McNamara v. Bre-X Minerals Ltd. (197 F. Supp. 2d 622, 2001)

MEMORANDUM OPINION AND ORDER

FOLSOM, District Judge.

TABLE OF CONTENTS

I.INTRODUCTION. ,629

II.RELEVANT LAW. .630

A. 10b-5 Claims. ,630

B. Pleading Requirements. 631

III. FOURTH AMENDED COMPLAINT 632

A. Introduction. 632

B. The Bre-X Gold Fraud . 635

IV. KILBORN DEFENDANTS. 670

A. Pleading Misrepresentation_ 670

B. Pleading Scienter. 674

V. J.P. MORGAN. 679

679 A. Pleading Misrepresentation or Omission

B. Pleading Scienter. 680

C. J.P. Morgan’s Motion to Dismiss Claims of Purchasers Prior to July 23,1996 and After March 27, 1997.683

YI. BARRICE .684

A. Pleading Misrepresentation or Omission.684

B. Pleading Scienter.688

VIL NESBITT BURNS. 690

VIII. LEHMAN.693

A. Pleading Misrepresentation or Omission.693

B. Pleading Scienter.693

IX. STATE LAW CLAIMS.697

X. CONCLUSION .699

I.

INTRODUCTION

This is a securities fraud case. Seeking class certification, the named Plaintiffs are persons who purchased common stock of Bre-X Minerals Ltd. (“Bre-X”) and/or Bresea Resources Ltd. (“Bresea”) between January 17, 1994 and May 2, 1997 alleging that Bre-X publicly and fraudulently announced increasingly large gold resource estimates — from less than three million ounces in 1994 to 200 million ounces in February 1997 — for its Busang properties in Indonesia. As these estimates increased, Bre-X’s stock price rose from C$2.85 in early 1995 to C$224.75 in early 1996. Plaintiffs allege that over the class period, Bre-X “salted” its core samples and that these resource estimates were based on tests of these samples.

In addition to Bre-X, Bresea, and eight officers and directors of these companies, Plaintiffs name several institutional defendants: (1) P.T. Kilborn Pakar Rekayasa, Kilborn Engineering Pacific, Ltd., and SNC-Lavalin, Inc. (“Kilborn Defendants”), engineering companies that Plaintiffs allege performed resource estimates, mine pre-feasibility studies, and other services for Bre-X and issued false and misleading reports regarding Bre-X’s gold reserves; (2) J.P. Morgan Securities, Inc. (“J.P.Morgan”), an American investment bank hired by Bre-X in September 1996 as a financial advisor to aid in negotiating with potential joint venture partners to develop a mine at Busang; (3) Barriek Gold Corporation (“Barriek”), a Canadian mining company that Plaintiffs allege disseminated false and misleading statements in the course of its joint venture negotiations with Bre-X; (4) Nesbit Burns, Inc. (“Nesbitt”), a Canadian investment bank and broker-dealer that Plaintiffs allege issued false and misleading securities research reports regarding Bre-X’s gold reserves; and (5) Lehman Brothers, Inc. (“Lehman”), an American investment bank and broker-dealer that Plaintiffs allege issued false and misleading securities research reports regarding Bre-X’s gold reserves.

The Court granted previous motions by these institutional Defendants to dismiss the Plaintiffs’ Second Amended Complaint as to them on July 13, 1999. (Dkt. No. 370.) See McNamara v. Bre-X Minerals Ltd., 57 F.Supp.2d 396 (E.D.Tex.1999). The Plaintiffs then filed a Third Amended Complaint on August 19, 1999. (Dkt. No. 374.) On February 18, 2000, Plaintiffs requested leave to file a supplement to this third complaint. The Court granted Plaintiffs leave, but ordered that any additions be incorporated within a fourth amended complaint instead of merely a supplement. Plaintiffs filed their Fourth Amended Class Action Complaint on June 14, 2000. (Dkt. No. 437.) The following motions to dismiss this 189-page Fourth Amended Class Action Complaint under Federal Rules of Civil Procedure 12(b)(6) and 9(b) are pending:

• P.T. Kilborn Pakar Rekayasa (“P.T.Kilborn”) (Dkt. No. 446);

• Kilborn Engineering Pacific Ltd. (“Kil-born Engineering”) (Dkt. No. 444); and

• SNC-Lavalin, Inc. (“SNC-Lavalin”) (Dkt. No. 442);

• J.P. Morgan (Dkt. No. 448);

• Barrick (Dkt. No. 441);

• Nesbitt (Dkt. No. 450).

• Lehman (Dkt. No. 451);

These Defendants move to dismiss both the federal securities claims and the state common law claims. After reviewing these motions, Plaintiffs’ responses, and any replies, the Court finds that the state laws claims should be dismissed with prejudice because after four attempts, the Plaintiffs have failed to plead actual reliance, which is an element of their state law claims. As for the Plaintiffs’ claims under the federal securities laws, the Court finds that Lehman’s and SNC-Lavalin’s motions should be granted and all others denied.

II.

RELEVANT LAW

In deciding a motion to dismiss for failure to state a claim, the Court must look only to facts stated in the complaint and in documents attached to or incorporated in the complaint. Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1017 (5th Cir.1996). For purposes of deciding the instant motions, the Court will accept as true the well-pleaded factual allegations in the Complaint and any reasonable inferences which can be drawn from them. See Tuchman v. DSC Comm., 14 F.3d 1061, 1067 (5th Cir.1994). The Plaintiffs, however, “must plead specific facts, not merely conclusory allegations.... ” Id. The Court will “not accept as true conclusory allegations or unwarranted deductions of fact.” Id.

A. 10b-5 Claims

The Plaintiffs bring their primary claim under section 10(b) of the Exchange Act. This section makes it unlawful for any person

[t]o use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors.

15 U.S.C. § 78j(b). The SEC rule promulgated under section 10(b), known as Rule 10b-5, makes it unlawful for any person, directly or indirectly

[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading ...

in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5. For ease of discussion, the Court will refer to these claims as the “10b-5 claims.” To establish their 10b-5 claims, the Plaintiffs must show “(1) a material misstatement or omission (2) which occurred in connection with the purchase or sale of securities (3) that was made with scienter (4) harm, and (5) causation.” Mercury Air Group, Inc. v. Mansour, 237 F.3d 542, 546 (5th Cir.2001).

