California District Court Dismisses Securities Fraud Class Action, Finding News Reports Insufficient To Support A Claim Absent "Corroborating Details"

by Shearman & Sterling LLP
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On September 6, 2017, Judge Fernando M. Olguin of the Central District of California granted in part and denied in part a motion by defendants to dismiss a putative securities fraud class action against Goldcorp, Inc., a gold mining company, its former CEO Charles A. Jeannes, and other current and former officers of Goldcorp.  Cowan v. Goldcorp, No. 16-CV-6391 (C.D. Cal. Sept. 6, 2017).  The complaint asserted that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by misleading investors about pollution levels at one of Goldcorp’s major mines in Mexico.  In denying in part and granting in part the motion to dismiss, the Court ruled that—with the exception of a statement by Goldcorp’s former CEO—the complaint failed to adequately allege a materially false or misleading statement, noting that the complaint relied extensively on allegations raised in a Reuters article and lacked any corroboration.

Goldcorp is a leading gold producer in North and South America.  The present action relates to allegations concerning pollution levels at Goldcorp’s largest mine—the Penasquito mine—located in Mexico.  In October 2014, Goldcorp discovered increased groundwater pollution levels at the mine, which it reported to Mexican regulators.  Internal company documents showed that contamination levels continued to increase over the following months and identified several health, regulatory, and public relation risks that the company might face.  On August 24, 2016, Reuters published an article detailing the pollution issues at the mine, which coincided with a nine percent drop in Goldcorp’s share price.  Goldcorp’s share price dropped again in September 2016, after the mine was blockaded by local residents protesting the pollution.

In asserting claims for securities fraud under the Exchange Act, plaintiffs—relying heavily on the Reuters article—alleged that Goldcorp’s 2013 through 2015 Annual Reports, as well as several of their 2014 and 2015 Quarterly Reports, were materially misleading in that they failed to disclose the sharp increase in pollution levels at the Penasquito mine, as well as possible violations of Mexico’s environmental laws and regulations.  In dismissing the complaint, the Court found—with one exception—that the complaint failed to identify a material misstatement with the specificity required by Rule 9(b).  Specifically, the Court found that the Reuters article raised “significant concerns” as to whether defendants concealed the extent of the pollution and possible violations of Mexico’s environmental laws and regulations, but that these concerns were insufficient to plead a material misstatement or omission absent (1) corroboration by a confidential witness or expert or (2) reference to specific Mexican laws and regulations that Goldcorp allegedly violated.  The Court drew a distinction, however, with respect to statements made by Goldcorp’s former CEO at a public forum on September 16, 2014, in which he indicated that “everything [was] going well operationally” at the mine.  The Court found that the former CEO’s statement was inconsistent both with the Reuters article and Goldcorp’s Form 6K, which indicated that the company knew groundwater pollution levels at the mine were potentially outside Mexican environmental standards as of October 2013.  The Court therefore found that the complaint adequately pled a material misstatement by the former CEO.

The Court also ruled that plaintiffs’ general allegation that defendants failed to inquire whether the mine was in compliance with Mexican environmental law after being advised of the risk through internal company reports was insufficient to plead scienter.  The Court noted that plaintiffs’ allegations were impermissible group pleading and “[a]lthough the Ninth Circuit has not definitively addressed whether group pleading may be adequate in certain instances, courts within the Ninth Circuit have largely concluded that group pleading is not compatible with the [Reform Act’s] requirements.”  Finally, the court found the complaint failed to plead loss causation, remarking that the complaint failed to demonstrate a causal connection between any false statement by defendants and plaintiffs’ injury.

This case highlights that plaintiffs must plead a material false and misleading statement or omission with specificity in order to satisfy the heightened pleading requirements of Rule 9(b) and that claims based on a news report may not be sufficient if the news report lacks specificity or the complaint lacks “corroborating details.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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