in re tronox, inc., securities litigation 09-cv-06220-first...
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Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 1 of 203
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UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK '° as an
xIN RE TRONOX, INC., Civil Action No. 09 —cv-06220-SAS
SECURITIES LITIGATIONFIRST AMENDED CONSOLIDATED CLASSACTION COMPLAINT FOR VIOLATIONSOF THE FEDERAL SECURITIES LAWS
JURY TRIAL DEMANDED
ECF CASE
x
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TABLE OF CONTENTS Pate
INTRODUCTION AND OVERVIEW 2
THE LEGACY LIABILITY FRAUD BANKRUPTS TRONOX 6
JURISDICTION AND VENUE 12
PARTIES 13
A. Plaintiffs 13
B. Unnamed Defendant 14
C. Corporate Defendants 14
D. Accounting Defendant 15
E. Individual Defendants 16
KERR-McGEE DOMINATES AND CONTROLS TRONOX 22
ANADARKO IS LIABLE AS THE SUCCESSOR-IN-INTEREST TO KERR-McGEE 29
CLASS ACTION ALLEGATIONS 32
HOW THE FRAUD WAS ACCOMPLISHED 35
A. Old Kerr-McGee Creates The Legacy Liabilities 35
B. Old Kerr-McGee Formulates A Plan To Free Itself From The LegacyLiabilities 36
C. Kerr-McGee And Its Officers Devise The Tronox Fraud 38
D. Prospective Purchasers Of Kerr-McGee’s Chemical Business Spurn Taking OnThe Legacy Liabilities 40
E. New Kerr-McGee Offers A $400 Million Indemnity To Apollo To Take TheEnvironmental Liabilities 42
F. New Kerr-McGee And Its Officers Who Became Tronox Board MembersEngineer The IPO Fraud 42
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TABLE OF CONTENTS Pate
G. Materially Misleading Information Regarding Tronox Was Disseminated To TheMarket 45
H. New Kerr-McGee Is Bought For $18 Billion 50
I. Tronox Goes Bankrupt 52
TRONOX ADMITS MULTIPLE MATERIAL ACCOUNTING 52
MISSTATEMENTS THROUGHOUT THE CLASS PERIOD 52
ADDITIONAL SCIENTER ALLEGATIONS AS TO THE INDIVIDUALLY NAMEDDEFENDANTS WHO SERVED ON TRONOX’S BOARD OF DIRECTORS 56
A. Reasons For The IPO Fraud 57
B. Fraud In The Environmental Remediation Reserve 60
C. Special Compensation Arrangements For Tronox Executives And CertainEmployees 66
D. Motive And Opportunity Of Defendants Corbett, Wohleber and Pilcher ToPerpetrate The Fraudulent Scheme 69
GAAP VIOLATIONS 71
A. Specific GAAP Relating To Reserve Calculations Violated By Defendants 74
B. SFAS 5 74
C. FIN 14 75
D. SOP 96-1 75
E. SAB No. 92 76
DEFENDANTS’ MATERIALLY FALSE AND MISLEADING 79
STATEMENTS MADE DURING THE CLASS PERIOD 79
A. Registration Statement 79
B. December 21, 2005 Investor Presentation 83
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TABLE OF CONTENTS Pate
C. Announcement Of Navy Settlement Related To Henderson, Nevada Site 84
D. 2005 Year End Results And Related Press Release 84
E. February 22, 2006 Investor Presentation 86
F. Annual Report On Form 10-K For Fiscal Year 2005 87
G. First Quarter 2006 91
H. Second Quarter 2006 94
I. Third Quarter 2006 97
J. 2006 Year End Results And Related Press Release 100
K. Annual Report On Form 10-K For Fiscal Year 2006 101
L. First Quarter 2007 103
M. Second Quarter 2007 106
N. Third Quarter 2007 109
O. 2007 Year End Results And Related Press Release 112
P. Annual Report On Form 10-K For Fiscal Year 2007 114
Q. First Quarter 2008 116
R. Second Quarter 2008 118
S. Third Quarter 2008 121
DEFENDANT E&Y VIOLATED THE FEDERAL SECURITIES LAWS 123
A. Background 123
B. E&Y Had Full And Complete Access To Kerr-McGee’s And Tronox’sInformation 124
C. E&Y’s Materially False And Misleading Audit Reports 125
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TABLE OF CONTENTS Pate
D. E&Y’s Audits Were Not Conducted In Conformity With GAAS 129
E. E&Y Knew Or Recklessly Disregarded That Tronox’s Internal AccountingControls Were Materially Deficient With Regard To Environmental RemediationReserve Balances 130
F. E&Y Knew Of Or Recklessly Disregarded Significant Risk Factors In ConductingIts Audits 133
