Former geologist sentenced to six years in prison

Former geologist sentenced to six years in prison for assay fraud

John Paterson bilked Southwestern Resources and its shareholders of $260.5 million by issuing bogus assay results

By David Baines, Vancouver Sun columnist

Former Vancouver geologist and mining executive John Gregory Paterson, who created and distributed hundreds of bogus assay results to boost the share price of Toronto Stock Exchange-listed Southwestern Resources Corp., has been sentenced to six years in prison.

“This was without question a very serious fraud that meets in substance all of the statutory aggravating factors,” Vancouver Provincial Court Judge Harbans Dhillon stated in her 64-page decision, which she orally delivered on Friday.

Crown prosecutor Ian Hay had sought a 10-year prison term. Rod Anderson, who represented Paterson, asked for a term of two years less a day, to be served in the community. Alternatively, he sought a three-year prison term.

Paterson, who is now 62 years old, sat silently while the judge read her decision. When the proceeding was completed, he blew a kiss at his wife Joan and waved to his lawyers before a sheriff escorted him through a back door to his new life as a prison inmate.

Paterson was the president, chief executive officer and largest shareholder of Southwestern in 2002 when it optioned a prospective gold property in China (the Boka project).

He assumed responsibility for the exploration program and served as the “qualified person” — the person responsible for compiling and disseminating information about the project, including assay results.

From May 2003 to February 2007, he issued 25 consecutive releases reporting favourable assay results on the Boka project. This prompted the share price to increase and the company to incur more exploration-related expenses.

Problem is, the assays were not true. Of the 446 assay results, he had inflated 433 of them. When the ruse was discovered in July 2007, the share price plunged.

In December 2010, he was charged with nine counts of defrauding Southwestern and its shareholders. Last September, just before the trial was set to begin, he pleaded guilty to four counts.
The 11th-hour plea turned the anticipated trial into a sentencing hearing, but there was still substantial disagreement about the aggravating and mitigating circumstances, in particular the amount of damage the fraud inflicted on the company and its shareholders.

In passing sentence Friday, Dhillon noted the duration of the fraud, its evolving sophistication and the magnitude of the loss.
“Mr. Paterson’s falsifications and misrepresentations of the Boka gold assay data resulted in total losses of $260.5 million,” she said. “This was a large-scale, massive fraud committed on the investing public and on Southwestern Resources.”

She said Paterson took advantage of the high regard in which he was held in the community to commit his offences, then took active steps to cover up and delay discovery of his fraud. Among other things, he recruited the on-site project manager, John Zhang, to assist in the fraud and paid $500,000 “to secure his loyalty and silence.”

On the other hand, she said, Paterson had entered an early guilty plea, made voluntary financial reparations and had cooperated with investigators.

The judge also noted that Paterson “was raised in an environment of illness and tragedy.” His father, who was remote and demanding, died when he was 13. His mother suffered from depression and was committed to a psychiatric hospital when he was 10, and eventually committed suicide.

The judge said Paterson also suffered from depression, panic attacks and anxiety, triggered by work and family pressures. He required hospitalization and ongoing treatment as a UBC Hospital outpatient.

She said Paterson, although he benefited professionally and financially from his fraud, was not driven by greed, “but by a combination of factors including his underlying mental health problems and his fear of failure. He held the belief that lying about the early poor results would be overcome by better results through drilling.”

She noted that he had acknowledged the harm his conduct had caused and expressed remorse for his actions.

Paterson also suffered other adverse consequences. After the fraud was detected, he was pursued by the B.C. Securities Commission. In June 2009, he admitted to fraud and illegal insider trading, and agreed to a lifetime ban from the B.C. marketplace. Among other things, he can never again serve as a qualified person.

Although he lived and worked as a geologist in Vancouver, he was licensed with the Australasian Institute of Mining and Metallurgy in Australia. A week after he signed the settlement agreement with the BCSC, the institute permanently revoked his membership.

dbaines@vancouversun.com

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