In re Pretium Resources Inc. Securities Litigation

Citations: 256 F. Supp. 3d 459; 2017 U.S. Dist. LEXIS 90560Docket: 13-CV-7552 (VSB)

Court: District Court, S.D. New York; June 13, 2017; Federal District Court

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In a putative class action, lead plaintiffs Gary Martin, Sandra Lee Reyes Troyer, and Michael Yeo allege that Defendants Pretium Resources, Inc. and its officers—Robert Quartermain, Kenneth McNaughton, and Peter de Visser—violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 by making materially false and misleading statements to investors. The plaintiffs claim that these misstatements caused the stock price of Pretium to be artificially inflated during the Class Period from June 11, 2013, to October 22, 2013, resulting in damages when the truth was revealed.

The court is reviewing Defendants’ motion to dismiss the Second Consolidated Amended Class Action Complaint, which is granted due to the plaintiffs' failure to allege sufficient scienter to support a securities fraud claim under the Exchange Act. 

Pretium is a publicly traded company engaged in gold mining and exploration primarily in the Americas. The Brucejack Project, Pretium's key asset acquired in October 2010, underwent independent evaluations starting in 2012 by Qualified Persons (QPs) to estimate its gold resources. A report by Snowden Mining Industry Consultants in November 2012 projected significant gold resources at the Valley of the Kings zone of the Brucejack Project, recommending further testing to confirm these findings, with an estimated budget of CAD 50 million for necessary drilling and studies.

Pretium engaged Tetra Tech to conduct a feasibility study for the Brucejack Project, with AMC Mining Consultants and Snowden providing mineral reserve estimates. On June 11, 2013, Pretium announced that the VOK contained probable mineral reserves of 6.6 million ounces of gold, and projected a mine life of 22 years with total production of 7.1 million ounces of gold. The study indicated average annual production of 425,700 ounces for the first decade and 321,500 ounces over the mine's lifespan, alongside a processing rate of 2,700 tons per day and capital costs of $663.5 million USD, with operating costs averaging $156.46 CAD per ton milled. The findings were later filed in a Form 6-K.

Additionally, Pretium initiated a 10,000 ton bulk sample program overseen by Strathcona, which included a 15,000-meter underground drill program. A press release on May 28, 2013, highlighted the discovery of visible gold in the first drilled hole, confirming high-grade mineralization. Excavation for the bulk sample was set to begin in mid-June 2013, with samples processed through a sample tower. The results from the sample tower and underground drilling were to be reported by Strathcona. On July 23, 2013, Pretium reported the discovery of the Cleopatra Vein, which was located in an area of expected high-grade mineralization. The vein was defined over approximately 85 meters, and plans were made to adjust the bulk sample tonnage testing to focus on higher-grade blocks. The press release reiterated the anticipated average annual production figures for the Brucejack project.

On August 1, 2013, Pretium released highlights from its second quarter, including results from a June 2013 Feasibility Study, the July 2013 discovery of the Cleopatra Vein, and a working capital of $37.9 million. The release emphasized that the Brucejack project was advancing as a high-grade underground mine, projecting annual gold production of 425,700 ounces for the first ten years and 321,500 ounces over its 22-year lifespan. On August 15, 2013, Pretium reported that underground drill assays continued to confirm high-grade gold mineralization and announced a relocation of the Bulk Sample Program’s excavation site. Additional drilling was ongoing to explore the Cleopatra Vein.

Subsequent press releases on September 9 and 23, 2013, reiterated the confirmation of high-grade mineralized domains and the intent to continue excavating in the Cleopatra Vein. On October 3, 2013, Pretium stated that all material from the Bulk Sample Program had been sampled, with expectations of approximately 90% gold recovery, and that Strathcona was appointed as the independent Qualified Person overseeing the program.

On October 9, 2013, Pretium disclosed Strathcona's resignation before the completion of the Bulk Sample Program and its report, revealing for the first time an expectation of 4,000 total ounces of gold from the excavated material. This announcement led to a 30% drop in Pretium's stock price. On October 22, 2013, Pretium reported Strathcona's assessment that no valid gold mineral resources existed for the Valley of the Kings Zone, invalidating all claims of probable mineral reserves and future production. Strathcona noted that reported high-grade intercepts were narrow and lacked continuity. Following this, Pretium's stock fell an additional 27%.

