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IN RE ASHANTI GOLDFEELDS SECURITIES LITIGATION

March 30, 2004.

In re ASHANTI GOLDFEELDS SECURITIES LITIGATION


The opinion of the court was delivered by: DAVID TRAGER, District Judge

MEMORANDUM AND ORDER

I. Background*fn1

On March 27, 2000, a group of shareholders in Ashanti Goldfields Company Limited ("Ashanti") brought an 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) ("defendants"), 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 (the "Webster Action"). A similar action was filed on February 3, 2000 (the "Furman Action"). A third complaint was filed on April 19, 2000, asserting claims on behalf of a class of all persons who acquired shares of Ashanti between April 21, 1997 and October 5, 1999 (the "Kuch Action").

  Following consolidation of all three actions, counsel for all parties, including the defendants, agreed by a stipulated stay, "so ordered" by this Court on September 8, 2000 ("the Page 2 Stipulation," "the Stipulated Stay," or "the Stay"), that the proposed class period set forth in the Consolidated Amended Complaint would be limited to the period between July 28, 1999 and October 5, 1999, the period asserted in the Furman and Webster Actions. The parties agreed that the plaintiffs would have the right to seek to lift the stay in the event that the consolidated action is not dismissed in its entirety upon a motion to dismiss. In March 2001, defendants moved to dismiss the First Amended Consolidated Complaint. In February 2002, defendants' motion to dismiss was granted in part and denied in part. In re Ashanti Sec. Litig., 184 F. Supp.2d 247. On March 7, 2002, a Second Amended Consolidated Complaint was filed by lead plaintiffs.

  Lead plaintiffs William Webster, Ron Moore, and Rosemary Valente ("proposed class representatives," "lead plaintiffs," or "plaintiffs") now move for an Order lifting the Stipulated Stay, and for leave to amend plaintiffs' Second Consolidated and Amended Complaint ("SAC") to encompass the claims originally stayed in the September 2000 Stipulation. Defendants cross-move to dismiss the Third Amended Complaint in the event that leave to amend is granted. Lead plaintiffs also move to certify a class pursuant to Rule 23 of the Federal Rules of Civil Procedure.

 
II. Motion to Lift the Stipulated Stay and for Leave to Amend Plaintiffs' Second Consolidated and Amended Complaint
  Plaintiffs move the Court for an Order lifting the Stipulation, and for Leave to Amend Plaintiffs' Second Consolidated and Amended Complaint ("SAC"). The Stipulation states:

  The stay provided for by this Stipulation and Order shall not be lifted without the approval of this Court after prior notice to the defendants and opportunity for the defendants to contest the lifting of the stay. In the event that this action is not dismissed in its entirety, the lead plaintiffs appointed by the Court shall determine whether to seek to lift the stay provided by this Stipulation and Order by no later than 120 days before the close of fact discovery as to the claim in the Proposed Class Period. Page 3

 Yanez Decl. Ex. A. § 4.

  Plaintiffs assert that the Stipulation places no substantive conditions on the lifting of the stay except for requiring that the claims first survive a motion to dismiss. Since the action has not been dismissed in its entirety, with most of the claims actually surviving the motion to dismiss, plaintiffs have chosen to seek to lift the stay. Defendants acknowledge that while plaintiffs waited until the last minute to seek a lifting of the Stay, plaintiffs did move to lift the stay within the time permitted by the Stipulation and Order. Def. Mem. 4. Therefore, there can be no question that plaintiffs' request to lift the stay is timely. The second ground on which defendants contest the lifting of the stay relates to the matter of whether the defendants will be prejudiced by lifting of the stay and a further amendment of the complaint. Since the potential for prejudice rests not with the lifting of the stay but with the amendment of the complaint, this objection will be discussed below in the analysis of the motion to amend. As defendants raise no other objection to the lifting of the stay and there is no other reason why the stay should not be lifted, the stipulated stay is hereby lifted.

  The question that follows is whether plaintiffs should be permitted to amend the complaint to extend the proposed class period and include the claims stayed by the Stipulation. Plaintiffs assert that they should be permitted to amend to include the claims stayed by the Stipulation because these claims are based on misstatements and omissions that are virtually identical, and in most cases verbatim, to those already ruled actionable by this Court's February 2002 Memorandum and Order. As such, plaintiffs argue that the additional changes in the PTAC are not new claims of fraud but simply serve to demonstrate defendants' ongoing fraudulent conduct over an expanded time period. Pl. Mem. 1. Page 4

  Amending of a complaint is governed by Rule 15(a) of the Federal Rules of Civil Procedure, which provides that "leave [to amend] shall be freely given when justice so requires." Fed.R.Civ.P. 15(a). The decision to grant a request for leave to amend a complaint is within the discretion of the Court. Foman v. Davis, 371 U.S. 178, 182 (1962); Ching v. United States, 298 F.3d 174, 180 (2d Cir. 2002). It is well-established in the Second Circuit that leave to amend should be granted freely though the district court may exercise its discretion to deny a motion to amend if there is a good reason for it. Min Jin v. Metro. Life Ins. Co., 310 F.3d 84, 101 (2d Cir. 2002) ("Leave to amend should be freely granted, but the district court has the discretion to deny leave if there is a good reason for it, such as futility, bad faith, undue delay, or undue prejudice to the opposing party.").

