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In re Allied Nevada Gold Corp., Securities Litigation

United States District Court, D. Nevada

September 20, 2017

IN RE ALLIED NEVADA GOLD CORP., SECURITIES LITIGATION

          ORDER

          LARRY R. HICKS UNITED STATES DISTRICT JUDGE

         Defendants Scott Caldwell, Robert Buchan, Randy Buffington, and Stephen Jones moved to dismiss the second consolidated amended complaint (“SAC”) in this federal securities class action. ECF No. 126. Plaintiffs opposed the motion and Defendants filed a reply. ECF Nos. 132 and 135. Lead Plaintiff Andrey Slomnitsky filed the SAC after the court granted Defendants' motion to dismiss the first amended complaint (“FAC”). ECF No. 125; see ECF No. 120.[1] The court dismissed the FAC for failing to adequately plead the required elements for a claim brought under Section 10 and Rule 10(b)-5 of the Securities Exchange Act (“SEA”), which include: (1) falsity, (2) scienter, and (3) causation. ECF No. 120. For the same reasons that the court dismissed the FAC, the court now dismisses the SAC with prejudice.

         I.FACTUAL BACKGROUND

         Plaintiffs brought this federal securities class action on behalf of investors who purchased stock in Allied Nevada Gold Corporation (“Allied”) from January 18, 2013, to August 5, 2013, (the “class period”). ECF No. 125 at ¶ 1.

         During the class period, Allied operated the Hycroft Mine in Nevada, which consisted of three leach pads: the Lewis leach pad, the Brimstone leach pad, and the North leach pad. Id. at ¶¶ 2, 5. The instant class action focuses on the operations at the Lewis leach pad. See id.

         Allied mined and developed the Hycroft Mine in order to recover gold and silver from oxide ores through a heap-leaching process. Id. at ¶¶ 3-4. The heap-leaching process requires the creation of a leach pad, which is created by compacting soil to create a flat but sloped foundation for the placement of an impermeable barrier. Id. at ¶ 14. The impermeable barrier is the leach pad, on which gold and silver-bearing ore is placed after it is extracted, crushed, and coated with lime. Id. at ¶¶ 15-16. The crushed ore is then doused with a diluted cyanide solution to dissolve the gold and the silver from the ore. Id. at ¶ 16. This process creates a solution, called the pregnant solution, that holds the dissolved gold and silver. Id. The pregnant solution percolates through the ore stacked on the leach pad. Id. at ¶¶ 17-18. The ability of the pregnant solution to percolate through the stacked ore is essential to the heap-leaching process. Id. at ¶¶ 19-22. At the end of the process, the gold and the silver are removed from the pregnant solution by carbon absorption. Id. at ¶ 23. Allied conducted a heap-leaching process at the Lewis leach pad during the class period, during which time, the Lewis leach pad experienced ongoing operational difficulties. Id. at ¶¶ 24-25.

         In addition to conducting a heap-leaching process at the Hycroft mine, Allied sought to expand its leach pad operations. Id. at ¶ 5. It engaged in expansion projects, such as increasing the mining rate, adding process machinery, constructing a mill, and upgrading infrastructure items. Id. at ¶ 5. However, Allied eventually suspended its expansion projects in August 2013 due to the ongoing operational difficulties at the Lewis leach pad. Id. at ¶ 47.

         In the complaint and the opposition to the instant motion, Plaintiffs focus largely on an activity known as “belly-dumping.” See generally id.; see also ECF No. 132. Belly dumping is the use of large trucks that release piles of lime while driving over a leach pad. ECF No. 125 at ¶ 25. However, Plaintiffs identify the issue that impeded the recovery of gold and silver at the Lewis leach pad as a condition known as “blinding.” Id. at ¶¶ 25; ECF No. 132 at 3. Blinding occurs when an impermeable barrier is created within the stacked ore on the leach pad, which inhibits the leaching process by preventing the leaching solution from soaking ore located below the impermeable barrier. ECF No. 125 at ¶ 25.