On October 25, 2013, Tim Kosowski filed the initial complaint in this case. Subsequently, on January 22, 2014, Judge Paul G. Gardephe appointed Pretium Investor Group as lead plaintiff. The case was reassigned on February 10, 2014, and the plaintiffs submitted their consolidated amended complaint on March 24, 2014. Defendants indicated their intent to file a motion to dismiss on April 9, to which the plaintiffs responded on April 14, followed by a pre-motion conference on April 23. The defendants formally filed the motion to dismiss on May 19, 2014. The plaintiffs then filed a Second Amended Complaint on July 23, 2014. A request for a briefing schedule regarding the motion to dismiss the Second Amended Complaint was made by the defendants on July 30, which was granted the following day. The defendants submitted their motion, memorandum, declaration, and exhibits on September 5, 2014, while the plaintiffs opposed this motion on October 20, 2014, with the defendants replying on November 19, 2014. During this time, the Supreme Court decided Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, prompting both parties to submit letters discussing its relevance to the case.

To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), a complaint must present sufficient factual matter to establish a plausible claim for relief, as established in Ashcroft v. Iqbal and Bell Atlantic Corp. v. Twombly. Plausibility involves assessing the totality of the factual allegations, the specific cause of action, and the presence of alternative explanations that could render the plaintiff’s claims unreasonable. Courts are required to accept well-pleaded facts as true and to draw reasonable inferences in favor of the plaintiff.

Securities fraud claims are held to heightened pleading standards under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act (PSLRA). Rule 9(b) mandates that plaintiffs specify the fraudulent statements, identify the speaker, state the timing and location of the statements, and explain their fraudulent nature. The PSLRA further requires that each misleading statement be specified, the basis for the belief of misleading nature be provided, and facts that give rise to a strong inference of the defendant's required state of mind be outlined. Complaints failing to meet these standards are subject to dismissal.

Materiality requires a fact-specific analysis to determine if a reasonable shareholder would find a stated or omitted fact significant in investment decision-making. Courts assess whether the disclosure of omitted information would have significantly changed the overall information available to investors. Materiality is a mixed question of law and fact; a complaint cannot be dismissed for lack of materiality unless the alleged misstatements or omissions are clearly unimportant to a reasonable investor.

Falsity in the context of Section 10 requires a plaintiff to not only claim that a representation is material but also false, providing specific reasons for this assertion. Falsity is defined as a lack of truthfulness, distinct from errors or misunderstandings. The truth of a statement is evaluated based on its potential to mislead investors rather than its literal accuracy, considering the context in which it was presented. There is no general duty under Section 10 to disclose all material information; however, once a party discloses information, they must ensure it is accurate and complete.

Regarding statements of opinion or belief, the Supreme Court in Omnicare established that a plaintiff can prove falsity by showing either that the opinion itself is a factual misstatement or that it is misleading due to the omission of material facts. An opinion may be actionable if it is both false and not sincerely held. Even accurate opinions can be misleading if they omit essential facts that would inform a reasonable investor. To prove this, a plaintiff must identify the omitted fact, demonstrate its materiality, and explain how the omission rendered the opinion misleading, taking into account the context of the statement.

The SAC alleges that Pretium made misleading statements, including claims about planning with Strathcona to enhance the Bulk Sample Program and selective disclosures regarding the Cleopatra Vein drilling.

Defendants assert that their July 23 statement regarding "planning" with Strathcona to adjust bulk sample tonnage testing was not misleading. However, the argument is countered by the material implications of Strathcona's disagreement over continued drilling in the Cleopatra Vein, which a reasonable investor would find significant. The 2012 Resource Report and June 2013 Feasibility Study recommended the Bulk Sample Program to verify projections, with Strathcona as the independent Qualified Person (QP) overseeing the program. This context suggests that Pretium's claim of "planning" with Strathcona could imply Strathcona's support for the sampling strategy, which the SAC alleges is false. Strathcona reportedly pressured Pretium for full disclosure of the Bulk Sample results, indicating that the resource model was not performing as expected. The SAC claims that Strathcona informed Pretium of the unfavorable early assay results starting June 23, 2013, and ultimately withdrew support on October 8, 2013, citing misleading press releases. The allegations sufficiently establish that Defendants knew or should have known their statements were false, satisfying the requirements of Rule 9(b) regarding the timing of misstatements.

