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John Felderhof, former chief geologist of Bre-X Minerals Ltd., was a no-show at the start his trial on Ontario Securities Commission charges Monday, as lawyers began to fight over the constitutional merits of the case.

Mr. Felderhof is charged with four counts of illegal insider trading for selling $84-million worth of shares in 1996 when he was allegedly aware of undisclosed information about the ownership of Bre-X's Indonesian gold site. Another four counts charge him with having "authorized, permitted or acquiesced" in issuing misleading press releases about the firm's gold resources.

He is the first and only person to be charged by regulators with offences related to the salting scandal that brought down the stock market high flier in 1997.

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The case is being heard in a wood-panelled courtroom in Toronto's old city hall, a room lined on three sides with temporary shelving filled with hundreds of black binders containing hundreds of thousands of pages of documents to be used in the case.

Mr. Felderhof, who lives in the Cayman Islands, did not attend. His lawyer, Joseph Groia, would not say if he will show up later in the trial, which could last more than two months.

Before getting down to the merits of the OSC case against Mr. Felderhof, Ontario Court Judge Peter Hryn must deal with Mr. Groia's challenges to the OSC case, using arguments based on the Charter of Rights and Freedoms.

Mr. Groia told the court that the four counts relating to the misleading press releases are unfair because Securities Act provisions they are based on violate Mr. Felderhof's rights under the Charter.

Mr. Groia said Mr. Felderhof has to defend the company's actions as well as his own. "Essentially, Mr. Felderhof is being charged with something Bre-X did, or failed to do," Mr. Groia said. "That doesn't withstand Charter scrutiny."

The OSC is effectively "pouncing on the most convenient victim," Mr. Groia said.

In addition, the language in the Securities Act that says a director can be found guilty if he "acquiesced" to issuing a misleading press release is too vague, Mr. Groia said. "It leaves open the possibility that someone who hasn't really done anything wrong can be convicted."

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If Judge Hryn decides not to throw the charges out altogether, Mr. Groia argued, he should at least force the OSC to prove that the press releases were misleading and that the company itself did not exercise proper due diligence. Mr. Felderhof could then defend his own actions without having to defend the actions of the company.

In reply to Mr. Groia's motions, lawyers for the OSC filed a document defending their actions and the wording of the Securities Act.

There is nothing vague about the section of the act that provides for quasi-criminal liability for directors and officers, they said. "It imposes liability on those who ought to have, and could have, stopped the company they control from breaching the law." The section "does not catch the morally innocent," they added.

There is lots of room for Mr. Felderhof to mount a defence, the OSC said, both by showing that the company exercised proper due diligence and by establishing that he "had taken all reasonable care to avoid the commission of the offence by the company."

There is no "unconstitutional burden" in Mr. Felderhof having to deal with the actions of the company itself, the OSC lawyers argued.

Mr. Groia told the court that he is prepared to defend Mr. Felderhof against the insider trading charges, which relate to information his client allegedly had about the Busang gold site's ownership, not its gold content.

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However, in a separate motion Mr. Groia said all the charges should be stayed because the OSC has not given him all the documents he has asked for, thus violating Mr. Felderhof's Charter right to "make full answer and defence."

Mr. Groia revealed in court that among the witnesses he will call for the defence are Peter Munk, chairman of Barrick Gold Corp., Kerry Smith, former mining analyst at First Marathon Securities Ltd., Paul Semple, a vice-president of Bre-x adviser Kilborn Engineering Pacific Ltd., and Paul Willson, a former senior officer of Placer Dome Inc.

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About the Author
Reporter, Report on Business

Richard Blackwell has reported on Canadian business for more than three decades. At the Financial Post and the Globe and Mail he has covered technology, transportation, investing, banking, securities and media, among many other subjects. Currently, his focus is on green technology and the economy. More


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