|
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF TEXAS
TEXARKANA DIVISION
Lane McNamara, et al., õ
õ
Plaintiffs, õ
v. õ Civil Action No. 5-97-CV-159
õ (Jury)
Bre-X Minerals Ltd., et al., õ
õ
Defendants. õ
PLAINTIFFS? OPPOSITION TO ADDITIONAL
MOTIONS TO DISMISS OR TRANSFER
Damon Young R. Paul Yetter
Young & Pickett Yetter & Warden, L.L.P.
4122 Texas Boulevard 600 Travis, Suite 3800
Texarkana, Texas 75504 Houston, Texas 77002
Attorney-in-Charge for Plaintiffs H. Lee Godfrey
Susman Godfrey L.L.P.
Michael C. Spencer 1000 Louisiana, Suite 5100
Milberg Weiss Bershad Hynes & Lerach LLP Houston, Texas 77002
One Pennsylvania Plaza, 49th Floor
New York, New York 10119 Lead Counsel for Plaintiffs
Of Counsel for Plaintiffs
DATE \@ "MMMM d, yyyy"February 26, 1998
TABLE OF CONTENTS
Page
TOC \f
Preliminary Statement 1
Argument and Authorities 2
Point I: The Amended Complaint States Valid ClaimsUnder the Federal Securities Laws 2
The Amended Complaint Adequately Pleads Scienter 2
1. Recklessness is a basis for pleading scienter 2
2. The allegations against Nesbitt sufficiently plead scienter 3
a. Allegations of Nesbitt?s severe recklessness
b. Allegations of Nesbitt?s motive and opportunity
3. The allegations against Felderhof sufficiently plead scienter 7
a. Allegations of Felderhof?s conscious intent to
defraud, and motive and opportunity
b. Allegations of Felderhof?s severe recklessness
B. The Amended Complaint Pleads Fraud with Particularity 15
C. Felderhof?s Statements Are Not Immunized as ?Forward-Looking? Statements 17
D. Defendants Are Liable for Their False and Misleading Statements Published in Analyst and News Reports 18
E. Felderhof?s Statements Were Material and Specific, Not Just Vague and Optimistic Generalities 20
F. The Amended Complaint Adequately Pleads
Felderhof?s Control Person Liability 22
G. The Amended Complaint Adequately Pleads Claims
on Behalf of Purchasers of Bresea Shares 24
Point II: This Court Has Subject Matter JurisdictionOver the Claims of Foreign Purchasersof Bre-X and Bresea Stock 25
A. The Amended Complaint Pleads Claims That Satisfy Both the ?Conduct? and ?Effects? Tests 26
1. Conduct test 27
Effects test 28
B. This Court Also Has Supplemental Jurisdiction Over Claims of Non-U.S. Residents Who Purchased Bre-X and Bresea Shares in Canada 29
C. International Comity Does Not Support Dismissal of Claims of Foreign Residents Who Purchased in Canada 31
Point III: The Doctrine of Forum Non ConveniensDoes Not Provide a Basis for Dismissal. 35
A. Nesbitt Has a Heavy Burden of Proof 37
B. Canada Is Not An Available and Adequate Alternative 38
C. Private Interest Factors Favor this U.S. Forum 40
D. Public Interest Factors Favor this U.S. Forum 42
E. Convenience Factors Point Equally to Retaining Claims by Foreign Investors in This Forum 43
Point IV: This Court Has Personal JurisdictionOver Kavanagh, Francisco and Bresea 44
A. The Governing Standards 44
The Court Has Personal Jurisdiction Over Kavanagh 45
C. This Court Has Personal Jurisdiction Over Francisco. 50
D. This Court Has Personal Jurisdiction Over Bresea 52
