Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Royal Wulff Ventures LLC v. Primero Mining Corp.

United States Court of Appeals, Ninth Circuit

September 17, 2019

Royal Wulff Ventures LLC, Lead Plaintiff; Robert E. Cook, as Trustee for the Robert E. Cook and Paula J. Brooks Living Trust Under An Agreement Dated 12/30/1998. Lead Plaintiff, Plaintiffs-Appellants,
v.
Primero Mining Corp.; Joseph F. Conway; David Blaiklock; Wendy Kaufman; Wade Nesmith; David Demers; Grant Edey; Brad Marchant; Robert Quartermain; Michael Riley; Rohan Hazelton; Timo Jauristo; Eduardo Luna, Defendants-Appellees.

          Argued and Submitted March 4, 2019 Pasadena, California

          Appeal from the United States District Court No. 2:16-cv-01034-BRO-RAO for the Central District of California Beverly Reid O'Connell, District Judge, Presiding

          Richard W. Gonnello (argued), Katherine M. Lenahan, and Megan M. Sullivan, Faruqi & Farugi LLP, New York, New York, for Plaintiffs-Appellants.

          Daniel M. Perry (argued) and James D. Whooley, Milbank Tweed Hadley & McCloy LLP, Los Angeles, California, for Defendants-Appellees.

          Before: Kim McLane Wardlaw and Mark J. Bennett, Circuit Judges, and William K. Sessions III, [*] District Judge.

         SUMMARY[**]

         Securities Fraud / Act of State Doctrine

         The panel affirmed the district court's dismissal of a securities fraud action as barred by the act of state doctrine because plaintiffs' claims under the Securities Exchange Act of 1934 would require a United States court to pass judgment on the validity of a 2012 ruling by the Mexican tax authority.

         Plaintiffs alleged that defendants failed to disclose legal deficiencies in the tax ruling and sold shares knowing those deficiencies existed. After a change in government in Mexico, a challenge to the ruling was filed, but it remained valid under Mexican law.

         The act of state doctrine bars suit where there is an official act of a foreign state performed within its own territory and the relief sought or the defenses interposed in the action would require a court in the United States to declare invalid the foreign sovereign's official act. The panel held that plaintiffs' claims would require a United States court to determine whether the Mexican tax authority's ruling was properly issued under Mexican law. To determine whether defendants misled investors with an intent to deceive, a court would have to decide whether, and to what extent, the ruling complied with Mexico's Income Tax Law, as well as various other Mexican laws governing the ethical obligations of public servants in Mexico. Agreeing with other circuits, the panel held that the district court was not required to consider other factors, known as the Sabbatino factors. Further, those factors would not have weighed against application of the act of state doctrine. In sum, the mandatory elements for applying the act of state doctrine were satisfied, and the policies underlying the doctrine weighed in favor of applying it to bar plaintiffs' claims.

         Dissenting, Judge Bennett wrote that the majority misapplied the act of state doctrine, and he believed that defendants' statements were materially false or misleading. Judge Bennett wrote that, to find for plaintiffs, a court would only need to determine whether, at the time the defendants made the alleged misrepresentations, they knew that there was a real risk that the Mexican government would nullify the tax ruling-not whether the ruling was actually invalid. Judge Bennett would reverse the district court's rulings that the act of state doctrine barred plaintiffs' action and that plaintiffs failed to adequately plead any materially false or misleading statements.

          OPINION

          WARDLAW, CIRCUIT JUDGE

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

         I.

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

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

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

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

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

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

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

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

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

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

(1) Primero's October 5, 2012 press release: "Primero Mining Corp. . . . announced today that [PEM] has received a positive ruling from the Mexican tax authorities (Servicio de Administracion Tributaria) on its Advance Pricing Agreement ("APA") filing made in October 2011. The ruling confirms that [PEM] appropriately records revenues and taxes from sales under the silver purchase agreement at realized prices rather than spot prices effective from August 6, 2010. Under Mexican tax law, an APA ruling is generally applicable for up to a five year period. For Primero this applies to the fiscal years 2010 to 2014. Assuming the Company continues to sell its silver from its San Dimas mine on the same terms and there are no changes in the application of Mexican tax laws relative to the APA ruling, the Company expects to pay taxes on realized prices for the life of the San Dimas mine."
(2) Defendant Conway: "We had a significant tax burden, which we have just recently got cleared of, but more importantly I think as well now that that is done, what else are we doing?"
(3) Primero's February 13, 2014 Form 6-K: "The Company has taken the position that if the Mexican tax laws relative to the APA ruling do not change and the Company does not change the structure of the silver purchase agreement, the ability of the Company to continue to pay taxes in Mexico based on realized prices of silver will continue for the life of the San Dimas mine. Should this judgment change, there would be a material change in both the income and deferred tax position recognized by the Company."

