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McNamara v. Bre-X Minerals Ltd.
Citations: 57 F. Supp. 2d 396; 1999 U.S. Dist. LEXIS 11279Docket: 5-97CV-159
Court: District Court, E.D. Texas; July 13, 1999; Federal District Court
Several Defendants in the securities fraud case involving Lane McNamara et al. v. Bre-X Minerals Ltd. filed motions to dismiss under Federal Rules of Civil Procedure 12(b)(6) and 9(b). The motions from Barrick Gold Corporation, Lehman Brothers Inc., J.P. Morgan Securities, Inc., Nesbitt Burns Inc., and the Kilborn Defendants (P.T. Kilborn Pakar Rekayasa, Kilborn Engineering Pacific Ltd., and SNC-Lavalin Inc.) were granted. Conversely, John Felderhof's motion to dismiss was denied. The Plaintiffs, who seek class certification, are individuals who purchased common stock of Bre-X Minerals Ltd. and/or Bresea Resources Ltd. between January 17, 1994, and May 2, 1997. They allege that the Defendants' misleading omissions and misrepresentations artificially inflated the stock prices. Bre-X, a publicly traded mineral exploration company based in Calgary, Alberta, is the primary Defendant. Its stock was traded on the Alberta Stock Exchange, the Toronto Stock Exchange, and the NASDAQ during the class period. Bresea, a holding company that owned a 25% stake in Bre-X, is also implicated. Plaintiffs claim that Bre-X misled investors by falsely reporting escalating estimates of gold resources in the Busang area of Indonesia, increasing estimates from 3 million ounces in 1994 to 200 million ounces in 1997. Additionally, they allege that Bre-X tampered with core samples before laboratory testing, contributing to the inflated stock prices. In March 1997, an independent mining consultant determined that previous estimates of gold reserves at Busang were exaggerated due to invalid sample testing, leading to a decline in stock prices and Bre-X's subsequent bankruptcy. The Plaintiffs have named Bre-X, Bresea, and fifteen additional defendants, including eight former officers/directors of Bre-X, as well as firms such as P.T. Kilborn, Kilborn Engineering, J.P. Morgan, Lehman, Nesbitt Burns, and Barrick. These entities are alleged to have contributed to misleading claims about gold presence and financial advisement. The Plaintiffs assert three claims against the defendants: (1) violations of Section 10b-5 of the Securities Exchange Act of 1934, (2) negligent misrepresentation, and (3) common law fraud, with Felderhof facing additional control person liability. In assessing a motion to dismiss, the Court will consider only the facts in the complaint and relevant documents, accepting well-pleaded allegations as true while requiring specific factual support rather than mere conclusions. The primary claim under Section 10(b) of the Exchange Act prohibits manipulative or deceptive practices in securities transactions, with Rule 10b-5 specifically addressing false statements or omissions of material fact. To succeed in their fraud claims, Plaintiffs must demonstrate a misstatement or omission of material fact made with intent to deceive (scienter), reliance on that statement, and resultant injury. A false statement or omission is considered material if its disclosure could change the total mix of facts available to an investor and if a reasonable shareholder would view it as important to their investment decision. Materiality is generally determined by a fact finder. A complaint cannot be dismissed for immateriality unless the misstatements are so trivial that no reasonable investor could find them significant. To establish reliance in a securities fraud case, plaintiffs invoke the 'fraud on the market' doctrine, which assumes that the market price of securities reflects all publicly available information, including material misrepresentations. Consequently, individual reliance on market integrity may be presumed when misleading statements are made in a well-developed market. To meet the pleading burden for causation, plaintiffs must allege that the defendants' misrepresentations led to an artificially inflated stock price, resulting in a loss when the truth was revealed. Under Federal Rule of Civil Procedure 9(b), plaintiffs must plead fraud claims with particularity, detailing the time, place, contents of the false representations, the person making them, and the benefits obtained. They must also explain why the statements were fraudulent, ideally by pointing to inconsistent contemporaneous statements or information. This heightened standard serves to provide defendants with fair notice of claims, protect their reputations, and reduce frivolous lawsuits. Additionally, plaintiffs must demonstrate that the defendant acted with scienter, meaning intent to deceive or severe recklessness, as not every misstatement or omission constitutes a Rule 10b-5 claim. Conclusory allegations of knowledge or recklessness alone do not satisfy the heightened requirements. An inference of fraudulent intent can be established if plaintiffs demonstrate either (1) a defendant's motive and opportunity for securities fraud, or (2) circumstances indicating the defendant's conscious behavior. If the motive is not presented, plaintiffs must meet a higher standard by showing stronger circumstantial evidence