By Jesse Morton, Technical Writer

A bankruptcy court in Nevada this month tossed a motion to reopen the Gryphon Gold bankruptcy case on the grounds the debtor miner failed to show how the alleged fraud perpetrated by the lender, Waterton Global Resources Management, drove the miner to take actions that contributed to the bankruptcy.

In 2013, Gryphon filed for Chapter 11 bankruptcy protection after defaulting on a loan to Waterton and ceding controlling ownership of the Borealis mine, located near Hawthorne, Nevada, to the Canadian financial house. During the bankruptcy proceedings, Waterton personnel managed the mine.

In court, Waterton argued that the mine was not economically viable, and that Gryphon should be denied bankruptcy protection. Conversely, the state-appointed trustee for Gryphon filed an adversary complaint alleging nine counts of fraud perpetrated by Waterton.

The court ruled against Gryphon.

Gryphon’s attorneys from the law firm Woodburn and Wedge filed to have the case reopened on the basis that the company, shareholders and the court had allegedly been defrauded by Waterton. The hearing occurred on October 1.

Court records posted online by Gryphon allege the Canadian financial house, as part of a death spiral financing scheme, incrementally inserted operatives on the board at Gryphon and into management positions at the mine. Those alleged operatives made financial and operational decisions that then bankrupted the company.

The records reveal at least two former longtime Borealis employees testified in sworn affidavits that, with instructions from high-level Waterton personnel, mine management told employees to rig the carbon-in-leach system so that pregnant carbon was piped to a pond instead of to the plant’s filter press. This allegedly occurred while Waterton was maintaining the stance that the mine was not viable, and that the Gryphon appeal for bankruptcy protection should be tossed.

On October 16, the bankruptcy court dismissed the motion to reopen the case. The court argued that any proof of fraud alone was not enough to reopen the case. “Gryphon maintains that if the bankruptcy court was aware that gold-laden carbon was being diverted and shielded from detection, it would not have dismissed the bankruptcy case. Even so, this proposition nevertheless fails to identify a false statement made from Waterton to Gryphon and what Gryphon did, to its detriment, in reliance on this representation.”

The court also held that Gryphon failed to prove the allegations that Gryphon board members and mine managers were Waterton agents.

Gryphon shareholder representative Murray Bockhold said the decision is only a temporary setback. What Bockhold described as three new whistleblowers have come forward in recent days and their testimony will be part of the basis for the next round of legal action.

“That makes seven whistleblowers,” Bockhold said. “We are going to be refiling.”

Bockhold manages a website that details Gryphon’s case, which he has taken to multiple stock exchange authorities and media outlets.

This summer, Bockhold reportedly raised the case to the British Columbia Securities Commission (BCSC). A BCSC agent then filed to get documents from Waterton that were drawn up by the firm PricewaterhouseCoopers, which reportedly provided a third-party valuation of Borealis.

Brian Kladko, spokesperson for the BCSC, told E&MJ that to “protect the integrity of the investigative process, the British Columbia Securities Commission does not comment on any inquiries or investigations we might be conducting.”

Historically, Waterton has provided financial services to a number of mines. Most recently, it made headlines for the campaigning that ensued among factions of Hudbay Resources shareholders when the financial house attempted to exercise its rights in the board member selection process. Waterton, which is reported to own roughly 12% of Hudbay, sued some Hudbay shareholders when they circulated a presentation that alleged Waterton had used death spiral financing tactics to acquire the assets of, and destroy the value of, roughly a dozen mining companies to whom they had provided loans.

In death spiral financing, the financier gets a sizeable amount of stock as collateral for a loan. Depending on the terms of the loan, the financier can sell that stock whenever. By selling at certain times, the financier effectively drives down the market capitalization of the company, making it increasingly harder for the company to get loans from other lenders. The financer can then either update the existing loans or make new loans to the company. Historically, in instances of death spiral financing, the debtor company’s stock value can become worthless.

Death spiral financing is legal.

Waterton did not immediately return emails requesting commentary.