Opinion
03 Civ. 4302 (RMB), 03 Civ. 5059 (RMB), 03 Civ. 5104 (RMB), 03 Civ. 5856 (RMB), 03 Civ. 6089 (RMB).
January 31, 2006
ORDER
I. Background
On or about November 5, 2003, Plaintiffs Richard Wagner, Muriel P. Engelman, Philip Schechter, Ira Gaines, and C.H. Smith (collectively, "Plaintiffs") filed a Consolidated and Amended Complaint alleging Defendants Barrick Gold Corporation ("Barrick"), Randall Oliphant ("Oliphant"), John K. Carrington, and Jamie C. Sokalsky (collectively, "Defendants") violated Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b) ("Section 10(b)"), Securities and Exchange Commission Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 and Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a) ("Section 20(a)").
By Order dated September 29, 2004 ("September 29, 2004 Order"), the Court held that Plaintiffs had plead adequately a securities fraud claim relating to Barrick's costs and earning projections regarding mining operations ("Costs and Earning Projections") but dismissed without prejudice Plaintiffs' claims arising out of Barrick's Premium Gold Sales Program ("Gold Sales Program" or "Program") and Barrick's reclassification of certain contracts ("Accounting Change") for failure to plead loss causation. (September 29, 2004 Order at 24-26 ("The September 26, 2002 `revelations' did not address the Gold Sales Program, nor any alleged speculation, anticompetitive activity, price manipulation, improper relationship with J.P. Morgan, or high risk revenue."), 30-31 ("[T]here is no causal link alleged between the Accounting Change and the harm suffered by Plaintiffs.").)
On or about October 19, 2004, Plaintiffs filed a Second Amended Complaint, and, with the Court's permission, Plaintiffs filed a Third Amended Complaint ("TAC") on or about January 6, 2005.
Familiarity with the September 29, 2004 Order and the TAC is presumed.
On or about May 23, 2005, Defendants filed a (final) motion to dismiss part of the TAC pursuant to Fed.R.Civ.P. 12(b)(6). (See Memorandum in Support of Defendants' Motion to Dismiss, dated May 23, 2005 ("Def. Mem.").) Defendants' motion addresses the question whether the TAC adequately alleges loss causation with respect to those claims which were dismissed without prejudice by the September 29, 2004 Order. On or about July 5, 2005, Plaintiffs filed an opposition. (See Corrected Plaintiffs' Memorandum in Opposition, dated July 5, 2005 and filed as corrected July 13, 2005 ("Pl. Mem.").) Defendants filed a reply on or about August 2, 2005. (Defendants' Reply Memorandum of Law, dated August 2, 2005. For the reasons set forth below, Defendants' motion to dismiss the TAC is granted in part and denied in part.
The parties waived oral argument.
II. Legal Standard
In resolving a motion to dismiss, the Court "must accept the factual allegations of the complaint as true and must draw all reasonable inferences in favor of the plaintiff." Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir. 1996). "The issue is not whether a plaintiff is likely to prevail ultimately, `but whether the claimant is entitled to offer evidence to support the claims.' Indeed it may appear on the face of the pleading that a recovery is very remote and unlikely but that is not the test." Gant v. Wallingford Bd. of Educ., 69 F.3d 669, 673 (2d Cir. 1995) (quoting Weisman v. LeLandais, 532 F.2d 308, 311 (2d Cir. 1976)). "[A] complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45 (1957).
In considering a motion to dismiss under Fed.R.Civ.P. 12(b)(6), a district court limits its consideration "to the factual allegations in plaintiffs' [complaint], . . . to documents attached to the complaint as an exhibit or incorporated in it by reference, to matters of which judicial notice may be taken, or to documents either in plaintiffs' possession or of which plaintiffs had knowledge and relied on in bringing suit."Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir. 1993); see also Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 48 (2d Cir. 1991). The district court may also consider "public disclosure documents required by law to be, and that have been, filed with the SEC." Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000).
