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In re Silver Wheaton Corp. Securities Litigation

United States District Court, C.D. California

May 11, 2017


          Present: The Honorable CHRISTINA A. SNYDER, Judge.


         Proceedings: (IN CHAMBERS) - PLAINTIFFS' MOTION TO CERTIFY CLASS (Filed November 1, 2016, dkt. 91)


         On July 8, 2015, plaintiff Chris Masilionis commenced this putative class action alleging violations of the Securities Exchange Act of 1934, 15 U.S.C. § 78(a), et seq. (“the Exchange Act”), against defendants Silver Wheaton Corp. (“Silver Wheaton”), Randy V. J. Smallwood (“Smallwood”), Peter Barnes (“Barnes”), and Gary Brown (“Brown”) (collectively, “defendants”). Dkt. 1. On October 19, 2015, the Court consolidated this action with a related action, Steve Klein, et al. v. Silver Wheaton Corp., et al., Case No: 2:15-cv-5173-CAS-JEM, and appointed Joe Elek as lead plaintiff in the consolidated action. Dkt. 55. The plaintiffs in the consolidated action filed an amended complaint (“CAC”) on December 18, 2016. Dkt. 60. The CAC asserts two claims for relief: (1) violation of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder (17 C.F.R. § 240.10b-5) against all defendants, and (2) violation of Section 20(a) of the Exchange Act against all individual defendants. Id. Plaintiffs allege that the class period runs from March 30, 2011 to July 6, 2015, inclusive (“the Class Period”). Id. ¶ 1.

         On January 29, 2016, defendants filed a motion to dismiss the CAC. Dkt. 61. On June 6, 2016, the Court denied the motion to dismiss. Dkt. 79.

         On November 1, 2016, plaintiffs filed a motion for class certification. Dkt. 91. In support of their motion, plaintiffs filed a memorandum, dkt. 92 (“Mot.”), and a declaration by plaintiff's counsel, Jonathan Horne, dkt. 93 (“Horne Decl.”), to which most of plaintiffs' supporting evidence is attached. Exhibit 1 to the Horne declaration is a report by Steven P. Feinstein (the “Feinstein Report”), discussed at length in this order. Plaintiffs also appended declarations from the named plaintiffs. See generally Dkt. 93 Exs. 3-10. On November 2, 2016, plaintiffs filed a declaration by named plaintiff Jeffrey Frohwerk, dkt. 94-1, which counsel evidently received a day later than expected, dkt. 94.[1]

         Thereafter, the parties agreed to a briefing schedule for the motion. On February 24, 2017, defendants filed an opposition, dkt. 122 (“Opp'n”); a declaration by defendants' counsel, dkt. 122-2 (“Watts Decl.”); and exhibits in support of the opposition, dkts. 122-2:122-26. One such exhibit, discussed in this order, is a report by Allan W. Kleidon (the “Kleidon Report”). Dkt. 122-26.

         On March 27, 2017, plaintiffs' filed a reply in support of their motion, dkt. 135 (“Reply”); a second declaration by Horne, dkt. 136 (“Horne Reply Decl.”); and a rebuttal report by Feinstein, dkt. 136 Ex. 1 (“Feinstein Rebuttal”), among other exhibits. On April 17, 2017, the Court held oral argument on the instant motion and thereafter took the matter under submission. Dkt. 147.

         Having carefully considered the parties' arguments the Court finds and concludes as follows.


         A. Silver Wheaton Corporation

         Defendant Silver Wheaton is a Canadian Company, headquartered in Vancouver, British Columbia whose shares are traded on the NYSE under the ticker symbol “SLW”. CAC ¶ 18. Silver Wheaton and its subsidiaries purchase and sell gold and silver worldwide. Id. ¶¶ 2-3. Silver Wheaton enters into so-called “streaming agreements, ” whereby it obtains the rights to a portion of precious metals produced by mines located in politically stable regions around the world such as Canada, Mexico, Portugal, Brazil, Peru, and Sweden. Id. ¶ 19. According to Silver Wheaton, it is the “largest pure precious metals streaming company in the world.” Dkt. 61-12 at 793. Under the terms of a typical streaming agreement, Silver Wheaton or its subsidiaries would agree to purchase a specified percentage of the future production of silver or gold from a mine operator for an upfront payment plus, on delivery, an amount equal to the lesser of an agreed upon price or the then-current market price. Id. Silver Wheaton and its subsidiaries earn profits by selling the silver and gold purchased pursuant to its streaming agreements. Id. at 847.

