant degree Enron seemed to be doing. Analysts were not asking the right questions either.

Even Manulife was a much tamer example of a lifeco taking excessive risk in equity markets (versus bond markets) than its competitors and Manulife crashed a lot harder during the financial crisis, and remained in the gutter for some time thereafter. No analysts saw that coming either. Before the financial crisis, Manulife was out performing Sun Life in its business performance and stock prices of each were about the same when the financial crisis started. Now look at the stock price of the 2 companies. Manulife remains well behind Sun Life in terms of recovery.


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## kcowan (Jul 1, 2010)

When any company goes parabolic, you need to set your goals for 2x or 3x and then exit. Pigs get slaughtered.


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## Oldroe (Sep 18, 2009)

Crazy share price increase on nothing was biggest sign. 

Cuseman jump out of airplane no parachute.

Never made 1 commitment.

Most important it was on the 6 o'clock news.


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## Just a Guy (Mar 27, 2012)

The warning signs I really remember was all the hype. There was a lot of media releases, all claiming it was possibly the bigggest gold find ever, or something to that effect. Everyone and their dog was trying to jump on board (think today's weed stocks). It was literally in the news everyday, despite not having any actual information or real numbers. If you ever study scams, cons, pyramid schemes, etc. It had similar telltale signs.

Of course, at the time, no one really knew it was a scam, and there is, of course, the possibility that it wasn't one so, when you are going through the process, it's easy for people to ignore the warning signs, especially when the stock is going up, up, up.

Nortel was another company at the time. I remember me and a buddy sitting around at lunch discussing how Nortel was selling equipment to customers and financing all the equipment they sold. Then, according to their books they were reporting profits from the sales as well as the financing (so they were paying to sell their own stuff with their own money and claiming both as a profit stream, yet they never collected a dime, they just had a bunch of iou's from mostly internet companies who were losing money like crazy). 

Of course, because of the huge sales and strong financial division, Nortel stock was he darling of the market and went up, up, up...it was in the news daily, everyone and his dog was trying to get in (think Enron, worldcom, etc.). 

If you refused to invest in these companies, people mocked you. Most people were addicted to their papaer gains and refused to even consider selling. When they imploded, people poured money into them despite reports that the companies were doing questionable practices. Think internet stocks of the 90's. No income, no sign of income, but they had a ".com" in their name and lots of people looking/talking about them. 

BreX, Nortel, worldcom, Enron, internet stocks, weed stocks today...all could have made you a lot of money. None of them fit my investment criteria so I missed the boat on them. My criteria involves buying companies which I understand, know their products, and are usually not talked about a lot because they aren't the "sexy" stock of the day. 

More stocks I've missed out on are ones like sino-Forrest. An advisor I know loved that stock. He'd really pump it for a while, then go quite about it for a while, then pump it again. I started to track the stock. When he'd pump it, it would go up. When he was quiet, the stock was dropping. When he'd pump it, the stock was going back up. The long term trend seemed to be the stock was fairly flat between the rises and drops. The advisor had all sorts of reports about what the company (listed on the Canadian exchange but located in china) about all the trees the company had access to, how it was expanding into new areas like producing hardwood flooring, etc. But all these reports were issued by the company itself, never verified by outside sources (no financial advisor actually looks at companies anymore, especially ones outside the country). It had a super high rating average from brokerage houses (4.5/5), it was a sure thing...then the truth came about and it was a scam.

There are lots of signs out there if you look. The problem is, when you're in the middle of all they hype, and the stocks are going up, up, up, the news media is talking about the companies all the time, everyone is bragging about their papaer profits, it's hard to not dismiss them as people who are foolish. There is always a chance that this stock is legit. We'll see what happens with weed stocks. After all a market of 35M, most of which won't be users, is about to open up...that's like the population of New York. The profits are probably unbelievable...

Another good modern example would be bitcoin. Worth watching to see how it turns out. It has the same classic warning signs that no one wants to see. Maybe it'll be different this time. 

If the hype doesn't justify the pricing of the stock, it's probably too good to be true. Of course, if you're smart and sell out before the bubbble bursts, you could do quite well.


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## Rusty O'Toole (Feb 1, 2012)

If you are curious there are several books about the BreX affair. And no doubt, articles on the internet. I had the same questions at the time. What I found out was, there was a strong whiff of fraud about the company from the start. Most people in the industry thought it was dodgy and wouldn't touch it. The investors were from far enough away all they saw was the slick publicity. I dare say, anyone who did their due diligence and read the company's reports would have smelled a rat. But, there are always lots of investors who buy anything they think is going up without doing any checking at all.

I might also say Canada has a name for phony mining stocks going back many years. There were billions taken from American suckers on the Toronto Stock Exchange in the fifties, and the Vancouver Stock Exchange in the sixties seventies and eighties every year.


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## jargey3000 (Jan 25, 2011)

...all I seem to remember is that I think I made about 2 grand, toward the end, when the price was jumping up & down...
just lucky timing....could've just as easily lost...


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## AltaRed (Jun 8, 2009)

Rusty O'Toole said:


> I might also say Canada has a name for phony mining stocks going back many years. There were billions taken from American suckers on the Toronto Stock Exchange in the fifties, and the Vancouver Stock Exchange in the sixties seventies and eighties every year.


