January 2008 Issue

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professional practice

APEGGA Discipline Committee Decision

In the matter of the Engineering, Geological and Geophysical Professions Act
and
In the matter of the conduct of Philip Denis de Souza, P.Eng. (the “Member”)

The Hearing

Hearing of evidence in the case took place on February 27 and 28, 2006 in the Association’s offices in Calgary, Alberta. Following receipt of the parties’ written closing submissions, oral closing arguments were heard on April 19, 2006. Additional written submissions from the parties were completed on May 5, 2006.

Charges (Allegations)

The matters to be decided, as brought by the Investigative Committee before the Panel and as noted in the Notice of Hearing, are indicated as numbered charges in the following section.

Findings and Reasons

This case involves a mining property located near Bul River in the interior of British Columbia. History shows that the Placid Oil Company did recover gold from the property.
In 1976, Bul River Mineral Corporation and the Gallowai Metal Mining Corporation acquired the property. In the 1980’s and in the 1990’s, Gallowai Metal Mining Corporation was in the process of raising money for the development of the property.

In this regard various project summaries were prepared by Mr. de Souza (the “Member”). While one has to be aware of the series of reports prepared by the Member between 1993 to 1997 to fully appreciate and understand the case, one 1997 Report in particular is singled out in the charges for special scrutiny. In September of 1997, the Member prepared, signed and sealed the “1997 Exploration Report for Gallowai Metal Mining Corporation”. The Member knew that this Report would be made available to investors as part of an Offering Memorandum for the project.

The central issue before this Panel is whether the Member met his professional obligations in preparing, signing and sealing the 1997 Exploration Report. More specifically, it is alleged that the Report is “deficient and misleading”.

Based on the evidence presented to us during the Discipline Committee hearing, we followed a two-step process requiring proof of the underlying facts and conduct, and then that the proven conduct must constitute either unprofessional conduct or unskilled practice.

A lot of evidence and argument was centered on whether or not the Member should have complied with NPS 2A. This is not, in our opinion, a particularly important point. Reports prepared by professionals must meet a high standard with respect to accuracy and trustworthiness. This fact is, one of the reasons that a professional’s report is added to an Offering Memorandum is that the report adds credibility to the Offering.

The Member states that his report did not give sufficient information to make an investment decision. This case highlights the fact that a professional has no control over his work once signed. For this reason, all necessary limitations and assumptions must be in the body of the work. Nowhere in the Report is it indicated that this is a summary or that additional information can be obtained.

We find that the Member wrote a Report he knew would be used in an Offering Memorandum which he describes as a summary with further background material available on inquiry, without noting this in his Report. He had no control or knowledge over who would be reviewing the Report and the Report made no mention that further information was available.

The Member also prepared a Share Evaluation Report which was a misleading financial projection and appeared to in-adequately support the values presented.

Charge 1a

“That you authored and issued an exploration report entitled “1997 Exploration Report for Gallowai Metal Mining Corporation” in September, 1997, for use in an Offering Memorandum, which report was signed and sealed by Philip D. de Souza, P.Eng., and which report was deficient and misleading in the following respects:

a) The said report did not include adequate and relevant exploration data to support the opinions and findings expressed in the report.”

To begin, the Member alleges that this Charge is vague. We disagree. Any perceived deficiencies could and should have been remedied by an application for particulars brought before this Panel. We think, on the whole there was sufficient clarity to maintain initial jurisdiction and any deficiencies could be remedied by other procedures.

We have reviewed the 1997 Report with great care. We have applied our own professional experience and judgment to the evidence. We have also heard peers testify in this case and have heard extensive evidence regarding the appropriate professional standard and expectations applicable to this case. We have also looked at the Member’s own evidence as well.

