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In re Molycorp, Inc. Securities Litigation

United States District Court, D. Colorado

January 20, 2016

In re MOLYCORP, INC. SECURITIES LITIGATION

ORDER

RAYMOND P. MOORE, District Judge.

This uncertified securities fraud class action comes before the Court on Defendants Russ D. Ball ("Ball"); Ross R. Bhappu ("Bhappu"); Brian T. Dolan ("Dolan"); Mark Kristoff ("Kristoff"); Alec Machiels ("Machiels"); Charles R. Henry ("Henry"); Jack E. Thompson ("Thompson"); Mark A. Smith ("Smith"); James S. Allen ("Allen"); John F. Ashburn, Jr. ("Ashburn"); John L. Burba ("Burba"); J.P. Morgan Securities LLC ("J.P. Morgan"); Morgan Stanley & Co., LLC ("Morgan Stanley"); Knight Capital Americas, L.P. ("Knight"); Dahlman Rose & Company, LLC ("Dahlman"); Stifel, Nicolaus & Company, Inc. ("Stifel"); BNP Paribus Securities Corp. ("BNP"); CIBC World Markets Corp. ("CIBC"); Piper Jaffray & Co. ("Piper Jaffray"); and RBS Securities, Inc.'s ("RBS") (collectively, "Defendants") motion to dismiss (ECF No. 160) Plaintiffs'[1] first amended consolidated complaint ("FAC") (ECF No. 153). Defendants Craig M. Cogut ("Cogut"); Pegasus Capital Advisors, L.P. ("Pegasus"); T-II Holdings, LLC ("T-II Holdings"); and RCF Management, LLC ("RCF") (collectively, the "Investor Defendants") joined in Defendants' motion to dismiss (ECF No. 160) and also moved separately to dismiss (ECF No. 163) the FAC (ECF No. 153). The motions are fully briefed and ripe for adjudication. (ECF Nos. 164; 167; 168.)

Plaintiffs allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. §§ 78j(b) and 78t(a) and United States Securities and Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5. Plaintiffs also allege violations of Sections 11, 12(a), and 15 of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. §§ 77k, 77l, and 77o.

The Court has subject matter jurisdiction pursuant to Section 27 of the 1934 Act, 15 U.S.C. § 78aa(a), and Section 22 of the 1933 Act, 15 U.S.C. § 77v(a), as well as pursuant to 28 U.S.C. § 1331.

For the reasons discussed below, the Court (i) GRANTS Investor Defendants' motion to dismiss (ECF No. 163); (ii) GRANTS, in part, Defendants' motion to dismiss (ECF No. 160); and (iii) DENIES, in part, Defendants' motion to dismiss (ECF No. 160).

I. BACKGROUND

Because this matter is before the Court on Defendants' and Investor Defendants' motions to dismiss, the Court accepts all well-pled facts, as distinguished from conclusory allegations, as true. Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1088 (10th Cir. 2003) (citation omitted). The Court also incorporates those facts of which it takes judicial notice pursuant to its prior order (ECF No. 149) and the parties' stipulation (ECF No. 160 at 16-17 n.18).

A. Overview[2]

Plaintiffs, a group of individuals who purchased shares of Molycorp, Inc.'s ("Molycorp" or "Company")[3] stock during the class period (February 7, 2011 through November 10, 2011) ("Class Period"), bring this action to recover damages sustained as a result of Defendants' allegedly misleading statements regarding "rare earth elements" ("REEs") at Molycorp's mine known as "Mountain Pass." (ECF No. 153 ¶¶ 1-3.) Plaintiffs allege that Defendants told investors that (i) Molycorp's "principal" products included the heavy rare earth elements ("HREEs") dysprosium and terbium; and (ii) these elements were "contained... in [Molycorp's] deposit at Mountain Pass." (ECF No. 153 ¶ 3.) Defendants informed investors that during its development of Mountain Pass (a project known as "Project Phoenix"), its principal products, dysprosium and terbium, were present in the ore deposit at Mountain Pass. (ECF No. 153 ¶ 72.)

Plaintiffs allege that there were no HREEs at Mountain Pass[4] and that Defendants knew of this fact. (ECF No. 153 ¶¶ 68-118; see also ECF No. 153 ¶¶ 147-158.) Plaintiffs rely upon a former Molycorp "analytical chemist" and a former Molycorp "operator" to form the basis for these allegations. (ECF No. 153 ¶¶ 76-83.) Plaintiffs allege that Defendants made these misleading statements to inflate Molycorp's stock prices to allow insider-selling Defendants to sell large portions of their shares in Molycorp. (ECF No. 153 ¶¶ 84-91.)

