R. v. Paterson Date:, 2013 BCPC 5

Citation: R. v. Paterson Date: 20130118 2013 BCPC 0005 File No: 215966-1 Registry: Vancouver IN THE PROVINCIAL COURT OF BRITISH COLUMBIA REGINA v. JOHN GREGORY PATERSON REASONS FOR JUDGMENT OF THE HONOURABLE JUDGE H. K. DHILLON Counsel for the Crown: Ian Hay and Kevin J. Marks Counsel for the Defendant: H. Roderick Anderson and Lee Mauro Place of Hearing: Vancouver , B.C. Dates of Hearing: September 19, 2012 to December 7, 2012 Date of Judgment: January 18, 2013

Introduction [1] The accused John Paterson is charged by Indictment under s. 380(1) (

a) of the Criminal Code with committing fraud in excessof $5,000 by falsely reporting gold assay results in relation to a mining resource known as the Boka Project in the People’s Republic ofChina. [2] Mr. Paterson entered pleas of guilt to four of nine counts of fraud, thereby admitting that over an approximate four year periodhe defrauded members of the public who owned or were induced to purchase shares of Southwestern Resources Corp. by falsifying goldassay data results to indicate a greater confidence in the presence of a gold mineral resource than had been certified through independenttesting.

He also admitted that by such deceit, falsehood and other fraudulent means, he defrauded Southwestern Resources Corp. ofwhich he was President and Chief Executive Officer of services and capital of a value exceeding five thousand dollars. [3] The Crown seeks a sentence of 10 years for each of Counts 1, 2, 5 and 6, all sentences to be served concurrently. [4] Mr. Paterson seeks a sentence of 2 years less a day to be served in the community under a Conditional Sentence Order,followed by 3 years probation. Alternatively, he seeks a penitentiary sentence of 3 years. [5] Following the guilty pleas by which Mr.

Paterson admitted the essential elements of the offence, Crown Counsel filed acomprehensive set of agreed Admissions of Fact as proof of the essential elements of the offence. Under R. v. Gardiner (SCC), [1982] 2 S.C.R. 368, the prosecution bears the onus of proving any contested aggravating facts beyond a reasonable doubt: seealso s. 724(3)(

e) of the Criminal Code. Under a “Gardiner Hearing”, the Crown called lay and expert witnesses to establish how and inwhat manner the fraud was committed, and the quantum of loss thereby caused as aggravating factors on determination of sentence. [6] The Defence called Mr. Paterson and forensic psychiatrist Dr. Roy O’Shaughnessy to establish certain facts in mitigation ofsentence. Background Facts [7] In 1990 John Gregory Paterson was one of three principal founders of Southwestern Resources Corp. ("Southwestern) thenknown as Southwestern Gold Corporation.

Southwestern was a junior mineral exploration company based in Vancouver, BritishColumbia. It carried on exploration projects in Peru, Chile, Argentina, USA, and China. [8] Southwestern was first listed to trade on the Vancouver Stock Exchange in 1993. It traded on the Toronto Stock Exchange("TSX") from 1994 to 2009 under the ticker symbol SWG. [9] From 1991 until his resignation on June 19, 2007, Mr. Paterson was President, Chief Executive Officer, and a Director ofSouthwestern. From February 1, 2001 Mr.

Paterson was the designated “Qualified Person” under securities disclosure regulations forseveral of the Peruvian projects and became a Qualified Person on the Boka Project. Boka Project [10] The Boka Project came to the attention of Southwestern in the course of its exploration in China for nickel and platinumdeposits. By 2001 its local contacts noted a broad gold anomaly in stream sediment near a small existing gold mining operation and byJuly 2002 Southwestern had entered into a preliminary agreement with Brigade 209, the property rights holder, to explore this resourcepotential.

John Paterson visited Boka in August 2002. Tunnel sampling and soil surveys appeared to show very promising results forthe prospect of gold deposits. Southwestern decided to stake an interest in the property. [11] In November 2002, Southwestern entered into a formal agreement with Brigade 209 to acquire, by scheduled payments over aterm of four years, a 90 percent interest in Boka.

Southwestern took further tunnel and soil samples at Boka and started to put into effectan initial drilling program. [12] In January 2003 John Paterson visited the Boka Project with a number of research analysts and representatives from severalinstitutional investors, all with a particular interest in mineral resource investments.

One, Julian Baldry, took his own soil samples andwas satisfied after his visit, as were many others, that Boka had the potential to produce high grade gold results. [13] Southwestern’s interest in Boka and its early program of exploration soon became the focus of articles and investment letterswritten by promoters and research analysts.

The materials and commentary were glowing in early 2003 in describing the Boka Project asa viable source for high grade gold results. [14] Based on the very good preliminary soil and tunnel sampling results, which confirmed the presence of gold, there weresignificant expectations within the resource sector investment community about the potential value of the Boka Project. Much of thediscourse was heavily promotional and largely speculative, but it set the stage for heightened investor interest in Southwestern as itmoved into the next stage of exploration on Boka.

An Overview of the Process of Drilling and Assay Sampling

[ 15 ] In order to place Mr. Paterson`s fraudulent conduct in the proper context, particularly in view of his position as a geologist and Qualified Person on Boka, some basics of mineral exploration are helpful. At the risk of oversimplifying the process testified to by expert geologists, I set out a

summary of the key steps in mineral exploration including the importance of drill core sampling and accurate reporting. [ 16 ] Once a property of interest as a potential mineral resource site is identified and targeted for further exploration, drilling rigs on site begin to penetrate the earth’s crust to a designated depth at locations where the ore body is believed to be. The core or rock is pulled up for examination by a geologist for the presence of minerals, in this case gold. Sampling is a process that starts with the core being removed and identified as to drill hole location and depth.

The core is cut into segments, each numbered and labelled for identification and appropriately logged. The samples are packaged or contained to prevent their destruction or contamination. One portion of the cut core sample is sent to an independent laboratory for geotechnical analysis and the other portion of the same segment is retained in a secure location. The lab crushes and grinds the sample under a geotechnical process and provides its analysis of the findings in the form of a certified assay result (assay certificate) setting out the mineral or gold content in the core sample.

The assay certificates are sent to an authorized representative of the exploration company and typically retained by the exploration company in a data base of certified assay results. [ 17 ] The objective of a gold drilling exploration program is to determine from an analysis of the drill hole contents and to a reasonable level of geologic confidence how much gold is in a deposit, how easy or difficult it is to mine in that location, and how much of the gold can be extracted from the mined rock. [ 18 ] The metallurgical test work done on the drill core samples by the laboratory provides guidance to the exploration company in answering these questions and allows the company to inform current and future investors about the company`s economic prospects.

The results of the metallurgical testing are material and are required to be publically disclosed. [ 19 ] Mineral exploration on a target property is conducted in stages, with some initial drilling and early analysis of core samples for gold content.

If the gold values from the initial selective drilling justify it, the project moves to a preliminary assessment or “scoping study” to determine if the site contains a sufficient gold resource to justify implementing a more comprehensive study, called a Preliminary-Feasibility Study (“Pre-Feasibility Study”) of the viability of the project. [ 20 ] Metallurgical testing drives the investment life of a mineral exploration project.

Through positive assay sample results at each stage, a company hopes to secure investment to proceed to the next and more comprehensive stage of assessment and analysis, with the ultimate objective of obtaining the necessary financial investment to develop an economically viable mineral producing site. An Overview of the Offence [ 21 ] The gravamen of the offence committed by Mr. Paterson is that he knowingly and intentionally falsified the laboratory metallurgical test results to increase the amount of gold in the Boka drill core samples.

By doing so, he falsely misrepresented the richness and size of the Boka gold deposit to Southwestern, its shareholders, and to the investing public. He actively maintained this facade from the first set of assay results in early 2003 to his resignation from Southwestern in June 2007. During this period of time, knowing that he had falsified the Boka gold assay results, he promoted the prospects of Boka in company news releases, promotional meetings, and in Southwestern`s letters to shareholders and Boka Project updates in the company’s annual reports. [ 22 ] Mr.

