In re Molycorp, Inc. Securities Litigation 13-CV-05697-Consolidated Amended Class Action

Case 1:13-cv-05697-PAC Document 28 Filed 05/19/14 of 72

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

In re Molycorp, Inc. Securities Litigation 13 Civ. 5697 (PAC)

CLASS ACTION

CONSOLIDATED AMENDED CLASS ACTION COMPLAINT

KIRBY McINERNEY, LLP Ira M. Press 825 Third Avenue, 16th Floor New York, NY 10022 Telephone: (212) 371-6600 Facsimile: (212) 699-1194

Plaintiffs’ Lead Counsel

(additional Plaintiffs’ counsel listed on signature page)

Dated: May 19, 2014


TABLE OF CONTENTS

I. NATURE OF THE ACTION ............................................................................................. 1

II. JURISDICTION AND VENUE ......................................................................................... 3

III

PARTIES & RELEVANT NON-PARTIES ....................................................................... 4

A. Plaintiffs .................................................................................................................. 4

B. Defendants .............................................................................................................. 5

C. Confidential Witnesses ........................................................................................... 8

IV

SUBSTANTIVE ALLEGATIONS .................................................................................. 10

A. Background ........................................................................................................... 10

B. Defendants’ Material Misrepresentations Regarding the Modernization of the Mountain Pass Mine ........................................................... 11

1. Molycorp’s Materially Misleading Statements ConcerningPhase 1................................................................................... 13

2. Defendants Were Aware of Serious Problems in Their Effort to Complete Phase 1 of Project Phoenix ............................... 18

3. The Truth is Partially Revealed While Defendants Perpetuatethe Fraud ................................................................................. 31

4. The Full Truth Concerning Phase 1 Delays is Revealed .......................... 35

5. Scienter ..................................................................................................... 36

C. Defendants’ Material Misrepresentations of Financial Results ............................ 39

1. Molycorp’s Materially Misleading Statements Regarding the Company’s Financial Results.............................................................. 40

2. The Truth is Revealed ............................................................................... 41

3. Scienter ..................................................................................................... 43

D. Defendants’ Material Misrepresentations Regarding the Marketabilityof SorbX ......................................................................................... 44

1. Molycorp’s Materially Misleading Statements Regarding the Marketability of SorbX ............................................................................. 46

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2. The Truth is Revealed ............................................................................... 53

3. Scienter ..................................................................................................... 54

V. LOSS CAUSATION ......................................................................................................... 58

VI. PLAINTIFFS’ CLASS ACTION ALLEGATIONS ......................................................... 59

VII. NO SAFE HARBOR ........................................................................................................ 62

VIII. CLAIMS FOR RELIEF .................................................................................................... 63

COUNTI ...................................................................................................................................... 63

COUNTII ..................................................................................................................................... 66

IX. PRAYER FOR RELIEF ................................................................................................... 68

X. DEMAND FOR TRIAL BY JURY .................................................................................. 68

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Lead Plaintiff Gary Armstrong (“Armstrong”) and additional Plaintiffs identified in

Section III(A), below, (collectively, “Plaintiffs”), on behalf of themselves and all other persons

similarly situated, allege the following based upon personal knowledge as to themselves and

their own acts, and upon the investigation of Plaintiffs’ counsel, which included, inter alia, a

review of United States Securities and Exchange Commission (“SEC”) filings by Molycorp, Inc.

(“Molycorp” or the “Company”) and other companies, regulatory filings and reports, media

reports about the Company, security analysts’ reports and advisories, press releases and other

public statements issued by the Company, the daily trading prices for the Company’s publicly-

traded securities, other research materials available on the Internet, and publicly available filings

in federal and state court actions concerning Molycorp, the Defendants, and other persons.

Plaintiffs believe that substantial additional evidentiary support will exist for the allegations set

forth herein after a reasonable opportunity for discovery.

I. NATURE OF THE ACTION

1. This is a class action for violations of the U.S. federal securities laws on behalf of

purchasers or acquirers of Molycorp securities between February 21, 2012 and October 15, 2013,

inclusive (the “Class Period”), against Defendants Molycorp, Inc.; Constantine Karayannopoulos,

the Company’s former President and Interim-Chief Executive Officer; Mark A. Smith, its former

Chief Executive Officer; Michael F. Doolan, its Executive Vice President and Chief Financial

Officer; John L. Burba, its former Executive Vice-President and Chief Technology Officer; and

John F. Ashburn, Jr., its former Executive Vice President and General Counsel (collectively

referred to herein as “Defendants”). Plaintiffs’ claims arise from allegations of securities fraud

in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange

Act”).

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2. Throughout the Class Period, Defendants materially misrepresented three primary

facets of Molycorp’s operations, and thereby fraudulently and artificially inflated the price of its

securities. First, after nearly two years building investors’ excitement for a modernization of

Molycorp’s rare earths mine in Mountain Pass, California, to expand its production capacity to

rival industry titans in China, Defendants misled investors by repeatedly representing that the

first phase of the project was progressing on schedule and would be completed in late 2012. In

reality, however, and unbeknownst to investors, Defendants knew throughout the Class Period

that the project had been plagued with several serious problems that had already precluded its

timely completion. In fact, Defendants hid that the Company had terminated one of its

contractors in May 2012 for producing seriously deficient work and creating unsafe working

conditions in the mine. They also failed to disclosure their knowledge that the errors caused by

that contractor, among other problems at the mine, would be extremely costly and would

materially delay the progress of the modernization project.

3. Second, as a producer and distributor of rare earth materials, two of the critical

indicators of Molycorp’s financial strength and well-being were the amount of inventory carried

on its balance sheet and its cost of sales. During the Class Period Defendants materially

misstated, inter alia, both of these critical metrics.

4. Lastly, during the Class Period, Defendants touted Molycorp’s progress in

commercializing cerium, a lower-value rare earth that made up almost 50% of its Mountain Pass

mine, by using it to produce a supposedly in-demand proprietary water filtration product, SorbX.

Defendants repeatedly represented that SorbX was helping to stimulate cerium sales and that

they expected SorbX to continue to build meaningful market traction such that the Company

could sell its large supply of cerium in the near future. However, as Defendants knew

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throughout the Class Period, and finally admitted at its end, in October of 2013, the Company

was not making meaningful progress in building commercial potential for SorbX, nor was SorbX

expected to meaningfully stimulate demand for cerium before or during 2014.

5. These false and misleading statements artificially inflated the price of the

Company’s publicly traded securities during the Class Period. When, in each instance, the truth

was finally revealed, the artificial inflation was removed from the price of Molycorp’s publicly

traded securities, causing the Company’s shareholders millions of dollars of damages.

6. As described more fully below, upon disclosure in early November of 2012

concerning the damage to Project Phoenix caused by the poor workmanship of a dismissed

contractor, Molycorp’s stock price declined 27.9%, from $10.40 to $7.50. Disclosure of the full

truth concerning Project Phoenix delays in January of 2013 triggered a stock price decline of

22.7%, from $10.79 to $8.34. Molycorp’s August 2013 admission of materially inaccurate

financial reporting triggered a 9.7% stock price decline, from $7.41 to $6.69. Finally, the

October 2013 admission that SorbX sales had not been meaningful and had not been expected to

be meaningful any time soon let to an immediate 21.4% stock price decline, from $7.10 to $5.58.

As a direct and proximate result of Defendants’ fraud and the stock price declines that it caused,

Plaintiffs and the Class members suffered substantial monetary damages.

II. JURISDICTION AND VENUE

7. The claims asserted herein arise under Sections 10(b) and 20(a) of the Exchange

Act, 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5.

8. This Court has jurisdiction over the subject matter of this action pursuant to

Section 27 of the Exchange Act, 28 U.S.C. §§ 1331 and 1337.

9. Venue is proper in this District pursuant to Section 27 of the Exchange Act, 28

U.S.C. § 1391(b). Many of the acts and transactions giving rise to the violations of law

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complained of herein, including the preparation and dissemination to the investing public of false

and misleading information, occurred in this District.

10. In connection with the acts and other wrongs alleged herein, Defendants, directly

or indirectly, used the means and instrumentalities of interstate commerce, including, but not

limited to, the United States mails, interstate telephone communications and the facilities of the

national securities markets.

III. PARTIES & RELEVANT NON-PARTIES

A. Plaintiffs

11. Lead Plaintiff Gary Armstrong purchased shares of Molycorp common stock

during the Class Period and was damaged thereby, as detailed in the certification that Mr.

Armstrong previously filed with this Court. On April 2, 2014, the Court appointed Armstrong as

Lead Plaintiff pursuant to the Private Securities Litigation Reform Act of 1995 (“PSLRA”).

12. Plaintiff Ronald Simmers purchased shares of Molycorp common stock during the

Class Period and was damaged thereby, as detailed in the certification that Mr. Simmers

previously filed with this Court.

13. Plaintiff Gail Fialkov purchased shares of Molycorp common stock during the

Class Period and was damaged thereby, as detailed in the certification that Ms. Fialkov

previously filed with this Court.

14. Plaintiff Macie “Mike” Jurkowski purchased shares of Molycorp common stock

during the Class Period and was damaged thereby, as detailed in the certification that Mr.

Jurkowski previously filed with this Court.

15. Plaintiff Paul Saldafla purchased shares of Molycorp common stock during the

Class Period and was damaged thereby, as detailed in the certification attached hereto as Exhibit

A.

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16. Plaintiff Brett Huber purchased shares of Molycorp common stock during the


B.

17. Plaintiff Allen Trempe purchased shares of Molycorp common stock during the


C.

B. Defendants

18. Defendant Molycorp is a Delaware corporation with its headquarters located at

5619 Denver Tech Center Parkway, Suite 1000, Greenwood Village, Colorado, 80111. Its

common stock is traded on the New York Stock Exchange (“NYSE”) under the ticker symbol

“MCP.”

19. Defendant Constantine E. Karayannopoulos (“Karayannopoulos”) is Molycorp’s

Chairman of the Board, having previously served as its Vice Chairman starting in June 2012, and

he was the Company’s Interim President and Chief Executive Officer from December 2012 until

December 2013. Prior to his appointment as Chief Executive Officer, Defendant

Karayannopoulos served as Vice Chairman and Director of Molycorp from June 2012 to

December 2012. His prior work experience includes serving as Chief Executive Officer and

President of Neo Material Technologies, Inc., which was acquired by Molycorp. Prior to that, he

worked at AMR Technologies, Inc., where he rose from Vice President and General Manager of

the rare earths business unit to serve as Chief Operating Officer and Executive Vice President.

Defendant Karayannopoulos holds Bachelor and Master’s degrees in chemical engineering.

20. Defendant Mark A. Smith (“Smith”) served as the Company’s Chief Executive

Officer from October 2008 until he was replaced by Defendant Karayannopoulos in December

2012. His termination during the Class Period buttresses the allegations of scienter set forth

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herein. Moreover, Defendant Smith spoke at all of Molycorp’s quarterly conference calls with

investors until his employment was terminated in December of 2012, and commonly provided

statements that were incorporated into Company press releases and SEC filings. Further,

Defendant Smith attended periodic meetings in Mountain Pass and was regularly informed of the

progress of Project Phoenix by virtue of these meetings and by reports from Defendant Burba.

Prior to working at Molycorp, Defendant Smith was President and Chief Executive Officer of

Chevron Mining, Inc. Defendant has a Bachelor’s degree in engineering.

21. Defendant Michael F. Doolan (“Doolan”) has served as Molycorp’s Executive

Vice-President and Chief Financial Officer since June 2012 and its Principal Accounting Officer

since August 1, 2012. As such, Defendant Doolan provided financial information for the

Company’s SEC filings and answered questions from investors and analysts about the

Company’s financial information at quarterly conference calls. Prior to working at Molycorp,

Defendant Doolan served as Chief Financial Officer of Neo Material Technologies, Inc., of

AMR Technologies, Inc. and of Xstrata Canada Corporation.

22. Defendant John L. Burba served as the Company’s Executive Vice President and

Chief Technology Officer from December 2009 until March 2013. As described by former

Molycorp employees infra, Defendant Burba was involved on a regular basis in operations at the

Mountain Pass site, oversaw all aspects of Project Phoenix, and attended regular meetings with

the Mountain Pass contractors. Therefore, Defendant Burba was aware of the progress of Project

Phoenix at all relevant times until his employment was terminated in March of 2013.

Molycorp’s announcement of Defendant Burba’s termination during the Class Period offered no

explanation; his termination therefore buttresses the scienter allegations set forth herein. Prior to

working at Molycorp, Defendant Burba was Vice President of Technology at Chevron Mining,

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Inc., where he was involved in identifying and developing technologies for its mining businesses,

including its rare earths business. Defendant Burba has a Bachelor’s in chemistry, a Master’s in

physical chemistry, and a Ph.D. in physical chemistry.

23. Defendant John F. Ashburn, Jr. served as the Company’s Executive Vice

President and General Counsel from December of 2009 until March of 2013. Defendant

Ashburn also provided statements and information that were incorporated into Company press

releases and SEC filings. Molycorp’s announcement of Defendant Ashburn’s termination during

the Class Period offered no explanation; his termination therefore buttresses the scienter

allegations set forth herein.

24. The Defendants referenced above in paragraphs 19 to 23 are sometimes referred

to herein as the “Individual Defendants.”

25. Each of the Individual Defendants caused the false and misleading statements

described herein to be disseminated to the investing public. During the Class Period, the

Individual Defendants, by virtue of their senior executive positions with the Company, were

privy to confidential and proprietary information concerning the progress of Molycorp’s Project

Phoenix and its financial condition and accounting practices. The Individual Defendants had

access to such information via internal corporate documents; conversations and connections with

other corporate officers; employees; and contractors; attendance at management and/or board of

director meetings and committees thereof; and via reports and other information provided to

them. Among other information, the Individual Defendants had access to materially adverse

non-public information concerning Molycorp’s progress on Project Phoenix, the

commercialization of its proprietary filtration technology, SorbX, and its actual financial

condition and accounting practices during the Class Period. Because of their possession of such

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information, the Individual Defendants knew or recklessly disregarded that the adverse facts

specified herein had not been disclosed to, and were being concealed from, the investing public.