We have concluded that the Report does not include adequate and relevant exploration and development information and data to support the opinions and findings expressed in the Report. We do not intend to outline every single factual circumstance giving rise to our conclusion, but in a general sense, we do wish to make it plain that we found Mr. Keith McCandlish’s and Mr. Paul Hawkin’s testimony compelling and we accept the evidence and their concerns in their entirety. For the record, we do want to highlight some of the evidence that caused us to reach our finding of guilt on this charge:

• The Member himself does not seriously contest that the Report did not include all the data and information to support the opinions and findings expressed in the Report. He says it was just a summary and the supporting data was available on inquiry. In the course of his interviews, as indicated in Paul Kavanaugh’s testimony, the Member made it clear that when he wrote his Report the terminology was somewhat vague. He attributes some of this to a lack of clarity in the industry. But his primary answer to this charge is that this was just a “summary” and the Sophisticated Investor could have made additional inquiries to obtain supporting data. And, as a “summary”, it does not offer the reader any indication that the supporting data is not included and offers the reader no meaningful way of obtaining such data. This, and the reasons that we have outlined elsewhere in this decision is simply not an explanation that we are prepared to accept from professional engineers, geologists and geophysicists.

• The Member states that there are additional assay data available in support of opinions and recommendations. At no place in the 1997 Report is that data made available, in whole, in part or in compilation. Hence, the intent, purpose and justification of the Report takes on substance and reliance from a single assay value. There is no written explanation noting the existence of the additional data or explaining the reason why it was not included in the Report. It does not provide the reader with any way to obtain it and it does not in any way indicate what effect the omitted data would have on the judgments made in the Report. This does not meet the standard expected of a professional engineer, geologist or geophysicist.

• The 1997 Report does not have sufficient historical technical input and substance to allow the reader to assess where previous activities and expenditures have occurred on the mineral properties; and, it is unclear where and how the funds to be generated from the Offering Memorandum are justified and allocated to exploration and development activities.

• For a project covering a variety of redevelopment, development and exploration activities, the 1997 Report, at a minimum, should have disclosed a fully supported Resource Statement in terms of tonnage and grade using recognized Canadian or United States resource and reserve classifications. A detailed execution plan was not required, but a full, fair and accurate compilation of all geological, geochemical, geophysical and drilling results were necessary as a professional requirement.

• There are other important omissions in the 1997 Report. There is no description or discussion of the infrastructure requirements, the costs associated while developing these components of the Project and no mention of the necessary base requirements, milestones or achievements leading to a feasibility study for redevelopment and new development for commercial mining.

• The 1997 Report does propose or recommend standard exploration and development activities, but fails to define progress reviews at key milestone developments or achievements. A professional report would, at a minimum, acknowledge or identify milestone development points where technical uncertainty had been resolved and planned future activities are justified or not.

• The drawings, figures and maps are below an acceptable standard. Quality maps, diagrams and figures are necessary in mining projects to accurately convey locations, to present certain data and information and to lay out planning and execution objectives for potential investors and stakeholders not intimately familiar with mining exploration and development.

This is a summary of our concerns for Charge 1. We acknowledge that the 1997 Report might well give rise to a false sense of comfort to potential investors. The explanations offered for the Report’s inadequacies and failings are not acceptable. The fact that the
Report is a “summary” and that the investor could obtain background information elsewhere simply does not address the professional failings evident in this case nor properly address the public interest evident in all of this.

As the mining industry is one with many historical examples in which an unwitting public has been mislead, it is absolutely essential that a professional provide adequate and relevant data to place his findings and opinions into context with other similar exploration and development promotions. Absent this, the Report ought to state clearly and fairly what it purports to be (i.e., a “summary”) and ought to make it plain the limitations evident in the Report, such as a failure to disclose adequate background data information.

Charge 1b

b) The report prematurely recommended the commencement of mine planning.”
The Panel dismisses this charge. We accept the vast majority of the points put forward by the Member’s counsel on this point. Particularly germane to our decision is Mr. McCandlish’s testimony. Mr. McCandlish made it very plain in his evidence that mine planning occurs at the earliest stage of a project. As Member’s counsel noted, a professional engineer, by his very nature, begins planning a mine the moment he steps onto any property that might reasonably have a prospect for development.

Charge 1c

c) The methods used in calculation of resource estimates as reflected in the report were not appropriate and the estimates were therefore suspect.”

