United States District Court, C.D. California
IN RE SILVER WHEATON CORP. SECURITIES LITIGATION
Present: The Honorable CHRISTINA A. SNYDER, Judge.
CIVIL MINUTES - GENERAL
(IN CHAMBERS) - PLAINTIFFS' MOTION TO CERTIFY CLASS
(Filed November 1, 2016, dkt. 91)
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.
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.
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.
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.
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.
carefully considered the parties' arguments the Court
finds and concludes as follows.
Silver Wheaton Corporation
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.
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.
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.
Canada's Transfer Pricing Rules
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.
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.
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.
Silver Wheaton's Tax Position with Regard to SW
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.
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.
CRA and Silver Wheaton's Response
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.
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.
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.
Defendants' Allegedly False or Misleading
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.
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.
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.
Plaintiffs and the Proposed Class
Plaintiff Joe Elek and Named Plaintiffs Thomas Bartsch, Larry
Brandow, Diana Choi, Ben Potaracke, Jedrzej Borowczyk, and
Charles Remmel 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
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
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).
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)).
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.
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.
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.