26. The Individual Defendants, because of their positions with the Company,

controlled and/or possessed the authority to control the contents of its SEC filings, reports, press

releases, and presentations to securities analysts. The Individual Defendants were provided with

copies of the Company’s SEC filings, reports, press releases, and other statements alleged herein

to be false and misleading prior to or shortly after their issuance and had the ability and

opportunity to prevent their issuance or cause them to be corrected. Thus, the Individual

Defendants had the opportunity to prevent as well as to commit the fraudulent acts alleged herein.

27. As senior executives of a publicly traded company whose common stock is

registered with the SEC pursuant to the Exchange Act, is traded on the New York Stock

Exchange, and is governed by the federal securities laws, the Individual Defendants had a duty to

promptly disseminate accurate and truthful information with respect to Molycorp, and to correct

any previously issued statements that were or had become materially misleading or untrue, so

that the market price of Molycorp’s common stock would be based upon truthful and accurate

information. The Individual Defendants’ misrepresentations and omissions during the Class

Period violated these specific requirements and obligations.

C. Confidential Witnesses

28. Plaintiffs’ allegations below rely in part on accounts of events at the Mountain

Pass facility that were provided by the following former employees and sub-contractors.

29. Confidential Witness 1 (“CW1”) is a former Senior Manager of Process

Technology at Molycorp. CW1 was employed by Molycorp from July 2012 until September

2013. CW1 was hired to assess and “clean up” the errors caused by a Molycorp contractor,

M&K Chemical Engineering Consultants, Inc., as discussed below.

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30. Confidential Witness 2 (“CW2”) is a former Molycorp sub-contractor who

worked on various Molycorp projects while at Bodell Construction from September 2011 until

March 2013. CW2 reported to the Bodell Construction Project Superintendent, the Bodell

Construction Project Manager, and the Bodell Construction Lanthium Dithium Overseer.

31. Confidential Witness 3 (“CW3”) is a former Molycorp Purchasing Agent, and

worked at Molycorp from March 2012 to September 2012. CW3 reported to the Molycorp

Warehouse Manager in Mountain Pass.

32. Confidential Witness 4 (“CW4”) is a former Production Supervisor in Molycorp’s

Chloro Alkali facility. CW4 worked at Molycorp from June 2012 until the end of July 2013 and

reported to Tim Morris, the Chloro Alkali Plant Manager and Rick Seisinger, the Production

Manager.

33. Confidential Witness 5 (“CW5”) is a former Molycorp Minerals Process Engineer

who was employed by Molycorp from December 2000 until June 2013. CW5 reported to Kelton

Smith, Molycorp Engineering Manager.

34. Confidential Witness 6 (“CW6”) is a former Director of Human Resources at

Molycorp. CW6 worked at Molycorp from February 2010 until July 2012 and reported to

Defendant Ashburn (from February 2010 to mid-2011) and thereafter to Defendant Smith (from

mid-2011 to July 2012).

35. Confidential Witness 7 (“CW7”) is a former Molycorp Minerals Process Engineer.

CW7 worked at Molycorp from September 2011 to August 2013, and reported to Steve Kunze,

Molycorp Process Engineering Lead, and other Engineering Leads.

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36. Confidential Witness 8 (“CW8”) is a former Molycorp Process Development

Scientist. CW8 worked at Molycorp from March 2008 until October 2012 and reported to

Defendant Burba and the manager directly below Defendant Burba.

37. Confidential Witness 9 (“CW9”) was a Molycorp Foreman in the Mill area. CW9

worked at Molycorp from October 2011 until October 2012 and reported to Ken Dershan, former

Molycorp Main Project Manager and later reported to Brian Heider, Molycorp Shift Supervisor.

38. Confidential Witness 10 (“CW10”) worked as a Molycorp Chemical Operator

from August 2011 until the beginning of July 2013 (July 9, 2013), and in that capacity acquired

direct knowledge of SorbX and its manufacturing plant.

IV. SUBSTANTIVE ALLEGATIONS

A. Background

39. Rare earth and rare metal products are critical inputs in clean energy technologies,

such as hybrid and electric vehicles and wind power turbines; multiple high-tech uses, including

mobile devices, fiber optics, lasers and hard disk drives; critical defense applications, such as

guidance and control systems and global positioning systems; and advanced water treatment

technology for use in industrial, military and outdoor recreation applications.

40. Molycorp produces and sells rare earth and rare metal products in the United

States and internationally. The Company’s Resources segment extracts rare earth minerals,

including rare earth concentrates; rare earth oxides (“REO”), such as lanthanum, cerium,

neodymium, praseodymium, and yttrium; heavy rare earth concentrates, which include samarium,

europium, gadolinium, terbium, dysprosium, and others; and produces SorbX, a line of

proprietary rare earth-based water treatment products. Rare earth oxides are marketed and sold

in units of metric tons. The rate at which a mine can produce metric tons of rare earth oxides is

referred to herein as its “run rate.”

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41. Molycorp’s products are used in oil refinery catalyst, glass polishing, automotive,

water purification, and energy efficiency lighting applications. The company sells its products

directly to customers, as well as through distributors.

42. For decades, the rare earth metals industry in China has controlled more than 90%

of the global rare earths market, with only a handful of non-Chinese companies producing rare

earth metals. In 2010, the Chinese government announced new restrictions and export quotas in

China, which vastly decreased export and availability of rare earths from China and created a

very favorable market position for non-Chinese rare earth producers, including Molycorp.

43. In Molycorp’s Registration Statement for its Initial Public Offering (Form S-A),

dated July 29, 2010, Molycorp explained that “[g]iven China’s estimated consumption levels and

the limitations its government has put on exports, [industry consultant] Roskill Projects a global

deficit beginning in 2011 without the advent of production from new projects, such as Mountain

Pass.” Statements such as this emphasized to investors the importance of Molycorp’s Mountain

Pass mine in both the global rare earths market and the Company’s future profitability.

44. To capitalize on the favorable market conditions caused by the global deficit,

Molycorp initiated several efforts to expand its product line and inventory. Given the new

initiatives and market climate, as stated in its Registration Statement, the Company expected, “to

be well-positioned to capitalize on the tightening balance of global supply and demand of rare

earth products.”

B. Defendants’ Material Misrepresentations Regarding the Modernization of the Mountain Pass Mine

45. Molycorp developed a plan to reopen and modernize its long-closed mining

facility in Mountain Pass, California, which had been previously shuttered in 2002 due to, among

other factors, low demand for rare earths. Named “Project Phoenix” (and referred to herein as

11


“Project Phoenix” or the “Project”), the modernization as originally announced was to have

increased the run rate of the facility from approximately 3,000 metric tons (“mt”) to 19,050 mt of

rare earth oxides per year. A Project of this magnitude was expected to take eighteen months

and cost $531 million to complete.

46. The planned production increase to 19,050 mt of rare earth oxides was named

“Phase 1” of Project Phoenix, and was scheduled to be completed during the fourth quarter of

2012 – a timetable repeatedly reiterated by Defendants during the Class Period. On December

13, 2010, Molycorp announced that it had secured all permits necessary to begin modernizing the

Mountain Pass mine.

47. Throughout the Class Period, Defendants misled the investing public by

repeatedly misrepresenting that Phase 1 was progressing on schedule, or even ahead of schedule,

and would be completed in the fourth quarter of 2012. Unknown to investors, but known to

Defendants, the Project was in fact plagued with serious problems that prevented the timely

completion of Phase 1.

48. Specifically, Molycorp continued to misrepresent the progress of Phase 1 by

consistently stating that it was on or ahead of schedule despite the undisclosed fact that at least

one contractor, M&K Chemical Engineering Consultants, Inc. (“M&K”) had produced

consistently flawed and unsafe engineering work, which Molycorp knew would have to be

assessed and corrected at great expense. Molycorp hid the problems with M&K from investors,

and instead continued to misrepresent the progress of Phase 1, as described below. In fact,

although the situation grew so serious that Molycorp terminated M&K in May of 2012,

Molycorp made no mention of problems with M&K, or the fact that it had terminated M&K for

more than five months after said termination. Even then, Defendants continued to publicly

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misrepresent the progress of Phase 1 by publicly representing that the Company remained on

track to complete Phase 1 in 2012, in a timetable that Molycorp’s CEO would later admit had

been “too aggressive” and “not realistic.”

1. Molycorp’s Materially Misleading Statements Concerning Phase 1

49. On February 21, 2012, in a Molycorp press release published on the Company’s

website, Defendants stated that the Project was “on track to achieve its full Phase 1 annual

production rate of 19,050 mt of rare earth oxide equivalent by the end of the third quarter of

2012.” The press release also contains quotes attributed to Defendant Smith.

50. On February 23, 2012, Molycorp published a press release on its website in which

it stated:

The Company confirmed that Project Phoenix remains on its accelerated schedule, with a target of achieving a Phase 1 production run rate of 19,050 metric tons of rare earth oxide (REO) equivalent by the end of Q3 2012 (3 months earlier than originally planned) and Phase 2 mechanical completion by the end of Q4 2012 (6 months earlier than originally planned).”

* * *

Specifically we increased allocations to build and train our work force, so that we would be in a better operational position as we reached Phase 1 production capacity by the end of Q3 of this year.

The press release was also filed as Exhibit 99.1 to a Current Report (Form 8-K) dated February

23, 2012 and contains quotes attributed to Defendant Smith.

51. During its February 23, 2012 conference call with investors discussing the

Company’s Results of Operation and Financial Condition for the 2011 fiscal year, Defendant

Smith stated that, “we’ve accelerated the Project Phoenix modernization and expansion of our

flagship Mountain Pass facility, which remained on time for a Phase 1 production rate of 19,050

metric tons by the end of third quarter 2012. Mechanical completion of Phase 2 production

capacity is still on target for the end of 2012.”

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52. Further, during this conference call, Defendant Smith stated, “we succeeded in

launching the formal start up of our new Project Phoenix facility this week with early stage

operations such as mining, crushing and initial cracking [leaching] operations now underway. . . .

I am pleased to note that this sequential start up of Project Phoenix has occurred well in advance

of our previously announced April 1, 2012 timeline.” However, according to a former Molycorp

Minerals Process Engineer, CW5, this statement was misleading because the leaching process

was not running at that time.

53. According to CW5, the development of the leaching process was plagued with

problems throughout 2012, and by August of 2012, management realized that the process as

designed would not work. CW5 stated that, in August of 2012, Molycorp directed engineers to

redesign the leach process and to build the redesigned process quickly. CW5 stated that, despite

Defendant Smith’s statement that the leach process was operational in February of 2012, even as

late as January of 2013, the process was only running at a tenth of its capacity. CW5 stated that

this information was presented to Defendants Karayannopoulos and Burba, in addition to other

Molycorp engineers and managers in January of 2013. As stated more fully in Section IV.B.4,

Defendants finally admitted in May of 2013 that the Company had experienced “delays in

bringing the leach and multi-stage crack processes up to initial run rate capacity,” which

contributed to the overall delay of Phase 1.

54. On February 28, 2012, Molycorp filed its Annual Report (Form 10-K) with the

SEC. The report was signed by Defendant Smith and contained certifications signed by

Defendant Smith pursuant to the Sarbanes-Oxley Act of 2002 (“SOX”). The Annual Report

stated, “Upon the completion of Project Phoenix Phase 1, which we expect to be completed by

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the end of the third quarter of 2012, we expect to have the capacity to produce approximately

19,050 mt of REO per year at our Molycorp Mountain Pass facility.”

55. In its Annual Report 1 for 2011, which was released to investors through

Molycorp’s website on May 6, 2012 and included statements made by Defendant Smith,

Molycorp stated, “We expect to be operating our new, state-of-the-art facility at a Phase 1 annual

production rate of 19,050 metric tons of rare earth oxide (REO) equivalent by the fourth quarter

of 2012. Mechanical completion of Project Phoenix’s Phase 2 production capacity of 40,000

metric tons of REO equivalent is expected to be achieved by the end of 2012.”

56. In its Quarterly Report (Form 10-Q) filed with the SEC on May 10, 2012 and

signed and SOX-certified by Defendant Smith, Molycorp warned “[w]e expect our labor and

benefits costs to increase through at least 2012 due to the addition of personnel and contractors

required to implement Project Phoenix Phase 1 and Project Phoenix Phase 2.”

57. Further, in its Quarterly Report Molycorp stated:

We are executing an accelerated modernization plan that includes the refurbishment of the Molycorp Mountain Pass mine and related processing facilities through 2012 in order to increase our REOs production. We anticipate our 2012 production to be between 8,000 and 10,000 mt of REOs. We accelerated Project Phoenix Phase 1 start-up due to robust rare earth oxide markets and favorable Project economics. This acceleration, if successful, will help to improve the diversity of global supply, which is an increasingly urgent matter for rare earth consumers. By accelerating Project Phoenix Phase 1 start-up, we also expect to reduce the overall Project risk by allowing for a more orderly and sequential start-up of the various circuits of this complex plant.

58. On May 10, 2012, eight days before it terminated its contract with M&K for cause,

Molycorp issued a press release announcing its Results of Operation and Financial Condition for

the first quarter of 2012, in which it quoted Defendant Smith as saying, “The start of 2012 has

been tremendously productive as we continue to hit each of our major milestones on the path to

1 Available at http://www.molycorp.com/wp-content/uploads/2011-annual-report.pdf

15


completion of Project Phoenix.” The press release also stated that “the Company anticipates no

material changes to its Project Phoenix EPC (engineering, procurement and construction) capital

budget.” The press release was filed with the SEC as Exhibit 99.1 to the Current Report (Form

8-K) filed on May 10, 2012.

