We have David Baines of the Vancouver Sun to thank for a new story on mining investment gone bad. We use this case history to formulate another Investment Rule: Do not buy shares in a mining company controlled by one man.

Over thirty-three years ago, Ross Stanfield founded Gallowai Metal Mining Corp and Bul River Minerals Corp. He is the chairman of both companies and owns all the voting stock. Nothing wrong with that: he founded the company and now owns and controls it. Except that over those thirty-three years, he has sold more than $220 millionworth of non-voting shares to 3,765 investors, mainly from Alberta. Nothing wrong with that either: you are entitled to purchase non-voting shares if you considerit a reasonable investment. Except that over those same thirty-three years, no mining has been undertaken and no dividends paid. At least it is not a Ponzi scheme!

Enter a former Lutheran minister and sometime shareholder of non-voting shares. By 2007 he was getting impatient. He convened some other impatient holders of non-voting shares. They no doubt muttered and grumbled. Now they have applied to the British Columbia Supreme Court asking that Ross Stanfield be removed, that new directors be appointed, or that the court appoint a receiver manager to run the company, or that Mr. Stanfield be forced to buy or redeem their shares.

At the first hearing the Judge simply said: “NO. Come back on Wednesday.”

David Baines explains the Judge’s NO thus:

Judge Peter Leask, while asserting he has no “preliminary views” on the merits of the petition, said he intends to approach the case “on the basis of the least remedy that will solve the problem. I’m not immediately attracted to the idea of removing Mr. Stanfield, only for that reason.”

It is hard to have any sympathy for the nearly four thousand investors who sit staring at an old man (Stanfield is 81), a property that will never be a mine, a Judge who won’t act as they desire, and a pile of worthless non-voting shares. In the news reports they are described as: all successful business men or professionals from Edmonton. We must hope they have been more prudent in their business and professional lives than they have been in this investment. Or maybe they have been so successful that they could afford to invest over $220 million for thirty years and more for no return and no action.

The unrewarded investors must include a cast of characters. I particularly enjoyed the part about Stanfield counter claiming that one of the petitioners had been authorized to take three tons of rock from the prospective mine to landscape his yard, but had “actually taken more.” Seems the only mining going on at the property was by non-voting shareholders landscaping their back yards.

This is a funny story of folk who fraud one another, make stupid investment decisions, and then resort to the courts with a fervor that would make Charles Dickens proud. That is unless you consider that the law that governs such situation is all wrong and the regulators all inactive. David Baines discusses the problems at this link.

What it boils down to is this: how many investors should be allowed to invest in a private company before the security regulatorsshould step in and protect them as a group? Seems obvious that if four sophisticated investors choose to pool their funds to develop a property without going public, they should be allowed to. But should 40, 400, or 4,000 private investors be allowed to pool and stay private with no securities oversight? It is easy to envisage four savvy investors around a table in an expensive restaurant in Edmonton. It is difficult to envisage 400 savvy investors in one place anywhere. The idea that 4,000 smart people exist in the business and professional circles of Edmonton is feasible, but disproved by this case.

We will watch as this case unfolds–although the end will probably be a whimper. For in reality there is no mine, no money, and no young muscle to mine. There are only 4,000 investors who were unwise.