         Plaintiffs allege that Silver Wheaton derives revenues principally from streaming agreements entered into by one of its subsidiaries located in the Cayman Islands (“SW Cayman”). CAC ¶ 3. Plaintiffs further allege that, pursuant to the laws of the Cayman Islands, SW Cayman paid no income tax in the Cayman Islands on its profits derived from these agreements. Id. ¶ 4. Nor did Silver Wheaton pay any income tax in Canada on the profits earned by SW Cayman because Silver Wheaton took the position that SW Cayman was a separate entity and that no income tax on SW Cayman's profits was owed to Canada. Id.

         The individually named defendants are all current and former executives of Silver Wheaton. Defendant Smallwood has served as Silver Wheaton's President since January 2010, and as the company's Chief Executive Officer (“CEO”) since April 11, 2011. Id. ¶ 20. Defendant Barnes served as Silver Wheaton's CEO and as a member of the company's board of directors from 2006, until April 11, 2011. Id. ¶ 21. Defendant Brown joined Silver Wheaton in 2008, and served as the company's Chief Financial Officer (“CFO”) throughout the Class Period. Id. ¶ 22.

         B. Canada's Transfer Pricing Rules

         The merits of this case turn, in large part, on Silver Wheaton's financial reporting based on defendants' interpretation of Canada's corporate income tax laws. Accordingly, the Court begins with a brief overview of several pertinent provisions of the Canadian Income Tax Act.

         Pursuant to the Canadian Income Tax Act, when a person or corporation sells something of value, they are generally required to include the amount they received from the purchaser when computing their taxable income. See generally R.S.C. 1985, c. 1. (5th Supp.) (The “Canadian Income Tax Act”). In addition, Canadian corporations are subject to Canada's transfer pricing rules. See generally R.S.C. 1985, c. 1. (5th Supp.) § 247. Transfer pricing refers to the prices at which services, tangible property, and intangible property are traded across international borders between related entities. The transfer pricing rules govern the amount a corporation must report as taxable income based on such transactions. M.N.R., Canadian Revenue Agency Information Circular 87-2R “International Transfer Pricing” (September 27, 1999) (“CRA Circular”), ¶¶ 2, 5. In general, Canada's transfer pricing rules require that when a taxpayer engages in a non-arm's length transaction the taxpayer must report income from that transaction in such a manner so as to approximate the amount of income the taxpayer would have received had the transaction been negotiated at arm's length. Id. ¶ 7.

         According to Canada's tax authority, the Canada Revenue Agency (“CRA”), Canadian courts consider the following criteria in assessing whether parties to a transaction are not dealing at arms' length: (1) was there a common mind which directs the bargaining for both parties to a transaction; (2) were the parties to a transaction acting in concert without separate interests; and (3) was there “de facto” control. M.N.R. Interpretation Bulletin IT-419R2 “Meaning of Arm's Length” (June 8, 2004), ¶ 23.2. If a Canadian corporation enters into a non-arm's length transaction with a non-resident and does not use arm's length pricing, the CRA may (a) recompute the taxable income of the corporation to reflect arm's length pricing, and (b) reassess the income tax payable by applying the income tax rate to the adjusted income. See R.S.C. 1985, c. 1. (5th Supp.), § 247(2); CRA Circular, at ¶ 13. In addition, the CRA may also assess penalties to corporations that fail to report income using arm's length pricing and fail to make contemporaneous records documenting their reasonable efforts to establish arm's length prices. R.S.C. 1985, c. 1. (5th Supp.), §§ 247(3)-(4); CRA Circular ¶ 14-18.

