McNamara v. Bre-X Minerals Ltd.

• Decision Date: 13 July 1999
• Docket Number: No. 5-97CV-159.,5-97CV-159.
• Citation: 57 F.Supp.2d 396
• Parties: Lane McNAMARA, et al., Plaintiffs, v. BRE-X MINERALS LTD., et al., Defendants.
• Court: U.S. District Court — Eastern District of Texas

Page 396

57 F.Supp.2d 396

Lane McNAMARA, et al., Plaintiffs, v. BRE-X MINERALS LTD., et al., Defendants.

No. 5-97CV-159.

United States District Court, E.D. Texas, Texarkana Division.

July 13, 1999.

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H. Lee Godfrey, Charles Robert Eskridge, III, Susman Godfrey LLP, Houston, TX, Damon Young, Young & Pickett, Texarkana, TX, Michael C. Spencer, U. Seth Ottensoser, Milberg Weiss Bershad Hynes & Lerach LLP, New York City, for plaintiffs.

T. Richard Handler, Jenkins & Gilchrist, Dallas, TX, John L. Verner, Calvin Gibbs & Verner, Houston, TX, David Boies, Boise & Schiller, Armonk, NY, Robert E. Dodson, Gooding & Dodson, Texarkana, TX, Glen Carter Hudspeth, Texarkana, TX, Karen Patton Seymour, Tiffany M. Erwin, D. Stewart Meiklejohn, Sharon Nelles, Sullivan & Cromwell, New York City, Preston Worley McGee, Tyler, TX, Gary D. Grimes, David Gibson Paul, Grimes & Paul, Texarkana, TX, Johnny Paul Arnold, Texarkana, TX, David J. Beck, L. Nicole Batey, Eric J. R. Nichols, Beck Redden & Secrest LLP, Houston, TX, John Hess McElhaney, Locke Punell Rain Harrell, Dallas, TX, John David Crisp, Crisp Jordan & Boyd LLP, Texarkana, TX, Zack A. Clement, Linda L. Addison, William J. Boyce, Preston Worley McGee, Fulbright & Jaworski, Houston, TX, Robert M. Buschmann, Daniel R. Murdock, Winston & Strawn, New York City, Nicholas H. Patton, Patton Tidwell & Sandefur, Texarkana, TX, J. Hoke Peacock, II, Oragin Bell & Tucker, Beaumont, TX, Bruce Domenick Angiolillio, Simon A. Steel, Michael A. Berg, Simpson, Thacher & Bartlett, New York City, James N. Haltom, Patton Haltom Roberts McWilliams & Greer LLP, Texarkana, TX, Eric F. Grossman, Lewis B. Kaden, Lawrence J. Portnoy, Davis Polk & Wardell, New York City, for defendants.

ORDER

FOLSOM, District Judge.

Several Defendants in this action have filed motions to dismiss under Federal Rules of Civil Procedure 12(b)(6) and 9(b). The motions of the following Defendants are well taken: Barrick Gold Corporation ("Barrick"); Lehman Brothers Inc. ("Lehman"); J.P. Morgan Securities, Inc. ("J.P.Morgan"); and Nesbitt Burns Inc. ("Nesbitt"). Also well taken are the motions of the following Defendants (collectively referred to as the "Kilborn Defendants"): P.T. Kilborn Pakar Rekayasa ("P.T.Kilborn"); Kilborn Engineering Pacific Ltd. ("Kilborn Engineering"); SNC-Lavalin Inc. ("SNC"), John Felderhof's motion to dismiss is not well taken.

I. BACKGROUND

This is a securities fraud case. Seeking class certification, the named Plaintiffs are persons who purchased common stock of Bre-X Minerals Ltd. ("Bre-X") and/or Bresea Resources Ltd. ("Bresea") between January 17, 1994 and May 2, 1997. The Plaintiffs essentially allege that the Defendants' omissions and misrepresentations artificially inflated the value of these stocks.

A. Bre-X and Bresea

The central player in this action is Defendant Bre-X, a publicly traded mineral exploration corporation headquartered in Calgary, Alberta, Canada. Bre-X common stock was traded on the Alberta Stock Exchange at all times during the purported class period. The stock was traded on the Toronto Stock Exchange beginning April 23, 1996, and on the NASDAQ National Market beginning August 19, 1996. Defendant Bresea is a Canadian holding company which owns (or at least owned at one time) a twenty-five percent share of Bre-X.

In 1993, Bre-X acquired mineral rights in the Busang area of the East Kalimantan province of Indonesia. The Plaintiffs allege that during the purported class period, Bre-X and its insiders misled its stockholders and the public by falsely announcing increasingly larger estimates of a gold resource that it had discovered in the Busang area through exploratory drilling. In particular, the Plaintiffs accuse Bre-X of numerous misstatements in estimating the amount of gold at this site from 3 million ounces in 1994 to 200 million ounces in the spring of 1997. Bre-X also allegedly tampered with core samples before they were sent to a laboratory for testing.