G. E&Y Failed To Obtain Sufficient Competent Evidential Matter Or Ignored TheAudit Evidence It Did Gather In Violation Of GAAS 136
LOSS CAUSATION 142
NO SAFE HARBOR 158
APPLICATION OF THE PRESUMPTION OF RELIANCE: 159
FRAUD ON THE MARKET 159
COUNT I 161For Violations Of Section 10(b) Of The Exchange Act And Rule 1 0b-5(Against Defendants Adams, Wohleber, Mikkelson, and Rowland)
COUNT II 165For Violation of Section 10(b) of the Exchange Act and Rule 1 0b-5(Against Ernst & Young)
COUNT III 168For Violations of Section 20(a) of the Exchange Act(Against Defendants Adams, Wohleber, Mikkelson, Rowland, and Rauh)
COUNT IV 169For Violation of Section 20(a) of the Exchange Act and Respondeat Superior(Against Defendants Kerr-McGee, Anadarko, Corbett, Wohleber, and Pilcher)
PRAYER FOR RELIEF 172
JURY TRIAL DEMANDED 173
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Lead Plaintiffs, LaGrange Capital Partners, LP and LaGrange Capital Partners Offshore
Fund, Ltd. (together, “LaGrange” or “Lead Plaintiffs”), through their attorneys, bring this action
on behalf of themselves and all others similarly situated, and allege as follows. This First
Amended Complaint is filed pursuant to the Court’s Opinion and Order dated June 28, 2010.
The allegations herein are based on personal knowledge as to the Lead Plaintiffs and the Named
Plaintiffs (collectively, “Plaintiffs”) as to their own acts and upon information and belief as to all
other matters. Plaintiffs’ information and belief is based on, inter alia, the investigation of
Plaintiffs’ Counsel. This investigation has included a review of: (1) Tronox Incorporated’s
(“Tronox” or the “Company”) public filings with the Securities and Exchange Commission
(“SEC”); (2) Kerr-McGee Corporation’s (“Kerr-McGee”) public filings with the SEC; (3)
Anadarko Petroleum Corporation’s (“Anadarko”) public filings with the SEC; (4) the pleadings
and papers on file in the pending Chapter 11 bankruptcy case captioned In re Tronox,
Incorporated, et al., No. 09-10156 (ALG) (Bankr. S.D.N.Y.); (5) securities analyst reports
regarding Tronox and Kerr-McGee; (6) transcripts of quarterly earnings conference calls with
Tronox management; (7) publicly available trading information regarding Tronox securities; (8)
articles in the general and financial press; (8) interviews with confidential witnesses; and (9)
consultation with experts. Certain of the allegations set forth herein are based on the Adversary
Complaint (Tronox Inc., et al. v. Anadarko Petroleum Corporation, et al., No. 09-01198 (ALG)
(Bankr. S.D.N.Y. May 12, 2009)), as amended on April 28, 2010, filed by Tronox Inc. against
Kerr-McGee and Anadarko in Tronox’s pending bankruptcy case, which allegations are based on
Tronox’s access to and review of internal Tronox business records and access to and interviews
with Tronox executives.
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The investigation of Plaintiffs’ Counsel into the factual allegations contained herein is
continuing. Many of the relevant facts are known only by the Defendants, or are exclusively
within their custody or control. Plaintiffs believe that substantial evidentiary support exists for
the allegations set forth herein and that such evidence will be available after a reasonable
opportunity for discovery.
INTRODUCTION AND OVERVIEW
1. This is a federal securities class action on behalf of purchasers of the publicly
traded equity and debt securities of Tronox between November 21, 2005 and January 12, 2009,
inclusive (the “Class Period”). The Defendants are: certain Tronox officers and directors during
the Class Period; its controlling entity, Defendant Kerr-McGee and certain of its officers;
Anadarko, the successor-in-interest to Kerr-McGee; and Tronox’s outside public accounting firm
during the Class Period, Ernst & Young LLP (“E&Y”).
