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In re Britannia Bulk Holdings Inc. Securities Litigation

October 30, 2009


The opinion of the court was delivered by: Denise Cote, District Judge


This consolidated lawsuit, brought by lead plaintiff Edward Wahl ("Plaintiff") as a class action under the Securities Act of 1933 ("Securities Act"), alleges that the Registration Statement and Prospectus (collectively, "Offering Documents") accompanying a June 17, 2008 public offering of common stock in Britannia Bulk Holdings, Inc. ("Britannia" or the "Company") was materially misleading. Plaintiff's claims center on certain alleged misrepresentations concerning Britannia's use of forward freight agreements ("FFAs"), financial contracts used to hedge against charter-rate volatility in the shipping market. Specifically, Plaintiff alleges that Britannia misstated or failed to disclose two material facts: (1) that Britannia used FFAs to hedge against increases, and not merely decreases, in charter rates, and (2) that the Company had entered into FFAs for purely speculative purposes. Plaintiff argues that this undisclosed use of FFAs was not only "false and misleading," but also represented material information of considerable relevance to investors in evaluating Britannia's business. Named as defendants are Britannia; Britannia's Chief Executive Officer, Arvid Tage; four other Britannia directors and senior officers (collectively, except for Tage, the "Individual Defendants"); and the four underwriters for the IPO (collectively "Underwriter Defendants"). These groups are identified in detail further below.

This Opinion addresses the motions to dismiss that three defendants or groups of defendants -- Arvid Tage, the Individual Defendants, and the Underwriter Defendants -- have filed. Each of these three groups of defendants (collectively, "Defendants") asserts that the disclosures in the Offering Documents were not misleading, or in the alternative, not materially misleading. Moreover, each defendant also claims that the complaint merits dismissal because an affirmative defense of negative causation is evident on the face of the complaint. For the following reasons, the Defendants' motions are granted except as to the Section 15 claims against Fariyal Khanbabi and Arvid Tage.


I. The Company and the IPO

The following facts are taken from the Consolidated Amended Complaint ("Complaint") of May 1, 2009, and the documents on which it relies, unless otherwise noted. Britannia, a Marshall Islands corporation conducting business from offices in the United Kingdom and Denmark, was a leading international provider of drybulk shipping and maritime logistic services. The majority of Britannia's business centered on transporting drybulk commodities in and out of the Baltic region, but the Company also engaged in shipping services in Europe, South America, East Asia, and Australia. Britannia's expertise in the Baltic derived from the icy conditions and short-haul nature of the shipping routes of the region, conditions for which Britannia's fleet was particularly suited. As of June 2008, Britannia's owned fleet included 22 vessels, comprising 5 ice-class drybulk vessels, 8 non-ice-class drybulk vessels, 5 ocean-going ice-class barges, and 4 ice-class tugs. Aside from these owned vessels, Britannia also "chartered-in" additional vessels to increase its overall capacity. In the twelve months prior to March 2008, the Company expanded its chartered-in fleet from 18 to 51 vessels.

On June 17, 2008, Britannia launched an initial public offering (the "IPO") of 8.33 million shares of common stock, valued at $15 per share, for total proceeds of approximately $125 million, excluding underwriters' discounts. The IPO was registered with the Securities and Exchange Commission ("SEC") and conducted pursuant to a registration statement on Form F-1 filed on or about June 4, 2008, as amended on June 13 and June 16 ("Registration Statement"), and a prospectus on Form 424B4 that became effective on June 18 ("Prospectus").*fn1 The Prospectus was signed by various Company officers and directors, including Tage and the Individual Defendants. Four underwriters participated in the IPO: Goldman, Sachs & Co. ("Goldman Sachs"), Banc of America Securities LLC ("Banc of America"), Dahlman Rose & Company ("Dahlman Rose"), and Oppenheimer & Co. Inc. ("Oppenheimer"). Collectively, these four Underwriter Defendants received more than $8.7 million in fees related to the IPO. Britannia's stock began trading on the New York Stock Exchange under the symbol "DWT" on June 18, 2008.

At the time of the IPO, Britannia's finances were apparently in good condition. In the years leading up to the IPO, demand for Russian coal and other raw materials -- and therefore, demand for drybulk transportation in the Baltic and Northern Europe regions -- had been increasing substantially. As a product of this rising demand for shipping and as a result of Britannia's simultaneous expansion of its owned and chartered-in shipping capacities, Britannia's revenues soared to reach "historic levels" in early 2008. Britannia's revenue for the three months ending March 31 was $300.2 million, a sum nearly four times greater than the $61.3 million it had earned in the same three-month period in 2007. Over the same period, Britannia also expanded its offices and hired many new employees, contributing in turn to a more than fourfold increase in general and administrative expenses from the first quarter of 2007 to the same quarter in 2008.

II. Forward Freight Agreements

In the Offering Documents accompanying the IPO, Britannia disclosed the Company's past attempts, and continued intent, to manage the financial risk associated with its exposure to charter-rate volatility by entering into drybulk forward freight agreements ("FFAs"). FFAs are a type of financial hedging instrument "involv[ing] contracts to provide a fixed number of theoretical voyages at fixed rates, which contracts generally range from one month to one year and settle monthly based on a published index." Simply put, parties enter into FFAs to hedge against the possibility that market prices for shipping cargo along certain generic trade routes might increase or decrease relative to a fixed, contractual dollar amount.*fn2 Britannia reported that it had entered into eight FFAs in the three months ending March 31, 2008. In the next three months ending June 30, Britannia entered into an additional twenty-nine FFAs. As measured from June 30, 2008 -- around two weeks after the date of the IPO -- these FFAs were highly profitable for the Company. According to Britannia's Form 6-K quarterly report of August 4, 2008 ("August Report"), the Company reported net financial gains of $7.9 million from its FFAs for the three months ending June 30 and gains of $15.7 million for the six months ending June 30.*fn3