Paterson kept the Board of Southwestern in the dark about the true assay results. Relying on the manipulated results, the company moved forward with its exploration program in Boka and invested millions of dollars. [ 23 ] When Southwestern uncovered the fraud in 2007, and made the public aware that its drill hole results were unreliable, the market responded. The value of shares in Southwestern dropped overnight, with the resulting loss of capitalization of $154.1 million dollars.

This calculation of loss is admitted by the defence. [ 24 ] The Crown contends that the total quantifiable market capitalization loss directly attributable to Mr. Paterson’s impugned conduct is $260 million dollars and the overall loss and expense suffered by investors and Southwestern is over $300 million. The defence disputes this figure. [ 25 ] By any measure, a fraud in the tens of millions of dollars is of a significant magnitude.

Specific Particulars of the Commission of the Offence of Fraud [ 26 ] The following admitted facts [Exhibit #1] set out the timeline of significant events: Paterson`s Sole Control of Official Assay Certificates 27. Starting in 2003, drill core mineral samples were taken from the Boka site periodically. These drill core mineral samples were sent to one of three independent laboratories for gold content analysis: ALS Chemex ("ALS"), International Plasma Labs Limited ("IPL"), and SGS Laboratories Limited ("SGS"). 28.

These laboratories transmitted spreadsheets containing the results of the gold content analyses only to Paterson by e-mail. Later, the laboratories forwarded the form of Official Assay Certificates (the "Certificates") only to Paterson.

29. Paterson did not distribute the original spreadsheets or Certificates to any other persons involved in Boka or Southwestern. 30.

Paterson did not maintain, nor did he cause any other officers or employees of Southwestern to maintain, an accurate database containing the original gold assay results. [ 27 ] Southwestern was required under securities legislation to make public disclosure of the Boka gold assay results through or under the supervision of a designated Qualified Person defined under National Instrument 43-101, s. 2.1 as an experienced mining engineer or geoscientist in good professional standing. [ 28 ] The purpose of NI 43-101 is to ensure that information about mineral properties is reported in a reliable and consistent manner to investors and potential investors on the stock exchanges overseen by Canadian Securities Administrators.

One of its objectives is to reduce the risk of misleading, erroneous or fraudulent information relating to mineral properties being published or promoted to investors on those stock exchanges. The Qualified Person, who is governed by the professional and ethical standards of his or her calling, is charged with reviewing and making accurate and timely disclosure of all drilling assay results to actual and potential shareholders and to the capital markets. [ 29 ] From 2003 to June 2007 Mr.

Paterson held the designation of a Qualified Person on the Boka Project and undertook to perform the duty of timely and accurate disclosure to the investing public of scientific and technical information on the Boka Project, including the Boka assay results. [ 30 ] Mr. Paterson makes the following admissions as to his conduct [Exhibit #1]: 38. On 25 occasions between May 8, 2003 and February 21, 2007, Paterson drafted a Press Release after receiving gold assay results from the laboratory. 39. Paterson altered some of the gold assay results received from ALS, IPL and SGS.

The Press Releases drafted by Paterson contained those altered gold assay results for Boka. 40. The Press Releases containing those altered gold assay results were forwarded to TSX Market Surveillance, SEDAR and CNN Matthews, as described above. 41. No other directors, executives or employees of Southwestern were assigned, nor was there any procedure in place, to authenticate the gold assay results reported to the investing public in the Press Releases against those Paterson received from ALS, IPL and SGS. 42.

By altering gold assay results and publicly disseminating them through the Press Releases, Paterson failed to convey the true assay results from Boka to investors, potential investors and the capital markets. 43. From May 8, 2003 to February 21, 2007, Paterson caused public disclosure of 25 Press Releases. Each and every Press Release contained the altered gold assay results. [ 31 ] Mr. Paterson misled the Southwestern Board and its Public Disclosure Committee by including false information in the Press Releases about the drill hole results.

He forwarded spreadsheets containing the falsified assay results to employees of Southwestern responsible for entry into the company's database. He maintained a similar fraudulent assay data base at Southwestern’s offices in China. [ 32 ] Fortified by the positive gold assay results over the preceding two years, in 2005 Southwestern retained independent consulting geologists to provide their recommendations about the viability of proceeding to the next stage of exploration.

Consultant Lionel Winter concluded in February 2005 that the Boka property “contained a robust gold system” and recommended expansion of the drilling and engineering studies of the property. A second more detailed study was commissioned and obtained by Southwestern on June 30, 2005 and it also concluded positively on the scope for developing a mining operation on Boka. [ 33 ] The information provided by Southwestern to these consultants, and in particular the drill hole and gold assay data manipulated by Mr.

Paterson, was material to their conclusions to recommend proceeding with further exploration and investment on the project. [ 34 ] By late 2005 the stage was set for Southwestern to proceed to a “Pre-Feasibility Study” on the Boka Project. Southwestern retained Ausenco Limited as its principal consultant to spearhead the study. Ausenco was responsible for evaluating the metallurgy and

plant design and had arranged for Aamtec, a laboratory in Australia, to receive and test shipped Boka drill hole samples for gold values. As aspect of the Pre-Feasibility study was to review the metallurgical test work done to date by checking the accuracy of those results and arranging for other sampling as required.

Other aspects included preparing a mineral resource estimate and mining options, and assessing the potential environmental and socio-economic impacts of mining within its regional setting. [ 35 ] In short, the study was to be the equivalent of an independent report card to the Board of the company and to its investors about the strengths or weaknesses of the exploration findings to date, and issues required to be addressed before further exploration or investment decisions were undertaken. [ 36 ] The importance of Southwestern’s retainer of Ausenco and its sub-consultants in late 2005 is that Mr.

Paterson knew their independent work on Boka would uncover his fraud and he set about on a course of conduct designed to thwart the study. He procured the assistance of Boka’s general manager John Zhang, a geologist based in China, to assist in the cover up. The Cover-Up of the Fraud [ 37 ] As discussed, metallurgical test work is a key part of the process an exploration company utilizes to assess the economic feasibility of a mineral property. It requires the collecting and forwarding of a comprehensive set of samples to the lab to determine all the variations in the resource.

Without it, the Pre-Feasibility Study can not be completed. [ 38 ] I find it proved that the fraudulent conduct of Mr. Paterson included the steps he took in 2006 and 2007 to divert, delay and hinder the inevitable discovery of the fraud by delaying the completion of the Pre-Feasibility Study. Mr. Paterson greatly amplified the effect and importance of local government pressures about environmental issues and foreign gold ownership in an attempt to slow down the progression of the study.

As several witnesses testified, these matters are part and parcel of the landscape of mineral exploration and can be amenable to negotiation and resolution while the project proceeds. I find that Mr. Paterson gave local issues far more weight than was warranted in order to delay the inevitable uncovering of his criminal conduct. [ 39 ] I further find that Mr. Paterson put the Pre-Feasibility study on hold by stopping the metallurgical testing.

He did so unilaterally and without the full knowledge or concurrence of the Board of Southwestern. [ 40 ] Timo Jauristo, a geologist and Southwestern’s Vice President for corporate development, testified that a coordinated effort was taking place in early 2007 to complete the Pre-Feasibility Study by June of that year. Independent consultants had been retained to collect and ship samples to Australia for testing.

In early to mid-2007, a host of calamities appeared to befall the samples collected for shipment, including being misplaced, destroyed or being otherwise lost in transit . [ 41 ] Unbeknownst to Southwestern, Mr. Paterson was countermanding sample delivery instructions by directing Southwestern’s China-based geologist John Zhang to use various tactics to prevent the samples from leaving China for the Australian metallurgical test laboratory. Mr.

Paterson has admitted that he instructed John Zhang to run interference with Southwestern’s attempts to get independent sample testing done by hiding, contaminating or mixing the samples, or by otherwise preventing the drill hole samples from being shipped. [ 42 ] To procure Mr. Zhang`s assistance, in September 2006 Mr. Paterson made a $200,000 U.S. payment to Mr. Zhang from his personal offshore account. As the fraud started to unravel after Mr. Paterson’s resignation from Southwestern in June 2007, Mr. Paterson made a further payment of $300,000 U.S. to Mr. Zhang in July 2007. [ 43 ] I reject Mr.

