Buy This Stock, Eh?

WHEN INVESTORS FIRST HEARD the story of Bre-X Minerals, most were aghast. For three years the Canadian mining company claimed to own the world's biggest gold deposit, and its soaring stock turned its executives into millionaires. The gold rush ended in March, when the stock cratered after early tests found little but dirt in Bre-X's Indonesian mining site. But where journalists see a scandal with mini-series potential, Adrian du Plessis sees a familiar tale. Du Plessis spent six years as a trader on the Vancouver Stock Exchange, a market that's nicknamed "The Scam Capital of the World." Now he runs a muckraking Web site that chronicles Canada's dubious deals. "Our reputation is better than it deserves to be," du Plessis says. "Anything you've heard, it's really much worse."

The mystery surrounding Bre-X may end this week, when new tests will show whether there's any gold in those hills. Even if the find is legit, as Bre-X execs insist, the stock's implosion has given investors a reminder that financial markets operate differently north of the U.S. border. Canada's markets are small, but they produce more than their share of shady investments. Even most market neophytes have heard of the treacherous Vancouver exchange, home of historically dubious investments like MTC Electronic Technologies, which promised profits by running a cell-phone network in China (which was illegal), and Cam-Net Communications, whose chairman landed in court on FBI charges that he offered bribes to boost its stock last fall. This time it's the blue-chip Toronto Stock Exchange that's been blemished. When Bre-X tanked in March, Toronto's computers overloaded, and trading was halted for four days straight. The computer glitch is embarrassing--especially in light of Toronto's move last week to close its trading floor to become North America's largest computerized market. But worse hand-wringing will come if Bre-X's mines turn out to contain hot air instead of gold. Says financial columnist William Hanley of Canada's Financial Post: "This makes it look like there are a bunch of crooks running around up here."

On the books there's little reason scamsters should thrive up north: Canada's securities laws are very similar to U.S. rules. Enforcing them is the problem. Despite years of debate, there are still no federal regulators comparable to the U.S. Securities and Exchange Commission. That leaves underfunded provincial regulators to police the markets, making it easy for crooks to slip through cracks by skipping between provinces. The bigger problem, though, comes from Canadian civil laws that practically outlaw class-action lawsuits. In the United States a manager who hiccups too optimistically can be dragged into court by shareholders who complain they were misled; in Canada, such cases are still extremely rare.

Defenders of Canada's markets blame Bre-X-type blowups on the perils of the mining industry rather than on lax regulation. Junior mining companies like Bre-X make up 18 percent of listings in Alberta and 54 percent in Vancouver. Most own nothing more than plots of dirt that will never earn a dime, but the few that do will gush dollars. "Within days a completely worthless piece of ground can be worth billions," says gold analyst John Kaiser. That makes mining stocks gyrate wildly, and those price swings--and the companies' tiny size--make their stock a target for manipulators. The markets' bosses say it's a case of buyer beware. "We don't pretend to be something we're not--these are emerging companies," says Alberta exchange chief Tom Cumming. Warns former Toronto exchange chairman Fred Ketchen: "This isn't like dealing in utility stocks."

In the regulators' defense, Bre-X did pass muster to list on the NASDAQ market and seemed solid enough to find a place in the portfolios of 63 U.S. mutual funds. Says securities lawyer Philip Anisman, "There is no regulatory regime that would prevent the kinds of things that have been alleged against Bre-X." But experts say the latest black eye will create a push for tougher rules. "There's no doubt it will be a catalyst," says lawyer Tom Allen, who led a task force that concluded it was too easy for Canadian companies to fib without penalty. Among his recommendations: tighter disclosure rules and fewer restrictions on shareholder lawsuits. But they'll be too late to help investors like Haig Madjarian, who lost $10 million when Bre-X's stock collapsed. If Bre-X does turn out to be goldless, folks like him may start to believe Mark Twain's adage: a mine is just a hole in the ground with a liar at the top.