         Plaintiffs complain that four Defendants caused the stockholders' loss during the class period by not disclosing the blinding issue: (1) Scott A. Caldwell, (2) Robert M. Buchan, (3) Randy E. Buffington, and (4) Stephen M. Jones. See generally Id. Plaintiffs allege that each Defendant-all high-ranking Allied officials at some time during the class period-were extensively experienced in mining and had a comprehensive understanding of the heap-leaching process. Id. at ¶¶ 11, 57-60.

         Through the four high-ranking Defendants, Allied issued a variety of press releases and financial information during the class period. See generally Id. (referencing multiple press releases and financial documents).[2] It also participated in several conference calls to discuss the Hycroft Mine's performance. See generally Id. (quoting multiple conference calls held by Allied).[3] Plaintiffs allege that the press releases, financial statements, and conference calls all contained materially false and misleading statements about: (1) the operations of the Lewis leach pad, (2) Allied's cash position and access to capital, (3) the expansion project of the Hycroft Mine, and (4) Allied's favorable financial guidance. Id. at ¶¶ 156, 162, 180, 203. Plaintiffs also allege that Defendants knew the statements were materially false and misleading at the time the statements were made. See id.

         Plaintiffs then allege that the truth regarding Allied's business was slowly revealed to stockholders beginning on April 30, 2013. Id. at ¶¶ 183-86. On April 30, Allied announced its financial results for the first quarter of 2013 and its “higher than expected” production costs. Id. at ¶ 183; see also ECF No. 126 at Ex. L. Allied then disclosed that it would likely phase the expansion project of the Hycroft mine and that it planned to issue a secondary public offering (“SPO”). ECF No. 125 at ¶¶ 185-86; see also ECF No. 126 at Ex. L. Allied also filed a Form 10-Q, in which it made projections regarding gold and silver production for the year of 2013 and stated it had sufficient capital and access to funding. ECF No. 125 at ¶¶ 188-89; see also ECF No. 126 at Ex. 15. The following day, May 1, 2013, Allied held a conference call, in which Defendants explained their reasoning for phasing the expansion project and for issuing a SPO. ECF No. 125 at ¶ 191; see also ECF No. 126 at Ex. N. In the conference call, Defendants reiterated their confidence in the business plan and its ability to deliver as planned. ECF No. 125 at ¶¶ 192-95; see also ECF No. 126 at Ex. N.

         Then, on May 2, 2013, Allied filed an automatic shelf registration statement on Form S-2 with the Securities Exchange Commission (“SEC”). ECF No. 125 at ¶ 214. On May 9, 2013, Allied amended the registration statement, offering to sell fourteen million shares of Allied stock in the SPO. Id. at ¶ 215, ECF No. 126 at Ex. O. On May 17, 2013, Allied announced the closing of its sale of the fourteen million shares in the SPO at $10.75 per share. ECF No. 125 at ¶¶ 211, 230. On July 8 and July 22, 2013, Allied released two new press releases, which allegedly further exposed the truth about Allied's business. Id. at ¶¶ 233-34; see also ECF No. 126 at Exs. P and Q.

         However, Plaintiffs contend that full disclosure regarding Allied's operations and financial positions was not made until early August 2013. Id. at ¶¶ 241-50. Specifically, on August 6, 2013, Defendants issued a press release and held a conference call, announcing its production costs had increased dramatically and would continue to rise because of operational defects at the Lewis leach pad. Id.; ECF No. 126 at Exs. R and S. It also announced that the expansion project was indefinitely suspended as a result of the operational issues. ECF No. 125 at ¶ 241; see also ECF No. 126 at Exs. R and S. The next day, Allied's stock dropped from $5.90 per share at the close of trading on August 5, 2103, to $3.73 per share at the close of trading on August 7, 2013. Id. at ¶ 251.

