More than 460 investors from across the country hoped to cash in on undiscovered gold in British Columbia’s interior.
But instead of striking it rich, they are suing the mining company for millions in a class action lawsuit after they say their money disappeared and the Canada Revenue Agency ruled their income tax deductions invalid.
“It’s affected my ability to enjoy some of my retirement plans in terms of travel, improvements around the house, acting as a safeguard for my old age,” Ed Walker of Winnipeg, who says he lost tens of thousands of dollars in the alleged scheme, told the CBC News I-Team in an interview.
Reynold Robertson, the lawyer representing investors, estimates the lawsuit is worth at least $10 million.
The investors — who are mostly from Saskatchewan and Manitoba, with some from Alberta, British Columbia, Ontario and New Brunswick — are suing Royal Crown Gold Reserve Inc., its president Douglas Stewart Scott and his associate Claude Taillefer for deceit, misrepresentation, and breach of contract. It also said the prominent legal firm, McMillan LLP, and one of its lawyers, Michael Friedman, were negligent.
“Our motto — let’s get the gold!” is how Scott signed off in a 2009 letter addressed to Royal Crown investors.
In order to get to the gold, the company needed money. Through sales agents, investors said Royal Crown sold them parts of the mine at $100,000 per unit.
Investors allege that Royal Crown, Scott and Taillefer lied to them about the mine’s potential.
According to the claim, they only had to put down $25,000 in cash and the remaining $75,000 could be covered by a promissory note, which investors would pay back once the mine started making money.
In addition, investors said they paid four per cent interest per year on the promissory note plus administration costs. They also said they expected to receive at least $3,000 per year in royalties.
But investing in a larger-than-life pot of gold wasn’t the only enticement for investors, according the the lawsuit. A document produced by Royal Crown says investment in the mine, located 10 kilometres southwest of Cranbrook, B.C., qualified as a “Canadian development expense” under the Income Tax Act.
This led investors to believe they could deduct 30 per cent of their investment from their income taxes and could continue to do so on a declining basis “until the entire cost [had] been written off.”
Tax shelter 'inducement'
“It was considered to be quite an inducement,” said Robertson, the Saskatoon lawyer representing investors.
Investors said sales agents provided them with a copy of a letter from McMillan LLP addressed to Royal Crown and its president, Scott, which said the tax write-off was valid.
Where are the investors?
Lawsuit lawyer Reynold Robertson estimates there are around 500 investors who put their money in Royal Crown. So far, 210 of them have registered with the lawsuit from the following provinces:
- Saskatchewan: 97
- Manitoba: 92
- Alberta: 10
- British Columbia: 5
- Ontario: 5
- New Brunswick:1
In a letter dated Dec. 5, 2005, the firm wrote, "Based on the facts outlined above, we are of the opinion that amounts paid by investors to acquire legal and beneficial ownership of the Mining Claim should constitute a ‘Canadian development expense’ for the purpose of section 66.2 of the Tax Act.”
One of Friedman and McMillan’s lawyers, Keith Kilback of Kanuka Thuringer LLP, said it “would not be appropriate to comment on the matter at this time” due to ongoing court actions.
However, in Friedman and McMillan’s statement of defence, he wrote the letter was targeted to Royal Crown only and did not consider any tax advantages that potential investors might receive.
The statement of defence stated that at the time the letter was written, Royal Crown had not decided if it would sell parts of the mine to investors and the law firm “never authorized the use of its name or its opinion letters … in connection with the marketing, promotion, or sale of Mining Claims.”
“I thought there was a bona fide opportunity here,” said Walker.
The 65 year-old retiree purchased two units of Royal Crown, paying out $40,000 plus interest charges and administrative fees of $7,000.
After The CRA audited his tax returns, Walker said officials ruled his deductions invalid. Walker had to pay them back with interest, totalling $55,000.
Gold not uncharted territory for investor
Gold mine investment was not uncharted territory for Walker. He had successfully invested in gold twice before.
But the retired telecommunications worker — who has accepted that his investment Royal Crown is gone — is still hurt by the alleged scheme.
“[I’m] very upset. I don’t necessarily show my emotions to a degree. But it’s a loss of a fair amount of money,” he said.
Walker is one of the investors already registered in the lawsuit. He has not heard from Royal Crown or Scott since March 2012.
CBC News has tried to contact Royal Crown Gold Reserve Inc., as well as Scott and Taillefer, but was unable to reach them.
