In re Turquoise Hill Resources Ltd. Securities Litigation

Background

The proposed securities class action concerns alleged misrepresentations or omissions by Turquoise Hill Resources Ltd., its related defendants, Rio Tinto entities, and individual defendants concerning development of the Oyu Tolgoi copper mine in Southern Mongolia. The asserted claims arise under the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. The proposed class consists of people who acquired Turquoise Hill securities from July 17, 2018, through July 31, 2019.

The court appointed the Pentwater Funds as lead plaintiff in January 2021 under the Private Securities Litigation Reform Act. The court relied in part on Pentwater’s largest financial interest and its preliminary satisfaction of the adequacy and typicality requirements under Federal Rule of Civil Procedure 23. The court also required Pentwater to report any litigation it brought against defendants or their affiliates and explain why that litigation did not conflict with its duties to the proposed class.

After Turquoise Hill and Rio Tinto agreed to a proposed arrangement under which Rio Tinto would acquire the remaining minority interest in Turquoise Hill, Pentwater said it intended to pursue dissent rights and a shareholder-oppression claim in Canada. Pentwater asked to continue as lead plaintiff while pursuing those Canadian claims and asked to add John J. Murphy as an additional lead plaintiff. Chang Pin Lin, another putative class member, asked to replace Pentwater and have himself appointed lead plaintiff.

Legal standard

The Private Securities Litigation Reform Act generally creates a presumption in favor of the timely applicant with the largest financial interest that also satisfies the preliminary requirements of Rule 23. A class member seeking to displace that presumptive lead plaintiff must provide proof that the plaintiff will not fairly and adequately protect the class or is subject to unique defenses that make adequate representation impossible. Mere speculation is insufficient.

The court explained that its responsibility to assess a lead plaintiff’s adequacy continues throughout the case. Although a lead plaintiff’s separate, non-class claims can create a conflict of interest, a conflict that is only hypothetical or dependent on future events ordinarily does not require immediate replacement.

Court’s analysis

The court found that Pentwater’s Canadian claims raised the possibility of an incurable conflict but that the conflict remained largely speculative. The court found no evidence of a limited pool of money that would force Pentwater to trade a worse recovery for the class for a better recovery in Canada. The court also relied on Pentwater’s representation that its Canadian claims sought direct recovery rather than derivative recovery for Turquoise Hill and that its counsel in this federal action was not representing Pentwater in Canada.

The court rejected Lin’s concerns that Pentwater might favor its current investment in Turquoise Hill, compromise the federal class claims to improve its Canadian recovery, or preserve the value of its current shareholder position. The court found no evidence supporting the first concern, concluded that the second did not yet meet the high standard for changing lead plaintiff status, and said the third largely repeated concerns the court had already rejected when appointing Pentwater.

The court determined that class certification was the better stage for a more searching review of Pentwater’s adequacy and typicality. By then, the Canadian litigation and any related discovery would presumably provide a fuller record. The court also noted that replacing Pentwater immediately could prevent other class members, including Lin, from seeking appointment if Pentwater later had to withdraw.

Regarding Murphy, the court recognized that the law permits adding named plaintiffs to help represent a proposed class. But it found that the record did not yet show that Pentwater could not adequately represent the class, whether adding another lead plaintiff would cure any problem, or whether Murphy was the appropriate person to add. The court therefore declined to add Murphy at this stage.

Disposition

Pentwater’s motion for leave to add John J. Murphy as an additional lead plaintiff was denied without prejudice to renewal. Lin’s motion to replace Pentwater as lead plaintiff was also denied without prejudice to renewal. Pentwater may continue serving as lead plaintiff and proposed class representative in the interim. The clerk was directed to close the docket entries for the two motions. The opinion states that an initial pretrial conference was scheduled for January 23, 2023, and that discovery had not yet commenced.