A false statement or omission is material if its disclosure would alter the “total mix” of facts available to an investor and “if there is a substantial likelihood a reasonable shareholder would consider it important” to the investment decision. Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). Whether a statement is material is usually a question for the fact finder. See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 450, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976). A complaint should not be dismissed on the grounds that the alleged misstatements or omissions are immaterial unless they are “so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance.” Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir.1985).

Scienter is the intent to deceive, defraud, or manipulate. See Mercury Air, 237 F.3d at 546 n. 3. Scienter also “encompasses reckless indifference such that the omission or misrepresentation was ‘so obvious that the defendant must have been aware of it.’ ” Id. (quoting Rubinstein v. Collins, 20 F.3d 160, 169 (5th Cir.1994)).

The causation element mentioned in Mercury Air requires reliance. To satisfy the reliance elements, the Plaintiffs in this action rely on the fraud-on-the-market doctrine. The premise of this doctrine is that “the market price of shares traded on well-developed markets reflects all publicly available information, and, hence, all material misrepresentations.” Basic, 485 U.S. at 246,108 S.Ct. 978. Under this doctrine, “where materially misleading statements have been disseminated into an impersonal, well-developed market for securities, the reliance of individual plaintiffs on the integrity of the market price may be presumed.” Id. at 247, 108 S.Ct. 978. The Plaintiffs “need only allege facts which show that Defendants’ omissions and misrepresentations caused the market price of the stock to be artificially inflated, and therefore to appear to be a good risk for investment, so that when the truth came out about the company’s condition, the stock lost value and Plaintiffs suffered a loss.” See Zuckerman v. Foxmeyer Health Corp., 4 F.Supp.2d 618, 626 (N.D.Tex.1998).

B. Pleading Requirements

Congress addressed the pleading requirements for securities fraud actions in the Private Securities Litigation Reform Act of 1995, Pub L. No 104-67 (“PSLRA”). The PSLRA requires the court, upon a motion of any defendant, to dismiss a case when certain pleading requirements are not met. 15 U.S.C. § 78u-4(b)(3). There are basically two pleading requirements under the PSLRA. See McNamara, 57 F.Supp.2d at 405-06. The first requirement deals with the alleged statements or omissions. The second deals with the defendant’s state of mind when making these statement or omissions.

1. Pleading the Misleading Statements or Omissions

The first requirement of the Reform Act is that the complaint “shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(l). The Fifth Circuit has indicated that this statutory language is merely an adoption of the Second Circuit’s requirement that plaintiffs in fraud cases must “specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent.” See Williams, 112 F.3d at 177-78.

2. Pleading Scienter

The second pleading requirement of the Reform Act addresses the scienter requirement. The PSLRA states:

In any private action arising under this chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.

15 U.S.C. § 78u-4(b)(2). The “required state of mind” is scienter. Scienter may be adequately plead by alleging facts that would permit a strong inference of conscious misbehavior or severe recklessness. See Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1018 n. 2 (5th Cir.1996); Coates v. Heartland Wireless Communications, 100 F.Supp.2d 417, 422 (N.D.Tex.2000). If the facts alleged permit such an inference, the Plaintiffs’ 10b-5 claim will survive the motion to dismiss. See Queen Uno Ltd. Partnership v. Coeur D’Alene Mines Corp., 2 F.Supp.2d 1345, 1359 (D.Colo.1998).

Prior to the PSLRA, plaintiffs needed only to plead facts that demonstrated that the defendants had both the motive and opportunity to commit securities fraud. While such allegations will no longer automatically survive a motion to dismiss, the Court will consider facts concerning a defendant’s alleged motive in determining whether the complaint raises a strong inference of scienter. See id.; In re Stratosphere Corp. Sec. Litig., 1 F.Supp.2d 1096, 1107-08 (D.Nev.1998); In Re Glenayre Technologies, Inc., 982 F.Supp. 294, 298 (S.D.N.Y.1997)(“That ‘motive and opportunity’ no longer automatically suffices to raise a strong inference of scienter does not mean that facts relating to motive and opportunity are not relevant to the scienter analysis.”); In re Baesa Sec. Litig., 969 F.Supp. 238, 241-42 (S.D.N.Y.1997); Silicon Graphics II, 970 F.Supp. at 757.

With these legal principles in mind, the Court will now examine the Plaintiffs’ allegations in the Fourth Amended Complaint.

III.

FOURTH AMENDED COMPLAINT

The Court constructed the following narrative from the facts as alleged in the Fourth Amended Complaint. For the purpose of ruling on these motions, the Court assumes that these facts are true. See Tuchman, 14 F.3d at 1067.

A. Introduction

David Walsh, a former stock broker, founded Bre-X in 1988. Walsh, however, was unable to obtain sufficient funding to explore the various mineral claims Bre-X had acquired. The Plaintiffs allege that as a result of this, Walsh went into personal bankruptcy in 1992. Bre-X remained small, and Walsh remained in financial trouble. In 1993, when Bre-X became involved in Busang, the company still had only five employees.

The story of the Bre-X gold fraud began in 1993 when Walsh paid $80,000 for mineral rights to 475,000 acres near Busang, an area on the Island of Borneo in the East Kalimantan province of Indonesia. Busang consisted of three properties — Bu-sang I (Central Zone), Busang II (Southeast Zone), and Busang III (Northwest Zone). Thereafter, Walsh and his cohorts allegedly embarked on a scheme to convince the investing public that Busang was one of the richest gold deposits ever discovered. For the next three and half years, Bre-X published reports of ever increasing amounts of gold at Busang.

In the Complaint, the Plaintiffs set forth how a find such as the one announced by Bre-X would generally be evaluated. The first step in the evaluation process is a determination of the volume and grade of the mineral resource. These are determined by drilling for core samples and then performing mineral assays on those core samples. The handling, processing, and assaying of core samples must follow generally accepted mining industry practices in order to be credible. Plaintiffs state that these procedures are especially important to mining companies and mine financiers who might participate in the mine development, as well as to investors in the mine owner’s securities.

Assays are normally prepared by independent contractors. Periodically, samples from the same core interval are sent to multiple assaying laboratories to verify the “repeatability” of the assay results using the same and different assaying techniques. Poor repeatability within the same core interval causes concern because it usually indicates a problem with either the sampling protocols or the assay procedures.

Plaintiffs state that a high level of confidence in the veracity of assay results is probably the most important factor in the evaluation of an undeveloped mineral property. The Complaint states that historically, the gold mining industry has been victimized by fraudulent assay data resulting from the “salting” of core samples with gold from an external source. “Salting” is industry jargon for adding gold to the rock samples before they are tested. It creates a false value for an otherwise non-existent or non-commercial mineral deposit. The gold industry is particularly vulnerable to salting schemes because a small amount of gold added to a core sample can translate into the appearance of a tremendously valuable deposit.

