The opinion of the court was delivered by: Denise Cote, District Judge
THIS DOCUMENT RELATES TO:
All Actions : ----------------------------------------X
This action concerns an ambitious copper-gold mining project in a remote area of British Columbia, Canada undertaken by defendant NovaGold Resources, Inc. ("NovaGold"). NovaGold's decision to abandon the mining project because of spiraling capital costs, and the sharp decline in its stock price, have led to this putative securities class action lawsuit, which primarily challenges NovaGold's disclosures regarding the anticipated costs and risks of the mining project. This Opinion addresses the motions to dismiss that three separate groups of defendants have filed. As explained below, the defendants' motions to dismiss the claims filed under the Securities Act of 1933 (the "Securities Act"), are granted. As for the claims brought under Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), only the claim against NovaGold survives.
The following allegations are taken from the corrected consolidated class action complaint (the "consolidated complaint") and the documents on which it relies. NovaGold was founded as a mineral exploration company, but shifted its focus to mineral extraction and production in the late 1990s. As part of its foray into mineral extraction, NovaGold began investigating the untapped mineral reserves of Galore Creek in northern British Columbia in 2003, and acquired the mineral rights to 215,000 acres. Located in a mountainous area, the untapped Galore Creek -- initially accessible only by helicopter -- was believed to have large copper, silver, and gold deposits.*fn1
The minerals were to be extracted through an "open pit" mine, close to the surface, but spread out over a large area.
A. Scoping the Project: Engineering Challenges and the Preliminary Feasibility Study
Considerable engineering challenges accompanied the lucrative potential of the mine. Because the Galore Creek site was an open pit mine, extracting the minerals would require excavating the waste rock sitting on top of the minerals first. The excavated earth, which contained waste rock (the portion not containing valuable minerals) and tailings (the material left over from the process of separating the valuable minerals from the worthless portion of the ore) needed to be stored permanently elsewhere, usually in a structure known as a "tailings dam." NovaGold initially intended to place the tailings dam in a valley where Galore Creek flowed, requiring the creek to be directed for 4.7 miles around the tailings dam area. Heavy rains and snowfall in the winter of 2005-06 sharply increased the amount of surface water that NovaGold would need to divert. The remote location and large size of the mine only amplified these logistical difficulties.
NovaGold undertook feasibility studies regarding the project in compliance with Canadian securities regulations imposing specific disclosure requirements on companies undertaking mineral exploration. These requirements include preparation of "feasibility studies" by independent experts that include sufficient detail to enable a financial institution to determine whether it should finance the development of a project. NovaGold retained defendant Hatch Ltd. ("Hatch") in 2003 to perform a preliminary study of the feasibility of the Galore Creek mine (the "Project"). Defendant Rick Van Nieuwenhuyse, NovaGold's CEO, announced the results of the preliminary study in October 2005, which included a capital cost estimate of US$1.1 billion (approximately 1.3 billion Canadian dollars ("C$")), indicating the commercial viability of the Project. Hatch then began a final feasibility study, which was designed to estimate costs within 10-15% (the "Hatch Study"). NovaGold expected Hatch's study to be complete in the second half of 2006. NovaGold subsequently raised US$165.3 million through an initial public offering ("IPO") on January 24, 2006.
A week later, it announced an agreement with the Native Canadian Tahltan First Nation, which resided on portions of the Galore Creek area (the "February 2006 Participation Agreement"). In June 2006, NovaGold reported to Canadian authorities that it had explored "all viable options" so that it could make a "reasonable decision" about planning the Project.
B. Barrick's Hostile Takeover Bid and the Release of the Hatch Study
NovaGold had earlier begun discussions with global mining giant Barrick Gold Corp. ("Barrick") regarding a potential joint venture to develop Galore Creek. On July 24, 2006, Barrick announced a hostile bid for NovaGold at US$14.50 per share, and NovaGold's share price increased from US$11.67 to US$16.17 the following day. NovaGold issued a press release on July 25 condemning Barrick's offer. While attempting to fight off the hostile bid, NovaGold also continued to learn more about the surface water issues caused by heavy precipitation, which drove up the costs of the Project further. By October 2006, NovaGold's share price declined to $15.35, approaching the $14.50 offered by Barrick.