of the defendant's conscious behavior or recklessness. Severe recklessness is defined as an extreme departure from ordinary care that is either known to the defendant or obvious enough that the defendant should have been aware of it. The opportunity to commit fraud can be shown by demonstrating the defendant's access to communication channels for disseminating false information and access to specific non-public information. Adequate motive must be supported by concrete benefits from the false statements; generic allegations of financial interest or efforts to improve company reputation are insufficient. Specific allegations, such as a corporate insider selling stock at a profit based on false information, can establish motive. Under Rule 9(b), plaintiffs must plead facts showing scienter through (1) motive and opportunity, (2) strong circumstantial evidence of recklessness, or (3) indications of conscious behavior. The Private Securities Litigation Reform Act of 1995 imposes strict pleading requirements, allowing for case dismissal if these are not met. Most courts concur that the Reform Act was designed to elevate pleading requirements in securities fraud cases beyond the standards of Rule 9(b). However, there is significant disagreement regarding the specifics of this heightened burden. The Reform Act mandates that complaints must detail each misleading statement, the reasons for its misleading nature, and, if based on information and belief, the specific facts supporting that belief (15 U.S.C. 78u-4(b)(1)). The Fifth Circuit has interpreted this to align with the Second Circuit's requirements for fraud cases, which necessitate the specification of fraudulent statements, identification of the speaker, and explanation of the fraud (Williams, 112 F.3d at 177-78). The second requirement relates to the scienter element, where the statute requires that complaints provide particular facts that create a strong inference of the defendant's requisite state of mind (15 U.S.C. 78u-4(b)(2)). Courts have varied in their interpretations of what constitutes a "strong inference" of fraudulent intent, with findings categorized into three groups: (1) only the conscious behavior test is applicable; (2) both motive and recklessness tests remain relevant; and (3) motive and recklessness facts are considered in establishing a strong inference of intent. Some courts have adopted hybrid approaches incorporating elements from these categories. Specific legislative history indicates that the Reform Act refers to the Second Circuit’s pre-Act requirements, which required plaintiffs to present specific facts indicating either reckless or conscious behavior or to demonstrate the defendant's motive and opportunity for fraud (Norwood, 959 F.Supp. at 208). However, some courts assert that the Reform Act does not codify the Second Circuit's standards, insisting that plaintiffs must now particularly plead facts that suggest conscious behavior, disregarding pre-Reform Act considerations of motive, opportunity, and recklessness (In re Silicon Graphics, Inc. Sec. Litig., 1996 WL 664639). In the case of Friedberg v. Discreet Logic Inc., the court asserted that the Reform Act has removed the recklessness standard, allowing conscious behavior to be inferred only through circumstantial evidence that indicates intent to defraud or knowledge of falsehood. Consequently, plaintiffs must now plead specific facts that strongly suggest knowing misrepresentation by defendants, as reiterated in Norwood Venture Corp. v. Converse Inc. and Voit v. Wonderware Corp. The Conference Committee Report for the Reform Act clarifies that Congress aimed to strengthen pleading requirements, deliberately omitting language concerning motive, opportunity, and recklessness, which reflects an intention to discard the Second Circuit's standards. The rejection of proposed language that would have retained these tests is interpreted by several courts as evidence that Congress did not wish to maintain them. Furthermore, President Clinton's veto statement emphasized Congress's intention to elevate the pleading standard beyond previous benchmarks. However, some federal district courts, such as in Zuckerman v. Foxmeyer Health Corp., maintain that the motive and recklessness tests remain applicable under the Reform Act. In the case of Marksman Partners, L.P. v. Chantal Pharm. Corp., the court affirmed the viability of the motive, opportunity, and recklessness tests for establishing scienter in securities fraud cases. It emphasized that the Legislative history of the Reform Act does not indicate an intent to eliminate recklessness as a basis for pleading scienter. The court found legislative silence on this matter persuasive, suggesting that Congress did not intend to abrogate recklessness as a valid pleading standard. The court also defended the motive test, highlighting that the Second Circuit's stringent pleading standards align closely with the Reform Act's requirements. It argued that the footnote in the Conference Committee Report, which noted the omission of language regarding motive, opportunity, and recklessness in the statute, did not imply disapproval of these tests but rather indicated that Congress chose not to codify them as specific