2. During the Class Period, Defendants misled Tronox’s public investors by
disseminating a series of materially false and misleading statements concerning Tronox’s
financial condition. In particular, as further alleged herein, Tronox improperly recorded and/or
failed to record on its publicly issued financial statements material liabilities for environmental
remediation obligations and related tort claims in violation of Generally Accepted Accounting
Principles (“GAAP”). Tronox also failed to provide sufficient disclosure to investors to permit a
meaningful evaluation of the true scope and extent of these environmental remediation and
related tort liabilities, which were associated with decades of environmental pollution. These
materially misleading misstatements and omissions regarding the Company’s financial results
occurred, in large part, because of Defendants’ knowing or reckless failure to: (1) record
appropriate reserves as required by GAAP; (2) disclose a range of possible reserves for probable
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and reasonably estimable environmental remediation and tort liabilities as required by GAAP;
and (3) properly estimate known and probable environmental remediation obligations as required
by GAAP. By knowingly or recklessly failing to record adequate reserves as required under
GAAP, Defendants depicted Tronox in a misleadingly positive light.
3. Indeed, from the moment it was spun-off from its long-time parent, Defendant
Kerr-McGee, in 2005 (the “Tronox IPO”), Tronox faced significant economic pressures as a
stand-alone enterprise. Specifically, Tronox was heavily burdened with massive environmental
and other liabilities (the “Legacy Liabilities”) without adequate cash and assets to fund these
obligations. In fact, as was ultimately revealed, Tronox was unable to survive due, in material
part, to the magnitude and extent of its Legacy Liabilities.
4. As alleged more fully below, the Tronox IPO was a scheme orchestrated by
Defendant Kerr-McGee to foist the vast majority of its enormous environmental remediation and
related tort liabilities, accumulated over decades, onto Tronox, so that Kerr-McGee could
thereafter present itself for sale as a pure oil and gas exploration and production company free of
the toxic financial by-products of its seventy (70) year history as an oil and gas, chemicals, and
uranium mining concern. Defendant Kerr-McGee’s fraudulent plan reaped massive and almost
immediate benefits when, on August 10, 2006, Defendant Anadarko acquired Kerr-McGee for
$18 billion in cash and assumption of debt purportedly free and clear of any obligation for what
had become, as of that date, Tronox’s environmental remediation and tort liabilities. Certain
senior Kerr-McGee executives, including Defendants Luke R. Corbett, Robert M. Wohleber, and
Gregory L. Pilcher, each of whom had been instrumental in planning and effectuating the
transfer of the environmental remediation and tort liabilities to Tronox prior to the IPO, reaped
huge personal windfalls from this transaction. Defendant Kerr-McGee controlled all aspects of
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this transaction. Anadarko, having acquired Kerr-McGee, subsequently continued to dominate
and control Tronox through the Class Period by virtue of the agreements that had been entered
into as the time of the Tronox IPO between Kerr-McGee and Tronox. Kerr-McGee
accomplished this fraud not only by developing the unlawful plan, but also by putting in place as
officers and directors of Tronox individuals who had served as Kerr-McGee officers and who
themselves knew of, or recklessly disregarded, the extent of the environmental remediation and
tort liabilities facing Tronox, and who were willing to sign off on the inappropriate accounting
treatment and lack of disclosure regarding these liabilities to serve the interests of Defendant
Kerr-McGee.
5. While the fraudulent spin-off freed Kerr-McGee from its Legacy Liabilities and
cleared the way for its sale to Anadarko, Tronox was left broke and overburdened with millions
of dollars of environmental remediation costs and liabilities. As a result, Tronox was forced to
file for bankruptcy protection on January 12, 2009. In its bankruptcy petition, Tronox revealed
for the first time that it had spent more than $118 million to satisfy the Legacy Liability
obligations and still faced billions of dollars in additional claims. The bankruptcy also revealed
for the first time the existence of “secret sites” representing additional undisclosed and material
environmental remediation liabilities that would cost Tronox hundreds of millions of dollars to
remediate and that Defendants had known about, or recklessly disregarded, during the Class
Period. The revelations of Tronox’s billions of dollars in Legacy Liability obligations were in
stark contrast to the approximately $200 million Tronox consistently reported as constituting an
appropriate environmental remediation reserve throughout the Class Period.