The Investigative Committee alleges that the methods used in the calculation of the resource estimates were not appropriate and the estimates were therefore suspect. The Member, through his counsel, correctly notes that he testified that there were two methods of calculating reserves in the 1990’s. The first was based on a “cross sectional” calculation. The Member says that this was the approach taken by Mr. Master and he produced it in a separate report. The second approach was based on a “polygonal” calculation and this was the approach taken in the work of Mr. Ming Chang. The Member, in effect, say, that these approaches were both used in his Report and without any evidence of an alternative method of calculating a resource estimate, the charge simply can’t be substantiated.

The Investigative Committee’s approach and focus was different. Their criticism was leveled at the grade estimates attached to the above methodologies. The term “reserve” is supported by a recommended or acknowledged standard in determining mineral or metal content. So, to speak of a “reserve” one has to establish the grade by appropriate standards in addition to rock volumes and weights.

The Panel finds that the Investigative Committee’s criticism is absolutely well founded. The term “reserve” is inappropriate at this stage in the development, as “reserve definition” demands a higher level of confidence in both grade and tonnage estimates. The computer generated mineral deposit model is not a reserve nor or a resource estimate. It is what it says, a model and nothing more. There is no meaningful data or information on Figure 6 in the Report to fully explain what is associated with the original mine and what can be considered “new reserves” either in the original mine, extensions or new deposits.

In any sense the “method” used in the Report is not an appropriate method to be used in this instance and the estimates contained in the Report cannot be confirmed with any acceptable degree of confidence. The 1997 Report does not meet the expectations and demands of the professional engineer, geologist or geophysicist in this respect.

Charge 1d

d) The report portrays the project as being more advanced than was actually the case.”
The Panel finds the Member guilty of this charge. The Report is misleading and speculative in that it wrongly implies and/or infers that the decision to develop, or redevelop and operate a commercial operation will be forthcoming at an early date. The evidence and testimony of peers and the Member himself does not support those conclusions.

The Member’s own words substantiate our finding. The Report, at page 12, indicates that there are 8.7 million tons of reserves reflecting varying geological confidence levels. The Member testified, at p. 288, that the Report provides information to the reader that there are 8.7 million tons of mineral-bearing rocks in the project. But the Report is, at best, an exploration report and there is no evidence or rational that the proposed work program is or will be a feasibility study to test the commercial production opportunity. The Member’s statement is unjustifiably optimistic and is not supported by any real or meaningful grade data in the 1997 Report. It implies, and the reader would naturally infer, that the project is at a later stage of development than is actually the case. This is the exact complaint being raised in this charge and based on the peer testimony, the Member’s own evidence and our own experience and common sense reading the Report, we conclude that the Member is guilty as charged.

Charge 1e

e) The report and other similar exploration reports authored by Mr. de Souza and identified as follows:

i. 1993 exploration report for the R.H. Stanfield Group Fort Steele Mining Division British Columbia, June 11, 1993;

ii. 1994 exploration report for the R.H. Stanfield Group Fort Steele Mining Division British Columbia, July 29, 1994;

iii. 1996 exploration report for the Gallowai Metal Mining Corporation Fort Steele Mining Division British Columbia, August 16, 1996; quote grades from a 1982 report by Dr. Weber-Diefenbach and 1984 Wennekers report which was inappropriate and misleading due to the lack of support for the grades in said reports.”

The Panel finds the Member guilty of this charge. The Member’s testimony clearly indicates that selective assay information was used in preparing the above Reports. No new or existing supporting assay data is found in the report to validate or support the original assay data to a reasonable standard. A “rough and ready” and a “comfort level calculation” does not constitute a reasonable professional standard for an investment decision.

In this regard, we wish to quote from the Member’s testimony beginning at p. 277:

Q Okay. Now, sir, am I correct that in all four reports that we’ve identified that you prepared as a member, that you accept the average grades quoted in Wennekers and Weber-Diefenbach’s reports?
A As I said, I did a comfort level calculation in the early times to get that degree of satisfaction, Yes.

Q Okay. For example, in your report under 7.e, at page 12, you say: “Munich Assays used in the previous reserve calculation indicate the Gallowai Bul River tonnages as averaging: 2.25 percent Copper, 1.05 ounce per ton Silver, and .35 ounce per ton Gold.”
A Yes.

Q And you did some sort of calculation to satisfy your own comfort level?
A I did a comfort level calculation.

