Rhodes v. Gold Resource Corporation et al

Filing 22

ORDER: 1. Defendants' Motion to Dismiss Plaintiff's First Amended and Consolidated Class Action Complaint (Dkt. No. 35 in 12-cv-02832-RBJ) is GRANTED. Plaintiff's amended consolidated class action complaint (Dkt. No. 32 in 12-cv-028 32-RBJ) is DISMISSED WITH PREJUDICE, thereby dismissing cases 12CV2832 and consolidated case 12CV2971. 2. Lead Plaintiff's Motion to Strike or Disregard Portions of Defendants Reply (Dkt. No. 43 in 12-cv-02832-RBJ) is DENIED. 3. Defendants are awarded their costs pursuant to Fed. R. Civ. P. 54 (d)(1) and D.C.COLO.LCivR 54.1. By Judge R. Brooke Jackson on 07/15/13. (alvsl)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge R. Brooke Jackson
Civil Action No. 12-cv-02832-RBJ
(Consolidated with Civil Action No. 12-cv-02971-RBJ)
In re GOLD RESOURCE CORP. SECURITIES LITIGATION

ORDER

This case is before the Court on defendants’ Motion to Dismiss Plaintiff’s First Amended
and Consolidated Class Action Complaint for Violation of the Federal Securities Laws [docket
##35, 36] and Lead Plaintiff’s Motion to Strike or Disregard Portions of Defendants’ Reply in
Support of Defendants’ Motion to Dismiss [#43]. On April 29, 2013, the Court held oral
argument on the motions and took the matters under advisement. See [#46]. This order
addresses all pending motions.
I. Facts
Plaintiff Nitesh Banker is the appointed lead plaintiff in this consolidated action against
Gold Resource Corporation (“GRC”) and four of its officers and directors: William Reid, GRC’s
Chief Executive Officer and Chairman of the Board of Directors; Jason Reid, GRC’s President;
David Reid, GRC’s Vice President, Secretary, and Treasurer; and Bradley Blacketor, GRC’s
Chief Financial Officer. Plaintiff Banker has filed a First Amended and Consolidated Class
Action Complaint [#32], individually and on behalf of all purchasers of GRC common stock
between January 30, 2012 and November 8, 2012 (the “Class Period”). Plaintiff alleges that
defendants committed securities fraud pursuant to Section 10(b) of the Securities Exchange Act
and Rule 10b-5. 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. Plaintiff also asserts claims against

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individual defendants as “control persons” pursuant to Section 20(a) of the Act. 15 U.S.C. §
78t(a).
A. Gold Resource Corporation and the El Aguila Mining Project.
GRC is a publicly traded mining company that primarily focuses on the production and
development of gold and silver projects. First Amended Complaint ¶ 30. GRC is considered an
“exploration stage company” that has seven full-time employees in the United States and more
than 300 Mexican nationals as employees at its properties in Mexico. Id. ¶ 31–32.
The facts of this case involve commercial production on GRC’s El Aguila project in
Mexico, which primarily involves mining and processing ore from an open-pit mine and an
underground mine at the La Arista vein system. Id. ¶ 39–40. Much of GRC’s activity at issue
involved “stoping,” or the removal of wanted ore from an underground mine leaving behind an
open space called a “stope.” Id. at iii. GRC also engaged in “long-hole stoping,” which is a
profitable stoping technique that “can be the lowest cost method of mining when large ore bodies
are located in strong country rock.” Id. On July 1, 2010 commercial production at the El Aguila
project was announced; active underground mining began in November 2010. Id. ¶ 39, 41.
GRC’s business plan was to increase production from mining—as measured in ounces of
AuEq, or precious metal gold equivalent—dramatically in its initial years. Id. ¶ 44. This
production measurement “is determined by taking the silver payable metal ounces produced and
converting them to the dollar equivalent of gold by using the gold to silver average price ratio.
The gold and silver average prices used are the actual metal prices realized from the sales of
metals concentrate.” Id. at iii. Specifically, GRC’s plan was to increase from 70,000 ounces of
AuEq in the first year of mining operations, to 100,000 in the second year, to 120,000 for the

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following four years. Id. ¶ 44. The business plan also called for substantial dividends for
investors. The dividend program was formalized in 2011. Id. ¶ 47.
Plaintiff alleges, however, that the El Aguila project began suffering from severe
production problems beginning in early 2012. These alleged problems included:
(1) overly aggressive expansion of underground mining operations during the first
quarter of 2012;
(2) forced mining of lower grade zones of the deposit;
(3) failure to make “significant operational efficiency improvements . . . ,
including the need to upgrade electric power through the mine, expand ventilation
and handle increased ground water the deeper the mine went, limiting the
Company’s ability to mine higher grade stopes;” and
(4) decreased long-hole stoping, forcing GRC to process more diluted
development and mine from areas of the deposit with lower metal grades.
Id. ¶ 49. Plaintiff alleges that because of these problems, tonnes (metric tons) produced by
stoping as a percentage of milled ore decreased from 55% during the first quarter to 14% during
the second quarter of 2012. Id.
Furthermore, plaintiff alleges that GRC was improperly “recognizing ‘sales’ that were
not actual sales of product mined, but were part of an overbilling scheme,” thus inflating their
reported production statistics. Id. ¶ 9. GRC has two major buyers for all of its mining
concentrate. Id. ¶ 50. GRC invoices these buyers first with a “provisional invoice,” which is
calculated using GRC’s own sampling and assaying results. Id. ¶ 51. GRC recognizes revenue
based upon these provisional invoices. Id. On delivery, another concentrate sample, the “final
sample,” is taken. Id. ¶ 52. The final price paid by the buyer is adjusted to the final sample
results. Id. Therefore, any difference between the provisional sample and the final sample
would “inflate” previously reported revenue based on provisional invoices.

