Banker v. Gold Resource Corp.
2015 U.S. App. LEXIS 839
| 10th Cir. | 2015Background
- Securities-fraud class action by lead plaintiff Nitesh Banker alleging Gold Resource Corp. (GRC) and four officers made materially false/misleading statements and failed to disclose production problems and an overbilling dispute with its sole concentrate buyer during Jan 30–Nov 8, 2012. Complaint alleged violations of §10(b)/Rule 10b-5 and control-person liability under §20(a).
- Core factual allegations: (1) GRC touted record 2011 production and aggressive 2012 growth targets; (2) El Aguila underground operations suffered unexpected water, ventilation, dilution, and infrastructure issues that reduced production; (3) GRC used provisional assays to invoice buyers (Trafigura subsidiaries) and later faced significant variances with buyers’ final assays for certain months, which led to a settlement and restatement reducing revenue by ~$3.7M for Q1–Q2 2012.
- Plaintiff alleged defendants knew of the assay variances and production problems earlier but concealed them, improperly recognized provisional revenue, and certified internal controls despite deficiencies.
- District court dismissed the amended complaint with prejudice under Rule 12(b)(6) for failure to plead scienter with the PSLRA’s heightened particularity standard; appeal followed.
- On appeal, the Tenth Circuit reviewed de novo, assumed some statements could be misleading for pleading purposes, but focused on whether the complaint pleaded particularized facts giving rise to a strong inference of scienter.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiff pled materially false or misleading statements under §10(b)/Rule 10b-5 | Banker: GRC’s positive statements (record production, growth trajectory, long-hole stoping improvements, SOX certifications, Q1/Q2 financials) were misleading because defendants knew of production issues and assay variances and improperly recognized provisional revenue | GRC: Statements contained cautionary language; provisional revenue recognition was contractually permitted; operational problems were plausible, newly discovered, and investigated before disclosure | Court assumed some statements might be misleading but did not need to decide; dismissal turned on scienter failure |
| Whether plaintiff alleged scienter with particularity under the PSLRA | Banker: Multiple factors (GAAP violation, magnitude of restatement, SOX certifications, small single-product company with one buyer, quick settlement, senior management involvement) together create a strong inference of intentional or reckless conduct | GRC: Plausible nonculpable explanations — local employees believed buyer samples were wrong, delay due to umpire assays and investigation, contract allowed provisional payments, and executives lacked contemporaneous knowledge | Held: Plaintiff failed to plead particularized facts giving rise to a strong inference of scienter; opposing nonfraudulent inferences were at least as compelling |
| Whether control-person liability under §20(a) survives absent primary violation | Banker: Individual officers controlled GRC and are liable if primary violations established | GRC: §20(a) requires an underlying primary violation which plaintiff failed to plead | Held: §20(a) claim dismissed because primary §10(b) claim fails |
| Whether dismissal with prejudice and denial of leave to amend and motion to strike/reply were abuse of discretion | Banker: District court erred by denying leave to amend and by allowing new reply arguments | GRC: Plaintiff’s request to amend was a single undeveloped sentence; defendants’ reply addressed plaintiff’s arguments so district court properly refused strike | Held: No abuse of discretion — denial of leave to amend and denial of motion to strike were proper |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (strong-inference-of-scienter standard and comparative inquiry)
- Adams v. Kinder-Morgan, Inc., 340 F.3d 1083 (10th Cir.) (use of GAAP allegations plus other facts to infer scienter)
- In re Level 3 Commc’ns, Inc. Sec. Litig., 667 F.3d 1331 (10th Cir.) (PSLRA scienter pleading standards)
- City of Philadelphia v. Fleming Cos., Inc., 264 F.3d 1245 (10th Cir.) (recklessness definition and GAAP allegations insufficient alone)
- Dronsejko v. Thornton, 632 F.3d 658 (10th Cir.) (companies must adhere to GAAP when recognizing revenue)
- Higginbotham v. Baxter Int’l, Inc., 495 F.3d 753 (7th Cir.) (investigation after learning problems can support nonculpable inference)
- Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir.) (bare SOX-certification allegations add little to scienter showing)
- Grossman v. Novell, Inc., 120 F.3d 1112 (10th Cir.) (standard of review on Rule 12(b)(6))
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (scienter defined as intent to deceive, manipulate, or defraud)