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Villella v. Chemical & Mining Co. of Chile Inc.

United States District Court, S.D. New York

March 28, 2017

MEGAN VILLELLA, Individually and on Behalf of All Others Similarly Situated, Plaintiff,


          Edgardo Ramos, U.S.D.J.

         This action is brought as a putative class action against Chemical and Mining Company of Chile Inc. (a/k/a Sociedad Química y Minera de Chile S.A.) (“SQM” or “Defendant”) and individual SQM executives[1] alleging violations of Section 10(b) of the Securities Exchange Act and Rule 10b-5, promulgated thereunder. Before the Court is Defendant's motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) on the basis of forum non conveniens, or alternatively, for failure to state a claim.

         For the reasons set forth below, Defendant's motion is DENIED in part and GRANTED in part.

         I. BACKGROUND[2]

         A. The Parties

         SQM is a producer and worldwide distributor of specialty fertilizers and industrial chemicals, based in Chile. Corrected Consolidated Complaint for Violation of the Securities Laws (“Consolidated Complaint”) ¶ 18. SQM's Series B American Depository Shares (“shares”) have been listed on the New York Stock Exchange (“NYSE”) since 1993, under the ticker symbol “SQM.” Id. This class action is brought on behalf of all persons who purchased SQM's shares traded on the NYSE between June 30, 2010 and June 18, 2015 (the “Class Period”). Id. at ¶ 1. Lead Plaintiff, the Council of the Borough of South Tyneside, acting in its capacity as the Administering Authority of the Tyne and Wear Pension Fund (“Plaintiff”), is located in South Shields, Tyne and Wear, England. Id. at ¶ 17. Plaintiff alleges that it purchased a total of 376, 521 shares and suffered damages in excess of $4.4 million during the Class Period as a result of Defendant's securities violations. Id.

         B. Factual Background

         On February 24, 2015, the Attorney General of Chile (“AG”) announced an investigation of a bribery and tax-evasion scandal involving the financial firm Banco Penta, which embroiled numerous politicians across the country's political spectrum. Id. at ¶¶ 2, 5. The scheme involved the creation of fake expense receipts used to lower Banco Penta's taxable income, all for the purpose of funding illegal payments to political candidates. Id. Two days later, on February 26, 2015, SQM issued a press release divulging that an extraordinary Board meeting had been held at the request of SQM's Chairman to “analyze” this escalating political scandal. Id. at ¶ 25. The Board resolved at the meeting to establish a special committee (“Ad-Hoc Committee”) comprised of three SQM Board members and the New York office of the law firm Shearman & Sterling, to conduct an investigation. Id. at ¶¶ 9 n.1, 25. Around the same time, the press started to report that SQM was being investigated by the AG for misconduct similar to Banco Penta's- using fake invoices and phony services to illegally fund politicians. Id. at ¶ 23.

         On March 11, 2015, SQM disclosed that its Board would meet the next day to evaluate a request from the Public Prosecutor that SQM deliver accounting records and other information in connection with the investigation into the political contributions scandal. Id. at ¶¶ 26-27. After the Board meeting on March 12, 2015, SQM issued a press release stating that the Board resolved (i) to request an independent report with respect to a March 6, 2015 letter from the AG requesting certain information from SQM, (ii) to schedule another extraordinary Board meeting on March 16, to analyze the independent report and decide whether to comply with the AG's request, (iii) to ratify its willingness to cooperate with the Public Prosecutor's investigation and request for information, and (iv) to inform the AG of the Board's plan in response to his March 6, 2015 letter. Id. at ¶ 27. Four days later, on March 16, SQM issued a subsequent press release announcing that the Board had unanimously voted to terminate its Chief Executive Officer (“CEO”) Patricio Contesse, who had attempted to block the Board's decision to turn the information over to the IRS. Id. at ¶ 32. The Board subsequently voted to designate Patricio Solminihac Tampier (“Solminihac”) as the new CEO of SQM. Id.

         On March 18 - just two days after the press release - SQM announced that three SQM Board members from the Canadian stakeholder Potash Corporation of Saskatchewan, Inc. (“Potash Directors”) - SQM's largest noncontrolling shareholder - had resigned from the Board. Id. at ¶¶ 210-11. SQM disclosed in a press release that day that the Potash Directors had resigned because they could not ensure an adequate investigation of SQM and that their “emphatic requests” that SQM cooperate fully with the authorities had been rejected by a majority of the Board. Id. at ¶ 36. Plaintiff alleges that as a result of SQM's disclosures, as of March 17, 2015, SQM shares dropped more than 15% from its price on February 25, 2015. Id. at ¶ 11. SQM shares also fell an additional 15% after the Potash Directors' resignation. Id.

         In late March and early April 2015, both the Chilean tax regulatory agency (a/k/a Servicio de Impuestos Internos) (“SII”) and the securities regulator (Superintendencia de Valores y Seguros) (“SVS”) initiated criminal proceedings against SQM Board members and representatives. The five individuals were criminally charged with, among other offenses, participation in tax fraud and “failure to provide the market with information that could be relevant for investment decisions” in violation of the Chilean corporations code. Id. at ¶¶ 39, 45. The charges were brought based on numerous declarations from the recipients of SQM's payments, who admitted that they submitted invoices to SQM without having provided services. Id. at ¶¶ 47, 50, 56. The investigation also led to an admission by SQM's Chief Financial Officer (“CFO”) Ricardo Andres Ramos Rodriguez that SQM made 1, 000 payments to companies without any consideration of whether they were based on services rendered. Id. at ¶ 57. In September, the SII updated its complaint against Contesse to include allegations that he authorized the submission of 91 additional false invoices for expenses totaling more than CLP 309 million.