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B. Defendants’ Statements during the Class Period.
According to plaintiff, these production problems and the “overbilling scheme” were
actively concealed from GRC’s investors through a series of material, false and misleading
statements by GRC and its executive officers. In essence, defendants’ allegedly misleading
statements fall within the following categories: (1) announcements of production or revenue
results, particularly those characterizing them as “record” results; (2) statements about
anticipated production results in the future; (3) assurances of the effectiveness of GRC’s internal
control over financial reporting; and (4) statements related to what plaintiff characterizes as the
“overbilling scheme” that resulted in GRC issuing a restatement in November 2012.
On January 30, 2012, the beginning of the Class Period, GRC announced its preliminary
“record” production results for end of 2011. Id. ¶ 65. The press release stated, “We look
forward to achieving our 2012 targets as we continue on our trajectory for aggressive production
growth.” Id. ¶ 62; see also id. ¶ 65 (defendant William Reid stating that “these results
demonstrate our ability to execute the business plan we have articulated from day one, and we
are just getting started” and that GRC was “one of the lowest cost gold producers with one of the
tightest capital structures in the industry”).
Plaintiff claims, however, that as early as February 2012, GRC began observing
“significant variances” between its provisional invoices and the final sample assays performed
by the buyer, which would cause negative adjustments to the final revenue recognized by GRC.
Id. ¶ 54. Plaintiff alleges that the buyer of the concentrates informed GRC of the significant
variances “within a month or two” following shipment of the concentrate. Id.
On February 29, 2012, GRC filed its 2011 Form 10-K annual report stating that
“management concluded that we maintained effective internal control over financial reporting as

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of December 31, 2011.” Id. ¶ 66. The Form 10-K included a sworn certification by CEO
William Reid pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Id. ¶ 67.
During a conference call with investors on March 1, 2012, William Reid reiterated the
record production results in 2011, stated that stope development at La Arista was on track with
anticipated increased stoping. Id. ¶ 70 (“[A]t this point in time, we feel comfortable that we will
be able to achieve our 900 tons per day [of production].”).
In an April 9, 2012 press release GRC announced its first quarter preliminary results,
which were “in line” with anticipated production, in part due to “increase long-hole stoping.” Id.
¶ 75; see also id. ¶ 76 (defendant Jason Reid stating that “[f]irst quarter record production sets a
firm base from which to continue our growth trajectory of producing more low cost ounces”).
Another press release on April 30 stated, “With record first quarter production, the increased
April dividend to six cents per common share per month speaks to the positive outlook we have
for the continued success and production trajectory of the Aguila Project.” Id. ¶ 78.
A May 10, 2012 press release reiterated similar sentiments. Id. ¶ 80 (defendant Jason
Reid stating that “[t]he first quarter set a strong base for the Company with record production,
record revenues and dividends of $7.9 million while focusing on aggressive growth”). GRC also
filed its quarterly report for the first financial quarter with the SEC on May 10. Id. ¶ 81–83
(“There was no change in our internal control over financial reporting that occurred during the
quarter ended March 31, 2012, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.”). On May 11, 2012, defendant Jason Reid
again stated that GRC was “transitioning into more long-hole open stoping.” Id. ¶ 84.

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On July 19, 2012, in an after-hours press release, GRC for the first time disclosed what
the plaintiff characterizes as “massive production problems.” Id. ¶ 90. The press release
disclosed that second quarter production “was lower than expected,” which was in part due to
Arista underground mine infrastructure needs coupled with mining of lower grade
zones of the deposit . . . . These development activities limited the Company’s
preparation and mining of higher grade stopes. Decreases in long-hole stoping
resulted in both processing more diluted development ore and required mining
from areas of the deposit with lower metal grades. Tonnes from stoping as a
percentage of milled ore decreased from an estimated year-to-date high of 55%
during the first quarter of 2012 to an estimated year to-date low of 15% during the
second quarter.
As a result of the decrease in second quarter production, the Company revises its
2012 Outlook by ~15% to a targeted annual production range of 100,000 to
120,000 ounces AuEq, at an estimated 53:1 price ratio. This represents a decrease
from its previous 2012 target of 120,000 to 140,000 AuEq.
Id. ¶ 89. Plaintiff alleges that this caused GRC’s stock to drop on the next trading day from
$24.99 to $17.34, more than a thirty percent decrease. Id. ¶ 93.
On August 9, 2012, GRC announced “disappointing” second quarter production results
and echoed that production problems during the second quarter slowed results. Id. ¶ 96. On the
same day, GRC filed its quarterly report for the second quarter with the SEC. Id. ¶ 97 (“There
was no change in our internal control over financial reporting that occurred during the quarter
ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.”).
The next day, defendant William Reid assured investors on a conference call that “I am
pleased to report we are now back mining from development stopes in higher grade zones . . . . I
can state that our production is going to more of what we expect.” Id. ¶ 104. An investor
inquired on the long-hole stoping percentage released in the previous July 19 press release:
Q: The 7/19 PR stated that the stope percentage for Q1 was 55%. What stope
level was milled in Q1?

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A: Okay. A little bit of confusion over that. We gave the high and the low,
basically if you look at the production from stoping in Q1, it averaged 40%. If
you look at the stoping in Q2, it averaged 20%. So basically it was about half. In
addition we were actually in the second quarter mining some of that from lower
grade areas. So that’s the actual numbers.
Id. ¶ 106; see supra, id. ¶ 89 (press release stating that “[t]onnes from stoping as a percentage of
milled ore decreased from an estimated year-to-date high of 55% during the first quarter of 2012
to an estimated year to-date low of 15% during the second quarter”).
On October 17, 2012, GRC announced in a press release its third quarter results, which
were significantly lower than the targeted production even though they showed an increase from
the second quarter. Id. ¶ 110. The press release also disclosed a billing dispute requiring
adjustments to previous invoices:
A dispute arose during the third quarter with the buyer of the Company’s metal
concentrates that involves the buyer’s handling, control and sampling of those
concentrates at the buyer’s warehouse, and the resulting assays the buyer obtained
from those samples. The buyer is claiming net adjustments (reductions) to the
Company’s provisional invoices of approximately 2,300 AuEq ounces.
Id. ¶ 112. Plaintiff alleges that, contrary to GRC’s representations in the press release, “the
‘dispute’ did not concern possible misconduct by the buyer, but known misconduct by GRC in
improperly billing the buyer for product that it never sent to the buyer.” Id. ¶ 113. After the
press release, GRC’s shares dropped from its previous day’s closing price of $20.15 per share to
$18.01 per share, a 10% decrease. Id. ¶ 111.
On the last day of the Class Period, November 8, 2012, GRC issued a press release after
the close of the market that indicated that during the third quarter of 2012 the Company’s
executive management became aware of “large variances between the results of the Company’s
preliminary assays used for determining the provisional sales price for its concentrate sales when
compared to the assays obtained from samples after shipment to the buyer used to determine

