Royal Wulff Ventures LLC v. Primero Mining Corp.

• Decision Date: 17 September 2019
• Docket Number: No. 17-56367,17-56367
• Citation: Royal Wulff Ventures LLC v. Primero Mining Corp., 938 F.3d 1085 (9th Cir. 2019)
• Parties: ROYAL WULFF VENTURES LLC, Lead Plaintiff; Robert E. Cook, as Trustee for the Robert E. Cook and Paula J. Brooks Living Trust Under An Agreement Dated 12/30/1998. Lead Plaintiff, Plaintiffs-Appellants, v. PRIMERO MINING CORP.; Joseph F. Conway; David Blaiklock; Wendy Kaufman ; Wade Nesmith; David Demers ; Grant Edey; Brad Marchant; Robert Quartermain; Michael Riley; Rohan Hazelton; Timo Jauristo; Eduardo Luna, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

938 F.3d 1085

ROYAL WULFF VENTURES LLC, LeadPlaintiff; Robert E. Cook, as Trustee for the Robert E. Cook and Paula J. Brooks Living Trust Under An Agreement Dated 12/30/1998. LeadPlaintiff, Plaintiffs-Appellants,

v.PRIMERO MINING CORP.; Joseph F. Conway; David Blaiklock; Wendy Kaufman ; Wade Nesmith; David Demers ; Grant Edey; Brad Marchant; Robert Quartermain; Michael Riley; Rohan Hazelton; Timo Jauristo; Eduardo Luna, Defendants-Appellees.

No. 17-56367

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 4, 2019 Pasadena, California

Filed September 17, 2019

WARDLAW, Circuit Judge:

We have long recognized that the courts of one country will not sit in judgment of the acts of a foreign sovereign committed within its own territory.The act of state doctrine limits judicial interference in foreign relations by precluding adjudication of the sovereign acts of other nations in United States courts.Because Plaintiffs’ claims under the Securities Exchange Act of 1934 would require a United States court to pass judgment on the validity of a 2012 ruling by the United Mexican States’ (Mexico) tax authority, the Servicio de Administración Tributaria, they are barred by the act of state doctrine.We therefore affirm the district court’s dismissal of Plaintiffs’ putative class action complaint.

I.

PlaintiffsRoyal Wulff Ventures LLC and Robert E. Cook, as trustee of the Robert E. Cook and Paula J. Brooks Living Trust Under An Agreement Dated 12/30/1988(collectively Plaintiffs), filed a putative class action in the Central District of California, alleging violations of the Securities Exchange Act of 1934(Exchange Act) against Primero Mining Corporation(Primero) and twelve other named defendants.

According to the operative complaint, Primero is a Canadian mining company whose principal asset at the beginning of the class period (October 5, 2012 to February 3, 2016) was the San Dimas gold-silver mine in Tayoltita, Durango, Mexico.The San Dimas mine "has a large silver reserve [that] can be mined at a relatively low cost," and was previously owned and operated by two companies that are not parties to the present action: Wheaton River Minerals Ltd. and Goldcorp Inc.After Primero purchased the San Dimas mine from Goldcorp Inc. in August 2010 for $510 million, Primero’s Mexican subsidiary, Primero Empresa Minera, S.A. de C.V.(PEM) owned and operated the San Dimas mine.Primero also acquired a separate subsidiary from Goldcorp Inc., which it renamed Silver Trading Barbados.

In connection with the August 2010 purchase of the San Dimas mine, Primero also assumed the obligations of two separate amended contracts: the Internal Silver Purchase Agreement 2004(Internal SPA) and External Silver Purchase Agreement 2004(External SPA).As a result, PEM was contractually bound to sell to Silver Trading Barbados, another Primero subsidiary, "the first 3.5 million ounces per year of silver produced by the San Dimas mine, plus 50% of the excess silver above this amount" at the market rate per ounce of silver (Spot Price) for the first four years after Primero acquired the San Dimas mine.Silver Trading Barbados, in turn, was bound by these contracts to "sell that silver to [unaffiliated Silver Wheaton (Caymans) Ltd.] at the lesser of $4.04 per ounce (adjusted by 1% per year) and Spot Prices."Primero also agreed that after the first four years, it would sell "the first 6 million ounces per year of silver produced by the San Dimas mine, plus 50% of the excess silver above this amount," to Silver Wheaton (Caymans) Ltd., "at the lesser of $4.20 per ounce (adjusted by 1% per year) and Spot Prices for the life of the mine."During this period, PEM "computed income taxes in Mexico based on selling all silver produced at the San Dimas mine to [Silver Trading Barbados] at Spot Prices as provided in the Internal SPA."Thus, while Primero was required to sell the silver to Silver Wheaton (Caymans) Ltd. at around $4 per ounce, it was required under Mexican law to pay taxes at the significantly higher Spot Prices at which PEM sold the silver to its sister subsidiary.The complaint alleges that Mexico then allowed six transfer pricing methods for transactions with non-resident related parties, which PEM was required to follow with respect to sales by PEM to Silver Trading Barbados under Mexico’s Income Tax Law.

