My father’s family came from the Anthracite coal mining region of Northeastern Pennsylvania. My grandfather was first employed as a miner. My great-grandfather was a miner. In fact, an article in the local Mt. Carmel, Pennsylvania newspaper from the 1910’s carries an article about my great-grandfather leading a mission to rescue miners trapped in an underground mine. His father before him was a miner. In fact, many of my family members worked in the mines until they mostly closed.

We have long since left the mining industry. My grandfather eventually moved to Harrisburg to work for the Commonwealth of Pennsylvania, a position he owed to the political connections he made in the Coal Region. My father worked as a computer programmer and systems analyst and never, to my knowledge, stepped foot in a mine. I became a lawyer and served as a state and federal prosecutor before becoming a white-collar defense counsel, but the Coal Regions were always part of my family history, and, I guess you could say, part of my history.

Unlike some of my relatives, I do not have a romantic view of the mining industry, although in my professional capacity, I frequently am called upon to review allegations of fraud in the mining industry. A recent report suggests that the mining industry is among the most at-risk industries for fraud. Indeed, in the coal mining industry, coal companies come and go often leasing land and removing coal only to file for bankruptcy, leaving the landowner with little more than an environmental mess. Fraud seems endemic in all aspects of the mining industry. There is financial fraud, environmental fraud, occupational safety and health fraud, and just about every conceivable fraud possible.

The case of Don Blankenship, CEO of Massey Coal, which at the time of Blankenship’s leadership was the sixth largest coal company in this United States, is interesting. One of the mines operated by Massey was the Upper Big Branch Mine in West Virginia. On April 4th, 2010, an explosion at the mine killed twenty-nine miners. A subsequent investigation revealed rampant safety violations. Blankenship himself was convicted of conspiracy to violate mine safety standards and sentenced to a year in prison. After serving his prison sentence Blankenship launched a high-profile campaign for U.S. Senate demonstrating the lack of seriousness associated with fraud in the mining industry.

But it is the financial frauds that are among the most serious frauds in the industry. Let’s look at the case of Brian C. Rose who ran New Century Coal, a coal company in Tennessee. Rose, and ten of his employees report the discovery of “blue gem” coal and began efforts to mine the coal. Blue gem coal is substantially more valuable than other types of coal because its chemical composition leads to lower ash and greenhouse gas emissions. Rose and his employees were eventually able to raise over $14 million from 160 investors and began mining operations. The coal, however, was simply common coal worth no more than normal market prices. In the end, ten individuals were sentenced to prison for their roles in the fraud. Rose received a nine-year prison sentence.

Nor is fraud confined to the coal mining industry or to the United States. I have seen multiple mining schemes involving mining operations in Ecuador, Peru, Mexico, and throughout Central Africa. It is important to note that not all mining investments are frauds, but a lot are. Part of the problem is the time associated with developing a mine. Initial tests may demonstrate the likelihood of valuable miners, but it can take years to develop a mine and discover if the deposits present are sufficient to create a commercially viable mine. Sometime the expenditure of vast amounts of money leads to nothing, and there is no fraud.

Gold is a 2016 movie loosely based on the 1993 Bre-X Minerals, Ltd. mining scandal of 1993. Bre-X, a Canadian mining company, reported the finding of gold deposits in the Indonesian jungle estimated to be worth more than $3 billion. In short order, Bre-X’s stock soared from being a penny stock to being worth more than $260 per share. The scheme collapsed in March of 1997 when it was discovered that there actually was no gold that could be commercially extracted from the site. Subsequent investigations revealed that the initial finds had been faked. Bre-X lost billions in market capitalization almost overnight.

Understanding What is Fraud, and, Just as Importantly, what is Not Fraud.

“Fraud” is common in the mining industry, but it is also common in other industries. It is a term that is bantered about by a lot of people, most of whom have no understanding of what the term actually means. Fraud is different from a breach of contract—it is more than failing to fulfill the terms of an agreement. Fraud is more than a failure to meet expectations. If an investment is projected to earn a return of 30 percent but instead loses money, the fact that money was lost does not mean there was fraud. There may be civil liability for the loss, but the failure to meet expectations, in and of itself, is not fraud.

As I explain in Understanding Mail Fraud and Wire Fraud: A Nonattorney’s Guide (available at Amazon and Barnes & Noble), what sets fraud apart from other losses is the specific intent to defraud. Fraud requires an intentional false statement of material fact. For example, if a person states that some of the world’s largest diamonds have been discovered in the Central African Republic when they, in fact, had not been, that statement would be false. However, it would not be fraud if the person was merely repeating what he or she was told. People often repeat false hearsay believing it to be true.

Also, in order to constitute fraud, the statement must be “material”. In a court case, whether a statement is material or not is a question for the jury to decide. Generally speaking, however, a material statement is one which a reasonable person would take into account before deciding to engage in a transaction. For example, if one were to invest in a mine in Mexico and was shown an old photo of the mine with a black and white sign in the front even though the sign had been changed to an orange and black sign, the photo (which would be a statement) would not constitute a material misstatement. Although “false”, a reasonable person would not decide to invest or not invest based upon the color of the signage.

The statement must also cause a loss. If a false statement is made, and if that statement is material, it still does not constitute fraud unless the recipient of the fraud suffered some sort of loss as a result of the false statement. Take for example an investment in an avocado farm in Central America where an investor has been provided false information about the suitability of the land where the farm is to be located. This could be a fraud, but if the local government takes the property for construction of the road. The investor has lost his investment, but the loss was caused by the actions of the local government and not because of the false statement.

