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ALBRIGHT, STODDARD, WARNICK
& ALBRIGHT
G. MARK ALBRIGHT (NV #001394)
WILLIAM H. STODDARD (NV #001477)
801 South Rancho Drive
Quail Park Suite D-4
Las Vegas, NV 89106
Telephone: 702/384-7111
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH
DARREN J. ROBBINS
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
WOLF HALDENSTEIN ADLER
FREEMAN & HERZ, LLP
FRANCIS M. GREGOREK
BETSY C. MANIFOLD
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/338-4599
Attorneys for Plaintiffs
[Additional counsel appear on signature page.]
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
| K. MITCHELL NAFICY and SAM NAFICY,
On Behalf of Themselves and All others Similarly Situated, Plaintiffs, vs. DELGRATIA MINING CORPORATION, J.
Defendants.
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No. CV-S-97-00573-PMP (RLH)
CLASS ACTION COMPLAINT FOR VIOLATION OF
Plaintiffs Demand A
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2. The defendants, which include both current and former officers and directors of the Company, knew that Delgratia's disclosures relating to its Nevada gold project were false and misleading when made. During the Class Period, defendants, attempting to stimulate interest in the Nevada assay "results," purportedly substantially increased Delgratia's interests in the Nevada gold Project by committing $15 million in cash and 4 million Delgratia shares, a package then worth in excess of $100 million, to a company that defendants knew but failed to disclose, was owned by the wife and three children of Delgratia's President and Chairman. Defendants further agreed to pay $5 million in exploration and development costs for the Nevada gold project to a company, which they knew but failed to disclose, was wholly owned by Delgratia's President and Chairman. During the Class Period, defendants disclosed certain assay results purportedly from the Nevada gold project, and allegedly prepared by an outside licensed independent lab, in order to support their claims of substantial gold reserves. However, defendants knew but failed to disclose that the assay results were not conducted by an licensed independent outside lab but instead by an unlicensed gold assayer who was personally selected by and was a long-time business associate of Delgratia's President and Chairman, and who had been previously convicted of securities fraud. Defendants concealed the truth about the Nevada gold project in order to allow various related parties, including several offshore entities with whom the Company had financial relationships, to reap massive profits, and to allow its former President and Chairman, J. Terrence Alexander (with whom the Company had a consulting contract) to reap massive profits through his exercise of stock options priced at $6 per share. Defendants Eric Lavarack and David Manning also sold some 20,000 shares of their Delgratia stock, pocketing profits in excess of $200,000. Manning sold 50% of his holdings and Lavarack sold 23% of his holdings.
3. Delgratia is a mining company that acquires properties in the United States and Latin America for the exploration and development of precious metals. In 1992, Delgratia went public at $0.50 per share. At the time of its IPO, Delgratia owned several mining properties located in British Columbia, Canada. In December 1992, Delgratia explored diamond mines in Canada's Northwest Territories and Manitoba. From 1993 to 1996, Delgratia explored for gold and other precious metals in Venezuela and Nicaragua. On May 1, 1995, Delgratia began trading on the NASDAQ National Market System (the "NASDAQ") . The Company's value was and is dependent on the successful definition of geological resources on its mining properties and the establishment of positive comprehensive feasibility studies on these resources. After the completion of positive feasibility studies, the Company's profitability was and is dependent on the successful financing, construction and operation of a facility to extract the minerals from the geological resource.
4. From September 1, 1991 to November 25, 1996, Delgratia's President was J. Terrence Alexander ("Alexander"). Delgratia was considered one of the Alexander Group of companies which included, inter alia, Arakis Energy Corp. ("Arakis"), Donner Resources ("Donner"), Nortran Pharmaceutical ("Nortran") and Pinewood Resources ("Pinewood"). In mid-1995, in a now familiar scenario, Alexander misled investors claiming that Arakis had struck oil in the Sudan and that, in a joint venture with a group of Saudi investors, Arakis could develop and would finance a $750 million oil pipeline in Sudan. Upon this news, Arakis stock rose sharply from $8-5/16 per share on May 17, 1995 to $26-5/8 per share by July 1995. However, on August 22, 1995, the high profile joint venture began to collapse when both the Vancouver Stock Exchange ("VSE") and NASDAQ questioned Arakis' disclosures on its financing arrangements with the Saudi group. On August 23, 1995, Arakis voluntarily delisted from the VSE as the proposed financing did not conform to the exchange's policies. On August 23, 1995, NASDAQ halted trading of Arakis shares until Arakis corrected disclosures relating to its financing arrangements with the Saudi group. By September 22, 1995, when the trading of Arakis shares resumed on the NASDAQ, the financing arrangements had completely collapsed because the Saudi group never had sufficient capital to finance the project. The stock now trades in the $3 to $5 per share range, far below its high of $26-5/8. Nonetheless, the meteoric rise in Arakis stock allowed various offshore companies, with whom Alexander and Arakis had financial dealings to issue stock in order to reap massive profits. Because of their fraudulent practices, Arakis and defendant Alexander were sued for securities fraud and stock manipulation no less than 30 times as a result of the Arakis debacle. Arakis' collapse in 1995 is still the subject of private class action lawsuits and an ongoing investigation by securities regulators in British Columbia.
5. At the same time Alexander was selling large, cheap blocks of Arakis stock to offshore companies, Alexander also negotiated private sales of Delgratia stock to the same offshore companies where lax tax and liberal secrecy laws prevail. Many of these entities employ professional front men who keep the identity of beneficial owners secret. In June 1995, Delgratia entered into a private placement agreement to sell 750,000 units of Delgratia stock for $8-1/2 per unit to Vananda Investment Trust in Liechtenstein. Each unit consisted of one share of Delgratia stock and a warrant exercisable over the next year at $9-3/4 per share. As of June 1996, none of these warrants had been exercised. In September 1996, two Zurich-based firms, Bank Sarasin & Cie and VPB Finanz AG also acquired Delgratia stock. Bank Sarasin bought 150,000 units for $5-1/2 each and VPB Finanz bought another 150,000 units at the same price1. All these entities also held large stakes in Arakis. Also in September 1996, Delgratia announced a $5.5 million financing arrangement pursuant to Regulation S to certain unidentified offshore sources, who purchased one million units at $5-1/2 each. Each unit consists of one common share and a warrant entitling the holder to purchase one additional Delgratia share at $6-1/2 per share prior to March 7, 1997 or $7-1/2 per share for the six months thereafter.
6. Amidst the scandal caused by Alexander and the collapse of Arakis, the stock price of Delgratia tumbled as some investors viewed any link with Alexander with suspicion. By August 1995, Delgratia had fallen from a 52-week high-of $11-5/8 to $4-1/2 per share. Alexander's other companies, Donner, Nortran and Pinewood, also experienced similar declines "in sympathy with Arakis." With the regulatory spotlight on Alexander, Delgratia delisted from the VSE on August 23, 1996 and now trades exclusively on the NASDAQ. Delgratia's private investors were not happy. Alexander desperately needed to boost Delgratia's stock price; however, after his public debacle with Arakis, Alexander's actions were closely watched by the market. Therefore, Alexander enlisted the aid of a long-time business associate, defendant Charles Ager ("Ager"), to help remove Alexander and his poor public image from the spotlight surrounding Delgratia. To help achieve that result, Alexander and Ager decided that Delgratia would "strike gold."