         C. Silver Wheaton's Tax Position with Regard to SW Cayman

         According to plaintiffs, during the Class Period, Silver Wheaton derived its profits principally from streaming agreements Silver Wheaton attributed to its subsidiary, SW Cayman. CAC ¶ 3. Silver Wheaton paid no Cayman Islands or Canadian taxes on these profits. Id. ¶ 4. This is so because Silver Wheaton took the position that SW Cayman was a separate entity and that it was SW Cayman and not Silver Wheaton that had earned these profits. Id. Nevertheless, plaintiffs contend that Silver Wheaton provided an extensive range of services, commercial opportunities, capital, know-how, intellectual property, strategic support, contractual support, and other property to SW Cayman that were critical to generating the revenue purportedly earned by SW Cayman. Id. ¶ 57. Indeed, plaintiffs go so far as to assert that SW Cayman was a mere “conduit” for Silver Wheaton's business operations, id. ¶¶ 72, 98, and that all substantive strategic, managerial, and operational direction relating to the activities of SW Cayman was provided by Silver Wheaton, id. ¶ 58. Plaintiffs contend that the employees of SW Cayman lacked the requisite professional experience and training to perform all of the activities Silver Wheaton attributes to SW Cayman during the Class Period. Id. ¶ 61.

         Notwithstanding the substantial services Silver Wheaton provided to SW Cayman, plaintiffs allege that, during the Class Period, Silver Wheaton “recognized no material revenue for tax purposes” with respect to the provision of these services. CAC ¶ 106. Silver Wheaton reported income of $33, 605, 338 (Canadian Dollars or “Cdn $”) for the services it provided to SW Cayman. Dkt. 61-27 at 367. By contrast, SW Cayman reportedly earned profits of Cdn $715 million during the Class Period. CAC ¶ 106. Plaintiffs aver that the manner in which Silver Wheaton reported its income from these sales was in “express contravention” of Canada's transfer pricing rules. Id.

         D. CRA and Silver Wheaton's Response

         Plaintiffs allege that, in May 2011, CRA officials visited SW Cayman to begin an audit of SW Cayman's transactions with Silver Wheaton to determine if Silver Wheaton had violated transfer-pricing rules. Id. ¶ 143. Plaintiffs contend that, pursuant to the CRA's internal procedures, Silver Wheaton would have been informed of the CRA's intention to conduct this audit no later than February of 2011. Id. ¶ 144. Plaintiffs allege that the Class Period commenced on March 30, 2011.

         The alleged Class Period ends on July 6, 2015, when Silver Wheaton issued a press release announcing that the CRA was proposing to reassess Silver Wheaton's tax liability (“the Press Release”). Id. ¶ 175. The Press Released stated, in pertinent part:

Silver Wheaton Corp. . . . announces that it has received a proposal letter dated July 6, 2015 (the “Proposal”) from the Canada Revenue Agency (the “CRA”) in which CRA is proposing to reassess Silver Wheaton under various rules contained in the Income Tax Act (Canada).
The Proposal outlines CRA's position that the transfer pricing provisions of the Income Tax Act (Canada) relating to income earned by our foreign subsidiaries outside of Canada should apply such that the income of Silver Wheaton subject to tax in Canada should be increased for the 2005 to 2010 taxation years (the “Relevant Taxation Years”) by approximately Cdn $715 million (US$567 million).
* * * If the CRA reassesses Silver Wheaton on the basis outlined in the Proposal, and assuming that Silver Wheaton would be assessed taxes on the foreign subsidiaries' income on the same basis as its Canadian income, Silver Wheaton currently estimates on a preliminary basis that it would be subject to federal and provincial tax of approximately US$150 million in respect of the Relevant Taxation Years. The Proposal also indicates that the CRA is seeking to apply transfer pricing penalties of approximately Cdn $72 million (US$57 million) in respect of the Relevant Taxation Years. . . .