Since a core drill hole is an expensive undertaking, core data is collected on drill hole spacing adequate to establish a “resource” and then with later, narrower, infill spacing to convert the resource into a “reserve.” Drill hole spacing is also typically patterned to provide adequate data for the development of a preliminary engineering mine plan for prefeasibility evaluation. Thereafter, a statistical analysis is prepared on the basis of the geological and assay data to determine the nature and continuity of the mineral in the rock between the drillholes. An estimation of the mineral resource is made by determining the volume of rock between the drill holes, the average density of the rock, and the average concentration of the mineral (“grade”) from the mineral assays.

The alleged fraud at Busang involved salting of the crushed samples. One would expect the Complaint to clearly set forth the alleged scheme used to commit this fraud. It doesn’t. From various sections of the Complaint, however, the Court has constructed it as follows.

Bre-X drilled the core samples at Bu-sang. The samples were then crushed by Bre-X at the site. The normal practice is to split the core sample and send half to an independent lab for assaying and to save the other half for future reference. These procedures prevent salting by the exploration company. Bre-X crushed the whole core sample on site and saved only a 10 centimeter sliver for future reference. Not only did Bre-X crush the samples itself, the core samples also sat for extended periods of time in Bre-X’s sample storage facility in Samarinda. This gave Bre-X ample opportunity to add gold to the crushed samples.

It was important in this scheme that the whole core sample be crushed. If an independent party had wanted to crush and test the other half, someone from Bre-X would have needed to be there to salt it. This is also the alleged reason why Bre-X switched from the industry standard fire assay method to the cyanide leach method — -the cyanide method involves destruction of the core sample. Bre-X’s sample preparation procedures and assay procedures ensured that little was left of the samples for someone else to test.

Not only did Bre-X adopt sample preparation and assay techniques to hide the fraud, Bre-X also refused to allow anyone else to drill for their own core samples. Barrick, who tried to negotiate a joint venture with Bre-X to develop Busang, attempted for several months to do its own due diligence on site, and Bre-X flatly refused. Bre-X kept the fraud going in this manner for nearly three years.

The Complaint describes a serious flaw in this plan. Gold in igneous hard rock deposits such as that at Busang is in the form of tiny, wiry flakes. Whoever salted the samples had to use alluvial gold, the type of gold found in river beds. This gold comes in the form of small nuggets that are much larger than the tiny particles that one would expect to find in a crushed sample from a hard rock igneous deposit. Several reports cited by the Plaintiffs and made available at different times to the moving Defendants described this coarse, nugget-like appearance of the gold. This and other unusual characteristics of the gold, the Plaintiffs allege, made these Defendants aware that there was a serious risk that the samples were being salted.

Eventually, Bre-X had to allow someone to drill their own holes at Busang. Bre-X was too small to develop a mine by itself, so it was inevitable that Bre-X would have to choose a partner to help it develop the mine at Busang. This company would want to do its own drilling as part of its due diligence prior to any agreement between it and Bre-X. This occurred in late February 1997 and the company was Free-port-McMoRan Copper and Gold, Inc. (“Freeport”), a New Orleans-based mining company. Of course anyone involved in the actual salting of the samples knew that the fraud would now be discovered. As expected, when Freeport drilled for its own core samples and assayed them, it found no gold. Freeport announced these results on a March 26,1997.

Now that the fraud has been exposed, all Defendants point their fingers to Michael de Guzman, Bre-X’s chief geologist. During Freeport’s due diligence, de Guzman fell 800 feet from a helicopter on March 19, 1997 and died, and most of his work had been burned in a fire at Busang in January of 1997. Thus, he makes an excellent scapegoat.

As described below, Plaintiffs allege that Defendants J.P. Morgan, Lehman, Nesbitt, and Barrick consciously disregarded multiple red flags and other warning signs that Busang was a fraud of unparalleled proportions. Plaintiffs also allege that the Kilborn Defendants intentionally and substantially deviated from the accepted methods of testing and analyzing the potential gold reserves at Busang and that the Kilborn Defendants knew that Bre-X would communicate these test results to investors.

B. The Bre-X Gold Fraud

Beginning in January 1994, Bre-X announced that drilling in Busang revealed significant amounts of gold. With each announcement, the potential gold reserve at Busang increased. For example, on September 20, 1994, Bre-X issued a press release announcing that 22 of the 31 drill holes completed at Busang intersected “significant widths of gold mineralization.” In an interview from the Company’s Jakarta office, John Felderhof, a Bre-X Senior Vice President and Chief Geologist, stated that he was “confident that an open pitiable resource ranging between 30 million ton to 60 million ton at an average grade better than 3g Au/t ... can be attained at Busang.” His representation, if true, would have translated to 3 to 6 million ounces of gold. On May 10, 1995, Walsh and Felderhof upped that estimate to 6 to 8 million ounces of gold.

On May 15, 1995, Bre-X hired Nesbitt, together with other underwriters, to sell 1,350,000 common shares of Bre-X at C$3.75 per share. This is also when Nesbitt’s mining analyst Egizo Bianchini began to follow Bre-X. The Complaint states that Bianchini had nine years experience in the mining industry as a geologist and mining research analyst. Bianchini holds a Geology degree and a Master of Business Administration degree from the University of British Columbia. Plaintiffs allege that over the next two years, Bianchini developed an extremely close relationship with Bre-X’s management and that this relationship made him privy to information to which other analysts did not have access. The Complaint also alleges that Bianchini had a strong financial interest in ensuring Bre-X’s success. The Complaint states that according to Bre-X: The Inside Story, a book written about the Bre-X gold fraud, Bianchini personally held one million Bre-X shares.

Bianchini spoke with Walsh and the other insiders frequently and made several trips to Busang. Bianchini first visited Busang during September 23-30, 1995. Plaintiffs claim that he was the first analyst to visit the Busang site. According to his itinerary, he spent the entire day of September 25 at the Busang site, toured Bre-X’s ■ exploration office in Manado on September 29, and visited Bre-X’s office in Jakarta on September 30. Plaintiffs allege that many analysts were denied access to the site or were given limited access.