requirements. Furthermore, the court contended that the motive test does not contradict Congress's goal of making scienter allegations more challenging to plead, as it requires a rigorous analysis of allegations that must create a strong inference of fraudulent intent. The committee’s report indicated a preference for a uniform pleading standard modeled after the Second Circuit's approach, which necessitates that plaintiffs plead facts supporting a strong inference of fraudulent intent, aligning with the intent behind the Reform Act. The court determined that the pleading standard under the Reform Act is influenced by prior Second Circuit case law, and another federal district court affirmed that the Reform Act does not impose stricter pleading requirements than those established in the Second Circuit. The Rehm case acknowledged that while the Conference Committee Report indicated an intention to strengthen pleading requirements, it did not imply a rejection of the Second Circuit's standards. Motive and opportunity facts remain relevant to determining intent, although courts have moved away from a pre-Reform Act interpretation of the motive test. The Queen court emphasized that the Reform Act mandates a holistic examination of a plaintiff's allegations, allowing for the inference of fraudulent intent even if motive and opportunity do not independently establish such intent. This does not preclude the possibility that in some cases, motive and opportunity alone could suffice to withstand a motion to dismiss. Additionally, the courts clarified that while recklessness is a valid standard, it must approach actual intent rather than merely being a heightened form of negligence. The Silicon Graphics II ruling reinforced that plaintiffs need to establish a strong inference of knowing or intentional misconduct, which includes deliberate recklessness as defined in the Hollinger case. The definition of scienter referenced is consistent with that from the Fifth Circuit, emphasizing that while motive, opportunity, and non-deliberate recklessness may suggest intentional wrongdoing, they alone do not suffice to establish scienter unless combined with strong circumstantial evidence of fraud. The Court supports the majority view that strong circumstantial evidence of conscious misbehavior or recklessness can adequately plead scienter and acknowledges that motive can contribute to this inference without being conclusive on its own. It cites various cases affirming that satisfying the motive test does not automatically yield a strong inference of the required state of mind under the Reform Act, although in some instances, motive and opportunity may still support a strong inference sufficient to withstand a motion to dismiss. The Court also notes that even if motive and recklessness tests are not met, they should still be considered in the overall assessment of fraudulent intent. The analysis will then turn to the allegations against Barrick, where Plaintiffs assert violations of securities laws based on Barrick’s misrepresentations and omissions, detailing specific statements made by Barrick regarding negotiations and intentions related to a joint venture with Bre-X. On December 16, 1996, Barrick announced a submission to the Indonesian Government in collaboration with Bre-X, contingent on certain conditions being met, resulting in a stock price increase of C$1.45 to C$40.25 per share. Barrick spokesman Vince Borg emphasized the company's fair track record in transactions. Following this, on December 21, former U.S. President George Bush reassured Bre-X shareholders of fair treatment by Barrick. Borg reiterated Barrick's fairness in a December 23 statement to The Northern Miner. On January 14, 1997, Bre-X disclosed an unsolicited tender offer from Placer Dome, to which Barrick responded by asserting an agreement with Bre-X was pending governmental approval, dismissing Placer's offer as a trial balloon. On January 20, the Indonesian Government urged Barrick and Bre-X to finalize a partnership within a month; Barrick interpreted this as confirmation of governmental support for its involvement in the Busang development project. Borg publicly stated the government's support was a significant advancement. Borg further stated on January 22 that Barrick was committed to collaborating with Bre-X to finalize the arrangement within the government's timeline. Barrick issued a press release highlighting its development expertise and financial strength, with CEO Munk affirming that Indonesian support underscored Barrick's unique capabilities. Despite ongoing public assertions of intentions to finalize a deal, Barrick ceased efforts to secure an interest in Busang by February 14, 1997, while Munk maintained that Barrick’s proposal was fair and beneficial to all parties involved, despite undisclosed earlier test results indicating a lack of gold at Busang. A favorable economic deal was offered to stakeholders, prioritizing shareholder interests. The Plaintiffs accused Barrick of misrepresentations, but many allegations lack the necessary specificity. Key failures include the absence of details regarding the time, place, and identity of speakers in multiple paragraphs (1, 2, 3, 4, 5, 9, and 13). However, the Court accepts