59. During the May 10, 2012 conference call with investors discussing the first

quarter results, Defendant Smith emphasized how smoothly the modernization Project was going,

stating:

I cannot express how proud I am of the more than 1,850 employees and contractors working daily [on Phase 1 of Project Phoenix]. . . . Especially given that we recently logged more than 2.3 million hours of construction without a lost time incident. Indeed we have not had a recordable incident this year, which is truly a remarkable accomplishment in a Project this large and complex.

He added, “We remain on track for Phase 1 operations by the beginning of the fourth quarter.”

60. In the Molycorp press release issued on August 2, 2012 announcing the Results of

Operation and Financial Condition for the second quarter of 2012, the Company stated,

“Molycorp’s Project Phoenix remains on-time to ramp up production at Mountain Pass to a

Phase 1 rate of 19,050 metric tons (mt) per year in Q4 of 2012, and to mechanically complete its

Phase 2 capacity of 40,000 mt by year end. Project Phoenix recently exceeded three million

work hours without a Lost Time Incident.” The press release was also Exhibit 99.1 to the

Current Report (Form 8-K) signed by Defendant Doolan and filed with the SEC on August 2,

2012. No mention was made of the numerous problems that Molycorp was encountering in

Project Phoenix (as described in Section IV.B.2 below), including the problems with M&K or

the fact that these problems led Molycorp to remove M&K from the Project months earlier.

61. Defendant Smith also mischaracterized the Project Phoenix schedule in that press

release, stating that Molycorp’s “phased start-up of Project Phoenix Phase 1 is in full-swing, and

16


we are on target to meet our accelerated schedule of achieving the Phase 1 production rate of

19,050 metric tons in Q4,” when in fact the accelerated schedule called for Phase 1 run rates in

the third quarter of 2012, not the fourth.

62. On the same day, during the Company’s conference call with investors, which

was attended by both Defendants Smith and Doolan, Defendant Smith repeated that Phase 1

would be operational “in Q4” and that the Company was “only a couple of months away” from

Phase 1 run rates. Further, Smith stated:

[W]e remain focused on building the rare earth industry-leading, low-cost and high-margin capture advanced materials company. . . . We are only a couple of months away now from the start of Project Phoenix Phase 1 production levels and have assembled the infrastructure to move our low-cost reliable supply of feedstock into the production of high-purity advanced materials.

63. On August 9, 2012, Molycorp filed with the SEC its Quarterly Report (Form 10-

Q) for the second quarter of 2012, which was signed by Defendants Smith and Doolan and was

accompanied by SOX certifications signed by Defendants Smith and Doolan. This filing stated:

“We expect our labor and benefits costs to increase through at least 2012 due to the addition of

personnel and contractors required to implement Project Phoenix Phase 1 and Project Phoenix

Phase 2.”

64. In a press release issued on August 27, 2012, which was published on Molycorp’s

corporate website, Defendant Smith stated that, “We have launched operations of Project

Phoenix’s heavy rare earth concentrate facilities on schedule, our combined heat and power plant

is set to begin powering our new facilities this week, and we remain on track to achieve full

Phase 1 production rates at Mountain Pass in the fourth quarter of this year.”

17


65. In a press release issued on August 29, 2012, which was published on Molycorp’s

corporate website, Molycorp reiterated that it would achieve Phase 1 run rates during the fourth

quarter of 2012. Defendant Smith stated:

Our Project Phoenix modernization and expansion of Mountain Pass remains on track to achieve a Phase 1 annual rate of production of 19,050 metric tons in the fourth quarter of this year, and we are on schedule to deliver mechanical completion of our Phase 2 production assets by the end of this year.

66. The foregoing statements were false and misleading for the reasons stated in

Section IV.B.2 infra because, inter alia, as Confidential Witnesses and Molycorp’s own

pleadings filed in a later lawsuit against M&K now confirm, there were actually widespread

problems during the construction of Phase 1 that prevented its completion according to the

announced schedule. Most notably, by Molycorp’s own admission, M&K engaged in shoddy

workmanship which necessitated its removal and which led to extensive ancillary damages.

However, in the foregoing statements, Molycorp made no mention of any problems with M&K,

or of any of the many other problems at the Mountain Pass facility, and further omitted that these

errors had in fact seriously delayed the Project such that its completion in 2012 was impossible.

2. Defendants Were Aware of Serious Problems in Their Effort to Complete Phase 1 of Project Phoenix

67. However, all of the above statements were false or misleading. By early 2012,

Defendants knew that there would be delays to Phase 1 because, inter alia, there were serious

problems in the work performed by one of Molycorp’s contractors, M&K Chemical Engineering

Consultants, Inc. on its Project Phoenix Phase 1 assignments. Specifically, M&K failed to meet

the engineering standards set forth by its contract with the Company and by government

regulation, failed to complete assignments as specified, and flouted safety regulations in a

manner that resulted in hazardous conditions in the Mountain Pass mine. The problems became

so serious that on May 18, 2012, Molycorp terminated M&K’s engagement and concluded that

18


much of M&K’s work would have to be corrected, which would be both time consuming and

expensive.

68. Yet, despite this knowledge, Defendants falsely continued to insist that all was

proceeding according to plan, and misleadingly made no mention to investors of the serious

problems caused by M&K (let alone that Molycorp had terminated M&K), and the consequences

for Project Phoenix until more than five months later, when Molycorp filed a lawsuit against

M&K in the U.S. District Court for the District of Colorado in an attempt to recover some of the

damages that, unbeknownst to investors, had already been caused by M&K’s errors. 2

69. The errors by M&K detailed in Molycorp’s complaint against M&K, attached

hereto (without exhibits) as Exhibit D, which constitute admissions by the Company for purposes

of this lawsuit, provides some insight into the magnitude of the damages that resulted from

M&K’s shoddy workmanship, and illustrates that M&K’s errors had been occurring

“consistently” in the time period leading up to M&K’s termination, all unbeknownst to investors.

While Defendants continuously misrepresented to its investors, as discussed in Section IV.B.1

above, that Phase 1 was on (or ahead of) schedule, they were omitting that the Project was in

actuality being delayed by all of the following:

a. Molycorp’s complaint reveals that M&K repeatedly failed to adhere to the

standards set for all contractors working on the Project, including Molycorp’s standards and

applicable government regulations. Specifically:

. “M&K failed to adhere to Molycorp’s standard Project Phoenix technical specifications, and as a result, Molycorp’s effort to standardize equipment and installation methods was impeded.”

. “M&K failed to meet its obligations under the Contract in several material ways. M&K failed to perform its work in accordance with Good

2 Complaint, Molycorp Minerals, LLC v. M&K Chemical Engineering Consultants, Inc., No. 12-cv-2880 (D. Colo. Oct. 31, 2012).

19


Engineering Practices, as required by the Contract, and consistently failed to provide its Work Product in accordance with the contractual work schedule.”

~ “M&K’s layout of the major process equipment and systems was not designed to enable construction, operations, and maintenance of the systems. M&K failed to locate equipment and systems in these facilities in accordance with design criteria and applicable federal, state and local codes.”

~ “M&K’s design work at the cerium building for Project Phoenix failed to comply with applicable contractual and engineering standards, and were incomplete and incorrect.”

~ “M&K failed to work cooperatively with the other engineering and construction contractors. M&K produced detail design for facilities at Project Phoenix that failed to follow M&K’s earlier engineering specifications and preliminary design parameters.”

b. As alleged in Molycorp’s complaint, M&K also failed to complete its

assigned work as specified. Specifically:

~ “In several instances, M&K failed to produce complete and final specifications. In addition, specifications that M&K did produce grossly over-specified system needs and requirements in some instances, and were insufficient in others.”

. “In several instances, M&K failed to specify the correct materials for the facilities.”

~ “M&K’s design of the processing systems using mixers/settlers caused major issues during fabrication. M&K’s design specifications for the floor of the building, for instance, were inadequate, and did not allow for proper equipment placement.”

~ “M&K’s structural design work often was also incomplete and incorrect. In particular, M&K’s design specifications for the floor for one building were inadequate, and a complete redesign was required to allow for placement of the mixer/settlers in accordance with code requirements.”

. “M&K did not provide the major design elements for the mechanical and electrical systems, and failed to perform the engineering required to properly design and specify the major design elements.”

20


c. Molycorp’s complaint further alleges that, by virtue of its errors, M&K

caused hazardous conditions that, if implemented unchanged, could have resulted in serious

accidents and that required corrective measures to be taken. Specifically:

“Many of M&K’s designs were unsafe creating hazardous conditions that, if not rectified, could have resulted in serious injury or death to personnel working in and around the facilities.”

“M&K failed to comply with Molycorp’s established procedures for preparation and completion of Project Hazard Analyses, which included basic process safety information (“PSI”) and procedural requirements for all engineering partners.”

“M&K’s detailed structural design of various systems did not include code-related design specifications. M&K failed to provide a pipe stress analysis for its design of steam piping systems. Without approval or consent from Molycorp, M&K retained a third party to conduct this analysis. Despite this, M&K’s design for various portions of the steam system was unsafe and, if implemented, would have created hazardous conditions that could have caused serious injury or death.”

“A number of vessels designed by M&K included safety release valves that, as specified, would have failed as a result of pressure ratings of the vessels being lower than the ratings of the safety valves employed. Had M&K’s design been utilized, the vessels themselves would have failed before the safety valve mechanism could be released with the potential to cause serious injury or death.”

70. During a November 8, 2012 conference call with investors, Defendant Smith

revealed that M&K’s shoddy workmanship would cost Molycorp an estimated $150 million in

damages. This staggering figure was clearly material to Molycorp. In 2012, Molycorp’s

revenues were just $528.9 million, and its reported gross profits for 2012, just $17.3 million

would be completely exhausted to correct M&K’s errors.

71. Former Molycorp employees confirm that Phase 1 was not “on track” as

Molycorp had been telling investors during the Class Period, in part due to the errors made by

M&K. Further, former Molycorp employees confirm that a lack of organization and

infrastructure, including a lack of effective communication between the contractors and

21


Molycorp management and inadequate oversight of purchasing and equipment storage, resulted

in a construction site that was rampant with costly, time consuming errors and unnecessary or

duplicative construction projects and spending – all with Molycorp’s full knowledge and much

of it at Molycorp’s express direction.

72. CW1 is a former Senior Manager of Process Technology at Molycorp and was

employed by Molycorp from July 2012 until September 2013. CW1 was hired solely to assess

and “clean up” the errors caused by M&K, including redesigning processes, sorting through

various mismatched equipment, and even reorganizing the placement of the equipment within

the Mountain Pass mine buildings. CW1 represented that, by the time CW1 was hired in July of

2012, the Project was already “a mess.” CW1 explained that the chemistry involved in the

design of the Project was “beyond complex” and that the services provided by M&K were

blatantly deficient and came nowhere near meeting the standard of quality necessary to complete

M&K’s part of the Project. He concluded that, “M&K did a lot of very poor engineering. That’s

a fact.”

73. CW1 clarified that M&K was not the only party causing problems at the mine,

and that in fact several contractors, including Eichleay Engineers (“Eichleay”), and the Company

itself were creating obstacles to completing the Project on time by failing to complete their

assignments in a methodical, organized fashion. CW1 stated:

[T]he problem, if you can understand this, is [Molycorp] didn’t have the process defined at the same time they were trying to get M&K to do blueprints and then go into construction with Eichleay. Eichleay is trying to manage construction. M&K is trying to do blueprints and design the process at the same time. It can’t be done. They did a lousy job at it.

74. Further, CW1 stated that when CW1 was hired, the Leach, Crack and Dissolution

system was completely disorganized. There was no design for the equipment that had already

22


been purchased and placed in the building, the equipment was mismatched, and the piping design

for the process was essentially “non-existent” and had to be created from scratch.

75. CW2 is a former Molycorp sub-contractor, employed by Bodell Construction

(“Bodell”) who worked on various Molycorp projects from September 2011 until March 2013.

CW2 reported to the Bodell Project Superintendent, the Bodell Project Manager, and the Bodell

Lanthium Dithium Overseer.

76. According to CW2, in the summer of 2012, Bodell was contracted to install two

pieces of expensive equipment, called turbines C and D, in one of the Mountain Pass facilities.

Upon receiving the relevant equipment from another contractor, Eichleay, in the summer of 2012,

CW2 noted that many of the items were covered with dust and had been improperly stored. This

was a material problem, in that, according to CW2, improper pre-installation storage could

hamper the future, post-installation efficiency of the items Bodell was contracted to install.

77. Additionally, CW2 noted that, at Molycorp’s instruction Eichleay went on a

“buying spree” of items that were not necessarily effective or the most appropriate for the Project.

Molycorp directed Eichleay to buy waste disposal equipment from factories and plants that had

shut down or upgraded, notwithstanding that Molycorp was not entirely sure that the equipment

would work for the Mountain Pass mine. Rather, CW2 explained that Molycorp was “kind of

going to make it work,” meaning to wastefully buy first and figure out later if the purchased

equipment could be made to suit the intended uses. CW2 related that the Company spent

$40,000.00 on one such piece of used equipment alone, without knowing in advance whether it

could be implemented within the context of the Project.

78. CW2 provided another example of disorganization between the contractors and

the failure of Molycorp and contractors to agree on expectations for work done on the Mountain

23


Pass mine. According to CW2, near the inception of the Project and well before such equipment

was actually needed, contractor KBR, Inc. (“KBR”) was assigned to engineer a brine evaporator

(a piece of equipment that disposes of brine, which is generated as waste in many industrial

processes) and a salt recovery unit. However, CW2 stated that Molycorp and Eichleay later

decided that they were not going to use everything that Molycorp had purchased for KBR’s

design. Even after KBR had purchased the equipment needed for both systems, Molycorp only

allowed KBR to install one of them, the salt recovery unit, in the summer of 2012. The

Company wastefully elected to start an entirely different brine evaporation process that only used

half of the items already purchased. The brine evaporator was not installed, notwithstanding that

all its parts had already been purchased, due to uncertainty as to whether it was actually needed.