Bianchini’s “eheerleading” for Bre-X began in September 1995. That is when he first issued a “Buy” recommendation for the stock. In the report, which stated a target price of C$21 for shares of Bre-X, Bianchini stated that Busang was “likely to evolve into a world-class gold mining project,” based on his own review of “all the drill data.” He then estimated that “the resource can be converted to a reserve of approximately 4.5 to 5 million ounces.” Bianchini went on to vouch for the technical competence of Bre-X management and its financial strength.

On October 8, 1995, Nesbitt issued a new research report as a result of further drilling results announced by Bre-X. In its report, Nesbitt increased its one-year target price for the shares to C$50. Nesbitt stated, again, that “Busang will become one of the elite world class ore bodies,” based on Nesbitt’s own review of “all the available technical data.” At this point, of course, all Nesbitt or any other analyst had to go on was Bre-X’s public announcements of its own test results. The Complaint states that Bre-X needed an outsider to add credibility to its claims and that Bre-X chose P.T. Kilborn.

On October 12, 1995, P.T. Kilborn entered into a contract with Bre-X to perform geostatistical analyses and mine feasibility studies of Busang. This work included on-site inspections, resource calculations, and mining feasibility studies, with the alleged goal of confirming the existence and amount of gold at Busang. It did not include drilling for core samples, assaying the core samples, or supervising drilling.

Bre-X allegedly hired P.T. Kilborn and Kilborn Engineering because they are part of a well known mining services company with a solid reputation in the industry, especially in Canada. Plaintiffs allege that two years later on May 17, 1997, Roger Pooley, who had performed consulting work for Bre-X at Busang before the Kil-born Defendants were hired, stated that “Bre-X clearly wanted reports written by a high profile Canadian firm whose credibility would be accepted without hesitation by the market.”

When first hired in October 1995, the Kilborn Defendants were given copies of core assay reports prepared by Indo Assay Laboratories (“Indo Assay”), who had previously performed assay work for Bre-X. Plaintiffs allege that these reports questioned the validity of the testing process. The allegations regarding the Indo Assay reports, however, are confusing. For example, Plaintiffs point to a memorandum by Indo Assay that states “possible gold was observed megascopically.” The Complaint states that one should infer from this statement that Indo Assay was concerned about the inability to observe gold in the whole core samples. The Court fails to see the logic behind such an inference. “Megascopic” means visible to the naked eye. The Complaint also states that Indo Assay’s fire-assays resulted in lower gold recovery than its assays using the cyanide method, which is allegedly abnormal. The Complaint then states that most of what appeared to be “problem batches” were allegedly prepared on-site by Bre-X, thus giving Bre-X an opportunity to salt the sample with gold.

The Kilborn Defendants were also provided reports prepared by Normet PTY Ltd., a metallurgical firm based in Burs-wood, West Australia. Normet’s reports were allegedly filled with red flags. For example, the Complaint states that Nor-met found that more than 90 percent of the gold in the Busang samples could be recovered in a gravity concentrate. As evidence that this should have alerted Kil-born to the possibility of fraud, Plaintiffs point to a report issued almost two years later by a company hired to investigate the fraud. The report stated, “Although one could expect to see such exceptional recoveries in a gravity circuit for material coming from an alluvial [river-bed] deposit, we have never before seen such a response from a primary deposit.” The Complaint also states that Normet described the gold as “particle shapes ... mostly rounded with beaded outlines.” According to Plaintiffs, this also describes alluvial gold found in riverbeds. After reviewing Normet’s report, Freeport’s due diligence team declared that the description by Normet was “possibly the best description of alluvial grain gold ever written.” Plaintiffs allege that due to these findings by Normet, P.T. Kilborn should have been skeptical from the beginning. As the story continues, these same red flags will reappear in every independent report prepared.

Nevertheless, the scheme continued. By October 17, 1995, Bre-X stock had risen to C$18.25 per share. That day, Bre-X reported that an updated resource calculation “completed by Kilborn Engineering” showed that the Central Zone contained in excess of 2.75 million ounces of gold. Felderhof indicated that the Southeast Zone had the potential to possess even greater amounts of gold, stating that the Central Zone “pales in comparison” to the potential of the Southeast Zone. Felderhof also claimed that “the Bu-sang project in its entirety has the potential of becoming one of the world’s great gold orebodies.” The next day, October 18, 1995, T. Stephen McAnulty, the Vice President of Investor Relations and Treasurer of Bre-X, told Reuters that he was comfortable with estimates that Busang could contain more than 30 million ounces of gold.

Meanwhile, Nesbitt’s Bianchini continued to follow Bre-X. He returned to Bu-sang during November 11-16, 1995. On this visit, he was allegedly treated to a private tour of the property by Michael de Guzman, a Bre-X geologist, and Cesar Puspos, a Bre-X project manager. After Bianchini departed, de Guzman wrote to Felderhof summarizing the results of the visit. De Guzman praised the “Nesbitt-led group of analysts” as the “most professionally open-minded” that Bre-X had ever encountered. He also informed Felderhof that “over-all corporate plans, strategy were discussed to their optimum satisfaction.”

After this visit by Bianchini, Nesbitt issued a revised report on November 21, 1995. It repeated its recommendation of Bre-X as a “Buy,” and estimated that Bre-X had 30 million ounces of resources: “In our view the most recent drill results put out by BXM demonstrate that Busang prospect is very likely to contain a gold deposit which can only be categorized in the elite class of deposits around the world.” Shortly thereafter in a December 8 research report, Nesbitt and Bianchini declared Busang to likely be “one of the largest gold deposits in the world.” Nes-bitt set a 12-month target for the stock of C$70. At the time, Bre-X traded at C$53.50.

On December 15, 1995, Bre-X issued a year-end update on its mineral properties in Indonesia. “Based on preliminary results available to Bre-X, a pre-feasibility study also undertaken by Kilborn Engineering and scheduled for release in February is expected to be very favorable.” Felderhof went on to state in this report that the “Busang deposit is very likely to become a gold mine of elite world class status. Our current objective is to drill out 30 million ounces by early fall 1996.”

The scheme continued throughout 1996. In a press release dated January 15, 1996, Felderhof announced that a resource of 30 million ounces at Busang could be readily attained. Such a resource, if true, would have put Busang in the top four largest gold finds in the world. Plaintiffs state that the world’s largest gold deposit is the Grasberg copper and gold mine operated by Freeport in Indonesia,, which holds 51 million ounces. As seen below, Bre-X would soon be claiming reserves far in excess of this amount.

On January 16, 1996, Nesbitt and Bian-chini, in reliance on Bre-X’s most recent statements at the time, revised the target price for the shares of Bre-X to C$110.