         Plaintiffs allege that Defendants knew the Lewis leach pad suffered from the blinding issue at the time in which the alleged misstatements were made. See generally ECF No. 125. In so alleging, Plaintiffs rely in part on a May 2, 2013 letter that Defendants sent to the Nevada Division of Environmental Protection (NDEP). Id. at ¶¶ 210, 246. The letter to NDEP “proposes a sonic drill program for the Brimstone and Lewis Leach Pads.” ECF No. 134 at Ex. A. The accompanying documentation states: “Mineralization within a heap can be located and characterized through drilling” and “[Allied] intends to case these drill holes … for possible use as injection wells in the future.” Id. Because the letter and accompanying report allegedly took “a number of days to weeks to prepare[, ]” Plaintiffs allege Defendants knew about the blinding condition and planned to use the drilling program to confirm the areas in the Leach Pad where blinding was occurring. ECF No. 125 at ¶ 210. The “investigative drilling program” began in approximately June or July of 2013. Id. at ¶¶ 100, 118, 120. Plaintiffs also rely on multiple statements from fifteen confidential witnesses, all of whom are Allied's former employees. Id. at ¶¶ 61-122. Ten of the fifteen confidential witnesses were included in the FAC. Compare ECF No. 98 with ECF No. 125.

         II. PROCEDURAL BACKGROUND

         Plaintiffs filed the first complaint in this action on April 3, 2014. ECF No. 1. The court consolidated this case on November 7, 2014, and named Andrey Slomnitsky as lead plaintiff. ECF NO. 59. Allied then filed for Chapter 11 bankruptcy. ECF No. 95. Plaintiffs filed the FAC on May 1, 2015. ECF No. 98. Defendants moved to dismiss the FAC on September 29, 2015. ECF No. 103. The court dismissed the FAC on August 8, 2016, but gave Plaintiffs leave to amend. ECF No. 120. The court dismissed the FAC because Plaintiffs' allegations failed to support the idea that Defendants knew the extent of the operational issues at the time the alleged misrepresentations were made. Id. Accordingly, Plaintiffs failed to plead falsity, scienter, and causation. Id.

         Plaintiffs then filed the SAC on November 3, 2016, alleging two claims: (1) a violation of Section 10 under the SEA and Rule 10(b)-5; and (2) a violation of Section 20(a) of the SEA. ECF No. 125. Defendants moved to dismiss the SAC on January 25, 2017. ECF No. 126. Defendants also requested judicial notice of Allied's stock prices and the cost of gold on various dates. ECF No. 127. Plaintiffs filed an opposition to the motion, and Defendants replied. ECF Nos. 132, 135.

         III. LEGAL STANDARD

         Federal Rule of Civil Procedure (“Rule”) 8(a)(2) requires a pleading to contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). A court may dismiss a complaint that fails to meet this standard under Rule 12(b)(6). Fed.R.Civ.P. 12(b)(6). Rule 12(b)(6) permits dismissal on the basis of either (1) the “lack of a cognizable legal theory, ” or (2) “the absence of sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). In considering whether the complaint is sufficient to state a claim, the court accepts as true all factual allegations contained in the complaint. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). However, a court need not “accept as true allegations that contradict matters properly subject to judicial notice or by exhibit” or “allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008) (internal quotations omitted). While a complaint need not allege detailed factual allegations, it “must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Iqbal, 556 U.S. at 678 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is facially plausible when it “allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id.

         Rule 9(b) and the Private Securities Litigation Reform Act (“PSLRA”) also govern securities fraud claims. Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009) as amended (Feb. 10, 2009). Accordingly, a plaintiff must satisfy the heightened pleading standard required by both Rule 9(b) and the standards under PSLRA. Id. Rule 9(b) requires a plaintiff alleging fraud or mistake to “state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other condition of mind of a person may be averred generally” Fed.R.Civ.P. 9(b); Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 1230 (9th Cir. 2004). But while Rule 9(b) permits the general averment of a person's state of mind, the PSLRA requires a plaintiff alleging securities fraud to “plead with particularity both falsity and scienter.” Gompper v. VISX, Inc., 298 F.3d 893, 895 (9th Cir. 2002) (quoting Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir. 2001)); see also Nursing Home, 380 F.3d at 1230.

