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A case study for investors in environmental danger disclosure

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Many consider the 2015 collapse of the 30-storey-high Fundão dam to be Brazil’s worst environmental disaster ever.

It appears, however, that the collapse, which occurred at an iron ore mining facility operated by Samarco Mineração, a joint venture between BHP Billiton and Brazilian company Vale, perhaps was not a total surprise.

Following the incident, BHP Billiton investors filed a securities fraud class action in the US federal court in New York, alleging that BHP Billiton was aware of the risk of collapse, yet made false or misleading statements and omitted material information about the risk of dam failure (and its safety and risk management protocols generally), and downplayed the significance of the collapse in its aftermath.

In addition to claims under section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), the investors asserted that the company violated its duty to disclose ‘known trends or uncertainties’ as required by Item 303 of Regulation S-K, promulgated by the US Securities and Exchange Commission (SEC). This regulation has come up in a number of cases in recent years, and courts have not applied it consistently.

BHP Billiton sought to have the case dismissed. As to Item 303, the company argued, among other things, that the regulation did not require it to disclose the alleged risks posed by the Fundão dam because those risks were not known to be reasonably likely to have a material effect on the company’s financial condition.

The court largely allowed the case to proceed, upholding claims that the company’s statements regarding safety practices were, as alleged, materially false or misleading under the standard generally applicable to claims under section 10(b) of the Exchange Act. The court dismissed the Item 303 claims, however.

The court relied on a 2015 ruling of the Second Circuit, a federal appellate court, which held that Item 303 can give rise to a private securities fraud claim if the plaintiff sufficiently alleges that the registrant had ‘actual knowledge’ of the relevant trend or uncertainty. Then, analysing SEC guidance regarding Item 303, the court held that the regulation requires disclosure only if there is a substantial probability that the trend or uncertainty would come to fruition and that such occurrence would have a material impact.

The court found that the allegations did not meet this standard. Noting that safety problems with the Fundão dam were within the company’s control, the court found it implausible that the company knew about the risk of dam failure and that such failure would have a material impact if it occurred, yet did nothing about it.

The court concluded, based on the allegations, that the company did not know of a risk that was likely to occur and have a material impact. The court observed that a dam failure could have been minor, rather than the massive catastrophe that in fact occurred. Therefore, the court dismissed the Item 303 claims.

Though Item 303’s reference to known trends or uncertainties seems particularly relevant to corporate disclosures about environmental issues, this ruling illustrates the potential limits of such claims. Other federal courts, however, have applied Item 303 differently.

In 2017, the US Supreme Court agreed to hear an appeal in a different case that could have resolved major questions about Item 303, but the case was removed from the Supreme Court’s calendar after the parties reached a settlement.

The BHP Billiton opinion may be found in BHP Billiton Limited Securities Litigation, 276 F Supp 3d 65 (SDNY 2017). The case is currently in the discovery phase.

Grant & Eisenhofer is preparing what is believed to be the first Australian shareholder class action against BHP Billiton. The firm is working with local Australian counsel Phi Finney McDonald in support of the suit, which is in response to the Samarco mine disaster in Brazil which killed 19 people, wiped out the entire village of Bento Rodrigues and caused significant environmental damage.

The complaint will allege that BHP knew, or should have known, there was a significant risk the dam would collapse as early as October 2013. Despite knowing this information, BHP failed to ‘immediately disclose’ this risk to investors as required under Australian law, specifically the continuous disclosure obligations under § 674 of the Corporations Act 2001 (Cth) (the Act) and Australian Securities Exchange (ASX) Listing Rule 3.1.

The complaint will also allege a claim against BHP for engaging in misleading or deceptive conduct contrary to § 1041H of the Act.

G&E KTMC Funding is offering qualifying investors the opportunity to participate in a risk-free, fully funded, and ATE-insured action on a contingency-fee basis.

Jonathan D Park, associate, Grant & Eisenhofer

Column sponsored and supplied by Grant & Eisenhofer



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