that Paragraphs 6, 7, 8, 10-12, and 14 meet the particularity requirement. The surviving alleged misrepresentations include claims about Barrick's fairness to Bre-X shareholders, support from the Indonesian government, confidence in finalizing agreements within governmental timelines, and assertions regarding Barrick's unique operational capabilities in gold mining. The Court finds these statements non-actionable under Rule 10b-5, as the Plaintiffs did not demonstrate that they were false at the time made. Barrick's statements about fairness related to potential negotiations and did not imply the existence of gold at Busang. The Court emphasizes that vague, optimistic statements are not considered actionable because reasonable investors rely on concrete facts rather than optimistic projections. The Plaintiffs' interpretation of the Virginia Bankshares case, which regarded fairness opinions in transactions, is rejected as overly broad in this context. Directors represented to minority shareholders that a $42 valuation was both "high" and "fair" for the shares, raising the question of whether these statements were actionable under securities laws. The court determined that such statements are actionable when they are linked to a specific dollar amount that can be quantitatively verified. In contrast, Barrick's statements were vague and not tied to a specific figure, making the precedent set in Virginia Bankshares inapplicable. The court also referenced the case of Gordon v. Diagnostek, where shareholders' claims of inflated earnings were dismissed because the alleged misrepresentation was not deemed to mislead reasonable investors. Similar reasoning applied to Barrick, as it was not required to clarify its statements with cautionary language about the accuracy of Bre-X’s claims regarding gold at Busang. The plaintiffs argued that Barrick's statements misled investors by suggesting that Busang was a significant gold discovery, despite Barrick's knowledge from its tests that 130 out of 135 samples contained no gold. However, the plaintiffs did not specify when these tests were conducted, which weakens their allegations. Allegations against Barrick may struggle with specificity requirements. Even if the tests occurred prior to Barrick's statements, the Plaintiffs have not adequately supported their claims. For their theory to withstand dismissal, allegations must reasonably infer that Barrick's awareness of negative test results equates to knowledge or reckless disregard of the absence of gold at Busang. This inference is unsupported by the Complaint, raising questions about the conclusiveness of the tests, the representativeness of negative samples, and the significance of positive results. Without sufficient facts for reasonable inferences, the Court concludes that the Plaintiffs have not identified actionable misstatements. Additionally, the Plaintiffs assert that Barrick's due diligence in fall 1996, which involved testing 135 core samples (130 of which showed no gold), demonstrated Barrick's knowledge of the falsity of Bre-X's claims. They argue that Barrick's public statements misled Bre-X shareholders by lending credibility to these claims, thereby constituting a violation of Rule 10b-5 due to a failure to disclose negative test results. A critical issue is whether Barrick had a duty to disclose this information. The Plaintiffs argue that by making certain statements, Barrick assumed a duty to disclose. However, Barrick contends it had no such obligation, as silence is only actionable under federal securities law if there is a duty to speak. The mere possession of nonpublic information does not create a disclosure duty, nor is a corporation required to disclose information simply because investors desire it. The Plaintiffs reference a precedent suggesting a duty arises when a defendant makes any statement, but this principle is not absolute. A duty to disclose the full truth arises when a defendant makes any statement on a specific subject. In the case of Gordon, Medco announced its intention to acquire Diagnostek but did not disclose an accounting error made by Diagnostek that inflated earnings. After Diagnostek's disclosure, Medco reconsidered the stock swap and ultimately canceled the acquisition. Despite making three public statements, Medco was found to have no duty to disclose the accounting error. Similarly, Barrick's public statements about negotiating with Bre-X did not create a duty to disclose negative test results, as no affirmative claims about the existence of gold were made. Regarding the Plaintiffs’ allegations against Barrick, the court found insufficient evidence to support claims of fraudulent intent or recklessness. The Plaintiffs did not demonstrate a reasonable inference that Barrick knowingly misrepresented the existence of gold at Busang or that its actions represented a significant deviation from ordinary care. Allegations of a desire to maintain a high stock price or the need for additional gold reserves were deemed inadequate to establish motive. Consequently, the court dismissed the Plaintiffs' claims against Barrick without prejudice. Additionally, starting November 16, 1996, Lehman issued positive analyst reports on Bre-X, which included some