6. Tronox also has admitted that it repeatedly and materially misstated its financial
results throughout the Class Period based on its improper reserving methodology. On May 4,
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2009, Tronox filed a Form 8-K with the SEC stating that the financial statements it had
published throughout the Class Period could no longer be relied upon and would require
restatement:
[O]n May 4, 2009, the Chief Executive Officer of [Tronox], inconsultation with and consistent with the conclusion reached bythe Board of Directors, concluded that the financial statementsincluded in the Company’s Quarterly Reports on Form 10-Q andAnnual Reports on Form 10-K filed with the Securities andExchange Commission should no longer be relied upon becausethe Company failed to establish adequate reserves as requiredby applicable accounting pronouncements. The financialstatements that would be affected by any restatement relatedto the methodology previously employed in establishing andmaintaining the company’s environmental and othercontingent reserves [and] are the Company’s previously issuedfinancial statements for the years ended December 31, 2005, 2006,and 2007 along with affected Selected Consolidated Financial Datafor 2003 and 2004 and the financial information for the first threequarters of 2008.
The Company has not yet completed a review of contingencyreserves related to all known sites where the company may haveenvironmental remediation and other related liabilities andtherefore the amount of any increase to its reserves that may needto be taken is not known at this time. However, the adjustmentswill be material. (Emphases added).
7. Tronox has not released any restated financials covering the periods in question,
and likely will not do so in light of its bankruptcy. However, by announcing that its Class Period
financial statements could not be relied upon and require restatement, Tronox has admitted that
the publicly-issued financial statements for each of the reported periods during the Class Period
were not prepared in conformity with GAAP, and that Tronox and the officers and directors who
signed the SEC filings containing these misstated financial results, materially misrepresented the
Company’s financial condition and results of operations.
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8. The public dissemination of the materially false and misleading financial
information with regard to reserves caused Tronox’s publicly traded shares and debt obligations
to trade at artificially inflated prices during the Class Period. Tronox’s stock price traded as high
as $17.43 per share during the Class Period. As the fraud was revealed and assimilated by the
marketplace, the price of Tronox’s stock declined to a low of $0.13 on the date of its bankruptcy.
Plaintiffs and all other members of the Class sustained substantial damages as the full and true
extent of Tronox’s environmental remediation and related tort liabilities slowly came to light.
THE LEGACY LIABILITY FRAUD BANKRUPTS TRONOX
9. Over its more than 70-year history, and because of the nature of its operations and
acquisitions, Defendant Kerr-McGee had become obligated for massive actual and contingent
environmental remediation and tort liabilities (defined above as the “Legacy Liabilities”). The
Legacy Liabilities were accumulated by Defendant Kerr-McGee through its various businesses
including, but not limited to the manufacture of chemicals, treatment of wood products,
production of rocket fuel, refining and marketing petroleum products, and the mining, milling,
and processing of nuclear materials. In its SEC filings, Tronox identified certain – but not all –
of the Legacy Liabilities. Specifically, Tronox identified environmental remediation at the
following sites: Henderson, Nevada; West Chicago, Illinois; Ambrosia Lake, New Mexico;
Crescent, Oklahoma; Lakeview, Oregon; Soda Springs, Idaho; Milwaukee, Wisconsin; the New
Jersey Wood-Treatment Site (Manville, New Jersey); Sauget, Illinois; Hattiesburg, Mississippi;
Cleveland, Oklahoma; Cushing, Oklahoma; Jacksonville, Florida; Riley Pass, South Dakota; and
Hanover, Massachusetts. However, Tronox failed to disclose certain other Legacy Liabilities,
including environmental costs for “certain other sites” related to wood-treatment, chemical
production, landfills, mining, and oil and gas refining, distribution and marketing. Specifically,
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Tronox failed to disclose that the Legacy Liabilities included approximately eleven additional
wood-treatment sites (the “Secret Sites”) 1 and approximately 260 agricultural chemical sites, 2
five undisclosed former chemical manufacturing sites, two former fertilizer manufacturing sites,
and several other undisclosed sites.
