The US Court of Appeals for the Tenth Circuit recently affirmed the dismissal of a class action by investors in Gold Resource Corp. (GRC) alleging that the company and four of its officers violated Section 10(b) of the Securities Exchange Act and Rule 10b-5. The court held that there was insufficient evidence to draw a strong inference of scienter under the heightened pleading standard of the Private Securities Litigation Reform Act (PSLRA).
The claims against the defendants arose out of GRC’s mining operations in Mexico. Plaintiffs alleged that GRC and the defendants intentionally inflated GRC’s production statistics by counting provisional invoices for sales of ore as revenue. These invoices were revised when final samples of the ore were taken and, due to “significant” differences between the provisional invoices and the final sample, the actual sale price of the ore was significantly lower than the provisional invoice, forcing GRC to restate its earnings for the first two quarters of 2012. Additionally, plaintiffs alleged that the defendants knew of but “intentionally ignored” infrastructure problems that would affect production in the second quarter of 2012. The US District Court for the District of Colorado dismissed the suit for failing to plead scienter.
The Tenth Circuit affirmed, concluding that there were other equally plausible non-fraudulent explanations for the defendants’ conduct. In regard to the financial restatements, the court, emphasizing that Section 10(b) requires that the defendants’ statements be made at least recklessly, not merely negligently, determined that a generally accepted accounting principles (GAAP) violation alone was not sufficient for an inference of scienter without other violations or irregularities. The court regarded the defendants’ explanation, that the discrepancy in measurement taken in Mexico was not immediately known by the management and not disclosed until confirmed by an investigation, at least as plausible as plaintiffs’ inference of scienter. Further, the court rejected plaintiffs’ arguments regarding the infrastructure problems of the mines, emphasizing that mining difficulties were unforeseen by the defendants and an inherent risk of the industry.
In re Gold Resource Corp. Securities Litigation, No. 13-1323 (10th Cir. Jan. 16, 2015).