On February 20, 1996, Bre-X publicly announced an updated resource calculation “completed by Kilborn Engineering” pegging the total measured, indicated, and inferred gold resource for the Central Zone at nearly 15 million ounces. The next day, Nesbitt and Bianchini issued another report, bumping up their own estimate of total resources:

We are increasing our estimate of total resources on the Busang property to 42.6 million ounces [of gold]. As a result we are increasing our 12-month target price to $180 per share and our 18-month target price to $220 per share. In our view, the Busang discovery represents one of the most prolific and soon-to-be profitable gold discoveries over the past 20 years.

This target price was impressive considering that Bre-X had gone public a year earlier on May 15, 1995 at C$3.75 per share. Plaintiffs also point out that Bian-chini’s reserve estimates consistently exceeded even those reported by Bre-X.

On March 7, 1996, P.T. Kilborn and Kilborn Engineering issued their Prefeasibility Study to Bre-X. The executive summary stated that the purpose of the study was “to determine the viability of the project.” P.T. Kilborn received data from Bre-X on drill hole locations and sampling and assay results. P.T. Kilborn then performed its statistical analysis for the Prefeasibility Study based on that data. The metallurgical work for the Prefeasibility Study was done by Normet. Plaintiffs claim that the Prefeasibility Study contained numerous red flags concerning Bre-X’s claims about Busang:

• the cyanide leach assay procedures at Busang were not standard practice;

• Bre-X’s assay results had chronic problems with variance and repeatability;

• the rates of recovery from simple coarse grinding were extraordinarily high, indicating that the gold particles were not embedded in the host rock;

• simple coarse grinding yielded large free gold grains, which were strongly atypical of a primary rock deposit where gold particles were embedded in the host rock;

• the gold in Bre-X’s samples was . unusually large for a primary deposit like Busang — 86.3% of the Busang gold was larger than 106 microns;

• the core sampling procedure, which used whole (not split) cores and saved only 10cm of the core samples for future reference, was not industry standard;

• the absence of gold in the composite mineralized samples initially examined by Mintek Services Trust, an Australian geological consultant that Bre-X had hired in 1995; and

• Kilborn believed that a higher confidence level in the test results was needed.

These red flags are repeated numerous times in the Complaint.

Another report prepared near this time by Hazen Research, Inc. allegedly contained additional red flags at Busang. Hazen’s report stated that the gold particles from the Busang samples were “relatively coarse nuggets,” “very compact,” and “often nearly spherical in shape.” These findings were similar to those of Normet discussed above. Plaintiffs allege that any competent mining engineer knows that the nature and shape of the gold particles described by Hazen and Normet were wholly inconsistent with the size and shape of gold found in a deposit such as Busang. Thus, Plaintiffs argue that the Kilborn Defendants had to have been aware of the strong likelihood of salting by Bre-X.

By the Spring of 1996, Plaintiffs allege that others in the mining industry were doubting the reliability of Bre-X’s claims. According to a Financial Post article dated March 23, 1996, “technical experts watching the methods that Bre-X is using to estimate the amount of gold at Busang warn that no large mining company would consider investing in the project without a lot more data.” Howard Stockford, executive vice-president of one of Canada’s most successful mining companies, also cast doubt on the reliability of Bre-X’s studies. “Their methodology is not accurate enough to correctly tell you what you are investing in,” Stockford warned. The article goes on to question Bre-X’s assaying method. In 1995, Bre-X had switched from the more standard fire assaying technique to the cyanide leach method. According to Glen Clark, a Toronto-based engineering consultant, “Cyanide leaching is more commonly used to evaluate gold processing methods rather than the orebody itself. Since it also involves the destruction of the original drill core, interested buyers will want to check Bre-X’s numbers by doing more drilling on the property. That’s just good due diligence.”

In response to the Financial Post article, Nesbitt’s Bianchini told Walsh that he would personally vouch for Bre-X’s assaying method. Walsh wrote to Felderhof on March 2B, 1996:

Someone’s trying to do a number on us and its really starting to piss me off. Egizo [Bianchini] is also pissed off at Peter Kennedy [the author of the Financial Post article] who he refuses to talk to ever. He’s off to Chile for a week with other analysts but will call his office Monday morning and explain that our assaying method is a world recognized standard technique for grade determination and that Glen Clark [the consulting engineer who was questioning Bre-X’s numbers] is B.S.

Bianchini also allegedly offered to blunt the effect of the Financial Post article by contacting institutional buyers and urging them to buy Bre-X stock. Walsh wrote to Felderhof: “He (Egizo) also will call all the institutions to buy the stock if it sells off.” Plaintiffs argue that the response of Bre-X, Walsh, and Nesbitt to this article is significant proof of the collusive nature of the relationship among these Defendants; the extent to which they went to avoid detection of their fraudulent conduct; and the lack of due diligence by Nesbitt with regard to the serious questions concerning the Bre-X studies and assay results.

Felderhof defended his assaying methods in a March 28, 1996 press release. Felderhof stated that the assay methods employed by Bre-X actually understated the Busang resources, attributing this conclusion to “internationally recognized Kil-born Engineering”:

In addition, metallurgical testwork conducted by internationally recognized Kil-born Engineering, as part of their recently completed prefeasibility study on Busang, resulted in their determining that Bre-X’s current and previously reported gold assay results are in fact understated by as much as 12.9%.

Three days later on March 31, 1996, Fel-derhof described Busang as a “monster.” Another Bre-X spokesman estimated “30 million, plus, plus, plus.”

It is clear that P.T. Kilborn and Kilborn Engineering were well aware Bre-X’s assay methods and sample preparation process. In a memo to de Guzman dated April 2, 1996, Sean Walter, Kilborn Engineering engineer, describes his visit to Bu-sang:

INDO ASSAY LAB

The Indo Assay facility had suitable assay equipment that appeared to be in satisfactory condition. The facility was clean, orderly, and appeared to be well run.

John Irvin has been operating this lab for approximately seven years and the lab has a good reputation for quality assay work. John will expedite the metallurgical samples to NORMET in Australia and Hazen in the United States. METALLURGICAL SAMPLE PREPARATION AND COMPOSITING AT SAMARINDA

Upon arrival at Samarinda on March 26 a meeting was held with Mike de Guzman and Mr. Jerome Alo of Bre-X, Mr. Tony Showell of NORMET and myself to discuss the metallurgical samples. The procedures as previously defined in correspondence were confirmed and Mike [de Guzman] supplied a list of samples available for testwork

I arrived at the Bre-X sample preparation and storage facility on March 27, 1996 and worked there each day through Saturday March 30,1996.

