On June 3, 2019, Judge Analisa Torres of the United States District Court for the Southern District of New York dismissed a putative class action against the mining company Rio Tinto and certain of its executives. Colbert v. Rio Tinto plc, 17 Civ. 8169 (AT) (DCF) (S.D.N.Y. June 3, 2019). Plaintiff—purportedly on behalf of a class of purchasers of Rio Tinto’s American Depositary Receipts (“ADRs”)—alleged that defendants made misrepresentations regarding Rio Tinto’s investment and mining operations in Mozambique, in violation of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder. The Court held that certain of plaintiff’s claims were time-barred and the remaining claims failed to adequately allege an actionable misrepresentation or scienter.
Plaintiff alleged that, beginning in late 2010 and continuing into 2011, Rio Tinto learned that the coal reserves at a Mozambique mine that it had purchased were less valuable than initially projected, and that transporting the coal would be substantially more difficult and expensive than anticipated at the time of the purchase, due to physical constraints and the denial of necessary government approvals. See slip op. at 4-6. Plaintiff further alleged that defendants did not disclose these adverse developments until a press release and SEC filings in early 2013, which disclosed an impairment of more than $3 billion associated with the Mozambique investment. Id. at 7-8.
The Court first ruled that, because plaintiff did not file suit until October 2017, claims based on alleged misrepresentations made prior to October 2012 were time-barred in light of the Exchange Act’s five-year statute of repose. The Court rejected plaintiff’s argument that defendants had violated a continuing duty to “correct or update” pre-October 2012 statements, holding that such a duty would make the statute of repose a “nullity.” Id. at 10. The Court also rejected plaintiff’s argument that the five-year statutory period began running when the class members purchased the ADRs in reliance on the alleged misrepresentations. Id. at 11. Notwithstanding the Second Circuit’s decision in Arnold v. KPMG LLP, 334 F. App’x 349, 351 (2d Cir. 2009), in which the Second Circuit held that the statute of repose for securities claims “starts to run on the date the parties have committed themselves to complete the purchase or sale transaction,” the Court noted that several other Second Circuit decisions had dismissed complaints that failed to allege any misrepresentations within five years of the filing of the complaint. Slip op. at 11 (citing, e.g., SRM Glob. Master Fund P’ship Ltd. v. Bear Stearns Cos. LLC, 829 F.3d 173, 177 (2d Cir. 2016)).
The Court then turned to, and rejected, claims based on November 2012 statements in a securities filing and during a presentation at an industry conference that production had “continued to ramp up,” “work [was] progressing to expand [railway] capacity,” and “[o]ur presence in Africa is growing.” Plaintiff argued that these statements were at a minimum reckless, and an inference of scienter should be drawn, because “defendants were aware” and “executive management was aware” that there was no profitable way to exploit the mine given the inability to cheaply transport the coal. Id. at 13. The Court held, however, that these arguments “fall far short” of alleging that “an agent of the corporation committed a culpable act with the requisite scienter.” Id. at 13-14. The Court concluded that plaintiff failed to allege any individual defendant’s involvement or the involvement of anyone else who could have acted with the requisite scienter, and a “complaint in which defendants are clumped together in vague allegations” does not meet the heighted pleading requirements for a Section 10(b) claim. Id. at 14.
The Court also dismissed plaintiff’s claim based on Rio Tinto’s CEO’s response to a question at an investor conference, in which the CEO was asked whether transporting coal by barge was “still on the agenda” for the Mozambique project, and he replied that “any of the options should always be looked at” but rail was “probably the highest probability.” Id. at 14. While plaintiff argued that this response was misleading because the investor had asked about a specific transportation option that was “essential to the success of the operation,” and the response referred only to “options,” the Court determined that the CEO did not misleadingly suggest that transportation by barge was a “practical or realistic option.” Id. at 14-15.
Finally, the Court rejected plaintiff’s claim that Rio Tinto had misrepresented the value of the Mozambique operation in a 2013 bond offering that had incorporated a prior Annual Report valuing the operation at $3.7 billion even though Rio Tinto had known at the time of the 2013 offering that the operation had a lower value. The Court concluded that, even if the incorporation of the $3.7 billion valuation was a misrepresentation, it was immaterial because Rio Tinto had already announced several weeks prior that it expected to impair the Mozambique operation’s value by “approximately $3 billion.” Id. at 15. The Court emphasized that, under the Second Circuit’s decision in Ganino v. Citizens Utils. Co., 228 F.3d 154, 167 (2d Cir. 2000), a misrepresentation is immaterial if “the information is already known to the market because the misrepresentation cannot then defraud the market.” Slip op. at 15.