NovaGold issued a press release on October 12 announcing that the Hatch Study would likely be released by the end of the quarter. Barrick responded on October 24 by raising its offer to US$16 per share. The next day, NovaGold announced the release of the Hatch Study in a press release (the "October 25, 2006 Press Release"), entitled "Final Feasibility Study Completed at NovaGold's Galore Creek Project." As described in the October 25, 2006 Press Release, the study confirmed the economic viability of the Project, stating that it was "one of the world's largest undeveloped copper-gold-silver projects with one of the lowest cash costs in the industry," and calculated capital costs at US$1.8 billion, or C$2.2 billion. The October 25, 2006 Press Release also explained that the study's estimates reflected a %/-10% level of accuracy, and encompassed "all the direct and indirect costs and appropriate project estimating contingencies," including "construction of all major civil earthworks for the dams and water diversion structures."
Analysts responded to the Hatch Study enthusiastically and advised investors to reject Barrick's bid. NovaGold announced in an October 31 press release that, because of the strong projections in the study, its negotiations with potential joint venture partners had accelerated. It noted its recent "value-adding milestones," including the release of the "independent Galore Creek Feasibility Study, confirming economics of the project and providing the Company's first Proven and Probable Reserves."
The hostile takeover bid was overwhelmingly rejected on November 8, 2006, and NovaGold announced the same in a press release issued that day. It attributed the shareholders' rejection of the bid to "milestones," which included the "[c]ompleted final Feasibility Study at Galore Creek." NovaGold also held a conference call on November 8 (the "November 8, 2006 Conference Call"), in which Van Nieuwenhuyse characterized the Hatch Study as "done" and informed the public that NovaGold was moving forward with construction:
Final preparations are now being made . . . to basically take that feasibility study and implement that into a construction plan . . . having completed the feasibility study at Galore Creek, we can now speak about the reserves there.
Also participating in the call, defendant Robert J. MacDonald, the CFO of NovaGold, described "significant interest from potential joint venture partners," who had been awaiting "the completion of our feasibility study, which was just released two weeks ago." MacDonald also repeated the Hatch Study's cost figures: "based on the feasibility study . . . for Galore Creek, we have a total capital of about [US]$1.8 billion." Van Nieuwenhuyse referred to the Project as "eminently financeable" in a November 14 press release (the "November 14, 2006 Press Release"), noting that "[w]ith the Feasibility Study for Galore Creek now complete, NovaGold has been approached by a variety of interested financial and industry partners . . . we are confident that Galore Creek is of significant interest to potential joint venture parties."
Another press release of December 5 (the "December 5, 2006 Press Release") urged investors to continue to reject Barrick's bid, with Van Nieuwenhuyse declaring that "we plan to build [the Galore Creek] project on time and on budget." The press release also mentioned "the release of an independent Feasibility Study confirming Proven and Probable Reserves and the economics of the Galore Creek project." NovaGold again touted the Hatch Study in a December 14 press release, noting cost estimates of "approximately US$1.8 billion" to be incurred "between 2007 and 2010" and again stating that "[a] final Feasibility Study for the Galore Creek project, completed by Hatch Ltd. in October 2006, provided Proven and Probable Reserves for NovaGold and confirmed the economics and mine plan of the Galore Creek project."
C. Cost Increases and a Secondary Offering
Behind the scenes, plaintiff's confidential sources report that costs were spiraling upward and approached C$3.7 billion by early summer 2007. Without publicly disclosing its decision, NovaGold retained AMEC Americas Ltd. ("AMEC"), a competitor of Hatch, to conduct a new feasibility study to re-estimate certain costs beginning in February or March 2007.
NovaGold's disclosures, meanwhile, continued to refer to the cost figures calculated in the Hatch Study. On February 9 (the "February 2007 Report"), NovaGold issued a press release stating that "the Feasibility Study budget is sufficient for construction of the Project within current contingency allegations" and reiterating the cost figures from the Hatch Study.*fn2 The February 2007 Report quoted defendant Peter W. Harris, Chief Operating Officer of NovaGold, who, after noting that a "Project Development Team has been reviewing the Feasibility Study capital costs," stated that "the team has determined that the Feasibility Study budget is sufficient for construction of the Galore Creek project within current contingency allocations. This review will continue as basic and detailed project engineering proceeds."
