Former Southwestern Resources CEO admits fraud

TORONTO (Reuters) - Former Southwestern Resources Chief Executive John Paterson has admitted reporting false results for the company's China gold project and selling company shares before the results were revealed to be a fraud in 2007, according to a securities settlement.

In a statement on Thursday, the British Columbia Securities Commission said Paterson admitted to fraud and illegal insider trading, and will be banned for life from trading securities in British Columbia or acting as a corporate director or officer.

According to an agreed statement of facts, Paterson, a trained geologist, admitted altering assay result certificates. The certificates provided the data for company press releases touting high-grade gold strikes at its Boka gold project in China's Hunan province.

"Instead of transferring the actual assay certificate data, Paterson transferred data containing the discrepancies into Southwestern's database," the regulator said.

He then prepared the company's press releases, which included the discrepancies. The company claimed at one point that Boka contained more than 3 million ounces of gold.

He sold 50,000 shares of Southwestern on July 16 -- for proceeds of about C$300,000 (159,000 pounds) -- three days before Southwestern said it had found errors and was withdrawing all of the drill results, triggering a sharp drop in the shares.

The regulator said it would have imposed a C$3.5 million fine on Paterson, but that he had already used all of his assets to settle a lawsuit last year.

MEMORIES OF BRE-X

The implosion of Southwestern was one of the top mining stories of 2007, reviving memories of the infamous Bre-X gold salting scandal of the 1997, when a C$6 billion company collapse to nothing after gold results at a site in Indonesia were revealed as false.

In Southwestern's case, the company's stock charged higher through 2006 as encouraging gold results from the Boka site prompted large investors to jump in and drew glowing reports from analysts, some of whom speculated the deposit could hold tens of millions of ounces.

The stock started to ease in 2006 as a growing chorus of sceptics began to outnumber the boosters, and then plunged in July 2007 after the drill results were withdrawn.

Paterson, who had resigned as chief executive two weeks earlier, sought hospitalization for treatment of critical depression.

In the settlement, the regulator said that an independent mining consulting firm retained by Southwestern in 2007 uncovered 433 discrepancies in gold grades reported in 24 press releases between March 2003 and February 2007.

"The discrepancies between the gold grades reported in the press releases and the actual gold grades were material and the actual gold grades were low enough to make the Boka project unlikely to be economic," the regulator said.

Southwestern eventually sold its 90 percent stake in Boka to a Chinese firm. The company was taken over this year by British miner Hochschild Mining (HOCM.L) for about C$22.5 million.

(Reporting by Cameron French; editing by Peter Galloway)