cautionary statements. The Plaintiffs allege that these positive statements, along with the failure to disclose negative information about the Busang site, could lead to Lehman's liability under Rule 10b-5. The Court will focus on analyzing the most actionable statements regarding Bre-X from Lehman analyst reports, which include both positive and cautionary remarks. Key points from various reports dated between November 18, 1996, and March 14, 1997, indicate: - **11/18/96**: Stock rated 3-Neutral, with a target price of C$16, highlighting the high risk and volatility associated with Bre-X, while suggesting the potential significance of the Busang discovery. - **11/21/96**: Stock rated 1-Buy, target price C$28-C$30, predicting an imminent takeover and acknowledging risks related to Bre-X's administrative actions in Indonesia. - **11/22/96**: Stock rated 1-Buy, emphasizing favorable takeover prospects and estimating a C$27-C$30 acquisition price. - **11/26/96**: Stock rated 1-Buy, praising the Busang deposit. - **11/27/96**: Stock rated 1-Buy, advising to buy on weakness despite acknowledging potential price drops, while asserting that Bre-X's challenges were manageable. - **12/3/96**: Commentary on Barrick's position in negotiations, suggesting favorable outcomes for shareholders. - **12/4/96**: Stock rated 1-Buy, recommending purchases on weakness, despite associated risks. - **1/13/97**: Stock rated 1-Buy, reporting on impressive drill results that underscore the uniqueness of the discovery. - **2/20/97**: Stock rated 3-Neutral, mentioning John Felderhof’s belief in proving substantial gold reserves. - **3/14/97**: Stock rated 2-Outperform, noting continued improvements in the perception of Busang's size and richness. Overall, the reports reflect a mixture of optimism about Bre-X's potential and caution regarding inherent risks. Investors should be aware that Busang may potentially hold more gold than the entire state of Nevada. Following the death of Bre-X geologist Michael De Guzman in a helicopter crash, concerns have arisen about the integrity of the geological data regarding the Busang gold resource, although the authors of the document remain cautiously optimistic about the resource's validity. An Indonesian source suggested that Freeport believes the actual reserves are significantly less than the 70 million ounces claimed by Bre-X, which raised doubts but could not be immediately confirmed. The authors assert a belief in the existence of the gold deposit, highlighting the credibility of John Felderhof and his team, as well as endorsements from various professionals and companies reviewing the assay lab techniques used. Despite the concerns raised, the authors maintain their position until further substantive information is available. They caution investors seeking lower risk to divest from the venture. The Plaintiffs allege that Lehman Brothers made positive statements about the Busang deposit despite being aware of the absence of significant gold. They argue that Lehman acted with reckless disregard for contrary information. The Plaintiffs have adequately met the particularity requirements under Rule 9(b) by detailing the timing, content, and source of Lehman's alleged misstatements in their complaint, which references specific reports. The court counters Lehman's defense that it merely relayed Bre-X's statements, noting that Lehman's reports sometimes presented its views without clearly labeling them as unverified information from Bre-X. An example includes a report asserting that Bre-X's reserves supported a share price of CAD $28-$30. Lehman made unqualified representations asserting that Bre-X had substantial gold reserves, specifically praising the Busang deposit and endorsing the credibility of Bre-X's reports. The crux of the case revolves around whether Lehman was aware or recklessly disregarded the absence of gold at Busang. Plaintiffs argue that Lehman gained knowledge of this through access to negative test results from Barrick and a visit by analyst Daniel R. McConvey to Busang. However, the court found that the Plaintiffs did not meet the particularity requirements necessary for their allegations. They failed to detail when and how McConvey learned about the negative test results, thus lacking sufficient factual support for their claims regarding Lehman's representations being false. Additionally, while the Plaintiffs claimed McConvey learned of Bre-X's industry violations during his visit, the court deemed it unreasonable to conclude that he could ascertain the absence of gold based solely on that visit. The Plaintiffs were required to specify the tests McConvey observed and how they deviated from industry standards, but did not provide adequate detail on this matter. Ultimately, the court concluded that the Plaintiffs did not sufficiently allege that Lehman knew or recklessly disregarded the absence of gold at Busang, leading to the dismissal of their claims against Lehman without prejudice. Nesbitt is accused of making optimistic claims about gold at the Busang site, similar to allegations against Lehman. The Plaintiffs must establish whether Nesbitt knowingly or recklessly ignored evidence suggesting the absence of gold. Key allegations include that Egizio