AuthorDewire, Gregory



The Securities Exchange Act of 1934 (the Act) is a set of laws that regulate companies within the United States of America (United States) that cause harm inside or outside the United States' boundaries, and foreign companies whose conduct outside of the United States has a substantial effect within the United States. (1)The Act of State doctrine, which arose as a [*182] reflection of the separation of powers between the Judicial Branch and Executive Branch, provides foreign nations immunity from United States courts evaluating the validity of an official act of a foreign sovereign. (2)In Royal Wulff Ventures LLC v. [*183]Primero Mining Corp., (3)the Ninth Circuit Court of Appeals examined if the Act of State doctrine barred Royal Wulff Ventures LLC's (Royal) claims against Primero Mining Corp. (Primero) based on statements regarding Primero's Mexican Advance Pricing Agreement (the APA). (4)The court held that because Royal's claims required examination of the APA, the Act of State doctrine barred the claims. (5)

Royal was the lead plaintiff in a class action suit against Primero claiming violation of the Act. (6)Primero's Mexican subsidiary, Primero Empresa Minera, S.A. de C.V. (PEM), purchased [*184] a gold-silver mine (San Dimas) in Mexico from Goldcorp Inc. and purchased a mineral sales company, later renamed Silver Trading Barbados (STB), from Wheaton River Minerals. (7)The purchase of San Dimas caused PEM to assume an obligation to STB, making the obligation one between affiliated companies. (8)The sales contracts required the sale of a predetermined amount of silver to STB at the market spot rate. (9)In a separate contract, STB was separately obligated to sell a predetermined amount of silver to Silver Wheaton (Caymans) Ltd. (SWC), an unaffiliated company, for the lesser of a set contract price or the prevailing market spot rate. (10)

[*185] The Mexican tax authority required Primero to pay the higher cost of the silver at the market spot rate because the sales contract was between affiliated companies. (11)During March 2011, the market spot rate rose to $ 35 an ounce and the contract price was significantly lower causing a "significant" yearly tax burden for Primero. (12)Primero took steps to lower the burden in response to the large tax burden. (13)One step was to engage an attorney in Mexico, whose brother was the Central Administrator for Transfer Pricing Audits, to file the APA with Servicio de Administracion Tributaria (SAT). (14)The Central Administrator [*186] of Transfer Pricing Audits is a position within the Transfer Pricing Audit Administration, a division of SAT that approves or denies applications for Mexican Advance Pricing Agreements. (15)In the APA, Primero requested approval for a new pricing mythology that allowed PEM to pay taxes on the unaffiliated price paid to SWC instead of the higher market spot rate. (16)

In October 2012, SAT granted the APA and Primero made multiple statements regarding the positive ruling, but never mentioned the connection between their lawyer and the Central Administrator who approved the APA, these public statements the root of Royal's claims. (17)This favorable ruling resulted in a [*187] 36% spike of Primero's stock price in a single day. (18)In August 2015, a new Mexican government was elected, looked into the APA, and filed a juicio de lesividadto nullify the APA, which was not ruled on at the time of the trial. (19)In February 2016, [*188] Primero issued public statements declaring there were no material changes in or threats to the status of the APA due to the juicio, and these statements are the basis for Royal's claims for false and misleading statements, but they did not contest the validity of the APA. (20)Primero, and other named defendants, moved to dismiss in the District Court, which the court granted because the Act of State doctrine barred the claim, but the court noted that they believed Plaintiffs also failed to prove their claim under the Act. (21)

[*189] The purpose of the Act is to ensure a level of protection for American investors and American markets and is regulated by the Security and Exchange Commission (SEC). (22)Courts have created two tests - the conduct test and the effects test - to determine if claims requiring extraterritorial jurisdiction can be heard by a United States court. (23)The Act holds corporations liable for the acts of their agents under 20(a), but requires the [*190] complainant to allege a violation of either section 10(b) or Rule 10b-5 of the Act. (24)To succeed on claims under either section 10(b) or Rule 10b-5, the complainant must allege (1) material false or misleading statement, (2) scienter, (3) nexus between the misrepresentation or false statement and a transaction relating to the security, (4) the party relied upon the statement, (5) some level of economic loss, and (6) show of causation between the statement and loss. (25)One can satisfy the false or misleading [*191] statement element by showing either (1) an actual false statement or (2) statements omitting material information. (26)