  Defendants argue that the motion to amend should be denied on several grounds. First, defendants argue that plaintiffs' undue delay and improper purpose mandates denial of the motion to amend. Second, defendants argue that they will be prejudiced if lead plaintiffs are granted leave to amend the complaint. Third, defendants allege that lead plaintiffs have failed to adequately allege a strong inference of scienter, so that the Proposed Third Amended Complaint ("PTAC") would not survive a motion to dismiss. Fourth, defendants argue that the new claims plaintiffs seek to file are barred by the statute of limitations, and that this would be another basis on which the new complaint would not survive a motion to dismiss.

 1. Undue Delay

  Defendants argue that the motion to amend should be denied because plaintiffs seek to file the PTAC almost three years after the filing of the original complaint on February 3, 2000, Page 5 and that plaintiffs knew about the additional claims proposed in the PTAC since the case first began. Furthermore, defendants argue plaintiffs' motion to amend was filed for an improper purpose in that the claims in the PTAC "are claims that lead plaintiffs have known about prior to every prior iteration of their complaint and chose not to pursue." Def. Mem. 6. The rule in this Circuit with respect to undue delay is that a court may deny a motion for leave to amend "where the motion is made after inordinate delay, no satisfactory explanation is offered for the delay and the amendment would prejudice other parties." Grace v. Rosenstock, 228 F.3d 40, 53-54 (2d Cir. 2000). Defendants' claims of bad faith and undue delay are meritless given that the delay resulted directly from the Stay stipulated to by all parties. As plaintiffs rightly explain, the delay was contemplated by the Stipulation, and defendants have known since the date of the Stipulation that plaintiffs could make a motion to lift the stay and seek to extend the time period covered by the complaint. Pl. Mem. 5-6. Thus, defendants' claims of improper purpose and undue delay are unsupported and do not constitute good reason to deny leave to amend.

 2. Prejudicial Effect

  Defendants also argue that they will be prejudiced if lead plaintiffs are granted leave to file the PTAC. However, in their briefing on the issue defendants fail to make a convincing argument. The only basis for a claim of prejudice asserted by defendants is that they would have to conduct discovery and prepare for trial on the new claims. Since discovery is still ongoing in this case, it is hard to see how expansion of the class period would prejudice the defendants other than simply expanding the scope of discovery. In this instance, there is no undue prejudice to the defendants from amendment of the complaint since the amended claim arises from the same Page 6 conduct set forth in the original pleading and the original complaint gave the defendant fair notice of the newly alleged claims. See Wilson v. Fairchild Republic Co., 143 F.3d 733, 738 (2d Cir. 1998) (holding that a district court may grant leave to amend so long as "the original complaint gave the defendant fair notice of the newly alleged claims."); O'Hara v. Weeks Marine, Inc., 294 F.3d 55, 68 (2d Cir. 2002) (quoting Fed.R.Civ.P. 15(c)(2)) (holding that a plaintiff generally may amend the complaint to include a claim if it "arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading.").

 3. Scienter

  A third ground advanced by defendants in opposition to the motion to amend is that plaintiffs have failed to adequately allege a strong inference of scienter, and amendment would therefore be fufile because the PTAC would not survive a motion to dismiss. This court has previously decided that plaintiffs adequately pled scienter with respect to the claims in the Second Amended complaint ("SAC"). In re Ashanti Goldfields Sec. Litig., 184 F. Supp.2d 247, 270 (E.D.N.Y. 2002). Plaintiffs attempt to argue that defendants' scienter challenge is barred by the law of the case doctrine since it has already been held that plaintiffs adequately pleaded scienter with regard to statements alleged in the SAC. The law of the case doctrine "posits that when a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages in the same case. Law of the case directs a court's discretion, it does not limit the tribunal's power. . . ." Arizona v. California, 460 U.S. 605, 618 (1983) (citations omitted). Since this court did not have the claims advanced in the PTAC before it when it Page 7 decided the defendants' motion to dismiss the SAC, the law of the case doctrine does not bar defendants' scienter challenge.

