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January 15, 2013

Mining Company Shareholders Failed to Show Fraud Based on Either Motive or Recklessness

By Rodney F. Tonkovic, J.D.

The inference of scienter in a fraud action brought against a mining company was not strong and was less compelling than plausible alternative inferences concerning the defendants' intent, a district court held. The court accordingly granted a motion to dismiss the complaint's securities fraud claims and also concluded that leave to amend was inappropriate on the grounds of futility (In re Agnico-Eagle Mines Ltd. Securities Litigation, January 14, 2013, Oetken, J.).

This action arose out of Agnico-Eagle Mines Ltd.'s (Agnico) activities at a gold mine in Quebec. In late 2011 Agnico announced that it was suspending mining and gold production at the mine due to structural issues affecting the mine's safety and stability. The value of Agnico stock subsequently dropped nearly 25 percent within two days, wiping out approximately $2.2 billion of shareholder equity. The shareholders alleged that Agnico and its CEO and COO made a series of false statements and omissions about the situation at the mine.

The Quebec mine, known as Goldex, was Agnico's top producer, and the company repeatedly touted its value in conference calls and public filings. In March 2010 Agnico set off a "mega blast" at the mine which was larger than planned and which resulted in water flow into the mine and the surface soil above the mine subsiding. The damage also affected the water supply of nearby residents, who had to be connected to the Goldex water supply as their wells dried up. For the remainder of the year, Agnico issued press releases stating that mining at Goldex was proceeding at a "steady state" and that operations there would be expanding.

The water issues and subsidence were noted in a mid-2011 press release that also noted remediation efforts and forecasted an increase in production. In October 2011, however, Agnico announced that it would immediately be closing Goldex until the subsidence and seepage issues and their remedies could be investigated. Analysts and the market responded negatively to these disclosures. Shortly thereafter, the Quebec Environmental Ministry released a report indicating that the mine had been experiencing ground settling and water seepage and that these problems had been an issue for the previous two years.

The shareholders argued that the defendants touted Agnico as a growth company in an effort to boost its stock price, raise capital, and acquire other companies and that this showed a strong inference of scienter under the "motive and opportunity" theory. The court disagreed, finding insufficient facts to support a strong inference of fraudulent intent. "The motive alleged by Plaintiffs boils down to a description of the methods by which Agnico pursued its business strategy and economic self-interest," the court wrote, and these ordinary motives are too general to establish scienter. Moreover, the shareholders alleged no facts showing that Agnico was unable to finance any of the acquisition that occurred during the relevant period, that it lacked cash, or that the officers believed the situation at Goldex to be a threat to the acquisitions.

The court then rejected the shareholders' argument that the CEO and COO actually knew, or should have known, information about Goldex that they deliberately or recklessly failed to disclose. The shareholders maintained that, due to Goldex's status as top producer, the officers treated Goldex with "special solicitude" and were thus likely to be aware of what was happening there. To make statements about the steady state of operations and expanded operations, then, would have been at least reckless, the shareholders asserted.

The court stated that "the essential flaw in Plaintiffs' position is that it would impose too high a burden of clairvoyance and continuous disclosure on corporate officials." According to the court, the argument that the officers recklessly failed to recognize and disclose the significance of the information in their possession amounted to fraud by hindsight. The court explained that the facts alleged most strongly supported an inference that the officers used the information they had to weigh the threats to the mine's viability and believed that they were not obliged to publicly disclose the problems at the time. Only by hindsight was the risk significant, the court went on, because there were no facts suggesting that the defendants knew, or should have known, before October 2011 that the problems were of such severity that the mine would have to be closed.

Finally, the court concluded that the defendants were not obligated to make greater and more continuous disclosure than they did. The defendants were "entitled to devote a reasonable amount of time to investigation and remediation before disclosing an assessment of the Goldex situation any gloomier than that contained in its July and October 2011 disclosures." In the Second Circuit, a good-faith effort by defendants to get information and the ordering of an investigation as soon as a problem is learned of will weaken the inference of scienter.

The case is No. 11 Civ. 7698 (JPO).

Attorneys: Ann Meredith Lipton, David Lloyd Wales and Sean K. O'Dowd (Bernstein Litowitz Berger & Grossmann LLP) for Forsta AP-Fonden, Jerome Stone and Chris Hastings. David Avi Rosenfeld (Robbins Geller Rudman & Dowd LLP) for City of Brockton Retirement System. Joseph R. Seidman (Bernstein Liebhard, LLP) for Randall Humphreys. Irwin Howard Warren and Miranda Saskia Schiller (Weil, Gotshal & Manges LLP (NYC)) for Agnico-Eagle Mines Ltd., Sean Boyd and Eberhard Scherkus. Curtis Victor Trinko (Law Offices of Curtis V. Trinko, LLP) for Robert Lacey. Timothy John MacFall (Rigrodsky & Long, P.A.(LIS)) for Brent Barrett, Robert Ver Schave and Ernest Schalk. Richard William Gonnello (Faruqi & Faruqi, LLP) for Lance Clark.

Companies: City of Brockton Retirement System; Agnico-Eagle Mines Ltd.

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