Shocking revelations by an ex-employee of Fortescue Metals Group to an Australian court will strengthen the case filed by the country's watchdog against the miner and its chief executive Andrew Forrest for misleading the market in 2004 and 2005, claiming to have signed "binding contracts" with three Chinese companies to build and finance its Pilbara iron-ore project.

Andrew Forrest had claimed in 2004 and 2005 that Fortescue had ''binding contracts'' with the China Metallurgical Construction Corporation and China Harbour Engineering Corporation to build mining, rail and port infrastructure in its Pilbara iron ore project in Western Australia.

Based on press releases by the miner and these bullish statements, which were repeated 11 times between August 2004 and March 2005, the stock prices of the company soared, but came crashing down on 24 March 2005, when The Australian Financial Review reported that these contracts were suspect.

The report dislosed that the the company had no such ''binding contracts'' but had signed only ''three framework agreements'' and was still negotiating with the Chinese companies to further these agreements to something more substantial.

The Australian Securities and Investments Commission (ASIC)had filed a case in the Australian Federal Court in Canberra against Fortescue and Forrest for deliberately misleading the market on its so called ''binding deals'' with Chinese companies and thereby creating a bullish run on the company's stock.

ASIC is seeking millions of dollars in penalties and debarring Forest from holding the chief executive post of the company.

Ex-employee Wei Fisher said in the court yesterday that Forrest was very upset when he received a fax on 3 February 2005 from China Metallurgical Construction Group (MCC) saying that the deal was off.

According to Wei Fisher , Forrest was walking about the office, waving the fax and raising his voice saying, ''This is ridiculous. If anyone tells the press, we have had it.''

Wei Fisher was sacked immediately on the grounds that she had not given her best in the negotiations with the Chinese companies in getting the deal through.

The deal disintegrated when MCC asked for more proof of the reserves of iron ore at the company's Pilbara mines and also demanded an 80-per cent share in the Australian miner while Forrest was only willing to part with 30 per cent.

ASIC said in the court that Fortescue and Forrest were aware all the time that ''framework agreements'' were not ''binding contracts'' but just a memorandum of understanding to take the talks further.

ASIC further stated that Forrest was involved in drafting out the press releases and company statements about the ''binding contracts'' and in doing so had breached his duty as the chief executive officer of the company by failing to advise the market that the deals were not binding.

ASIC said in the court that "Even after a breakdown of negotiations in January and February, Forrest was making representations to mining conferences ... without any mention of the difficulties that had arisen."

Although the case is a civil case, Fortescue and Forrest can face maximum penalties of up to $6 million and $4.4 million, respectively if found guilty.

In February 2009, Chinese steel maker Hunan Valin Iron and Steel took a 16.5-per cent stake for $770 million (A$1.2 billion) in Fortescue. (See: China invests heavily in Australian miner-Fortescue)