To state a claim under Section 10(b), a plaintiff "must plead that the defendant, in connection with the purchase or sale of securities, made a materially false statement or omitted a material fact, with scienter, and that the plaintiff's reliance on the defendant's action caused injury to the plaintiff." Ganino v. Citizens Utils. Co., 228 F.3d 154, 161 (2d Cir. 2000); see also Dura Pharm., Inc. v. Broudo, 125 S.Ct. 1627 (2005) (basic elements of Section 10(b) claim are "(1) a material misrepresentation (or omission);" "(2) scienter;" "(3) a connection with the purchase or sale of a security;" "(4) reliance;" "(5) economic loss;" and "(6) `loss causation'") (emphasis omitted).
III. Analysis
Section 10(b) — Loss Causation
"Loss causation `is the causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff.'" Lentell v. Merrill Lynch Co., 396 F.3d 161, 174 (2d Cir. 2005) (quoting Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189, 197 (2d Cir. 2003)). Under the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u et seq. ("PSLRA"), Plaintiffs must "adequately allege a causal connection between defendants' non-disclosures and the subsequent decline in the value of [the security.]" Emergent Capital, 343 F.3d at 197; see also 115 U.S.C. § 78u-4(b)(4) ("In any private action arising under this chapter, the plaintiff shall have the burden of proving that the act or omission of the defendant alleged to violate this chapter caused the loss for which the plaintiff seeks to recover damages."). "[T]o establish loss causation, `a plaintiff must allege . . . that the subject of the fraudulent statement or omission was the cause of the actual loss suffered' . . . i.e., that the misstatement or omission concealed something from the market that, when disclosed, negatively affected the value of the security."Lentell, 396 F.3d at 173 (emphasis in original) (citations omitted). "[L]oss causation has to do with the relationship between the plaintiff's investment loss and the information misstated or concealed by the defendant. . . . If that relationship is sufficiently direct, loss causation is established . . . but if the connection is attenuated, or if the plaintiff fails to demonstrate a causal connection between the content of the alleged misstatements or omissions and the harm actually suffered, a fraud claim will not lie." Lentell, 396 F.3d at 174 (internal quotations and citations omitted).
Defendants argue, among other things, that the TAC fails to allege a causal link between the Gold Sales Program and/or the Accounting Change and the fall in Barrick's stock price on September 26, 2002 because "the September 26 Announcement [stating that Barrick would revise its earnings projection downwards] does not `disclose' the alleged frauds relating to the Gold Sales Program or the Accounting Change" but rather "attributes the revisions of Barrick's earnings outlook exclusively to lower production and higher costs at Barrick's gold mines," (Def. Mem. at 17 (emphasis omitted) (citing Press Release, Barrick, Barrick Revises 2002 Outlook (Sept. 26, 2002) ("September 26 Announcement"), attached as Exhibit F to Notice of Motion, dated May 23, 2005)), and the September 27, 2002 article cited by Plaintiffs in the TAC also "clearly ties the September 26 Announcement to the Cost and Earnings Projections." (Def. Mem. at 9 (citing Steve Maich, Barrick Keeps Dropping the Second Show: Bad News Follows Good, National Post (Canada), September 27, 2002, at IN 1 ("September 27 Article"), attached as Exhibit E to Notice of Motion, dated May 23, 2005 ("The world's second-biggest gold producer warned that a series of production problems at three of its mines will reduce earning through the rest of this year by as much as 30%."); see also Def. Mem. at 10 ("Plaintiffs do not allege that the September 26 Announcement disclosed any relationship between the Program and Barrick's mining operations; nor do plaintiffs cite any specific facts in support of their conclusory allegations that such a relationship existed."). Defendants also argue that "plaintiffs have added [in the TAC] unsupported, conclusory allegations in support of their contention that all three categories of statements [i.e., relating to Barrick's Costs and Earnings Projections, Gold Sales Program, and Accounting Change] are part of a `single, inter-related fraudulent scheme,' relieving plaintiffs of the need to plead loss causation separately for each category." (Def. Mem. at 3.) They contend that Plaintiffs are required "to plead loss causation separately with respect to the Gold Sales Program and the Accounting Change claims." (Def. Mem. at 3.)