         IV. DISCUSSION

         The court first addresses the issue of judicial notice. The court then discusses each claim alleged by Plaintiffs in turn. Finally, the court turns to the issue of dismissal with prejudice.

         A. Judicial Notice

         A court may take judicial notice of “records and reports of administrative bodies.” Interstate Natural Gas Co. v. Southern California Gas Co., 209 F.2d 380, 385 (9th Cir. 1953). Under the Federal Rules of Evidence, “[a] judicially noticed fact must be one not subject to reasonable dispute in that it is either (1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned.” Fed.R.Evid. 201(b). “A court shall take judicial notice if requested by a party and supplied with the necessary information.” Fed.R.Evid. 201(d). Accordingly, “[a]though generally the scope of review on a motion to dismiss for failure to state a claim is limited to the [c]omplaint, a court may consider evidence on which the complaint necessarily relies if: (1) the complaint refers to the document; (2) the document is central to the plaintiffs' claims; and (3) no party questions the authenticity of the copy attached to the 12(b)(6) motion.” Daniels-Hall v. Nat'l Educ. Ass'n, 629 F.3d 992, 998 (9th Cir. 2010) (internal quotations and citations omitted). The court may “treat such a document as ‘part of the complaint, and thus may assume that its contents are true for the purposes of a motion to dismiss under Rule 12(b)(6).'” Marder v. Lopez, 450 F.3d 445, 448 (9th Cir. 2006) (quoting United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003)).

         Plaintiffs refer to and quote from the following: (1) Allied's press releases dated January 18, 2013, February 22, 2013, February 25, 2013, March 21, 2013, March 27, 2013, April 8, 2013, April 30, 2013, July 8, 2013, July 22, 2013, and August 6, 2013; (2) Allied's conference calls on January 18, 2013, February 25, 2013, April 9, 2013, May 1, 2013, and August 6, 2013; (3) Allied's financial statements including the 2012 Form 10-K filed February 25, 2013, the Form 10-Q filed April 30, 2013, and the Prospectus Supplement filed on May 9, 2013. Plaintiffs also refer to Allied's letter to NDEP, dated May 2, 2013. Plaintiffs' references and quotes from the forgoing form the basis for the allegations within Plaintiffs' SAC. Further, the parties do not dispute the authenticity of the documents provided to the court. The court therefore takes judicial notice of Exhibits B to S provided by Defendants and Exhibit A provided by Plaintiffs.

         Additionally, Defendants request the court to take judicial notice of their Exhibit A, which contains a graphical representation of the published stock prices for Allied from October 1, 2012, to August 29, 2013; a table showing the published stock prices for Allied from October 1, 2012, to August 9, 2013; a graphical representation of the published prices for gold from October 8, 2012, to August 27, 2013; a table showing the published prices for gold from October 1, 2012, to December 31, 2012; and a table showing the published prices for gold from April 30, 2013, to August 9, 2013. A company's published stock prices qualify as judicially noticeable information. See In re Homestore.com, Inc. Sec. Litig., 347 F.Supp.2d 81, 817 (C.D. Cal. 2004). “[P]ublicized commodities prices” also qualify as judicially noticeable information. See In re Crude Oil Commodity Futures Litig., 913 F.Supp.2d 41, 52 (S.D.N.Y. 2012). Plaintiffs did not object to any of Allied's exhibits. The court therefore takes judicial notice of Exhibit A provided by Defendants.

         B. Violation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act

         Section 10(b) of the SEA, 15 U.S.C. § 78j(B), makes it unlawful “for any person … [t]o use or employ, in connection with the purchase or sale of any security … any manipulative or deceptive device or contrivance in contravention of such rules and regulations as ...


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