The Act of State doctrine is derived from the separation between the Executive Branch and the Judicial Branch within the United States. (27)The doctrine is founded in the belief that [*192] the judicial branch of every sovereign is bound to respect the official acts of a foreign sovereign taken within their borders. (28) [*193] The Act of State doctrine was originally viewed as an expression of international law and was founded upon "international comity and expediency." (29)The Act of State doctrine requires there be, (1) an official act of the sovereign, conducted within their borders, and (2) the relief sought, or defense raised, requires the court within the United States to evaluate the legality of the official act. (30)In Sabbatino, the Supreme Court provided three factors [*194] to consider and balance to determine the correct allocation of functions between the judiciary and the political branches of the government. (31)In subsequent cases, the Supreme Court held the Act of State doctrine is not applicable when, (1) the act is commercial act, (2) there is no objection voiced to the court by the Executive Branch, or (3) the sovereign consents to the United States court's evaluation of the official act. (32)

[*195] The Supreme Court has determined that where the court is not evaluating an official action but merely determining if the action occurred, the Act of State doctrine is not applicable. (33) W. S. Kirkpatrick & Co. v. Envtl. Tectonics Corp., Int'l (34)exemplifies when the Act of State doctrine does not apply. (35)The Court in [*196] Kirkpatrick reflected on the degree that application of the Act of State doctrine is fact dependent. (36)The Court noted that for the Act of State doctrine to apply, the issues must not only cast doubt upon the validity of a foreign act, but also require the adjudicator to evaluate the validity of the act, not merely ask the adjudicator to find alleged acts occurred. (37)

In Royal Wulf Ventures LLC v. Primero Mining Corp., the court held that the Act of State doctrine barred Royal's claims. (38) [*197] The court determined that the root of Royal's claims required evaluation of the APA - a sovereign government action taken with its own territory - requiring the application of the Act of State doctrine. (39)The court distinguished this case from Kirkpatrick because the issue in Royal was not whether an alleged act occurred, but the legality of the action. (40)In the record, the [*198] court found Royal conceded the APA was still legal under Mexican law, regardless of the Mexican government filing juicio de lesividadto invalidate the APA. (41)The majority concluded the only way for Royal to prevail was to (1) find the APA invalid, (2) show Primero knew the APA was invalid, and (3) show Primero made statements contrary to the APA being invalid. (42)As the Royal court determined, the Act of State doctrine barred the claims, and declined to evaluate the validity of the securities claims. (43)

Judge Bennet, dissenting, argued the root of Royal's claims was actually whether Primero knowingly made false or misleading statements to the public. (44)The dissent further explained that the Supreme Court has only invoked the Act of State doctrine when the sovereign caused the injury, as it would require a [*199] court to both evaluate, and possibly set aside the sovereign's official action to provide relief. (45)The Court applied the Act of State doctrine primarily in cases where plaintiffs requested damages for harms allegedly caused by the foreign sovereign, such as the confiscation of land, or when plaintiffs requested injunctive or declaratory relief, which would cause the overruling of a foreign sovereign's decision. (46)Judge Bennet argued the Act of [*200] State doctrine was not applicable, citing (1) the lack of Supreme Court application in cases similar to Royal, (2) the claims related to Primero's conduct, (3) the lack of an official action of a foreign sovereign. (47)After holding the Act of State doctrine was not applicable, the dissent moved to determining if Primero's statements created an impression of the state of affairs materially different from how they currently exist. (48)Judge Bennet concluded Primero's statements regarding the APA were misleading and supported a claim under section 10(b) or Rule 10b-5 of the Act. (49)

[*201] The majority in Royal incorrectly viewed the issue before them as one regarding whether the APA was legally valid, rather than if statements regarding the APA were false or misleading as defined by the Act. (50)Focusing on the legality of the APA, rather than whether Primero made false or misleading statements, lead the majority to misapply the Act of Sate doctrine. (51)Beginning with the mistaken presumption that the only way the court to find Primero's statements false or misleading, were to determine (1) the...

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