79. Additionally, CW2 related that “Molycorp was disgusted with the way KBR was

running the show, so they decided to take the equipment that KBR purchased and award the

contract to Bodell around March 2013, after modification of the drawings.” The brine

evaporator was ultimately installed by Bodell in around March 2013, after CW2 left the

company.

80. CW3 is a former Molycorp Purchasing Agent, and worked at Molycorp from

March 2012 to September 2012. CW3 reported to the Molycorp Warehouse Manager in

Mountain Pass.

81. CW3 confirms that miscommunications between the contractors and the

Mountain Pass team were rampant and costly throughout CW3’s employment. According to

CW3, in June or July of 2012, the Mountain Pass power plant, which was built to power the

Project, only ran for a few hours at a time, even though Molycorp had purchased ten to fifteen

pumps at a cost of roughly $20,000 per pump to keep the power plant running. The inadequate

24


power supply was due, in part, to the fact that in May or June of 2012, six of those pumps, worth

over $100,000, were placed into a submersible location despite that they were not submersible

pumps, and were destroyed. CW3 stated that this mistake took place every few weeks because

the engineer drawings for the site were mislabeled and incorrect.

82. CW3 asserted that the Company generally did not keep proper record of the

products they had in stock, and that Eichleay similarly did not keep proper record of what they

were buying. Furthermore, CW3 recalled that Rocky Smith, Molycorp Mountain Pass Managing

Director, said that “whatever maintenance wants, get it, no matter what the cost,” despite that

often the products requested by the maintenance team were already at the site, and were therefore

unnecessarily purchased more than once.

83. CW4 is a former Production Supervisor in Molycorp’s Chloro Alkali facility.

CW4 worked at Molycorp from June 2012 until the end of July 2013 and reported to Tim Morris,

the Chloro Alkali Plant Manager and Rick Seisinger, the Production Manager.

84. The Chloro Alkali plant was a facility that was supposed to save the Company the

cost of shipping waste offsite, which amounts to roughly $4 million monthly. CW4 stated that

the total cost savings of such a plant amounts to between $17 and $22 million monthly because

the waste could be supplied back to the mine.

85. CW4 stated that the rare earth mine was shut down for one and a half months in

the last quarter of 2012, thereby making it impossible to meet the Phase 1 target date. CW4

stated that the shutdown took place because of design and equipment issues, including that the

pumps purchased for the Project were the incorrect size. CW4 stated that the Company was in

the process of working out problems with new equipment.

25


86. With regard to the Chloro Alkali plant, CW4 stated that there were daily issues

with Project Phoenix from June 2012 until year end. However, Molycorp management

frequently pulled Chloro Alkali engineers away from their standard duties to help resolve

technical issues. CW4 felt pressured because the Chloro Alkali plant was supposed to be

running in October 2012, but they were not even close to being able to meet that deadline. In

fact, in mid-October 2013, a year later, the Company was still aiming to launch the Chloro Alkali

site in early November 2013.

87. CW4 stated that one of the main reasons for the delay was that the mine did not

receive two or three of their major pieces of equipment for the Chloro Alkali plant until January

or February of 2013. Specifically, CW4 stated that the Hydrochloric Acid Burner was a major

component to operate the plant, and did not arrive until early 2013. Additionally, as of July 2013,

the Chloro Alkali plant personnel had not started assembling the electrolysis cells, which are the

engine of the Chloro Alkali plant. CW4 stated that it takes two or three months to construct such

cells.

88. CW4 related that between June 2012 (when CW4 started working at Molycorp)

and November 2012, Defendant Burba was onsite at Mountain Pass on a monthly basis to have

status meetings with the principal engineers: Tim Morris, Chloro Alkali Plant Manager; Pat

Glynn, Rare Earth Processing Mine Plant Manager; Kelton Smith, Engineering Manager; and

Rocky Smith, Mountain Pass Managing Director. Defendant Burba was apprised of the site

problems, including the obstacles to meeting Project Phoenix deadlines. Defendant Burba

reported to Defendant Smith, who also visited the mine periodically. Nevertheless, CW4 stated

that Defendant Burba and Defendant Smith ignored the reality of the progress of the Project and

projected false but promising numbers related to the mine to investors.

26


89. CW5 is a former Molycorp Minerals Process Engineer who was employed by

Molycorp from December 2000 until June 2013. CW5 reported to Kelton Smith, Molycorp

Engineering Manager.

90. CW5 related that there was a major engineering error in the development of the

Project’s leaching (also called “cracking”) process. CW5 was assigned to aid in the startup of

the leaching process. CW5 stated that much of what had already been done before CW5 was

assigned to the leaching process was done improperly and would have to be changed in order to

make the process work. The leaching process was projected to be operational by mid- to late-

2012, but was not operational until early 2013, and when finally completed the process was

slower than it was designed to be.

91. CW5 related that executive management informed investors that the leaching

process was running, but omitted that it was not running at the quoted capacity. See Molycorp

Conference Call with Investors, February 23, 2012 (“[W]e succeeded in launching the formal

start up of our new Project Phoenix facility this week with early stage operations such as mining,

crushing and initial cracking [leaching] operations now underway. . . . I am pleased to note

that this sequential start up of Project Phoenix has occurred well in advance of our previously

announced April 1, 2012 timeline.”)

92. CW5 also related that Defendant Burba, former Molycorp Executive Vice

President and Chief Technology Officer, over-prioritized meeting target numbers and would

therefore make technical decisions on the fly. CW5 stated that some of Burba’s decisions caused

dissension among Project engineers.

93. For example, CW5 explained that the caustic crack program was “his [Burba’s]

baby.” CW5 related that the caustic crack process was a massive process that management

27


attempted to conduct in an “old building on top of a hill” in Mountain Pass. CW5 stated that

management scaled up small laboratory experiments to develop the caustic crack process but

were never able to prove the concept. Nevertheless, they built a $100 million plant to carry out a

scaled up version of the unproven process. CW5 stated that the Company filled the plant with

“beautiful, expensive machinery,” but ultimately the process did not work and the building was

left unused. CW5 believes that management did not conduct the proper due diligence to

ascertain whether such a process would work before spending the resources to build the facility.

94. Further, CW5 stated that when, in August of 2012, Molycorp management

realized that the process in question did not work, the Company again rejected the traditional

leaching process, and instead, in early 2013, tried to improvise a new procedure in an attempt to

make the process quicker and more efficient. CW5 stated that Molycorp spent four months

developing this new process, which also failed. CW5 believes that these failures could have

been related to problems with the water used for these processes, as the Company was trying to

save money on water processing and therefore may have used substandard water. CW5

estimated that by January 2013, the leaching process was running at a tenth of the normal

capacity because, among other things, there were problems with the process’s filtration system.

95. In January of 2013, CW5 presented the progress of the leaching process, and the

various problems discussed above, to Defendant Karayannopoulos, the Mountain Pass mine

management staff, including Defendant Burba, and other contractors/affiliates of the Company.

CW5 related that Jesse Scheuer, former Molycorp Process Development Scientist, was dismissed

because of the ongoing problems with the development of the caustic crack/leaching process.

CW5 stated that Defendant Burba tried to terminate the employment of another development

scientist, but ultimately, Defendant Burba’s employment was terminated before he could do so.

28


96. CW6 is a former Director of Human Resources at Molycorp. CW6 worked at

Molycorp from February 2010 until July 2012 and reported to Defendant Ashburn, Former

Molycorp Executive Vice President/General counsel (from February 2010 to mid-2011), and

thereafter to Defendant Smith (from mid-2011 to July 2012).

97. CW6 stated that there were periodic presentations, meetings, and general

discussions before July of 2012 with both the Molycorp senior management and the team on the

ground in Mountain Pass, including the general contractor and the sub-contractors, who would

give presentations on the status of the Project and answer questions. CW6 attended some of

these meetings and stated with regard to the Project that as time passed, the issues began to pile

up. CW6 described being constantly behind schedule as “a theme” at Mountain Pass and also

stated that the problems with the Project were so pervasive that employees sometimes referred to

the Company as “Molymess.” CW6 explained that “there were discussions along the way that

things were not on schedule. . . . It was ongoing and it just kept building up and building up and

building up and becoming more of an issue. Then of course, the cost started (increasing).”

Because of these presentations, Defendants were aware that the Project was not progressing

according to the announced schedule.

98. Further, CW6 stated that Molycorp may have been too ambitious with the Project

and that the Project was delayed more by the numerous, complex separation processes that were

lagging behind in the construction phase, as opposed to the more simple mining processes, which

were completed earlier on.

99. CW7 is a former Molycorp Minerals Process Engineer. CW7 worked at

Molycorp from September 2011 to August 2013, and reported to Steve Kunze, Molycorp Process

Engineering Lead, and other Engineering Leads.

29


100. CW7 stated that the management at Mountain Pass had weekly meetings wherein

they would report progress on the goals for each quarter. CW7 stated that there were typically at

least four high level managers at these meetings, and Defendant Burba also attended periodically.

101. However, CW7 stated that there seemed to be a disconnect between the numbers

these engineers reported and the numbers quoted to investors by Defendant Smith, stating, “It

almost seemed like he wasn’t given the same numbers that we were giving.” CW7 stated that

there were times that Molycorp would announce a Project was nearly completed but the

engineers knew that it was barely in the construction phase. CW7 informed Steve Kunze,

Molycorp Process Engineer Lead, about the misinformation, but if such concerns were addressed

to Defendant Burba, CW7 stated that Defendant Burba would “sweep it under the rug.”

102. CW7 stated that the executive management did not accept much input from the

engineers regarding the status of the Project and that the executives did not seem to do their due

diligence.

103. CW8 is a former Molycorp Process Development Scientist. CW8 worked at

Molycorp from March 2008 until October 2012 and reported to Defendant Burba and the

manager directly below Defendant Burba.

104. CW8 described Defendant Burba as a hands-on manager, and stated that during

late 2012, Defendant Burba worked in the Mountain Pass mine full-time. CW8 confirmed that it

was Defendant Burba’s responsibility to report the progress of the Project to Molycorp

executives between the regular executive briefings, and that Defendant Burba was fully aware of

the progress of the Project during the Class Period until his termination in early 2013.

30


3. The Truth is Partially Revealed While Defendants Perpetuate the Fraud

105. On October 31, 2012, with no announcement to investors, Molycorp filed a suit in

the US District Court for the District of Colorado against M&K and two of its

directors/officer/owners. As detailed above, Molycorp alleged in its Complaint that M&K failed

to meet the standard set by their contract because M&K made excessive errors, including errors

that compromised the safety of the facility, and failed to adhere to Molycorp’s standards for the

construction of Project Phoenix.

106. Although Molycorp made no public announcement concerning its commencement

of the lawsuit, within two days, the price of Molycorp securities declined, from $10.54 on

November 1, 2012 to $9.83 on November 2, 2012, for a one day loss of 6.7%.

107. On November 5, 2012, Molycorp issued a press release announcing for the first

time that it had filed suit against M&K. This was Molycorp’s first public mention of any

problems with M&K, despite the fact that Molycorp had terminated M&K five months earlier.

Molycorp announced:

GREENWOOD VILLAGE, Colo. (BUSINESS WIRE) Nov. 5, 2012 -- Molycorp, Inc.’s (NYSE: MCP) (“Molycorp” or the “Company”) Executive VP and General Counsel, John F. Ashburn, Jr., today announced that the Company has filed a claim against M&K Chemical Engineering Consultants, Inc. (“M&K”) and certain current and former officers and owners of M&K in Colorado Federal District Court arising from a commercial dispute over defects in engineering services related to the Company’s Project Phoenix modernization and expansion of its Mountain Pass, California, facility.

While the Company generally does not comment on active disputes, Mr. Ashburn indicated that, due to the high level of public interest in the Project, he wanted to ensure that the reasons underlying the dispute were clear.

Mr. Ashburn said that the claim was filed in an attempt to recover a portion of the costs incurred by the Company in rectifying defective engineering services for which the Company believes the defendants are responsible and that the effects of the defective engineering underlying the claim have already been largely mitigated by the Company’s Technology Group and other engineering companies

31


working on the Project. Those defects will not impact the timing of the Company’s plans to ramp up production at its Mountain Pass facility, Mr. Ashburn said, and the Company still expects to achieve full Phase 1 production rates by the end of the current quarter as previously announced.

Mr. Ashburn noted that, while unfortunate, the claim filed by Molycorp essentially amounts to nothing more than a commercial dispute over monetary damages.

108. The press release provided many investors with their first notification that the suit

had been filed. Molycorp’s stock price declined to $8.97 on November 7, 2012, a decline of

$0.82 or 8.3% of the previous day’s closing price. However, even while alerting investors as to

the lawsuit and the problems with M&K, this press release nevertheless perpetuated the

misrepresentation that the timing of Project Phoenix was unaffected and that Phase 1 would be

completed by the end of the fourth quarter of 2012.

109. On November 8, 2012, when the Company hosted a conference call to discuss its

Results of Operation and Financial Condition for the third quarter with investors, the public was

provided with more information regarding the gravity of the M&K conflict. During the call,

which was attended by Defendants Smith and Doolan, Defendant Smith disclosed that the breach

of contract would be extremely costly to the already struggling Company:

We currently expect to incur additional costs on Project Phoenix of up to $150 million, which are largely attributable to the engineering defects I mentioned earlier. To put that into perspective, it represents approximately up to a 14% increase over the Project’s overall costs.

110. The initial budget for Phase 1 of the Project was $531 million. The Project was

already projected to have an actual cost of $1.1 billion before settling the costs of M&K’s errors.

Therefore, the $150 million represented a massive 28% increase over the initial budget of Phase

1 and a 14% increase over the actual cost of the Project. In fact, Molycorp’s gross profits for

32


fiscal year 2012 were only $17.3 million – this budget setback alone would exhaust more than

eight times the value of 2012’s profits.