E. Francisco, Kavanagh, and Bresea Are Participants in an
Unlawful Scheme and Subject to the Court?s Jurisdiction 54
TABLE OF AUTHORITIES
Federal Cases
Acito v. Imcera Group,
47 F.3d 47 (2nd Cir. 1995) 17
Alfadda v. Fenn,
935 F.2d 475 (2d Cir. 1991) 27
Alfus v. Pyramid Tech. Corp.,
764 F. Supp. 598 (N.D. Cal. 1991) 20
Allstate Life Insurance Co. v. Linter Group Ltd.,
994 F.2d 996 (2d Cir. 1993) 32
Asahi Metal Industry Co. v. Superior Court of California, Solano County,
480 U.S. 102 (1987) 48, 49, 52
Bernstein v. Crazy Eddie, Inc.,
702 F. Supp. 962 (E.D.N.Y. 1988), vacated in part
on other grounds, 714 F. Supp. 1285 (E.D.N.Y. 1989) 7
Borden, Inc. v. Spoor Behrins Campbell & Young, Inc.,
735 F. Supp. 587 (S.D.N.Y. 1990) 23
Branch-Hess Vending Services Employees' Pension Trust v. Guerbert,
751 F. Supp. 1333 (C.D. Ill. 1990) 14
Breard v. Sachnoff & Weaver, Ltd.,
941 F.2d 142 (2d Cir. 1991) 11
Burkhart v. Allson Realty Trust,
363 F. Supp. 1286 (N.D. Ill. 1973) 54
Burt v. Isthmus Development Co.,
218 F.2d 353 (5th Cir. 1955) 37
Chemical Bank v. Arthur Andersen & Co.,
726 F.2d 930 (2d Cir. 1984) 25
Chill v. General Electric Co.,
101 F.3d 263 (2d Cir. 1996) 13
Cohen v. Koenig,
25 F.3d 1168 (2d Cir. 1994) 9, 11
Consolidated Gold Fields PLC v. Minorco, S.A.,
871 F.2d 252 (2d Cir.), modified,
890 F.2d 569 (2d Cir. 1989) 27
Continental Grain (Australia) Pty. Ltd. v. Pacific Oilseeds, Inc.,
592 F.2d 409 (8th Cir. 1979) 27
Cosmas v. Hassett,
886 F.2d 8 (2d Cir. 1989) 9, 10, 11
Cruz v. Ortho Pharmaceutical Corp.,
619 F.2d 902 (1st Cir. 1980) 47
Cyrak v. Lemon,
919 F.2d 320 (5th Cir. 1990) 22
DeYoung v. Beddome,
707 F. Supp. 132 (S.D.N.Y. 1989) 32, 33
Decker v. Massey-Ferguson, Ltd.,
534 F. Supp. 873 (S.D.N.Y. 1981), aff'd in part,
remanded in part, 681 F.2d 111 (2d Cir. 1982) 16
Dennis v. General Imaging, Inc.,
918 F.2d 496 (5th Cir. 1990) 51
Department of Economic Development v. Arthur Andersen & Co. (U.S.A.),
747 F. Supp. 922 (S.D.N.Y. 1990) 45
Derensis v. Coopers & Lybrand Chartered Accountants,
930 F. Supp. 1003 (D.N.J. 1996) 32, 33, 34, 40
Doll v. James Martin Associates (Holdings) Ltd.,
600 F. Supp. 510 (E.D. Mich. 1984) 47
Elkind v. Liggett & Meyers, Inc.,
635 F.2d 156 (2d Cir. 1980) 19, 20, 22
Fecht v. Price Co.,
70 F.3d 1078 (9th Cir. 1995), cert. denied,
116 S. Ct. 1422 (1996) 22
Federal Deposit Insurance Corp. v. Milken,
781 F. Supp. 226 (S.D.N.Y. 1991) 53
Fleeger v. Clarkson Co.,
86 F.R.D. 388 (N.D. Tex. 1980) 32
Fugman v. Aprogenex, Inc.,
961 F. Supp. 1190 (N.D. Ill. 1997) 11
Gibbs. Sinclair v. Soniform, Inc.,
935 F.2d 599 (3d Cir. 1991) 30, 31
Goldman v. Belden,
754 F.2d 1059 (2d Cir. 1985) 9
Grunenthal v. Hotz,
712 F.2d 421 (9th Cir. 1983) 28
Gulf Oil Corp. v. Gilbert,
330 U.S. 501 (1947) 37, 43
Harvey M. Jasper Retirement Trust v. Ivax Corp.,
920 F. Supp. 1260 (S.D. Fla. 1995) 19
Heckker v. Ideon Group, Inc.,
[1996-97 Transfer Binder], Fed. Sec. L. Rep. (CCH) ô 99,299 at 95,815-16
(M.D. Fla. 1996) 16
Hilgeman v. National Insurance Co.,
547 F.2d 298 (5th Cir. 1977) 54
Hill York Corporation v. American International Franchises, Inc.,
