In re Turquoise Hill Resources Ltd. Securities Litigation

Background

The case involves securities-fraud claims under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. Pentwater Funds was appointed lead plaintiff under the Private Securities Litigation Reform Act (PSLRA) and held a 9.3% equity stake in Turquoise Hill Resources Ltd. Turquoise Hill and three individual defendants—the “TRQ Defendants”—asked for a protective order.

The requested order would have required Pentwater, until the end of the litigation, to stop communicating with Turquoise Hill about the Oyu Tolgoi mine. It also would have barred Pentwater from asking questions, or proposing questions for others to ask, during Turquoise Hill earnings calls and other presentations to investors or analysts.

The TRQ Defendants relied on communications by Pentwater representatives, including Matthew Halbower, the chief executive officer of Pentwater Capital Management. Halbower made several attempts to obtain information from Turquoise Hill about mine operations and related matters. Pentwater representatives also sought to ask questions at Turquoise Hill’s annual meeting and attended an earnings call. Turquoise Hill did not answer the shareholder questions described in the opinion.

Pentwater said that, without a court order, it intended to continue exercising its shareholder rights by monitoring its investment, asking questions in public shareholder forums, and writing public letters to Turquoise Hill. The defendants did not object to Pentwater continuing to make public statements and indicated that Pentwater could meet its shareholder needs without one-on-one questions to Turquoise Hill employees.

Legal framework and analysis

The court recognized that it has authority to regulate the conduct of parties and counsel in a class action and to address communications that threaten the action’s proper functioning. The court also recognized its authority to address unethical conduct, including communications with a represented opposing party that are caused by counsel.

The court distinguished informal investigation from formal discovery. The PSLRA stays discovery and other proceedings while a motion to dismiss is pending, but the court explained that informal information gathering that does not use the Federal Rules of Civil Procedure’s discovery tools is not necessarily discovery and remains permitted. The court concluded that the PSLRA does not prevent counsel from investigating the client’s claims.

The court found that Pentwater’s communications did not implicate the concerns underlying restrictions on class-action communications, such as misleading class members, improperly encouraging participation, or undermining confidence in class counsel or the court. The court also found no evidence that Pentwater’s counsel had contacted the defendants or caused Pentwater to do so, directly or indirectly.

The court applied New York Rule of Professional Conduct 4.2(a), which generally bars a lawyer from communicating about the representation with a party known to be represented by another lawyer, or causing another person to do so, without consent or legal authorization. The court explained that the rule does not bar one represented party from directly contacting another represented party about their ongoing business when the communication is not directed or caused by counsel.

The court held that a lead plaintiff who is also a shareholder of a defendant may continue communicating with that company in the shareholder role while representing a class of investors, so long as the communications comply with ethics rules. The court noted that the PSLRA favors institutional investors serving as lead plaintiffs and found nothing in the law requiring such investors to give up their current shareholder rights and obligations.

The court distinguished its earlier concerns about Pentwater’s “two hats”—its role as a large Turquoise Hill shareholder and its role as class representative. Those earlier concerns involved the possibility that Pentwater could compromise absent class members’ interests through a separate transaction or related litigation. The present request instead sought to protect Turquoise Hill from questions by a current shareholder or from what the defendants viewed as aggressive prosecution of the case. The court found that these were different concerns and stated that Pentwater’s large ownership interest did not disable it from prosecuting the case.

Disposition

The court denied the TRQ Defendants’ request for relief. It declined to direct Pentwater to cease seeking information from Turquoise Hill in its capacity as a shareholder, including by asking questions in public and issuing public letters, subject to counsel’s compliance with applicable ethical rules. The opinion did not decide whether the alleged securities fraud occurred or whether the underlying claims would succeed.