Paterson`s evidence that these extraordinarily large payments were for legitimate purposes, such as a loan or severance pay. A loan of $200,000 in 2006 to an off-shore employee without written terms or security defies credulity. The so-called severance payment is also not believable. Southwestern had cause to terminate John Zhang without severance given his complicity in tampering with the samples. The $300,000 payment was not only incompatible with Mr.

Zhang`s short (two years) tenure of employment, it was far in excess of his annual salary. [ 44 ] In early July 2007, Southwestern set up a Special Committee to review the delays at Boka and sent Timo Jauristo, now interim CEO, Thomas Beattie and Alex Losada-Calderon to China to investigate. Mr. Zhang was not cooperative or forthcoming in assisting them with their enquiries. [ 45 ] I find and conclude that Mr. Paterson’s email instructions to Mr. Zhang to delay the Boka Project and the timing of his two large payments shows that the monies were related to Mr.

Zhang`s connivance in assisting him in preventing the fraud from being discovered by Southwestern board members and consultants. [ 46 ] During this July 2007 trip by the Special Committee, a comparison of Southwestern`s Boka assay data base with the true assay certificates showed clear evidence of modifications of assay data. Timo Jauristo reported his preliminary concerns about data “contamination” to the Board of Southwestern and this led in short order to the publicly announced withdrawal of all Boka gold assay results. [ 47 ] In

summary, by the end stages of Mr. Paterson’s involvement on the Boka Project, he was actively coordinating and conducting the continued concealment of the fraud. He ran interference with Southwestern`s desire to move to the next stage of exploration. In particular he delayed the progression of the project to the stage of independent metallurgical testing of the drill hole samples.

Through large monetary payoffs, he subverted a company employee, John Zhang, to contaminate, hide or destroy the drill hole samples destined for metallurgical testing at independent laboratories, all of it with the intention of impeding and delaying independent verification of Southwestern`s previously reported (and manipulated) gold assay data results. Circumstances of the Offender

[ 48 ] Mr. Paterson was born in 1950 is age 62. He has been married for over 40 years and is the father of two adult daughters. His education and professional experience is in geology and mineral exploration, the mainstay of his employment and business activities from 1974 to 2007. As noted, Mr. Paterson was a principal founder of Southwestern and was its President, Chief Executive Officer and Director from 1991 until his resignation in June 2007. [ 49 ] Mr. Paterson suffers from chronic depression, an illness which has its roots in his family history and dynamics.

He was raised in an environment of illness and tragedy. His father was wounded in World War II and suffered from its after-effects, including chronic pain caused by his shrapnel injuries. He is described as a remote, demanding and perfectionistic father who was hypercritical of his son`s performance. Mr. Paterson’s father died from stomach cancer when Mr. Paterson was age 13. [ 50 ] Mr. Paterson’s mother was a life-long chronic depressive who was institutionalized in a psychiatric hospital when he was ten years old.

She was treated with electroconvulsive therapy and seemed never to be the same after her discharge. She remained extremely sad and unwell for the rest of her life, eventually taking her own life in 1978. This came in the same year that Mr. Paterson suffered his first onset of depression which along with panic attacks, anxiety and lethargy caused him to abandon his wife and child for almost three and a half years before reconciling.

The trigger for the onset of this illness was his poor performance at university and the stress of starting a family. [ 51 ] After he reconciled with his family he built a career in mining exploration. By all accounts, he was a hard working and respected geologist within the mining community. In 1990 Mr. Paterson co-founded a small exploration company which would eventually become Southwestern Resources. [ 52 ] Nineteen years after his first serious depression, Mr.

Paterson went into another depression in 1997 after a Peruvian joint venture agreement partner terminated the relationship due to poor exploration results. His feelings of anxiety and hopelessness, loss of appetite, and thoughts of suicide caused him to be hospitalized for treatment. He was diagnosed as suffering from a severe clinical depression. [ 53 ] Two years thereafter, in 1999, Mr. Paterson went into another downward spiral on learning of subpar drill results on a Mongolian exploration project. He testified that he felt responsible for the results showing a very low grade of gold.

He left the office to attempt suicide by overdosing on medication. He required hospitalization and subsequent ongoing treatment at UBC Hospital as a psychiatric outpatient. His anxiety was noted in the clinical records to relate predominantly to work issues, including feeling personally responsible for the corporate downturn. He was away from his duties at Southwestern for four months. [ 54 ] Mr. Paterson testified that he returned to Southwestern on each occasion after his illness because feared of loss of his presidency and he felt a pressure to return to produce for the company. [ 55 ] By 2001, Mr.

Paterson was actively focused on exploration for valuable mineral deposits in China and by 2003 Boka was at the forefront of Southwestern`s exploration activities there. [ 56 ] It is submitted by the defence that Mr. Paterson’s acts of fraud between 2003 and 2007 were not motivated by personal greed but were the result of a complex blend of psycho-social factors which put him at risk of severe clinical depression on receiving underwhelming exploration results.

He was unable to accept and report such dismal news on a much lauded and highly promoted project because he feared the disapproval of his partners and the return of a debilitating clinical depression. [ 57 ] The defence does not say that this mindset deprived Mr. Paterson of the knowledge that he was committing a serious fraud and that it was wrong. Mr. Paterson admits and accepts that his conduct was unlawful but says his illness and motivation are factors that should be considered in assessing his culpability. [ 58 ] The defence relies on the opinion evidence of Dr.

Roy O’Shaughnessy, an experienced forensic psychiatrist with 32 years of clinical experience, to provide insight into Mr. Paterson’s mental condition and its relationship to the commission of the offence. [ 59 ] Dr. O'Shaughnessy confirms that Mr. Paterson meets the diagnostic criteria for Major Depressive Disorder which is in partial remission on medication, and an underlying Dysthymic Disorder which is a low grade chronic depression. Throughout much of his adult life Mr.

Paterson has suffered from chronic low-grade depression overlaid from time to time with discrete episodes of major depression generally triggered by environmental, family or work stresses. At certain periods in his life, he has suffered from this “double depression” when the more severe disorder descends on his chronic low grade disorder. [ 60 ] Dr. O'Shaughnessy notes that Mr. Paterson’s medical records support several clear episodes of severe depression particularly in 1997 and 1999 that has a correlation to employment stressors, and likely also in 1978 with environmental and family stress. [ 61 ] Mr.

Paterson’s described personality traits of aloofness, pessimism, remoteness, unhappiness and reticence are consistent with his ongoing chronic low-grade depression. He does not suffer from a true Personality Disorder but has character traits that are obsessional or compulsive in nature and he is described to be highly sensitive to external criticism and fear of failure. [ 62 ] Mr. Paterson admitted to Dr.

O'Shaughnessy and also testified at the sentence hearing that he knew that falsifying the assay results was wrong but chose to suppress this knowledge because he firmly believed that Boka contained better grades of gold than the initial results revealed and this would be proven by further drilling on the property. Secondly, he was fearful of failure and criticism by his partners and shareholders and falsifying the results kept their recriminations at bay. [ 63 ] Dr. O'Shaughnessy commented that Mr.

Paterson’s chronic depression coupled with his underlying personality traits played a “significant role in his motivation” to falsify the assay results. He feared spiralling into a full blown, severe depression as before if the Boka Project was perceived to be a failure, and he wanted to meet the expectations of the company and its share holders. [ 64 ] Dr. O'Shaughnessy acknowledges, as does Mr. Paterson, that he benefitted financially by falsifying the assay results. While he did not fully maximize the potential gains available to him and he made trades that were at times uneconomic, over the period of his

frauds between May 8, 2003, and July 31, 2007, his Southwestern securities transactions resulted in a positive net proceeds of sale of $5,632,913. [ 65 ] I accept that Mr. Paterson felt stress and pressure on the Boka Project but do not accept that there was overt pressure placed on Mr. Paterson by his partners to obtain “good results” as he testified or that they were callous or unsympathetic to his condition. The evidence indicates he kept his personal life and illnesses extremely private. He did not voluntarily disclose his difficulties or seek assistance or accommodation.