Bianchini, a Nesbitt analyst, frequently communicated with Bre-X and its executives and was aware that verified core samples from Busang had not been independently tested. Bianchini, renowned as Canada's leading gold analyst, significantly contributed to Bre-X's credibility through his favorable reports and recommendations, including a 'buy' rating in 1995. He had extensive access to Bre-X management and the Busang site, where he engaged with geologists and filmed operations at the sample preparation facility. However, the Plaintiffs' allegations lack specificity, failing to clarify how they obtained their information about Bianchini’s visits to Busang. Consequently, the court dismissed the complaint against Nesbitt without prejudice. In a separate allegation, J.P. Morgan is accused of promoting Bre-X's gold resources despite being aware, or recklessly disregarding, the absence of gold. A specific statement attributed to J.P. Morgan analyst David Neuhaus in The Financial Post claimed a conservative estimate of 150 million ounces of gold at Busang, allegedly made after visiting the site. J.P. Morgan contends that this statement could not reasonably influence investor decisions. J.P. Morgan contends that its statements regarding Bre-X were mere guesses rather than factual representations. However, the Court finds that a reasonable investor could interpret these statements to indicate the presence of gold at Busang, with 150 ounces being a conservative estimate, thus making the statements potentially actionable under a 10b-5 claim if other elements are met. During a February 17, 1997, conference call involving J.P. Morgan's Doug McIntosh and Bre-X's CEO David Walsh, several statements were made that the Plaintiffs argue were misleading, including expectations of lower cash production costs, an estimated resource of 71 million ounces of gold, and high recovery rates from metallurgy. The Court recognizes that a reasonable investor could interpret these statements as affirming the existence of gold at Busang. The Plaintiffs allege that J.P. Morgan had knowledge or recklessly disregarded facts contradicting its statements, based on J.P. Morgan analysts' visits to the Busang site, during which they observed violations of standard mining practices. They assert that these visits provided the analysts with knowledge that there was no gold at the site. However, the Plaintiffs have not detailed the specific facts upon which this belief is based, leaving the adequacy of their claims in question. The excerpt critiques the Plaintiffs' allegations against J.P. Morgan and the Kilborn Defendants regarding the absence of gold at the Busang site. It highlights the lack of specificity in the Plaintiffs' claims, particularly regarding the timing of visits and samples. The Plaintiffs have not convincingly shown that J.P. Morgan analysts identified "red flags" during their site visits or that they were aware of the independent testing results revealing no gold in the core samples given to Neuhaus. Furthermore, the Plaintiffs fail to establish how J.P. Morgan allegedly learned about the absence of gold from Kilborn's studies, with the complaint undermining its own assertions by stating that the studies did not disclose material facts indicating a lack of gold. The allegations of recklessness and scienter against J.P. Morgan are deemed insufficient, lacking concrete evidence of knowledge or motive, which parallels findings in precedent cases like Melder v. Morris. Consequently, the claims against J.P. Morgan are dismissed without prejudice. In regard to the Kilborn Defendants, the Plaintiffs assert that they conducted geostatistical analyses and feasibility studies for Bre-X but intentionally withheld critical information about the nature of the gold samples. The allegations suggest that independent tests indicated the gold was not consistent with the geological conditions of Busang and that the core samples had been improperly handled, raising concerns about tampering. The Kilborn Defendants are accused of knowingly distributing misleading reports to the public, concealing significant material facts, and providing materially false information. The gold found in Bre-X's samples was inconsistent with that expected from volcanic hard-rock deposits, as it lacked the specific shape, size, and state indicative of such sources. After extraction, the samples were left unsupervised for weeks, compromising their integrity. Independent mineralogical studies conducted in 1995 and 1996 revealed that the gold did not exhibit the geological characteristics typical of the purported Busang site. The Kilborn Defendants were aware that Bre-X and Bresea were distributing their assay studies to investors, who relied on this information in stock transactions, thus establishing Kilborn's duty of disclosure. Bre-X engaged Kilborn for resource calculations and identified them in related announcements. However, the results of the independent studies were not disclosed, and they contradicted the claims about the Busang deposit. The gold was determined to be alluvial rather than from a primary deposit, with characteristics such as round, beaded shapes and a size of 0.1 to 0.4 mm, suggesting it had been weathered and abraded, typically