Additionally, the SAC contends that Defendants misled investors by failing to disclose that the Cleopatra Vein is a narrow geological structure unrepresentative of the overall Valley of the Kings (VOK) and that drilling into this vein was an attempt to obscure poor Bulk Sample results. However, this argument lacks merit, as Defendants had disclosed relevant information, including the narrow nature of the vein and its geological dimensions, which reasonable diligence by investors would reveal. Thus, the claims of omission regarding the Cleopatra Vein are unpersuasive.

Pretium announced its intention to continue excavating in high-grade and extreme-grade areas of the Cleopatra Vein, countering claims of omitted material information. The plaintiffs argued that Pretium's predictions about the Brucejack Project being a high-grade, high-production mine were misleading, as the company allegedly failed to disclose concerns from Strathcona regarding economic viability, negative results from the Bulk Sample Program, and the narrowness of the Cleopatra Vein. However, after considering all allegations in favor of the plaintiffs, the court found no reasonable basis to conclude that Pretium did not genuinely believe its forecasts.

The distinction between statements of opinion and statements of fact was addressed, referencing the Omnicare case, which clarified that opinions can sometimes contain embedded factual statements. Pretium's projections regarding the Brucejack Project were classified as opinions, since they did not reflect currently existing objective facts. Pretium’s SEC filings indicated that estimating mineral reserves is inherently subjective, reliant on the judgment of those preparing the estimates and subject to change with new information. The company employed independent qualified persons to assist in providing accurate mineral estimates, underscoring the complexity and imprecision associated with such evaluations.

Strathcona was not contracted to provide mineral estimates or participate in the June 2013 Feasibility Study for the Brucejack Project, which was managed by Tetra Tech. Despite this, Strathcona expressed disagreement with the Snowden model and Pretium's estimates, leading to allegations in the Second Amended Complaint (SAC) that independence is essential for Qualified Persons (QPs) and that their findings are presumed unbiased. Pretium criticized Strathcona's conclusions as premature, noting they were based on incomplete data, including only 20% of underground drilling results and no assay results. There is no evidence that Pretium doubted the potential profitability of the project, as they invested significantly in drilling and studies. The plaintiffs' claims of fraud hinge on a disagreement about interpretations of results rather than evidence of intent to deceive, thus failing to establish subjective or objective falsity regarding Pretium's estimates. The total gold reserves and expected production from the Brucejack Project remain undetermined, and Strathcona’s disagreement does not render Pretium's estimates objectively false, as Strathcona was not in a position to challenge them credibly.

The SAG alleges that Pretium's opinion statements regarding the Brucejack Project were misleading due to the omission of material facts. However, an opinion statement is not deemed misleading simply because an issuer fails to disclose certain contradictory facts; context is crucial. Investors interpret each statement alongside its surrounding text, including disclaimers and conflicting information. Pretium disclosed that Strathcona would report sample tower results later in the year, indicating that estimates could not be based on a non-existent report, as Strathcona resigned before completing its report. Additionally, Pretium provided prior disclosures about drilling results that would inform reasonable investors about the nature of the Cleopatra Vein. 

The central issue is whether Pretium had a duty to disclose Strathcona’s opinion, which suggested that Pretium's projections for the Brucejack Project were inaccurate. While the defendants do not dispute the materiality of Strathcona’s opinions, it is clarified that such opinions were expected to reflect the basis for Pretium's estimates. On October 22, 2013, Strathcona informed Pretium that there were no valid gold resources for the VOK Zone, rendering any statements about probable mineral reserves and future gold production misleading. Thus, Strathcona concluded that Pretium had provided misleading information to investors.

Pretium’s duty to disclose Strathcona’s opinions arose after it chose to communicate with the market about its findings. While a party must be accurate and complete once it decides to speak, it is also permitted to investigate potentially negative information before making disclosures. Chief Judge Easterbrook emphasized that prudent managers should conduct thorough inquiries rather than hastily disseminate incomplete information. Pretium regarded Strathcona's opinions as premature, believing the latter should have awaited the completion of the Program. Specifically, Pretium was concerned about potential flaws in the sampling approach for the Valley of the Kings deposit and undertook a several-month investigation into Strathcona’s concerns following an alert received on June 23, 2013. Pretium ultimately disclosed its disagreement on October 22, 2013, after approximately four months of investigation, which is deemed reasonable given the context of the project and competing expert opinions. Consequently, the plaintiffs' challenge to the timing of Pretium’s disclosure does not substantiate a claim of securities fraud.