7. On November 7, 1996, under a share acquisition agreement with Philgold Investments, Inc. ("Philgold") , Delgratia acquired 40% of Nevada Gold Corp. ("NGC"), a B.V.I. company, for $5 million in cash and 1 million shares of Delgratia (with a deemed value of $7.875 per share at the time of the agreement), a package worth $12.8 million. NGC owned all the shares of Valley Gold Corporation ("Valley Gold") , a Nevada corporation. Valley Gold holds title to the mining claims constituting Delgratia's Nevada gold project, consisting of approximately 9,000 acres of land located in Clark County, Nevada. Delgratia's gold project was and is known as the "Josh Project." Philgold held the remaining 60% of NGC. Defendant Ager, who took over the Presidency and Chairmanship of Delgratia from Alexander some three weeks later, was and is the President and a director of Philgold, NGC and Valley Gold, with 50% of Philgold being owned by a discretionary trust for the benefit of Ager's wife and three children. Furthermore, exploration and development of the Josh Project was to be conducted by Cactus Mining Corp. ("Cactus Mining"), a company wholly owned by Ager.
8. As a part of the arrangements between Alexander, and Ager, on November 21, 1996, just four days before resigning as Delgratia's President and Chairman, Alexander sold 767,732 shares of Delgratia stock at $4.20 per share, pocketing proceeds of $3.2 million and leaving him with only 100,000 shares. On November 29, 1996, just four days after becoming Delgratia's new President and Chairman, Ager acquired 767,732 shares of Delgratia stock at $4.20 per share, then valued in the open market at $6.9 million.
9. Almost immediately after Ager became President and Chairman, Delgratia increased its interest in NGC by 10% by issuing a further 1 million shares to Philgold (worth more than $8 million) and by providing $5 million for exploration and development costs to Cactus Mining. Cactus mining was also immediately granted options to acquire 1.3 million common shares of Delgratia at $6 each. Then, less than two months later, on January 13, 1997, Delgratia retained Alexander for "Special Project" matters and agreed to pay him up to 850, 000 shares of Delgratia stock at $6 per share, vesting at 106,500 shares per calendar quarter. While Delgratia's intention to increase its interest in the Josh Project was made public, Ager's connection with Philgold and Cactus Mining and the options granted to Cactus Mining and Alexander were not disclosed.
10. It was imperative that the defendants inflate the price of Delgratia's stock, as: (i) the value to be received by Philgold for its interest in NGC was dependent, in part, on the price of Delgratia stock; (ii) the value of Alexander's remuneration was wholly dependent on the price of Delgratia stock; (iii) the value of options granted to Cactus Mining and the Individual Defendants was wholly dependent on the price of Delgratia stock; and (iv) because Delgratia's offshore investors had grown impatient with Delgratia's low stock price. In order to boost Delgratia's stock price, the defendants issued false statements about Delgratia's Nevada gold project which culminated in February of 1997 when defendants intentionally "leaked" to the media that 5 million ounces of gold reserves had been discovered on the Josh Project. Fired by the news of gold at the Josh Project, the rush for Delgratia stock began. In fact, the Company's share price more than doubled from $15-1/4 on February 28, 1997 to $34-3/4 on March 19, 1997.
11. In mid-March 1997, shortly after the news of Delgratia's gold strike was widely dispersed by the media and the price of Delgratia's stock more than tripled in value, Delgratia committed to acquiring another 30% of NGC by paying Philgold $15 million in cash and 3 million shares of Delgratia stock, now worth in excess of $30 per share. This sudden step up in Delgratia's acquisition plans provided Philgold with more than $100 million in cash and Delgratia shares.
12. On March 20, 1997, Delgratia's scheme began to disintegrate as a Nevada mining official questioned the Company's disclosures relating to its Nevada gold project. Delgratia stock took a nose dive, dropping 50% to $16 per share on trading volume of 3.1 million shares, approximately 26 times Delgratia's normal trading volume. NASDAQ halted trading and forced Ager to retract the Company's claims that the Josh Project contained five million ounces of gold reserves:
"The Company regrets that media reports of 5 million ounces of gold reserves on the Nevada project have occurred. I believe that it is premature to quantify the potential of this gold system. . . . I am confident about the existence of a major gold system on [the Nevada project]. It remains to be determined how big [the Nevada project is]. This will be demonstrated in fact by the exploration and drilling efforts currently underway."After these revelations, trading in Delgratia was halted for three weeks! Trading resumed on April 11, 1997, and the price of Delgratia's stock reacted sharply to these revelations by dropping $6-3/4, or approximately 40% on volume of 2.2 million shares, more than ten times Delgratia's average daily volume, as horrified investors sold off their Delgratia shares.
13. The inflation in Delgratia's stock price during the Class Period also gave various offshore entities that had acquired large blocks of Delgratia stock in sweetheart deals an opportunity to sell large portions of their stake in Delgratia for massive profits.
14. Each of the positive statements about Delgratia's business during the Class Period was materially false and misleading when issued, and failed to disclose, inter alia, the following adverse information which was then known only to Delgratia insiders due to their access to internal Delgratia data:Shares Share Offshore Company Bought Date Price ---------------- ------ ---- ----- Vananda Investment 750,000 Nov. 1995 $8.50 per unit Trust (share and warrant) Bank Sarasin & Cie 150,000 Sept. 1996 $5.50 VPB Finanz AG 155,000 Sept. 1996 $5.50 Regulations S Offering 1,000,000 Sept. 1996 $5.50 (entities unknown) (share and warrant) TOTALS: 2,055,000 $13,552,500 ========= ===========
(a) The available assay results did not support any quantification of a gold system at the Josh Project;
(b) No available assay or laboratory results supported the defendants' statement that 5 million ounces of gold reserves existed at the Josh Project as of February 1997;
(c) The laboratory tests of the random ore samples allegedly from the Josh Project were unreliable and suspect as they were not conducted by a licensed independent outside lab but by an unlicensed gold assayer who was a convicted securities fraudster and was not independent because he was personally selected by Ager and because he was a long-time business associate of Ager;
(d) Defendants lacked any basis to believe that a major gold system existed on the Josh Project because:
(i) defendants could not then and cannot now confirm that a major gold system existed or now exists at the Josh Project;(e) Defendants certainly had no basis for belief that 5 million ounces of gold reserves existed on the Josh Project.(ii) the alleged assay results did not support any quantification of a gold system at the Josh Project and certainly did not support the statement that 5 million ounces of gold reserves existed;
(iii) the laboratory tests of the "random ore samples" allegedly from the Josh Project were not tested by a licensed independent outside lab but by an unlicensed gold assayer who was convicted of securities fraud and who was personally selected by Ager because he was a long-time business associate of Ager; and
(iv) defendants intentionally concealed Ager's interests in Philgold and Cactus Mining, and his relationship with Alexander, all of which were material to investors in evaluating the Josh Project discovery; and
15. The chart below shows Delgratia's stock price as it reacted to defendants' patently false statements about the Josh Project gold find and the stock's collapse as the true facts became publicly known.