         Plaintiffs also allege that Primero made various false and misleading public statements representing that its quarterly and annual financial statements were "prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and reflect management's best estimates and judgment based on information currently available." In addition to making these statements, Primero allegedly used its newly generated wealth to acquire two companies, Cerro Resources NL and Brigus Gold Corp., selling 41, 340, 664 of its own shares in the process.

         But, according to Plaintiffs, several legal deficiencies in the SAT's 2012 APA Ruling were confirmed after a new government administration came to power in Mexico. The new government, led by President Enrique Peña Nieto and members of the Institutional Revolutionary Party, began to crack down on suspected tax avoidance schemes. Plaintiffs allege that by November 2013, Luis Natera had been found administratively liable for failing to recuse himself from Primero's APA application, and was temporarily suspended from working in the public sector. Plaintiffs also allege that in August 2015, the SAT filed a juicio de lesividad against PEM seeking to retroactively nullify the 2012 APA Ruling. When Primero issued a press release in February 2016 announcing that the SAT had served it with a juicio de lesividad challenging the 2012 APA Ruling, Primero's shares fell "$0.74 per share, or over 28%, to close at $1.89 per share on February 4, 2016." However, although a juicio de lesividad was filed, its contents, and the reasons for which it was filed, are not public. Moreover, Plaintiffs do not contest that the 2012 APA Ruling remains valid under Mexican law.

         Although Plaintiffs concede that the contents of the juicio de lesividad and the reasons for which it was filed are not public, Plaintiffs allege "[u]pon information and belief . . . that the juicio de lesividad was filed for the following reasons: (i) Luis Natera improperly failed to recuse himself from Primero's APA application given that his brother, Christian Natera, was an authorized representative of [Primero;] (ii) the APA Ruling approved a transfer pricing methodology other than the CUP methodologies that were proposed by Primero[;] (iii) the APA Ruling did not conduct the requisite comparison of the factors set forth in Article 215 of [Mexico's Income Tax Law] that are used to determine whether a transaction complies with the [arms length principle;] and (iv) Primero's proposed CUP methodologies were flawed anyway because the transaction that Primero attempted to use as its comparable independent transaction . . . was actually a related party transaction and was therefore an inappropriate comparison transaction . . . ."

         Plaintiffs allege that in failing to disclose these alleged legal deficiencies in the 2012 APA Ruling, and in selling Primero shares knowing these legal deficiencies existed, Primero violated Rule 10b-5 and sections 10(b), 20A of the Exchange Act. Plaintiffs also allege violations of Rule 10b-5 and sections 10(b), 20(a) of the Exchange Act against various "Officer Defendants," as well as violations of section 20(a) of the Exchange Act against various "Director Defendants" and Defendant Joseph Conway.

         Primero moved to dismiss the Plaintiffs' complaint based on the act of state doctrine and failure to state a claim. The district court dismissed the action as barred by the act of state doctrine, and ruled in the alternative that Plaintiffs had failed to adequately plead any materially false or misleading statements. Plaintiffs timely appeal.

         II.

         "[W]e review the district court's decision concerning the act of state doctrine de novo." Liu v. Republic of China, 892 F.2d 1419, 1424 (9th Cir. 1989). "When the doctrine is raised on a motion to dismiss, we take the allegations in the complaint as true and view them in the light most favorable to the plaintiffs." Sea Breeze Salt, Inc. v. Mitsubishi Corp., 899 F.3d 1064, 1068 (9th Cir. 2018) (citing Clayco Petroleum Corp. v. Occidental Petroleum Corp., 712 F.2d 404, 406 (9th Cir. 1983) (per curiam)).

         III.

         While the act of state doctrine was once viewed as "an expression of international law, resting upon 'the highest considerations of international comity and expediency, '" W.S. Kirkpatrick & Co. v. Envtl. Tectonics Corp., Int'l, 493 U.S. 400, 404 (1990) (quoting Oetjen v. Cent. Leather Co., 246 U.S. 297, 303-04 (1918)), we have come to view the doctrine "as a consequence of domestic separation of powers, reflecting 'the strong sense of the Judicial Branch that its engagement in the task of passing on the validity of foreign acts of state may hinder' the conduct of foreign affairs," id. (quoting Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 423 (1964)).

          "As a doctrinal matter, the 'classic statement' of the act of state doctrine is that '[e]very sovereign State is bound to respect the independence of every other sovereign State, and the courts of one country will not sit in judgment on the acts of the government of another done within its own territory.'" Sea Breeze Salt, 899 F.3d at 1069 (quoting Credit Suisse v. U.S. Dist. Court for Cent. Dist. of Cal., 130 F.3d 1342, 1346 (9th Cir. 1997)). "In its modern formulation, the doctrine bars suit where '(1) there is an official act of a foreign sovereign performed within its own territory; and (2) the relief sought or the defense interposed [in the action would require] a court in the United States to declare invalid the [foreign sovereign's] official act.'" Id. (alterations in original) (quoting Credit Suisse, 130 F.3d at 1346). "[E]ven when [these] two mandatory elements are satisfied, courts may ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.