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final sales price.” Id. ¶ 116. After the press release, the GRC stock again dropped in value, by
$0.50 per share from the previous day. Id. ¶ 118.
A Form 8-K submitted to the SEC detailed the related restatement by GRC and
settlement with the buyer. Id. ¶ 116. The settlement with the buyer required, for the purposes of
final invoice and payment, the adoption of the preliminary assays taken prior to shipment of
concentrates for April, May and June 2012, but not for February and March 2012. Id. This
resulted in GRC restating its “first and second quarter 2012 financial statements to reflect a net
reduction to revenues of approximately $3.7 million for the six months ended June 30, 2012, of
which $3.0 million represents the cash settlement with the buyer and $0.7 million represents a
non-cash derivative adjustment.” Id.
GRC admitted that “[t]his deficiency constitutes a material weakness in the Company’s
control over financial reporting,” but also stated that “[a]s of September 30, 2012, management
believes the internal control deficiency has been remediated.” Id. According to plaintiff, this
shows that “by at least September 30, 2012, the Company was not only aware that material
problems existed with its systems of internal accounting control, but that it had already taken
remedial steps and allegedly had corrected the problems.” Id.
II. Motion to Strike [#43]
Before reaching the motion to dismiss, plaintiff has asked this Court to strike or disregard
portions of the defendants’ reply brief [#40] that employ “reply by ambush” tactics. Plaintiff
argues that defendants do not respond to plaintiff’s arguments in his response [#39] and instead
assert new arguments not previously raised in their motion to dismiss.
Although plaintiff is correct that the Court “generally does not review issues raised for
the first time in a reply brief,” the Court will “make an exception when the new issue argued in
the reply brief is offered in response to an argument raised in the [plaintiff’s] brief.” Beaudry v.
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Corr. Corp. of Am., 331 F.3d 1164, 1166 n. 3 (10th Cir. 2003). In responding to defendants’
argument that GRC’s mining-projection statements are covered by the PSLRA’s safe harbor
provision for forward-looking statements, plaintiff relies on three statements by GRC that he
claims are not forward-looking but historical statements. Defendants are responding to that
argument—which plaintiff himself raises in the response—when defendants argue that those
three statements do not support a securities fraud claim. Accordingly, the Court declines to
strike or disregard any portion of the defendants’ reply brief.
III. Motion to Dismiss [#35]
A. Standard of Review.
When “faced with a Rule 12(b)(6) motion to dismiss a § 10(b) action, courts must, as
with any motion to dismiss for failure to plead a claim on which relief can be granted, accept all
factual allegations in the complaint as true.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551
U.S. 308, 322 (2007). “[C]ourts must consider the complaint in its entirety, as well as other
sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular,
documents incorporated into the complaint by reference, and matters of which a court may take
judicial notice.” Id.
Complaints in civil actions generally should contain “a short and plain statement of the
claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. (8)(a)(2). “A plaintiff suing
under Section 10(b), however, bears a heavy burden at the pleading stage.” In re Level 3
Communications, Inc. Securities Litigation, 667 F.3d 1331, 1333 (10th Cir. 2012). To state a
securities fraud claim, a plaintiff’s complaint must allege that:
(1) the defendant made an untrue or misleading statement of material fact, or
failed to state a material fact necessary to make statements not misleading; (2) the
statement complained of was made in connection with the purchase or sale of
securities; (3) the defendant acted with scienter, that is, with intent to defraud or
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recklessness; (4) the plaintiff relied on the misleading statements; and (5) the
plaintiff suffered damages as a result of his reliance.
Id. (quoting Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1095 (10th Cir. 2003)).
Prior to the passage of the Private Securities Litigation Reform Act of 1995 (PSLRA),
Federal Rule of Civil Procedure Rule 9(b) governed the pleading requirements for scienter. City
of Philadelphia v. Fleming Cos., 264 F.3d 1245, 1258 (10th Cir. 2001). Now, however, under
the PSLRA, a heightened pleading standard applies to the first and third of these elements. Id.
The PSLRA requires that:
(1) [T]he complaint shall specify each statement alleged to have been misleading,
the reason or reasons why the statement is misleading, and, if an allegation
regarding the statement or omission is made on information and belief, the
complaint shall state with particularity all facts on which that belief is formed.
(2) [T]he complaint shall, with respect to each act or omission alleged to violate
this chapter, state with particularity facts giving rise to a strong inference that the
defendant acted with the required state of mind.
15 U.S.C. § 78u-4(b)(1)–(2).
B. Conclusions.
Plaintiff brings this securities fraud case under Section 10(b) of the Securities Exchange
Act and Rule 10b-5. 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. Under Section 10(b) of the
Securities Exchange Act, it is unlawful to “use or employ, in connection with the purchase or
sale of any security . . . any manipulative or deceptive device or contrivance in contravention of
such rules and regulations as the Commission may prescribe.” 15 U.S.C. § 78j(b). In
implementing the Securities Exchange Act, Rule 10b-5 prohibits, inter alia, “mak[ing] any
untrue statement of a material fact.” 17 C.F.R. § 240.10b-5.
In moving to dismiss the Class Action Complaint, the defendants challenge the
sufficiency of the pleadings on two grounds: (1) whether the class action complaint sufficiently
pleads facts establishing that defendants made false or misleading statements of material fact,
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particularly as to defendant’s mining projection statements, which defendants argue are protected
by the PSLRA’s safe harbor provision; and (2) whether the complaint sufficiently pleads facts
establishing scienter, particularly with respect to any statements related to the November
restatement.1 I address these arguments in turn below.
Before delving into any detailed analysis, however, I first note that defendants have filed
two unopposed requests for judicial notice of various publicly-available documents, including
GRC press releases, forms filed with the SEC, transcript of earnings conference calls, and a
Google Finance chart showing opening and closing stock prices on August 10, 2012. [##37, 41].
The Court takes judicial notice of these documents pursuant to Federal Rule of Evidence
201(b)(2). See Tellabs, 551 U.S. at 322; GFF Corp. v. Associated Wholesale Grocers, 130 F.3d
1381, 1384 (10th Cir. 1997) (“if a plaintiff does not incorporate by reference or attach a
document to its complaint, but the document is referred to in the complaint and is central to the
plaintiff’s claim, a defendant may submit an indisputably authentic copy to the court to be
considered on a motion to dismiss”).
1. Forward-Looking Statements.
GRC first argues that all statements that GRC and its officers made about its mining
projections were forward-looking statements, and that they therefore are not actionable pursuant
to the PSLRA’s safe harbor provision in 15 U.S.C. § 78u-5(c). Plaintiff responds that the