17. Jurisdiction is conferred on this Court by §27 of the Exchange Act, 15 U.S.C. §77aa, and 28 U.S.C. §1331. Jurisdiction exists over the claims asserted herein and against each of the defendants. Delgratia's common stock was actively traded in the United States on the NASDAQ since May 1995 and throughout the Class Period. Delgratia filed periodic reports with the SEC as a foreign issuer pursuant to regulations promulgated by the SEC. Thousands of shares of Delgratia stock were sold to investors in the United States. Each of the press releases and stockholder reports referred to herein was issued by Delgratia in the United States via the Business Wire and distributed to securities houses, public relations agencies, and to Delgratia shareholders who reside here. In addition, Delgratia's Nevada gold project is located in the United States. Thus, Delgratia had and continues to have substantial operations located in the United States, many of its customers are domiciled and transact business in the United States, and one of its largest mining explorations is here in the United States.
18. Defendants used the instrumentalities of interstate commerce, the United States mails, and the facilities of the national securities markets.
19. As a result of the foregoing, defendants in this action have had continuous and systematic contacts with the United States in connection with Delgratia's business and operations here which permit the exercise of personal jurisdiction over each of them consistent with the U.S. Constitution and international law.
20. Venue is proper in this District pursuant to §27 of the Exchange Act, and 28 U.S.C. §1391 (b). Certain of the acts and transactions giving rise to the violations of federal law complained of herein, including the dissemination to the investing public of false and misleading information, occurred in this District. Delgratia's Nevada mining operations are located in Searchlight, Nevada, in this District.
(b) Plaintiff Sam Naficy purchased 140 shares of Delgratia common stock on March 13, 1997 at $26-1/2 per share and has been damaged thereby.
22. Defendant Delgratia was incorporated in 1984 under the law of the province of British Columbia ("B.C."), Canada. The Company has maintained its corporate headquarters, during all times relevant hereto, at 1500 West Georgia Street, Vancouver, B.C. 4V6G2Z6 ("1500 West Georgia Street") Delgratia pursues the acquisition of properties for exploration and development of precious metals in the United States and Latin America. Delgratia's common stock was openly and actively traded on the NASDAQ, an efficient market, during all times relevant to this action. As of November 30, 1996, Delgratia had 10.6 million shares outstanding.
23. (a) Defendant J. Terrence Alexander ("Alexander") was Delgratia's President and Chairman of the Board of Directors from September 1, 1991 until his resignation on November 25, 1996. Although Alexander resigned from Delgratia, Alexander continues to share office space with Delgratia at its corporate headquarters at 1500 West Georgia Street. On January 13, 1997, Delgratia retained the services of Alexander for "Special Project" matters. Alexander's remuneration for such services was the option to purchase up to 850,000 shares of Delgratia stock at $6 per share vesting at 106,500 shares per calendar quarter. Because of defendant Alexander's positions with the Company, he knew the adverse non-public information about Delgratia's Nevada gold project, the definition of geological resources on the Company's mining properties and feasibility of extracting these geological resources, and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual survey and mining operations compared thereto) , conversations and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof, and via reports and other information provided to him in connection therewith.
(b) Defendant Charles A. Ager ("Ager") has been the Company's President and Chairman of the Board of Directors since November 25, 1996. During the Class Period, Ager was also the President and a director of Philgold, NGC and Valley Gold. In addition, throughout the Class Period, Ager owned a Canadian company, Cactus Mining Group Inc, which owned Cactus Mining Corp., a Nevada firm ("Cactus Mining") Cactus Mining provides technical services and staff to the Josh Project and was granted options to acquire 1.3 million common shares of Delgratia at $6 each. Because of defendant Ager's positions with the Company, Philgold, NGC, Valley Gold and Cactus Mining, he knew the adverse non-public information about Delgratia's Nevada gold project, acquisitions, the definition of geological resources on the Company's mining properties and feasibility of extracting these geological resources, and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual survey and mining operations compared thereto) , conversations and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof, and via reports and other information provided to him in connection therewith. On November 25, 1996, defendant Ager was granted options to purchase 300,000 shares of Delgratia stock at an exercise price of $6 per share and Cactus Mining was granted similar options to purchase 700,000 shares of Delgratia. Shortly thereafter, on January 20, 1997, Cactus Mining was again granted similar options to purchase 650, 000 shares of Delgratia. In total, Ager had an option to purchase 1.65 million shares of Delgratia at $6 per share, in a company in which 10.2 million shares were outstanding as of November 30, 1996.
(c) Defendant Eric X. Lavarack ("Lavarack") was and is Vice President of Finance, Chief Financial Officer and a member of the Board. On or about November 7, 1996, Lavarack became Chairman of Valley Gold and NGC. Because of defendant Lavarack's positions with the Company, NGC and Valley Gold, he knew the adverse non- public information about Delgratia's Nevada gold project, its mining business, finances, its acquisitions, the definition of geological resources on its mining properties and feasibility of extracting these geological resources, and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual survey and mining operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof, and via reports and other information provided to him in connection therewith. During the Class Period, defendant Lavarack sold 15,000 shares of Delgratia stock, or 23% of his holdings, for proceeds of $143,150.
(d) Defendant Geoff Courtnall ("Courtnall") was elected to the Delgratia Board of Directors on December 16, 1996. Courtnall was also made a director of Valley Gold and NGC during the Class Period. Because of defendant Courtnall's position with the Company, he knew the adverse non-public information about its Nevada gold project, its mining business, finances, its acquisitions, the definition of geological resources on its mining properties and feasibility of extracting these geological resources, and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual survey and mining operations compared thereto) , conversations and connections with other corporate officers and employees, attendance at Board of Directors' meetings and committees thereof, and via reports and other information provided to him in connection therewith. On November 25, 1996, defendant Courtnall was granted options to purchase 100,000 shares of Delgratia stock at an exercise price of $6 per share.
(e) Defendant Patrick J. Furlong ("Furlong") was elected to the Delgratia Board of Directors on December 16, 1996. Furlong was also a director of NGC during the Class Period. Because of defendant Furlong's positions with the Company and NGC, he knew the adverse non-public information about its Nevada gold project, its business, finances, its acquisitions, the definition of geologica onnection therewith. On November 25, 1996, defendant Furlong was granted options to purchase 50,000 shares of Delgratia stock at an exercise price of $6 per share.
(f) Defendant David R. Manning ("Manning") was Delgratia's controller during the Class Period. On November 7, 1996, Manning became a director and the Secretary/Treasurer of Valley Gold. Because of defendant Manning's position with the Company and Valley Gold, he knew the adverse non-public information about the Nevada gold project, its business, finances, its acquisitions, the definition of geological resources on its mining properties and feasibility of extracting these geological resources, and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual survey and mining operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith. On November 25, 1996, defendant Manning (via Mahatta Consulting) was granted options to purchase 60,000 shares of Delgratia stock at an exercise price of $6 per share. During the Class Period, defendant Manning sold 5,000 shares of Delgratia stock, or 50% of his holdings, for proceeds of $74,150.
(g) The individuals named as defendants in ¶23(a)-(f) are referred to herein as the "Individual Defendants."
