In an order issued on August 29, 2017, the Honorable Naomi Reice Buchwald of the United States District Court for the Southern District of New York partiallydeniedthe motion to dismiss inIn reBHP Billiton Limited Securities Litigation. The court ruled that plaintiffs had sufficiently alleged that BHP knowingly or recklessly made actionable misstatements and omissions regarding its commitment to safety and its risk management controls, in view of the dangerous condition of a massive wastewater dam (“Fundão”) at the Samarco iron ore mine in Brazil, which BHP co-owns.
BHP is a global resources company and is among the world’s top producers of major commodities, including iron ore. It operates under a dual listed company structure, with parent companies BHP Ltd. and BHP Plc operated as a single economic entity by a unified board and management team. The case charges BHP with violations of the Securities Exchange Act of 1934.
The lawsuit, brought on behalf of purchasers of BHP American Depositary Receipts (“ADRs”) between September 25, 2014 and November 30, 2015, arises out of the November 5, 2015 collapse of the Fundão dam, which was used to store “tailings” – wastewater that is a byproduct of mining and may contain harmful elements – at the Samarco iron ore mining complex in the Brazilian state of Minas Gerais. The collapse of the 30-story-high dam, which stored enough tailings to “fill 19 Dallas Cowboys stadiums,” is considered to have resulted in the worst environmental disaster in Brazil’s history. The resulting flood destroyed a nearby town, killed19 people, and caused extensive property and environmental damage.Even today, Brazil is in the process of recovering from the disaster.
The amended complaint alleges that the Fundão dam had structural problems dating back as far as 2009, including visible cracks, and that the emergency action plan in place was severely deficient. Notwithstanding these problems, the complaint alleges, BHP repeatedly made statements about its commitment to health and safety and the adequacy of its safety, risk management and monitoring protocols – statements that disregarded and failed to disclose to investors the precarious condition of the Fundão dam, which presented substantial risks for BHP’s business.
In upholding certain claims against BHP, the court found that the plaintiffs had adequately alleged that “the Samarco board, Samarco executives, and BHP executives were aware of some of these problems and their potential consequences, yet did not address the problems effectively.” The court also ruled that plaintiffs had adequately alleged that BHP’s pre-incident misstatements and omissions concerning safety and risk management were materially false and misleading, and that BHP made them with scienter.Notably, the court rejected the argument that these statements were mere “puffery,” reasoning that investors were induced to rely on these representations, as follows: “By touting its commitment to safety to such a degree, BHP put the topic ‘at issue’ such that we cannot say that, as a matter of law, investors would not find these representations material.”
As the court further noted: “The materiality of these omitted risks is . . . indicated first by BHP’s own acknowledgment, in its SEC filings, that ‘[s]afety, health, environmental and community impacts, incidents or accidents . . . may adversely affect our people, operations and reputation or license to operate,’ and that ‘[e]nvironmental incidents,’ including ‘uncontrolled tailings containment breaches,’ ‘have the potential to lead to material adverse impacts on our operations.’” Imputing certain executives’ knowledge and intent to BHP, the court further held that the complaint “raises a strong inference . . . that these executives knew or should have known of facts suggesting that BHP’s public statements and disclosures relating to the risks at Fundão and Samarco and BHP’s risk management policies were not complete and accurate.”
In re BHP Billiton Limited Securities Litigation, No. 1:16-cv-01445-NRB, Memorandum and Order (S.D.N.Y. Aug. 29, 2017).