  While defendants' scienter challenge is not barred, the court's decision with respect to scienter in the SAC informs its analysis of the issue of scienter with respect to the PTAC. Defendants argue that: (1) plaintiffs have alleged no facts giving rise to a strong inference of intent to defraud; (2) plaintiffs have failed to allege motives giving rise to a strong inference of intent to defraud; and (3) alternative explanations for defendants' conduct preclude sustaining a scienter allegation based on a strong inference of intent to defraud. Def. Mem. 8-16. This court has already clearly stated that a `"strong inference that the defendant[s] acted with the required state of mind' . . . may be established by either alleging facts to show that defendants had both motive and opportunity to commit fraud, or alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Ashanti, 184 F. Supp.2d at 269 (citing Novak v. Kasaks, 216 F.3d 300, 307 (2d Cir. 2000)). As was the case with the previous scienter challenge, with respect to the present scienter challenge "[t]he shareholders only attempt to show scienter under the second category, conscious misbehavior or recklessness." Ashanti, 184 F. Supp.2d at 269. That being the case, plaintiffs are not required to show motive for fraud. Thus, defendants' objections that plaintiffs have failed to adequately allege a strong inference of intent to defraud are inapposite.

  As was already stated in the previous opinion: "If a plaintiff is attempting to prove scienter by showing conscious misbehavior or recklessness, it is not sufficient to merely allege that such behavior took place. Recklessness in this context is conduct which is `highly unreasonable representing an extreme departure from the standards of ordinary care . . . to the Page 8 extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.'" In re Ashanti, 184 F. Supp.2d at 269-70 (quoting Rothman v. Gregor, 220 F.3d 81, 90 (2d Cir. 2000)). Based on the facts alleged in the SAC, it has already been concluded that defendants "were aware of the nature of the transactions in the hedge book" and that plaintiffs established a "strong inference that Ashanti knew that its characterization[s] of its futures activity as hedging and not speculation were false." Ashanti, 184 F. Supp.2d at 270.

  The claims advanced in the PTAC merely bolster the prior finding. Ashanti's public filings during the extended class period indicated that the company's sales and hedging policy was set at quarterly meetings and was subject to strict internal controls. PTAC ¶¶ 13-14, 16. Moreover, plaintiffs have already been granted leave to amend their complaint to include the transcript of Keatley's July 28, 1999 conference call after finding that "Keatley's statements regarding the hedge book's ability to withstand a price rise shows that he and Ashanti were aware of the nature of the transactions in the hedge book." Ashanti, 184 F. Supp.2d at 270. Similarly, plaintiffs allege that in statements made during the April 29, 1999 conference call, which plaintiffs seek to add to the complaint, defendant Keatley assured investors of the hedge book's ability to withstand a price rise. PTAC ¶¶ 21-22. Thus, the scienter analysis with respect to the July 28, 1999 conference call applies to the April 29, 1999 conference call as well. In short, as with the claims asserted in the SAC, the additional claims put forward in the PTAC "lead to the strong inference that Ashanti knew that its characterizations of its futures activity as hedging and not speculation were false." Ashanti, 184 F. Supp.2d at 270.

  Defendants also argue that lead plaintiffs' claims cannot be reconciled with the fact that defendants engaged in significant repurchases of their own securities during the proposed class Page 9 period. Def. Mem. at 9-12; Def. Rep. Mem. at 2. While net purchases or sales of stock may be relevant with respect to a motive for fraud claim, when the claim is based on conscious misbehavior or recklessness net purchases of stock by defendants do not necessarily negate an inference of scienter on a motion to dismiss. See, e.g., In re Seebeyond Techs. Corp. Secs. Litig., 266 F. Supp.2d 1150, 1169 (C.D. Cal. 2003) (holding on a motion to dismiss that even though defendants argued that "purchases of stock negate an inference of scienter because they are inconsistent with a motive to maximize his personal benefit from an artificial inflation of the stock price. . . . [T]aking the allegations together, the plaintiff has presented sufficient allegations to raise the strong inference of scienter [in the form of] a strong inference that the defendants acted with deliberate or conscious recklessness.")-Since in this case the scienter claims are based upon conscious misbehavior, whether defendants were net buyers or net sellers of Ashanti is irrelevant. Ashanti, 184 F. Supp.2d at 269. Once again this court concludes that "[t]aken together, [the] facts pleaded by the shareholders lead to the strong inference that Ashanti knew that its characterizations of its futures activity as hedging and speculation were false." Id. at 270.

 4. Statute of Limitations

  A fourth ground advanced by defendants in opposition to the motion to amend is that the claims relating to the expanded portion of the proposed class period are barred by the statute of limitations. A claim under Section 10(b) and Rule 10b-5 must be brought within one year after discovery of the facts constituting the violation, and that one year period begins to run once a Page 10 plaintiff is on "constructive" or "inquiry" notice.*fn2 15 U.S.C. § 78i(e); Kahn v. Kohlberg, Kravis, Roberts & Co., 970 F.2d 1030, 1042 (2d Cir. 1992) (the one-year limitations period applicable to discovery of the violation begins to run after the plaintiff "obtains actual knowledge of the facts giving rise to the action or notice of the facts, which in the exercise of reasonable diligence, would have led to actual knowledge."); Menowitz v. Brown, 991 F.2d 36, 41-42 (2d Cir. 1993) (referring to discovery of facts giving rise to the violation as "constructive or inquiry notice."). Defendants argue that the claims regarding the expanded portion of the proposed class period ...


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