24. Defendants Alexander, Ager and Lavarack, by reason of their positions as former and present President and Chairman of Delgratia's Board of Directors, and Chief Financial Officer and director, respectively, were controlling persons of Delgratia and held and exercised the power and influence to cause Delgratia to engage in the conduct complained of herein.
25. During the Class Period, each Individual Defendant occupied a position that made him privy to non-public information concerning Delgratia. Because of this access, each of these defendants knew that the adverse facts specified herein were being concealed. Notwithstanding their duty to refrain from selling Delgratia stock while in the possession of material, non-public information concerning Delgratia, the defendants sold 20,000 shares of the Company's stock, profiting from their fraudulent scheme.
27. Each of the Individual Defendants had the motive to commit and participate in the fraud. The value of Philgold's interest in NGC ranged from $30 million to $100 million and was substantially dependent on the price of Delgratia stock. The value of options granted to Alexander, Cactus Mining and the Individual Defendants for services rendered to Delgratia was also wholly dependent on the price of Delgratia stock and ranged from $0 when the stock fell below $6 to over $3 million for the outside directors and to over $20 million for Cactus Mining as Delgratia stock reached over $30 per share. Finally, because Delgratia's offshore investors had grown impatient with Delgratia's low stock price, the performance of Delgratia's stock was critical. In order to artificially inflate Delgratia's stock price, the defendants issued false and misleading statements about Delgratia's Nevada gold project that culminated in February 1997 when defendants disclosed that the Josh Project contained 5 million ounces of gold reserves. Delgratia's stock price quadrupled during the Class Period. The performance of Delgratia stock allowed the Company's offshore investors to sell cheaply-acquired stock for massive profits. The stock performance also benefited Philgold, Ager's family trust, Cactus Mining, Alexander and the Individual Defendants. For all these reasons, Delgratia's high stock price was of the utmost importance to Delgratia's directors and top executives.
29. When Delgratia undertook an analysis of the Josh Project, reports were issued which included the following: (1) due diligence supporting Delgratia's evaluation of the Josh Project; (2) assay results from the various drill holes on the Josh Project; (3) laboratory reports confirming and reviewing assay results by Harlan Gunnison or Energy International lab; and (4) reports from its mining engineers auditing and/or monitoring the Company's mining operations.
30. When the assay results from drill holes on the Josh Project were received, the Individual Defendants were immediately advised of the results. Delgratia closely monitored and evaluated the exploration and drilling activities and results of such assays to confirm and to attempt to quantify the potential of this gold system. Delgratia possessed no information from the exploration and drilling activities that quantified the potential of any gold system on the Josh Project.
31. Because of the foregoing, each of the Individual Defendants was aware that Delgratia's public announcements relating to the discovery of gold on the Josh Project were false. Based on the negative internal reports and actual assay reports, the Individual Defendants each knew that the Company could not quantify the potential of any gold system on the Josh Project. Thus, each defendant actually knew that the forward-looking public statements issued during the Class Period about Delgratia were false and misleading when made, and actually knew or recklessly disregarded that the non forward-looking statements issued during the Class Period about Delgratia were false and misleading when made.
34. The statements made in ¶33 were made without a reasonable basis and were false and misleading when made because defendants concealed:
(a) That Cactus Mining was wholly owned by Ager, and, as part of the agreement with Philgold, would be conducting the exploration and development of the Josh Project;
(b) That Cactus Mining and Ager lacked independence to evaluate the "success" of the Josh Project because Ager and Cactus Mining had been granted options to acquire 1.4 million common shares of Delgratia at $6 each;
(c) That Cactus Mining was wholly owned by Philgold's President and Chairman and was not an independent engineering firm;
(d) That Peter Bogtos, a geologist and a former CEO of a Canadian mining company with gold exploration and production experience, had resigned from the Delgratia Board because of the lack of information provided to the Board about the November Agreement;
(e) That defendant Courtnall, a St. Louis Blues hockey player who was appointed as an "independent" director to replace Bogtos, and the other directors had approved the November Agreement without adequate information about the Josh Project;
(f) That Courtnall, as a reward for joining the Board, was immediately granted options to purchase 100,000 shares of Delgratia stock at $6 each; and
(g) That the November Agreement was not conducted at arm's length or at fair market value.
35. On November 25, 1996, Lavarack issued a press release announcing that Ager had been named Chairman and President of Delgratia and that Courtnall had joined the Board as an independent director. The press release described Ager as an international mining entrepreneur "with a historic record of success in gold mining exploration, development and operations," and stated that Courtnall "will be working closely with Dr. Ager and the Board to also help effectuate the enhancement of the Company's gold mining assets." The press release stated that Alexander and Manning had stepped down from the Board "to accommodate Dr. Ager and Mr. Courtnall." The press release disclosed that "the Company has allocated 1,500,000 stock options to employees and directors at $6.00" subject to shareholder approval.
36. As contemplated by the November Agreement, defendants Lavarack, Manning, Courtnall and Furlong joined Ager as directors of Valley Gold and NGC. Lavarack became Chairman and Manning became Secretary/Treasurer of both Valley and NGC.
37. On January 13, 1997, Lavarack again issued a press release announcing that Alexander had been named to "oversee Special Projects for the Company" and that drilling had commenced at the Josh Project "to test the extension at depth of the gold anomaly which is approximately 18,000 feet long and 1,800 to 6,000 feet wide."
38. On January 20, 1997, Lavarack issued another release announcing Ager's election to the Board at the Annual General Meeting held on December 16, 1996. In addition, the release announced that Delgratia's shareholders had ratified "[t]he Company's acquisition of up to a 70% interest in a 9,000 acre property located in southern Nevada," that the Company had acquired "an initial 40% interest in the property for 1 million shares and $5 million cash" and that a drilling program was underway at the Josh Project. The Company also disclosed that it had granted 1.5 million stock options to "certain directors, employees and consultants" at a price of $6 per share.
39. The statements made in the Company's November 25, 1996, January 13, 1997 and January 20, 1997 press releases (¶¶35, 37-38) were made without a reasonable basis and were false and misleading when made because defendants concealed:
(a) The facts set forth in ¶34;
(b) Ager's interest in Philgold or Cactus Mining;
(c) Cactus Mining's exclusive role under the November Agreement in the exploration and development of the Josh Project;
(d) The $5 million in exploration fees to Cactus Mining;
(e) The grant of an option to Cactus Mining to purchase 1.3 million shares of Delgratia at an exercise price of $6 per share;
(f) A grant to Alexander of options to purchase 106,500 shares of Delgratia at $6 per share; and
(g) That Alexander and Ager (including Cactus Mining) received options to purchase 1.4 million shares (out of 1.5 million authorized), more than 10% of the shares outstanding, at $6.00 per share. (As of January 20, 1997, the price of Delgratia was $11-51/64 per share.)