The facility was new, large, well equipped, clean, orderly and very satisfactory for the duty required. Indonesian employees were present to start work immediately.

The samples prepared were crushed drill core (minus 1/4) inch and are to be used primarily for metallurgical test-work. The required sample preparation program was completed on Saturday, March 30. The samples were placed in large plastic drums and forwarded to Indo Assay in Balikpapan.

BUSANG SITE VISIT

Tony Showell and I arrived at the Bu-sang project site on March 31, 1996 and returned to Samarinda on April 2, 1996. The campsite and project facilities were excellent. The handling of drill core from delivery at the camp through storage appeared very satisfactory. The sample preparation facility was large, well equipped, clean, orderly, and very satisfactory for the duty required. Again I was very impressed with the project facilities and the project appeared to be very organized and well supervised.

Note that de Guzman supplied the list of samples. None of the samples that were to be tested by Normet or Hazen were independently gathered or prepared. Plaintiffs allege that Walter also sent a copy of his memo to John Robertson, P.T. Kilborn’s resident manager, and Paul Sem-ple, who was the vice president and general manager of Kilborn Engineering in Vancouver. Thus, Plaintiffs argue, these men were fully aware of the process for handling and storing the core samples from Busang.

A Bre-X press release dated April 4, 1996 reported that as a result of additional testing, “Bre-X’s technical team remains confident that 30 million ounces of gold are readily attainable.” Every time Bre-X made a public statement in 1996, Nesbitt and Bianehini would increase the target price. Sure enough, on April 8,1996, Nes-bitt and Bianehini issued a new research report in which they strongly recommended Bre-X’s stock. They again raised their target price, this time to C$230 (the price was then C$159.75). In this report, Nesbitt and Bianehini stated, “We have increased our overall estimate of the Bu-sang I and II resource potential from 42.6 million ounces to 46 million ounces. Our new estimate is more than likely to be conservative.”

Defendant SNC-Lavalin purchased Kil-born in early 1996. Plaintiffs allege that shortly after this acquisition, SNC-Lavalin aggressively moved to play an active role in the Busang project. In a July 18, 1996 letter to Walsh, James Booker, P.T. Kil-born’s President, explained the kind of role the newly merged company wanted to play at Busang:

Kilborn SNC-Lavalin has considered all requirements to take the project from its present stage through into commercial operations, and believe that we can provide the expertise necessary to design, build, commission and operate the complete facilities without the need for participation of a major mining company.

Plaintiffs offer this as an allegation of SNC-Lavaliris role in Busang. Booker’s proposal touted the fact that Kilborn was owned by SNC-Lavalin, and he promised that SNC-Lavalin, “the largest engineering/construction company in Canada,” would be actively involved in the project.

On April 17, 1996, Bre-X announced that an initial resource calculation had been “completed by Kilborn SNC-Lavalin” on certain sections of Busang. Thus, Bre-X was now associating SNC-Lavaliris name with its resource announcements. Based on this new calculation, Busang contained a total of 24.87 million ounces of gold, a 60 percent increase over the previous estimate.

Also on April 17, Defendant Barrick approached Bre-X to discuss a possible agreement relating to Busang. The Plaintiffs allege that this was the second time that Barrick had approached Bre-X. Bar-rick had previously discussed a joint venture with Bre-X in 1993 and 1994. These discussions had eventually broken down. According to the Complaint, pressure by its own shareholders to increase its reserves convinced Barrick to try again to negotiate an agreement with Bre-X concerning Busang. Bre-X expressed little interest in concluding a quick deal with Barrick, but being a small mining company, Bre-X needed a partner to help it develop its imaginary gold reserve. So on April 22, 1996, Bre-X announced that it would start to look for a partner for Bu-sang. Barrick was reported to be a contender for the position.

Around April 23, 1996, Bre-X began trading again on the Toronto Stock Exchange. Within minutes of the opening of trading, the price of Bre-X stock skyrocketed from C$50 + to nearly C$200.

The next day, April 24, Bre-X delivered a copy of Eilborris Prefeasibility Study to Bianchini’s home address. Based on the alleged red flags in this study, Plaintiffs argue that Bianehini knew that comprehensive additional due diligence was required at Busang to confirm the huge preliminary Bre-X gold resource estimates. Plaintiffs allege that instead of proceeding with caution in light of these warning signs, Nesbitt, through Bianehini, dove in blinded with the prospect of participating in one of the greatest gold mines in history and ignored the obvious signs that something was severely wrong.

On May 15, 1996, Bre-X filed its Annual Report, which claimed that Busang contained resources of 30 million ounces of gold. Within a month of its initial trading day on the Toronto Stock Exchange, shareholders had approved a 10-for-l split in Bre-X stock, which took effect on May 22, 1996. Share prices continued to rise after the split, at one point surpassing C$28.

On May 28,1996, Bre-X stock reached a new high of C$26.10 per share (post-split). On the same day, Nesbitt gave a presentation to clients in the packed grand ballroom of Toronto’s Sheraton Centre. Bian-chini told the crowd that Bre-X was “a double.” Bianehini stated, “I still think it’s a buy here, but the really easy money has been made, and all we have left now is a double. I remember when doubles used to be great.” As was later reported in the Ottawa Citizen,

Clients who packed a Toronto hotel ballroom were told by an enthusiastic Nes-bitt team — not only from sales, but from the economics and research departments — of the incredible opportunities to be found in the booming junior mining sector.

Nesbitt’s superstar gold analyst, Egizio Bianehini, and its senior mining analyst, Julian Baldry, made glowing presentations about the fortunes to be made while Nesbitt’s chief economist Sherry Cooper provided an overview.

Mr. Bianehini was introduced as the man who recommended Bre-X when it was at $2.40 per share.

Over the next several months, just prior to Bre-X’s opening on the NASDAQ, Bre-X’s public disclosures concerning Busang grew more and more extraordinary. Bre-X’s resource calculations increased by millions of ounces. In a press release dated June 20, 1996, Bre-X stated that an updated resource calculation “completed by Kil-born SNC-Lavalin” resulted in a total estimate of 39.15 million ounces of gold at Busang. Bre-X announced its “objective to outline 50 million ounces in the measured/indicated resource category by the end of 1996.”