448 F.2d 680 (5th Cir. 1971) 48
Hilton v. Guyot,
159 U.S. 113 (1895) 31
Holt Oil & Gas Corp. v. Harvey,
801 F.2d 773 (5th Cir. 1986) 51
Howe v. Goldcorp Investments, Ltd.,
946 F.2d 944 (1st Cir. 1991) 36
IIT v. Vencap, Ltd.,
519 F.2d 1001 (2d Cir. 1975) 27
In re 3COM Sec. Litig.,
761 F. Supp. 1411 (N.D. Cal. 1990) 10
In re Air Crash Disaster Near New Orleans,
821 F.2d 1147 (5th Cir. 1987),
vacated on other grounds, 490 U.S. 1032 (1989) 36, 37, 38, 40
In re Apple Computer Security Litigation,
886 F.2d 1109 (9th Cir. 1989) 10
In re Bausch & Lomb, Inc. Security Litigation,
941 F. Supp. 1352 (W.D.N.Y. 1996) 9, 16
In re Cascade International Security Litig.,
840 F. Supp. 1558 (S.D. Fla. 1993) 6
In re Chase Manhattan Corp. Sec. Litig.,
1991 WL 152618 (S.D.N.Y. 1991) 16
In re Health Management, Inc. Security Litigation,
970 F. Supp. 192 (E.D.N.Y. 1997) 6, 14
In re Leslie Fay Cos., Inc. Security Litigation,
871 F. Supp. 686 (S.D.N.Y. 1995) 6, 14
In re Meridian Security Litigation,
772 F. Supp. 223 (E.D. Pa. 1991) 23
In re Sahlen & Associate Security Litig.,
773 F. Supp. 342 (S.D. Fla. 1991) 23
In re Seagate Tech. II Security Litigation,
843 F. Supp. 1341 (N.D. Cal. 1994) 10
In re Syntex Corp. Security Litigation,
95 F.3d 922 (9th Cir. 1996) 10, 20
In re Verifone Securities Litigation,
784 F. Supp. 1471 (N.D. Cal. 1991), aff'd,
11 F.3d 865 (9th Cir 1992) 20
In re Wellcare Management Group, Inc. Security Litigation,
964 F. Supp. 632 (N.D.N.Y. 1997) 13
In re Worlds of Wonder Security Litigation,
35 F.3d 1407 (9th Cir. 1994) 10
In re ZZZZ Best Security Litigation,
864 F. Supp. 960 (C.D. Cal. 1994) 7
Insurance Co. of North America v. Marina Salina Cruz,
649 F.2d 1266 (9th Cir. 1981) 49
Intermed Laboratories v. Perbadanan Geta Felda,
898 F. Supp. 417 (E.D. Tex. 1995) 47
Itoba Ltd. v. LEP Group PLC,
54 F.3d 118 (2d Cir. 1995), cert. denied, 116 S. Ct. 703 (1996) 27, 29
Itoba Ltd. v. LEP Group PLC,
930 F. Supp. 36 (D. Conn. 1996) 46, 50
Ivers v. Keene Corp.,
780 F. Supp. 185 (S.D.N.Y. 1991) 17
Kaplan v. Rose,
49 F.3d 1369, 1379 (9th Cir. 1994) 10, 22
Kaufman v. Campeau Corp.,
744 F. Supp. 808 (S.D. Ohio 1990) 28, 29
Keene Corp. v. Weber,
394 F. Supp. 787 (S.D.N.Y. 1975) 54
Landry v. Price Waterhouse Chartered Accounts,
715 F. Supp. 98 (S.D.N.Y. 1989) 52, 53
Leasco Data Processing Equipment Corp. v. Maxwell,
468 F.2d 1326 (2d Cir. 1972) 27
Lehman v. Humphrey Cayman, Ltd.,
713 F.2d 339 (8th Cir. 1983) 39, 41
Lovelace v. Software Spectrum Inc.,
78 F.3d 1015 n.2 (5th Cir 1996) 3, 14
MCG, Inc. v. Great Western Energy Corp.,
896 F.2d 170 (5th Cir. 1990) 29
Marbury Management, Inc. v. Kohn,
629 F.2d 705 (2d Cir. 1980) 23
Marksman Partners, L.P. v. Chantal Pharmaceutical Corp.,
927 F. Supp. 1297 (C.D. Cal. 1996) 9, 10
Mayer v. Ehrenberg,
988 F.2d 635 (6th Cir. 1993) 22
Meadows v. Securities & Exch. Committee,
119 F.3d 1219 (5th Cir. 1997) 3
Mills v. Polar Molecular Corp.,
12 F.3d 1170 (2d Cir. 1993) 18
Myzel v. Fields,
386 F.2d 718 (8th Cir. 1967), cert. denied,
390 U.S. 951 (1968) 23
Nathan Gordon Trust v. Northgate Exploration, Ltd.,
148 F.R.D. 105 (S.D.N.Y. 1993) 28