40. On or about February 7, 1997, The Financial Post published an article describing the management transition from Alexander to Ager based upon an interview with Lavarack, which stated:
Ager is credited with having brought to Delgratia a gold-exploration property near Las Vegas, in which the company acquired a 40% interest for US$ 5 million and one million shares.41. On or about February 26, 1997, Delgratia filed with the SEC its Report on Form 6-K for the quarter ended December 31, 1996, which was signed by defendant Lavarack. In the Notes to the Consolidated Financial Statements, Delgratia, in discussing its agreement with Philgold to acquire a percentage ownership in the Josh Project, discloses:
Under the terms of a share acquisition agreement, the Company initially acquired 40% of NGC for $5 million and 1 million shares. The company is committed to increased [sic] its interest to 50% by issuing a further 1 million shares and by funding $5 million in exploration expenditures by November 1, 1997.Under "related party transactions," the Report on Form 6-K noted that certain consulting fees (roughly $49,000) were paid to officers and directors or companies controlled by directors, concealing Ager's interests or positions in Philgold or Cactus Mining.
42. The representations made in ¶¶40-41 during the Class Period were each materially false and misleading when made because they concealed and failed to disclose, inter alia, the following adverse information concerning the Company and its business, information which was known to defendants from internal Delgratia corporate date and the disclosure of which was necessary to make the statements made not misleading, including:
(a) The facts set forth in ¶39, supra;
(b) The exploration and development of the Josh Project was controlled and owned by Ager of Cactus Mining;
(c) Exploration costs of $5 million would be paid to Cactus mining, a company wholly owned by Ager;
(d) Cactus mining, the entity which would be exploring, testing and developing the Josh Project, had been granted an option to purchase 700,000 shares of Delgratia at $6 per share on November 25, 1996 and an option to purchase 650,000 shares of Delgratia at $6 per share on January 20, 1997 (the stock closed at $11-51/64);
(e) Ager was President and a director of Philgold and held a substantial beneficial ownership interest through a family trust in Philgold; and
(f) Delgratia's acquisition of an increased interest in the Josh Project would substantially benefit Ager's family trust by $50 million to over $100 million.
43. On February 28, 1997, Ager, "on behalf of the Board," issued a release announcing "First Nevada Drill Results." The results from the first 3 holes drilled on the Josh Project are as follows:
44. The February 28, 1997 press release concerning the Company's drill results was false and misleading when made because defendants concealed the true adverse facts, including:Drill Hole Gold Gold Assays Hole# Depth Zone opt q/t ----- ----- ---- ----------- 1 440' 0-440' .084 2.88 including 0-160' .122 4.17 2 1180' 0-600' .033 1.12 including 350-580' .044 1.49 3 1005' 0-880' .071 2.43 including 0-50' .146 4.99 190-400' .060 2.04 550-750' .186 6.37
(a) The facts set forth in ¶¶39 and 42, supra;
(b) That Ager controlled Cactus Mining, the entity conducting the exploration of the Josh Project, and had personally selected as the project's assayer, a person who was a long-time business associate, a convicted securities fraudster and was neither a licensed nor independent outside lab;
(c) That defendants' assayer, Robert Harlan Gunnison ("Gunnison"), was unlicensed;
(d) That the lab in which its assayer, Gunnison, worked was unlicensed;
(e) That Cactus mining, Gunnison and Energy International could not and did not provide an independent assay of the ore at the drill sites; and
(f) That defendants lacked a reasonable basis to believe the announced drill hole results were accurate because: (i) the assayer was unlicensed and not independent; (ii) neither Delgratia, Cactus Mining nor the assayer provided or obtained a licensed, independent assay; (iii) Energy International prominently displayed a sign at its facility stating that the lab was "not a registered or accredited assaying lab"; (iv) Energy International was unable to provide a licensed independent assay of ore; (v) Gunnison had been convicted of securities fraud in 1978; (vi) Ager was personally involved in Philgold, Cactus Mining and in selecting Gunnison; and (vii) Ager had a substantial undisclosed economic interest in the success of the Josh Project.
45. Beginning in late February and early March 1997, Delgratia spokesman Kyle Washington ("Washington"), discussed the results of the holes drilled with various financial reporters including reporters from The Vancouver Sun, The Financial Post and Bloomberg stating that the Josh Project had reserves of five million ounces of gold and describing the assayer of the Josh Project samples as an "outside, independent lab."
46. The foregoing representations made during the Class Period were each materially false and misleading when made because they concealed, inter alia, the following information which was known to defendants from internal Delgratia corporate data, the disclosure of which was necessary to make the statements made not misleading, including:
(a) Gunnison was neither licensed nor independent;
(b) Washington's misrepresentation of Gunnison's assay of the Josh Project ore as independent or licensed was, in fact, a crime;
(c) The Company did not have a current feasibility study that proven reserves existed pursuant to U.S. Geological Survey definitions;
(d) Any estimate of proven reserves based on only three or four widely-spaced drill holes (ranging from 300 feet to 3,700 feet) was improper, inaccurate and irresponsible;
(e) That the Josh Project had no proven gold reserves;
(f) That there was insufficient data from the drill holes to support any such estimate and that the Company had done insufficient drilling to support any estimate; and
(g) As a result of (a)-(f) above, defendants lacked any reasonable basis for the Company's claim of 5 million ounces of gold in the Josh Project or for any claim of a proven reserve based on just a few widely spaced drill holes.
47. The positive test results announced in the February 28, 1997 press release combined with a claim of five million ounces in reserves sent the Company's shares soaring from $15-1/4 on February 28, 1997 to over $34 per share on March 19, 1997, an all-time high for Delgratia stock. On March 11, 1996 alone, Delgratia was among the most actively traded foreign shares on the NASDAQ. By mid- March 1997, the defendants' scheme was reaching high gear and, as planned, the value of their Delgratia stock and options was millions.
48. On March 19, 1997, the Delgratia Board issued a release announcing the assay results from the first 3 holes drilled on the Josh Project along with the new results from the Hole 4 as follows:
(Footnote omitted.) Delgratia also announced its intention to step up its acquisition plans and increase its holdings in NGC to 70%. Delgratia would pay Philgold $15 million in cash and 3 million Delgratia shares, now worth in excess of $30 per share. This sudden step up in Delgratia's acquisition plans would give Philgold in excess of $100 million in cash and Delgratia shares.Drill Hole Gold Gold Assays Hole# Depth Zone opt q/t ----- ----- ---- ------------- 1 440' 0-440' .084 2.88 2 1180' 0-600' .033 1.12 3 1005' 0-880' .071 2.43 4 1120' 10-1040' .063 2.14
49. As a result of the dissemination of these news releases by the Company, Delgratia stock rocketed to $34-3/4 on March 19, 1997, representing a gain of 900% from its 52-week low of $3-1/2 per share. Defendants' false statements had boosted Delgratia's market capitalization to over $500 million. The offshore companies holding more than 2 million shares of cheap stock stood to make in excess of $60 million.
50. On March 20, 1997, Bloomberg, The Vancouver Sun and Reuters reported that Russ Fields, administrator of the Nevada Division of Minerals, expressed doubt about Delgratia's claims for the Josh Project. Fields indicated that the Company had not done enough drilling to make reliable claims about the size of the property's gold reserves. In a interview with The Vancouver Sun, Fields stated: "'The degree of confidence you can put in four drill holes, especially holes this far apart, is not very high.'" In an interview with Reuters, Fields also stated:
"There's a long way to go before anyone can say with certainty that that's going to become a reality . . . ."51. In an attempt to stem the damage done by the Vancouver Sun, Reuters and Bloomberg reports, Washington, Delgratia's investor contact, claimed to have been misquoted and said that the Company was not claiming any definite reserves. Nonetheless, Washington reiterated that after viewing the latest results, mining analysts would conclude that the deposit is at least "very big." In an interview with a Financial Post reporter, Washington suggested that the reporter poll mining analysts and "I guarantee you'll get answers a lot bigger than five million [ounces]." As Washington was well aware, not a single mining analyst followed Delgratia.* * *
"These are widely spaced drill holes -- four drill holes -- it's not enough . . . Our world-class gold mines in the northern part of the state drill their properties on 200 foot-centers. These holes are as far apart as 3,700 feet."