Between 2003 and June 2007 he appeared to be his usual self, managing a sizeable project in China and running the company as President. He participated in company meetings, drafted press releases and annual reports, sent emails and attended promotional meetings from time to time. The people he dealt with at Southwestern did not note anything out of character with Mr. Paterson during the four years he ran the Boka Project. [ 66 ] I accept the opinion of Dr. O'Shaughnessy that the motivators behind Mr.

Paterson’s offending are multi-factorial, and that his illness played a significant role in the thinking and behaviour that led to his falsifying the assay results. I would add however that Mr. Paterson’s frauds benefitted him professionally and personally as well. He maintained control of his Presidency which was important to him, a position he was very reluctant to give up during his last severe episode of depression.

In my view, maintaining his position at the helm of an apparently successful mineral exploration company founded by him was an important further motivator to continue with his deception. [ 67 ] Mr. Paterson used his position and power within Southwestern to influence company decision making. He was autocratic and unilateral as opposed to participative in his management style and was difficult to approach.

This afforded him a great deal of decision making control and allowed him clear opportunity to commit the frauds. [ 68 ] Feelings of pressure and stress to produce are not surprising for any one running a large foreign exploration project with investor backing. Mr. Paterson was particularly vulnerable to adverse mental health effects due to his genetic loading for depression. I accept the contribution that Mr. Paterson’s personality traits and fragile mental health made to his decision to alter the assay results.

I also accept that the deceit continued initially because of “wishful thinking” that better drill core results were around the corner and latterly for the reason that there was no easy way out of the difficulties in which Mr. Paterson had placed himself and Southwestern. [ 69 ] The evidence indicates that Mr. Paterson did not pad expenses or live high off the company. He did not use the knowledge he had as to the assay results to reap personal financial advantage from his Southwestern shares. I find that while financial gain was a result that flowed to Mr.

Paterson, it was not the primary motivating factor behind his offending behaviour. Post Offence Factors [ 70 ] Following his resignation from Southwestern in June 2007 and public confirmation by the company of the manipulated Boka assay results in July 2007, Mr. Paterson had a mental breakdown and fell into a major depression. He was hospitalized for about six weeks. Presently, Mr. Paterson is in partial remission, and on medications to help control and alleviate the physiological symptoms of his depression. [ 71 ] Shortly after release from hospital, Mr.

Paterson began to take steps to acknowledge his wrongdoing. He accepted responsibility for the falsified assay results and assisted in the investigation and resolution of the civil and regulatory proceedings that followed.

His cooperation extended to the following: -September 17, 2007 by consent order he made a voluntary disclosure to RCMP of his computer data and images; - September 27, 2007 he consented to a Mareva injunction related to administrative, civil and criminal proceedings arising from his conduct. - September 2008 the Class proceedings brought in Ontario, Quebec, and British Columbia in relation to Boka were settled. Mr. Paterson contributed to settlement of claims by surrendering substantially all of his assets, valued at $4,200,000 in order to make restitution to victims. Mr.

Paterson and his wife collectively contributed $7.2 million, a substantial and significant portion of their assets, to settlement of the civil claims. -Mr. Paterson cooperated with British Columbia Securities Commission investigation and entered into a Consent Order on June 24, 2009 permanently prohibiting him from trading in securities, acting as a director of a public company, acting as a manager or consultant in connection with the securities market, or engaging in investor relations activities. [ 72 ] In criminal proceedings, Mr.

Paterson through his counsel cooperated in disclosing financial and other related documents to RCMP investigators that were material to establish his participation in and cover up of the fraud. [ 73 ] The d efence also contends that Mr. Paterson has sought an early resolution of the criminal charges which were not laid until December 2010. Prior to being formally charged, Mr. Paterson had offered to voluntarily surrender himself to authorities.

His arrest occurred without notice and some 41 months after the discovery of the altered assay values, 27 months after the class proceedings had been resolved, 18 months after the administrative proceedings had been resolved, and 18 months after Mr. Paterson offered to surrender himself to authorities. He was released on strict terms on December 20, 2010 and has been fully compliant with the conditions of his release. [ 74 ] Mr. Paterson has suffered from the effects of notoriety due to pending criminal charges.

He has volunteered at various charitable organizations including care facilities and food banks, but was asked to withdraw from community service in one organization once his arrest was publicized. [ 75 ] From early days of the criminal investigation, Mr. Paterson evinced an intention to enter a guilty plea to fraud. He made a

significant series of admissions to expedite proof of facts. Although the guilty plea was entered on the first day of an estimated five month trial, I am satisfied that an indication of an intent to plead was communicated in a timely fashion and moreover Mr. Paterson cooperated in providing a comprehensive set of detailed admissions of fact for purposes of sentencing. The contested issues as to aggravating and mitigating factors were properly the focus of the sentence hearing. [ 76 ] I am satisfied that the full and timely cooperation of Mr.

Paterson in the pre-trial investigative stages, and his settlement of the civil claims, along with the guilty pleas in this proceeding has saved the administration of justice significant cost and expense. I accept and find that these endeavours to be mitigating factors in sentencing. Principles of Sentencing [ 77 ] Statutory sentencing principles under the Criminal Code and case law collectively provide guidance to a sentencing judge in the determination of a fit and just sentence. The statutory directives are found under s. 718 through s. 718.2 inclusive of the Criminal Code .

The fundamental purpose of sentencing is to contribute to respect for the law and the maintenance of a just, peaceful and safe society by imposing just sanctions that achieve one or more of the following objectives: (

a) to denounce unlawful conduct; (

b) to deter the offender and other persons from committing similar offences; (

c) to separate offenders from society where necessary; (

d) to assist in rehabilitating offenders; (

e) to provide reparations for harm done to victims or to the community; and (

f) to promote a sense of responsibility in the offender, and acknowledgement of the harm done to victims and to the community [ 78 ]

Section 718.1 calls upon a court that imposes a sentence to balance the gravity of the offence with the degree of responsibility of the offender. As noted by the Supreme Court of Canada in R. v. Nasogaulak 2010 SCC 6 at paras. 41-44 , the principle of proportionality is central to the sentencing process.

The sentencing judge must assess the moral blameworthiness of the offender and the gravity of the offence and strive to ensure that “the degree of censure required to express society’s condemnation of the offence is always limited by the principle that that an offender’s sentence must be equivalent to his or her moral culpability, and not greater than it.” [ 79 ] Secondary sentencing principles under s. 718.2 include that a sentence should be increased or reduced to account for any relevant aggravating or mitigating circumstances relating to the offence or the offender and expressly includes as a deemed aggravating circumstance evidence that the offender, in committing the offence, abused a position of trust or authority in relation to the victim: s. 718.2(iii). [ 80 ] For the specific offence of fraud, s. 380.1 directs that a number of circumstances if proved beyond a reasonable doubt are to be considered as aggravating for purposes of fixing a sentence.

This

section came into force September 15, 2004 codifying aggravating circumstances previously found in sentencing case law. Criminal Code s. 380.1

(1) Without limiting the generality of

section 718.2, where a court imposes a sentence for an offence referred to in

section 380, 382, 382.1 and 400, it shall consider the following as aggravating circumstances: (

a) the value of the fraud committed exceeded one million dollars; (

b) the offence adversely affected, or had the potential to adversely affect, the stability of the Canadian economy or financial system or any financial market; (

c) the offence involved a large number of victims; and (

d) in committing the offence, the offender took advantage of the high regard in which the offender was held in the community.

(2) The court shall not consider as mitigating circumstances the offender’s employment, employment skills or status or reputation in the community if those circumstances were relevant to, contributed to, or were used in the commissions of the offence. [ 81 ] I turn now to the specific issues raised at the sentence hearing.