111. After this news, Molycorp securities declined from $8.68 on November 8, 2012 to

$7.50 on November 9, 2012, a one-day loss of 14% and a loss since the filing of the suit of

nearly 28%.

112. Despite that Molycorp’s belated disclosure of the M&K fiasco surprised investors,

the Company still had not come completely clean with them. In an attempt to downplay the

damage done by M&K and its consequences for Phase 1, Molycorp continued to falsely claim

that the Project was on track for completion of Phase 1 by the end of 2012.

113. On November 8, 2012, Molycorp issued a press release, which was filed with the

SEC as an exhibit to a Form 8-K, signed by Defendant Doolan, in which it announced its Results

of Operation and Financial Condition for the third quarter of 2012 and stated:

Molycorp continues to ramp up Project Phoenix operations at its Mountain Pass, California, facility, and it remains on schedule to achieve a Phase 1 operational rate of 19,050 metric tons (mt) per year in the fourth quarter of 2012. To date, 80% of Project Phoenix facilities are at Phase 1 or greater than Phase 1 operational capabilities.

114. During the conference call on November 8, 2012, in which Defendants Smith and

Doolan participated, Defendants continued to misrepresent the Project Phoenix timetable.

Analyst Michael F. Gambardella also asked Defendant Smith about progress of the Project given

M&K’s errors:

Q: Okay. I was under the understanding when you said it, that you were going to have Phase 1 up by the beginning of the fourth quarter.

Defendant Smith: I apologize for any confusion with that. I think what we’ve been saying is that we will have Phase 1 up and running in the fourth quarter. And we still are on track to achieve that.

33


115. In this conference call, Defendant Smith also stated:

The first area is the progress we’re making on Project Phoenix, our top corporate priority. Let me start by saying that I’ve never been more proud of what our team has accomplished in a single quarter, especially in terms of how this team has worked to overcome every single obstacle in our path to achieving Phase 1 production in the fourth quarter, which we are absolutely on track to deliver.

* * *

We are only a matter of weeks away from full Phase 1 production levels at Mountain Pass.

* * *

As many of you saw in our announcement earlier this week, we experienced some defective engineering services on Project Phoenix arising from some subcontractor work. While remediation of these items may increase our overall Project costs by up to 14%, everything has been remedied or is on track to be remedied and we see no obstacles to achieving Phase 1 production this quarter.

In summary, on Slide 30, Project Phoenix is on track for Phase 1 run rates in the fourth quarter.

116. In its Quarterly Report for the third quarter of 2012 (Form 10-Q), dated

November 9, 2012 and signed and SOX-certified by Defendants Smith and Doolan, Molycorp

stated that “Project Phoenix remains on track to begin producing at our Phase 1 annual rate of

19,050 mt of REO by the fourth quarter of 2012.”

117. On November 23, 2012, the Company filed a Form S-4 with the SEC, which was

signed by Defendants Smith, Burba, and Doolan, in which it stated: “we anticipate completion

[of Project Phoenix Phase 1] to occur in the fourth quarter of 2012.”

118. On December 11, 2012, the Company issued a press release in which Chairman

of the Board Ross R. Bhappu reiterated that “Project Phoenix [is] on track to achieve a Phase 1

run rate by the end of this month.”

34


119. The statements in paragraphs 107 to 118 above were materially misleading

because, as a result of the massive damage caused by M&K’s malfeasance, as well as subsequent

operational problems at Mountain Pass, as recounted by Confidential Witnesses 1 to 8 (see

Section IV.B.2 above), Defendants were aware that Molycorp would be unable to operate the

Mountain Pass mine at Phase 1 run rates according to the announced schedule.

120. In that same press release, the Company announced that Defendant Smith had

“left the Company” and that Defendant Karayannopoulos would replace Defendant Smith as

Interim-Chief Executive Officer until a permanent successor could be hired. While the Company

did not provide a reason for this move, JPMorgan Chase & Co. analyst Michael Gambardella

noted, “we feel that Mark [i.e. Defendant Smith] had lost credibility with a number of

constituents, shareholders, potential investors and analysts.”

121. The market reaction suggests that Gambardella was not alone in that belief.

Molycorp’s stock price fell from $11.33 to $10.99 on the first trading day following this

announcement (December 12, 2013) and to $10.24 the following day, with trading volume both

days that was materially above average.

4. The Full Truth Concerning Phase 1 Delays is Revealed

122. On January 10, 2013, when Phase 1 should have already been completed, with no

interim statement to investors suggesting that Phase 1 had not been completed according to

schedule, and with no explanation as to why the target date changed, Molycorp pushed the target

date for Phase 1 back another six months to mid-year 2013. Molycorp’s press release on January

10, 2013, which contained quoted statements from Defendant Karayannopoulos, stated that “with

an orderly ramp up of production it will reach or exceed its Phase 1 run rate of 19,050 metric

tons per year (mt/year) of [REO] by mid-year.”

35


123. After that disclosure, Defendants, having had full knowledge of the actual

progress of the Project, admitted that the inability to complete Phase 1 by the fourth quarter of

2012 resulted in large part from the defective performance of M&K, which they had known

about for well over seven months, and also admitted that the timetable that it had provided to

investors regarding Phase 1 had not been realistic.

124. Specifically, on January 10, 2013, Defendant Karayannopoulos admitted in an

interview with Bloomberg News that the fourth quarter Phase 1 projection was “too aggressive”

and that the timetable that management had previously given to the public concerning achieving

Phase 1 operating rates “was not realistic and it should not have been the expectation.”

125. On this news, Molycorp’s stock plummeted from its January 9, 2013 closing price

of $10.79 to close at $8.34 on January 10, 2013, a single-day loss of value of 22.7%.

126. In its Quarterly Report for the first quarter of 2012 (Form 10-Q), which was filed

on May 9, 2013 and signed and SOX-certified by Defendants Smith and Doolan, Molycorp made

several admissions related to the Project. Specifically, Molycorp admitted that, as alleged in

paragraph 53 above, there were “delays in bringing the leach and multi-stage crack processes up

to initial run rate capacity,” a statement which stands in direct contrast to the Company’s

February 23, 2012 statement that it had already “succeeded in launching” the leaching process.

127. Further, Molycorp admitted that “certain defective engineering work that required

additional engineering, procurement, and construction to correct,” i.e. , the M&K and other

contractor problems described above, contributed to its inability to achieve Phase 1 run rates

according to the announced schedule.

5. Scienter

128. Defendants knew and/or recklessly disregarded that their bullish statements

regarding the progress of Phase 1 were materially false and misleading.

36


129. Defendants knew, and admitted in their own later-filed pleading, that one of their

contractors, M&K, made serious errors that delayed Project Phoenix and vastly increased the

Project’s budget. As detailed in Section IV.B.2 above, Molycorp’s complaint against M&K

details the numerous material and costly ways in which M&K failed to perform. Yet Defendants

concealed this fact for months after discovering these problems. In fact, they made no public

mention of these serious problems until more than five months after the situation had

deteriorated to the point that Molycorp terminated M&K’s engagement.

130. Defendants knew that there were numerous other problems in various Project

Phoenix facilities, including errors relating to the purchasing, storing, and installation of

equipment, miscommunications between the contractors, and problems with the engineering

processes underlying the Project, as related by Confidential Witnesses 1-8 in Section IV.B.2

above, and as detailed in Molycorp’s complaint against M&K.

131. Defendant Karayannopoulos later admitted, in an interview with Bloomberg

News on January 10, 2013, that the projections for Phase 1 stated by Defendants during 2012

were unrealistic and “should not have been the expectation”.

132. Defendant Smith, Defendant Burba, Defendant Ashburn – Molycorp’s Chief

Executive Officer, Chief Technology Officer, and General Counsel – were terminated or forced

to resign during the Class Period as a result of the problems at the Mountain Pass mine and the

resultant misleading disclosures to investors. In fact, on December 12, 2012, Bloomberg News

published an article discussing Defendant Smith’s termination entitled “Molycorp CEO Exits Six

Months After New Material Deal.” The article quoted Michael Gambardella, a New York-based

analyst at JPMorgan Chase & Co. who often covered Molycorp, who stated that “We feel that

37


Mark [i.e. Defendant Smith] had lost credibility with a number of constituents, shareholders,

potential investors and analysts.”

133. As persons quoted within the press releases and filings containing the

misrepresentations and/or as signatories to those documents, the Individual Defendants were

charged with a duty to inquire and a duty to monitor to ensure that the statements set forth

therein conveyed the complete truth. Moreover, they had a duty to correct their prior statements

when facts later became known that rendered such statements false or misleading.

134. Despite that, as signatories to the SOX certifications accompanying certain of the

SEC filings at issue, the Individual Defendants were obligated to ensure that those SEC filings

were accurate and that the Company’s internal controls were sufficient, they failed to do so and

instead allowed or caused materially inaccurate or misleading reports to be filed with the SEC.

135. As detailed in Section IV.A, Project Phoenix was one of Molycorp’s core

operations. Indeed, Defendant Smith was quoted in the Company’s August 2, 2012

announcement of their Results of Operation and Financial Condition for the second quarter of

2012, as referring to Project Phoenix as one of the Company’s “three strategic priorities.” At

quarterly conference calls, Defendant Smith regularly updated investors on the progress of

Project Phoenix and answered investor and analyst questions concerning same. Defendants

Smith and Burba were involved in constant oversight of the Project. As recounted by CW8,

“Burba had his hands in everything that was going on in Mountain Pass, California.” As

described above in paragraphs 83 to 95, CW4 and CW5 both confirmed that Defendant Burba

was a highly involved manager. CW8 stated that Defendant Burba reported the numbers

regarding the progress of the Project directly to Defendant Smith. As described above, CW4,

CW5, and CW7 confirmed that Defendants Smith and Burba were both involved in regular

38


meetings where they were briefed on the progress of the Project. Based, inter alia, on these

alleged facts, when they discussed Project Phoenix, the Individual Defendants were aware of the

serious ongoing problems detailed above.

136. Moreover, as set forth in Section III.B above, the backgrounds of Defendants

Karayannopoulos and Burba put them in a position to have particular familiarity with rare earth

operations. In the December 11, 2012 press release announcing Karayannopoulos’ elevation to

CEO, the Company touted his “exceptional track record in and knowledge of” the rare earths

industry, which “puts him in a unique position to direct the leading rare earths technology

company.” Likewise, Defendant Burba has decades of experience in the rare earths industry, as

well as a Ph.D. in physical chemistry.

137. More generally, as senior executives of a publicly traded company, the Individual

Defendants had a duty to promptly disseminate accurate and truthful information with respect to

Molycorp, and to correct any previously issued statements that were or had become materially

misleading or untrue, but despite that Defendants were aware that materially false or misleading

information was being reported to investors, none of the Individual Defendants caused the

inaccurate information to be publicly corrected.

138. Defendants were aware that delays to, and increased costs for Phase 1, as well as

the nearly $150 million dollars of damages caused by M&K, were deeply material. Therefore,

Defendants had a duty to disclose such information to investors.

C. Defendants’ Material Misrepresentations of Financial Results

139. As a producer and distributor of rare earth materials, one of the critical indicators

of the Company’s financial strength and well-being is the amount of inventory carried on the its

balance sheet, and its cost of sales. Defendants materially misstated both throughout the Class

Period.

39


1. Molycorp’s Materially Misleading Statements Regarding the Company’s Financial Results

140. On May 9, 2013, the Company filed its Quarterly Report (Form 10-Q) for the

period ended March 31, 2013. The report was signed by Defendants Karayannopoulos and

Doolan and reported the Company’s previously reported financial results and financial position

as follows:

Reported Values for the First Quarter of 2013 (in thousands of dollars)

Costs of sales: Costs excluding depreciation and (152,544) amortization Depreciation and amortization (14,309)

Total long-term inventory 24,984 Income tax benefit 28,112

Assessment of normal production levels. For the three months ended March 31, 2013 and 2012, the Company determined that $4.6 million and $3.0 million, respectively, of production costs would have been allocated to additional production, assuming the Company had been operating at normal production ranges. As a result, these costs were excluded from inventory and instead expensed during the applicable periods. The assessment of normal production levels is judgmental and is unique to each quarter.

Write-downs of inventory. As a result of production or purchase costs in excess of net realizable value, the Company recognized write-downs of inventory of $33.9 million and $6.6 million for the three months ended March 31, 2013 and 2012, respectively. In addition, for the same respective periods, the Company recognized write-downs of work-in-process and stockpile inventory totaling $6.2 million and zero based on slow moving inventory and adjustments to estimated REO quantities. The level within the fair value hierarchy in which the write-downs of inventory are included is the significant other observable inputs— Level 2.

Severance Charges. In the first quarter of 2013, the Company took a number of actions throughout the organization as part of its continuing effort to contain costs and increase the efficiency of its operations. As a result, the Company reduced a portion of its workforce, primarily within the Corporate group, and recognized employee severance and benefit costs of $2.1 million, which were included in "Selling, general and administrative” expense in the condensed consolidated statement of operations and comprehensive income for the current interim period.

40


As of March 31, 2013, the Company paid $0.3 million of these severance benefits using the Company's cash balance available at that time. The remainder will be paid over 11 months from March 31, 2013.

141. In addition, the report contained signed certifications pursuant to SOX by

Defendants Karayannopoulos and Doolan stating that the financial information contained in the

report was accurate, and disclosed any material changes to the Company’s internal control over

financial reporting.

142. The statements referenced in paragraphs 140 to 141 above were materially false

and/or misleading because they misrepresented and failed to disclose the following adverse facts,

which were known to defendants or recklessly disregarded by them, including that, as discussed

below: (1) the Company’s reported inventory was materially understated; (2) the Company

overstated its income tax benefit in the first quarter of 2013 by approximately $6.5 million; (3)

the Company lacked adequate internal and financial controls; and (4) as a result of the foregoing,

the Company’s statements were materially false and misleading at all relevant times.