Regarding scienter, the plaintiffs failed to allege facts indicating that the defendants engaged in deliberate illegal conduct or exhibited recklessness. The defendants argued that the allegations were too vague to demonstrate a concrete personal benefit from the alleged fraud, which is necessary to establish motive and opportunity. The plaintiffs did not provide evidence that the defendants profited from any fraudulent misstatements or sold company stock before the corrective disclosures. They only claimed that Pretium’s future depended on demonstrating the economic viability of the Brucejack Project and mentioned that Defendant Quartermain had a performance bonus tied to increases in the company's market capitalization.

Purported motives related to corporate profitability and stock price maintenance are deemed insufficient to establish a legal motive for securities fraud, as affirmed by the Second Circuit. General motivations for corporate officers, such as appearing profitable or maintaining stock prices for compensation, do not satisfy the requirement for a 'concrete and personal' benefit. Specifically, the allegations that a corporation aimed to raise funds to mitigate a potential stock price drop lack the necessary specificity to support claims of fraud. The connection between corporate performance and Defendant Quartermain's bonuses is weak; if incentive compensation sufficed as a motive for fraud, it would lead to an influx of securities fraud claims against many companies experiencing stock price declines.

The court identifies that the only actionable misstatement involves Pretium’s disclosure regarding the planning with Strathcona for the Bulk Sample Program and drilling in the Cleopatra Vein. However, the plaintiffs failed to adequately demonstrate the defendants' recklessness or scienter concerning this misstatement. Pretium’s disclosures about the Cleopatra Vein were characterized by transparency and prudence, countering any claims of recklessness. The existence of differing opinions between Strathcona and Pretium on the potential success of the Brucejack Project does not imply scienter, nor do the plaintiffs provide specific evidence of contrary information that was allegedly communicated to the defendants. As a result, the plaintiffs did not sufficiently allege the requisite scienter regarding the misstatements or omissions in their claims.

Plaintiffs must specifically identify reports or statements that demonstrate defendants had access to contrary facts, as established in prior case law. The Second Amended Complaint lacks details on how Strathcona communicated sample tower results to defendants, or how these findings contradicted defendants' statements. It notably fails to allege that defendants knowingly engaged in fraudulent behavior; instead, it suggests possible negligence regarding the disclosure of contrary information, which does not meet the standard of recklessness required for establishing scienter under Section 10. The court found that any inference of scienter drawn from the allegations was not as compelling as alternative interpretations of the facts. Consequently, the 10(b) claims were dismissed, which also invalidated the related 20(a) claims. The court granted the defendants' motion to dismiss the Second Amended Complaint and directed the termination of pending motions and closure of the case. The court indicated it would consider attached documents and assume all facts in the complaint to be true while drawing reasonable inferences for the plaintiffs. Additional references clarify typographical errors and specific reports related to the allegations.

Omnicare assessed the misleading nature of a statement under Section 11, noting that the standard for material misleadingness aligns with Section 10(b), as referenced in Rombach. The August 15th Press Release is linked to Michael Decl. Ex. 25. The analysis concluded that Pretium’s projections regarding the Brucejack Project were not misleading and therefore did not constitute actionable misstatements or omissions. Consequently, the argument from Defendants regarding these projections being forward-looking statements was not addressed. Following a review of Defendants' initial brief, Plaintiffs recognized inadequacies in their Second Amended Complaint, resulting in the abandonment of previously alleged scienter theories. Specifically, Plaintiffs did not defend the claims that Defendants were aware of the materially false and misleading nature of their statements, nor did they establish sufficient motive and opportunity for fraud. Additionally, Plaintiffs failed to allege "known trends or uncertainties" as required by Item 303, as a two-month timeframe was deemed insufficient to constitute a ‘trend’ for disclosure purposes per Blackmoss Inv. Inc. v. ACA Capital Holdings, Inc.