Royal Wulff Ventures LLC v. Primero Mining Corp., No. 17-56367 (9th Cir. 2019)
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The Ninth Circuit affirmed the district court's dismissal of a securities fraud action because it was barred by the act of state doctrine. Plaintiffs alleged that defendants knowingly failed to disclose legal deficiencies under Mexican tax law in the 2012 APA Ruling and sold shares knowing these legal deficiencies existed.
The panel held that plaintiffs' claims under the Securities Exchange Act of 1934 would require a United States court to pass judgment on the validity of a 2012 ruling by Mexico's tax authority. In this case, the mandatory elements of applying the act of state doctrine were satisfied and the policies underlying the doctrine weighed in favor of applying it to bar plaintiffs' claims. Agreeing with its sister circuits, the panel held that the district court was not required to consider the Sabbatino factors. The panel declined to reconsider whether a tax ruling by the Mexican government, that remains valid in Mexico, complied with Mexico's tax laws.
Court Description: Securities Fraud / Act of State Doctrine The panel affirmed the district court’s dismissal of a securities fraud action as barred by the act of state doctrine because plaintiffs’ claims under the Securities Exchange Act of 1934 would require a United States court to pass judgment on the validity of a 2012 ruling by the Mexican tax authority. Plaintiffs alleged that defendants failed to disclose legal deficiencies in the tax ruling and sold shares knowing those deficiencies existed. After a change in government in Mexico, a challenge to the ruling was filed, but it remained valid under Mexican law. The act of state doctrine bars suit where there is an official act of a foreign state performed within its own territory and the relief sought or the defenses interposed in the action would require a court in the United States to * The Honorable William K. Sessions III, United States District Judge for the District of Vermont, sitting by designation. ROYAL WULFF VENTURES V. PRIMERO MINING 3 declare invalid the foreign sovereign’s official act. The panel held that plaintiffs’ claims would require a United States court to determine whether the Mexican tax authority’s ruling was properly issued under Mexican law. To determine whether defendants misled investors with an intent to deceive, a court would have to decide whether, and to what extent, the ruling complied with Mexico’s Income Tax Law, as well as various other Mexican laws governing the ethical obligations of public servants in Mexico. Agreeing with other circuits, the panel held that the district court was not required to consider other factors, known as the Sabbatino factors. Further, those factors would not have weighed against application of the act of state doctrine. In sum, the mandatory elements for applying the act of state doctrine were satisfied, and the policies underlying the doctrine weighed in favor of applying it to bar plaintiffs’ claims. Dissenting, Judge Bennett wrote that the majority misapplied the act of state doctrine, and he believed that defendants’ statements were materially false or misleading. Judge Bennett wrote that, to find for plaintiffs, a court would only need to determine whether, at the time the defendants made the alleged misrepresentations, they knew that there was a real risk that the Mexican government would nullify the tax ruling—not whether the ruling was actually invalid. Judge Bennett would reverse the district court’s rulings that the act of state doctrine barred plaintiffs’ action and that plaintiffs failed to adequately plead any materially false or misleading statements. 4 ROYAL WULFF VENTURES V. PRIMERO MINING
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