Finally, fraud requires “convergence.” All of these elements must occur at the same time. Fraud does not exist if the initial statements made to an investor were true but, after a loss, the investment advisor lies about the cause of the loss. However, if the investment advisor lies in order to attract more investment, he or she may be engaging in fraud at that point.

Fraud is more complicated than this article might suggest, and volumes have been written on each element of a fraud claim. The purpose of this article is not to fully educate anyone on the complexities of fraud, but rather, to demonstrate that fraud is nuanced and requires a close examination of the facts in each particular case.

Where fraud does exist, however, it constitutes both an intentional tort and a serious crime. Unlike a breach of contract or negligence where the purpose of recovery is to make the injured party whole, fraud normally allows for punitive damages which are intended to punish the party engaging in fraud. Fraud is an evil act akin to theft. The fraudster, in old common law terms, possesses a malignant heart. Only by the imposition of significant financial costs can the fraudster be punished and deterred from further fraudulent conduct.

At least that is the way it used to be. In recent decades, state courts have come up with something called the “economic loss doctrine”. While the precise definition of the rule varies from state to state, generally, the economic loss doctrine provides that where an injured party suffers only “economic loss”, the injured party’s damages are limited to those damages required to make the injured party whole. Thus, a fraudster in a civil case who defrauded an elderly couple of their life savings leaving them destitute, under the economic loss doctrine, will only have to pay back what he or she actually stole and then, only after a lengthy court battle.

Many years ago, as a state prosecutor, I came across a fraudster masquerading as a timber company. Essentially, this gentleman would contract with landowners to buy timber from them. During the timbering operation, he would stray onto the property of adjoining landowners, and harvest thousands of dollars in timber to which he was not entitled. If he was caught and sued for conversion, he would vigorously fight the suit eventually settling for a portion of what he actually would have owed. In these circumstances, the economic loss doctrine shielded his criminal conduct allowing him to, in essence, steal even more trees. His criminal career came to an end only when he was convicted of state racketeering charges. Nevertheless, the economic loss doctrine is a barrier to suits against fraudsters.

Even for experienced professionals, fraud can be difficult to detect and even more difficult to pursue. Since fraud is determined by the intent of the alleged fraudster, and since intent exists in the mind of the alleged perpetrator, it is difficult to prove. There is almost never direct evidence of fraud. Therefore, parties attempting to prove fraud must rely upon circumstantial evidence. Circumstantial evidence, however, can be misleading or confusing, and the attorney using circumstantial evidence to prove a case must understand what any particular piece of evidence means and how it can be used. This, also, is a complicated subject beyond the scope of this article.

Avoiding Fraud in the Mining Industry.

Fraud is common in the mining industry, and one of the first questions is: can it be avoided? The short answer is “yes”, but it is difficult. Mining is a highly regulated industry with literally thousands of sometimes conflicting laws and regulations governing the industry. For smaller mining companies that are struggling financially, compliance with all of these laws may be impractical—it may not even be possible to keep track of changes in all state, federal, and potentially international laws that might apply. False statements are commonly made to regulators and to potential investors. Are these statements fraudulent? The answer is: it depends.

There are concrete steps that investors can take to avoid being defrauded. I should emphasize that I am not an investment advisor and do not mean to suggest any particular investment strategy. Investments involve risks, and investors should rely upon competent advice from a professional before making investment decisions.

Turning back to fraud in the mining industry, it is first necessary to know something about the industry before deciding how to invest. All too often, people are victimized by fraud because they do not understand the industry into which they are investing. A warm, sincere, investment “professional” may have an excellent ability to explain that a special type of clean coal has been discovered in a mine in Pennsylvania and that this coal will revolutionize the coal industry and make those lucky enough to invest first very rich. If it is backed up with professionally prepared brochures, a slick website, and some number on some sort of geological survey, many people will invest.

Someone, an attorney from church perhaps, may explain an opportunity he has stumbled into in Ecuador, one of the top gold mining countries in the world. According to him, a company traded on the Toronto Stock Exchange (TSE) has just hit a strike in the Amazon, and those who are first to invest could be rich. If it’s traded on the TSE, it must be legitimate, right? The list of opportunities is never ending—Rare Earth Elements in Montana, lithium mines in Chile, etc. The reality is that some of the opportunities are legitimate, and most are not. If you do not understand the industry, you are not in a position to determine whether a particular opportunity is valid or not, and even when they are valuable, it can take many years to see a real return.

Even when there is no fraud, accusations of fraud abound in the mining industry, and the difference between fraud and legitimate business loss can be razor thin, often turning on the meaning of a few pieces of circumstantial evidence. A prospector may honestly believe that he has discovered a vein of gold in a most unlikely place. Anxious to help family members and friends, he may sell shares in a limited liability company he has formed to raise funds and then spend those funds on equipment and labor to recover the ore. Only after all of the funds have been expended does he discover that what he actually discovered was a small amount of alluvial gold. Unfortunately, the cost required to retrieve the gold exceeds the value of the gold. The investors lose everything. Is this fraud? No, but the prospector could be prosecuted and convicted (or sued for fraud) if he is not careful in how he handles the initial investigation.

As with many industries, it is probably impossible to avoid fraud in the mining industry. Financial losses are common. Often times, only a skilled professional can tell whether there was fraud or not. If you think you might be the victim of fraud, or you have been accused of fraud, contact us. We might be able to help.

Dennis Boyle
Founder / Partner

Mr. Dennis Boyle is an accomplished white-collar criminal defense and complex civil litigation attorney who practices throughout the United States and internationally.

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