Plaintiffs allege that between November 8, 2011 and November 10, 2011, information regarding the true nature of Mountain Pass's HREE ore composition became available to the market and, as a result, Molycorp's stock dropped and Plaintiffs were harmed. (ECF No. 153 ¶¶ 110-118.)

B. The Parties and the Claims

Plaintiffs bring this action on behalf of all purchasers or acquirers of Molycorp securities from February 7, 2011 through November 10, 2011, including all persons who purchased or acquired Molycorp common and preferred Stock on or about February 10, 2011 (hereinafter "February Offering") and all persons who purchased Molycorp common stock on or about June 15, 2011 (hereinafter "June Offering"). (ECF No. 153 ¶¶ 2, 41.)

Molycorp is a Colorado-based company (ECF No. 153 ¶ 24) whose core business is the mining, production, and sale of rare earth elements (ECF No. 153 ¶ 24). Prior to Molycorp's 2010 formation, Molycorp's predecessor and current subsidiary, Molycorp Minerals, LLC ("Molycorp Minerals"), owned and operated Mountain Pass. (ECF No. 153 ¶ 24.)

1934 Act Defendants include certain Molycorp executive officers and/or directors[5] (ECF No. 153 ¶¶ 25, 27, 28, 30, 31, 34, 36, 38, 39) as well as certain Molycorp private equity investors[6] (ECF No. 153 ¶¶ 32, 33, 35, 37).

1933 Act Defendants include certain Molycorp executive officers and/or directors[7] (ECF No. 153 ¶¶ 42-52) and various securities underwriters[8] (ECF No. 153 ¶¶ 53-61).

Plaintiffs generally allege that Smith, Allen, Ashburn, Ball, Bhappu, Burba, Dolan, Kristoff, Machiels, Henry, and Thompson were senior officers or directors of Molycorp; each of them had access to the materially adverse, undisclosed information; each of them directly participated in the management of Molycorp; each was directly involved in the day-to-day operations of Molycorp; and each was involved in signing and/or disseminating the information in SEC forms and press releases. (ECF No. 153 ¶¶ 25-28, 30-31, 34, 36, 38-39, 42-52, 92-109.)

Plaintiffs allege Cogut exercised control over Pegasus and T-II Holdings. (ECF No. 153 ¶ 32.) Plaintiffs allege Pegasus controlled Molycorp Minerals-the entity that was formed to acquire Mountain Pass. (ECF No. 153 ¶ 32.) Plaintiffs allege Cogut engaged in insider trading[9] in violation of Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. (ECF No. 153 ¶ 32.) Plaintiffs allege Defendants Pegasus and T-II Holdings engaged in insider trading in violation of Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. (ECF No. 153 ¶¶ 33, 37.) Plaintiffs allege RCF engaged in insider trading in violation of Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. (ECF No. 153 ¶ 35.)

Plaintiffs allege Morgan Stanley, J.P. Morgan, Knight, Dahlman, Stifel, BNP, CIBC, Piper Jaffray, and RBS (collectively, "Underwriter Defendants"), were engaged as underwriters for the February and June Offerings. (ECF No. 153 ¶¶ 53-62.) Plaintiffs allege the Underwriter Defendants failed to perform adequate due diligence and/or did not possess reasonable grounds for the belief that the statements contained in and/or incorporated in the February and June offering documents did not misrepresent and omit material facts. (ECF No. 153 ¶¶ 53-62.)

C. Alleged Material Misrepresentations and Omissions

Plaintiffs' securities claims focus upon two misrepresentations: statements related to Mountain Pass's ore composition (ECF No. 153 ¶¶ 93-109) and statements related to Molycorp's principal products (ECF No. 153 ¶¶ 93-109).

1. February 2011 Statements Related to Molycorp's February Offering

On February 7, 2011, Molycorp filed the February 2011 Form S-1/A with the SEC in connection with the February Offering. (ECF No. 153 ¶ 93.) Defendants Smith, Allen, Ball, Bhappu, Dolan, Kristoff, Machiels, Henry, and Thompson signed the February 2011 Form S-1/A. (ECF No. 153 ¶ 93.) The February 2011 Form S-1/A for the February Offering allegedly contained materially false and misleading statements. (ECF No. 153 ¶ 93.) Plaintiffs allege that the February 2011 Form S-1/A contained the following materially false and misleading statements: (i) "heavy REEs are contained in... our deposit at Mountain Pass"; and (ii) "[o]ur principal products[] includ[e]... dysprosium [] and terbium." (ECF No. 153 ¶ 93.)

