In re Turquoise Hill Resources Ltd. Securities Litigation

Background

The lawsuit asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. The proposed class consists of people who purchased or otherwise acquired Turquoise Hill Resources Ltd. securities from July 17, 2018, through July 31, 2019.

The complaint alleges that Turquoise Hill Resources Ltd., Rio Tinto plc, Rio Tinto Limited, Rio Tinto International Holdings, Ltd., and five officers and directors made materially false or misleading statements, or failed to disclose information, about the Oyu Tolgoi project in Southern Mongolia. The alleged omissions and misstatements concerned underground-development delays, stability problems, unachievable cost and production estimates, more than $1 billion in additional development costs, and the need for additional financing or equity. The opinion states that the company’s stock price fell after partial disclosures on February 26, July 15, and July 31, 2019.

Lead-Plaintiff Process

The Private Securities Litigation Reform Act of 1995 (PSLRA) establishes a presumption favoring the timely applicant with the largest financial interest that also satisfies the relevant requirements of Federal Rule of Civil Procedure 23. At this stage, the court considers primarily whether the proposed lead plaintiff’s claims are typical of the class’s claims and whether the proposed plaintiff is adequate to represent the class.

Seven parties timely moved for appointment as lead plaintiff. The Pentwater Funds reported losses of approximately $299 million under a first-in, first-out calculation and approximately $220 million under a last-in, first-out calculation. The other principal competing movants were Chang Pin Lin, who claimed $344,719.21 including losses attributed to alleged assignees, and John J. Murphy, who claimed $327,028.02. The court did not decide whether Mr. Lin properly received the interests he claimed because it appointed the Pentwater Funds.

Adequacy Objections

Chang Pin Lin and John J. Murphy argued that the Pentwater Funds’ approximately 9.3% ownership interest in Turquoise Hill could make them unwilling to pursue the strongest recovery for all class members. The court rejected that argument at this stage, explaining that current ownership does not generally disqualify an investor from serving as lead plaintiff. The court also found speculative concerns that the Pentwater Funds might seek arrangements with Rio Tinto concerning their holdings or use the litigation to improve the company’s value for current shareholders.

The Pentwater Funds represented that they would not enter into an agreement with a defendant or its affiliate concerning their Turquoise Hill holdings except through a class settlement subject to notice and court approval. The court ordered the Pentwater Funds to show cause why they should not be required to report arrangements concerning the purchase of their shares or finding purchasers for those shares during the litigation.

The opposing movants also raised concerns about a prior unsuccessful campaign for a Turquoise Hill board seat, possible separate litigation in Canada, the location of a large share purchase, the Pentwater Funds’ event-driven investment strategy, and possible access to material nonpublic information. The court concluded that these concerns were speculative or unsupported by proof. It found that the Pentwater Funds had adequately alleged a domestic transaction for purposes of the challenged purchase, and noted that the Funds had submitted a sworn declaration stating that they had not received material nonpublic information.

As a condition of appointment, the court required the Pentwater Funds to report to the court within five days if they file litigation against a defendant or affiliate, together with an explanation of why they believe the litigation does not create a conflict with the class’s interests.

Class Counsel and Disposition

The PSLRA permits the most adequate plaintiff, subject to court approval, to select class counsel. The Pentwater Funds selected Bernstein Litowitz Berger & Grossman LLP. The court found the firm highly experienced in securities class actions and saw no reason it would not adequately represent the class.

The court granted the motion at Docket No. 66, appointed the Pentwater Funds as lead plaintiff, and appointed Bernstein Litowitz Berger & Grossman LLP as class counsel. It denied the remaining motions for appointment as lead plaintiff. The court also directed the newly appointed lead plaintiff to meet and confer with the defendants about a briefing schedule for a consolidated amended complaint and any motion to dismiss. This opinion selected the class representatives and counsel; it did not decide the underlying securities-fraud claims.