1

Among other things defendants suggest that the First Amended Complaint is an example of “puzzle pleading.” See
Level 3 Communications, 667 F.3d at 1339 n. 8 (citing Judge Brimmer’s underlying order). The complaint is
lengthy, nearly seventy-pages in all, but as in Level 3, it has a tendency to “excerpt[] long passages including
numerous statements and, to a large degree, leave[] the Court to the task of teasing out which specific statements are
at issue.” Id. (internal quotation marks omitted). In light of the amount of briefing that has been filed
notwithstanding these failures, and now “[h]aving managed to ‘teas[e] out’ the most relevant statements from
plaintiff’s lengthy complaint,” this Court, like the Level 3 courts, finds that this is not a particularly helpful manner
of pleading.

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complaint pleads “misstatements of historical fact,” citing to three specific statements, and that
these misstatements of historical fact are not protected by the safe harbor. Resp., [#39] at 15–18.
“Congress enacted the safe-harbor provision in order to loosen the ‘muzzling effect’ of
potential liability for forward-looking statements, which often kept investors in the dark about
what management foresaw for the company.” Harris v. Ivax Corp., 182 F.3d 799, 806 (11th
Cir.1999) (citing H.R. Conf.Rep. No. 104369, at 42 [1995], reprinted in 1995 U.S.C.C.A.N. 730,
741). Accordingly, § 78u-5(c) protects “any forward-looking statement, whether written or
oral,” where:
(A) the forward-looking statement is-(i) identified as a forward-looking statement, and is accompanied by
meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those in the forward-looking
statement; or
(ii) immaterial; or
(B) the plaintiff fails to prove that the forward-looking statement-(i) if made by a natural person, was made with actual knowledge by that
person that the statement was false or misleading; or
(ii) if made by a business entity; was-(I) made by or with the approval of an executive officer of that
entity; and
(II) made or approved by such officer with actual knowledge by
that officer that the statement was false or misleading.
§ 78u-5(c)(1)(A)–(B).
The Tenth Circuit has yet to determine whether the three protected categories—(1)
forward-looking statements accompanied by “meaningful cautionary statements,” (2) forwardlooking statements that are “immaterial,” and (3) forward-looking statements made without
“actual knowledge” of its falsity—are to be read disjunctively as the statutory language suggests,
or conjunctively such that the “actual knowledge” requirement spans to the first two categories.
Cf. In re Aetna, Inc. Securities Litigation, 617 F.3d 272, 278–79 (3d Cir. 2010). Other circuit
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courts, however, have held that the “actual knowledge” test in § 78u-5(c)(1)(B) is not read into
the first two tests. See In re Cutera Securities Litigation, 610 F.3d 1103, 1112–13 (9th Cir.
2010) (listing cases holding that disjunctive reading is mandated by the statutory text). I agree.
Specifically, in the Aetna case the court concluded that “[t]he logical reading of the
statute is simply to take it as written—subsections (A) and (B) and their subpoints each offer safe
harbors for different categories of forward-looking statements. The defendants’ state of mind is
not relevant to subsection (A).” Id. at 1113. In other words, even if the defendants made a
forward-looking statement with knowledge of its false or misleading nature, that forward-looking
statement is still protected if it is either immaterial or “accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to differ materially from
those in the forward-looking statement.” § 78u-5(c)(1)(A)(i)–(ii). I conclude that this is a
reasonable and logical interpretation of the statute.
Here, the defendants argue that their statements are not actionable both because of the
presence of meaningful cautionary language and because plaintiff fails to allege actual
knowledge. I then look first at which of the numerous allegedly false and misleading statements
are “forward-looking” under the statute. See Aetna, 617 F.3d at 281. Then I turn to whether the
forward-looking portions of the statements are protected under the meaningful cautionary
language test or under the actual knowledge test.2
a. Mixed Statements of Historical Fact.
Section 78u-5(i)(1) defines the term “forward-looking statement” as:

2

But, as I discuss below in Part III.B.2, the class action complaint fails to allege particularized
facts establishing scienter, regardless of whether these statements are considered “mixed”
statements of current fact and future projection.
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(A) a statement containing a projection of revenues, income (including income
loss), earnings (including earnings loss) per share, capital expenditures, dividends,
capital structure, or other financial items;
(B) a statement of the plans and objectives of management for future operations,
including plans or objectives relating to the products or services of the issuer;
(C) a statement of future economic performance, including any such statement
contained in a discussion and analysis of financial condition by the management
or in the results of operations included pursuant to the rules and regulations of the
Commission;
(D) any statement of the assumptions underlying or relating to any statement
described in subparagraph (A), (B), or (C);
(E) any report issued by an outside reviewer retained by an issuer, to the extent
that the report assesses a forward-looking statement made by the issuer; or
(F) a statement containing a projection or estimate of such other items as may be
specified by rule or regulation of the Commission.
The distinction must be made between statements of future projections and statements of
current or historical fact, as the latter are not protected by the safe harbor. See, e.g., Mishkin v.
Zynex Inc., No. 09-CV-00780-REB-KLM, 2011 WL 1158715, at *5 (D. Colo. Mar. 30, 2011)
(citing Grossman v. Novell, Inc ., 120 F.3d 1112, 1123 (10th Cir. 1997), holding the same under
the “bespeaks caution” doctrine); In re Ribozyme Pharmaceuticals, Inc. Securities Litigation,
119 F. Supp. 2d 1156, 1163 (D. Colo. 2000). Here, the alleged false and misleading statements
do include many that are at least superficially “forward-looking.” For example, defendants
emphasize statements such as those in their January 30 and February 29 press releases: “We look
forward to achieving our 2012 targets as we continue on our trajectory for aggressive production
growth;” and “these results demonstrate our ability to execute the business plan we have
articulated from day one, and we are just getting started.” Id. ¶ 62, 65 (emphasis added).
Other examples include statements such as:
“[A]t this point in time, we feel comfortable that we will be able to achieve
our 900 tons per day [of production].” (March 1 conference call, id. ¶ 70).