On February 11, 2011, Molycorp filed the February 2011 Form S-1MEF with the SEC for the purpose of adding shares of preferred stock to the February Offering. (ECF No. 153 ¶ 95.) The February 2011 Form S-1MEF incorporated by reference all statements contained in Molycorp's February 2011 Form S-1/A. (ECF No. 153 ¶ 95.) Defendants Smith, Allen, Ball, Bhappu, Dolan, Kristoff, Machiels, Henry, and Thompson signed the February 2011 Form S-1MEF. (ECF No. 153 ¶ 95.)

On February 14, 2011, Molycorp filed a prospectus with the SEC in connection with the February Offering. (ECF No. 153 ¶ 96.) The February prospectus contained the same statements in the February 2011 Form S-1/A. (ECF No. 153 ¶ 96.)

Plaintiffs allege that these statements are false, misleading, and omitted material facts based on the following:

(a) daily analysis of 20 to 30 samples of Mountain Pass ore body, between 2008 and throughout 2011, showed no dysprosium or terbium in Mountain Pass ore and this information was kept in a Laboratory Information Management System ("LIMS") system to which certain Molycorp executives had access and was part of their job responsibilities (ECF No. 153 ¶¶ 25-28, 31, 79, 109(a));

(b) investigations of float tests of Mountain Pass ore body failed to identify any significant quantities of HREEs at Mountain Pass (ECF No. 153 ¶¶ 77, 109(a));

(c) between 2008 and throughout 2011, Mountain Pass never produced any HREEs (ECF No. 153 ¶¶ 80, 109(b)).

2. Molycorp's 2010 Form 10-K

On March 9, 2011, Molycorp filed its 2010 Form 10-K with the SEC. (ECF No. 153 ¶ 99.) Defendants Smith, Allen, Bhappu, Dolan, Henry, Kristoff, Machiels, and Thompson signed the 2010 Form 10-K. (ECF No. 153 ¶ 99.) The 2010 Form 10-K allegedly contained the same materially false and misleading statements as in the February 2011 Form S-1/A. (ECF No. 153 ¶ 99.)

Plaintiffs allege that these statements are false, misleading, and omitted material facts based on the following:

(a) daily analysis of 20 to 30 samples of Mountain Pass ore body, between 2008 and throughout 2011, showed no dysprosium or terbium in Mountain Pass ore and this information was kept in a LIMS system to which certain Molycorp executives had access and was part of their job responsibilities (ECF No. 153 ¶¶ 25-28, 31, 79, 109(a));

(b) investigations of float tests of Mountain Pass ore body failed to identify any significant quantities of HREEs at Mountain Pass (ECF No. 153 ¶¶ 77, 109(a));

(c) between 2008 and throughout 2011, Mountain Pass never produced any HREEs (ECF No. 153 ¶¶ 80, 109(b)).

3. Molycorp's 1Q11 Form 10-Q

On May 10, 2011, Molycorp filed with the SEC its 1Q11 Form 10-Q. (ECF No. 153 ¶ 102.) Defendants Smith and Allen signed the 1Q11 Form 10-Q. (ECF No. 153 ¶ 102.) The 1Q11 Form contained the allegedly false and misleading statement: "Our principal products[] includ[e]... dysprosium[] and terbium...." (ECF No. 153 ¶ 102.)

Plaintiffs allege that these statements are false, misleading, and omitted material facts based on the following:

(a) daily analysis of 20 to 30 samples of Mountain Pass ore body, between 2008 and throughout 2011, showed no dysprosium or terbium in Mountain Pass ore and this information was kept in a LIMS system to which certain Molycorp executives had access and was part of their job responsibilities (ECF No. 153 ¶¶ 25-28, 31, 79, 109(a));

(b) investigations of float tests of Mountain Pass ore body failed to identify any significant quantities of HREEs at Mountain Pass (ECF No. 153 ¶¶ 77, 109(a));

(c) between 2008 and throughout 2011, Mountain Pass never produced any HREEs (ECF No. 153 ¶¶ 80, 109(b)).

4. Molycorp's June 2011 Secondary Offering

On June 7 and 10, 2011, Molycorp filed with the SEC the June 2011 Registration Statement and the June 2011 Prospectus, respectively, in connection with the June Offering of 11.5 million shares of common stock. (ECF No. 153 ¶ 104.) Defendants Smith, Allen, Ashburn, Ball, Bhappu, Dolan, Kristoff, Machiels, Henry, and Thompson signed the June 2011 Registration Statement. (ECF No. 153 ¶ 104.) The June 2011 offering documents for the June Offering, in pertinent part, contained the following false and misleading statements: (i) "heavy REEs are contained in... our deposit at Mountain Pass"; and (ii) "[o]ur principal products[] includ[e]... dysprosium [] and terbium." (ECF No. 153 ¶ 104.)