In their statement of defence filed in 2010, they said “the plaintiffs have not suffered any loss except their original investment which is still an interest in property which Scott intends to develop as a producing gold mine."
It goes on to state, “What the purchaser is now saying is that such an investment does not meet his high expectations both from a tax point of view and mining point of view and that he is desirous of getting his money back, although he has no equitable or legal right to do so."
Veteran forced to face old demons
Ken Mahon served in the Canadian Forces for 25 years. Deployments to war-ravaged Haiti in 2004, Cyprus in 1988 and East Timor in 1999 scarred the communications specialist. Today he lives with memories he just can't shake.
"As the forces moved to the west end of the island, they burnt everything. There was a lot of mass graves," said Mahon, describing the situation in East Timor.
Doctors diagnosed the veteran with post-traumatic stress disorder in 2005. By 2009, the military medically discharged him. He left with a $25,000 severance cheque.
"One of the first things I decided to do was look at my future," he said.
Mahon decided to invest in Royal Crown and he handed over all of his Canadian Forces severance.
But instead of reaping the rewards of a bountiful gold mine, Mahon and other investors say the alleged scheme collapsed.
Meanwhile, the Canada Revenue Agency denied their tax deductions, ordering them to pay the money back with interest.
Mahon said he has to face old demons every time he opens a letter from the CRA about Royal Crown and the $25,000 he owes — money he does not have.
"You got a noose around your neck and you can keep walking, but eventually it's going to get tight, and that's where I am right now," he said.
For now, he hopes the lawsuit succeeds and that someone helps him and the other investors find their money, so he doesn't go back to the dark place he has fought so hard to escape.
Some investors went bankrupt: lawsuit lawyer
Investors purchased the mine claims through sale agents. According to the lawsuit, Winnipeg alternative investment adviser Neil Friesen sold the majority of Royal Crown claims, 58.28 per cent. Saskatoon-based CDS Consulting Inc sold 32.23 per cent.
CBC News reached out to Friesen but has yet to hear back. CDS Consulting has since gone out of business and its chief executive officer, Dean Stanzel, declined an interview request.
For some investors, the consequences have been devastating, according to lawsuit lawyer Robertson.
“Some of them have gone broke, gone bankrupt, at an age and time in life when it’s the worst time to go bankrupt,” he said.
Walker said when Scott came to Winnipeg to meet with investors in December 2009, some of them were so worried about their money, they were in tears.
They “were depending on this as an income stream for their retirement and they’re in very bad shape," Walker said.
"It’s hurtful to see that go on. I really think something needs to be done about this.”
Investor wants accountability
Walker said when investments fall apart, as he alleges has happened in the case of Royal Crown, there is not enough accountability.
“If you look to the U.S., you’ll see there’s much more aggressive action on any of these kinds of activities, more so than we have in Canada. I think there’s an opportunity there to make some improvements to the public,” he said.
The investors’ lawyer said retirees are “prey” for potentially high-risk and fraudulent schemes.
He believes, with an aging population, that we will see more cases like Royal Crown.
“Retirees are looking to make investments and hopefully enhance their retirement benefits as they go forward,” said Robertson.
Investor held gold in his hand
Walker believes that some work was done to try and get the mine operating.
He recalls the December 2009 meeting at the Clarion Hotel in Winnipeg, when Scott tried to explain the progress of the mine. Walker says Scott showed off a sample of gold that was extracted from a road the company built to the mine.
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“Actually, I held it in my hand … several ounces of gold in a pill bottle. That was just what was presented as evidence there’s some progress, there’s some gold even on the surface without digging any further.”
Through various letters, Walker said the company relayed numerous reasons to investors as to why the mine was not producing any gold.
“It was a zigzag pattern of ‘gee whiz’ frustration and then a bit of euphoria — ‘We’re going to be there, let’s go, let’s go, let’s hang on a little longer.’ And then at the end, disappointed,” he said.
Walker said he has not heard from Royal Crown since March 2012. He said, to his knowledge, that little vial of gold was the only gold ever extracted by the company.
None of the allegations have been proven in court.
Commercial and corporate lawyer Maureen Ward from Bennett Jones LLP said no amount of regulation can protect individual investors alone.
“There’s no real way to prevent other than to raise awareness,” she said, adding that she believes this lawsuit is significant due to the millions at stake.
Read the lawsuit documents
Below is the statement of defence from Royal Crown Reserve Inc., Douglas Stewart Scott and Claude Taillefer, as well as the statement of defence from McMillan LLP and lawyer Michael Friedman.