During the existence of these contracts the Spot Price per ounce of silver began to rise.At the outset of the agreements, the price was around $6.47 per ounce, but by March 2011, the Spot Price of silver had increased to nearly $35 per ounce.The Internal SPA and External SPA agreements thus led to a significant tax burden for Primero: in the first quarter of 2011, for instance, Primero "recorded a net loss of $7.895 million after paying $12.9 million in income taxes on pre-tax income of just $5.05 million."

Plaintiffs allege that Primero devised a tax evasion scheme to reduce this significant tax liability.This alleged scheme involved two steps.First, Primero restructured its company and amended the Internal SPA"so that the transfer price (i.e. , the sale price) from PEM to [its sister subsidiary, Silver Trading Barbados] was no longer the significantly higher Spot Price of silver, but rather the approximately $4 per ounce [unaffiliated Silver Wheaton (Caymans) Ltd.]Purchase Price."And second, on October 17, 2011, a few days after amending the Internal SPA, Primero submitted an "advance pricing agreement"(APA) application to Mexico’s tax authority, the Servicio de Administración Tributaria(SAT), seeking approval of its new transfer pricing methodology resulting from its amendment to the Internal SPA.

According to the operative complaint, an APA is a "prospective agreement regarding the taxpayer’s transfer prices" through which "taxpayers [in Mexico can] avoid future disputes over transfer pricing.""APA Rulings are valid for five years, spanning the fiscal year in which they are acquired, the immediately preceding year, and the following three fiscal years."If an APA Ruling is not properly grounded in law or fact, "it can be retroactively annulled by Mexico’s Tax Court through a proceeding initiated by the SAT, known as a juicio de lesividad ."

The operative complaint also alleges that "APAs are handled exclusively by the SAT’s Transfer Pricing Audit Administration," and that "[u]nder Mexican law, the head of the Transfer Pricing Audit Administration, known as the Central Administrator for Transfer Pricing Audits, is one of a few people in the Transfer Pricing Administration who may decide [APAs] and in any event is in charge of the remaining few [people] who can [decide APAs]."

As part of Primero’s APA application, the company hired an attorney named Christian Natera, whose firm, Natera Consultores, S.C., specialized in transfer pricing.At the time, Christian Natera’s brother, Luis Natera, served as the Central Administrator for Transfer Pricing Audits.In this position, Christian Natera’s brother was "one of a few people in the Transfer Pricing Administration who [could] decide [APAs] and in any event [was] in charge of the remaining few [people] who [could decide APAs]."Through its APA application, Primero allegedly sought approval of a transfer pricing methodology known as the "comparable uncontrolled price" or "CUP" method, which would allow it to pay taxes based on the approximately $4 per ounce unaffiliated Silver Wheaton (Caymans) Ltd. Purchase Price for silver extracted from the San Dimas mine, rather than the Spot Price.Plaintiffs allege that the CUP method is one of the six Mexican-approved transfer pricing methods; however, they also contend that Primero’s APA, as actually approved, failed to comply with the CUP method.

On October 5, 2012, Primero issued a press release announcing that PEM "ha[d] received a positive ruling from the Mexican tax authorities ...."The release described the ruling: "The ruling confirms that [PEM] appropriately records revenue and taxes from sales under the silver purchase agreement at realized prices rather than spot prices effective from August 6, 2010."Thus, under the ruling, the Mexican tax authority allowed PEM to pay taxes based on the Silver Wheaton (Caymans) Ltd. Purchase Price, rather than the Spot Price.According to Plaintiffs, this announcement "shocked the markets," and resulted in Primero’s stock increasing by 36%, closing at $7.37 per share that same day.

Following this positive ruling by the SAT, Primero made a number of public statements that Plaintiffs allege were misleading in violation of U.S. securities laws.The first set of statements Plaintiffs identify concerns the effect that the SAT’s 2012 APA Ruling would have on Primero’s cash flow and tax position.While Plaintiffs catalogue a significant number of these statements by Primero in their complaint, the district court found the following statements representative:

(1) Primero’s October 5, 2012 press release: "Primero Mining Corp. ... announced today that [PEM] has received a positive ruling from the Mexican tax authorities (Servicio de Administracion Tributaria) on its Advance Pricing Agreement ("APA") filing made in October 2011.The ruling confirms that [PEM] appropriately records revenues and taxes from sales under the silver purchase agreement at realized prices rather than spot prices effective from August 6, 2010.Under Mexican tax law, an APA ruling is generally applicable for up to a five year period.For Primero this applies to the fiscal years 2010 to 2014.Assuming the Company continues to sell its silver from its San Dimas mine on the same terms and there are no changes in the application of Mexican tax laws relative to the APA ruling, the Company expects to pay taxes on realized prices for the life of the San Dimas mine."

(2)Defendant Conway: "We had a significant tax burden, which we have just recently got cleared of, but more importantly I think as well now that that is done, what

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