O'Brien v. National Property Analysts Partners,
936 F.2d 674 (2d Cir. 1991) 18
Ohman v. Kahn,
685 F. Supp. 1302 (S.D.N.Y. 1988) 27
Ortman v. Stanray Corp.,
163 U.S.P.Q. (BNA) 331 (N.D. Ill. 1969), rev'd, on other grounds,
437 F.2d 231 (7th Cir. 1971), rev'd on other grounds, 31
Ortman v. Stanray Corp.,
371 F.2d 154 (7th Cir. 1967) 30
Pharo v. Smith,
621 F.2d 656 (5th Cir. 1980) 47
Piper Aircraft Co. v. Reyno,
454 U.S. 235 (1981) 34, 36, 37
Powers v. Eichen,
977 F. Supp.1031 (S.D. Cal. 1997) 11
Psimenos v. E.F. Hutton & Co.,
722 F.2d 1041 (2d Cir. 1983) 27
Rehm v. Eagle Finance Corp.,
954 F. Supp. 1246 (N.D. Ill. 1997) 13
Reingold v. Deloitte Haskins & Sells,
599 F. Supp. 1241 (S.D.N.Y. 1984) 46, 50
Robinson v. TCI/US West Communications Inc.,
117 F.3d 900 (5th Cir. 1997) 27, 28, 29, 30, 40
Rubinstein v. Collins,
20 F.3d 160 (5th Cir. 1994) 10
S.E.C. v. Feminella,
947 F. Supp. 722 (S.D.N.Y. 1996) 16
STI Classic Fund v. Bollinger Indus., Inc.,
1996 U.S. Dist. LEXIS 21553 (N.D. Tex.), adopted,
1996 Fed. Sec. L. Rep. (CCH) ô 99,539 (N.D. Tex. 1996) 2
San Leandro Emergency Medical Group Profit Sharing Plan v.
Philip Morris Cos., Inc.,
75 F.3d 801 (2d Cir. 1996) 18
Schaffer v. Timberland Co.,
924 F. Supp. 1298 (D.N.H. 1996) 19, 20, 51
Schlick v. Penn-Dixie Cement Corp.,
507 F.2d 374 (2d Cir. 1974), cert. denied,
421 U.S. 976 (1975) 15, 16
Schoenbaum v. Firstbrook,
405 F.2d 200 (2d Cir. 1968), rev'd on other grounds,
405 F.2d 215 (2nd Cir. 1968) 27
Serabian v. Amoskeag Bank Shares, Inc.,
24 F.3d 357 (1st Cir. 1994) 21
Shamis v. Ambassador Factors Corp.,
1996 WL 457320 (S.D.N.Y. 1996) 16
Shields v. Citytrust Bancorp, Inc.,
25 F.3d 1124 (2d Cir. 1994) 17
Simon v. American Power Conversion Corp.,
945 F. Supp. 416 (D.R.I. 1996) 12, 18, 19, 20
Somerville v. Major Exploration, Inc.,
576 F. Supp. 902 (S.D.N.Y. 1983) 45
Sterling Interiors Group, Inc. v. Haworth, Inc.,
1996 WL 426379 (S.D.N.Y. 1996) 16
Stuart-James Co. v. Rossini,
736 F. Supp. 800 (N.D. Ill. 1990) 54
Sunrise Industrial Joint Venture v. Ditric Optics, Inc.,
873 F. Supp. 765 (E.D.N.Y. 1995) 16
Trafton v. Barclays,
1994 U.S. Dist. LEXIS 20971 (N.D. Cal. 1994) 33, 34, 40, 41
Treadway Cos. v. Care Corp.,
638 F.2d 357 (2d Cir. 1980) 24
United Mine Workers of America v. Gibbs,
383 U.S. 715 (1966) 30
United States v. Cook,
573 F.2d 281 (5th Cir. 1978) 27
Voit v. Wonderware Corp.,
997 F. Supp. 363 (E.D. Pa. 1997) 11
Warshaw v. Xoma Corp.,
74 F.3d 955 (9th Cir. 1996) 19, 22
Wexner v. First Manhattan Co.,
902 F.2d 169 (2d Cir. 1990) 8, 18
Wilheim v. Murchison,
342 F.2d 33 (2d Cir. 1965) 24
Williams v. WMX Techs., Inc.,
112 F.3d 175 (5th Cir. 1997) 2
Wool v. Tandem Computers, Inc.,
818 F.2d 1433 (9th Cir. 1986) 51
World-Wide Volkswagen Corp. v. Woodson,
444 U.S. 286 (1980) 46
Federal Statutes
Securities and Exchange Act õ 10(b)
codified at 15 U.S.C. õ 78j (b) passim
17 C.F.R. õ 230.405(f) 47
15 U.S.C. õ 78t(a) 22, 47
15 U.S.C. õ 78 aa 44
15 U.S.C. õ 78u-4(b)(1) 16
28 U.S.C. õ 1367(a) 30
Fed. R. Civ. P. 9(b) 15
Fed. R. Civ. P. 12(b)(2) 44
Fed. R. Civ. P. 32, 34, 45 41
Miscellaneous
