Sep 172012
 

Southwestern Resources Corp (formerly SWG on the TSX) was once a successful mining company based out of Vancouver, Canada. They were sitting on a gold mine, literally, in China. Test samples and lab reports from this mine was periodically gathered by CEO, John Paterson. John would then present the findings to the company’s board of directors and create press releases so investors and analysts can see how well the company is doing, which was great for the most part.

Then one day share holders asked for a pre-feasibility study, they wanted to know how viable future projects might be. But John was reluctant to do so and stalled the preliminary assessment for as long as he could, until eventually he resigned from the company ಠ_ರೃ

As it turns out, for many years John has fudged the numbers from the mines and inflated the values on the reports without anyone knowing. But once the truth was revealed, the stock plummeted from more than $30 per share to less than 30 cents! It was eventually bought out by another company. All that happened over 5 years ago. Today I read in the news that John has pleaded guilty and is facing up to 10 years in jail. But investors who lost $260 million are pretty much S.O.L. Canada’s legal system isn’t known for prosecuting white collar crime, but we’ll see what happens. Below is just one possible outcome.

 

And if you have been an investor long enough (which I haven’t, lol) you might remember a similar incident with the Bre-X gold salting scandal in the 1990s, when a $6 billion gold company went to zero after their gold results were determined to be false ( ゚д゚)

The point is it doesn’t take much to lose all your investment. You have to be careful when putting your hard earned money in individual companies. Just one bad apple can potentially ruin it for everyone else including the shareholders, and possibly even its bond holders. Financial fraud can happen to any business, not just mining firms. Which is why my rule is to never put more than 10% of my investible assets into any one company. And if you sense something is wrong, consider getting out before it might be too late.

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Random Useless Fact:  Humans are the only mammal that can’t swallow and breathe at the same time. Every other mammal can breathe while they eat. In fact, human infants are also able to do so, which lets them breathe while they nurse. We lose this ability around the age of 9 months, when our voice box drops as part of our development.  (source)