The press release accompanying NovaGold's 2006 annual statement, released on February 28 ("the February 28, 2007 Press Release"), again "confirmed the economics and mine plan," of the Project, as well as the US$1.8 billion cost figure. During a March 2, 2007 conference call reviewing earnings for the fourth quarter of 2006 (the "March 2, 2007 Conference Call"), MacDonald reviewed the cost figures once again: "[y]ou see the total capital for Galore Creek at approximately [US]$1.8 billion or C$2.2 billion . . . just over four months ago, NovaGold completed the feasibility study for Galore Creek."
D. The Secondary Offering
On the advice of Citigroup, NovaGold sought to obtain additional financing for the Project. On April 18, NovaGold commenced a secondary offering of 12.5 million shares of its stock that raised US$194 million pursuant to an Amended Registration Statement on Form F10/A, filed with the SEC on April 16, 2007 (the "Registration Statement"). NovaGold also issued a press release and its Form 6-K Quarterly report on April 16. The press release noted that the start-up of operations at Galore Creek would be delayed from 2011 to 2012, but that the construction would nonetheless require an "unchanged overall construction budget of [C]$2.2 billion (US$1.8 billion)."
NovaGold then held an earnings conference call on April 25 (the "April 25, 2007 Conference Call"), where Van Nieuwenhuyse commented that NovaGold was "driving down into the very low end of the cash cost curve with production from Galore Creek." MacDonald repeated the same cost and viability tropes: "[t]he total project financing cost [for the Project] is about C$2 billion."
On May 23, NovaGold issued a joint press release with Teck Cominco ("Teck") announcing their US$2 billion partnership to develop Galore Creek, named "the Galore Creek Mining Corporation" ("GCMC") (the "May 23, 2007 Press Release"). The press release noted that "[s]ince the completion of the Feasibility Study last fall, NovaGold has been preparing for the start of construction." NovaGold also disclosed that it planned "an aggressive program of . . . technical studies. . . aimed at increasing the value of the Galore Creek project by optimizing the additional approximately 1 billion tonne mineral resource in the Galore Creek Valley that is not currently included in the Galore Creek feasibility study." In the meantime, construction would "continue in accordance with NovaGold's previously announced timelines and budgets to achieve production by mid-2012." Several analysts responded favorably to the joint venture, viewing it as evidence of the value of the Project. By the fall of 2007, Teck had provided C$78 million of funding.
In mid-2007, NovaGold began to experience cost overruns at another project, Rock Creek. Analysts from MGI questioned management regarding whether the flawed estimates could impact the Project. Satisfied that they would not, MGI issued a report in July stating that NovaGold had reviewed estimates with "their consultants" and "believe[d] that the numbers provided still stand." A June 1 press release (the "June 1, 2007 Press Release") discussed further technical studies, but without any effect on the Project's budgets or timelines:
Construction will proceed in accordance with NovaGold's previously announced budgets and timelines to achieve production by mid-2012, and the Galore Creek partnership will engage in exploration and technical studies aimed at increasing the value of the project by optimizing the additional resources that are not currently included in the Galore Creek Feasibility Study completed by Hatch Ltd. in October 2006.
A press release issued on July 16 reiterated that the Project would require an "investment of US$2 billion." A Form 6-K quarterly report filed that same day with the SEC (the "July 16, 2007 Quarterly Report") also confirmed that the budget described in the Hatch Study would remain "unchanged."
Taking analysts on a tour of the Project in August 2007, NovaGold described the AMEC study as a "scoping study" intended to measure a project's reserves, compared with capital costs.
Following the analyst visit, some analysts began to increase their own cost estimates for the Project. On August 30, an analyst from defendant Cormark Securities Inc. ("Cormark") explained that he now believed capital costs on the Project to be higher than originally estimated, owing to currency fluctuations and the fact that Hatch's estimate did not account for cost inflation occurring during the construction period or a US$115 million power line that the Project required. Cormark increased its capital expenditure assumption by approximately 25%, to US$2.3 billion. NovaGold issued a press release on October 1 that hewed to the Hatch Study's cost figure, referencing only the "C$2.2 billion" "estimated construction costs" of the "October 2006 Feasibility Study."
