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In re Turquoise Hill Resources Ltd. Securities Litigation

United States District Court, Southern District of New York

December 16, 2014

IN RE TURQUOISE HILL RESOURCES LTD. SECURITIES LITIGATION

OPINION AND ORDER

LORNA G. SCHOFIELD, United States District Judge.

This case is based on the allegation that Defendants "reported materially inflated revenue figures, " causing the stock of Turquoise Hill Resources Ltd. ("Turquoise Hill") to trade at "artificially inflated prices." Lead Plaintiff Petr Nemec asserts his claims individually and on behalf of similarly situated shareholders of Turquoise Hill who purchased the company's common stock between March 28, 2011 and November 14, 2013, inclusive (the "Class Period"). The defendants are Turquoise Hill, and five individual defendants who are current and former officers of the company. The Consolidated and Amended Complaint (the "Complaint") contains two counts: (1) securities fraud in violation of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 and (2) controlling person liability based on section 20(a) of the Securities Exchange Act. Defendants move to dismiss the Complaint in its entirety. For the following reasons, their motion is granted.

BACKGROUND

The facts below are taken from the Complaint and assumed to be true for purposes of this motion. The Court also considers statements or documents incorporated into the Complaint by reference and legally required public disclosure documents filed with the Securities and Exchange Commission. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007).

I. Parties

Known as Ivanhoe Mines Ltd. until August 2012, Defendant Turquoise Hill is a mineral exploration and development company headquartered in Vancouver, Canada. It holds mineral resource properties around the world. The common stock of Turquoise Hill is listed on the NYSE under the ticker symbol "TRQ."

Turquoise Hill owns a 57.6% interest in a company called SouthGobi Resources Ltd. ("SouthGobi") whose revenue recognition practices are at the center of this lawsuit. SouthGobi operates a coal mine in Mongolia, is headquartered in Canada, and its stock is listed on the Toronto and Hong Kong stock exchanges. SouthGobi, with its wholly-owned subsidiary SouthGobi Sands LLC ("Sands"), a company registered in Mongolia, owns and operates the Ovoot Tolgoi Project ("Ovoot"), a coal mine located in Mongolia. The coal mine primarily sells to customers in China. According to Defendants, SouthGobi issues its own audited financial statements. Its financial results are also consolidated with those of Turquoise Hill, due to the latter's majority ownership.

In addition to Turquoise Hill, the Complaint names five individual defendants who served as officers of Turquoise Hill during the relevant period. Defendant John Macken served as Turquoise Hill's Chief Executive Officer until October 2010 and as President until April 2012; he also served as SouthGobi's Chairman from June 2007 to October 2009 and as director until April 2012. Defendant Robert Friedland served as Chief Executive Officer between October 2010 and April 2012. Defendant Kay G. Priestly has served as Chief Executive Officer since May 2012, as a director since February 2011, and as SouthGobi's Board Chairperson since September 2012. Defendant Tony Giardini served as Turquoise Hill's Chief Financial Officer and Senior Vice President until April 2012. Defendant Christopher Bateman has served as Turquoise Hill's Chief Financial Officer since May 2012.

II. Coal Mine Operations

Ovoot is a coal mine located approximately 40 kilometers from the Mongolia-China border. In 2010 through 2013, SouthGobi sold its Ovoot coal primarily to two or three large China-based customers. "During the fourth quarter of 2010, the full year 2011, and the first half of 2012, SouthGobi had structured certain of its contracts such that a customer's coal would be delivered to stockpiles in a stockyard located within Ovoot Tolgoi's mining license area [in Mongolia], the location specified in the contracts as the point of title transfer." Customers were responsible for picking up the coal from the Ovoot stockyard.

Until the second half of 2012, revenue was recognized at the time of delivery in the stockyard, even though "the risk of loss stayed with SouthGobi until the customer physically transported the coal off the Ovoot Tolgoi Mine property." The Complaint contains accounts from two confidential witnesses. Confidential Witness No. 1 ("CW1") worked as a financial reporting advisor at SouthGobi from November 2012 to June 2013. CW 1 stated that, during the Class Period, SouthGobi's "revenue was recognized based upon a constructive obligation on, and history of, the customer coming to the stockyard to pick up the coal, " rather than "whether the customer actually picked up the coal at the stockyard." CW 1 explained that, during periods where coal prices declined, customers became less inclined to pick up the coal that they had contracted to buy at a higher price.

Confidential Witness No. 2 ("CW2") was employed by Sands in Mongolia as a mining operations manager from May 2008 through March 2011. CW 2 stated that, due to difficulties with transportation at the China-Mongolia border, customers were often delayed in picking up coal. CW 2 also explained that "the risk of loss stayed with SouthGobi until the customer physically transported the coal off the [SouthGobi] property."

During the Class Period, SouthGobi faced myriad challenges operating in Mongolia. Transportation across the Mongolia-China border was troubled by infrastructural difficulties, particularly through the early portion of the Class Period. These transportation difficulties frequently delayed customers in picking up their coal at the stockyard. SouthGobi also faced other challenges, including volatility in the Chinese coal market and "ongoing investigations by the Mongolian authorities into corruption and tax evasion."

In the second half of 2012, SouthGobi conducted "a comprehensive strategic review of [its] business" and reviewed its revenue recognition policies. SouthGobi thereafter changed its revenue recognition practice, such that revenue would not be recognized until a customer collected the coal from the stockyard, instead of at the time the coal was delivered to the stockyard.

III. Press Releases, Annual Reports, and SEC Filings

The Complaint incorporates the text of press releases issued by Turquoise Hill from March 2011 through August 2013 as well as quarterly and annual reports filed with the SEC during that period. These documents announced Turquoise Hill's quarterly financial results and detailed, inter alia, (1) the role of SouthGobi as a significant part of Turquoise Hill's business, (2) ...


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