Q And, I’m sorry, could you just take me through that again? I might have missed it.
A As I responded to earlier, I used a rough and ready method to determine whether there was anything that

To be blunt, the grade estimation used in the Report is represented by one historical assay. That assay was determined in Germany “a long time ago”, even in 1997 terms. The Member alludes to other relevant assays in other documentation, but there is no attempt to bring this data forward to support grade estimations for the resource and reserve categories. The quantity and quality of assay data normally needed in support of a $15 million exploration and development program at Gallowai is not found or suitably referenced in the Report.

Charge 1f

f) Mr. de Souza’s reports aforesaid omitted significant other recent Assay data.”

The Panel finds the Member guilty of the charge. On numerous occasions set out above we have indicated that the Reports do not contain or suitably reference assay or analytical data and information in support and substantiation of proposed exploration and development activities.

The Member’s answer to all of this seems to be set out at pp. 297 – 298 of the transcript. He agrees that there is information available to an investor but he says that the Sophisticated Investor has every right to come and ask him or the Company for the background information. But no contact information is provided and we heard evidence that the client did not cooperate with efforts of investors or their agents to reach out for further information. It is sufficient to say that significant assay data has been omitted and the failure to include it does not meet acceptable professional standards.

Charge 2

“That in or about December, 1997 you authored an evaluation report which calculated the value of shares in Bul River in Gallowai, which report was deficient and misleading in the following respects:

a) The Share Valuation Report was based on reserve numbers at a time when economically recoverable reserves had not been determined.

b) The title of the report wrongly implies that it is a financial projection.”

The Panel chooses to deal with both these charges together and finds the Member guilty. The Share Valuation Report is based on unsubstantiated tonnage and grade information and data. The Share Valuation Report is incomplete and results in a potential overstatement of the potential share value of the Bul River and Gallowai mining properties.

The approach taken by the Member is revealed in a very candid exchange which demonstrates the frailty of what was implied here. We wish to quote, at length from the transcript:

than does the country rock -- than does the main vein system; therefore, I can use a significantly higher dilution rate than he could when he was reliant on, I think it was a report done by Kilborne Engineers in 1971 or ’72, which was actually written for the previous owners, Placid Oil. They basically said: You’ll never mine in that ground.

Q Well, sir, I’m actually reading from the report of Weber-Diefenbach that says: Recover rate, 60 percent for gold.
A And he’s taking those figures from the Kilborne acknowledgment that the surrounding rock is incompetent. And I’m telling you that as a result of all the work we’ve done underground and the testing, also were alluded to as being necessary by your experts yesterday, we’ve don’t specific gravity testing, we’ve done rock-strength testing, we’ve done crushability testing, that all that information gives me the confidence to say: I can mine it for that kind of dilution.

Q And then how do you reach the numbers as you go down the page? Could you, please -- and, I’m sorry, I’m going to ask you to be primitive so I can understand it, please. How you go down the page and arrive at a per share value?
A Ooh, you’re asking me to go back a few years here. If you -- if you put this spreadsheet in spreadsheet form, you could not actually follow from one to the other, to the other, to the other, to the other. You’re actually having to go back to the mine report.

Q Okay.
A Mine plan report. What, in fact, I’m calculating out here is the -- is the possible net cash flow taking into account the value of the ore and the costs, and the costs come from there.

Q Okay. But let’s stop there for a moment. If my calculations are correct, you take 8.7 million tons of rock ore?
A M-hm.

Q You then apply the grade factor of .35 ounces per ton —
A M-hm

Q -- across that 8.7 million --
A M-hm.

Q -- and reach a recoverable 2.740,500 ounces of gold; am I correct?
A Which lines are you reading from, just to --

Q I’m sorry, I’m --
A Copper 2.25, rock recoverable.

Q Yes, rock recoverable --
A 2,740,500.

Q That is Au, so I assume that’s gold.
A Okay. 388,398,929?

Q No, I’m looking at the top one that says: Rock recoverable, Au ounces. Is that gold?
A Au is gold, yes.

Q Okay. So to reach 2.740 million ounces of gold --
A M-hm

Q -- am I correct that you would have calculated the average of .35 ounces of gold per ton over the 8.7 million tons?
A Taking into account the -- taking into account the dilution factor, yes; or the mine recover, mine and mill recovery, yes.