The Complaint states that Bianchini returned to Busang on June 9-10, 1996. On this visit, he videoed the sample preparation facility. He was also allegedly given a personal tour by de Guzman and Jerry Alo of the sample preparation laboratory where he was shown Bre-X’s procedures for crushing and pulverizing core samples. Alo later explained to Bianchini how Bre-X prepared sample bags prior to shipping to Indo Assay, what was involved in the check assay process, and the procedure for preparing mineralized core samples. After this visit, Nesbitt released a report which again increased the estimate of Bu-sang’s total resource potential. This time it pegged an amazing 62 million ounces of gold. In a June 17, 1996 research report, Nesbitt and Bianchini began to talk of Busang as perhaps the largest gold deposit ever.

Meanwhile Barrick, which was allegedly still under pressure to increase its own gold reserves, began to exert political pressure on Bre-X to permit Barrick to gain an interest in Busang. On June 17, 1996, Peter Munk, Barrick’s CEO, made a formal presentation to the Indonesian Mines and Energy Minister and other key officials concerning Busang. Barrick also allegedly recruited other influential Indonesian lobbyists to help it secure participation in Busang.

Bre-X continued to court financial analysts in an effort to increase its stock price. In July 1996, Bre-X took a group of ten mining stock analysts on a tour of Busang. David Neuhaus, an analyst at J.P. Morgan, and Daniel McConvey, an analyst at Lehman, were among them. They spent July 13-14,1996 with de Guzman and Felderhof touring in and around Busang. They also visited the assay labs of Indo Assay Laboratories in the town of Balikpapan on July 13, 1996. Accompanied by de Guzman and Felderhof, Neuhaus and McConvey were given a tour of the facility by the lab’s chief chemist, Jamie Ordona, who showed McConvey how Bre-X’s core samples were assayed.

The Complaint states that Neuhaus’s and McConvey’s access to the assay labs was significant in light of news articles published in March 1996 that questioned Bre-X’s cyanide leaching assay' process. Plaintiffs argue that they should therefore have been on the lookout for anything suspicious, and Plaintiffs allege that there was plenty there to arouse suspicion. Plaintiffs allege that during their visit, Neuhaus and McConvey were shown Bre-X’s “core yard” where core samples were stored for prolonged periods of time while awaiting processing. They allegedly saw that Bre-X was drilling cores far in excess of their ability to process the cores and dumping the unprocessed core samples in the core yard.

In a press release dated July 22, 1996, Bre-X stated that as a result of additional calculations conducted by “Kilborn SNC-Lavalin,” there were 46.92 million ounces of measured, indicated and inferred gold in Busang. The next day, on July 23, 1996, Nesbitt released a morning research report parroting new drill hole data released by Bre-X based on the work of the Kil-bom Defendants. The Nesbitt report stated:

Yesterday’s release of new drill hole data and revised resource estimate is further confirmation that the Busang deposit is among the two or three largest gold deposits in the world.... At this point, our review of all the drill and resource data confirms our view that Busang contains a resource of more than 62 million ounces. As a result of the size of the underlying resource, we continue to be of the opinion that Bre-X shares remain significantly undervalued both in the short and the long term. We reiterate our strong buy recommendation for Bre-X.

On July 23, 1996, David Neuhaus, the J.P. Morgan analyst fresh from his Busang trip, was interviewed by a reporter at the Financial Post Neuhaus made several statements concerning Busang. First, and most incredible, he stated that he believed that Busang could contain 100 to 150 million ounces of gold. Not only that, he said that “150 million ounces is a conservative guess as to what Bre-X will ultimately come up with.” Remember, Plaintiffs alleged that the largest known gold reserve at the time was 51 million ounces. Neu-haus didn’t stop there; he said his view was based on the “impressive geology at Busang....” Neuhaus said that size was no longer the key issue facing Busang. Now analysts wanted to know what kind of cash flow could be generated from the mine. Neuhaus said that Busang would emerge as a huge open gold mine with annual production in excess of 2.5 million ounces and cash costs of around US$200 an ounce. He reported that his preliminary estimates were that Busang would be a low-cost mine generating US$500 million in annual cash flow. Plaintiffs allege that at the time Neuhaus made the statements, J.P. Morgan had been working for five months trying to be hired as Bre-X’s investment banker.

With these ever increasing gold estimates at Busang, testing to verify these claims became more and more important, and the Kilborn Defendants supposedly had direct responsibility for monitoring and overseeing the conduct of metallurgical tests. But at least as of this time, the allegations indicate that Kilborn’s role was still rather limited even though Bre-X was using Kilborris name to legitimize its increasingly incredible estimates of gold reserves at Busang. The Complaint cites an August 5, 1996 memorandum from Rodolfo Vega, a Kilborn employee, to Jerry Alo, a Bre-X Geologist, regarding the “Metallurgy Meeting of August 1,1996,” in which Vega described the role of Kilborn:

Hazen Research Laboratory will handle the Phase II metallurgical testworks. Normet on the other hand will be an independent body and will run parallel metallurgical testworks as a check to Hazen’s results. Kilborn as the Metallurgical Manager will oversee the conduction [sic] of the testworks by Hazen and coordinate with Normet.

But Kilborn and the other independent labs working at Busang rarely ever took or prepared core samples that they tested. In an April 1, 1997 memorandum to Steve McAnulty, Bre-X’s vice president of investor relations, Bre-X manager Greg MacDonald explained the one occasion in which “Kilborn” allegedly collected core samples: “The only time that Kilborn collected core samples was during March 25 to April 3, 1996 when they, together with Normet, collected 10cm 1/2 core sections every 2 metres over a typical ore section from 4 holes.” Despite this somewhat limited role at Busang, Plaintiffs argue that the signs of fraud should have been becoming clear to P.T. Kilborn and Kilborn Engineering. Besides having “free and open access” to Bre-X’s operations at Busang, the Kilborn Defendants were allegedly provided the reports prepared by Indo Assay, Hazen, and Normet discussed above. The Complaint states that without exception, these reports contained evidence of serious inadequacies in Bre-X’s procedures and these same red flags mentioned above concerning the unusual characteristics of the gold in the samples.

On August 19, 1996, Bre-X common stock began trading on the NASDAQ National Market System. That same day, Walsh was quoted in the Financial Post as saying that Bre-X was developing the largest purely gold deposit in Indonesia. Following its NASDAQ listing, Bre-X filed an “Interim Report to Shareholders and Financial Statements for the seven months ended June 80, 1996.” The Interim Report announced a new resource calculation, “independently verified by Kilborn Engineering,” for the Busang site:

An updated resource calculation subsequent to the end of June 1996 from drilling results at Busang Gold Project increased the total gold resource by 44.3 million ounces to 46.9 million ounces, compared to a total gold resource of 2.6 million ounces at November 30, 1995. This resource calculation has been independently verified by Kilborn Engineering, engineering consultants.