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“First quarter record production sets a firm base from which to continue our
growth trajectory of producing more low cost ounces.” (April 9 press release,
id. ¶ 75).
“With record first quarter production, the increased April dividend to six cents
per common share per month speaks to the positive outlook we have for the
continued success and production trajectory of the Aguila Project.” (April 30
press release, id. ¶ 78).
“The first quarter set a strong base for the Company with record production,
record revenues and dividends of $7.9 million while focusing on aggressive
growth.” (May 10 press release, id.¶ 80).
“With the next three quarters of production prepared and ready to be stoped
we believe we have created the lead time needed to continue Arista mine
production and development on a more sustainable long term basis.” (July 19
press release, id. ¶ 94).
“I am pleased to report we are now back mining from development stopes in
higher grade zones . . . . I can state that our production is going to be more of
what we expect.” (August 10 conference call, id. ¶ 104).
Nonetheless, on a closer look, many of these statements are “mixed” statements of both
present and future events. “Forward-looking conclusions often rest both on historical
observations and assumptions about future events.” Harris v. Ivax Corp., 182 F.3d 799, 806
(11th Cir. 1999). “The mere fact that a statement contains some reference to a projection of
future events cannot sensibly bring the statement within the safe harbor if the allegation of
falsehood relates to non-forward-looking aspects of the statement.” In re Stone & Webster, Inc.
Securities Litigation, 414 F.3d 187, 213 (1st Cir. 2005). Rather, “a mixed present/future
statement is not entitled to the safe harbor with respect to the part of the statement that refers to
the present.” Institutional Investors Group v. Avaya, Inc., 564 F.3d 242, 256 (3d Cir. 2009)
(quoting Makor Issues & Rights, Ltd. v. Tellabs Inc. (Tellabs II), 513 F.3d 702, 705 (7th Cir.
2008).
In Tellabs II, the Seventh Circuit interpreted a statement that sales of a product were “still
going strong” as meaning “both that current sales were strong and that they would continue to be
15

so, at least for a time, since the statement would be misleading if Tellabs knew that its sales were
about to collapse.” 513 F.3d at 705. The court held that safe harbor protection did not extend to
any representation about current sales. Id.
Similarly, in Stone & Webster, the First Circuit interpreted a statement that the company
“has on hand and has access to sufficient sources of funds to meet its anticipated . . . needs” as
being a mixed statement. 414 F.3d at 207, 212. Despite the statement’s referral to anticipated
future needs for funds, “the alleged falsehood was in the fact that the statement claimed that the
Company had access to ample cash at a time when the Company was suffering a dire cash
shortage. The claim was not that the Company was understating its future cash needs.” Id. at
213.
In Institutional Investors, the statements at issue included: “Our first quarter results
position us to meet our goals for the year;” and “we are on track to meet our goals for the year,
even though there were some aspects to our performance that are below our expectations and that
we are working on to improve.” 564 F.3d at 254. The Third Circuit held that “[u]nlike the
language in Tellabs II and Stone & Webster, the ‘on track’ and ‘position us’ portions of the
January 25, 2005 statements, when read in context, cannot meaningfully be distinguished from
the future projection of which they are a part.” Id. at 255. Instead, any “current fact”
representations in these statements are too vague to be actionable. Id. “These statements do not
justify the financial projections in terms of any particular aspect of the company’s current
situation; they say only that, whatever that situation is, it makes the future projection attainable.
Such an assertion is necessarily implicit in every future projection.” Id.
Some of the statements challenged in this case resemble those in Tellabs II . The
defendants, in affirming their future projections, repeatedly related back to and emphasized the

16

“record” production results or “aggressive growth” that GRC had purportedly been experiencing.
See, e.g., First Amended Complaint ¶ 62 (“as we continue on our trajectory for aggressive
production growth”); ¶ 75 (“record production sets a firm base from which to continue our
growth trajectory”); ¶ 78 (“positive outlook we have for the continued success and production
trajectory of the Aguila Project”); ¶ 80(“first quarter set a strong base . . . while focusing on
aggressive growth”). The statements go a step further than those in Institutional Investors; they
do in fact “justify the financial projections in terms of [a] particular aspect of the company’s
current situation.” 564 F.3d at 255.
These statements not only suggest that GRC would see “aggressive growth” in the future,
but necessarily that this growth would be a continuation of GRC’s current experience of
“aggressive growth” and “record production.” The alleged falsehood here is not that GRC was
overstating its hopes for future growth, but rather that GRC was at that time growing
aggressively already. See Resp., [#39] at 17; cf. Stone & Webster, 414 F.3d at 213. Thus, to the
extent that these statements make affirmations about the current state of GRC’s growth or
production, those aspects of the statements are not forward-looking and not protected. Indeed,
these statements would be misleading if GRC knew that its production rate were in collapse or
about to collapse. Cf. Tellabs II, 513 F.3d at 705.
b. Accompanying Cautionary Statements and Actual Knowledge.
Any future projections on the flip side of these mixed statements, however, are protected
under the safe harbor provision as long as they are immaterial, made with accompanying
meaningful cautionary statements, or made without actual knowledge of their falsity. § 78u5(c)(1). I agree with the defendants both that the forward-looking aspects of the statements were
sufficiently “accompanied by meaningful cautionary statements identifying important factors

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that could cause actual results to differ materially from those in the forward-looking statement,”
and that plaintiff failed to plead sufficient allegations establishing defendants’ actual knowledge
of the falsity of those predictions. § 78u-5(c).
The press releases by GRC all contained a “cautionary statements” warning that any
forward-looking statements “involve risks and uncertainties” and that they “are based upon
information available to Gold Resource Corporation on the date of this press release, and the
company assumes no obligation to update any such forward-looking statements.” See, e.g.,
January 30 press release, [#38-2] at 7; February 29 press release, [#38-3] at 5–6; April 9 press
release, [#38-4] at 2–3.3 GRC warned further that its “actual results could differ materially from
those discussed in this press release. In particular, there can be no assurance that production will
continue at any specific rate.” Id.

