The opinion of the court was delivered by: Sidney H. Stein, U.S. District Judge.
This securities fraud action against Crystallex International Corporation and certain of its officers and directors arises from the company's failure to obtain an environmental permit necessary to mine for gold in Venezuela. Plaintiffs and a putative class of Crystallex shareholders seek to recover losses resulting from defendants' allegedly fraudulent misrepresentations about the likelihood Crystallex would obtain the permit from the Venezuelan authorities. Plaintiffs assert claims pursuant to Sections 10(b), 20(a) and 20A of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), 78t-1(a), and Securities and Exchange Commission Rule 10b-5 promulgated pursuant to that statute, 17 C.F.R. § 240.10b-5.
Defendants have moved to dismiss the amended complaint for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). Because the amended complaint fails to plead facts sufficient to raise a strong inference of scienter on the part of defendants, that motion is granted and the complaint is dismissed.
The following facts are taken from plaintiffs' Amended Class Action Complaint ("Complaint") and are assumed to be true for purposes of this motion.
On April 7, 2009, this Court appointed Andrew J. Colace, Thomas E. Montesion, Frederic Bouin, John D. Stone and Daniel DeNeve to act as lead plaintiffs in this securities class action. Those individuals purchased Crystallex common stock between March 27, 2006 and April 30, 2008 (the "Class Period"). (Am. Class Action Compl. ("Compl.") ¶¶ 20, 28.) They seek to represent a class of all those who bought Crystallex stock during the Class Period. (Id. ¶ 28.) Daniel T. Russo, another purchaser of Crystallex shares during the Class Period, is also a named plaintiff. (Id. ¶ 20.)
Defendant Crystallex International Corporation is a gold mining company headquartered in Toronto, Canada. (Id. ¶ 21.) Its shares trade on the American Stock Exchange. (Id. ¶ 18.)
Todd Bruce, Gordon M. Thompson, Robert A. Fung and Marc J. Oppenheimer constitute the "Individual Defendants" and each was the Chief Executive Officer ("CEO") of Crystallex at various times. Bruce was Crystallex's CEO from 2003 until early 2007. (Id. ¶ 22.) Thompson replaced Bruce as CEO and held that office until June 3, 2008. (Id. ¶ 23.) Thompson remains a director of the company. (Id.) Fung has been Crystallex's chairman since 1998 and took over from Thompson as CEO in 2008. (Id. ¶ 25.) Oppenheimer has been a Crystallex director since 1995 and served as CEO between 1995 and 2003. (Id. ¶ 24.)
B. Crystallex and the Las Cristinas Permit Application
Located in the Venezuelan state of Bolivar, the Las Cristinas gold deposit potentially contained more than 20.8 million ounces of gold. (Id. ¶¶ 5, 35.) In September 2002, CrystalleX entered into a "Mining Operation Agreement" with Venezuela's state-owned mining enterprise, the Corporacion Venezolana de Guayana ("CVG"), that granted the company the right to conduct mining operations at Las Cristinas. (Id. ¶¶ 3-4.) The contract granted Crystallex no ownership or other rights to the deposit. (Id. ¶ 4.) Crystallex's interest in developing Las Cristinas was its principal asset. (Id. ¶ 21.)
Pursuant to the Mining Operation Agreement, Crystallex's right to mine was contingent on obtaining the necessary permits from the Venezuelan government and funding social welfare projects in the Las Cristinas region. (Id. ¶ 37.) Chief among the necessary permits was an environmental one, the "Authorization to Affect Natural Resources," a.k.a. the "Final Permit." (Id.) The Vice Minister for the Ministry of the Environment and Natural Resources ("MARN")*fn1
was responsible for issuing the Final Permit. (Id. ¶ 4.) C. The Alleged Fraud
Plaintiffs allege that throughout the Class Period defendants issued false and misleading statements regarding the status of Crystallex's application for the Final Permit, all the while knowing or recklessly disregarding Crystallex's dwindling or nonexistent prospects for success. Defendants' purported fraud allegedly caused plaintiffs to purchase Crystallex stock at artificially inflated prices. When MARN ultimately denied Crystallex's request for the Final Permit in April 2008, Crystallex's common stock lost 45% of its value. (Id. ¶ 150.)
1.Crystallex indicates the permit application is complete
In March 2006, Venezuela's mining ministry approved the technical, economic and financial "Feasibility Study" for the Las Cristinas project. (Id. ¶ 65.) Bruce, then CEO, touted this development in a March 26, 2006 press release, explaining that the mining ministry's approval "represents the crucial cornerstone for the development of the Las Cristinas gold project and also represents the final external input required by the Ministry of the Environment and Natural Resources ("MARN") to complete the permitting process. We anticipate receiving this MARN permit in the near term . . . ." (Id.) On March 31 and May 11, 2006, defendants repeated the statement that mining ministry's approval was the "last external input" MARN required to complete its administrative process. (Id. ¶¶ 68, 71.) According to plaintiffs, these statements were false and misleading because MARN "would require many other 'external inputs' from Crystallex before the Final Permit might be issued, thus increasing the risk that the Final Permit would be delayed or denied." (Id. ¶ 67.)