15 Wright et al., Federal Prac. & Proc. õ 3228 (2d ed. 1986) 37
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF TEXAS
TEXARKANA DIVISION
Lane McNamara, et al., õ
õ
Plaintiffs, õ
v. õ Civil Action No. 5-97-CV-159
õ (Jury)
Bre-X Minerals Ltd., et al., õ
õ
Defendants. õ
PLAINTIFFS? OPPOSITION TO ADDITIONAL
MOTIONS TO DISMISS OR TRANSFER
Plaintiffs respectfully submit this memorandum in opposition to the motions to dismiss the Amended Class Action Complaint (Dkt. #3) filed by defendants Nesbitt Burns Inc., Paul Kavanagh, Bresea Resources Ltd., John Felderhof, and Rolando Francisco (Dkt. ## 67, 73, 78, 85, 92). These defendants hereinafter will be referred to collectively as Movants.
Preliminary Statementtc \l1 "Preliminary Statement
This memorandum is plaintiffs? response to the arguments in Movants? pending motions to dismiss. Their arguments largely mirror positions taken by defendants that have previously sought dismissal: J.P. Morgan, Lehman, the Kilborn defendants, Lyons, and Thorpe. For the sake of relative brevity, plaintiffs hereby incorporate their Decemberÿ19,ÿ1997 Opposition to the earlier motions to dismiss (Pl. Opp.), including its opening Statement of Facts.
Movants? arguments for dismissal as a matter of law are remarkably audacious. They are parties intimately tied to the scandalÿ ÿBre-X insiders (Felderhof, Francisco, and Kavanagh), its sister company (Bresea), and its major booster (Nesbitt), a firm that played a crucial role in Bre-X?s success in the financial community. Yet they demand immunity. For the reasons set forth below and in the Opposition (Dkt. #76), their motions should be denied.
Argument and Authoritiestc \l1 "Argument and Authorities
Point I
The Amended Complaint States Valid Claims
Under the Federal Securities Lawstc \l2 "Point I The Amended Complaint States Valid Claims Under the Federal Securities Laws.
The governing legal standards here are settled. The Amended Complaint must be sustained unless it appears beyond doubt that plaintiffs can prove no set of facts that would entitle them to relief. All pleaded facts are deemed admitted. All inferences are to be drawn in plaintiffs? favor. (Pl. Opp. at 8-9)
A. The Amended Complaint Adequately Pleads Scientertc \l2 "A. The Amended Complaint Adequately Pleads Scienter.
1. Recklessness is a basis for pleading scientertc \l3 "1. Recklessness is a basis for pleading scienter.
Despite Movants? attempts to avoid the prevailing law, it is established in this Circuit that reckless behavior, as well as intentional behavior, can constitute scienter.
The scienter standard articulated by the Second Circuit has been adopted as authority for this Court, following enactment of the Private Securities Litigation Reform Act (PSLRA). (Pl. Opp. at 10) Plaintiffs satisfy the requirement for pleading scienter using both alternatives available according to the Second Circuit standard: they identify circumstances indicating defendants? conscious or reckless behavior, and they allege facts showing defendants? motive for committing fraud and clear opportunity to do so.