The Company's use of FFAs is discussed repeatedly throughout the Registration Statement and Prospectus. Each of the Offering Documents includes the following disclosure regarding the Company's use of FFAs in the "Risk Factors" section:

Volatility in the shipping market requires constant adjustment of the balance between chartering out vessels for long periods of time and trading them on a spot basis. We seek to manage and mitigate that risk through hedging activities in forward freight agreements, or FFAs. We are exposed to market risk in relation to our FFAs and could suffer substantial losses from these activities in the event that our expectations are incorrect. We enter into FFAs with an objective of economically hedging the risk of the fleet, specific vessels or freight commitments. However, there is no assurance we will be able to successfully protect ourself [sic] from volatility in the shipping market. If we take positions in FFAs and do not correctly anticipate charter rate movements over the specified route and time period, we could suffer losses in the settling or termination of the FFAs. The performance of our hedging activities could significantly increase the variability of our operating performance in any given period and could materially adversely affect our results or operations, cash flows and earnings.

(Emphasis added). Later, in a section entitled "Qualitative and Quantitative Disclosures About Market Risk," the Offering Documents disclose regarding FFAs:

We are exposed to decreases in charter rates or our inability to fully employ our chartered-in vessels through COAs, time charters or spot charters. We enter into drybulk forward freight agreements, or FFAs, as economic hedges relating to identifiable ship or cargo positions and as economic hedges of transactions we expect to carry out in the normal course of our shipping business. By utilizing drybulk shipping FFAs, we attempt to manage our financial risk associated with fluctuating market conditions. When entering into FFAs, we assume the risk that counterparties may fail to meet the terms of their contracts. None of our derivative financial instruments qualify for hedge accounting; therefore, the net changes in derivative assets and liabilities are reflected in current period operations. . . . Hedging activities in FFAs could lead to material fluctuations in our reported net income on a period-to-period basis. See "Risk Factors--Risks Related to Our Business--Hedging activities in Forward Freight Agreements (FFAs) subject us to trading risks and we may suffer trading losses that reduce our earnings". . . .

(Emphasis added). Other passages related to FFAs, which repeat substantially the same language, appear elsewhere in the Offering Documents in sections entitled "Critical Accounting Policies," "Notes to Condensed Consolidated Financial Statements" (unaudited statements), and "Notes to Consolidated Financial Statements" (audited statements).

The Complaint alleges that the above-cited passages from the Offering Documents contained "materially false and misleading" statements concerning the Company's use of FFAs. The Complaint describes the Offering Documents as representing that the Company entered into FFAs to "(1) . . . serve[] as economic hedges to safeguard against decreases in vessel charter rates which related to identifiable ship or cargo positions, and (2) for transactions the Company expected to carry out in the normal course of its shipping business." The Complaint then alleges that, despite this policy, Britannia "engaged in speculative trading in FFAs that was not designed to shield the Company from exposures to falling charter rates on identifiable cargo or shipping routes, but to 'play the market' instead, betting that historically high charter rates would continue to rise."

As evidence for his assertion, Plaintiff alleges that, on or about April 24, 2008, Britannia Bulk purchased an FFA from Armada (Singapore) Pte Ltd. for the purpose of hedging against increases in charter shipping rates (the "Armada FFA"). The Armada FFA set a fixed contract price of $71,250 per day for a Panamax vessel*fn4 for the period of July through December 2008. The practical effect was such that, if charter rates rose above $71,250 between July and December 2008, Britannia would profit, but if they fell below $71,250, Britannia would be required to pay Armada the difference between $71,250 and the market index rate as set by the Baltic Exchange. The contract's terms included "no identifiable ship or cargo." As a result, the Complaint alleges that the Armada FFA was "contrary to the Company's disclosed use of FFAs to safeguard against falling charter rates" and against its stated policy of "provid[ing] an economic hedge for 'identifiable ship or cargo positions.'"

III. Post-IPO Developments

Within a few months following the IPO, the drybulk shipping industry began to suffer the effects of a deepening global recession. As demand for raw materials fell, so too did charter rates. Britannia, whose "revenues were dependent on rate levels in the international shipping markets," suffered directly as a result. Britannia's losses were further compounded by correlative losses from certain financial hedging arrangements. For example, as noted above, Britannia stood to suffer a loss on the Armada FFA if charter index rates fell below $71,250 between July and December 2008; in August 2008, the index rate was $51,965.78, and by October, it had fallen to $11,429.98. As a result, by the end of October, Britannia had lost almost $3.25 million under the terms of the Armada FFA alone.

In a Form 6-K report update filed on October 28, 2008, entitled "Britannia Bulk Holdings Inc. Provides Operational and Financial Update" (the "October Update"), Britannia acknowledged that it was experiencing "severe financial difficulties" and that it expected to announce "a significant net loss" for the three months ending September 30. The October Update stated that the primary driver for this loss was the "substantial decreases in dry bulk charter rates that occurred during the period." The October Update also identified several other factors that "exacerbated" this loss, however, including: (1) an increase in the Company's chartered-in capacity, at a time when the market demand for capacity was significantly decreasing; (2) a recently concluded bunker fuel hedge that had become "uncompetitive"; and (3) losses from FFAs. With respect to these FFA losses, the Company specifically noted:

Since July 2008, the Company bought FFAs that appear not to have been purchased to hedge identifiable ship or cargo positions. This resulted in the Company being more exposed to the falling charter rates and reduced overall demand for dry bulk shipping services than it would have been if its historic practice of using FFAs as economic hedges had been followed. In marking these FFAs to market, the Company expects to recognize a significant realized loss for the three months ended ...

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