F. Disclosures of Cost Increases
NovaGold's first disclosure that costs were expected to exceed the Hatch Study's estimate, and that AMEC had been engaged to conduct a new feasibility study, came in a press release issued on October 15 ("October 15, 2007 Press Release"). The October 15, 2007 Press Release disclosed that Galore Creek Mining Corporation has engaged AMEC to prepare an updated feasibility study to, amongst other things, support the project financing of Galore Creek. The updated feasibility study is expected to result in significant increases to capital costs resulting from, among other things, the inclusion of additional power line costs in connection with the higher-capacity line described below, and escalating local and worldwide constructions; further optimization of the project, including potential modifications to grind size and the significant strengthening of the Canadian dollar against the U.S. dollar.
Capital cost increases are expected to be partially offset by improvements in operating costs. The updated feasibility study is targeted to be complete in the first half of 2007, but revised costs for the project may be available earlier than that. (Emphasis supplied). NovaGold's Form 6-K quarterly earnings report signed the same day (the "October 15, 2007 Quarterly Report") repeated the statements above. Following the press release, the share price fell by forty-six cents, from US$19 to US$18.54. On a conference call two days later (the "October 17, 2007 Conference Call," Van Nieuwenhuyse again described the AMEC study as an "updated" feasibility study. A presentation to the New Orleans Investment Conference delivered on October 23, 2007 (the "October 23, 2007 NOIC Presentation"), however, referred twice to the Hatch Study when estimating Project costs, without mentioning any "update."
Six weeks after it first disclosed that AMEC was updating the Hatch Study, on November 26, 2007, NovaGold and Teck announced that they were suspending the Project, whose capital costs were now expected to approach US$4.4 billion (C$5 billion), a 144% increase from the original estimate. A member of the Tahltan Nation ("CW 3") learned that Teck insisted on the Project's suspension, while NovaGold had hoped to continue, despite the dramatic increase in the capital cost estimate. The press release announcing the suspension, dated November 26, 2007, disclosed that NovaGold had retained AMEC in April 2007 to review the results of the Hatch Study, with a focus on the construction of the tailings and water management structures and mine facilities. According to the press release, by October 2007, AMEC's preliminary findings indicated it expected capital costs would be significantly higher than originally estimated. As a result, NovaGold and Teck Cominco commenced a project strategy review . . . to assess the AMEC work.
Estimated costs have continued to increase during this review, and NovaGold and Teck Cominco now have sufficient information to indicate that the capital cost of the project could approach as much as [C]$5 billion. The engineering review is ongoing. Although there have been changes in scope from the original feasibility study, the largest portion of the capital cost increase is related to the complex sequencing of activities necessary to build the tailings dam and water management structures, and the resulting extension of the construction by 18 to 24 months. The project has also been affected by the rapidly escalating capital costs affecting major construction projects world-wide.
In light of these developments, NovaGold and Teck Cominco have agreed to suspend construction . . . (Emphasis supplied). The day that the press release announcing the suspension was issued, NovaGold's share price fell 53% to US$10.76 on a trading volume of over 24 times the daily average during the class period.
Three prospective lead plaintiffs filed securities class action complaints against NovaGold, alleging that the company had deceptively concealed the true costs of the Project in violation of securities laws, seeking recovery on behalf of a class who had acquired NovaGold common stock between October 25, 2006, the day of the press release announcing the completion of the Hatch Study, and November 23, 2007 (the "Class Period"). The first complaint was filed on August 7, 2008 by Rudolph Textor, naming NovaGold, Van Nieuwenhuyse, MacDonald, and Harris as defendants and alleging violations of Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§ 78j, 78t(a), and Rule 10b-5, the parallel regulation promulgated under Section 10(b), as well as Sections 11 (against all defendants except Harris) and 15 of the Securities Act (against Van Nieuwenhuyse and MacDonald only), 15 U.S.C. §§ 77k(a) and 77(o).