This Circuit has provided further guidance for pleading recklessness. The type of recklessness that supports liability under õÿ10(b) is termed ?severe? recklessness, a standard consistent with that in other circuits. (Pl. Opp. at 11) Such recklessness may be demonstrated by showing that defendants? misrepresentations or omissions involved ?an extreme departure from the standards of ordinary care? and presented ?a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it.? Lovelace v. Software Spectrum Inc., 78 F.3d 1015, 1018 n.2 (5th Cir 1996). Accord, Pl. Opp. at 9-14.
2. The allegations against Nesbitt sufficiently plead scientertc \l3 "2. The allegations against Nesbitt sufficiently plead scienter.
a. Allegations of Nesbitt?s severe recklessnesstc \l4 "a. Allegations of Nesbitt?s severe recklessness
The Amended Complaint sufficiently pleads recklessness against Nesbitt. It details misrepresentations and omissions representing an extreme lack of care and presenting a known danger of misleading investors. The firm?s central role in stoking investor enthusiasm for Bre-X and Bresea shares (through the cheerleading of its lead analyst, Egizio Bianchini) is so clear that Nesbitt does not even contest the obvious danger of misleading investors presented by its conduct.
Nesbitt?s departures from standards of care must be assessed in light of its statements and the circumstances under which they were made. From the outset, the ?energy and resources that Nesbitt expended in promoting Bre-X stock was extraordinary.? (ô 124) It was given ?unparalleled access to Bre-X management and the remote Busang site? (ôÿ56) and was a consistent, uncritical supporter of the stock. Nesbitt attested that the ?company?s technical expertise is first class.? (ôÿ107) It made escalating estimates of the gold at Busang, touting ?incredible opportunities? and ?fortunes to be made.? (ôÿ124) Nesbitt updated and reconfirmed these bullish attitudes, giving Bre X and Bresea stock ?a stamp of credibility and legitimacy.? (ôÿ60)
Remarkably, Nesbitt?s analyst even declared, ?I know for a fact there?s more gold. I?ve seen it.? (ôÿ107-08)
Viewed against those statements, plaintiffs? allegations of the circumstances of Nesbitt?s misrepresentations and omissions amply satisfy the standard for pleading scienter:
Bianchini visited the Busang drill site and was in constant communication with and closely associated with Bre-X, Bresea, and its top officers. As a result, Nesbitt knew that verified core samples from the Busang site had never been independently collected and independently tested, and knew that statements made by Bre-X, Bresea, and the Kilborn Defendants lacked any legitimate basis.
(ôÿ10) During his site visits, Bianchini spoke with Bre-X?s lead geologists and had access to core samples taken from the area. He videotaped Bre X?s drilling and handling procedures and saw employees crushing, pulverizing, and homogenizing ore samples taken from Bre-X?s preparation facility before the samples were tested. (ôô 10, 12, 55, 56, 187) He reviewed ?independent reports illustrating the fundamental inconsistencies regarding the nature of the gold purportedly discovered in Busang.? (ôÿ58) Nevertheless, Nesbitt was an ardent promoter of Busang.
This was only negligence, says Nesbitt, not an extreme lapse of care. Bianchini had to have ?acted in concert with those tampering with the core samples,? or ?had access to specifically identified inside information .ÿ.ÿ. which would have disclosed the tampering,? before Nesbitt concedes it may be liable. (Nesbitt Br. at 30) This position is untenable.
The recklessness standard provides an alternative to conscious involvement in fraud as a basis for liability. It is particularly appropriate where a defendant stakes out a position so aggressively aligned with company insiders, based on its touted expertise and access, as Nesbitt did with Bre-X and Bresea, and then it refuses to observe the company?s departures from rudimentary standards relating to the integrity of the entire process. This amounts to an extreme lack of care; it amounts to severe recklessness.
Nesbitt cannot accept the reality of the situation. It insists that its extraordinary lapses must be excused. It says it?s blameless because ?no one else was able to? uncover the fraud; all it did was ?not discover what nobody else discovered.? (Nesbitt Br. at 29-30)
Of course, that is untrue. The Bre X fraud was discovered, easily, by Freeport and Strathcona. Uncorrupted by the hype surrounding Bre-X and Bresea, they saw the amateurish fraud immediately, once they reviewed information that had long been known by Movants, but not by the investing public. (ôôÿ6, 182, 190) Unfortunately, they came on the scene too late to warn the thousands of class members who lost billions buying worthless stock.
