Queen Uno Ltd. Partnership v. Coeur D'Alene Mines

• Citation: 2 F.Supp.2d 1345
• Decision Date: 13 April 1998
• Docket Number: Civil Action No. 97-WY-1431-CB.
• Parties: QUEEN UNO LTD. PARTNERSHIP, Douglas Giedt, David F. Fromlet, and Silview Investments Limited, on behalf of themselves and on behalf of all others similarly situated, Plaintiffs, v. COEUR D'ALENE MINES CORPORATION, Dennis Wheeler, James A. Sabala, and Ernst & Young LLP, Defendants.
• Court: U.S. District Court — District of Colorado

2 F.Supp.2d 1345

QUEEN UNO LTD. PARTNERSHIP, Douglas Giedt, David F. Fromlet, and Silview Investments Limited, on behalf of themselves and on behalf of all others similarly situated, Plaintiffs, v. COEUR D'ALENE MINES CORPORATION, Dennis Wheeler, James A. Sabala, and Ernst & Young LLP, Defendants.

Civil Action No. 97-WY-1431-CB.

United States District Court, D. Colorado.

April 13, 1998.

COPYRIGHT MATERIAL OMITTED

Robert J. Dyer III, Kip B. Shuman, Jeffrey A. Berens, Dyer Donnelly, Denver, Alan Schulman, Randi D. Bandman, Randall J. Baron, Amber L. Eck, Milberg Weiss Bershad Hynes & Lerach LLP, San Diego, CA, for Plaintiffs.

Robert E. Youle, Michael B. Carroll, Williams, Youle & Koenigs, P.C., Denver, CO, Alan N. Salpeter, Michele Odorizzi, Jonathan C. Medow, Mayer Brow & Platt, Chicago, IL, for Defendants Coeur d'Alene Mines Corporation, Dennis E. Wheeler and James A. Sabala.

Alan M. Loeb, Davis, Graham & Stubbs LLP, Denver, CO, Michael L. Rugen, Renata M. Sos, Heller Ehrman White & McAuliffe, San Francisco, CA, for Ernst & Young LLP.

ORDER ON MOTION TO TRANSFER AND MOTIONS TO DISMISS

BRIMMER, District Judge, Sitting for the District of Colorado.

This matter is before the Court on Defendants Coeur D'Alene Mines Corporation's, Dennis A. Wheeler's, James A. Sabala's (the Coeur defendants), and Ernst & Young's Motions to Transfer and Motions to Dismiss. The Court FINDS and ORDERS as follows:

Background

Defendant Coeur d'Alene Mines Corporation (Coeur) is an Idaho corporation that explores, develops, and operates silver and gold mining properties in the United States, Chile, and New Zealand. Its stock is traded on the New York and Pacific Stock Exchanges. From 1991 to 1994, Coeur suffered significant losses because of high operating costs, large interest payments, and excessive dependence on silver production. According to Plaintiffs,¹ Coeur, via its Chief Executive Officer and Chairman of the Board Defendant Dennis E. Wheeler and its Chief Financial Officer Defendant James A. Sabala, engaged in an unlawful and fraudulent "scheme" to inflate the Company's stock price, reduce its operating losses, and create a public impression that in 1995 Coeur had returned to profitability. Plaintiffs further allege that Coeur's external auditor, Defendant Ernst & Young, LLP, was aware or should have been aware through the exercise of proper professional diligence that the 1994 and 1995 Coeur financial statements—represented by Ernst as in accordance with generally accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS)—were in fact materially overstated and based on material misrepresentations and omissions.

The allegedly fraudulent scheme was premised primarily on representations made by the Coeur defendants regarding two mines: the Golden Cross Mine in New Zealand and the Fachinal Mine in Chile. Coeur purchased the Golden Cross Mine in 1993 for approximately $50 million, and soon thereafter embarked on a lengthy and heavy public promotion of the mine's bright prospects. Via press conferences, press releases, meetings with securities analysts, and other public events Wheeler and Sabala reported that Golden Cross was producing gold at a lower cost per ounce than in prior years, that production at the mine was increasing, and that these benefits would continue well past 1995. When discussing Golden Cross, the Coeur defendants frequently speculated that the mine would produce approximately 77,000 ounces of gold in 1996. In early 1996, Coeur disclosed it had became aware of deep seated ground movement at Golden Cross that was "unrelated to our operations at the mine." Coeur assured investors and analysts it had implemented procedures to halt the movement and insure stability of the mine.

The Fachinal mine was an in-house project constructed by Coeur. As with Golden Cross, the Coeur defendants made and disseminated optimistic announcements of expected production levels at the Fachinal mine. Among these statements were repeated assurances that the Fachinal mine would be completed on time and under budget in October 1995 and would begin commercial production in late 1995 and produce 41,000—45,000 ounces of gold in 1996. Coeur publicized that production from Fachinal would "significantly impact revenues and cash flow."