found in streams. There was no documentation supporting the presence of visible gold in the drill cores from Busang, and unadulterated samples showed no gold. In a 1996 petrographic report by PetraScience Consultants Inc. for Bre-X and Kilborn Defendants, 103 samples from the Busang site were analyzed. The report concluded that while gold was presumed to be present as free grains, no definitive gold was identified in these samples, nor in other studies, a fact that was not disclosed publicly by the defendants. Strathcona later highlighted the inconsistency of finding no coarse gold in a deposit where it had been previously observed in assay samples. On February 20, 1996, Bre-X announced an updated resource calculation, estimating over 15 million ounces of gold at Busang, based on analyses purportedly aligning with accepted geological standards. Company officials claimed that 30 million ounces were easily attainable. A March 28, 1996, press release from Felderhof suggested that Bre-X's assay methods might have understated the gold resources, with Kilborn Engineering's metallurgical tests indicating understatements of up to 12.9%. Subsequent announcements revealed increasing resource estimates: on April 17, 1996, an additional 9.16 million ounces were identified, leading to a total of 24.87 million ounces. A June 20, 1996, release reported an increase to 39.15 million ounces, and by July 22, 1996, estimates rose to 46.92 million ounces. A report from Nesbitt on July 23, 1996, suggested a resource estimate of 62 million ounces by Kilborn SNC Lavalin. An interim report was filed with the SEC around August 28, 1996. An updated resource calculation for the Busang Gold Project, following drilling results after June 1996, revealed an increase in total gold resources from 2.6 million ounces on November 30, 1995, to 46.9 million ounces. This calculation was independently verified by Kilborn Engineering. On December 2, 1996, Bre-X filed a press release reiterating the previous calculation of 46.92 million ounces. Subsequently, on December 3, 1996, Bre-X announced Kilborn's updated estimation of 57.33 million ounces, projecting a further increase to 60 million ounces by early 1997. A press release on December 4, 1996, confirmed the 57.33 million ounces figure. However, on March 26, 1997, the Kilborn Defendants disclosed that their earlier estimate of 70.95 million ounces was based on data provided by Bre-X and not on independent drilling or assaying. They indicated that the validity of their estimates depended on the accuracy of the samples, raising concerns of potential overstatement of resources due to invalid samples. The plaintiffs allege that the Kilborn Defendants’ resource calculations deviated from accepted industry practices, suggesting possible conscious misbehavior or recklessness. The Kilborn Defendants contend that the claims against them should be dismissed, arguing that the plaintiffs failed to specify individual allegations against each defendant, which is necessary for fraud claims. The plaintiffs reference the "group pleading presumption," which allows for collective allegations when specific details are solely within the defendants' knowledge. Defendants who are insiders or affiliates involved in disputed statements are subject to more stringent pleading standards. The Plaintiffs' reliance on group pleading presumption is insufficient; they must specify which Kilborn Defendant provided information for Bre-X announcements or explain why such specificity is not feasible. The Court will not apply group pleading presumption regarding SNC, the parent company of Kilborn Engineering, as subsidiary fraud cannot be automatically attributed to the parent. Although the Plaintiffs' claims against the Kilborn Defendants are currently dismissed, it is noted that the absence of direct misrepresentations to the public does not inherently defeat their claims, provided all other legal requirements are met. The Plaintiffs assert that the Kilborn Defendants supplied reports to Bre-X, which were then disseminated to the investing public. The Kilborn Defendants argue that Plaintiffs are improperly framing aiding and abetting claims as primary claims, a practice disallowed by Supreme Court precedent. The distinction between providing a report as a service and issuing a public opinion is critical in determining liability. Cited case law emphasizes that an accountant who does not publicly endorse a company's financial statements cannot be held liable for inaccuracies in those statements, as they have no duty to inform the public of potential misstatements. Defendants assert that determining whether a defendant faces a primary violation claim or an aiding and abetting claim hinges on who made the allegedly fraudulent representation or omission. They reference Vosgerichian v. Commodore International, where Arthur Anderson (AA) was accused of violating securities laws by assisting Commodore in misleading shareholders about its financial status. The court dismissed one claim against AA because all alleged misrepresentations were attributed to Commodore, finding that AA's actions were merely supportive of Commodore's fraud. However, another claim was upheld as the plaintiff alleged that AA issued a