3

The full “Cautionary Statements” on the press releases is as follows:
This press release contains forward-looking statements that involve risks and
uncertainties. The statements contained in this press release that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act. When used in this press
release, the words “plan”, “target”, “anticipate,” “believe,” “estimate,” “intend”
and “expect” and similar expressions are intended to identify such forwardlooking statements. Such forward-looking statements include, without limitation,
the statements regarding Gold Resource Corporation’s strategy, future plans for
production, future expenses and costs, future liquidity and capital resources, and
estimates of mineralized material. All forward-looking statements in this press
release are based upon information available to Gold Resource Corporation on the
date of this press release, and the company assumes no obligation to update any
such forward-looking statements. Forward looking statements involve a number
of risks and uncertainties, and there can be no assurance that such statements will
prove to be accurate. The Company’s actual results could differ materially from
those discussed in this press release. In particular, there can be no assurance that
production will continue at any specific rate. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed in
the Company’s 10-K filed with the Securities and Exchange Commission[.]

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“[W]hen an investor has been warned of risks of a significance similar to that actually
realized, she is sufficiently on notice of the danger of the investment to make an intelligent
decision about it according to her own preferences for risk and reward.” Harris v. Ivax Corp.,
182 F.3d 799, 807 (11th Cir. 1999); see also In re Williams Securities Litigation, 339 F. Supp. 2d
1206, 1220 (N.D. Okla. 2003). Even “mere boilerplate” cautionary statements such as GRC’s
form warning have been upheld as sufficient. Id. Thus, the cautionary statements here suffice to
bring the forward-looking portions of the challenged statements under the safe harbor of § 78u5(c).
Moreover, the forward-looking statements are protected because plaintiff alleges no facts
establishing “actual knowledge” of falsity of the projection statements. Under the safe harbor
provision, a statement is protected where the plaintiff fails to prove that it was either made by a
natural person “with actual knowledge by that person that the statement was false or
misleading,” or made by a business entity through an executive officer “with actual knowledge
by that officer that the statement was false or misleading.” § 78u-5(c).
“A complication introduced by the Private Securities Litigation Reform Act is that ‘actual
knowledge’ of falsity, not merely indifference to the danger that a statement is false, is required
for liability for ‘forward-looking’ statements—predictions or speculations about the future.”
Tellabs II, 513 F.3d at 705 (citing § 78u-5(c)(1)(B)(ii)). Thus, at the pleadings stage, the
heightened scienter requirement is further heightened: “the ‘strong inference’ that must be drawn
to avoid dismissal cannot be an inference merely of recklessness if predictions are challenged as
fraudulent.” Id.; see also Institutional Investors, 564 F.3d at 274 (“the scienter requirement for
forward-looking statements is stricter than that for statements of current fact”).

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Plaintiff here has failed to state beyond mere conclusory allegations that any of the
individual defendants or other executives of GRC had actual knowledge of the falsity of their
statements at the time the statements were made. See Grossman, 120 F.3d at 1124 (“plaintiff
must set forth, as part of the circumstances constituting fraud, an explanation as to why the
disputed statement was untrue or misleading when made”); see also Andropolis v. Red Robin
Gourmet Burgers, Inc., 505 F. Supp. 2d 662, 681 (D. Colo. 2007). Instead, plaintiff pleads only
that defendants, as a natural consequence of their executive positions, had access to adverse
information related to GRC’s growth projections and should have known the projections were
unattainable. See First Amended Complaint ¶ 145. These allegations do not pass muster under
the stringent “actual knowledge” test in the safe harbor provision. See Fleming Cos., 264 F.3d at
1264. Even under the less strict scienter requirement for statements of current fact, “[a]llegations
that a securities fraud defendant, because of his position within the company, ‘must have known’
a statement was false or misleading are ‘precisely the types of inferences which [courts], on
numerous occasions, have determined to be inadequate.’” Id. (quoting In re Advanta Corp.
Securities Litigation, 180 F.3d 525, 539 (3d Cir. 1999). “Generalized imputations of knowledge
do not suffice, regardless of defendants’ positions within the company.” Id.; cf. Adams, 340 F.3d
at 1105–06 (particularized facts establishing scienter where chief financial officer was directly
informed of unprofitable ventures and where his own complaints demonstrated knowledge of the
future loss).
Accordingly, I find that these portions of the “mixed” statements that are forward-looking
are protected under the PSLRA’s safe harbor provision and are therefore insulated from liability
under federal law. I next turn to those historical misstatements of fact that plaintiff challenges.