The Nature and Sophistication of the Fraud [ 82 ] The Crown contends that the actions of John Paterson show a prolonged and sophisticated pattern of fraudulent conduct the cornerstone of which was the deliberate falsification of certified gold assay data from the Boka Project and its dissemination to the investing public. [ 83 ] The Crown relies on the opinion of Dr. Warrick Stuart Board, a registered professional geologist and accredited geoscientist.

[ 84 ] The defence does not dispute that there was manual and deliberate tampering of the gold assay data but disagrees with the inferences Dr. Board drew from the manipulated data as to the nature, sophistication and concealment of the fraud. It is submitted that there was no preconceived scheme by Mr. Paterson to alter the results and he did so in a random and relatively unsophisticated manner. The defence relies on Mr. Paterson’s psychological vulnerabilities to support its position that the acts were not part of a pre-planned grand scheme to defraud nor were they overly sophisticated. [ 85 ] For purposes of characterizing the nature of the fraud, I will deal in this

section with the expert testimony of Dr. Board and the evidence of Mr. Paterson as to his thinking processes at the time he made his alterations. [ 86 ] The evidence of Mr. Paterson was that on receiving the first set of certified results, and seeing the poor gold results, he panicked. There had been high optimism within Southwestern and the resource sector investment community because of visible gold at Boka and the less than stellar results were extremely disappointing. Mr.

Paterson testified that in the face of significant pressure to produce good gold assay results he randomly chose and inserted certain assay values or numbers to make the results better. He said he followed the same random insertion of numbers in each change he made to the many subsequent certified gold assay results.

He had no scheme or grand design in mind, and simply reacted unthinkingly in a panic in seeing such poor results in the pressure of expectations of Southwestern, the professional investment community and the investing public. [ 87 ] The Crown contends that the actions of John Paterson show a prolonged and sophisticated pattern of fraudulent conduct the cornerstone of which was the deliberate falsification of certified gold assay data from the Boka Project and its dissemination to the investing public. Evidence of Dr. Warrick Stuart Board [ 88 ] Dr.

Board testified for the prosecution as an expert in geology on the Boka drilling data and the nature and effect of falsification of data by Mr. Paterson. In summarizing the geological evidence, I hope to use common terms where feasible in the place of more precise geologic terms. [ 89 ] Dr. Board examined the manipulated Boka gold assay results published by Southwestern and compared these falsified results with the lab certified test results in the form of assay certificates. He was asked to give an opinion on how the certified gold assay results were altered and the methodology used in doing so. [ 90 ] Dr.

Board testified that he found clear evidence of manual and deliberate changes to the official certified Boka gold assay data. The changes were not the result of data entry error or systemic error. [ 91 ] Dr. Board constructed a true data base from the official assay certificates obtained directly from the issuing laboratories. In doing so, he found that the gold mineralization in Boka was far more variable, meaning that the grades of gold in the rock or ore were not as high or as consistent in value as the manipulated data represented.

The areas of gold mineralization were also more discontinuous or less uniform than was suggested by the manipulated gold assay data. Dr.

Board was of the opinion that the manipulated and false assay results significantly overstated the tonnage, grade and contained ounces of gold and overstated the confidence in the continuity of the mineralization, thereby falsely representing a more significant gold deposit on the Boka property than the certified lab data warranted. [ 92 ] He concluded that the certified gold assay data had been manually and deliberately manipulated from May 8, 2003 to February 21, 2007 to significantly overstate the Boka gold mineral resource estimate. [ 93 ] As to the method of manipulation, Dr.

Board stated that he examined over 200 drill hole results and looked at the changes made by Mr. Paterson to the certified gold assay results. He stated that the pattern of manipulation showed a “mineralization guided approach”, meaning that where the certified results showed a very low presence of gold in a particular sample taken from a drill hole section, Mr. Paterson`s changes invariably increased the assay value readings to indicate a higher level of gold mineralization in the segment. [ 94 ] Dr.

Board opined that where the gold values in the certified results were so low as to be of no economical interest, there was no change in the assay data base. The manipulations by Mr. Paterson as seen in the Southwestern assay data base occurred or were limited to intersections where there was a slight indication of the presence of gold otherwise referred to as a “hint” or “sniff” of gold. [ 95 ] In his testimony, Dr.

Board elaborated that this type of manipulation – elevating indicated low gold values in a segment - was representative of what occurred in “each and every test hole where there was a hint or sniff of gold”. In cross-examination, he agreed that Mr. Paterson had also altered data from some barren drill holes where there had been no hints or sniffs of gold whatsoever. This admission was inconsistent with his testimony that there were changes in “each and every hole” with weak mineralization. [ 96 ] However, of the 311 altered intervals, 80% were to weak drill hole gold assay values, supporting Dr.

Board’s opinion that a “mineralization guided approach” was pervasive in the pattern of data manipulation engaged in by Mr. Paterson. In plain terms, in the majority of cases Mr. Paterson looked for and selected intersections or segments with low levels of gold mineralization, boosted the gold values to represent geologically plausible gold mineralization zones, and lodged the changes in the Southwestern’s assay database. [ 97 ] Dr.

Board also agreed that the manner in which the assay values were changed involved simple arithmetical changes, such as moving a decimal by one or two points to increase the low gold values tenfold or a hundredfold. Other increases in value appeared to be more randomly selected. [ 98 ] Dr. Board concluded that the overall result of the manipulated data was to construct and present a geologically plausible gold mineralization zone having regard to the regional and geological setting, indicating relatively continuous and broad zones of gold mineralization that could be modelled with relative ease.

He concluded the person manipulating the data needed to have a good understanding of geology, geological sampling theory, and gold mineralizing processes. [ 99 ] The testimony of geologists Michael Pond, Timo Jauristo, Dan Innes and Dr. Losada-Calderon supports Dr. Board`s conclusion

that the manipulated assay data presented a geologically plausible and potentially viable mineralized zone to trained observers. Each geologist accepted the manipulated data without question until the fraud was uncovered and comparison with the certified laboratory assay results confirmed the true nature and extent of the gold mineralization at Boka. [ 100 ] Dr. Board found evidence of falsified hardcopy analytical laboratory assay certificates.

He concluded that the person responsible for deliberately changing the gold assay data needed to have custody of the gold assay database and overall control of the company’s gold assay dataflow, including maintaining sole control of the assay certificates released by the lab and Southwestern’s assay databases in Canada and China. [ 101 ] The impact of the deliberately manipulated assay database was that Southwestern published two mineral resource estimates for the Boka Project in two press releases, the first dated 18 July 2005 and the second dated 11 December 2006. Dr.

Board said that based on his experience in the mining industry, the increase in size and confidence in the mineral resource from the 2005 to the 2006 estimate, and the announced Pre-Feasibility Study, would have significantly increased investment interest in the project. [ 102 ] Dr. Board noted that the intended effect of this falsification, suggesting a more valuable mineral resource, was to generate investment interest in the project and, by implication, in Southwestern.

The correctly calculated mineral resource estimate based on the certified gold assay data showed the Boka deposit to be of interest only to small scale artisanal miners, as opposed to a Western junior mining company interested in taking the property through to the next stage of exploration or to eventual operation as a gold producing mine. Dr.

Board opined that the small, low grade gold deposit actually revealed by the certified gold assay data would not have been of interest to a western company because the gold resource would not have been economically feasible to mine using western methods, particularly having regard to the prevailing gold prices at that time. Findings as to Nature and Sophistication of the Fraud [ 103 ] I accept the evidence of Dr. Board as to the pattern of the changes and what they reveal. The mineralization guided approach as found by Dr. Board was pervasive, as he wrote in his report.

I do not find that his overstatement during his testimony that this type of enhancement occurred in “each and every hole” detracts from the soundness of his opinion. I found Dr. Board to be a knowledgeable and erudite witness who readily yielded to expert cross-examination where appropriate but did not resile from the pattern of manipulations disclosed by his analysis of the data. [ 104 ] I find that John Paterson made changes predominantly in those intersections where the certified gold assay data showed values suggesting weak gold mineralization. The Southwestern assay data base shows, as Dr.

