Western Coal Willow Creek operations.
Vancouver-based Western Coal Corp. artificially drove down its share price in 2007 to allow certain investors and insiders to make millions, a $220-million lawsuit headed to court on Monday alleges.Western Coal, a mid-sized coal producer with mines in B.C. and West Virginia, was taken over by Birmingham, Ala.-based Walter Energy Inc. last year. But the company and some of its investors and officials still face allegations filed in the 2009 lawsuit.
The case, one of an increasing number of similar shareholder lawsuits filed in Ontario in recent years, goes before Mr. Justice George Strathy of the Ontario Superior Court for a hearing in Toronto this week.
Plaintiffs are being represented by lawyer James Orr of Kim Orr Barristers PC, and are seeking permission for the lawsuit to proceed as a class action on behalf of Western Coal shareholders who suffered losses.
The allegations, which lawyers for Western Coal called "baseless" in a court submission, have not been proven. Lawyers for both sides declined to comment.
The lawsuit alleges that Western Coal injected a financial results release in November of 2007 with bad news to "spread alarm" among investors and give the "false impression that [Western Coal] was on the verge of bankruptcy."
The share price on the Toronto Stock Exchange price fell more than 70 per cent after the numbers came out, sliding from $1.68 to just 50 cents, prompting some investors to cut their losses and sell.
The lawsuit alleges that a major shareholder, Britain-based Cambrian Mining PLC, and one of Cambrian's shareholders, a Guernsey-registered hedge fund called Audley European Opportunities Master Fund Ltd., boosted their stakes in Western Coal and made hundreds of millions when coal prices increased and the shares bounced back.
ÖAudley injected $30-million in convertible debentures, which were worth $430-million when the company was taken over last year at $11.50 a share, the plaintiffs state in court documents.
A lawyer for Audley responded in a court submission that the hedge fund was forced to come "to the rescue" of Western Coal during its "financial storm," and the fund had been "shocked" by Western Coal's financial results.
Three Western Coal directors also bought shares the week after the bad results came out, the lawsuit alleges.
The lawsuit cites internal e-mails sent by senior company officials before the financial release in November, 2007, stating that Western Coal had decided to "clean house" and "enhance the losses" in its financial statements. It alleges the company used an outdated, and much lower, coal price to make its cash flow look worse.
In court submissions, lawyers for Western Coal and Cambrian say the company's disclosures contained "no misrepresentations," and that the plaintiffs' claims are not backed up by evidence.
They argue the company was struggling due to the rising Canadian dollar and other problems, and faced a demand for a quick $15-million payment from its lead lender, BNP Paribas, by the end of November 2007. It was auditor PricewaterhouseCoopers LLP, Western Coal says, that insisted language warning of "substantial doubt" about the company's ability to pay its debts should be inserted in the financial results.
The company and Audley deny that any discussions about boosting investment took place before the financials came out.
Jeff Gray