Plaintiffs argue, among other things, that the TAC alleges "that Defendants engaged in a single fraud through numerous false statements, omissions, manipulative and deceptive acts, (Pl. Mem. at 2), and that "each alleged misrepresentation and omission made in furtherance of a single fraud need not separately be shown to satisfy the loss causation requirement." (Pl. Mem. at 3.) Plaintiffs also argue that the September 27 Article, among other reports, "confirm[s] the market's immediate understanding of the full implications of the September 26th announcement, and that, at least a portion of Barrick's disappointing results, were connected to the Company's `hedging' activities associated with the [Gold Sale Program] and other open derivative positions." (Pl. Mem. at 23-24; see also id. at 21 ("the corrective nature of a disclosure is not limited to what it expressly states; rather, it includes everything it implies to the market and what the market understood its importance to be.").)
Gold Sales Program
The TAC adequately alleges loss causation with respect to Plaintiffs' claims arising out of the alleged speculative, risky, and central nature of the Gold Sales Program. It asserts facts which, when considered in the light most favorable to Plaintiffs, suggest that, even though the September 26 Announcement did not address the Gold Sales Program explicitly, (see September 29, 2004 Order at 25), the market understood that Barrick's revision of projected earnings was related to the Gold Sales Program. See Dura Pharm., 125 S.Ct. at 1634 ("ordinary pleading rules are not meant to impose a great burden upon a plaintiff. . . . But it should not prove burdensome for a plaintiff who has suffered an economic loss to provide a defendant with some indication of the loss and the causal connection that the plaintiff has in mind."); In re Parmalat Sec. Litig., 375 F. Supp. 2d 278, 307 (S.D.N.Y. 2005) (Kaplan, J.) ("That the true extent [of] the fraud was not revealed to the public until February — after Parmalat shares were worthless and after the close of the Class Period — is immaterial where, as here, the risk allegedly concealed by defendants materialized during that time and arguably caused the decline in shareholder and bondholder value.") (emphasis added). In particular, Plaintiffs allege that on September 27, 2002, the day after Barrick's stocks fell, an article published in the Canada National Post, i.e., the September 27 Article, reported "That suspicion was everywhere yesterday as investors tried to reconcile the optimism of last week, with this week's stumble. As usual, much of the speculation focused on what impact, if any, the company's complex hedging strategy is having on its performance." (See September 27 Article ("`We don't know anything about the hedge program, and we really wonder if there's something more there that we should know,' said Rolie Bradley a fund manager with Maison Placement Canada. `They don't reveal what the obligations to the counter parties are, and we think it's very germane to the profitability of the company.' The company has said repeatedly that the hedging program is not threatened by rising gold prices. Its recent move to scale back its hedging portfolio was aimed as easing these concerns. But that hasn't satisfied many critics."); TAC ¶¶ 231, 233.) Plaintiffs allege that, "[b]ased on the foregoing, it is clear that investors engaged in a sell-off of Barrick stock due, in part, to Defendants' repeated misrepresentations that Barrick's Program would not prevent the Company from profiting in a rising gold market." (TAC ¶ 232.)
(See also TAC ¶ 219 ("On September 26, 2002, . . . Barrick shocked the market by issuing a press release announcing that it would revise its earnings expectation downward. . . . During a same-day conference call with investors, Oliphant [Barrick's former Chief Executive Officer and President] stated that the revision was `primarily due to lower production and higher cost in the third quarter.'") (emphasis in original).)