Board testified, that Mr. Paterson changed or manipulated the Southwestern assay data base in a “mineralization-guided approach”. The sections were deliberately chosen and the effect of the changes was to show fairly continuous zones of gold mineralization than were otherwise present. [ 105 ] I find that changes to the certified gold assay results by Mr. Paterson were not truly random in the sense that the numbers were chosen out of the blue without any thought as to intended results or consequences.

The changes were made for the most part to selected and specific drill zone intersections for the purpose of raising the near negligible gold values to indicate continuous, geologically plausible gold mineralization in the zone. The values that were chosen were fit for the purpose of achieving the result desired, which was the creation of a more coherent series of grades of gold mineralization so as to show value in the Boka Project.

The manipulated data was geologically plausible and would not raise any suspicion as to its validity or reliability and was generally capable of withstanding geologic and investor scrutiny and in fact did so until after John Paterson’s resignation. As such, I am satisfied that the data manipulations were not ad hoc changes without an overarching design or purpose. [ 106 ] Dr. Board further concluded that changes made to the check assay data or pulp data were done in such a manner as to ensure that final results were in a certain band of precision in order not to attract queries from independent consultants.

I accept Dr. Board`s opinion on this point. [ 107 ] I find that the changes made by John Paterson to drill hole results over nearly five years of exploration drilling were not ad hoc but made with geologic knowledge of the region in order to convey the presence of a gold mineral resource. He testified he wanted to meet the expectations of his partners and investors.

To achieve that result, he controlled the certified data, manipulated the data through falsification of the assay results, and distributed the falsified data in the form of Southwestern press releases and published reports. [ 108 ] The defence notes that the fraud can not have been overly sophisticated because it was readily discoverable in the ordinary course because of regulatory checks and balances.

Southwestern`s gold assay data had to be independently verified by arm`s length consultants under the supervision of an unrelated qualified person for purposes of public disclosure under mining and securities regulations. [ 109 ] Many witnesses agreed that a number of red flags were evident in Mr. Paterson`s overall handling of the Boka Project, in particular his sole and close control of the certified assay certificates and his refusal to disclose them to board members or independent consultants.

These later turned out to be markers of deceit but at the time were equally consistent with a cautious and remote president of an exploration company intent on closely holding and controlling material corporate information [ 110 ] I do not accept that the relative ease of discoverability of the fraud is necessarily related to its lack of sophistication. I accept that when Mr. Paterson altered the first certified assay results, the fraud was not particularly sophisticated. I also accept that Mr.

Paterson did not have a pre-determined scheme or a falsely created geologic model in hand when he started to falsify the results. But it can be said that many frauds do not appear fully planned or formed at the outset. Fraud may start in small steps – the hand in the till, one forged cheque and one altered accounting entry or, as here, one altered assay result – and remaining undetected, continues to build to a greater level of sophistication. To sustain the Boka fraud, there evolved a more fully formed scheme. As further drill results flowed in Mr. Paterson continued to change poor results.

With this came further frauds and deceptions, including press releases and annual reports based on the false assay data results. Mr. Paterson took

part in professional events and promotional meetings in which he continued to misrepresent the richness of the Boka gold mineral resource through his altered results. By these actions Mr. Paterson clothed the Boka Project with greater legitimacy and value while he continued to manipulate and alter the certified assay results over a period of nearly four years.

[ 111 ] I am satisfied beyond a reasonable doubt on the whole of the evidence that Mr. Paterson deliberately and knowingly altered and falsified Boka Project gold assay results, delayed the completion of the Pre-Feasibility Study, falsified the check assay results to comport with expected ranges for duplicate samples, and falsified a partial set of certified assay results from the laboratories.

Collectively, it was a more sophisticated enterprise than the initial acts of alteration. [ 112 ] A simple act of fraud in the Spring of 2003 evolved and transformed into a more sophisticated and ongoing deception over the ensuing approximate four years until its eventual discovery after Mr. Paterson left the Boka Project. Mr. Paterson was the sole architect and mastermind of the fraud, having co-opted Mr. Zhang into assisting in the latter stages to prevent discovery of the fraud.

Breach of Trust [ 113 ] I accept and find that Southwestern Board members, Southwestern consultants retained on the Boka Project, shareholder and potential shareholders of Southwestern, institutional investors and analysts, and securities regulators relied on the accuracy of the assay results. [ 114 ] Through his fraudulent conduct, Mr. Paterson breached a position of trust by failing to act honestly and in good faith as the President and CEO of Southwestern and a Director and Board member of the company.

Moreover, I am satisfied beyond a reasonable doubt that by virtue of his position as Boka Project’s Qualified Person under National Instrument 43-101, he was required to discharge his professional duties to disclose scientific and technical developments in Boka in a true and accurate manner. This is a trust-like obligation designed to secure compliance with regulatory safeguards which Mr. Paterson breached. The Value of the Fraud [ 115 ] Mr.

Paterson admits the value of certain financial expenditures by Southwestern on the Boka Project and some but not all losses alleged by the Crown to be a direct consequence of his fraud. The evidence shows that from November 2002 when Southwestern first acquired its interest in Boka to when the impact of Mr.

Paterson`s frauds were more fully understood and calculated, Southwestern sustained many millions of dollars of loss. [ 116 ] The losses to Southwestern can be defined as acquisition costs to obtain rights to explore the Boka property, explorations costs incurred for project set up and drilling activities, and litigation and settlement costs expended to investigate the fraud and to settle claims from various stakeholders and investors. [ 117 ] The Crown contends that the totality of the losses must take into account the diminution in market capitalization arising from destruction of Southwestern as a successful Canadian mining exploration company trading publically on the Toronto Stock Exchange.

The Crown states that the value of the ultimate loss from all sources is in the range of $300 million. [ 118 ] The defence has made admissions of fact as to certain losses, but disputes the Crown’s assessment of the market capitalization loss.

I first discuss the admitted or proven losses and will thereafter consider the evidence of Crown expert Dean Holley in assessing the impact of the fraud on the market. [ 119 ] The admitted expenditures between November 2002 and July 19, 2007, are as follows: Boka Property Acquisition Costs: $ 5.7 million Boka Exploration Costs: $ 38.9 million Litigation Settlement Costs: $ 11.0 million Total $ 55.0 million [ 120 ] The evidence shows that Southwestern was very excited about the Boka prospects, as were the analysts who visited the property in late 2002 and early 2003.

I am satisfied that the property acquisition costs and some initial exploration costs for set up, drilling, and early analysis were legitimate exploration expenses that would have been incurred by the company in the early stages. In March 2003 Mr. Paterson recommended paying the $1.7 million early payment to Team 209 to accelerate Southwestern’s interest in Boka to 90% and to remove Chinese operations off the site.

This business decision, ratified by the Board in June 2003, was for the purpose of obtaining greater control of a promising property while very early exploratory drilling was underway. [ 121 ] In 2008 when the extent of the fraud was discernable, Southwestern calculated its total loss on Boka at $34.4 million dollars. I am satisfied that the costs of acquisition and exploration thrown away by Mr. Paterson’s fraudulent activities on Boka is $34 million dollars. [ 122 ] Southwestern was required to defend class action lawsuits in several jurisdictions, and to contribute to settlement of those claims.

It paid $2.1 million dollars in legal and consultants fees, and contributed $8.987 million in settlement of the class actions. I find the litigation costs of $11 million dollars are well supported by the evidence. [ 123 ] Accordingly, I find $45 million to be shown beyond a reasonable doubt to be the loss arising from the Boka exploration and settlement expenditures flowing from Mr. Paterson’s wrongdoing. Share Buy Back Costs [ 124 ] From September 2006 to June 2007 Southwestern purchased 1,297,500 of its own shares at a cost of $10,555,650.93.

