The opinion of the court was delivered by: David G. Trager, United States District Judge.
A group of shareholders in Ashanti Goldfields Company Limited
("Ashanti") brought this action against Ashanti and two of its officers,
Mark B. Keatley (CFO and member of the board of directors) and Sam Jonah
(CEO and member of the board of directors), alleging that Ashanti and the
officers of Ashanti made fraudulent statements between July 28, 1999 and
October 5, 1999 in violation of § 10(b) of the Securities Exchange
Act of 1934 (the "1934 Act") and Rule 10b-5 promulgated thereunder, and
§ 20(a) of the 1934 Act, concerning commodities futures activity by
the company. Ashanti now moves to dismiss the complaint pursuant to Rule
12(b)(6) of the Federal Rules of Civil Procedure ("FRCP"), arguing that
the complaint fails to include any actionable misstatements, that the
statements that were made are protected by the safe harbor provision for
"forward looking statements" under the Private Securities Litigation
Reform Act of 1995 (the "PSLRA"), and that the complaint fails to
adequately allege scienter.
Ashanti is a corporation organized under the laws of the Republic of
Ghana. Compl. ¶ 7. Traditionally, Ashanti's business has been the
mining, processing, and sale of gold. Ashanti's 1998 Securities and
Exchange Commission Form 20-F filing (the "1998 20-F") at 1.*fn1 In
connection with this business, Ashanti also maintains a "hedge book,"
which is comprised of assorted financial instruments primarily dealing
future sales of gold at set prices. Id. at 27.
According to the 1998 20-F, Ashanti's "hedging" operations generated
$58.6 million of income in 1996, out of Ashanti's total profit of $81.4
million. Id. at F-9. In 1997, hedging produced $139.9 million of income,
while overall Ashanti reported a $78.9 million profit. Id. In 1998,
Ashanti generated a total of $600.3 million in revenue. Id. The hedge
book generated $139.0 million of income that year, and Ashanti's total
profit was $90.3 million. Id. Total revenue for 1999 revenue was $582.1
million, with $143 million of hedging income and $96.3 million in total
profit. 1999 20-F at F-9.*fn2 According to an additional form filed by
Ashanti with the SEC on July 28, 1999 (the "July 1999 6-K"), as of June
30, 1999, Ashanti had hedged 11 million ounces gold, which was just under
50 percent of its gold reserves. Compl. ¶ 19. At that point, the
value of the hedge book was $290 million. Compl. ¶ 22.
The purported purpose of the hedge book was to protect Ashanti from
fluctuations in the price of gold. Compl. ¶ 14. The shareholders
allege that, contrary to this claimed purpose, the hedge book did not
serve as a protective measure at all. Rather, the shareholders maintain
that, undisclosed to investors, the hedging activity was actually a
"reckless bet" that exposed Ashanti to tremendous risks in the event that
the price of gold rose sharply. Compl. ¶ 16. The extent of these
risks was exposed on September 26, 1999, when fifteen European central
banks announced that they were limiting sales and leases of gold (the
"bank announcement"), causing the price of gold to rise by nearly $70 per
ounce.*fn3 Compl. ¶ 26.
As a result of this rise in the price of gold, many of the contracts in
Ashanti's hedge book became detrimental to the company. According to SEC
filings and newspaper reports, the value of the hedge book dropped from
$290 million to negative $570 million. Compl. ¶¶ 22, 29(e), 40.
Primarily due to this sudden loss in value of the hedge book, Ashanti
stock dropped from a high of $9.3785 per share to $5.50 per share.
Compl. ¶ 33.*fn4 In addition, despite efforts to restructure the
hedge book, the company was subjected to numerous margin calls from the
counterparties to the contracts. Compl. ¶ 29(d). Although not
explained in the complaint, these margin calls presumably protected the
counterparties by ensuring that Ashanti would deliver the gold at the
agreed-upon lower price. To meet these margin calls, Ashanti eventually
was forced to sell a fifty percent interest in one of its largest mines
and issue warrants for 15 percent of its stock. Compl. ¶ 43.