The TAC does not allege adequately a causal link between the potential legal liability arising from alleged anticompetitive conduct and an allegedly improper relationship with J.P. Morgan related to the Gold Sales Program and the fall in stock prices on September 26, 2002. See Lentell, 396 F.3d at 173-76. Neither the September 26 Announcement nor any reports relating to the market's activity on September 26, 2002 addresses these issues. (See September 27 Article (reporting concerns on September 26, 2002 regarding impact of "the company's complex hedging strategy" on Barrick's "performance") (emphasis added); September 26 Announcement.) See Lentell, 396 F.3d at 175 (plaintiffs failed to plead loss causation because they did "not allege that the subject of those false recommendations (that investors should buy or accumulate 24/7 Media and Interliant stock), or any corrective disclosure regarding the falsity of those recommendations, is the cause of the decline in stock value that plaintiffs claim as their loss.") (emphasis omitted); In re Merrill Lynch Tyco Research Sec. Litig., No. 03 CV 4080, 2004 WL 305809, at *3 (S.D.N.Y. Feb. 18, 2004) ("Because the June 6 research report did not discuss the subject matter of the alleged fraud, as a matter of law, the decline in Tyco's trading price on that date cannot be considered a reaction to the disclosure of the alleged `fraud.'"). (See also September 29, 2004 Order at 26 (citing Arduini/Messina P'ship v. Nat'l Med. Fin. Serv. Corp., 74 F. Supp. 2d 352, 361 (S.D.N.Y. 1999)). For the reasons stated above, however, Plaintiffs have plead adequately a claim to the extent Defendants' conduct allegedly made the Gold Sales Program riskier than was known.
Accounting Change
The TAC fails to allege adequately a causal link between the Accounting Change and the fall in stock prices on September 26, 2002. (See TAC ¶¶ 99 ("Barrick repeatedly proclaimed . . . that it was well-positioned to profitably exploit increased gold prices through gold production. To conceal the falsity of these statements, and to mask [losses from short call and min-max positions in the First Quarter of 2002] Barrick changed the name of these positions and accounted for them as `normal sales contracts' instead of `derivatives,' thereby removing them from its balance sheet and eliminating the recognition of this loss from its First Quarter 2002 balance sheet and income statement."), 102 ("[H]ad Barrick properly reported the impact of these derivative transaction, the market would have been alerted to the fact that Barrick's gold production business could not off-set the revenues lost (or losses being incurred) from rising gold prices due to Barrick's open sell-side gold positions, and that Barrick could not generate profits at previous levels based on gold production in a rising gold price environment.") (Defendants' "concealment of its losses in derivatives masked by the Defendants reclassification of those liabilities during the Class Period . . . contributed to the decline in the prices of Barrick shares on or after September 26, 2002.").) See In re QLT Inc. Sec. Litig., 312 F. Supp. 2d 526, 536 (S.D.N.Y. 2004);In re Merrill Lynch Tyco Research Sec. Litig., 2004 WL 305809, at *3. Section 20(a)
Defendants have offered no (independent) basis for dismissing the Section 20(a) claims beyond their arguments for dismissal of the Section 10(b) claims.
The Court is not dismissing Plaintiffs' Section 20(a) claims to the extent that they derive from the Section 10(b) claims related to the Gold Sales Program and Costs and Earning Projections.See, e.g., In re Sterling Foster Co. Sec. Litig., 222 F. Supp. 2d 216, 277, 282-23 (E.D.N.Y. 2002) (denying motion to dismiss Section 20(a) claim where Section 10(b) claim survives).
IV. Conclusion and Order
For the reasons set forth above, Defendants' motion to dismiss [48] is granted in part and denied in part.
Counsel and principles are requested to appear at a status/settlement conference with the Court on Friday, February 24, 2006 at 10:30 a.m. in Courtroom 706 of the Thurgood Marshall Courthouse, 40 Centre Street, New York, New York. The parties are directed to engage in good faith settlement negotiations prior to the conference with the Court.