Although the decision to purchase the shares was made by the Board of Directors, there is no doubt that John Paterson initiated and encouraged the share buy back endeavour. He championed the buy back of shares by implying that the shares were undervalued when he knew for a

fact they were not. His falsification of the assay data over the previous three years had contributed to a significant and unmerited inflation of Southwestern`s share price. I am satisfied beyond a reasonable doubt that Mr. Paterson misdirected his Board of Directors as to the valuation of Southwestern shares and his insistence on and participation in the share buy back program caused Southwestern a loss of $10.5 million. [ 125 ] In

summary, Mr. Paterson’s fraudulent activities caused Southwestern to sustain losses of $55.5 million as follows: Exploration Losses $34.0 million Litigation and Settlement Expenses $11.0 million Share Buy Back Expenses $10.5 million Total $55.5 million The Fraud on the Market [ 126 ] In June 2007 Southwestern’s independent consultants were comparing the assay certificates obtained directly from the issuing laboratories with the assay information in the company’s database and discovering troubling inconsistencies.

On July 19, 2007, Southwestern issued a news release announcing that the integrity of certain Boka drill core samples was compromised and the company was reviewing all aspects of the Boka Project. Southwestern announced it was withdrawing all previously disclosed assay results due to concerns about their reliability. [ 127 ] Southwestern’s 44,923,000 outstanding shares were trading the day before this disclosure at $6.34 and dropped to $2.90 by the end of the trading day of the announcement. The one-day market capitalization loss was approximately $154.5 million.

The price settled at $2.23 on July 23, 2007. [ 128 ] The $154.5 million figure is not contested. I accept that it represents a direct and measurable market response to the first public indication that something was amiss about the Boka drill core gold assay measures. [ 129 ] At this point, investors did not know any details other than that the results had been withdrawn. Southwestern started on a full investigation to assess the discrepancies in the assay data and began to prepare a Boka gold resource estimate based on verified assay results.

It retained consultants to calculate a reliable mineral resource based on drilling under much tighter security and controls. [ 130 ] Southwestern released its findings on the new inferred resource tonnage figures on November 2, 2007, at which time Southwestern’s share price closed at $0.65 and remained at or around this level for the balance of 2007. [ 131 ] In May 2008 Southwestern sold its interest in the Boka project to a Chinese entity for US $9.4 million. [ 132 ] On September 11, 2008, the pending settlement of the Boka class actions was disclosed. [ 133 ] The Crown submits that the true measure of the fraud on the market is to be calculated by reviewing the stock price changes that occurred after the first public disclosure of unreliable results on July 19, 2007, up to the settlement of civil claims in September 2008 when the full impact of the Boka fraud was known to investors.

The Crown relies on the expert opinion of Dean E. Holley, President of CMC Capital Market Consulting Corp., dated August 12, 2012, to support a market loss in excess of $260 million. [ 134 ] Mr.

Holley has expertise with respect to the operations, practices and regulation of Canadian securities markets developed through his 32 years of experience as a registered representative, a securities regulator and as a securities industry consultant, including three of his nine years with the British Columbia Securities Commission as its the Director of Compliance and Enforcement and four years as the Commission’s Executive Director. [ 135 ] The Defence contends that the full measure of the loss as a consequence of Mr. Paterson`s conduct is impossible to calculate. It submits that the methodology employed by Mr.

Holley is flawed and his calculation of the alleged loss is unreliable. It takes the position that the specific loss figure of $260 million has not been proven beyond a reasonable doubt. [ 136 ] Mr. Holley`s opinion is based on his examination of trading patterns in Southwestern shares at critical junctures between 2002 and 2009 in relation to the movements of the broader exchange indices and key Southwestern corporate developments.

He reviewed the trading activity in Southwestern shares in relation to company announcements and news releases for the period before the fraud was disclosed on July 19, 2007, and for the period following to examine the market response to the subsequent unfolding of the fraud. Using this approach, he provided opinion evidence on the financial impact on the market caused by the disclosure of the falsified Boka results. [ 137 ] Mr. Holley’s opinion is that the dramatic collapse of Southwestern share price from $6.34 to $2.90 is clearly tied to the withdrawal of the Boka assay results.

His further opinion is that the 90% decline in the share price of Southwestern over the period July 18, 2007, to December 31, 2007, (from $6.34 to $0.65) can be attributed primarily, if not exclusively, to the withdrawal and subsequent restatement of the Boka assay results to indicate a mineral resource significantly less than previously reported. Mr. Holley stated that by the time Southwestern had divested itself of Boka and settled the Boka class actions as at September 2008, Southwestern shares were trading at $0.55 to $0.57. [ 138 ] I have considered the opinion of Mr.

Holley in the context of the whole of the evidence, including very able cross-examination by the defence. Mr. Holley made several key concessions in cross-examination about external and independent events affecting the capital markets in 2007 and 2008 which are relevant considerations in calculating the capital market losses. [ 139 ] I accept as a starting point that before the Boka fraud was uncovered and disclosed, Southwestern`s share price value was

affected by a variety of market forces. The strength of Southwestern’s various exploration projects around the world, including Boka,were relevant. Information and guidance set out in various investment newsletters and promotional materials published by analysts basedon their assessment of Southwestern influenced the value of Southwestern shares between 2002 and 2007.

The performance of the stockmarket and the mineral exploration sector provided the context for investors’ views of the value of Southwestern and its projects. [140] The performance of Southwestern share price between 2004 and 2007 was characterized as “volatile” in that it was driven byexploration results and media commentary. This is consistent with Southwestern being at all times a high risk security. [141] The share values before the fraud was disclosed are indicative of investor decision-making based on their perceived confidencein Southwestern and in the capital markets as a whole.

However, it does not necessarily follow that the multiple factors which drivemarket investment in a company makes it difficult to determine the impact of an admitted fraud on investor confidence in the company. In the highly speculative sector in which Southwestern competed, the disclosure of false gold assay data affiliated with a keySouthwestern asset would, and in my view did, cause investors to react negatively and in a predictable fashion. [142] The defence contends that some of the drop in share price after the significant one day loss of July 19, 2007, was influenced byfactors other than the fraud.

In cross-examination, Mr. Holley accepted that in August 2007 asset backed commercial paper was frozenand this event had an adverse impact on share prices across financial markets and on the value of all small cap companies. Mr. Holleyagreed that there would be no reason to believe that Southwestern would not have been similarly affected.

The peak in the small capmarket between 2003 and 2010 occurred in the summer of 2007. [143] He also agreed that the following year, in September 2008, the capital markets were exhibiting a dramatic drop in share valuesas the financial markets fell to record lows. [144] David Black of Southwestern noted that junior mining exploration companies found their activities and investments decline withthe downturn in the capital markets in 2008 as senior mining companies pulled back from funding junior companies. The downwardmarket conditions had a significant if not severe impact on Southwestern. Mr.

McCartney of Southwestern also agreed that by 2008 thecapital markets were in a down cycle and raising capital would have been difficult in that environment. [145] It is now well known that the stock market performed disastrously in late 2008. [146] Mr. Holley conceded that he did not factor the impact of these two economic events into his review of Southwestern`s shareprice trends between August 2007 and September 2008. He explained that the primary drivers of Southwestern’s share price were notexternal but related specifically to its internal operations.

His review of historic trading activity in Southwestern correlated generally tothe positive news releases of its Boka drill results. While at times there was a decline in share price driven by market disappointment inpositive (but not positive enough) drill results, a general trend emerged which tied the share price with company performance. [147] The Crown contends that under the principles in R. v. Maybin 2012 SCC 24 , 2012 S.C.J. No. 24 the continuing lossesto September 2008 form part of the total value of the fraud.

It says that the intervening acts of the economic downturn in the second halfof 2007 and into 2008 were reasonably foreseeable events and Mr. Paterson’s frauds remained a significant contributing cause of theultimate loss sustained by shareholders. The Crown relies on the opinion of Mr. Holley that it would be safe to attribute ongoing shareprice decline after November 2, 2007, to September 2008 directly to Mr.

Paterson’s fraudulent manipulation of the Boka assay results. [148] The defence says that it stands to reason that Southwestern would not have been immune to these market factors even as it wasdealing with the after effects of Mr. Paterson`s fraudulent conduct. Findings as to Amount of Provable Market Losses [149] It is self-evident that news of unreliable Boka Project assay results caused the market value of shares to decline after July 19,2007. Withdrawal of the Boka assay results saw 6 million company shares traded over the day and a decline of share price 54% lowerthan closing the previous day.