         On December 15, 2015, SQM filed a Form 6-K with the Securities Exchange Commission (“SEC”) summarizing the findings of the Ad-Hoc Committee's investigation. The Committee found that payments were made on invoices that lacked supporting documentation, that SQM's books did not accurately reflect questioned transactions and that SQM lacked sufficient controls over expenses managed by Contesse. Id. at ¶ 75. The Committee also stated that it found no evidence demonstrating that the payments were made in order to induce a public official to act or refrain from acting. Id. at ¶ 76. Plaintiff nevertheless claims that the “illegal acts perpetrated by SQM's top executives acting on [SQM's] behalf, extended its sphere of influence throughout Chile's political system.” Id. at ¶ 78.

         C. The Disclosures

         Throughout the Class Period, SQM filed financial reports with the SEC and issued press releases detailing the company's financial performance, including its revenue, gross margins, and earnings per share. Id. at ¶ 80. In its Annual Reports filed during the Class Period, SQM also made the following representations:

Legal Compliance
There are currently no material legal or administrative proceedings pending against the Company with respect to any regulatory matter, except as discussed under ‘Safety, Health and Environmental Regulations' below, and we believe that we are in compliance in all material respects with all applicable statutory and administrative regulations with respect to our business.
Internal Controls and Procedures
Under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, pursuant to Exchange Act Rules 13(a)-15(b), as of the end of the period covered by this Annual Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective in providing reasonable assurance that material information is made known to management and that financial and non-financial information is properly recorded, processed, summarized and reported.
Code of Ethics
We have adopted a Code of Business Conduct that applies to the Chief Executive Officer, the Chief Financial Officer and the Internal Auditor, as well as, to all our officers and employees. Our Code adheres to the definition set forth in Item 16B of Form 20-F under the Exchange Act.

         The Annual Reports also assured its shareholders that its financial statements were prepared in accordance with Chilean Generally Accepted Accounting Principles (“GAAP”) and reported net and paid income tax pursuant to the U.S. GAAP. See e.g., id. at ¶¶ 86-87.

         In its 2014 Annual Report (filed on May 18, 2015), SQM reported a contract dispute with the Chilean government organization Corporacion de Fomento de la Produccion de Chile (“Corfo”) which had issued SQM a lease to mine the valuable Salar de Atacama region - the source of 40% of SQM's revenue. Id. at ¶¶ 11, 193. SQM explained that any breaches of the lease were technical and that Corfo was allowed to terminate the agreement only for a material breach. The disclosure further stated that:

SQM Salar[3] in consultation with external counsel believes that it is likely it will prevail in the arbitration proceeding. However, an adverse ruling awarding damages sought by Corfo or permitting early termination of the Lease Agreement would have a material adverse effect on our business, financial condition, cash flows and results of operations. We cannot assure you that Corfo will not use this arbitration proceeding to seek to renegotiate the terms of the Lease Agreement in a manner that is not favorable to SQM Salar. Although the parties are currently discussing potential resolutions, we cannot assure you such discussions will be successful or that Corfo will not take other actions in the future in relation to the Lease Agreement that are contrary to our interests.

Id. at ¶ 193.

         Plaintiff alleges that SQM's disclosures were materially false and/or misleading, because they failed to disclose: (i) that money from SQM was illegally channeled to bribe Chilean politicians and political parties, (ii) that SQM had filed fictitious tax receipts in order to conceal these bribe payments, (iii) that SQM lacked adequate internal controls over its financial reporting, and (iv) that, as a result, SQM's financial statements were materially false and misleading and not prepared in accordance with applicable accounting principles. Id. at ¶¶ 2-12. Plaintiff further claims that SQM's negotiation with Corfo was “put at risk” at least in part by SQM's inadequate corporate governance. Id. at ¶ 11.

         On January 13, 2017, SQM agreed to pay a $15 million criminal penalty and $15 million civil penalty to resolve parallel criminal and civil cases brought by the U.S. Department of Justice and SEC, respectively. (Doc. 64, Ex. A-E) In the deferred prosecution agreement (“DPA”) with the Department of Justice, SQM admitted that it “knowingly and willfully failed to maintain internal accounting controls, ” that Contesse authorized and directly paid funds to Chilean politicians and candidates in violation of “Chilean tax law and/or campaign finance limits, and caused payments of those funds to be falsely recorded in the SQM's books and records.” (Doc. 64, Ex. B) The SEC Order similarly stated that SQM made improper payments to Chilean politicians and political candidates and that the “payments were not supported by documentation that those vendors provided services to SQM. Virtually all of the improper payments” were directed and authorized by a senior SQM executive.” (Doc. 64, Ex. E).

         D. Procedural Background

         On March 19, 2015 and April 14, 2015, two separate class actions were filed - the Villella action and the Molinaro action, respectively - seeking damages for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5. (Doc. 1); (No. 15 Civ. 2884, Doc. 1). As required by the Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. §78u-4(a)(3)(A), Villella's counsel published notice over Globe Newswire on March 19, 2015, announcing that a securities class action had been filed against SQM and the individual defendants, and advising SQM shareholders that they had until May 18, ...

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