Courts readily infer scienter from such reckless disregard of obvious warning signs. For example, in In re Health Management, Inc. Sec. Litig., 970 F. Supp. 192, 203 (E.D.N.Y. 1997), ignoring ?numerous red flags? was ?adequate to suggest that [an accounting firm] turned a blind eye to Health Management?s fraudulent activities, thus creating a ?strong inference? of [defendant?s] recklessness.? See also In re Leslie Fay, 871 F. Supp. at 699 (S.D.N.Y. 1995) (while defendant?s ?ignorance of warning signs might in one sense demonstrate it was merely negligent, allegations that, with gross recklessness, [it] ignored multiple ?red flags? could reasonably support an inference that [it] acted with intent?), modified on other grounds, 918 F. Supp. 749 (1996). Those conclusions are particularly appropriate in cases in which the defendant, like Nesbitt, affirmatively held itself out as being informed about the subject based upon its own investigations. See In re Cascade Int?l Sec. Litig., 840 F. Supp. 1558, 1570-71 (S.D. Fla. 1993) (sustaining claim against securities broker, where it allegedly ?represented that it had undertaken an extensive independent investigation of [the company] prior to recommending the company?s securities, and that it had continually reassessed its evaluation of the company?).
b. Allegations of Nesbitt?s motive and opportunitytc \l4 "b. Allegations of Nesbitt?s motive and opportunity
Here, Nesbitt echoes every other defendant in this case: since it was inevitable that the fraud would be discovered at some point, it is inconceivable that Nesbitt, or any other reputable firm, would have become involved in the first place. (Nesbitt Br. at 35)
Courts do not reject as a matter of law a motive that may seem illogical, because they recognize that fraud often is not rational. (Pl. Opp. at 18-19) In the present case, Nesbitt had ample profit and prestige motives for making its false statements and omissions concerning Bre-X and Bresea. (ôôÿ10, 58, 60) The case law confirms the adequacy of such motive allegations in establishing scienter. (Pl. Br. at 17-19, 24)
Nesbitt proposes pleading standards that would protect everyone except insiders who actively carry out stock fraud and siphon money directly from stock sales proceeds. The law is otherwise. Examples abound where ostensibly reputable advisors, analysts, and others are held liable for their recklessness in connection with fraudulent conduct. See, e.g., In re ZZZZ Best Sec. Litig., 864 F. Supp. 960 (C.D. Cal. 1994) (denying summary judgment motion of accounting firm seeking dismissal from case involving phantom building cleaning business); Bernstein v. Crazy Eddie, Inc., 702 F. Supp. 962, 977 (E.D.N.Y. 1988) (denying dismissal motion of accounting firm in case involving stereo store?s phantom inventory), vacated in part on other grounds, 714 F. Supp. 1285 (E.D.N.Y. 1989).
Nesbitt similarly should be held responsible for its recklessness concerning the phantom gold of Bre-X and Bresea.
3. The allegations against Felderhof sufficiently plead scientertc \l3 "3. The allegations against Felderhof sufficiently plead scienter.
Felderhof was the Senior Vice President, Chief Geologist, and Vice Chairman of the Board of Directors of Bre-X. He is now in hiding at his palatial estate in the Cayman Islands, his assets frozen in a suit by the Bre X bankruptcy trustee. See ?Ex-Official of Bre-X Faces Suit by Trustee,? Wall Street Journal, p. A-16 (Jan. 5, 1998).
Based on his position as Chief Geologist, Felderhof issued statement after statement promoting Busang as the gold find of the century. These include his assurance in late March 1997, after doubts about Bre-X had been reported in the press:
I?m getting tired of all these stories . . . . I?m 110% confident the gold is there.
(ô 167) Added to that, he quietly sold buckets of Bre-X stock along the way. (ô 31)
Under the circumstances, Felderhof?s challenge to plaintiffs? allegations of scienter against him shows a gall unique even in the seamy world of stock swindles.