After a second plaintiff filed a complaint on September 9 against the same defendants, bringing Exchange Act claims only, an Order issued on September 15 scheduling a conference to consider any motions to be appointed as lead plaintiff and for consolidation. Following the conference, held on October 31, an Order of November 5 appointed the New Orleans Employees' Retirement System ("NOERS") as Lead Plaintiff ("plaintiff"), consolidated the actions, and required a consolidated complaint to be filed by December 19, 2008.
NOERS then filed its own complaint on November 21. To the defendants already named in the previously filed actions, it added the remainder of the defendants named below, including NovaGold's directors, Hatch Ltd., and the companies who served as underwriters of the April 18, 2007 secondary offering. In addition to the violations alleged by other plaintiffs, plaintiff alleged that NovaGold and the underwriters had violated Section 12(a)(2) of the Securities Act, 15 U.S.C. § 77l(a), and that the underwriters, NovaGold's directors, and Hatch and its employee Bruce Rustad, had violated Section 11 of the Securities Act, and that NovaGold officers Douglas Brown, Carl Gagnier, Harris, Gregory S. Johnson, Joseph R. Piekenbrock, Elaine M. Sanders, and Douglas Nicholson had violated Section 15 of the Securities Act. The plaintiff's complaint did not include Exchange Act claims.
Plaintiff filed the consolidated complaint on December 30, 2008, challenging NovaGold's disclosures regarding the Project.*fn3
It asserts causes of action under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5, as well as others under Sections 11, 12(a)(2) and 15 of the Securities Act. In essence, the complaint alleges that NovaGold, fearing Barrick's hostile takeover bid, manipulated the results of the Hatch Study, and continued to rely on the estimates contained in the Hatch Study in public disclosures, including the Registration Statement, while concealing the true escalation in the costs of Galore Creek and the retention of AMEC to assess those costs.
In addition to NovaGold and GCMC, the consolidated complaint identifies several groups of defendants, including:
- NovaGold officers Van Nieuwenhuyse, MacDonald, Harris, and Brown, who was NovaGold's Vice President of Business Development at the time that the Registration Statement became effective and the General Manager of Galore Creek and President of GCMC beginning in May 2007;
- NovaGold Directors George Brack, Michael H. Halvorson, Gerald J. McConnell, Clynton R. Nauman, and James L. Philip, all of whom signed the Registration Statement (the "NovaGold Directors"; collectively with NovaGold and Galore Creek Mining Corporation, the "NovaGold Defendants");
- The underwriters of the secondary public offering, including Citigroup Global Markets Inc., Citigroup Global Markets Canada Inc., RBC, Scotia Capital Inc., Cormark, and MGI (the "Underwriter Defendants"); and
- Hatch and Rustad, an engineer working for Hatch who had primary responsibility for the Hatch Study, who consented to the Registration Statement making references to his name and involvement in the study (the "Hatch Defendants").
Allegations appearing for the first time in the consolidated complaint include those asserting that NovaGold officer Brown violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 and that the NovaGold Directors violated Section 20(a) of the Exchange Act.
On January 23, 2009, the Underwriter Defendants, the Hatch Defendants, and the NovaGold Defendants each filed motions to dismiss the consolidated complaint for failure to state a claim on multiple grounds, pursuant to Rules 8(a), 9(b), 12(b)(1), and 12(b)(6) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4(b). The Hatch Defendants also seek dismissal of the claims against Rustad under Rules 12(b)(2) and (5), Fed. R. Civ. P. This Opinion first addresses defendants' arguments that plaintiff's Securities Act claims against the NovaGold Directors, NovaGold officer Brown, the Underwriter Defendants, and the Hatch Defendants are barred by the statute of limitations before considering whether plaintiff has stated a claim for relief under the Securities and Exchange Acts.
"Under Federal Rule of Civil Procedure 8(a)(2), a pleading must contain a 'short and plain statement of the claim showing that the pleader is entitled to relief.'" Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (citation omitted). This rule "does not require 'detailed factual allegations,'" id. (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)), but "[a] pleading that offers 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action will not do.'" Id. (quoting Twombly, 550 U.S. at 555); see also Achtman v. Kirby, McInerney & Squire, LLP, 464 F.3d 328, 337 (2d Cir. 2006). "Nor ...