Id. The Press Release also stated that “Management believes that [Silver Wheaton] has filed its tax returns and paid applicable taxes in compliance with Canadian tax law.” Id. The Press Release quoted defendant Smallwood saying, “We remain confident in our business structure which we believe is consistent with that typically used by Canadian companies, including Canadian streaming companies, that have international operations.” Id. The Press Release concluded by noting that “Silver Wheaton intends to vigorously defend its tax filing positions.” Id.

         On July 7, 2015, the day after Silver Wheaton issued the Press Release, Silver Wheaton's share price fell $2.08 or approximately 12% to close at $15.46 per share. Id. ¶ 176. Shortly thereafter, two analysts covering Silver Wheaton issued reports estimating that the CRA tax audit could reduce Silver Wheaton's value by 40% and 30% respectively. Id. ¶¶ 177, 178.

         E. Defendants' Allegedly False or Misleading Statements

         During the Class Period, defendants submitted a number of annual and quarterly reports to the SEC detailing Silver Wheaton's financial position. Defendants appended consolidated financial statements for Silver Wheaton and its subsidiaries to Silver Wheaton's annual and quarterly reports, and these financial statements included balance sheets for fiscal years 2009 through 2014. See, e.g., id. ¶¶ 139, 150, 157. Defendants represented that Silver Wheaton's consolidated financial statements were prepared in accordance with either Generally Accepted Accounting Principles (“GAAP”) or International Financial Reporting Standards (“IFRS”). See, e.g., id. ¶¶ 138, 148, 156.

         Plaintiffs contend that each of the balance sheets included in defendants' annual and quarterly reports was false and misleading because they failed to disclose a tax liability of USD$207 million (USD$150 million for unpaid income tax plus USD$57 million in mandatory penalties) for violating Canada's transfer pricing rules. See, e.g., id. ¶¶ 140, 146, 151. According to plaintiffs, under applicable provisions of GAAP and IFRS, defendants were required to recognize and record any tax liability that Silver Wheaton was “more likely than not” to incur. Id. ¶¶ 141, 152. In this case, plaintiffs contend that it was more likely than not that the CRA would reject Silver Wheaton's interpretation of transfer pricing rules and thus require Silver Wheaton to pay unpaid income tax plus appropriate penalties. Id. Accordingly, in plaintiffs' view, it was a violation of GAAP and IFRS for defendants not to recognize and record a tax liability of USD$207 million on Silver Wheaton's balance sheets. Id. Alternatively, even if Silver Wheaton was not more likely than not to incur a tax liability of USD$207 million, plaintiffs contend that, pursuant to other provisions of GAAP and IFRS, defendants were still required to disclose a “contingent” tax liability of USD$207 million. Id. ¶ 153. By failing to either record or disclose an actual or contingent tax liability of USD$207 million, plaintiffs contend that the balance sheets incorporated into defendants annual and quarterly reports to the SEC contained false and misleading financial information regarding Silver Wheaton. See, e.g., id. ¶¶ 140, 146, 151.

         Plaintiffs contend that the price of Silver Wheaton's securities was artificially inflated by defendants purportedly wrongful conduct. Id. ¶ 239. Accordingly, plaintiffs, all of whom purchased Silver Wheaton securities, allegedly suffered damages when it was disclosed that defendants had been disseminating inaccurate financial statements to the investing public. Id. ¶ 242.

         F. Plaintiffs and the Proposed Class

         Lead Plaintiff Joe Elek and Named Plaintiffs Thomas Bartsch, Larry Brandow, Diana Choi, Ben Potaracke, Jedrzej Borowczyk, and Charles Remmel[2] seek to be appointed class representatives for the following class (the “Class”):

All persons and entities who purchased the publically traded securities of Silver Wheaton Corp. (“SW”) (i) on a United States exchange, or (ii) in a transaction in the United States, during the period from March 30, 2011 to July 6, 2015, inclusive, and did not sell such securities prior to July 6, 2015. Excluded from the Class are Defendants, all present and former officers and directors of SW and any subsidiary thereof, members of such excluded persons' families and their legal representatives, heirs, successors or assigns and any entity which such excluded persons controlled or in which they have or had a controlling interest.