52. Despite Delgratia's attempt at damage control, Delgratia's stock began a free fall on March 20, 1997 in response to the Bloomberg report. In one day, Delgratia lost roughly one half its value, losing a whopping $17-5/8 to end at $16 per share on volume of 3.1 million shares, almost ten times its average trading. NASDAQ halted trading in Delgratia stock before the market opened on March 21, 1997 demanding that the Company clarify corporate announcements and provide additional information to the exchange. Electronic trading which occurred outside NASDAQ's central SelectNet clearing house continued to push the price down to $10 per share. This dramatic correction returned Delgratia shares to the same level as at the start of the Class Period.
53. Responding to the request by the NASDAQ that defendants disclose the truth, on March 21, 1997, Delgratia issued a release which retracted claims as to the size of any potential gold reserve on the Josh Project. According to the release signed by Dr. Ager on behalf of the Board, even though the first four holes of the Josh Project drilling program "are very encouraging," he disclosed that it was "premature to quantify the potential of this gold system." Although the Company was satisfied that gold mineralization had been found, "[i]n-fill drilling will be required before further comments can be made about the continuity, tonnage and grade of the gold mineralization." According to Dr. Ager, "[t]he Company regrets that media reports of 5 million ounces of gold reserves on the Nevada project have occurred." Although the Company finally disclosed, at the direction of the NASDAQ, Ager's interests in Philgold, including the 50% ownership interest of Ager's family trust in Philgold as well as Ager's role as Philgold's President and director, it persisted in concealing Ager's interest in Cactus Mining, the role of Cactus Mining in the exploration of the Josh Project, and that Cactus Mining received $5 million in exploration fees and options to purchase 1.3 million shares of Delgratia at an excise price of $6 per share.
54. On or about April 7, 1997, while subject to the NASDAQ trading halt, Delgratia invited Vancouver mining analyst Rosie Moore of Yorkton Securities to visit Gunnison's lab in Arizona. According to Moore, a sign at the lab read: "'We are not a registered or accredited assaying lab.'" Moore disclosed in an interview with The Vancouver Sun that she did not believe the spectacular results of the assayed samples from Delgratia's Josh Project. Moore is quoted as follows:
"They're using a weird assaying technique producing incredibly large assay numbers . . . . I just don't believe the numbers."55. According to a The Vancouver Sun article dated April 8, 1997, Ager responded to the analyst's statement reiterating his belief that the Josh Project "contains millions of ounces of gold ore and is urging people to invest in the company" and is quoted as follows: "'If you want to get rich, buy Delgratia . . . . If you want to stay poor, don't'"
56. On or about April 8, 1997, as the NASDAQ trading halt continued, T.J. Nethery ("Nethery") of Jones, Gable & Co., an analyst and geologist, visited the Josh Project in Nevada. According to Nethery, "'Geologically it doesn't make any sense.'" Nethery concluded: "'If there's gold there, I'd like to know how it got there,'" and stated that Ager refused his request to visit Gunnison's lab.
57. On Thursday April 10, 1997, while trading in Delgratia remained halted, Delgratia issued two press releases in order to satisfy the demands made by the exchange. The first press release stated Delgratia wished to address "the inter-corporate relationships pertaining to the holding of its interest in the [Josh Project]." The press release described Philgold's structure as follows:
Fifty percent (50 percent) of the shares of Philgold Investments Inc. are owned by Dominion Explorers Inc., a BVI corporation (in which Dr. Charles A. Ager, Delgratia's Chairman and President, is President) which is owned indirectly by a discretionary trust in which Dr. Charles A. Ager's wife and three children are beneficiaries.The press release continued by stating that neither Philgold nor Ager had sold any shares in Delgratia and that both agreed to enter into a lock-up and escrow agreement under which they agreed no to sell, transfer or otherwise assign until after January 2, 1998 their current holdings as well as any other shares in Delgratia that they might acquire up to January 2, 1998. Options obtained by Cactus Mining and by Alexander through Caufield Management, Alexander's privately held resource finance and management services company, would also be subject to a lock-up agreement. Delgratia continued to conceal the extent to which Cactus Mining and Alexander had exercised options and/or sold stock during the Class s Assay office in Tucson, confirmed that the assay results of the "project lab" (referring to Gunnison and Energy International) for drill holes 4 and 5 were accurate. The results from holes 4 and 5 were:
59. On April 10, 1997, in a Dow Jones release, Delgratia confirmed its intention to acquire and develop projects that, in the opinion of its technical team "'manifest the potential to contain reserves exceeding 5 million ounces of gold.'" Management confirmed that although further tests were needed to confirm the exact number of ounces in the Company's Coco Mina and the Josh Project, "'sufficient data exists to support the company's view that both projects have the potential to meet the company's threshold, and, accordingly warrant further exploration.'"Drill Gold Gold Assays Hole# Zone opt g/t ----- ---- ------------- 4 0-1120' .102 3.51 5 0-1160' .145 4.96
60. However, on the evening of April 10, 1997, Bloomberg Business News reporter, David Evans, contacted Beattie and Mountford to discuss the Company's April 10, 1997 press release. Delgratia's own consulting engineers contradicted the defendants' public statements. Mountford and Beattie stated that the assay results do not show that the Josh Project has any proven reserves and that the Josh Project "'should only be considered as a very interesting exploration project.'" In addition, Mountford and Beattie, unaware of Gunnison's prior fraud conviction until so advised by the Bloomberg reporter, disclosed that their review consisted of 20 random ore samples taken from Gunnison's lab for independent assay. Upon learning of Gunnison's prior fraud conviction, Mountford told The Financial Post "'that makes one hell of a difference.'" According to Mountford, "'All the samples we checked were in his lab at one time or another. We don't know whether it's been salted or not.'" Beattie is quoted by the Vancouver Sun as stating: "'The samples sitting in their lab have gold in it, but what I can't tell you is whether that gold was in there to begin with, or whether it was introduced along the way.'" Beattie indicated that he and Mountford would obtain and prepare their own samples for assaying, which would take a couple of weeks to complete.
61. The statements by Mountford and Beattie shocked already stunned investors as they clearly contradicted the defendants' earlier statements regarding a wholly independent audit which confirmed Gunnison's results as accurate.
62. In a last ditch attempt to stop the stock's free fall, Delgratia issued yet another press release on April 11, 1997 stating that Ager "confirm[ed] the Company's view" that the assay results reported in the April 10, 1997 press release "were performed in a thoroughly professional and competent manner." Delgratia also clarified the statements by Beattie and Mountford:
"We requested that samples be sent to independent laboratories and also selected samples at the assay lab which we had analyzed by a laboratory of our choice. Both these analyses confirmed the presence of gold in the samples. We have not to date analyzed samples which we obtained independently from the site."63. The Company also assured investors that in "Delgratia's own review," which included internal checks by its own Chief Assayer, "the assaying of test samples taken directly from the project site to the Jacobs Lab in Tucson" independently confirmed the previously reported results from Hole 5.