misleading “clean” opinion, constituting its own false representation rather than mere assistance. The plaintiffs argue that the Central Bank ruling indicates not all secondary actors are exempt from liability under securities laws, although it did not clarify what actions would constitute primary liability for such actors. They categorize decisions interpreting Central Bank into two groups: one where liability is established only if the defendant made a false statement, and another where a defendant who played a significant role in creating a false statement made by another can also be liable. Examples include cases where professionals, aware their opinions would be used in securities filings, face primary liability, and scenarios where accountants may be held responsible for significant involvement in drafting misleading communications. Accountants can be held primarily liable for drafting false sections in a prospectus, as established in relevant case law. The court agrees that while the Kilborn Defendants did not make public statements, they may still bear liability if other legal requirements are met, particularly if they were significantly involved in creating false statements. However, the court found that the plaintiffs failed to adequately state a claim against the Kilborn Defendants, leading to the dismissal of their claims without prejudice. In contrast, the court determined that the plaintiffs successfully stated federal claims against Felderhof, a senior executive at Bre-X, denying his motion to dismiss those claims. Although Felderhof sought to have state law claims dismissed, he did not provide substantial arguments for dismissal, so those claims remain. The court ruled on several motions to dismiss from various defendants, granting them and dismissing the plaintiffs' federal claims, which precludes exercising supplemental jurisdiction over state law claims. The court set deadlines for the plaintiffs to replead their claims, allowing for amended complaints and responses to motions to dismiss. Felderhof's motion to dismiss the amended complaint was denied. Some courts integrate the recklessness and conscious behavior tests into a single "circumstantial evidence" test, assessing whether plaintiffs present strong circumstantial evidence of misbehavior or recklessness. Judge Smith later clarified his court's stance on this issue. Judge Baer, in a subsequent opinion, affirmed that pleading "conscious recklessness" meets the Reform Act's requirements. The court in Rehm noted that while the Reform Act adopts the Second Circuit's standard, it does not bind other courts to interpret it the same way. One court maintained the recklessness test without determining the viability of the motive test, while another court declared the motive test obsolete but confirmed the continued relevance of the recklessness test. Plaintiffs can satisfy the Reform Act's pleading requirements by alleging either motive and opportunity to commit fraud or facts indicating conscious or reckless behavior, provided these allegations collectively suggest strong fraudulent intent. Congress intended for courts to evaluate the strength of the fraudulent intent inference based on specific case allegations. The SEC has expressed its view that the recklessness test remains applicable, and courts typically defer to the SEC's interpretations regarding federal securities laws. Finally, the court expresses confusion over reasoning suggesting that motive and opportunity are necessary pleading requirements, as they were never mandatory in the Second Circuit, merely one of several acceptable methods to plead scienter. A court has indicated that while the recklessness test's viability isn't explicitly confirmed, factors such as motive, opportunity, and recklessness can be relevant in establishing a strong inference of fraudulent intent under the Reform Act. This is contrasted by a Second Circuit decision requiring plaintiffs to either show motive and opportunity or provide strong circumstantial evidence of conscious misbehavior or recklessness. The court emphasizes that merely satisfying the pre-Reform Act motive test is inadequate; a stronger inference of fraudulent intent must also be established. There is a suggestion from the Ninth Circuit that the Reform Act may have intended to eliminate the motive test for pleading scienter. The plaintiffs referenced a statement allegedly made by Wynn-Jones without specifying time or place. They also included statements from Lehman Brothers' analyst reports in their complaint; however, Lehman Brothers pointed out additional statements not mentioned by the plaintiffs. The court can consider the entire reports relevant to the plaintiffs' claims without converting the motion to dismiss into a summary judgment motion. The complaint includes numerous references to various exhibits related to Lehman Brothers and the actions of J.P. Morgan, which served as a financial advisor to Bre-X in negotiating a joint venture for a gold mine. The plaintiffs also noted "red flags" regarding the gold testing procedures at Busang and cited a report from Strathcona Mineral Services Limited that questioned the existence of an economic gold deposit and indicated possible falsification of sample results.