10. To rid itself of the Legacy Liabilities, Kerr-McGee’s management (including
individuals who became officers of Tronox) devised a scheme to foist its Legacy Liabilities onto
a subsidiary business. This fraudulent scheme was executed as follows: First, Kerr-McGee
transferred all of its valuable oil and gas assets – but none of its costly Legacy Liabilities – into a
new entity, Kerr-McGee Corporation (referred to herein as “New Kerr-McGee”). Second, New
Kerr-McGee tried to sell off the businesses which had the Legacy Liabilities. When that failed,
New Kerr-McGee placed the Legacy Liabilities in a newly formed entity it would subsequently
spin-off in an attempt to purportedly immunize New Kerr-McGee from these liabilities. Tronox
was the newly incorporated entity which would initially be managed by several senior Kerr-
McGee executives who themselves had knowledge of the materiality of the Legacy Liabilities.
11. The code-name given to this plan was “Project Focus.” In addition to the new
“clean” parent company (New Kerr-McGee), a new “clean” subsidiary (Kerr-McGee Oil and
Gas Corporation) (hereafter, the “Oil and Gas Business”) into which all of the valuable oil and
1 As used herein, “Secret Sites” means the following wood treatment sites that Kerr-McGeetransferred to Tronox through the Spin-Off, including Birmingham, Alabama; El Dorado,Arkansas; Edwardsville, Illinois; Marion, Illinois; Bloomington, Indiana; Worthington,Kentucky; Bogalusa, Louisiana; Jackson, Mississippi; Bayonne, New Jersey; Hugo, Oklahoma;and Rome, New York. These Secret Sites were not disclosed during the Class Period and noreserves were taken for these sites.
2 These include agricultural chemical sites involved in chemical manufacturing, fertilizermanufacturing, and related sites that were transferred by Kerr-McGee to Tronox. Theseagricultural chemical sites were not disclosed during the Class Period and no reserves were takenfor these sites. They are listed on Appendix A hereto.
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gas assets were transferred was formed. Most of the liabilities created by those oil and gas
assets, however, remained with the liabilities of all of Kerr-McGee’s other, non-oil and gas
businesses, including the chemicals businesses in which Tronox was involved (“Old Kerr-
McGee”). Thus, Old Kerr-McGee, which became Tronox, was initially a subsidiary of New
Kerr-McGee and remained under the control of Kerr-McGee, and subsequently, Anadarko.
Several of the Legacy Liabilities foisted on Tronox were unrelated to the chemical business
operations to be conducted by Tronox after the IPO, as they included the environmental
liabilities created by the oil and gas operations of Old Kerr-McGee.
12. As has been disclosed in the Adversary Complaint filed in the bankruptcy
proceeding, which was based on the review of internal Tronox documents and interviews with
Tronox executives, in the spring of 2005, New Kerr-McGee tried to sell or spin-off the
businesses that would become Tronox in a package deal together with the Legacy Liabilities. At
least four (4) potential purchasers refused to participate in such a deal because of the sheer
magnitude of the Legacy Liabilities they were asked to assume. These entities were Apollo
Investment Corporation, Inc. (“Apollo”), Bain Capital LLC, J.P. Morgan Partners, and Madison
Dearborn Partners LLC. In fact, as recently revealed in the Adversary Complaint, one potential
deal partner stated that the amount of Legacy Liabilities that New Kerr-McGee was attempting to
impose on the buyer was “criminal.” Another potential purchaser reduced its proposed $1.2
billion purchase price by $900 million if the Legacy Liabilities were to be included. Despite
recording a total environmental remediation reserve of only $200 million throughout the Class
Period, Tronox has alleged in its Adversary Complaint that Kerr-McGee offered Apollo an
approximately $400 million indemnity – more than double Tronox’s reserve – if it would take all
of the Legacy Liabilities.