64. At the same time defendants were disseminating the April 11, 1997 press release to the market, Mike Jacobs of the Jacobs Assay office (the independent lab mentioned in the press release) was contradicting defendants, public statements reassuring investors. In an interview reported in the April 12, 1997 Arizona Republic, Jacobs discussed the samples assayed by his lab, stating: "'It's got a smell to it. . . . The numbers are too damn good.'"
65. On Friday April 11, 1997, trading in Delgratia resumed and defendants' beleaguered investors apparently were unwilling and/or unable to bear the shock of the information that had reached investors during the long trading halt and headed for the exits causing defendants' stock price to fall to $7 to close at $8, or less than 25% of its Class Period high, on volume of 2.2 million shares, almost ten times its average daily volume.
67. On or about April 28, 1997, Agers in a telephonic interview with a Fortune magazine reporter reiterated that "'[t]his company has tremendous value.'" In addressing the Nevada officials disclaimer of Delgratia's initial test results Ager stated: "'We have reported just four holes of a 75-hole program, and until we get enough holes -- I'm an engineer and a scientist -- I'm not prepared to tell the world what I think," but he went on to point out that Delgratia gets involved only in projects with "'at least five million ounces of potential. This Nevada project certainly meets those specs.'"
68. The foregoing representations in ¶¶47-65 made during the Class Period were each materially false and misleading when made because they concealed and failed to disclose, inter alia, the following adverse information concerning the Company and its business, disclosure of which was necessary to make the statements made not misleading, and which information was known to defendants from internal Delgratia corporate data, including:
(a) All the facts set forth in ¶¶39, 42, 44 and 46 supra;
(b) The decision to step up Delgratia's acquisition plans was not a decision made at arm's length or at fair market value;
(c) Defendants failed to adequately disclose Ager's interest in Cactus Mining, Cactus Mining's role in exploration and drilling, and that Cactus Mining received $5 million in exploration fees and options to purchase 1.3 million shares at $6 per share; and
(d) Defendants failed to follow standard mining industry practice of retaining independent outside entities to explore and drill mining properties and to assay results of such explorations.
70. SEC rules require that financial statements filed with SEC be prepared in accordance with generally accepted accounting principles ("GAAP"). Financial statements of foreign issues presented in accordance with other than GAAP as accepted in the United States, must, at a minimum, contain a reconciliation of the basis of accounting used compared to United States GAAP. Moreover, financial statements should include any material information which is necessary to make financial statements not misleading. Regulation S-X states in part:
(a) Financial statements should be filed in such form and order, and should use such generally accepted terminology, as will best indicate their significance and character in the light of the provisions applicable thereto. The information required with respect to any statement shall be furnished as a minimum requirement to which shall be added such further material information as is necessary to make the required statements, in the light of the circumstances under which they are made, not misleading.17 C.F.R. §210.4-01.(1) Financial statements filed with the Commission which are not prepared in accordance with generally accepted accounting principles will be presumed to be misleading or inaccurate, despite footnote of other disclosures, unless the Commission has otherwise provided. This article and other articles of Regulation S-X provide clarification of certain disclosures which must be included in any event, in financial statements filed with the Commission.
71. Delgratia violated GAAP and SEC rules by failing to disclose and describe the material related-party transactions which constituted its acquisition of its interest in NGC. Delgratia failed to disclose that the Company purchased its interest in NGC from a company half-owned by the family trust of Delgratia's president, defendant Ager, which trust benefited Ager's wife and children, and that Delgratia had agreed to pay $5 million in exploration costs to a company wholly owned by defendant Ager.
72. GAAP, as set forth in Statement of Financial Accounting Standard ("SFAS") No. 57, Related Party Disclosures, states:
Financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business . . . . The disclosure shall include:SFAS No. 57, ¶2 (footnote omitted).The nature of the relationships involved
A description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements
The dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the proceeding period
Amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement
73. SFAS No. 57 includes the following in its definition of "related parties":
[A]n enterprise and its principal owners, management, or members of their immediate families . . . .SFAS No. 57, ¶1.
"Immediate family" is defined as:
Family members whom a principal owner or member of management might control or influence or by whom they might be controlled or influenced because of the family relationship.SFAS No. 57, ¶24(c).
74. Both the trust controlled by defendant Ager and benefitting his wife and children and a wholly-owned company fall squarely within the definition of related parties and thus were required to be disclosed by the Company when it released its financial statements.
75. The absence of related-party disclosures greatly reduces the reliability of financial information reported to the public.
SFAS No. 57, ¶15 states:
Reliability of financial information involves "assurance that accounting measures represent what they purport to represent." Without disclosure to the contrary, there is a general presumption that transactions reflected in financial statements have been consummated on an arm's length basis between independent parties. However, that presumption is not justified when related party transactions exist because the requisite conditions of competitive, free-market dealings may not exist. Because it is possible for related party transactions to be arranged to obtain certain results desired by the related parties, the resulting accounting measures may not represent what they usually would be expected to represent. Reduced representational faithfulness and verifiability of amounts used to measure transactions with related parties weaken the reliability of those amounts. That weakness cannot always be cured by reference to market measures because in many cases there may be no arm's-length market in the goods or services that are the subject of the related party transactions.(Footnote omitted.)
76. As a result of Delgratia's failure to adequately disclose its related-party transactions, the Company's financial reports filed with the SEC were false and misleading and presented in violation of GAAP and SEC rules.
77. Due to these improprieties, the Company presented its results for the quarter ending December 31, 1996 in a manner which violated GAAP. Further, the undisclosed adverse information concealed by defendants during the Class Period is the type of information which, because of SEC regulations, regulations of the national stock exchanges and customary business practice, is expected by investors and securities analysts to be disclosed and is known by corporate officials and their legal and financial advisors to be the type of information which is expected to be and must be disclosed.
79. To accomplish the objectives of accurately recording, processing, summarizing and reporting data, a company must establish an internal control structure. In that structure, according to Appendix D to Statement on Auditing Standards No. 55, Consideration of the Internal Control Structure in a Financial Statement Audit ("SAS 55"), management should consider, among other things, such objectives as (i) making certain that "[t]ransactions are recorded as necessary . . . to permit preparation of financial statements in conformity with generally accepted accounting principles . . . and to maintain accountability for assets," and (ii) making certain that "[t]he recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences."
80. According to SAS 55:
Establishing and maintaining an internal control structure is an important management responsibility. To provide reasonable assurance that an entity's objectives will be achieved, the internal control structure should be under ongoing supervision by management to determine that it is operating as intended and that it is modified as appropriate for changes in conditions.AU §319A.13.
81. SFAS No. 57, ¶2 requires that "[f]inancial statements shall include disclosures of material related, party transaction . . . ."