2. The Truth is Revealed

143. On August 8, 2013, the Company disclosed that it would delay the filing of its

quarterly report for the period ending June 30, 2013, and that:

On August 6, 2013, the Audit and Ethics Committee of the Company’s Board of Directors, based upon a recommendation from management, determined that its unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2013 should no longer be relied upon because they contained an error with respect to the reconciliation of its physical inventory to the general ledger, which resulted in a cumulative overstatement of costs of sales and understatement of current inventory of approximately $16.0 million. This error also caused the income tax benefit in the first quarter of 2013 to be overstated by approximately $6.5 million, the disclosure of the consolidated assessment of normal production levels to be understated by approximately $17.4 million, and the consolidated total write-down of inventory to be overstated by $18.0 million. The misstatement had no effect on the net cash used in operating activities or cash and cash equivalent at the end of the first quarter of2013.

41


In addition, the Audit and Ethics Committee of the Company’s Board of Directors also determined that its unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2013 should no longer be relied upon because they contained an error with respect to the accrual of certain severance charges, which resulted in an understatement of accrued expenses and selling, general and administrative expense of approximately $2.1 million. This error also caused the income tax benefit in the first quarter of 2013 to be understated by approximately $0.8 million. The misstatement had no effect on the net cash used in operating activities or cash and cash equivalent at the end of the first quarter of 2013.

144. The restatement, by definition, was an admission by the Company that its

previously-reported figures had been materially misstated.

145. The restatement of inventory was especially of concern to investors in light of the

Project at Mountain Pass, which was intended, and needed, to capitalize on growing demand for

rare earths in order to be profitable. In other words, if the increased production from the

Mountain Pass facility could not be sold, as was indicated by the growing stockpile of unsold

inventory, the Project would be a failed investment (and one that was becoming heavily over-

budget). An inability to sell rare earths could have indicated a change in the rare earths market

dynamic, to Molycorp’s considerable disadvantage.

146. In an article posted on August 9, 2013 entitled “Molycorp 2Q Earnings - A Mixed

Bag,” “Shock Exchange,” a securities journalist at Seeking Alpha, explained why investors

would be concerned about unsold inventory:

At year-end 2012 inventory was almost 60% of tangible GAAP book value. In response, during 1Q 2013 management had apparently sold through $16 million of inventory on hand, despite the increase in revenue. However, management recently alerted shareholders that due to a miscalculation, inventory was understated by $16 million and cost of goods sold overstated by $16 million. That’s a long-winded way of saying that the company’s inventory was more stale than originally thought. . . . Rising or declining inventory balances may also have implications about future pricing and demand for Molycorp’s product suite.

42


147. On this news, Molycorp securities declined from $7.41 on August 8, 2013 to

$6.69 on August 9, 2013, a decline of 9.7%.

3. Scienter

148. Former Molycorp employees confirm that the Company’s restatement of earnings

was due in large part to inadequate oversight and rushed inventory counting procedures on the

part of Defendants and other Molycorp executives. CW2, a Molycorp sub-contractor who

worked on various Company projects while at Bodell Construction between September 2011 and

March 2013, related that, while receiving inventory, CW2 noticed that the inventory was

improperly managed and organized, such that inventory was stored in ways that could

compromise its quality or effectiveness.

149. In addition, CW8 related that, around the time of the inventory misstatement, “[i]t

was just chaos. The fact that there was a mistake made isn’t very surprising to me just because

of the operating conditions. There was a lot of pressure to get things out. . . . When things are

hasty mistakes get made.”

150. CW8 stated that Defendant Burba was involved with all of the operations of the

mine and knew about the delays. Further, CW8 stated that Defendant Burba reported the

numbers regarding the progress of the Project directly to Defendant Smith. Despite that

Defendants were aware of the work environment at the mine, and were aware that employees did

not have adequate time or resources to appropriately keep track of inventory, Defendants

participated in the preparation and/or dissemination of statements that were likely incomplete or

inaccurate.

151. Further, as stated above, Defendants acted with scienter in that they were

obligated to ensure that their SEC filings were accurate and that the Company’s internal controls

were sufficient, but despite these responsibilities, Defendants misrepresented their financial

43


results and accounting practices while they acted as signatories to the SOX certifications

accompanying certain of the SEC filings at issue, accepted the responsibilities to promptly

disseminate accurate and truthful information with respect to Molycorp as senior executives of a

publicly traded company, and realized that their misstatements were materially false and

misleading. Defendants failed to do so and instead allowed or caused materially inaccurate or

misleading reports to be filed with the SEC.

152. Moreover, as discussed supra, the terminations of Defendants Smith and Burba

during the Class Period is evidence of Defendants’ scienter.

D. Defendants’ Material Misrepresentations Regarding the Marketability of SorbX

153. Nearly half of the rare earth content of the Mountain Pass mine (48.8%, according

to reports and filings by Molycorp) is cerium, a rare earth metal in the group generally referred to

as the “light rare earths.” Cerium, comparatively speaking, is a low-value rare earth metal.

154. As with any other commodity, the price of any specific rare earth metal depends

on supply and demand. Since consumers have no direct need of rare earths as a consumer

commodity, rare earth metal demand is driven by industrial uses, and by the existence of

substitutes. Heavy rare earths are used in the manufacturing of high-tech products, including

magnets, lasers and hybrid car engines. For most of these applications, they are the best

available material; substitutes for rare earths in manufacturing magnets, for example, all produce

magnets that are much weaker. Though some light rare earths have high-tech uses, their main

uses are much less specialized: additives to diesel fuel, for example, or flints for lighters.

155. The price of cerium is low because it is an abundant metal in ready supply that

has few specialized applications in which it excels. It is the most common of all rare earths; its

crustal abundance is similar to common metals like copper and lead, about 10-100 times higher

44


than heavy rare earths. Further, in most of these applications, there are alternatives to cerium

that are equally effective as oxidizing agents.

156. In 2010, Molycorp developed a cerium-based filtration product called SorbXTM

(“SorbX,” and originally “XSORBX”) in an attempt to build commercial potential for the large

amount of cerium in the Mountain Pass mine. SorbX is a cerium chloride solution that bonds

quickly and strongly with phosphates, which, since the 1970s, have become a significant

ecological issue because they are a major component of detergents, and end up contaminating

rivers, streams and lakes when they are discharged from municipal sewage systems. SorbX

creates a compound with the phosphates that precipitates out of the water as a sludge that can be

skimmed or removed by filters.

157. There are many other commercial products that remove phosphates by causing

them to coagulate and precipitate: calcium, aluminum and iron compounds are the most

common phosphate removal products. The advantages of SorbX over these alternatives include

that: a) it has a less corrosive effect on equipment in waste-water treatment plants; b) it is more

efficient, and generates less sludge; and c) it is safer and easier to work with and will not stain or

discolor plant equipment. Molycorp markets SorbX as SorbX-100 for municipal and

commercial water-treatment applications, and as PhosFix for residential pool and spa

applications.

158. During the Class Period, Defendants made bullish statements about Molycorp’s

progress in building commercial traction and meaningful sales of its SorbX products.

Defendants repeatedly represented that they expected SorbX to generate commercial potential

for its Mountain Pass cerium sales in the near future. However, as Defendants knew throughout

the Class Period, and finally admitted at its end in October of 2013, the Company was not

45


making meaningful progress in stimulating SorbX sales and Defendants did not expect SorbX to

build the commercial potential of cerium before or during 2014.

1. Molycorp’s Materially Misleading Statements Regarding the Marketability of SorbX

159. During the Company’s February 23, 2012 conference call with investors

discussing the Results of Operation and Financial Condition for fiscal year 2011, Defendant

Smith stated:

We achieved our 2011 contracting goal for Phase 1 production, 78% of Phase 1 was now being signed in customer agreement or reserved for XSORBX production. And with regard to XSORBX, we sold a total of 55 metric tons of this product last year. We anticipate sale is rising [ sic] strongly in 2012 and beyond.

* * *

First, Mountain Pass performed in line with projections. . . . [S]ales of our cerium products also picked up strongly as compared to the third quarter.

* * *

I would note that we are very pleased with the traction we are making with XSORBX as we have sold approximately 55 metric tons into the market during 2011. Our market ceding efforts have started to take run and we expect further penetration of the waste water and recreational water markets this year. Indeed, we expect to sell approximately 1,000 ton of XSORBX product during 2012. We also believe that we’re on the path for market acceptance of XSORBX into drinking water purification markets.

160. Further, during the question and answer session of the same call, Defendant Smith

explained that the company had raised $564,000 in revenue from the sale of 55 metric tons of

SorbX, and expected to sell another 1,000 metric tons that year.

161. In Molycorp’s Annual Report for the 2011 fiscal year (Form 10-K), dated

February 28, 2012, the Company reported that:

During the third quarter of 2010, we completed our initial sale of XSORBX® to the water treatment industry, and, as of December 31, 2011, we have allocated 20% of Project Phoenix Phase 1 output to production of XSORBX®. In addition,

46


we are in discussions with multiple large companies regarding the sale of XSORBX®, which will expand demand for cerium in times when it is in surplus and low priced. We have begun to sell XSORBX® for commercial use in the wastewater, recreation, pool and spa, industrial process and other water treatment markets.

* * *

While the volume of products we are currently able to produce remain limited by the capability of our existing production facilities, we anticipate further expanding our products and markets throughout 2012, including market penetrations of our XSORBX® technology into the water treatment industry.

The report was signed and SOX-certified by Defendant Smith.

162. In its 2011 Annual Report released on May 6, 2012, Molycorp stated that it

“[s]old a total of 55 metric tons of our proprietary cerium-based XSORBXTM products in 2011,

and is on track to sell 20% of our Phase 1 production capacity through XSORBXTM products by

the end of 2013.” The report also included statements from Defendant Smith.

163. Further, it stated:

In 2011, we began to realize the full extent of XSORBXTM’s capabilities and the prominent role the technology will play in Molycorp’s future.

Not only does XSORBXTM hold the potential to revolutionize water treatment and purification, it also creates high-volume, high value end markets for the cerium produced at Mountain Pass. This greatly improves our cost competitiveness and shields us from traditionally lower cerium prices.

164. On May 10, 2012, Molycorp announced its Results of Operation and Financial

Condition for the first quarter. In that press release, Defendant Smith remarked, “We expanded

our sales of XSORBXTM during the quarter, and we look forward to the opportunities and

potential synergies that will arise from our pending acquisition of Neo Material Technologies.”

The press release was filed with the SEC as Exhibit 99.1 to the Current Report (Form 8-K) filed

on May 10, 2012.

47


165. In its May 10, 2012 Quarterly Report (Form 10-Q) for the first quarter of 2012,

which was signed and SOX-certified by Defendant Smith, Molycorp stated:

As of March 31, 2012, we have allocated 20% of Project Phoenix Phase 1 output to production of XSORBX®, our proprietary water treatment technology. In addition, we are in discussions with multiple large companies regarding the sale of XSORBX®, which could significantly expand demand for cerium-rich materials. We have begun to sell XSORBX® for commercial use in the wastewater, recreation, pool and spa, industrial process and other water treatment markets.

166. During the May 10, 2012 conference call with investors, Defendant Smith

emphasized that Molycorp’s sales goals were realistic and attainable:

[T]he potential for XSORBX in these additional markets is substantial, both in United States and around the world. To put this in the perspective, the United States market alone represents approximately, 163,000 metric tons annually of XSORBX product on the cerium oxide basis. Assuming only a 12.5% market penetration for XSORBX into these markets, we would consume all of the cerium that we would produce at full Phase 2 production. Given the current favorable reception from our customers, we believe that achieving the internal target penetration rates are very realistic. The net result is that, XSORBX is materializing into an excellent growth platform for Molycorp.

167. Later in the same call, Anthony Young from Dahlman Rose & Co. asked

Molycorp executives about their SorbX sales and clientele. Defendants’ replies reflect their

optimism toward the product:

Q: [T]he additional 100 tons [of XSORBX] that you guys are selling, is that to a new customer or is that customers from last year they are stepping up and taking more material?

Defendant Smith: That is a customer from last year that tested our product. He is very happy with it and is now taking significantly more product in over a three-year period.

Q: Okay, and then, as far as those XSORBX sales are concerned, is that going to go in the cerium sort of line item when you guys are reporting numbers, is that checks out to be the cerium products or is it in the?

48


James S. Allen3 : XSORBX will be placed in the cerium category where we have. . .

Defendant Smith: Yeah. It will probably be – eventually we’re going to separate it out, Anthony, because we do expect it to be significant.

168. During the August 2, 2012 announcement of Molycorp’s Results of Operation and

Financial Condition for the second quarter of 2012, Defendant Smith was quoted as saying,

“Molycorp continues to make significant progress on our three strategic priorities: completing

Project Phoenix, commercializing XSORBX, and integrating Neo Materials (now known as

Molycorp Canada) into Molycorp.” The press release was also filed with the SEC as Exhibit

99.1 to the Current Report (Form 8-K) filed on August 2, 2012.

169. During the conference call with investors discussing the results for the second

quarter, which was attended by Defendants Smith and Doolan, Defendant Smith stated, “We

believe XSORBX will become a bigger part of our offering next year and one of many growth

drivers within our company over the longer term.” He added, “Our XSORBX commercialization

team is on track with its development efforts, and our 2012 target of selling 1,000 metric tons of

XSORBX has not changed.”

170. On August 9, 2012, the Company filed its Quarterly Report for the period ended

March 31, 2012 (Form 10-Q), in which it stated:

During the second quarter of 2012, prices for most of our products have stabilized or declined at a much slower pace than earlier in the year. We believe this trend may continue in the third and fourth quarters of 2012, although there can be no assurance. We will continue to progressively expand our products and markets through the remainder of 2012, including market penetrations of our XSORBX® technology into the water treatment industry.

The report was signed and SOX-certified by Defendants Smith and Doolan.