The shareholders allege that before and during these events, Ashanti's
officers and directors made numerous misrepresentations regarding the
hedge book, thereby concealing the extent of the risks the company
The shareholders allege that defendants violated § 10(b) of the
1934 Act and Rule 10b-5 promulgated thereunder, and § 20(a) of the
1934 Act. Section 10(b) prohibits actions "involving manipulation or
deception . . . that are intended to mislead investors by artificially
affecting market activity." Field v. Trump, 850 F.2d 938, 946-47 (2d
Ashanti moves to dismiss the complaint for failure to state a claim
pursuant to Rule 12(b)(6). In order to state a claim under Section 10(b),
a plaintiff must allege that "the defendant, in connection with the
purchase or sale of securities, made a materially false statement or
omitted a material fact, with scienter, and that the plaintiff's reliance
on the defendant's action caused injury to the plaintiff." Ganino v.
Citizens Utilities Co., 228 F.3d 154, 161 (2d Cir. 2000). A motion to
dismiss must be denied "unless it appears beyond a reasonable doubt that
the plaintiff can prove no set of facts in support of his claim which
would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78
S.Ct. 99 (1957). The duty of a court in ruling on a 12(b)(6) motion "is
merely to assess the legal feasibility of the complaint, not to assay the
weight of the evidence which might be offered in support thereof." Ryder
Energy Distrib. Corp. v. Merrill Lynch Commodities Inc., 748 F.2d 774,
779 (2d Cir. 1984). In ruling on a 12(b)(6) motion, a court must accept
as true all well-pleaded facts alleged in the complaint and draw all
reasonable inferences in the pleader's favor. See Jackson Nat. Life Ins.
Co. v. Merrill Lynch & Co., Inc., 32 F.3d 697, 699-700 (2d Cir. 1994);
Liberty Ridge LLC v. RealTech Sys. Corp., 173 F. Supp.2d 129, 134
In addition to the facts alleged in the complaint, a court may take
judicial notice of public disclosure documents filed with the SEC when
considering a Rule 12(b)(6) motion. See Kramer v. Time Warner Inc.,
937 F.2d 767, 774 (2d Cir. 1991); In re MetLife Demutualization Litig.,
156 F. Supp.2d 254, 259 n. 1 (E.D.N Y 2001).
Initially, Ashanti argues that the shareholders have failed to allege
any actionable statements. The statements are best divided into those
made prior to the bank announcement on September 26, 1999 and those made
after the bank announcement.
a. Pre-Bank Announcement Statements.
The majority of the alleged misstatements occurred prior to the rise in
the price of gold following the bank announcement. For the most part, the
shareholders claim that these statements were false and misleading in
that they characterized the hedge book as a precautionary and protective
measure, rather than the risky speculation it actually was. Similarly,
the shareholders allege that Ashanti withheld specific, material risks to
which the purportedly "protective" hedge book exposed the company.
The first group of these alleged misstatements is found in Ashanti's
1998 20-F. Specifically, Ashanti stated:
Ashanti, in common with many other gold producers,
engages in hedging activities to protect its cash
flows against the risk of falls in the gold price.
Compl. ¶ 14; 1998 20-F at 1, 58. In addition to falsely
characterizing the hedge book as a precautionary measure, the
shareholders contend that these statements were false in that Ashanti had
actually "converted itself" from a mining business to a financial trading
entity, and, accordingly, its principal business was no longer the mining
of gold. Compl. ¶ 14.
The remainder of the allegedly false statements in the 1998 20-F
concern only the misrepresentation that the hedge book was a protective
measure, not speculation:
To reduce the impact on the Company of fluctuations in
the price of gold, the Company engages in hedging
 This well controlled, orderly market provides the
foundation for many derivative instruments such as
futures, options, warrants and swaps.  Substantial
producers and purchasers use these markets to hedge,
rather than to speculate, their respective positions.
 The process involves forward contracts and options
to hedge part of the production against falls in the
gold price. This secures a predictable cash flow which
assists in planning and forecasting future revenues,
ensuring that financial commitments and other
undertakings can be met.
Ashanti enters into derivative financial instrument
contracts in order to protect itself. . . . The
Company does not acquire derivative financial
instruments for speculative purposes.
Compl. ¶¶ 14-15; 1998 20-F at 27, 25, 60 (emphasis added). According
to plaintiffs, these statements paint a picture of a conservatively run
The second group of statements that the shareholders allege were false
are included in Ashanti's July 1999 6-K, filed on July 28, 1999.*fn6 In
the July 1999 6-K, Ashanti stated that it had "increased its level of
hedging protection to 11 million ounces. Just under 50% of reserves are
now hedged at an average price of US$389 per ounce, protecting the Group
against the current difficult gold market." Compl. ¶ 19.*fn7
Moreover, the July 1999 6-K included a table in which Ashanti claimed it
stated the "[f]ull details of the latest hedging position." Compl.
