Second Circuit Summarily Affirms District Court’s Dismissal Of Certain Securities Fraud Claims Against Mining Company, But Vacates District Court’s Decision To Reject Motion For Reconsideration Of Plaintiff’s “Abandoned” Claim
On August 6, 2020, the United States Court of Appeals for the Second Circuit affirmed in a summary order the judgment of the district court that granted defendants’ motion to dismiss certain claims in a putative securities class action, while vacating the district court’s decision on plaintiff’s motion for reconsideration. Colbert v. Rio Tinto PLC, et al., No. 19-2711 (2d Cir. Aug. 6, 2020). Plaintiff alleged that defendants—a mining company (“the Company”) and certain of its officers—violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder, by making materially false or misleading statements with respect to certain business investments. The Second Circuit affirmed the dismissal in a summary order, but reversed the denial of the motion for reconsideration, holding that the district court incorrectly refused to reconsider the determination that plaintiff had abandoned his claim by not explicitly opposing dismissal of the claim. Summary orders do not have binding precedential effect.
Plaintiff alleged five material misstatements concerning the Company’s purchase of coal mining rights in certain mines in Mozambique that initially appeared promising, but presented very little actual value, causing the Company to record a $3 billion impairment due to “transportation and coal ratio reasons.” Specifically, according to plaintiff, the Company’s valuation of the purchases hinged on the profitability of the venture based on an assumption that 60% of the recoverable coal from the region would be of the valuable variety and 30% would be of a less profitable variety. The Company also allegedly assumed that despite the remoteness of the mines, the Company could transport the majority of the coal produced each year by barge down the Zambezi River. The district court, however, dismissed plaintiff’s claims, holding that plaintiff had abandoned one claim concerning the CEO’s statement that the location of the mines “represented ‘a long-term opportunity with the potential to grow’” by failing to oppose its dismissal. Notably, the district court held this same allegation was actionable in a separate parallel SEC proceeding involving the Company. The district court also held that plaintiff failed to plead scienter with respect to the Company’s claims in its November 2012 Form 6-K that production was “ramp[ing] up” and that the Company’s presence in Africa was “growing,” because plaintiff failed to identify the alleged speaker. Further, the district court held that the CEO’s alleged statements regarding barging were not misleading given the context in which they were made, and that certain representations in the Company’s February 2013 Form 8-A filing also were not misleading because corrective disclosures had been made. Plaintiff moved for reconsideration of his claim regarding the alleged “long-term opportunity” misstatement in light of the district court permitting a similar claim to proceed in the parallel SEC action, but reconsideration was denied. Plaintiff only appealed the alleged misstatements in the Form 6-K and those concerning the “long-term opportunity” characterization of the mines.
The Second Circuit affirmed the district court’s dismissal of the alleged misstatements in the Form 6-K on the grounds that the complaint failed to plausibly allege that the statements in question were either false or misleading. In particular, the Court noted that the statements regarding the growth of the Company’s investments and involvement in Africa were in fact truthful given the Company’s investment portfolio, and further noted that plaintiff failed to allege the “ramp up” statements were misleading because plaintiff did not allege the production work was not increasing at the mines. Plaintiff had argued that the district court erred because, although he failed to allege the identity of the speaker, he should have been permitted to rely on the group pleading doctrine, which defendants argued was impermissible under the PSLRA and the Supreme Court’s holding in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011). The Court observed that although it had previously “endorsed the doctrine,” a circuit split on this issue existed, and the Court has since “pulled back from its most expansive construction,” as the Supreme Court’s decision in Janus has given it “reason to reexamine [its] precedent.” But the Court declined to “reach the question of the continuing viability of group pleading because [it] conclude[d] that the complaint” failed to adequately allege falsity.
Separately, the Second Circuit reversed the district court’s rejection of plaintiff’s motion for reconsideration as to the “long-term opportunity” statements, finding that under the “unique and limited procedural circumstances presented by this case,” the district court abused its discretion. The Court determined that because the district court subsequently determined in the parallel SEC action that such statements were actionable, and because “the district court had already ruled that the exact same factual allegation was sufficient to survive a motion to dismiss in a related proceeding involving the same defendant . . . and the same legal claim,” its rejection of plaintiffs’ motion to reconsider would result in “manifest injustice” to plaintiff. The Court emphasized, however, that despite its ruling on this issue, the Court “take[s] no position on the correctness of the district court’s ruling in the parallel SEC case that the ‘long-term opportunity’ statement was sufficient to survive a motion to dismiss.” The Court stressed that its decision was not that the district court should “permit” plaintiff’s claim on these statements to go forward, but “merely that, in these unique circumstances, the district court abused its discretion on the motion for reconsideration by failing to address the adequacy of [plaintiff’s pleading] . . . having already ruled that nearly identical allegations in the SEC action were adequately pled.” The Second Circuit added that on remand, the district court “may [still] conclude that the claim still fails due to . . . pleading requirements specific to private securities actions and not applicable in the SEC action.”
As a result, the Second Circuit vacated and remanded the district court’s denial of the motion for reconsideration, and also vacated and remanded the dismissal of the Section 20(a) claims to the extent that dismissal was dependent on the dismissal of plaintiff’s Section 10(b) claims.