3 James S. Allen was the Chief Financial Officer and Treasurer of Molycorp at the time of the call.

49


171. During the November 8, 2012 conference call with investors, which was attended

by Defendants Smith and Doolan, Defendant Smith updated investors on the Company’s

progress with commercializing SorbX:

The second most frequently asked question I get concerns our contracting status for Phase 1 production. We are seeing customer demand beginning to stabilize. And I’m happy to report that we have customer agreements in place or in advanced discussions and product qualification efforts with customers on the sales in excess of our Phase 1 capacity. . . . With cerium, our commercialization of XSORBX products continues to gain traction in the marketplace. In short, the combination of our customer agreements and our ability to move product into our own downstream operations is why the volume side of our strategic equation is working out very nicely. We are expecting it to improve further in the fourth quarter and into 2013.

*

The fourth area where we get the most questions from investors is on XSORBX, our proprietary cerium-based water purification product, which we are commercially introducing in several large-volume markets, including municipal and industrial wastewater treatment, pool and spa water treatment, recreational water and, eventually, drinking water purification. . . . [T]hese facilities alone represent a huge potential market for SorbX-100.

*

[O]ur product development group also is commercializing a further refined product for phosphate removal, SorbX-200. This product is for sale in the pool and the spa markets. Discussions are underway with several potential distributors in the United States, Europe and the Middle East. It is important for investors to understand why commercializing our XSORBX family of products is so important. Developing these high-value water treatment markets for our cerium-based products helps to decouple us from future volatility in cerium spot prices and projected market surpluses of this element. It is important to note that these new markets are only open to Molycorp as a result of the intellectual property we have established with these technologies.

Defendant Doolan added:

Project Phoenix is ramping up, and we have made significant traction on commercializing our XSORBX products.

50


172. During the same call, Defendant Smith emphasized how important the

commercialization of SorbX was to Molycorp’s business:

It is important for investors to understand why commercializing our XSORBX family of products is so important. Developing these high-value water treatment markets for our cerium-based products helps to decouple us from future volatility in cerium spot prices and projected market surpluses of this element.

173. Slide 15 of the power point presentation for the November 8, 2012 conference call

with investors includes the language, “Cerium: commercial success of SorbXTM will help us sell

every molecule of cerium we produce.” The presentation also states that there was, “[s]ignificant

market potential for SorbX-100.”

174. In the November 9, 2012 Quarterly Report (Form 10-Q), which was signed and

SOX-certified by Defendants Smith and Doolan, the Company stated, “We will continue to

progressively expand our products and markets through the remainder of 2012, including market

penetrations of our SorbXTM (formerly XSORBX) technology into the water treatment

industry.”

175. During the March 14, 2013 conference call with investors discussing the results

for the fourth quarter of 2012, which was attended by Defendants Karayannopoulos and Doolan,

Defendant Karayannopoulos announced that Molycorp had made a significant step toward the

commercialization of SorbX:

As some of you may have seen, a press release was issued this afternoon, separate from our earnings release announcing a five-year agreement under which Univar, one of the world’s leading distributors of industrial and specialty chemicals will purchase SorbX-100, our proprietary cerium-based water treatment product for distribution to the municipal and industrial wastewater treatment facilities in North America. This is an important step forward in our ongoing commercialization efforts for this product and I’m especially pleased by the company with Univar’s stature and market leadership will lead SorbX sales into these markets.

* * *

51


We have made our first shipments to Univar and we are doing a number of installations over the next three months that we expect will produce somewhat – some definitive optimization of pricing and utilization of SorbX in a variety of applications, different way streams of different characteristics.

* * *

I think it’s fair to assume that if the SorbX volumes get to that point, pretty well the entire output of separated cerium from Mountain Pass will be dedicated to SorbX. The output of – the Mountain Pass cerium output is ideally – is an ideal fit for SorbX.

176. The Company also discussed its goals for Mountain Pass’s cerium:

At full Phase 1 run rates, we would have excess cerium at year one of the contract, we’ll be getting close in year two. Year one being 2013, which is less than a full year and we have not hit Phase 1 rates yet. In year two 2013 by the end of the year, I would expect that would be getting closed to being sold out of our run rate capacity.

177. During the May 9, 2013 conference call with investors discussing the Company’s

results for the first quarter of 2013, which was attended by Defendants Karayannopoulos and

Doolan, analyst Michael Ritzenthaler from Piper Jaffray asked Defendant Karayannopoulos

about the development of SorbX:

Q: [J]ust one last quick one on SorbX, can you quantify for us how many trials are going on or are there any other details beyond what was on that slide?

Defendant Karayannopoulos: Yeah. The current schedule is for three municipal waste

water trials. We’ve completed one. We’re in the middle of the second and we’re starting the third closer to the end of the month. And we are still trying to choose the next industrial waste water facility. So we completed one, one is going on, another one coming, and this does the industrial trial that we want to complete before the end of June.

178. The foregoing statements were misleading because, as Molycorp would admit at

the end of the class period, the Company was not raising meaningful revenue from cerium sales

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related to SorbX, nor did it expect that there was or could be meaningful sales until at least 2014,

if not later.

2. The Truth is Revealed

179. In its Current Report (Form 8-K) dated October 15, 2013 and signed by

Defendant Doolan, Molycorp revealed that the Company had “not yet realized meaningful

market penetration for SorbXTM or other cerium-based products from our Molycorp Mountain

Pass facility,” that its cerium sales from the Mountain Pass mine had not been meaningful for

several quarters, and that Molycorp did not expect cerium sales to be meaningful “for a period of

time until SorbX achieves greater market penetration.” Specifically, Molycorp stated, “we

continue to expect that we will be unable to sell a substantial portion of our cerium production

during 2014.” (Italics supplied.) This statement was an admission that Defendants knew these

adverse SorbX facts substantially earlier than the date of this Form 8-K.

180. In response to this news, the price of Molycorp securities declined by 21.4%,

from its $7.10 closing price on October 14, 2013 to its $5.58 closing price on October 15, 2013.

181. Describing the reasons for this massive single day stock price decline, in an article

dated October 15, 2013 entitled, “Molycorp Rare Earths Quality Confession Worse Than

Secondary Offering,” Jon Ogg, a journalist from wallst.com , explained that “[w]hat the filing

really shows is that Molycorp’s rare earths might not be the great source that investors thought

the company had.” The next day, in an article entitled, “Molycorp Becomes King of Stockholder

Pain, but Real Concerns Cannot Be Changed,” Ogg explained that “[t]he real issue is that

Molycorp’s SEC filing was a confessional that the bulk of its rare earth materials are simply not

the greatest rare earth materials in demand right now.”

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3. Scienter

182. The Company’s October 15, 2013 public disclosure confirms Defendants”

longtime knowledge that, despite management’s hype, SorbX sales had not been meaningful, and

were not expected to be meaningful any time soon. Thus the Company’s October 15, 2013

Current Report (Form 8-K) admitted that (a) there had not been any material SorbX sales to date,

and (b) Molycorp “continues to expect” that to remain the situation for the foreseeable future.

183. CW5 confirmed that the Company knew or was reckless in not knowing well in

advance of October 15, 2013 that SorbX would not stimulate demand for cerium in the short

term. CW5 stated that Molycorp knew from the beginning of the development of SorbX that

initially demand for the product would not be strong, and that building its market position would

be a slow and difficult process. Specifically, CW5 stated, “I think if anybody [within Molycorp]

was really . . . paying attention and understanding that market, they [Molycorp management]

would have known in 2012 . . . certainly by late 2012” that SorbX had no short term potential of

achieving market acceptance.

184. CW8 stated that Defendant Burba was involved with all of the operations of the

mine and that “Burba had his hands in everything that was going on in Mountain Pass,

California.” Therefore, Defendant Burba knew or was reckless in not knowing that, as described

in CW9’s statement below and corroborated by the Company’s own October 15, 2013 admission,

the Company’s “stockpile” of the SorbX in Mountain Pass was growing, and that the Company

was not substantially selling the SorbX it produced.

185. CW9 was a Molycorp Foreman in the Mill area from October 2011 until October

2012. CW9 reported to Ken Dershan, former Molycorp Main Project Manager and later reported

to Brian Heider, Molycorp Shift Supervisor.

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186. CW9 related that Molycorp management knew about a year prior to the October

15, 2013 public announcement regarding cerium that SorbX sales were not going to be profitable

and that cerium sales would not be meaningful. CW9 was told by Ken Dershan, former

Molycorp Main Project Manager and Brian Heider, Molycorp Shift Supervisor, that Molycorp

executive management already knew that the sales would not be productive. Additionally, as of

the fall of 2012, CW9 stated that Molycorp had not received all of the money necessary to build

the new SorbX, which amounted to close to $2 billion, about $1.3 billion. CW9 stated, “That

kind of backed them on some of their losses on the stuff that they were doing.”

187. CW9 stated that when there were executive management meetings, the senior

personnel would pass information or concerns down to the supervisors who in turn passed it

down to the lower level employees. CW9 believed that Defendant Smith or Pat Glenn, Head of

the Shift Foremen, knew about the aforementioned problems because CW9 was told that the

information was passed down to CW9 from the “top.”

188. When CW9 was an hourly employee at Molycorp, CW9 routinely dealt with the

Company’s inventory of SorbX. CW9 worked a lot of overtime packaging SorbX. CW9 stated,

“I know that they were stockpiling it in the warehouses there.” CW9 said that the stockpiling

transpired for quite a while. CW9 worked on with the SorbX inventory from around May or

June 2011 through the end of 2012.

189. CW9 believes that Molycorp had a buyer for the SorbX product, which was the

Russian government, but that Russia backed out of the deal toward the end of 2011 into 2012.

CW9 is uncertain as to the exact reason that Russia backed out, but noted that it could have been

because Molycorp considerably increased the SorbX price due to product demand. The price

was initially $120,000 per sling and rose to $300,000 per sling within six months of Molycorp

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making SorbX, from late 2011 to early 2012. CW9 stated that Molycorp commonly sold

products to foreign governments.

190. CW9 stated that Ken Dershan told CW9 that Molycorp sold SorbX to itself for

quite a while after the price increased, because they did not have a SorbX buyer after Russia

backed out. Brian Heider corroborated that Molycorp was selling SorbX to itself, and CW9 also

heard about such activity from warehouse personnel who controlled the shipping and receiving.

CW9 stated that Molycorp was “actually buying it from themselves,” meaning that when they

were stockpiling the product and not shipping it out, but still made it appear that they were

shipping the product on the books. CW9 noted that such activity transpired for eight or nine

months, from January 2012 to August or September 2012, at which time CW9 still worked at

Molycorp.

191. CW10 worked as a Molycorp Chemical Operator from August 2011 until the

beginning of July 2013 (July 9, 2013).

192. CW10 stated that CW10 talked with some of the operators that worked in the

SorbX area who noted that Molycorp had problems with the manufacture of SorbX for a long

time. “Ever since they (Molycorp) started it up, they had problems running it, operating it,

getting it to work right for a while, this is the SorbX process, just making it. They had problems

making it. There were some issues with that.” CW10 stated that Molycorp revamped the SorbX

manufacture process in 2012.

193. CW10 stated that the SorbX plant had “never done what they had said it was

going to do.” CW10 explained that the plant was supposed to have 1050 gallons per minute of

filtering flow going into the downstream systems of the plant, out of the leaches. However the

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most they could initially get into the downstream systems was 25 gallons per minute. CW10

stated that it was a tenth of the running rate necessary to keep the “damn thing running.

194. Further, CW10 stated that there were issues with solvents in the material in a

couple of bags of SorbX that they sent out. CW10 heard from the SorbX operators in August or

September of 2012 that Molycorp sold several lots of SorbX to a company in Texas that were

returned to be filtered because the shipment had solids in it when it should have been clean and

free of solids, and was then filtered and shipped back to the client in Texas. CW10 believes all

of those issues may have hurt Molycorp.

195. Regarding the Company’s inability to sell SorbX, CW10 stated, “We bagged it

forever and never really saw a whole lot of it leaving. We never saw very much of it leaving the

plant. We just package it up, so we never saw too much of it going out.”

196. As stated above, Defendants acted with scienter in that they were obligated to

ensure that their SEC filings and other public statements were accurate, but flouted that

responsibility and instead knowingly or recklessly issued materially false and misleading

information. This is particularly true where the Individual Defendants signed, or were quoted

within, or SOX certified the statements being made.

197. The inference of scienter is further supported by the fact that SorbX was one of

the Company’s core projects. In the Molycorp press release issued on August 2, 2012

announcing the Results of Operation and Financial Condition for the second quarter of 2012,

Molycorp publicly identified SorbX as one of the Company’s three key strategic priorities. At

every quarterly conference call, Molycorp senior executives, including Defendants Smith,

Doolan, and Karayannopoulos, updated investors on the progress of SorbX commercialization

and answered investor questions concerning same. The foregoing supports the inference that

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Molycorp’s senior management was aware of any significant developments or problems

concerning Molycorp’s efforts to commercialize SorbX.

198. The scienter inference is strengthened, as discussed supra, by the resignations

during the Class Period of certain Individual Defendants, including Defendant Smith.

V. LOSS CAUSATION

199. Throughout the Class Period, Molycorp’s stock traded at artificially inflated

prices, and those prices declined materially upon public disclosures or partial disclosures of the

truth concerning Molycorp’s operations, thereby demonstrating the efficiency of the market for

Molycorp’s securities.

200. Specifically, when Molycorp partially disclosed problems with Project Phoenix

Phase 1 by revealing M&K’s major performance issues in early November 2012 (a full five

months after the situation had escalated to the point that Molycorp terminated M&K for cause),

Molycorp’s stock price declined from $10.40 to $7.50, from October 31, 2012 through

November 9, 2012 as Molycorp (a) filed a lawsuit against M&K wherein Molycorp revealed

details of M&K’s deficient performance, and thereafter (b) informed the investing public that it

filed suit, and finally (c) disclosed the full dollar amount of the damage caused by M&K’s poor

performance.