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2. Non-Forward-Looking Statements.
Along with the “historical misstatements of fact” contained in the “mixed” statements
above with respect to GRC’s record production and aggressive growth, plaintiff also emphasizes
statements between March and May 2012 regarding GRC’s increasing its long-hole stoping;
statements in the July 19, 2012 press release as to the first quarter stoping rate; and statements
regarding GRC’s profits resulting from its “overbilling scheme,” culminating in the November
restatement. See Resp., [#39] at 15-26. These, plaintiff argues, were historical statements that
were either false or misleading. Id. Defendants respond that these statements, even if not
protected by the safe harbor, cannot establish a securities fraud action, because plaintiff fails to
allege facts establishing a strong inference of scienter.
A “strong inference” of scienter must be “a conclusion logically based upon particular
facts that would convince a reasonable person that the defendant knew a statement was false or
misleading.” Adams, 340 F.3d at 1105. “To qualify as ‘strong’ . . . , an inference of scienter
must be more than merely plausible or reasonable—it must be cogent and at least as compelling
as any opposing inference of nonfraudulent intent.” Tellabs, 551 U.S. at 314 (internal quotation
marks and citations omitted). To survive a motion to dismiss, “[t]he complaint shall, with
respect to each act or omission alleged to violate this chapter, state with particularity facts giving
rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. §
78u-4(b)(2). “When reviewing a plaintiff’s allegations of scienter under the PSLRA, a court
should . . . examine the plaintiff’s allegations in their entirety . . . and determine whether the
plaintiff’s allegations, taken as a whole, give rise to a strong inference of scienter.” Fleming
Cos., 264 F.3d at 1263.

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First, as to any statements that GRC was experiencing “record” production results and
“aggressive growth,” this Court finds that plaintiff has failed sufficiently to allege that
defendants knew that these statements were false—if they are false at all. Rather, labeling the
production rate as “record” or the growth rate as “aggressive” is a good example of “corporate
optimism” or “mere puffing” that is “not capable of objective verification.” Grossman, 120 F.3d
at 1119. In a similar vein, with respect to statements by GRC that it was increasing its long-hole
stoping, the complaint lacks particularized allegations showing either the falsity of those
statements at the time they were made or defendants’ contemporaneous knowledge of the laterdisclosed problems that led to decreased long-hole stoping.
“Plaintiffs should not be allowed to proceed with allegations of fraud by hindsight . . .
because corporate officials should be liable for failing to reveal only those material facts
reasonably available to them.” Fleming Cos., 264 F.3d at 1260 (internal quotation marks and
citation omitted). “What makes many securities fraud cases more complicated is that often there
is no reason to assume that what is true at the moment plaintiff discovers it was also true at the
moment of the alleged misrepresentation, and that therefore simply because the alleged
misrepresentation conflicts with the current state of facts, the charged statement must have been
false.” Grossman, 120 F.3d at 1124. As is common with securities fraud cases where an
intervening event—the production problems in the instant case—occurs “between the time the
complained-of statement was made and the time a more sobering truth is revealed (precipitating
a drop in stock price),” the plaintiff has the burden to plead, “as part of the circumstances
constituting fraud, an explanation as to why the disputed statement was untrue or
misleading when made.” Id.

22

Here, plaintiff has pleaded no facts showing that GRC knew at each iteration of its
production results that those results were not as represented. Nor has plaintiff pleaded facts
suggesting that GRC knew in March through May that long-hole stoping was not an option or
that GRC intended not to transition into it. Any after-the-fact admissions regarding production
problems may establish that the defendants made statements that were false in hindsight, but that
is insufficient to establish fraud. Level 3 Communications, 667 F.3d at 1347. The Court cannot,
without particularized cause, assume that the later-disclosed production problems were known to
GRC or its executive officers at the moment of the alleged misrepresentations.
Another misleading statement on which plaintiff focuses seems to result from investor
confusion over the July 19 press release, in which GRC announced that “[t]onnes from stoping as
a percentage of milled ore decreased from an estimated year-to-date high of 55% during the first
quarter of 2012 to an estimated year to-date low of 15% during the second quarter.” First
Amended Complaint ¶¶ 89, 106. Plaintiff argues that GRC’s statement intentionally mislead
investors into believing that the stope percentage for the first quarter was an average of 55%,
relying on one investor’s apparent misunderstanding. However, as GRC explained on the
August 10 earnings call, the percentage was stated in the press release as a year-to-date high
stope percentage, which occurred in the first quarter. Id. ¶ 106. Plaintiff cannot establish that a
statement is intentionally misleading or false simply because an investor misread a press release
that unambiguously states an uncontested fact.
Finally, plaintiff relies on GRC’s failure to follow generally accepted accounting
principles (“GAAP”) to establish scienter. GAAP is “a body of pronouncements that govern the
measurement and reporting of financial information and related disclosure.” McNamara v. PrePaid Legal Services, Inc., 189 F. App’x 702, 705 n. 7 (10th Cir. 2006) (citing United States v.

23

Arthur Young & Co., 465 U.S. 805, 811 n. 7 (1984)(defining GAAP as “the conventions, rules,
and procedures that define accepted accounting practices”)).
“[A]llegations of GAAP violations or accounting irregularities, standing alone, are
insufficient to state a securities fraud claim.” Fleming Cos., 264 F.3d at 1261; see also Adams,
340 F.3d at 1105. Rather, in the context of other particularized and relevant facts, accounting
errors can be relevant in determining whether allegations are sufficient to support a strong
inference of scienter. Adams, 340 F.3d at 1105–06. To state a sufficient claim, allegations of
GAAP violations must be “coupled with evidence that the violations or irregularities were the
result of the defendant’s fraudulent intent to mislead investors.” Fleming Cos., 264 F.3d at 1261.
In Adams, the Tenth Circuit discussed allegations of the scienter of the chief financial
officer of the defendant corporation. 340 F.3d at 1105–1106. The court there found persuasive
that fact that “the alleged GAAP violations come on top of other particularized facts indicating
that a key operation of the company was losing money, [the chief financial officer] knew that
fact, and he falsely reported a profit for it.” Id. at 1106. The complaint alleged that the chief
financial officer was directly informed of unprofitable ventures by the assistant treasurer of the
company, and that he himself complained of the financial losses. Id. at 1088–89, 1106. The
alleged GAAP violations there “strengthen[ed] the inference that [the chief financial officer]
signed financial statements with intent to deceive, particularly in light of the detail with which
the alleged GAAP violations are stated, the fact that [he] was Kinder-Morgan’s chief financial
officer, and the fact that the Company’s financial reports declared that Kinder-Morgan’s
financial statements were prepared in accordance with GAAP.” Id. at 1106.
Plaintiff argues that the First Amended Complaint does allege additional factors that
contribute to a finding of scienter: (1) the error necessitated a restatement of previously issued