Dkt. 91 at 2. Accordingly, for purposes of this order, the Court refers to Elek, Bartsch, Brandow, Choi, Potaracke, Borowcyzk, and Remmel collectively as “plaintiffs” or “class representatives.”


         “Class actions have two primary purposes: (1) to accomplish judicial economy by avoiding multiple suits, and (2) to protect rights of persons who might not be able to present claims on an individual basis.” Haley v. Medtronic, Inc., 169 F.R.D. 643, 647 (C.D. Cal. 1996) (citing Crown, Cork & Seal Co. v. Parking, 462 U.S. 345 (1983)). Federal Rule of Civil Procedure 23 governs class actions. A class action “may be certified if the trial court is satisfied after a rigorous analysis, that the prerequisites of Rule 23(a) have been satisfied.” Gen. Tel. Co. of the Southwest v. Falcon, 457 U.S. 147, 161 (1982).

         To certify a class action, plaintiffs must set forth facts that provide prima facie support for the four requirements of Rule 23(a): (1) numerosity, (2) commonality, (3) typicality, and (4) adequacy of representation. Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541, 2548 (2011); Dunleavy v. Nadler (In re Mego Fir. Corp. Sec. Litig.), 213 F.3d 454, 462 (9th Cir. 2000). These requirements effectively “limit the class claims to those fairly encompassed by the named plaintiff's claims.” Falcon, 457 U.S. at 155 (quoting Califano v. Yamasaki, 442, U.S. 682, 701 (1979)).

         If the Court finds that the action meets the prerequisites of Rule 23(a), the Court must then consider whether the class is maintainable under Rule 23(b). Dukes, 131 S.Ct. at 2548. Rule 23(b)(3) governs cases where monetary relief is the predominant form of relief sought, as is the case here. A class is maintainable under Rule 23(b)(3) where “questions of law or fact common to the members of the class predominate over any questions affecting only individual members, ” and where “a class action is superior to other available methods for fair and efficient adjudication of the controversy.” Fed.R.Civ.P. 23(b)(3). “The Rule 23(b)(3) predominance inquiry tests whether the proposed classes are sufficiently cohesive to warrant adjudication by representation.” Hanlon v. Chrysler Corp., 150 F.3d 1011, 1022 (9th Cir. 1998) (citing Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997)). The predominance inquiry measures the relative weight of the common to individualized claims. Id.

         “Implicit in the satisfaction of the predominance test is the notion that the adjudication of common issues will help achieve judicial economy.” Zinser v. Accufix Research Inst., Inc., 253 F.3d 1180, 1189 (9th Cir. 2001) (citing Valentino v. Carter-Wallace, Inc., 97 F.3d 1227, 1234 (9th Cir. 1996)). In determining superiority, the court must consider the four factors of Rule 23(b)(3): (1) the interests members in the class have in individually controlling the prosecution or defense of the separate actions, (2) the extent and nature of any litigations concerning the controversy already commenced by or against members of the class, (3) the desirability or undesirability of concentrating the litigation of the claims in the particular forum, and (4) the difficulties likely encountered in the management of a class action. Id. at 1190-1993. “If the main issues in a case require the separate adjudication of each class member's individual claim or defense, a Rule 23(b)(3) action would be inappropriate.” Id. (citing 7A Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 1778 at 535-39 (2d. 1986)).

         More than a pleading standard, Rule 23 requires the party seeking class certification to “affirmatively demonstrate . . . compliance with the rule-that is he must be prepared to prove that there are in fact sufficiently numerous parties, common questions of law or fact, etc.” Dukes, 131 S.Ct. at 2551. This requires a district court to conduct “rigorous analysis” that frequently “will entail some overlap with the merits of the plaintiff's underlying claim.” Id.


         A. Rule ...

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