This was the direct and predictable consequence of Mr. Paterson falsification of the assay data.

In amineral exploration project, the integrity of the published assay results is the fundamental foundation on which investors and industryadvisors formulate their investment decisions. [150] The share price performance of the 44,923,000 Southwestern securities as news unfolded about the Boka assay results is asfollows: Date Share Price Value LossJuly 18, 2007 $6.34 $284.8 million --July 19, 2007 assay results withdrawn $2.90 $130.2 million $154.5 million August 30, 2007-Resource estimateadmitted to beoverstated $1.00 $ 44.9 million $ 239.0 million November 2, 2007 -new lower resourceestimate released $0.65 $ 29.19 million $255.6 million September 10, 2008 –Boka civil actionssettled $0.57 $25.6 $259.2 million

[ 151 ] I find that after the July 19, 2007 withdrawal of published Boka assay results it was known to the analysts and the investment community that a potential investment disaster was likely in the making. Although the extent it was not fully known, the market responded collectively through the decline in value of Southwestern shares. [ 152 ] The further decline in share price from $2.90 to $1.00 over the next six week period to late August 2007 reflects serious investor concerns about company management and capabilities as the Boka disclosure was received and digested.

On August 27 Southwestern gave notice that the mineral resource at Boka was significantly less than previously reported and a new resource estimate was being calculated. [ 153 ] Following the July 19, 2007 one-day trading day loss of $154.5 million, there was a loss of another $101 million to November 2, 2007, for a total loss of $255 million. [ 154 ] I found Mr. Holley’s compilation of data and analysis to be very helpful in tracking and analyzing changes in Southwestern share prices over time. I accept Mr.

Holley’s general opinion that there is a strong correlation between the negative developments at Southwestern and the market response in the period between July 19 to November 2, 2007, by which date a more reliable Boka resource estimate was made public and all key risks with respect to Boka, including the risk of civil claims, were known to the investing public. [ 155 ] The August freeze in the asset backed commercial paper can not be ignored as a relevant factor affecting investor behaviour but its effect is overshadowed by the specific impact the Boka fraud had on investor confidence in Southwestern.

That is, the freeze was a factor affecting the markets generally but the predominant reason for the significant decline in the value of Southwestern shares over this period were the specific negative and adverse developments at Boka. [ 156 ] R. v. Maybin notes that in criminal law factual causation in concerned with an inquiry about how the loss was sustained and the contribution of the accused’s wrongdoing to the result. [ 157 ] Legal causation calls for an inquiry as to whether someone whose act may have caused or contributed to an outcome is legally answerable for that result.

Where an intervening act is said to affect the result, the question is whether the intervening act and the harms that flowed were reasonably foreseeable to be the result of the accused’s wrongful act. Another inquiry is whether the losses said to flow are legally proximate to the acts of fraud. Applying these principles, it is my view that there is a reasonable doubt that the whole of the $260 million in capital market losses to September 2008 can be attributed in law to Mr. Paterson’s acts of fraud. [ 158 ] As noted, by November 2, 2007, the revised resource estimates at Boka had been released.

Any investor dealing with Southwestern shares after November 2007 was no longer acting in ignorance of the true state of affairs but for other and varied reasons including a belief in the strength and value of other Southwestern asset s. Indeed the share price moved within a narrow range between November and December 2007, suggesting that Mr. Paterson’s fraudulent conduct was no longer the proximate or legal operative cause of any loss over that period of time or for that matter into 2008. [ 159 ] Further, Mr.

Holley’s concessions about the impact of the economic freeze commencing in August 2007 on investor behaviour affects his assessment of the causes for share price decline. While I am not prepared to reject Mr. Holley’s well researched opinion, I am satisfied that it is overstated. Mr. Holley would attribute 90% of the Southwestern share price decline in the year 2007 to Boka without taking the August 2007 freeze into account.

Southwestern’s share price was also affected by factors external to the company which contingencies must be factored into the decline after the initial one day drop. [ 160 ] After taking into account the impact of independent market drivers, I find that at a minimum 50% of $101 million loss between July 20, 2007, and November 2, 2007 (being $50.5 million in addition to the initial $154.5 million decline) is attributable to the impact of Mr. Paterson’s fraud at Boka. This is a conservative estimate.

I am satisfied beyond a reasonable doubt that at a minimum the market capitalization losses directly attributable to the Boka fraud perpetrated by Mr. Paterson can be fixed at a total of $205 million.

Summary of Financial Losses [ 161 ] The total losses arising from Mr. Paterson’s falsification and misrepresentation of the Boka gold assay data are as follows: Exploration Losses $34.0 million Litigation and Settlement Expenses $11.0 million Share Buy Back Expenses $10.5 million Market Losses $205.0 million Total $260.5 million [ 162 ] As these figures indicate, Mr. Paterson’s acts of fraud and deceptions resulted in the commission of a large scale, massive fraud on the company Southwestern and on the investing public. Effect of the Fraud on the Stability of the Financial Market [ 163 ] Under

section 380.1(

b) the Crown must prove beyond a reasonable doubt that the offender’s conduct adversely affected, or had the potential to adversely affect, the stability of the Canadian economy or financial system or any financial market, or adversely affected investor confidence in such a financial market. To come to any conclusion on the risk of destabilization of the Canadian economic or financial systems, particularly beyond a reasonable doubt as an aggravating circumstance, requires the assistance of an expert economist or market analyst. No such evidence on this issue was tendered.

[ 164 ] As for impact on investor confidence, Mr. Paterson’s conduct whilst a Qualified Person under the regulatory scheme overseen by the Canadian Securities Administrators breached his duty to provide accurate and timely disclosure of material developments to participants in the capital markets. This was a serious breach. As was noted by the Ontario Court of Appeal in R. v.

Drabinsky 2011 ONCA 582 at para. 186 , “ when prominent business leaders who are directors and officers of public companies engage in fraudulent activity, the public faith in, and the integrity of, the public marketplace no doubt suffers regardless of the actual financial loss suffered.” I accept this as a guiding statement of principle and find that it applies to Mr. Paterson’s conduct in this case. [ 165 ] I am also satisfied that in committing the offence, Mr.

Paterson took advantage of the high regard in which he was held in the mining investment community and within his own company as its founder, President, and Board member. His corporate positions sheltered him from meaningful scrutiny within the company and his designation as a Qualified Person allowed him to take advantage of the trust and confidence reposed in him by virtue of his corporate and professional status. I am satisfied that the facts support a finding under s. 380.1(1) (

d) of the Criminal Code . The Number of Victims and Victim Impacts The Investors [ 166 ] There can be no dispute that investors holding collectively close to 45 million outstanding shares of Southwestern as at July 2007 fall into the category of an exceptionally large number of persons affected by the Boka fraud. It is not possible to put an exact number to the investors for the reason that some blocks of shares were held by institutional investors.

For example, Christopher Beer, Vice-President and Senior Portfolio Manager for RBC Global Asset Management Inc., a wholly owned subsidiary of the Royal Bank of Canada, indicated that he managed equity funds in an investment portfolio that included Southwestern shares.

The RBC funds were sold primarily to individual investors across Canada and experienced aggregate losses of $7.9 million as a result of the diminished value of the securities included in the funds. [ 167 ] On an individual basis, 91 year old Rodney Deane Pinkney filed a written victim impact statement noting a personal loss in the range of $35,000 up to $50,000.

This financial loss came at an age when he could not take up work to make up the shortage, and affected the quality of his remaining years. [ 168 ] Peter Winnell, retired at age 68 from a long career in the investment industry, took out a loan of $750,000 to invest in Southwestern with a total investment of $2.5 million in the company. The tampered drill results had a devastating impact, leading to loss of savings, loss of enjoyment of life, and retirement living on a much reduced budget. The financial and emotional hardships, including sleep disturbance, were described by this investor as a “constant torment”.

Southwestern Board and Staff [ 169 ] The overwhelming conclusion from the evidence of Southwestern executives, board members, and staff is that th

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