Allegations of Felderhof?s conscious intent to defraud and motive and opportunitytc \l4 "Allegations of Felderhof?s conscious intent to defraud and motive and opportunity
First, the Amended Complaint fully and adequately alleges that Felderhof acted with conscious intent to defraud Bre-X and Bresea stock purchasers.
Felderhof portrays himself as a ?general manager officing in Jakarta,? far from Busang. (Felderhof Br. at 25) He says he was forced to ?delegate responsibility,? leading to ??ill-advised? reliance on subordinates and outside experts,? so that he ended up with an understandable case of ?white heart/empty head.? (Id. at 26-27) (A case of forked tongue/full pockets would be a more accurate description.)
Without any sense of shame, Felderhof dismisses his hyper aggressive statements about Bre-X as harmless puffing. He even discounts his statement in February 1997, that he would ?feel very comfortable with a potential of 200 million ounces [of gold]? at Busang, as a ?soft? opinion and ?vague? optimism, something that ?no reasonable investor? should consider. (Id. at 21) This from Bre X?s own Chief Geologist.
The reality is reflected in the Amended Complaint. Felderhof was at the center of the mining operations of Bre-X. He led the team that ?determined the location of the deposit, drilled holes on the site, and tested the resulting ore samples to assess the amount of gold that each contained.? (ôÿ184) As the company?s Chief Geologist, Felderhof spent ample time at Busang and was squarely situated to know that the company?s gold claims were lies.
Based on the facts pleaded, any objective person would be convinced that Felderhof was aware of the fraud, and he should be responsible for his deception. In particular, he (and other defendants) made false public statements that ?(i) Bre-X owned 80-90% of Busang, when they knew that such representations were false and misleading, as they were later forced to acknowledge; (ii) that significant amounts of gold were located at Busang; and (iii) that Busang would support a world-class mine of extraordinary profitability.? (ôÿ76)
Second, Felderhof does not deny his many opportunities to commit the fraud.
Third, Felderhof?s extensive insider stock sales during the class period (ôÿ31, 201-02) provide an obvious motive, thus completing the motive and opportunity test. In cases in which plaintiffs allege that ?a corporate insider either presented materially false information, or delayed disclosing materially adverse information, in order to sell personally-held stock at a huge profit,? the motive prong of the test is satisfied. Marksman Partners, L.P. v. Chantal Pharmaceutical Corp., 927 F. Supp. 1297, 1312 (C.D. Cal. 1996).
Felderhof sold 1.2 million shares of Bre-X stock at opportune times in 1996. He pocketed C$49.8 million (ô 31) and maybe more. Sales of this magnitude are sufficient to give rise to a strong inference of fraud. See, e.g., Marksman, 927 F. Supp. at 1312-13.
Felderhof tries to downplay his illegal sales. He points out that in cases of insider trading at times other than shortly before the announcement of significant events, or at times that are credibly explained by legitimate reasons, ?some trading alone? will not support a finding of scienter. (Felderhof Br. at 29) His point is meaningless here.
Nowhere does Felderhof offer an explanation, let alone a credible one, for his sales. Moreover, the magnitude of his dumping -- over one million Bre-X shares -- is hardly ?some trading,? as Felderhof describes his spree. Nor was he alone; all of Bre-X?s executives (and even some of their spouses) were pursuing massive insider selling.
Even applying the ?conscious wrongdoing? standard urged by Felderhof, plaintiffs? detailed pleading suffices. For one, the allegations of insider trading are alone enough to support. See, e.g., Voit v. Wonderware Corp., 997 F. Supp. 363, 374 (E.D.ÿPa. 1997) (allegations that executives sold 129,570 shares of stock while issuing materially false statements satisfied scienter requirement). Scienter also may be inferred here from Felderhof?s position at Bre-X and access to its material information. See Cohen, 25 F.3d at 1174 (complaint raised strong inference that defendants ?more likely than not knew that their financial representations were false,? based on allegations that they were ?hands on managers active in [the company?s] day to day operations? and were ?fully familiar with all aspects of [its] businesses and financial conditions and operations?). In the end, Felderhof?s position is simply this: if the facts and inferences pleaded in the Amended Complaint can somehow be interpreted to support his spin that he was not consciously involved in the fraud, then he wins -- the pleading must be dismissed as a matter of law. This is nonsense. The standards for pleading securities fraud are strict, not impossible. The allegations of his conscious misconduct are adequate to withstand dismissal.
b. Allegations of Felderho |