Other statements did not mention Golden Cross or Fachinal but referred generally to overall company performance. The Coeur defendants publicized on numerous occasions that the company expected stronger cash flow, increased net income, and higher earnings per share in 1996 and 1997. Wheeler espoused that Coeur had a "plan for sustained growth" and a "strong financial position." As a result, Coeur had experienced "a significant strengthening in the balance sheet" and was poised for "dramatic growth." Wheeler further confided to the public that Coeur "was very optimistic as we look forward from 1995 on," and assured stakeholders they "had every reason to expect a good 1996." At one meeting, Wheeler and Sabala predicted Coeur would generate $24 million of cash flow in 1996. These sentiments were characteristic of statements made by Wheeler and Sabala throughout the class period.

The perceived vitality of Coeur, reinforced by the consistent barrage of optimistic forecasts regarding Golden Cross and Fachinal as well as the Company in general, drove Coeur's common stock price from $14-1/2 per share on January 9, 1995, the beginning of the class period, to an all-time high of $25-3/4 per share on July 11, 1996, the end of the class period. The boom was short lived. On July 10, 1996, massive structural problems at Golden Cross forced Coeur to write off its $53 million investment at the mine. At the same time, Coeur admitted the Fachinal mine had suffered significant losses as a result of operational difficulties and production shortfalls.

Following this news, Coeur's stock was downgraded and its price per share plummeted to $15-1/2, a 40% decline from its class period high. By year-end 1996, Coeur's losses were massive: $54.5 million or $2.54 per share. Cash flow had fallen by over half, from $20.9 million in 1995 to $7.7 million in 1996. Coeur's customary $.15 per share common stock dividend was eliminated.

1. Plaintiffs' Allegations

Plaintiffs bring this action on behalf of all persons who purchased Coeur's publicly traded debt and equity securities between January 9, 1995 and July 11, 1996. They state claims against all Defendants under Section 10(b) of the Exchange Act and its accompanying regulation Rule 10b-5, and against the Coeur defendants under Section 20(a) of the Exchange Act. Plaintiffs charge that the Coeur defendants made knowing material misrepresentations regarding the existence of structural problems with Golden Cross, the presence of construction, personnel, and production problems at Fachinal, and the negative effect these difficulties were likely to have on Coeur's balance sheet.

With respect to Golden Cross, Plaintiffs contend Coeur was aware even before it purchased the mine of significant structural and stability problems posing a substantial threat to the mine's long-term productivity. Specifically, Plaintiffs allege the Coeur defendants knew the Golden Cross mining operation was located on slipping, unstable ground that could cause—and had in fact caused—both the main tailings impoundment dam and the backup dam to fail, and further were aware that resolving these problems would require the incurrence of many millions of dollars in remediation expenses that would in turn render any significant future productive use of the mine unlikely. Furthermore, the presence of these problems made it impossible, or at least extremely unlikely, that Golden Cross was or would be producing gold at a lower cost than it had historically; that production at Golden Cross was increasing or would increase in the future; or that Golden Cross would produce the 77,000 ounces of gold in 1996 the Coeur defendants had publicly predicted.

According to Plaintiffs, the Coeur defendants put an equally evasive spin on conditions at the Fachinal mine. For example, the Coeur defendants were aware, while they were making contradictory statements, that the Fachinal mine would not be completed for commercial production purposes before the end of 1995; would remain in a preproduction stage for another year; would not in 1996 produce, as had been publicized by Coeur, 44,000 ounces of gold; was within budget only because Coeur had not purchased and installed certain equipment needed to bring the mine to full production capacity; and was saddled by management and worker deficiencies.

The Complaint further alleges that Coeur's financial statements for year-end 1994 and 1995 and quarter-end March 31, June 30, and September 30, 1995 and March 31, 1996 were in violation of GAAP and misleading and materially false because in each statement Coeur failed to accrue for losses or disclose the extreme risk of loss associated with Golden Cross. More specifically, Plaintiffs allege Coeur violated, among other rules, FASB Statement of Accounting Standard No. 5, Accounting for Contingencies, which requires losses to be accrued by a charge to income if it is probable an asset has been impaired and the amount of the loss can be reasonably estimated. Plaintiffs allege the problems at Golden Cross should have been disclosed in all these financial statements and losses incurred based on the Coeur defendants' awareness of the significant impairment of the Golden Cross asset. Plaintiffs further allege Coeur's disclosure in its 1995 10-K that it had become aware in "the fall of 1995" that Golden Cross's tailings dam "may have sustained movement," was itself misleading because Coeur had known of the problem for some time, knew the dam had in fact sustained movement, and also knew initial efforts to stop the movement had failed and that remediation costs would therefore be far in excess of the $4 million estimated...