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13. New Kerr-McGee’s desire to include the Legacy Liabilities in any deal was an
insuperable barrier to a transaction being concluded with a third party. Indeed, among other
things, New Kerr-McGee had learned that the EPA was demanding $178.8 million for
remediation costs incurred through December 2004 for the wood-treatment site in Manville, New
Jersey. When Kerr-McGee’s efforts to sell to a third party foundered – because these third
parties were able to conduct due diligence and thereby uncovered and refused to assume the
Legacy Liabilities – New Kerr-McGee went to Plan B: transferring Kerr-McGee’s environmental
remediation and tort liabilities to an unknowing investing public through an IPO. The Tronox
IPO allowed New Kerr-McGee to exercise complete control over the transaction, including being
able to unilaterally dictate the terms of the Tronox IPO, while avoiding any third-party due
diligence, and even eliminating the need for standard representations and warranties regarding
the massive Legacy Liabilities. Absent truthful and honest disclosure in the IPO by the issuer
(Tronox), its controlling person (Kerr-McGee), their common auditor, Defendant E&Y, Tronox’s
officers and directors and their control persons, which were New Kerr-McGee and its senior
executives, there was no way for the investing public to know the true extent and impact of the
Legacy Liabilities.
14. To effectuate the IPO, on November 21, 2005, pursuant to a Registration
Statement and Prospectus, the common stock of Tronox Worldwide held by Kerr-McGee was
converted into approximately 22.9 million shares of Tronox Class B common stock. Tronox
thereupon offered and sold to the investing public 17,480,000 shares of Tronox Class A common
stock at an initial offering price of $14.00 per share for proceeds of $225.4 million. Tronox
concurrently made a joint private offering through two wholly-owned subsidiaries, Tronox
Worldwide and Tronox Finance Corp., of $350 million in aggregate principal amount of 9 1/2%
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senior unsecured notes due 2012 (the “Bonds”). 3 At the time of the IPO, Tronox Worldwide also
entered into a secured credit facility consisting of a $200 million loan and a $250 million
revolving credit line. All proceeds of the IPO, the Bonds offering, the term loan facility, and
cash on hand at Tronox, less $40 million – a total of $804 million – were then distributed to
Defendant Kerr-McGee upon the closing of these transactions.
15. In addition, Tronox and Defendant Kerr-McGee entered into a Master Separation
Agreement made effective as of November 21, 2005. This agreement provided, among other
things, that Defendant Kerr-McGee’s potential responsibility for environmental remediation
costs would be capped at $100 million for a period of seven (7) years. It also provided that to be
reimbursed pursuant to this indemnity, Tronox had to obtain Kerr-McGee’s approval in advance
for any deviation from the environmental remediation reserving policies that were in place prior
to the IPO. And in a highly unusual provision which reversed the flow of the usual indemnities,
this agreement required Tronox to indemnify Kerr-McGee for any material misstatements in the
IPO Registration Statement, even though it was essentially a Kerr-McGee offering. The Master
Separation Agreement further incorporated an Assignment, Assumption, and Indemnity
Agreement, made effective as of December 31, 2002, between Kerr-McGee Chemicals
Worldwide LLC (essentially what became Tronox) and Kerr-McGee Oil & Gas. Other than a
limited number of listed sites, this agreement imposed on Kerr-McGee Chemicals ( i.e. Tronox)
all other environmental remediation obligations that were known to exist or may arise in the
future as a result of the operations of any of the Kerr-McGee Chemicals and Kerr-McGee Oil &
Gas businesses. Following these transactions, New Kerr-McGee owned 56.7% of the
outstanding Tronox Class B shares and 88.7% of the total voting power of all classes of Tronox
3 On or about June 7, 2006, the Bonds were exchanged on a one-for-one basis for identicalpublicly traded Bonds.
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common stock. On March 31, 2006, New Kerr-McGee distributed all of the Tronox Class B
common stock that it owned to its stockholders (the “Spin-Off”). As of that date, New Kerr-
McGee held no shares in Tronox, had taken more than $800 million out of the transaction, and
purported to have avoided liability for the massive Legacy Liabilities.
16. On June 22, 2006, less than ninety (90) days after successfully effectuating the
foregoing transactions, including dumping the massive Legacy Liabilities onto Tronox,
Anadarko offered to acquire New Kerr-McGee for $18 billion. The transaction was approved
and New Kerr-McGee became a wholly-owned subsidiary of Anadarko on August 10, 2006. A
primary architect of the fraud, New Kerr-McGee Chairman and Chief Executive Officer
Defendant Luke R. Corbett, personally profited by more than $270 million from the Anadarko
deal. New Kerr-McGee Senior Vice President and Chief Financial Officer Defendant Robert M.