The Company's future profitability is dependent on the successful definition of geological resources on its mining properties and the establishment of positive comprehensive feasibility studies on these geological resources. Upon completion of positive feasibility studies, the Company's success is dependent on the successful financing, construction and operation of a facility to extract the minerals from the geological resource.There is no assurance that additional funding will be available to allow the Company to complete sufficient work on any of its properties. Failure to obtain additional financing could result in delay or indefinite postponement of further exploration and development with the possible loss of properties. In addition, a number of properties in which the Company has or may acquire interests are located in Central and South America and consequently, the Company may be subject to certain risks including political and economic instability which may result in the impairment or loss of mineral concessions or other mineral rights.
85. Each of the defendants: (a) knew or had access to the material, adverse non-public information about Delgratia's financial results and then-existing business conditions, which was not disclosed; and (b) participated in drafting, reviewing and/or approving the misleading statements, releases, reports and other public representations of and about Delgratia.
86. During the Class Period, with knowledge of or reckless disregard for the truth, defendants disseminated or approved the false statements specified above, which were misleading in that they contained misrepresentations and failed to disclose material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
87. Defendants have violated §10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder in that they: (a) employed devices, schemes and artifices to defraud; (b) made, untrue statements of material facts or omitted to state material facts necessary in order to make statements made, in light of the circumstances under which they were made, not misleading; and/or (c) engaged in acts, practices and a course of business that operated as a fraud or deceit upon the purchasers of Delgratia stock during the Class Period.
88. Plaintiffs and the Class have suffered damage because, in reliance on the integrity of the market, they paid artificially inflated prices for Delgratia stock. Plaintiffs and the Class would not have purchased Delgratia stock at the prices they paid, or at all, if they had been aware that the market prices had been artificially and falsely inflated by defendants' false and misleading statements.
90. Alexander, Ager and Lavarack acted as controlling persons of Delgratia within the meaning of §20 of the Exchange Act. By reason of their respective positions as former and present Chairman of the Board and President, and Chief Financial Officer of Delgratia, Alexander, Ager and Lavarack had the power and authority to cause Delgratia to engage in the wrongful conduct complained of herein. Delgratia controlled each of the Individual Defendants and all of its employees.
91. By reason of such wrongful conduct, Delgratia, Ager and Lavarack are liable pursuant to §20(a) of the Exchange Act. As a direct and proximate result of these defendants' wrongful conduct, plaintiffs and the other members of the Class suffered damages in connection with their purchases of Delgratia stock during the Class Period.
93. The members of the Class are so numerous that joinder of all members is impracticable. Delgratia has more than 10 million shares of stock outstanding. During the Class Period, millions of shares of Delgratia stock were purchased by thousands of persons who were damaged thereby.
94. Plaintiffs' claims are typical of the claims of the Class because plaintiffs and the Class members sustained damages from defendants' wrongful conduct.
95. Plaintiffs will adequately protect the interests of the Class. Plaintiffs have retained counsel who are experienced and competent in class action securities litigation. Plaintiffs have no interests which are in conflict with those of the Class.
96. A class action is superior to other available methods for the fair and efficient adjudication of this controversy.
97. Common questions of law and fact predominate over questions which affect only individual members. Among the questions of law and fact common to the Class are:
(a) Whether the federal securities laws were violated by defendants' acts;
(b) Whether Delgratia's statements during the Class Period misrepresented and/or omitted material facts;
(c) Whether defendants pursued the fraudulent scheme and course of business complained of;
(d) Whether defendants acted intentionally or recklessly;
(e) Whether the market price of Delgratia's stock was artificially inflated due to the activities complained of; and
(f) The extent and measure of damage sustained by the Class.
1. Declaring this action to be a proper class action pursuant to Rules 23 (a) and 23 (b) (3) of the Federal Rules of Civil Procedure on behalf of the Class defined herein;
2. Awarding plaintiffs and the members of the Class compensatory damages;
3. Awarding plaintiffs and the members of the Class pre-judgment and post-judgment interest, as well as reasonable attorneys' fees, expert witness fees and other costs;
4. Awarding extraordinary, equitable and/or injunctive relief as permitted by law, equity and the federal statutory provisions sued hereunder, pursuant to Rules 64, 65; and
5. Awarding such other relief as this Court may deem just and proper.
DATED: May 8, 1997
| ALBRIGHT, STODDARD, WARNICK
& ALBRIGHT G. MARK ALBRIGHT WILLIAM H. STODDARD /s/
801 South Rancho Drive
MILBERG WEISS BERSHAD
WOLF HALDENSTEIN ADLER
/s/
HELLMUTH & JOHNSON, P.A.
LAW OFFICES OF LEO W.
Attorneys for Plaintiffs |
1 For brokering the deal between Delgratia and Bank Sarasin and VPB Finanz, Clarion Finanz AG of Zurich was paid a finder's fee of $125,000. Clarion is owned by Swiss businessman Carlo Civelli, who was identified by British government inspectors in 1994 as a conduit for suspicious share transactions and money-laundering.
1. Plaintiff has reviewed the complaint and authorized its filing.
2. Plaintiff did not purchase the security that is the subject of this action at the direction of plaintiff's counsel or in order to participate in this private action.
3. Plaintiff is willing to serve as a representative party on behalf of the class, including providing testimony at deposition and trial, if necessary.
4. Plaintiff's transaction(s) in the security that is the subject of
this action during the Class Period is/are as follows:
| Security
Delgratia Mining Corporation |
Transaction
150 shares |
Date
March 17, 1997 |
5. During the three years prior to the date of this Certificate, Plaintiff has sought to serve or served as a representative party for a class in the following actions filed under the federal securities laws:
None
6. Plaintiff has sought to serve or served as a representative party for a class in the following actions filed subsequent to December 22, 1995:
None
The Plaintiff will not accept any payment for serving as a representative party on behalf of the class beyond the Plaintiff's pro rata share of any recovery, except such reasonable costs and expenses (including lost wages) directly relating to the representation of the class as ordered or approved by the court.
I declare under penalty of perjury that the foregoing is true and correct.
Executed this 1st day of May 1997, at _________________________.
| /s/
_________________________________ K. MITCHELL NAFICY |
1. Plaintiff has reviewed the complaint and authorized its filing.
2. Plaintiff did not purchase the security that is the subject of this action at the direction of plaintiff's counsel or in order to participate in this private action.
3. Plaintiff is willing to serve as a representative party on behalf of the class, including providing testimony at deposition and trial, if necessary.
4. Plaintiff's transaction(s) in the security that is the subject of
this action during the Class Period is/are as follows:
| Security
Delgratia Mining Corporation |
Transaction
140 shares |
Date
March 13, 1997 |
5. During the three years prior to the date of this Certificate, Plaintiff has sought to serve or served as a representative party for a class in the following actions filed under the federal securities laws:
None
6. Plaintiff has sought to serve or served as a representative party for a class in the following actions filed subsequent to December 22, 1995:
None
The Plaintiff will not accept any payment for serving as a representative party on behalf of the class beyond the Plaintiff's pro rata share of any recovery, except such reasonable costs and expenses (including lost wages) directly relating to the representation of the class as ordered or approved by the court.
I declare under penalty of perjury that the foregoing is true and correct.
Executed this 28 day of April 1997, at Los Angeles.
| /s/
_________________________________ SAM NAFICY |
29 Oct 1997