Southwestern Resources seeking damages from former CEO, shares fall

By Craig Wong

VANCOUVER (CP) - Southwestern Resources Corp. (TSX: SWG.TO) has sued its former chief executive after the junior resource company said results from its drill data were altered to increase the grade of samples from its Boka project in China.

Southwestern accused former CEO John Paterson of fraud, breach of fiduciary, statutory and contractual duties and insider trading. None of the allegations has been tested in court. Chairman David Black said the suit was filed after a forensic IT audit re-examined its database.

"On the basis of what they found they recommended a course of action and we followed that," Black said in an interview.

The company also said it was working with its Chinese lawyers to pursue actions against its former general manager for the Boka project, John Zhang.

The company said it was seeking to recover all damages and losses.

Paterson family spokesman Chris Freimond said Paterson was aware of the company's statement, but offered no comment.

"He is still undergoing treatment for clinical depression," Freimond said.

In trading on the Toronto Stock Exchange Monday, shares in the company fell 34 cents to $1.70 in trading. The shares had been worth more than $6 until Southwestern announced on July 19 that it had discovered problems with the resource estimate at the project.

Southwestern said an independent mining consultant has been conducting a comprehensive review of the Boka project and now has largely completed a validation of the drilling database in respect of the gold assay data for the exploration work to date.

"Based on this work and its preliminary analysis of the now largely validated database to date, Southwestern believes that the mineral resource at its Boka project is significantly less than previously reported," the company said.

Southwestern has commissioned a new mineral resource estimate and accompanying technical report for the Boka project, which is expected to be completed in about eight weeks.

"Until such technical report is completed, the company can provide no assurances as to the mineral resource at the Boka project and its economic viability as currently explored," the company said.

In its case filed with the Supreme Court of B.C., Southwestern accused Paterson of creating falsified assay certificates to match the falsified results in electronic form that he or had someone enter into the company's drilling database.

"In carrying out his deceitful and dishonest misconduct, Paterson increased the assay values for actual gold found in certain samples," the company's statement of claim said.

Southwestern is seeking $1 million in punitive damages plus unspecified special and general damages. The company also has demanded Paterson indemnify the company for any and all losses or damage it is liable to pay as a result of his conduct.

Since the beginning of 2007, Paterson has bought 64,500 shares of Southwestern at prices ranging from $6.91 to as much as $8.44, according to documents filed with securities regulators. He also gave away a gift of 50,000 shares on March 2.

Paterson, who currently holds 789,250 shares of the company personally and another 7.27 million through Global Gold Corp. for about a 17.9 per cent stake in Southwestern, resigned from the company in June citing personal reasons.

Since then the company has seen the value of its stock plunge after it withdrew previously announced results for the Boka project and suggested there were errors in its reported assay results.

The drop prompted Southwestern to adopt a shareholder rights plan or poison pill to prevent an unwanted hostile takeover.

The lawsuit against Paterson came as lawyers for a class-action lawsuit against the company expanded the scope of their case to increase their demands to $320 million from an earlier claim of $220 million.

The class-action case, which has yet to be certified, accused the company and Paterson of misleading investors.

London, Ont.-based lawyer Dimitri Lascaris said the claim was increased last week because the period it covered was extended back from August 2005 to December 2002.

"That was the date upon which Southwestern first released drilling results from Boka and described the findings of those exploration activities as spectacular," Lascaris said.

Southwestern is a junior mineral exploration company with properties in China and Peru.