¶ 20. The shareholders claim that these statements were false in the
same way that the above statements were, in that they characterized the
hedging activity as a "protective" measure against fluctuations in the
gold market rather than risky speculation. Id. In addition, the
shareholders argue that the table was fraudulent by omission in that it
did not disclose important information related to the instruments in the
hedge book. Id.
These misrepresentations by Ashanti were allegedly repeated by
Keatley, Ashanti's CFO, on July 28, 1999. In an interview carried by
Bloomberg Business News, Keatley stated that:
In all cases, the fundamental premise upon which the shareholders base
their claims is that the "hedge" book was risky speculation, and,
consequently, the characterization of it as a protective hedging measure
was false. Similarly, the shareholders claim that Ashanti concealed the
risky nature of the investments in the hedge book from the shareholders.
By mischaracterizing and failing to disclose the true nature of the
investments in the hedge book, the shareholders argue that Ashanti
artificially increased its stock price.
Ashanti, in turn, argues that the hedge characterization statements are
not actionable for several reasons. These are addressed in turn.
1. Characterization of Futures Activity
Ashanti first argues that the difference between actions that are
"hedging" versus actions that constitute "speculation" is amorphous at
best, and the use of the term "hedging" as opposed to "speculation"
cannot possibly give rise to a securities fraud claim. In other words,
Ashanti claims that its characterization of its futures activity cannot
result in a viable claim. Specifically, Ashanti argues that the
shareholders have failed to satisfy the heightened pleading requirements
for securities fraud claims under Rule 9(b) of the FRCP and §
78u-4(b) of the PSLRA that require plaintiffs to plead with particularity
the reasons why the statements were fraudulent.
Rule 9(b) requires that "[i]n all averments of fraud or mistake, the
circumstances constituting the fraud or mistake shall be stated with
particularity." Similarly, § 78u-4(b)(1) requires that in any
securities fraud claim in which the plaintiff alleges that the defendant
made an untrue statement of material fact or omitted a material fact,
"the complaint shall specify each statement alleged to have been
misleading," and "the reason or reasons why the statement is misleading."
Accordingly, the complaint must: "`(1) specify the statements that the
plaintiff contends were fraudulent, (2) identify the speaker, (3) state
where and when the statements were made, and (4) explain why the
statements were fraudulent.'" Acito v. IMCERA Group, Inc., 47 F.3d 47, 51
(2d Cir. 1995) (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170,
1175 (2d Cir. 1993)).
It is not disputed that the shareholders have specified the allegedly
fraudulent statements, but Ashanti argues that given the nebulous nature
of the terms "hedge" and "speculate," none of the statements are
demonstrably false. In response, the shareholders argue that the
difference between the terms is real and clear, and Ashanti's statements
that it was hedging and not speculating can be shown to be untrue.
Despite Ashanti's arguments, courts and, presumably, investors and
parties in commodities markets, have defined "hedging" and "speculation"
and distinguished between them. Indeed, ever since it began considering
the futures market, the
Supreme Court has distinguished between players
who seek to insure themselves against price changes, and those who seek
to profit by taking positions in the market. In United States v. New York
Coffee & Sugar Exch., 263 U.S. 611, 44 S.Ct. 225 (1924), the Court
described the first group as "those who use [the futures market] to
hedge, i.e., to insure themselves against loss by unfavorable changes in
price at the time of actual delivery of what they have to sell or buy in
their business." Id. at 619, 44 S.Ct. at 227. The Court also identified
two other "classes" of parties who deal in futures: "legitimate
capitalists" who purchase futures "with a view to profit based on the law
of supply and demand, and gamblers or irresponsible speculators, who buy
or sell as upon the turn of a card." Id. The Court added to these
definitions and distinctions in the context of the tax consequences of
hedging and speculating in Corn Prods. Ref. Co. v. Comm'r of Internal
Revenue, 350 U.S. 46, 76 S.Ct. 20 (1955), where it agreed with
administrative decisions "distinguishing speculative transactions in
commodity futures from hedging transactions [that] held that hedging
transactions were ...