24

sworn financial statements; (2) the violated accounting rules were simple in nature; (3) the
accounting errors concerned revenue recognition; (4) GRC’s actual accounting policies differed
from its stated policies; (5) senior management played a role in the error; (6) the errors were
related to core operations of GRC; (7) GRC is a small-sized company; (8) GRC admitted to weak
internal financial controls; (9) GRC submitted sworn Sarbanes-Oxley certifications; (10) the
magnitude of error resulted in a $4 million loss; (11) the existence of a quick settlement in an
ancillary dispute. [#39] at 21–25. However, unlike in Adams where the court relied on other
facts evincing knowledge of the defendant executive, the GAAP violations here do not “come on
top of other particularized facts indicating that a key operation of the company was losing
money, [the defendant executives] knew that fact, and [they] falsely reported a profit for it.” Id.
at 1106. Plaintiff’s arguments seem to misunderstand the need for other particularized facts
showing fraudulent intent; many of these facts relate to the same accounting error that, standing
alone, is insufficient. The only facts not directly tied to the accounting error are that GRC is a
small-sized company and that there was an ancillary dispute that was settled quickly.
The Court agrees with defendants that here, “[w]hen the relevant personnel are separated
by nearly 2,000 miles and international borders,” the size of the company cannot be the sole
bolster to unearth some trace of scienter. Resp., [#40] at 12. Plaintiff likewise cannot rely on
what it calls an “ancillary dispute”—that GRC’s buyer allegedly accused GRC of “falsifying
sales invoices.” First Amended Complaint ¶ 112. Both logically and chronologically, that
dispute with the buyer is inherently not an “ancillary” charge of fraud where any such charge is
the direct cause of the alleged fraudulent error here. In any event, beyond a conclusory
allegation, plaintiff states no facts showing that such an accusation by GRC’s buyer ever
occurred or that GRC intentionally sought to cover it up by a quick settlement.

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Plaintiff also relies heavily on what he characterizes as an “admission” by GRC that GRC
was aware of the “overbilling” variances by March of 2012. Plaintiff appears to pull this
“admission” from an earnings call on November 15, 2012.4 Nonetheless, plaintiff relies on an
out-of- context statement of a larger representation by defendants:
So management in Denver was not notified of these issues regarding significant
variances for February and later months until the third quarter when the umpire
assay results had come back, and we could see that a pattern of large variances
had developed. Though some of our people in Oaxaca were aware of the
variances within a month or 2 following shipment, they didn’t communicate that
up the ladder to us at that time as they were proceeding with the view that those
numbers were wrong and would ultimately be corrected through the umpire assay
process. But the accounting rules take a different perspective on this situation,
and had we, executive management, known of the magnitude of this variance, it is
possible we would have provided a reserve against revenues in the first quarter.
Because the issue was not communicated up the chain, it was identified as a
material weakness for financial reporting purposes. This material weakness has
now been addressed and corrected, but it is the reason for the restatement of the
first and second quarters as opposed to simply making adjustments in the third
quarter.
November 15 earnings call transcript, [#38-7] at 4. This “admission” that plaintiff depends on to
prove defendants’ knowledge actually demonstrates that the executives were not the ones with
knowledge of the billing issues. Plaintiff fails to provide any connection—beyond sheer
assumption—between the knowledge held by GRC’s “people in Oaxaca” and that by the
executive officers.
Any insinuation that the defendant executives had both the motive and opportunity to
defraud the investors is likewise unpersuasive. “Corporate officers always have an incentive to
improve the lot of their companies, but this is not, absent unusual circumstances, a motive to
commit fraud.” Level 3 Communications, 667 F.3d at 1346 (incentive-based compensation

4

Plaintiff does not state from where he has drawn the supposed admission. See First Amended
Complaint ¶¶ 54, 137, 150. The Court cannot discern any allegation in the complaint that
supports this argument except for this statement in the November earnings call.
26

common among executives at publicly traded companies and does not ordinarily indicate
scienter); cf. Adams, 340 F.3d at 1106 (the fact that defendant “was the most senior executive of
the Company is a fact relevant in our weighing of the totality of the allegations,” but direct
knowledge of the chief executive officer was “an important link in the inferential chain”).
In sum, the class action complaint neither pleads facts demonstrating fraudulent intent
nor describes “conduct that is an extreme departure from the standards of ordinary care, and
which presents a danger of misleading buyers or sellers that is either known to the defendant or
is so obvious that the actor must have been aware of it.” Anixter v. Home–Stake Production Co.,
77 F.3d 1215, 1232 (10th Cir.1996) (internal quotation marks and citation omitted).
Accordingly, the Court finds that, when viewing the pleadings in their totality, plaintiff fails to
state factual allegations establishing a strong inference of scienter.
3. Control Person Liability Claim.
Defendants also move to dismiss plaintiff’s claim for violation of § 20(a) of the Securities
Exchange Act, 15 U.S.C. § 78t(a) for control person liability. Because plaintiff has failed to
plead a “primary violation of the securities laws,” he also has failed adequately to plead a
Section 20(a) violation. See Fleming, 264 F.3d at 1270 (“[T]o state a prima facie case of control
person liability, the plaintiff must establish (1) a primary violation of the securities laws and (2)
‘control’ over the primary violator by the alleged controlling person.”). Accordingly, that claim
for relief is also dismissed.
Order
1. Defendants’ Motion to Dismiss Plaintiff’s First Amended and Consolidated Class
Action Complaint [#35] is GRANTED. Plaintiff’s amended consolidated class action complaint

27

[#32] is DISMISSED WITH PREJUDICE, thereby dismissing cases 12CV2832 and
consolidated case 12CV2971.
2. Lead Plaintiff’s Motion to Strike or Disregard Portions of Defendants’ Reply [#43] is
DENIED.
3. Defendants are awarded their costs pursuant to Fed. R. Civ. P. 54(d)(1) and
D.C.COLO.LCivR 54.1.
DATED this 15th day of July, 2013.

BY THE COURT:

___________________________________
R. Brooke Jackson
United States District Judge

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