2.Crystallex reacts to potential changes in Venezuela mining laws
Later in 2006, various news outlets reported on potential nationalization of mining in Venezuela whereby the government would own a majority-stake in "mixed" joint ventures with private firms. (Id. ¶ 73.) In response to these reports, Bruce told investors in a June 13, 2006 press release that Crystallex had "a valid and binding contract to operate the Las Cristinas project, which is 100% owned by the Nation of Venezuela." (Id. ¶ 75.) A news article nine days later quoted Bruce as deploring the "sensationalist headlines" about Venezuela's policy changes. (Id. ¶ 77.) In Bruce's view, Venezuela was moving away from granting mining concessions in favor of operating contracts such as the one awarded Crystallex. (Id.)
Plaintiffs fault defendants for not "showing concern for the changing attitude and climate in Venezuela toward mining." (Id. ¶ 78.) In their view, "the Company's rights, if any, were extremely tenuous and uncertain given the change in the political climate." (Id. ¶ 76.)
3.Crystallex sees no impediments to issuance of the Final Permit
Beginning in February 2007, Crystallex and its officials repeatedly stated that they saw no obstacles to obtaining the Final Permit, which they expected would issue shortly. For instance, in a February 1, 2007 press release, Fung, the company's chairman, said "Crystallex is not aware of any impediments to granting the permit" and "Crystallex expects they [Venezuelan officials] will proceed quickly with the issuance of the permit." (Id. ¶ 86.) Thompson, the company's recently-named CEO, was quoted in a March 6, 2007 news article stating that Crystallex was "[c]loser than [it had] ever been before" to getting a permit and that "[t]here's nothing in the way of it happening." (Id. ¶ 88.) Later in March 2007, Thompson described MARN's approval of another gold mining company's permit application for the Las Brisas mine as "a clear signal that Venezuela is fulfilling its promise to advance mining projects. Crystallex is in the final stages of environmental permitting for the Las Cristinas projects and looks forward to the timely conclusion of the permitting process at MARN." (Id. ¶ 92.) In a subsequent article, apparently on the website Vheadline.com, Thompson elaborated on the relationship between the project MARN had approved and Las Cristinas: "One can't go ahead until the other goes ahead, and we're hoping that very soon after Easter we should be in the very same position" as the other project. (Id. ¶ 93.) Defendants reiterated that Crytallex was in the "final" stages of the permitting process on multiple occasions. (Id. ¶¶ 94, 99.)
Plaintiffs contend that these statements gave the false and misleading impression that "receipt of the Final Permit was at hand" (id. ¶ 87), when in reality defendants knew or should have known "that the Venezuelan government had several problems with Crystallex's permit application" (id. ¶ 89). Voicing these apparent concerns was Sergio Rodriguez, the director of planning at MARN, who told the news agency Reuters that Crystallex had "not acted responsibly in drawing up the project so as to minimize environmental objections," specifically faulting Crystallex's plan for failing to take advantage of copper found in the gold deposit and for lacking a plan to destroy cyanide used in the mining process. (Id. ¶ 96.) In response to these comments, defendants issued what plaintiffs characterize as a "false exculpatory statement" in which Crystallex stated that senior MARN officials, including Rodriguez, told the company that the Reuters story did "not reflect the statements made by Mr. Rodriguez" and that MARN would contact Reuters for a correction. (Id. ¶ 97.) MARN did not contact Reuters to correct the story, but Reuters did follow up with Rodriguez, who "stood by his position that Crystallex had to alter the project," but added that "the uproar around his comments was based on a misunderstanding that Crystallex had to draw up a new project." (Id. ¶ 96.)
4.Crystallex says that all the requirements for the permit have been met
On June 14, 2007, Crystallex issued a press release that MARN had approved the company's Environmental Impact Study ("EIS") for the Las Cristinas project. (Id. ¶ 101.) MARN communicated this approval to CVG and explained the need for the posting of a bond and the payment of certain taxes for the issuance of the Final Permit, both of which Crystallex subsequently did. (Id.) According to the press release, "CVG confirmed that the approval of the EIS, the posting of the bond and the payment of the taxes represent the final and conclusive step in the procedure for the issuance of the Environmental permit." (Id.) In the release, CEO Thompson said Crystallex had "complied with the very final stage of the procedure for receipt of the environmental permit." (Id.) Over the next nine months, defendants made statements to similar effect. (Id. ¶¶ 102, 104, 106, 108, 110, 112.) For example, a company official was quoted in a November 2007 Reuters article saying, "All of the requirements are covered . . . the permit should be assigned to us at any moment." (Id. ¶ 106.) And Thompson stated in a February 28, 2008 press release that "all the requirements for the issuance of the Las Cristinas Environmental permit had been fulfilled" and "[n]o impediments have been raised in discussions with Government officials, and they've recently confirmed we're in good standing for the issuance of the permit." (Id. ¶ 110.)