201. As noted above, the disclosures concerning M&K were only partial, as Molycorp

continued to misrepresent the Phase 1 timetable. On January 10, 2013, when Molycorp revealed

the full extent of the delays with Phase 1, the stock price declined from $10.79 to $8.34.

202. On August 7, 2013, when Molycorp admitted that several of its previously

reported financial statements had been materially inaccurate, the stock price declined from $7.41

to $6.69.

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203. On October 15, 2013, when Molycorp admitted that the progress in the

commercialization of SorbX had not been material to date and was not expected to be material at

any time in the near future, the stock price declined from $7.10 to $5.58.

VI. PLAINTIFFS’ CLASS ACTION ALLEGATIONS

204. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or

otherwise acquired Molycorp securities during the Class Period, February 21, 2012 and October

15, 2013, inclusive (the “Class”) at artificially inflated prices, and held those securities through

one or more of the alleged corrective disclosures. Excluded from the Class are Defendants

herein, the officers and directors of the Company, at all relevant times, members of their

immediate families and their legal representatives, heirs, successors or assigns and any entity in

which Defendants have or had a controlling interest.

205. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, Molycorp securities were actively traded on the

New York Stock Exchange. Molycorp had an average of over 143 million shares of stock

outstanding during the Class Period, and an average of over 6.7 million Molycorp shares were

purchased and sold daily during this period. While the exact number of Class members is

unknown to Plaintiffs at this time and can be ascertained only through appropriate discovery,

Plaintiff believes that there are hundreds or thousands of members in the proposed Class. Record

owners and other members of the Class may be identified from records maintained by Molycorp

or its transfer agent and may be notified of the pendency of this action by mail, using the form of

notice similar to that customarily used in securities class actions.

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206. Plaintiffs’ claims are typical of the claims of the members of the Class as all

members of the Class are similarly affected by Defendants’ wrongful conduct in violation of

federal law that is complained of herein.

207. Plaintiffs will fairly and adequately protect the interests of the members of the

Class and has retained counsel competent and experienced in class and securities litigation.

Plaintiffs have no interests antagonistic to or in conflict with those of the Class.

208. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

. whether the federal securities laws were violated by Defendants’ acts as

alleged herein;

. whether statements made by Defendants to the investing public during the

Class Period misrepresented or omitted to disclose material facts about the

business, operations and management of Molycorp;

. whether Defendants caused Molycorp to issue false and misleading

financial statements during the Class Period;

. whether Defendants acted knowingly or recklessly in issuing false or

misleading statements during the Class Period;

. whether the prices of Molycorp securities during the Class Period were

artificially inflated because of the Defendants’ conduct complained of

herein; and

. whether the members of the Class have sustained damages and, if so, what

is the proper measure of damages.

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209. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy because joinder of all members is impracticable. Furthermore,

as the damages suffered by individual Class members may be relatively small, the expense and

burden of individual litigation make it impossible for members of the Class to individually

redress the wrongs done to them. There will be no difficulty in the management of this action as

a class action.

210. Plaintiff will rely, in part, upon the presumption of reliance established by the

fraud-on-the-market doctrine in that:

. Defendants made public misrepresentations and/or made public statements

that failed to disclose material facts during the Class Period;

. Molycorp securities are traded in efficient markets;

the Company’s shares were liquid and traded actively during the Class

Period, with an average daily volume of more than 6.7 million shares and

an average of over 143 million shares of stock outstanding during the class

period;

the Company traded on the New York Stock Exchange, was regularly

covered by numerous analysts, including analyst Goldman Sachs, D.A.

Davidson & Co., JP Morgan, EVA Dimensions, Euro Pacific Canada Inc.,

R.W. Pressprich & Co., Robert W. Baird & Co., Stifel, and Byron

Capital Markets, and was regularly discussed by securities news outlets,

including Bloomberg News, Seeking Alpha, and Motley Fool;

. the market reacted promptly to new material information about the

Company, as evidenced inter alia, by the market reactions to news of the

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dispute between Molycorp and M&K, the delay of Project Phoenix Phase

1, the restatement of operating results for the first quarter of 2013, and the

reality of the timeframe of the commercialization of SorbX (as detailed

supra);

the misrepresentations and omissions alleged would tend to induce a

reasonable investor to misjudge the value of the Company’s securities; and

. Plaintiff and members of the Class purchased and Molycorp securities

between the time the Defendants failed to disclose or misrepresented

material facts and the time the true facts were disclosed, without

knowledge of the omitted or misrepresented facts.

211. Based upon the foregoing, Plaintiff and the members of the Class are entitled to a

presumption of reliance upon the integrity of the market.

VII. NO SAFE HARBOR

212. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the false and misleading statements pleaded in this

Complaint. The specific statements pleaded herein were not identified as forward-looking

statements when made.

213. To the extent there were any forward-looking statements, there were no

meaningful cautionary statements identifying important factors that could cause actual results to

differ materially from those in the purportedly forward-looking statements.

214. Alternatively, to the extent that the statutory safe harbor does apply to any

forward-looking statements pleaded herein, Defendants are nonetheless liable for making such

statements because, at the time each statement was made, the speaker knew the statement was

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false or misleading and/or that the warnings or cautionary statements being offered were already

contradicted by known facts.

VIII. CLAIMS FOR RELIEF

COUNT I (Against All Defendants for Violations of

Section 10 (b) and Rule 10b-5 Promulgated Thereunder)

215. Plaintiffs repeat and reallege each and every allegation contained above as if fully

set forth herein.

216. This Count is asserted against Defendants and is based upon Section 10(b) of the

Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the SEC.

217. During the Class Period, Defendants engaged in a plan, scheme, conspiracy and

course of conduct, pursuant to which they knowingly or recklessly engaged in acts, transactions,

practices and courses of business which operated as a fraud and deceit upon Plaintiffs and the

other members of the Class; made various untrue statements of material facts and omitted to state

material facts necessary in order to make the statements made, in light of the circumstances

under which they were made, not misleading; and employed devices, schemes and artifices to

defraud in connection with the purchase and sale of securities. Such scheme was intended to,

and, throughout the Class Period, did: (i) deceive the investing public, including Plaintiffs and

other Class members, as alleged herein; (ii) artificially inflate and maintain the market price of

Molycorp securities; and (iii) cause Plaintiffs and other members of the Class to purchase

Molycorp securities at artificially inflated prices. In furtherance of this unlawful scheme, plan

and course of conduct, Defendants, and each of them, took the actions set forth herein.

218. Pursuant to the above plan, scheme, conspiracy and course of conduct, each of the

Defendants participated directly or indirectly in the preparation and/or issuance of the quarterly

and annual reports, SEC filings, press releases and other statements and documents described

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above, including statements made to securities analysts and the media that were designed to

influence the market for Molycorp securities. Such reports, filings, releases and statements were

materially false and misleading in that they failed to disclose material adverse information and

misrepresented the truth about Molycorp’s finances and business prospects.

219. By virtue of their positions at Molycorp, Defendants had actual knowledge of the

materially false and misleading statements and material omissions alleged herein and intended

thereby to deceive Plaintiff and the other members of the Class, or, in the alternative, Defendants

acted with reckless disregard for the truth in that they failed or refused to ascertain and disclose

such facts as would reveal the materially false and misleading nature of the statements made,

although such facts were readily available to Defendants. Said acts and omissions of Defendants

were committed willfully or with reckless disregard for the truth. In addition, each Defendant

knew or recklessly disregarded that material facts were being misrepresented or omitted as

described above.

220. Information showing that Defendants acted knowingly or with reckless disregard

for the truth is particularity within Defendants’ knowledge and control. As the senior managers

and/or directors of Molycorp, the Individual Defendants had knowledge of the details of

Molycorp’s internal affairs. Moreover, as the individuals who were quoted in or signed the

Company press releases and SEC filings at issue, the Individual Defendants knew or should have

known the information discussed therein. As signatories to the SOX certifications

accompanying certain of the SEC filings at issue, as discussed above, Defendants Smith,

Karayannopoulos, and Doolan were further obligated to ensure that those SEC filings were

accurate and that the Company’s internal controls were sufficient.

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221. The Individual Defendants are liable both directly and indirectly for the wrongs

complained of herein. Because of their positions of control and authority, the Individual

Defendants were able to and did, directly or indirectly, control the content of the statements of

Molycorp. As officers and/or directors of a publicly-held company, the Individual Defendants

had a duty to disseminate timely, accurate, and truthful information with respect to Molycorp’s

businesses, operations, future financial condition and future prospects. Moreover, in choosing to

speak, Defendants had an obligation to speak the whole truth and a duty to inquire as to the

veracity of their public statements.

222. As a result of the dissemination of the aforementioned false and misleading

reports, releases and public statements, the market price of Molycorp securities was artificially

inflated throughout the Class Period. In ignorance of the adverse facts concerning Molycorp’s

business and financial condition which were concealed by Defendants, Plaintiffs and the other

members of the Class purchased Molycorp securities at artificially inflated prices and relied upon

the price of the securities, the integrity of the market for the securities and/or upon statements

disseminated by Defendants, and were damaged thereby.

223. During the Class Period, Molycorp securities were traded on an active and

efficient market. Plaintiff and the other members of the Class, relying on the materially false and

misleading statements described herein, which the Defendants made, issued or caused to be

disseminated, or relying upon the integrity of the market, purchased shares of Molycorp

securities at prices artificially inflated by Defendants’ wrongful conduct. Had Plaintiff and the

other members of the Class known the truth, they would not have purchased said securities, or

would not have purchased them at the inflated prices that were paid. At the time of the

purchases by Plaintiff and the Class, the true value of Molycorp securities was substantially

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lower than the prices paid by Plaintiff and the other members of the Class. The market price of

Molycorp securities declined sharply upon public disclosure of the facts alleged herein to the

injury of Plaintiffs and Class members.

224. By reason of the conduct alleged herein, Defendants knowingly or recklessly,

directly or indirectly, have violated Section 10(b) of the Exchange Act and Rule 10b-5

promulgated thereunder.

225. As a direct and proximate result of Defendants’ wrongful conduct, Plaintiffs and

the other members of the Class suffered damages in connection with their respective purchases

and sales of the Company’s securities during the Class Period, upon the disclosure that the

Company had been disseminating misrepresented financial statements to the investing public.

COUNT II (Violations of Section 20(a) of the

Exchange Act against The Individual Defendants)

226. Plaintiffs repeat and reallege each and every allegation contained above as if fully

set forth herein.

227. During the Class Period, the Individual Defendants participated in the operation

and management of Molycorp, and conducted and participated, directly and indirectly, in the

conduct of Molycorp’s business affairs. Because of their senior positions, and as the individual

signing, being quoted in, and certifying the public statements at issue, they knew the adverse

non-public information about Molycorp’s misstatement of income and expenses and false

financial statements.

228. As officers and/or directors of a publicly-owned company, and as the individual

signing, being quoted in, and certifying the public statements at issue, the Individual Defendants

had a duty to disseminate accurate and truthful information with respect to Molycorp’s financial

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condition and results of operations, and to correct promptly any public statements issued by

Molycorp which had become materially false or misleading.

229. Because of their positions of control and authority as senior officers, the

Individual Defendants were able to, and did, control the contents of the various reports, press

releases and public filings which Molycorp disseminated in the marketplace during the Class

Period concerning Molycorp’s results of operations. Throughout the Class Period, the Individual

Defendants exercised their power and authority to cause Molycorp to engage in the wrongful acts

complained of herein. The Individual Defendants therefore, were “controlling persons” of

Molycorp within the meaning of Section 20(a) of the Exchange Act. In this capacity, they

participated in the unlawful conduct alleged which artificially inflated the market price of

Molycorp securities.

230. Each of the Individual Defendants, therefore, acted as a controlling person of

Molycorp. By reason of their senior management positions and/or being directors of Molycorp,

each of the Individual Defendants had the power to direct the actions of, and exercised the same

to cause, Molycorp to engage in the unlawful acts and conduct complained of herein. Each of

the Individual Defendants exercised control over the general operations of Molycorp and

possessed the power to control the specific activities which comprise the primary violations

about which Plaintiff and the other members of the Class complain.

231. By reason of the above conduct, the Individual Defendants are liable pursuant to

Section 20(a) of the Exchange Act for the violations committed by Molycorp.

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IX. PRAYER FOR RELIEF

WHEREFORE, Plaintiffs demand judgment against Defendants as follows:

A. Determining that the instant action may be maintained as a class action under

Rule 23 of the Federal Rules of Civil Procedure, certifying Plaintiffs as the Class representatives,

and certifying the undersigned as Class Counsel;

B. Requiring Defendants to pay damages sustained by Plaintiffs and the Class by

reason of the acts and transactions alleged herein;

C. Awarding Plaintiff and the other members of the Class prejudgment and post

judgment interest, as well as their reasonable attorneys' fees, expert fees and other costs; and

D. Awarding such other and further relief as this Court may deem just and proper.

X. DEMAND FOR TRIAL BY JURY

Plaintiff hereby demands a trial by jury.

Dated: May 19, 2014

KIRBY McINERNEY, LLP

'1 /

Ira M. Press 825 Third Avenue, 16th Floor New York, NY 10022 Telephone: (212) 371-6600 Facsimile: (212) 699-1194

Plaintiffs' Lead Counsel


POMERANTZ LLP Jeremy A. Lieberman Matthew Tuccillo 600 Third Avenue, 20th Floor New York, New York 10016 Telephone: (212) 661-1100 Facsimile: (212) 661-8665

LAW OFFICS OF KENNETH ELAN ESQ. Kenneth Elan 217 Broadway, Ste. 603 New York, NY 10007 Telephone: (212) 619-0261 Facsimile: (212) 385-2707

Additional Counsel for Plaintiffs

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In re Molycorp, Inc. Securities Litigation 13-CV-05697-Consolidated Amended Class Action

Documents

Transcript of In re Molycorp, Inc. Securities Litigation 13-CV-05697-Consolidated Amended Class Action