Q Is that not a direct --
A Yes, it is, it’s 8.7 --

Q direct multiplication?
A -- 8.7 x .9 x .9 x .35. That should -- that should bring it out to 2.740.

Q So you would have just accepted that Master’s tonnage had the consistent recoverable gold in it as pursuant to your own description of your own comfort level calculations?
A Again, having gone back to my comfort level calculations, and knowing what kind of dilution I had to have, also knowing that my country rock on either side contains more values than the gold -- more gold values than the vein right next to it, yes, I’m comfortable with that; and, of course, obviously, it’s based on that, and it’s based on ongoing work.

Q But it was done in December ’97, sir?
A This was December ’97, yes.

Q It was two-and-a-half-months after your report of September ’97?

We have looked at this evidence with great care, we have reviewed the Share Valuation Report fully and we have concluded that the Share Valuation Report lacks any substance. It is taken from a journalist/analyst who purports to know how to value shares of a trading company. But the approach to this evaluation is completely unconventional and skirts traditional and recognized valuation based on N.V.P. or R.O.I calculations.
There is absolutely no substance or credibility to the approach taken here and the Member knew or ought to have known better in allowing this assessment to be used by the Stanfield Group for promotional purposes. At the very least he should have noted that he was applying an unconventional approach here. He knew full well that his Report would be part of an Offering Memorandum and that it would be used to promote share sales. He failed to define and substantiate between resources and reserves and rolled the whole ball of wax into a Share Evaluation Report that we would charitably describe as unconventional and appearing to lack any merit at all.

The Member’s resume implies that he has training and experience in mining engineering, but to include this Share Evaluation Report in the document was unfair to investors and at the very least should have come with some very clear statements indicating that it was an unconventional way of evaluating shares. The result was that the Share Evaluation Report was based on reserve numbers at a time when economically recoverable resources hadn’t been determined and the title of the Share Evaluation Report wrongly implies a financial projection.

Charge 3
“That your conduct in the foregoing respects constitutes unskilled practice and unprofessional conduct and a violation of APEGGA Code of Ethics Rules of Conduct #1, #2, and #4.”

Rule 1 states: Professional engineers, geologists, and geophysicists shall have proper regard in all their work for the safety and welfare of all persons and for the physical environment affected by their work.

The reports demonstrate unskilled practice and unprofessional conduct in failing to convey the basis and rationale for mineral exploration and development activities and in justifying the proposed expenditures on the Bul River and Gallowai properties. As Mr. de Souza was well aware that his document would be included in the Offering Memorandum document his conduct is in violation of Rule #1.

Rule 2 states: Professional engineers, geologists and geophysicists shall undertake only work that they are competent to perform by virtue of training and experience and shall express opinions on engineering, geological or geophysical matters only on the basis of adequate knowledge and honest conviction.

The reports demonstrate unskilled practice in failing to apply standard and conventional technical and financial tests and assessments in justifying a mineral exploration and development proposal. Further, the reports lack adequate analytical and assay data and information to support the work proposal outlined in the Offering Memorandum and Mr. de Souza is therefore in violation of Rule #2.

Rule 3 states: Professional engineers, geologists and geophysicists shall act for their clients or employers as faithful agents or trustees, always acting independently and with fairness and justice to all parties.

The reports demonstrate little evidence of documented incremental or cumulative improvement in the Bul River and Gallowai mineral properties and claims over the duration of an admitted lengthy experience. Mr. de Souza is therefore in violation of Rule #4 in failing his client through unskilled practice and unprofessional conduct to report in a transparent, accountable and professional manner.

The Panel, in a very general way and by way of summary only, finds that there are three main areas where the Code of Ethics has been violated.

The Share Evaluation Report which the Member signed and allowed to be distributed or advertised by the Stanfield Group fell well below acceptable standards. The Member likely knows better. The Member’s resume states that he took the Mineral Evaluation course at Colorado School of Mines. He would have learned proper and acceptable valuation techniques and methods in this course. He knew or ought to have known that the Share Valuation Report he was attaching was unconventional or he should have made that clear in his document.