These statements were false and misleading, in plaintiffs' view. The Complaint alleges that defendants "should have had serious concerns and questions about the viability of the Las Cristinas project." (Id. ¶ 103.) The delay in the receipt of the permit even after Crystallex "had supposedly been told it was in the 'final steps in the process for the issuance of the [Final] Permit'" in June 2007 "was a red flag to Crystallex management that the environmental issues that the MARN [via Sergio Rodriguez] raised in March 2007 had not been resolved." (Id.) So too were the comments of Sergio Rodriguez at an October 2007 hearing before a committee of Venezuela's National Assembly. (Id. ¶ 105.) Plaintiffs allege that [u]nlike the other participants at this hearing, Sergio Rodriguez did not testify that all requirements for the issuance of the Final Permit had been met. On the contrary, the minutes of the hearing state that he "referred, in general, to environmental aspects" of the project. The minutes also note under Rodriguez's name that "In a second exchange of ideas, the participants in the meeting agreed to study a proposal based on the endogenous development of the region [endgeno de la region], with an integral view that includes the people's participation, taking the Community Councils as a basis. This proposal should provide for sustainable development and have a marked social participation. (Id. (bracketed material in original).) According to plaintiffs, this demonstrated that "the requirements for receiving the Final Permit were still not met." (Id.)
The Complaint also alleges "[t]he fact that the Company might be subject to serious delays in obtaining the Final Permit was well known for many years to Crystallex and its management." (Id. ¶ 125.) Plaintiffs base this on the company's affiliation with Enrique Tejera-Paris, a Crystallex board member since 1997 and someone who apparently was involved in a failed 2002 coup against Venezuelan President Hugo Chavez. (Id. ¶¶ 126, 127.) A former Crystallex employee told VHeadline.com in December 2008 that "it was already made known to Crystallex several years ago" that Tejera-Paris's involvement with the company "made it impossible for the CVG/Crystallex deal to go through." (Id.)
D. MARN Denies the Final Permit
Crystallex announced on April 30, 2008 that MARN had denied its request for the Final Permit. (Id. ¶ 115.) The company's press release stated that the denial, which was communicated to CVG, cited "sensitivities surrounding indigenous peoples, the small miners and the environment in the area generally known as the Imataca Forest Reserve," which contains the Las Cristinas deposit. (Id.) Crystallex noted that the denial "appears to be in conflict with the Las Cristinas EIS approval, Construction Compliance Bond Request and Environmental Tax request issued by [MARN] (that Crystallex posted and satisfied last summer)." (Id.) Crystallex's share price fell from $1.68 to $0.91 on the news. (Id. ¶ 116.) Previously, the stock had traded above $6 at points during the Class Period. (Id.) Crystallex later revealed that the permit was denied on April 14, 2008. (Id. ¶ 147.)
Plaintiffs allege three causes of action pursuant to three different sections of the Securities Exchange Act of 1934.
Count I charges all defendants with violating Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. (Id. ¶¶ 156-60.) Section 10(b) prohibits the use of "any manipulative or deceptive" practice "in connection with the purchase or sale of any [registered] security." 15 U.S.C. § 78j(b). Rule 10b-5 specifies that it is "unlawful for any person . . . [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading . . . in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5.
Plaintiffs contend that defendants, with knowledge of or reckless disregard for the truth, disseminated or approved during the Class Period the false and misleading statements described above. (Compl. ¶ 158).
Plaintiff Daniel Russo, who acquired Crystallex shares on April 21 and 24, 2008, alleges in Count II that defendant Oppenheimer violated Section 20A of the Exchange Act. (Id. ¶¶ 161-67.) Pursuant to Section 20A, any person who violates the Exchange Act or its rules and then trades in the security at issue while in possession of material, nonpublic information is liable to any person who contemporaneously purchased that security. 15 U.S.C. § 78t-1(a). The Complaint alleges that Oppenheimer sold 313,658 shares of Crystallex stock on April 21, 2008 knowing what the market did not: that Crystallex had been denied the Final Permit. (Compl. ¶¶ 147, 163.)
All plaintiffs join in Count III, which accuses the Individual Defendants of violating Section 20(a) of the Exchange Act. (Id. ¶¶ 168-70.) That section creates liability for persons who control others who violate the Exchange Act or its rules. 15 U.S.C. § 78t(a). Plaintiffs allege that by virtue of their power and authority over Crystallex, the Individual ...