Plaintiffs allege that these statements are false, misleading, and omitted material facts based on the following:

(a) daily analysis of 20 to 30 samples of Mountain Pass ore body, between 2008 and throughout 2011, showed no dysprosium or terbium in Mountain Pass ore and this information was kept in a LIMS system to which certain Molycorp executives had access and was part of their job responsibilities (ECF No. 153 ¶¶ 25-28, 31, 79, 109(a));

(b) investigations of float tests of Mountain Pass ore body failed to identify any significant quantities of HREEs at Mountain Pass (ECF No. 153 ¶¶ 77, 109(a));

(c) between 2008 and throughout 2011, Mountain Pass never produced any HREEs (ECF No. 153 ¶¶ 80, 109(b)).

5. Molycorp's 2Q11 Form 10-Q

On August 11, 2011, Molycorp filed with the SEC its 2Q11 Form 10-Q. (ECF No. 153 ¶ 107.) Defendants Smith and Allen signed the 2Q11 Form 10-Q. (ECF No. 153 ¶ 107.) The 2Q11 Form 10-Q contained the following false and misleading statements: (i) "heavy REEs are contained in... our deposit at Mountain Pass"; and (ii) "[o]ur principal products[] includ[e]... dysprosium [] and terbium." (ECF No. 153 ¶ 107.)

Plaintiffs allege that these statements are false, misleading, and omitted material facts based on the following:

(a) daily analysis of 20 to 30 samples of Mountain Pass ore body, between 2008 and throughout 2011, showed no dysprosium or terbium in Mountain Pass ore and this information was kept in a LIMS system to which certain Molycorp executives had access and was part of their job responsibilities (ECF No. 153 ¶¶ 25-28, 31, 79, 109(a));

(b) investigations of float tests of Mountain Pass ore body failed to identify any significant quantities of HREEs at Mountain Pass (ECF No. 153 ¶¶ 77, 109(a));

(c) between 2008 and throughout 2011, Mountain Pass never produced any HREEs (ECF No. 153 ¶¶ 80, 109(b)).

D. Loss Causation

Between November 8 and November 10, 2011, Plaintiffs allege that news began entering the market that Molycorp had not found any quantities of HREEs in the Mountain Pass ore body. (ECF No. 153 ¶ 110.) Plaintiffs allege that on November 10, 2011, Molycorp had a 3Q11 earnings conference call during which Smith stated that the furthest Molycorp had come toward actually identifying HREEs at Mountain Pass was its construction of a "cracking facility" (in order to separate HREEs). (ECF No. 153 ¶ 111.) The price of Molycorp's common stock dropped from a closing price of $42.29 per share on November 8, 2011 to a closing price of $33.45 per share on November 11, 2011. (ECF No. 153 ¶ 112.) The price of Molycorp's preferred stock dropped from a November 8, 2011 closing price of $80.04 per share to a closing price of $69.92 per share on November 11, 2011. (ECF No. 153 ¶ 112.)

II. LEGAL STANDARDS

A. General Pleading Standards under Rule 8

Under Rule 8(a)(2) of the Federal Rules of Civil Procedure, a pleading must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). Pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, a complaint must be dismissed if it does not plead "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). "A pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action will not do. Nor does a complaint suffice if it tenders naked assertions devoid of further factual enhancement." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks and citation omitted).

"While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, ... a plaintiff's obligation to provide the grounds' of his entitlement to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do...." Twombly, 550 U.S. at 555 (citations omitted). "Factual allegations must be enough to raise a right to relief above the speculative level." Id. A "plaintiff must nudge [] [his] claims across the line from conceivable to plausible' in order to survive a motion to dismiss.... Thus, the mere metaphysical possibility that some plaintiff could prove some set of facts in support of the pleaded claims is insufficient; the complaint must give the court reason to believe that this plaintiff has a reasonable likelihood of mustering factual support for these claims." Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007) (emphasis in original, internal citation and quotation omitted).

The Tenth Circuit Court of Appeals has held "that plausibility refers to the scope of the allegations in a complaint: if they are so general that they encompass a wide swath of conduct, much of it innocent, then the plaintiffs have not nudged their claims across the line from conceivable to plausible." Khalik v. United Air Lines, 671 F.3d 1188, 1191 (10th Cir. 2012) (internal quotation and citation omitted). The Tenth Circuit has further noted "that the nature and specificity of the allegations required to state a plausible claim will vary based on context." Id. (Internal quotation and citation omitted.) Thus, the Tenth Circuit "concluded the Twombly/Iqbal standard is a middle ground between heightened fact pleading, which is expressly rejected, and ...


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