The second area of concern revolves around the resource/reserve/grade problem. The German assays suggest that the property contained a certain amount of metal. But there is also reference to other assays which would provide the understanding needed by potential investors to properly evaluate the potential of the Gallowai property. The Member didn’t discharge his professional responsibility when he selectively chose to omit information and data that would have put the German assays into context. A substantial amount of money was being raised by the public and they deserved to have all of the relevant information before them. Attaching a professional report to the Offering Memorandum was intended to give this project credibility and the investors ought to have been able to rely on that Report and that seal.

The third general area that we have concern about is the failure to qualify and phase the proposed exploration work. The amount of exploration work proposed is not supported, phased or justified in terms of good professional practice.

In conclusion, the Member failed to meet all the requirements of the Code of Ethics.

Orders
On December 14, 2006 the Discipline Committee Panel provided its written findings and reasons to the Member and the Investigative Committee and requested the parties to provide submissions on orders. Counsel for Mr. de Souza and for the Investigative Committee indicated they wished to prepare a joint submission.

The parties requested and were granted several extensions to the deadline for the joint submission. On May 3, 2007, the Panel notified the parties that all submissions were to be received by May 31, 2007.

The parties have agreed on a number of sanctions, as noted below, which are set out in the respective submissions. The Panel accepts those submissions and orders as follows:

1. Mr. de Souza shall pay a fine of $5,000.00 to the Association within 90 days of the date of service of this decision and a proportion of the investigative costs incurred by APEGGA in these proceedings in an amount to be determined by the Discipline Committee following receipt of written submissions from the parties.

2. Within six (6) months from the date of service of this decision, Mr. de Souza shall successfully complete the APEGGA Professional Practice Exam.
3. Mr. de Souza agrees that his professional work for the two year period commencing from the date of service of this decision may be audited or reviewed by a nominee of the Investigative Committee, on reasonable notice to Mr. de Souza, and at Mr. de Souza’s expense.

4. Publication of the results of the proceedings shall be done in a manner to be determined by the Discipline Committee following receipt of the written submissions from the parties.
Each party provided separate submissions on the matters of costs and publication.

The Investigative Committee argues that their total submitted costs in the amount of $12,981.21 are less that the total amount incurred by the Investigative Committee and counsel during the full course of the hearing. And, the costs payable by the Member should reflect APEGGA’s policy on cost recovery and be consistent with policies and allocation of costs in other professional association disciplinary matters.

Member’s counsel argues that costs should reflect the proportionate nature of the four reports in question in which only one report, or 25% of the total number of reports in question, was found to represent unskilled practice.

The Panel is in agreement with the Investigative Committee’s position on full recovery of total fee and expense costs, as requested, for the duration of the hearing. This is consistent with previous practice on orders where a respondent has been found in violation of all or most charges. The Panel makes the following order:
5. Mr. de Souza shall pay to the Association the sum of $12,981.21 as costs in these proceedings within 6 months of the date of service of this decision.

The Investigative Committee argues that the Member’s name should be published unless there is compelling reason not to publish the Member’s name. Further, the Investigative Committee submits that it is not unfair to publish the Member’s name as the profession and the public have entitlements to know the outcome of these proceedings. Investigative Committee takes point to note that the Panel’s decision noted that the Member’s indiscretions are not an uncommon incidence and recommends that the Member’s name be published.

The Member’s counsel argues that since the complaint originated with an APEGGA member, and not a member of the public, that publication of the Member’s name should be withheld.

The Panel is in agreement with the Investigative Committee’s position on publishing the name of the Member as there is compelling reason and basis to inform not only the public, but also the APEGGA membership about these unprofessional conduct and unskilled practice matters. The Panel orders as follows:

6. This decision, including the
Member’s name, shall be published in The PEGG.
Additionally, the Panel also makes the following orders:

7. If Mr. de Souza fails to comply with any of the above orders within the times specified, his registration shall be suspended until he does comply with those orders.

8. Notwithstanding an appeal, this
decision and these orders shall remain in effect until the Appeal Board or the Court of Appeal, as the case may be, makes its decision on the appeal.

Dated at the City of Calgary, Alberta this 13th day of July, 2007.

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