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IN RE ASHANTI GOLDFIELDS SECURITIES LITIGATION

February 13, 2002

IN RE ASHANTI GOLDFIELDS SECURITIES LITIGATION.


The opinion of the court was delivered by: David G. Trager, United States District Judge.

  MEMORANDUM AND ORDER

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.

Background

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 with 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 faced.

Discussion

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 Cir. 1988).

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 (S.D.N.Y. 2001).

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).

(1)

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's principal business is the mining and processing of gold. Its revenues and cash flows are therefore strongly influenced by the price of gold, which can fluctuate widely and over which the Company has no control.
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 transactions.*fn5
[1] This well controlled, orderly market provides the foundation for many derivative instruments such as futures, options, warrants and swaps. [2] Substantial producers and purchasers use these markets to hedge, rather than to speculate, their respective positions. [3] 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 gold-producing company.

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:

Compl. ¶ 23.*fn8

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 ...


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