Squeezed-out Birch Mountain shareholders take on Brookfield

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Back in 2003, an investment in Calgary-based Birch Mountain Resources Ltd. seemed like a sure thing. The junior resource company was sitting on a massive limestone deposit in the middle of Alberta's booming oil sands, where it used for roads and concrete. The oil industry also uses limestone, processed into quicklime, to filter air and water emissions.

"If you look at a map of the oil sands, [the limestone deposit]is basically in the heart of it," said Florida-based investor James Currie, who toured the site in 2003 with Birch Mountain executives and other investors and helped the company raise money to develop the quarry. "You see a bunch of grass, and then all of sudden you see a rock outcropping, some boulders sticking up."

Despite its promise, by 2007 Birch Mountain had run into trouble as oil sands development slowed. The company sought bridge financing (ultimately about $50-million, mostly in debentures that could be converted into shares) from subsidiaries of Brookfield Asset Management Inc.

But even as the quarry began operating, Birch Mountain's stock was plummeting. It defaulted on its debts, and in November, 2008, Brookfield forced it into receivership. Another Brookfield entity ended up with the limestone quarry, and Birch Mountain's shareholders ended up with nothing.

Mr. Currie and a committee of investors, some of whom lost hundreds of thousands of dollars, are convinced there is more to the story. They have launched a putative class-action lawsuit against Brookfield, alleging that it engaged in "death spiral stock trading," and failed to follow disclosure requirements and insider trading rules, in order to "liquidate" shareholders and grab a limestone quarry worth an estimated $1.6-billion for just $50-million.

The allegations have not been proved in court.

A spokesman for Brookfield said the company had no comment.

It's a case that, Mr. Currie and his supporters say, questions the methods of a Canadian corporate titan that provides financing for distressed companies and then snaps them up for a bargain price.

The lawsuit, which has not yet been certified by a judge as a class action, is before the Ontario Court of Appeal on Wednesday, after an Ontario Superior Court judge threw it out in April, saying it should be heard in Alberta.

That ruling is being appealed by lawyers for Mr. Currie, a former restaurateur, and his partner and fellow shareholder activist Wanda Bond, who is the named plaintiff in the case. They argue that because the stock was traded on the Toronto Stock Exchange, and because Brookfield's head office is in Toronto, the case should be heard in Ontario.

As alleged in their statement of claim, Brookfield's Tricap Partners Ltd., now known as Brookfield Special Situations Partners Ltd., acted in an "oppressive" manner. They allege that Tricap held itself out as a provider of "long-term patient capital," but less than a year later forced Birch Mountain into receivership.

From 2006 to November, 2008, the company's stock dropped from $7.99 a share to just a penny on the TSX, the lawsuit says. The lawsuit blames the drop on "death spiral stock trading" (short sales designed to drive down share value), but provides no evidence that Brookfield was linked to the trading. As the stock became near worthless, the effective control Tricap had over the company grew, since it had the right to convert its debenture into shares, the lawsuit says.

In court documents, the plaintiffs also single out Vancouver billionaire Jim Pattison, a Brookfield director. He is not named as a defendant, but the plaintiffs allege that he not only held a Birch Mountain debenture of his own, but also signed an option agreement allowing him to take a 30-per-cent stake in Brookfield's new owner of the limestone quarry, known as Hammerstone Corp. The shareholders allege in court documents that this "preferential treatment" given to an insider like Mr. Pattison, which was never disclosed to the receivership judge, could have violated disclosure or insider-trading rules. Mr. Pattison could not be reached for comment Tuesday.

The total value of the limestone deposit, appraised at $1.6-billion, and the fact that limestone production and potential contracts were ramping up in 2008, were also ignored as Brookfield put Birch Mountain into receivership, the lawsuit alleges.

Among the former directors of Birch Mountain is former National Hockey League star Lanny McDonald. He said that he became involved while coaching hockey with Birch Mountain's chief executive officer, and that he and his friends and family lost a "substantial" amount of money. Mr. McDonald said he supports the lawsuit.

"After what happened here, it certainly leaves a bad taste in your mouth," he said.

Former Birch Mountain director Charles Hopper, a former managing director at Citigroup Inc. and at Lehman Brothers, said he also supports the lawsuit and lost "hundreds of thousands" on his own investment.

"There were many people in the company whose lives were, and are, dramatically changed, people wiped out," Mr. Hopper said. "I should have known better, being in the financial services business, but I had pinned a lot of my retirement hopes on Birch."