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NERA Expert Provides Market Efficiency and Materiality Analysis for Class Action against Gold Mine Company
The Situation
A class action was brought against a gold exploration and development company (the "Company") following the restatement of the Company's unaudited quarterly financial statements for the first three quarters of 2007. The restatement was the result of a reclassification of certain gold forward contracts entered into by the Company from "executory contracts" to "financial instruments" under Canadian GAAP. Although this reclassification required the Company to recognize certain unrealized gains and losses on its income statements, those unrealized gains and losses were previously disclosed by the Company in the footnotes to its financial statements.
The plaintiff class alleged that the Company's failure to account for its forward contracts as financial instruments was a material misrepresentation, which had the effect of inflating the market price of its shares. Plaintiffs further alleged that shareholders incurred losses as a result of the decline in the price of the shares following the restatement of the Company's financial statements. The stock traded on the Toronto Stock Exchange (TSX) and the Alternative Investment Market (AIM) in London.
NERA's Role
Counsel for the Company retained a NERA team led by Vice President Bradley A. Heys to provide independent analysis of the efficiency of the market for the shares of the Company and to assess the impact on the stock price attributable to the alleged misrepresentations.
The Result
On 27 November 2009, a settlement was announced in the case prior to the class certification hearing and leave application. Under the terms of the settlement, the Company agreed to pay $2.2 million to settle claims brought by shareholders of common law misrepresentation and misrepresentation under the new provisions of the Securities Act (Ontario), which provide for civil liability with respect to the continuous disclosure obligations of a reporting issuer. The court-approved settlement represents four percent of the $55 million in damages claimed by the plaintiffs ($50 million in compensatory damages and $5 million in punitive damages). The Company did not admit any wrong-doing under the terms
of the settlement.