Wohleber, who also served as Chairman of the Board of Tronox until the completion of the Spin-
Off, garnered more than $26 million. New Kerr-McGee Senior Vice President and General
Counsel Defendant Gregory F. Pilcher, another moving force behind the fraudulent plan,
obtained more than $32 million.
17. While the “clean break” from the Legacy Liabilities allowed New Kerr-McGee to
complete an $18 billion sale with massive personal benefits for its senior executives, Tronox was
left with the Legacy Liabilities and no means to recover from this burden. The New Kerr-
McGee executives who had filled senior corporate positions at Tronox up until the completion of
the Spin-Off resigned their positions as of March 31, 2006. In a vain effort to keep itself afloat
following the Spin-Off, Tronox’s officers and directors repeatedly misled the market throughout
the Class Period as to the true scope of its environmental remediation and tort liabilities by
understating necessary reserves and repeating the false mantra as to Tronox’s alleged inability to
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make reliable estimates as to liabilities because they purportedly could not determine that such
liabilities were “probable and reasonably estimable.” To the contrary, Tronox’s officers and
directors during the Class Period, many of whom held senior positions within Kerr-McGee’s
chemicals businesses prior to the Tronox IPO, had sufficient information available to them as to
the potential scope of required reserves or were recklessly indifferent to such information.
Indeed, as admitted in Tronox’s restatement announcement, “[Tronox] failed to establish
adequate reserves as required by applicable accounting pronouncements.” (Emphasis
added). Moreover, based on their senior positions within the businesses that would become
Tronox, these individuals were fully aware of the details of and reasons for Kerr-McGee’s
elaborate scheme to offload the Legacy Liabilities onto Tronox. As a result, Tronox, its officers
and directors, and its auditor, Defendant E&Y, materially understated the required environmental
remediation reserve over an almost four (4) year period, the entire history of the Company, either
intentionally or, at a minimum, as a result of their recklessness.
18. Ultimately, Defendants could no longer conceal that the environmental and tort
liabilities which had been imposed on Tronox by Defendant Kerr-McGee were far in excess of
the amount that they had represented the liabilities to be. As a result, Tronox was in financial
ruin and needed the protection of the bankruptcy laws. The securities purchased by Tronox’s
public investors became virtually worthless.
JURISDICTION AND VENUE
19. The claims asserted herein arise under and are brought pursuant to Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §§78j(b) and
78t(a), and Rule 1 0b-5 promulgated thereunder by the SEC, 17 C.F.R. §240.10b-5.
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20. This Court has jurisdiction over the subject matter of this action pursuant to
28 U.S.C. §§1331 and 1337, and Section 27 of the Exchange Act, 15 U.S.C. §78aa.
21. Venue is proper in this District pursuant to Section 27 of the Exchange Act,
15 U.S.C. §78aa, and 28 U.S.C. §1391(b). Much of the conduct complained of herein occurred
within this District and Tronox was listed on the New York Stock Exchange (“NYSE”) and its
shares traded on the NYSE until September 30, 2008 when it began trading on the OTC Bulletin
Board. Furthermore, the Tronox bankruptcy case is pending in this District.
22. In connection with the acts, conduct and other wrongs alleged in this Complaint,
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 a national securities exchange.
PARTIES
A. Plaintiffs
23. Lead Plaintiffs purchased the Class A and Class B common stock of Tronox
during the Class Period as set forth in the certification attached hereto and sustained damages as
a result of the violations of law alleged herein.
24. Named Plaintiff The Fire and Police Pension Association of Colorado purchased
units of Tronox’s 9 % percent Senior Notes due 2012 during the Class Period as set forth in the
certification attached hereto and sustained damages as a result of the violations of law alleged
herein.
25. Named Plaintiff The San Antonio Fire and Police Pension Fund purchased units
of Tronox’s 9 % percent Senior Notes due 2012 and received Class B common stock as part of
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the Spin-Off during the Class Period as set forth in the certification attached hereto and sustained
damages as a result of the violations of law alleged herein.
26. Lead Plaintiff and the Named Plaintiffs are sometimes collectively referred to
herein as “Plaintiffs.”
