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In re Drdgold Ltd. Securities litigation

January 31, 2007


The opinion of the court was delivered by: VICTOR Marrero, United States District Judge.

This document relates to all actions.


This consolidated*fn1 class action was brought against defendants DRDGOLD Limited ("DRD"), the chairman of DRD's board of directors, Mark Wellesley-Wood ("Wellesley-Wood"), and its CEO-CFO, Ian Louis Murray ("Murray")(collectively, "Defendants"), by various individual plaintiffs (collectively "Plaintiffs") on behalf of all investors who purchased or otherwise acquired the securities of DRD between October 23, 2003 and February 24, 2005 (the "Class Period"). The consolidated amended class action complaint, dated February 27, 2006 ("CAC"), alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78a et seq. Defendant DRD now moves to dismiss the CAC pursuant to Fed. Rules of Civ. P. 9(b) and 12(b)(6). For the reasons set forth below, DRD's motion is GRANTED.



DRD is a gold exploration and mining company which operates mines in South Africa and Australasia (Australia and certain neighboring islands); it is a public company incorporated under the laws of South Africa and its American Depository Shares are traded on the NASDAQ. DRD's North West Operations in South Africa ("NWO"), which accounted for a significant part of DRD's business,*fn3 was experiencing financial problems prior to the start of the Class Period.

At the start of the Class Period, DRD announced that it was undertaking a major restructuring of its NWO in order to return it to profitability.*fn4 Throughout the Class Period, updates on the progress made at the NWO were optimistic. A January 24, 2004 press release announcing DRD's financial results for the previous quarter noted that while production at the NWO was lower, the restructuring "had delivered the anticipated results in terms of gold production, grade and costs . . . ." (CAC ¶ 71.) DRD even reported a return to profitability for the NWO for the quarter ending March 31, 2004. The report for the following quarter, ending June 30, 2004, noted that "DRD's [NWO] continued to stabilize following September 2003's restructuring . . . ." (Id. ¶ 81.)

However, DRD was unable to sustain the NWO at a profit. A press release announcing DRD's financial results for the period ending December 31, 2004 noted that "[p]roduction from the [NWO] was slightly lower, reflecting the impact of various infrastructural constraints. These are being addressed." (Id. ¶ 87.) Ultimately, the restructuring failed, and in February of 2005 DRD acknowledged that it would have to take a total impairment on the NWO. As stated in a February 24, 2005 press release announcing DRD's interim financial statements for the six months ending December 31, 2004, the "ongoing poor performance of the [NWO] in the low Rand environment has necessitated a full impairment of the mining assets amount to R214 million resulting in our net loss increasing to R370.1 million for the six months ended 31 December 2004." (Id. ¶ 100.)


Knowledge of Failed Restructuring Plaintiffs alleges that Defendants knew or recklessly disregarded that due to high fixed costs, the restructuring of the NWO "was doomed to fail from the start." (Id. ¶ 3.)

According to Plaintiffs, "[r]ather than admitting that existing union contracts resulting in very high labor costs and the antiquated infrastructure of the NWO made it impossible fo DRD to operate them at any where near break-even, DRD repeatedly insisted that the restructuring was successful." (Id.)

The CAC cites in support of its allegations two confidential witnesses who were DRD insiders during the Class Period. According to "CW2," DRD was aware that operations "were performing well below expectations and that there were very many undisclosed illegalities which when disclosed would have a marked impact on the DRD share price." (Id. ¶ 11.) Thus, Plaintiffs assert that DRD's repeated references to a "strong" balance sheet were materially false and misleading.

Rather than come clean about the barriers to profitability for the NWO, Plaintiffs allege that DRD misrepresented the state of affairs in order to artificially inflate DRD's stock price. According to the CAC, DRD's misrepresentations enabled the company to obtain financing on favorable terms and use its artificially inflated stock as currency to acquire additional mine interests outside South Africa.

2. DRD'S False and Misleading Financial Reporting

On November 29, 2004, DRD issued a restatement of its 2004 quarterly results. The restatement acknowledged certain mistakes in DRD's accounting. The first related to DRD's accounting for its 40 percent interest in Crown Gold Recoveries ("CGR"). DRD advanced money to CGR but did not recognize those losses in the respective quarters they were recorded. Instead, DRD reported these loans as fully impaired in the fourth quarter of fiscal year 2004. According to Plaintiffs, this omission resulted in DRD materially overstating its reported interim 2004 operating results.

The November 29, 2004 restatement also acknowledged that DRD mistakenly took an accelerated depreciation on Harties Number 6 Shaft ("Shaft 6") based on its expectation that the shaft would not be utilized. However, DRD did decide to bring parts of the shaft back into production. Thus, "depreciation should not have been accelerated in the first quarter and subsequently reversed in the third quarter." (Id. ¶ 119 (quoting Annual Report on Form 20-F, filed with the Securities and Exchange Commission ("SEC") on Nov. 29, 2004).)

Plaintiffs allege that DRD's restatement resulted in net income or losses that were overstated or understated in each of its fiscal 2004 quarter end financial statements by approximately 11 percent, 46 percent, 102 percent and 26 percent respectively. (Id. ¶ 140).

In addition to acknowledging specific accounting errors in the restatement, DRD conceded in its 2004 Form 20-F filed with the SEC, that its "disclosure controls and procedures were not effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed [to the SEC] as a result of material weaknesses in our internal control over financial reporting . . . ." (Id. ¶ 149.) DRD stated that these "material weaknesses" included: insufficient knowledge and experience among its internal accounting personnel regarding United States Generally Accepted Accounting Principles ("U.S. GAAP") and SEC requirements due to difficulty in finding sufficiently qualified personnel in South Africa; insufficient written policies and procedures regarding U.S. GAAP and SEC disclosure requirements; and insufficient management emphasis in evaluating compliance with U.S. GAAP. (Id.)

3. Insider Stock Sales

Plaintiffs also allege that Wellesley-Wood, while serving as the chairman of DRD's board of directors, sold a significant portion of his DRD stock holdings at what he knew to be artificially inflated prices. Specifically, the CAC alleges that "[o]n or about June 1, 2004, defendant Wellesley-Wood sold 20,000 (or more that 18% of his total holdings) at 2.88/share for $57,656." (Id. ¶ 154.) Plaintiffs assert that the timing of Wellesley-Wood's stock sale and the large percentage of his holdings involved are indicative of scienter. Plaintiffs also assert, according to confidential witness CW2, that "[c]ompany insiders sold shares prior to the release of bad news about the Company." (Id.)


An assessment of the sufficiency of a claim of fraud brought under the securities laws implicates a statutory and regulatory framework involving Section 10(b)("§ 10(b)") of the Exchange Act, Rule 10b-5 ("Rule 10b-5") promulgated thereunder, Federal Rule of Civil Procedure 9(b) ("Rule 9(b)") and the pleading standards required by the Private Securities Litigation Reform Act (the "PSLRA"), 15 U.S.C. §§ 77k et seq. Section 10(b) declares it unlawful for any person, directly or indirectly, by the use of any means of interstate commerce, the mails, or national securities exchange "to use or employ . . . any manipulative or deceptive device or contrivance in contravention" of SEC rules and regulations. 15 U.S.C. § 78j(b).

Rule 10b-5, promulgated by the SEC to implement § 10(b), "more specifically delineates what constitutes a manipulative or deceptive device or contrivance." Press v. Chemical Inv. Servs. Corp., 166 F.3d 529, 534 (2d Cir. 1999). Under Rule 10b-5, it is unlawful for any person, ...

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