Indeed. If one spent much time outside Canada as an expat, you'd find out Canada's stock exchanges, especially the regional Vancouver, Alberta, etc. ones at the time, had a terrible global reputation, and rightfully so. While we have cleaned up our act quite a bit with more centralized exchanges and oversight, our Venture exchange is still seen as a shady, frontier, buyer beware, exchange. I've never so much as considered buying off the Venture exchange and I wouldn't touch half the stocks on the TSX either. We simply don't have effective regulatory oversight to catch and punish perpetrators, and they know it. The deterrent is almost non-existent.


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## kcowan (Jul 1, 2010)

Yes the VSE was run by the Howe Street Boys. Around 2pm they would gather in the bar at Trader Vics and discuss their latest "goose". Whales were reserved for the more senior exchanges.

When the TSX Venture started to crack down, they migrated to the pink sheets at NASDAQ. They would tell their marks that they were listed on NASDAQ. Some good momentum plays. Seldom anything permanent.


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## Eder (Feb 16, 2011)

One thing that sticks out for me in that era was when Diamond Field Resources actually hit the nickel gusher in Voisey Bay. I owned a lot of moose pasture around the area but lost my ***. 

There was one stock called Cartaway Resources. The month before the strike they were a company dumping garbage cans in various cities...they changed there name to "Cartaway Resourses" bought some moose pasture, put a few press releases out of bogus drill results and their shares jumped from $.30 to almost $15 in a couple days. Remind anyone of any thing going on in the markets today?...


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## hlpme (Dec 3, 2017)

Thanks for the comprehensive reply. Even well-known hedge fund manager John Paulson got hit by Sino Forrest. Nortel was truly an unfortunate case because it was the among the biggest component stock of the TSX60 stock index. Passive investors would have been badly hit.



Just a Guy said:


> The warning signs I really remember was all the hype. There was a lot of media releases, all claiming it was possibly the bigggest gold find ever, or something to that effect. Everyone and their dog was trying to jump on board (think today's weed stocks). It was literally in the news everyday, despite not having any actual information or real numbers. If you ever study scams, cons, pyramid schemes, etc. It had similar telltale signs.
> 
> Of course, at the time, no one really knew it was a scam, and there is, of course, the possibility that it wasn't one so, when you are going through the process, it's easy for people to ignore the warning signs, especially when the stock is going up, up, up.
> 
> ...


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## hlpme (Dec 3, 2017)

To be on the safe side, I stick to stocks listed on the Toronto Stock Exchange. I avoid the smaller cap stocks on the smaller exchanges. 



kcowan said:


> Yes the VSE was run by the Howe Street Boys. Around 2pm they would gather in the bar at Trader Vics and discuss their latest "goose". Whales were reserved for the more senior exchanges.
> 
> When the TSX Venture started to crack down, they migrated to the pink sheets at NASDAQ. They would tell their marks that they were listed on NASDAQ. Some good momentum plays. Seldom anything permanent.


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## Oldroe (Sep 18, 2009)

Ballard Power was another from the tec boom think it got up to $300.

I picked fruit off Nortel and weed stocks.


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## Just a Guy (Mar 27, 2012)

It's very tempting to invest in these types of stocks, money flows freely, people around you are bragging about their paper wealth, he talking heads are hyping them daily...

As you can see, I've looked into all of them during their times. I'm no genius, but I do have rules that I use to invest by. My rules are far from perfect, are quite conservative by most measures but, as proven over time, they have protected me from the temptation of investing against my personality. As I said, there was a way to make a lot of money on these stocks on the run up (getting out with something as opposed to being greedy and losing everything), but I don't like to watch the markets much, and I'm not a trader I'm a buy and hold investor. Even when I know something needs watching, I'm not the type to actually do the watching, so I developed rules to protect myself.


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## DavidW (May 27, 2016)

hlpme said:


> To be on the safe side, I stick to stocks listed on the Toronto Stock Exchange. I avoid the smaller cap stocks on the smaller exchanges.


The listing requirements for the TSX do imply a little more safety though for something like the Bre-X scandal that won't make things safer. The mining industry is needed for a variety of basic materials. In my opinion the problem the mining industry has is how to finance initial exploration, which is like spending money to build 1000 prototypes before find you find something that might work except that you can't think up or calculate the concept in advance. How do you even build a case for investment when you don't even know what you will be starting with? These small exploration companies are complete speculation until they can build that prototype they need for a prospectus that could show a return and is why they have a story they present leading to the emotions and stock price volatility they often exhibit. I keep these speculative positions in my non-registered cash trading account, the speculation money is allocated and if the speculation results in a loss I can apply that loss against capital gains.

Another issue is that they often issue so many shares trying to get the prototype the stock is diluted and makes raising more investment money hard. Most share consolidations I have seen did not work out well for the time frame the average person making these speculations has when there is no existing production, I do remember Kinross seemed to do well after a consolidation when they had other existing production. 

I don't have a better idea to using this prototype model for exploration. Investor emphasis around the senior stock exchanges seems to be on how much money companies are earning and how they are growing those earnings, certainly safer for the investor and the way I am investing now. When I was younger, working, and building up my equity the biggest gain I achieved was with a junior mining company which was bought out using a risked capital allocation smaller than a lot of the risk allocations I do now. That said not many of these speculative companies get bought out so it is rather easy to lose money on them, rarely did I get the chance to collect on a triple as I had already sold. At the time I was following this sector a lot I thought it was safer than going to a casino.


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