The increasing gold estimates allegedly allowed Bre-X and Bresea stock to sell at artificially inflated prices. Things went downhill, however, in March 1997, when an independent mining consultant concluded that the prior estimates concerning the quantity of gold at Busang had been overstated because of invalid samples and improper testing of the samples. Stock prices began to fall, and Bre-X is now in bankruptcy.

B. Other Defendants

In addition to Bre-X and Bresea, the Plaintiffs have named fifteen other Defendants. Eight of them are individuals who were Bre-X officers and/or directors ("Insider Defendants"). Defendants P.T. Kilborn and Kilborn Engineering provided geostatistical services to Bre-X and issued reports to substantiate the claims of gold. SNC is the parent corporation of Kilborn Engineering.

Defendant J.P. Morgan, an American corporation, acted as a financial advisor to Bre-X beginning in approximately September 1996. Defendant Lehman, also an American corporation, issued some positive reports about the presence of gold in Busang and made profits selling stock to its customers.

Defendant Nesbitt Burns is a Canadian stock brokerage that underwrote Bre-X stock and syndicated Bre-X private stock. Defendant Barrick is a Canadian group that negotiated with Bre-X about the possibility of a joint venture for the Busang project.

C. Plaintiffs' Claims

The Plaintiffs have brought the following three causes of action against all of the moving Defendants: (1) violations of Section 10b-5 of the Securities Exchange Act of 1934 (the "Exchange Act") (found at 15 U.S.C. § 78j(b)) and Rule 10b-5 promulgated thereunder (found at 17 C.F.R. § 240.10b-5); (2) negligent misrepresentation; and (3) common law fraud. Additionally, the Plaintiffs charge Felderhof, one of the Insider Defendants, with control person liability.

II. RELEVANT LAW

In deciding a motion to dismiss for failure to state a claim, the Court must look only to facts stated in the complaint and in documents attached to or incorporated in the complaint. Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1017 (5th Cir. 1996). The Court may also take judicial notice of the contents of certain documents filed with the Securities Exchange Commission. Id. at 1018.

For purposes of deciding the instant motions, the Court will accept as true the well-pleaded factual allegations made in the Plaintiffs' complaint and any reasonable inferences which can be drawn from them. Tuchman v. DSC Comm., 14 F.3d 1061, 1067 (5th Cir.1994). The Plaintiffs, however, "must plead specific facts, not merely conclusory allegations...." Id. The Court will "not accept as true conclusory allegations or unwarranted deductions of fact." Id.

A. 10b-5 Claims

The Plaintiffs bring their primary claim under section 10(b) of the Exchange Act. This section makes it unlawful for any person

[t]o use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors.

15 U.S.C. § 78j(b). The SEC rule promulgated under section 10(b), known as Rule 10b-5, which makes it unlawful for any person, directly or indirectly

[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading ...

...

in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5. For ease of discussion, the Court will refer to these claims as the "10b-5 claims."

To establish their fraud claims (including the 10b-5 claims), the Plaintiffs must show "(1) a misstatement or an omission (2) of material fact (3) made with scienter (4) on which the [Plaintiffs] relied (5) that proximately caused [the Plaintiffs'] injury." Tuchman, 14 F.3d at 1067 (quoting Cyrak v. Lemon, 919 F.2d 320, 325 (5th Cir.1990)).

A false statement or omission is material if its disclosure would alter the "total mix" of facts available to an investor and "if there is a substantial likelihood a reasonable shareholder would consider it important" to the investment decision. Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). Whether a statement is material is usually a question for the fact finder. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 450, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976). A complaint should not be dismissed on the grounds that the alleged misstatements or omissions are immaterial unless they are "so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir.1985).

To satisfy the reliance elements, the Plaintiffs in this action rely on the "fraud on the market" doctrine. The premise of this doctrine is that "the market price of shares traded on well-developed markets reflects all publicly available information, and, hence, all material misrepresentations." Basic, 485 U.S. at 246, 108 S.Ct. 978. Under this doctrine, "where materially misleading statements have been disseminated into an impersonal, well-developed market for securities, the reliance of individual plaintiffs on the integrity of the market price may be presumed". Id. at 247, 108 S.Ct. 978. To satisfy their pleading burden on causation, the Plaintiffs "need only allege facts which show that Defendants' omissions and misrepresentations caused the market price of the stock to be artificially inflated, and therefore to appear to be a good risk for investment, so that when the truth came out about the company's condition, the stock lost value and Plaintiffs suffered a loss." See Zuckerman v. Foxmeyer Health Corp., 4 F.Supp.2d 618, 626 (N.D.Tex.199...