To date, only 25% of the entire Busang property has been explored and the extent of the mineralization has not been fully delineated.

This statement implied that Kilborn Engineering independently sampled and assayed the Bre-X results when, in reality, Kilborn used assay results provided by Bre-X.

At this point, J.P. Morgan became more involved. Plaintiffs describe the J.P. Morgan team in charge of the Bre-X engagement. First, Doug McIntosh, a J.P. Morgan vice president, was the lead senior J.P. Morgan technical representative in connection with the Bre-X project. McIntosh is a trained mining engineer and highly experienced in the technical evaluation of mining projects worldwide. He has a degree in Mine Engineering from the Colorado School of Mines. He is also a member of the Society for Mining, Metallurgy and Exploration, Inc., the national professional society for mining engineers. Second, Leslie Morrison, a J.P. Morgan managing director, was the lead senior deal strategist, client contact, and negotiator in connection with the Bre-X project. Plaintiffs allege that he was in contact with certain Insider Defendants and Barrick on a regular basis and was knowledgeable of Bre-X’s operations.

On August 24-27, 1996 Doug McIntosh visited . Busang accompanied by Richard Ward of Republic National Bank and by David Walsh’s son. On his visit, McIntosh was given a comprehensive tour of Bu-sang: the base camp, the Central Zone, and Southeast Zones I and II. Plaintiffs allege that during his trip to Busang, McIntosh had to have observed numerous anomalies. According to his August 29, 1996 memorandum to Michael de Guzman, McIntosh reviewed in considerable detail Bre-X’s sampling techniques, drill hole data, and resource estimates during his stay in Busang.

Based on his review, McIntosh allegedly concluded that the sampling techniques and statistical methodology used by Bre-X and Kilborn to determine Busang’s gold reserves were “nonstandard, incomplete, and possibly inaccurate.” The Complaint states that as a result, McIntosh recommended that Bre-X retain Mineral Resource Development Inc. (“MRDI”) of San Mateo, California, a geostatistical consultant, to recalculate Bre-X’s estimates using a more reliable methodology. Bre-X followed McIntosh’s advice. On September 6, 1996, Emmanuel Puspos, Bre-X’s Mine Planning Manager, hired MRDI to prepare an analysis of the Bre-X drill data.

Despite McIntosh’s alleged concerns about the sampling techniques and statistical methodology used by Bre-X and Kil-born, J.P. Morgan and Bre-X executed an agreement on September 3, 1996 whereby Bre-X hired J.P. Morgan to advise Bre-X “with respect to any sale, merger, consolidation or any other business combination.” In their agreement, J.P. Morgan agreed to do the following: perform a valuation of the Busang development; assist Bre-X in preparing an offering memorandum describing Bre-X and the Project, its operations, historical performance, and future prospects; identify and contact selected qualified partners; arrange for potential partners to conduct business investigations; assist Bre-X in negotiating the final aspects of any proposed transaction; and deliver an opinion to the Bre-X Board of Directors, if requested, as to the fairness of any proposed transaction. The agreement further provided that J.P. Morgan would receive a monthly retainer of $50,000, an additional $250,000 for a written valuation of the Busang project, another $500,000 for a fairness opinion, and a success fee of $3 million upon the closing of any transaction involving Bre-X. J.P. Morgan also executed a confidentiality agreement with Bre-X. On September 5, 1996, Bre-X publicly announced that J.P. Morgan had been hired by Bre-X as its financial advisor and that Republic National Bank had been retained as its corporate advisor.

On September 10, 1996, Felderhof authorized the release of Busang technical data to J.P. Morgan. A day later, Bre-X sent McIntosh Kilborn’s Prefeasibility Study, which contained summaries of Bre-X’s geology, drilling, sampling procedures, assay test data, and ore processing test data. Kilbom also included resource estimates in their studies. The Prefeasibility Study also contained a mining and mineral processing plan, capital and operating cost estimates, projected cash flows, net present values under different scenarios, and Kilborris recommendation that certain additional work be performed.

Plaintiffs allege that the Prefeasibility Study also alerted J.P. Morgan and McIntosh to the same red flags mentioned above. For example, the Prefeasibility Report referenced earlier problems with Bre-X assay results. The Prefeasibility Study also discussed Bre-X’s unorthodox sampling techniques, including the use of whole cores in assaying rather than split cores, the retention of only 10 centimeters of each core meter for future reference, and the use of cyanide leach process assays rather than conventional fire assay technique. The Prefeasibility Study recommended further metallurgical test work and a statistical analysis of assay variability. Plaintiffs state that a review of such materials by a mining engineer such as McIntosh would have immediately alerted him to red flags which, if pursued, would have led to the discovery that Busang was a sham.

Two weeks after J.P. Morgan received this technical data, on September 25, 1996, Bre-X held a meeting of its board of directors at J.P. Morgan’s offices. McIntosh and Morrison were present on behalf of J.P. Morgan. At the meeting, J.P. Morgan presented a chart, which summarized its conclusions. The J.P. Morgan bankers told the board that they believed that Bu-sang is the most attractive gold project known in the world today and that the reserves there were worth between US$4.5 billion and US$4.9 billion. They also advised the board that Bre-X needed a major mining company to develop and operate the mine in order to maximize Bu-sang’s value. They also stated that due to Busang’s size, capital requirements, and geographic location, only about six companies are qualified to be Bre-X’s partner, Barrick being among the six.

According to minutes of the meeting, Bre-X directors questioned the J.P. Morgan representatives closely concerning their-presentation. They specifically inquired about “the validity of the grade averages used in the report, certain other assumptions about the size of the Busang deposits, [and].the potential mining methods and related issues.” In response, McIntosh stated that he was. “familiar with the preliminary conclusions from the initial feasibility study by Kilborn SNC-Lavalin” and that “there would be further due diligence required with Kilborn at the Busang deposits.”

Meanwhile, Nesbitt was still releasing positive reports about Bre-X’s stock based upon Bre-X’s public statements. In September 1996 report, Nesbitt and Bianchini estimated that the total reserve potential for the Busang property was 62 million ounces of gold. They also stated that “recent drilling and mapping indicates that our estimate may be significantly underestimating the size of the deposit” and that the Busang deposit was “likely to be one