Blue Range Resource Corp. is an Enron-style accounting scandal of concealed debts and deliberately misstated corporate accounts, the Alberta Securities Commission said yesterday as it began to lay out its case against two former top executives of the defunct junior firm.
Robert Abells, an outside lawyer who is presenting the ASC's case, said the actions of the two executives at Blue Range in 1998 threaten to shake investor confidence and the integrity of public capital markets.
He compared the case to the revelations of wrongdoing at Enron Corp., Arthur Andersen and other high-profile U.S. cases.
"Blue Range is the Canadian example," he said.
Gordon Ironside, Blue Range's former chief executive officer, angrily dismissed the comparison between his firm and Enron, the giant Houston firm whose spectacular collapse over the past year has rocked the energy sector.
"To connect something almost four years apart, to connect them somehow, is really grasping at straws," he said, speaking after the day's proceedings ended.
Mr. Abells made his opening statement to a three-person panel in hearings expected to last at least until February, with more than 50 witnesses to be called and 178 thick three-ring binders' worth of evidence to be scrutinized.
The Blue Range issue arose only after Big Bear Exploration Ltd. completed a hostile takeover of the firm in December, 1998.
Big Bear slashed the official production and reserve estimates for its new acquisition, while boosting the amount of balance sheet debt.
In March, 1999, less than three months after Big Bear acquired it for $200-million, Blue Range was placed into protection from its creditors, with its assets liquidated.
The shock of Blue Range gave a boost to oil industry efforts to tighten the rules for estimating and reporting proven and probable reserves. The tougher standard becomes mandatory for fiscal years ending after Dec. 31, 2003.
The ASC is alleging that Mr. Ironside, and Robert Ruff, Blue Range's former chief financial officer, concealed or misstated several vital pieces of information, including:
Understating balance sheet debt through a transaction to sell and then lease back its pipeline facilities and other infrastructure, and then deliberately lying to the company's auditors to disguise the true nature of the leases
Overstating the production and reserves of the company by using a "raw gas" measurement, without disclosing that it was using an unconventional standard that is subject to shrinkage of more than 8 per cent.
Failing to disclose not only that it had reduced its production estimates, but that the company was falling short of even the lowered targets.
Misrepresenting its commitments to sell its natural gas production at fixed prices. Corporate press releases said Blue Range was in an excellent position to take advantage of expected increases in Alberta spot prices. But the company's "extensive portfolio" of gas marketing contracts and indirect commitments meant that it actually had to buy gas at a loss from September, 1998, to December, 1998, to make up for declines in production, the ASC said.
Failing to disclose a liquidity crisis. With bank debt already at the allowable maximum, Blue Ridge was at risk of breaching production covenants given to lenders, which would have forced the company to repay $10-million at the end of January, 1999.
Mr. Ironside's lawyer, Stan Carscallen, said his client is anxious to respond to the allegations. Speaking outside the hearing room, Mr. Carscallen stressed that the allegations from the ASC are not evidence.
"There are two sides to this story, like so many others."
Yesterday's proceedings were taken up with the opening statement by Mr. Abells and testimony from Jeffrey Tonken, former president and chief executive officer of Big Bear.
Mr. Tonken outlined his extensive experience in the energy sector, at several points highlighting his willingness to walk away from unfavourable deals.