B. Unnamed Defendant
27. Unnamed defendant Tronox Incorporated (“Tronox”) is a Delaware corporation
which was formed on May 17, 2005 as a wholly-owned indirect subsidiary of defendant Kerr-
McGee Corporation, with its principal place of business at One Leadership Square, Suite 300,
211 N. Robinson Avenue, Oklahoma City, Oklahoma. Tronox has operations and facilities in
the United States, the Asia Pacific region, and Europe. Tronox was formed for the purpose of
and in preparation for the contribution and transfer by Kerr-McGee of certain entities to Tronox,
including those comprising substantially all of Kerr-McGee’s chemical business. Tronox went
public on November 21, 2005. On January 12, 2009, Tronox and 14 of its affiliated companies
filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the
Southern District of New York, In re Tronox Incorporated, et al., No. 09-10156 (Bankr.
S.D.N.Y.) and is operating as a debtor in possession. As a result of the Tronox bankruptcy and
the automatic stay provisions of 11 U.S.C. §362(a), Tronox is not named as a defendant in this
action.
C. Corporate Defendants
28. Defendant Kerr-McGee Corporation was an oil and gas exploration and
production company, which was acquired by Anadarko during the Class Period. Kerr-McGee
controlled Tronox at relevant times herein. Kerr-McGee was the publicly-held parent of Tronox
from the time of Tronox’s incorporation in May 2005 until the Tronox IPO in November 2005.
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The net proceeds of Tronox’s IPO of approximately $224.7 million were distributed to Kerr-
McGee. In addition, concurrent with the IPO, Tronox, through wholly-owned subsidiaries,
issued $350 million in aggregate principal amount of 9.5% senior unsecured bonds due 2012 and
borrowed $200 million under a six year secured credit facility. The net proceeds of these
borrowings of approximately $537.1 million were also distributed to Kerr-McGee
contemporaneous with the closing of these transactions in November 2005. Immediately after
the IPO, Kerr-McGee held 56.7% of Tronox’s outstanding common stock. Kerr-McGee
exercised control over Tronox and the Tronox IPO in light of its 56.7% holding in Tronox
(which represented 88.7% of the voting power of all classes of Tronox common stock). On
March 31, 2006, Kerr-McGee completed the Spin-Off by distributing its Tronox shares to its
stockholders.
29. Defendant Anadarko Petroleum Corporation is a Delaware corporation with its
principal place of business at 1201 Lake Robbins Drive, The Woodlands, Texas. On June 22,
2006, Anadarko made an offer to acquire Kerr-McGee for $18 billion, of which $16.4 billion
was in cash. On August 10, 2006, Kerr-McGee shareholders voted to approve the offer and
Kerr-McGee was absorbed by Anadarko. As more fully alleged herein, Anadarko is the
successor-in-interest to Kerr-McGee.
D. Accounting Defendant
30. Defendant Ernst & Young LLP (“E&Y”) was at all times relevant to the
allegations raised herein the purported outside “independent” accountant and auditor for both
Kerr-McGee and Tronox. Through its Oklahoma City, Oklahoma office, E&Y falsely
represented that it audited Tronox’s financial statements for the fiscal years ended December 31,
2005, 2006, and 2007 in accordance with the standards promulgated by the Public Company
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Accounting Oversight Board and it issued materially false and misleading unqualified audit
opinions as to those financial statements, falsely claiming that they were prepared in accordance
with GAAP. In addition, E&Y consented to the use of its unqualified opinion letters for
Tronox’s financial statements contained in Tronox’s Form 10-Ks for the fiscal years 2005, 2006,
and 2007.
E. Individual Defendants
31. Defendant Thomas W. Adams (“Adams”) was the Chief Executive Officer
(“CEO”) of Tronox from September 2005 until September 5, 2008. Adams also served as a
Director of Tronox during the Class Period. During the Class Period, Adams signed the
following Tronox SEC filings: (i) Registration Statement for Tronox’s IPO, dated November 21,
2005; (ii) Tronox’s Form 10-K for the year ended December 31, 2005, filed March 29, 2006; (iii)
Tronox’s Form 10-Q for the first quarter of fiscal year 2006, filed May 15, 2006; (iv) Tronox’s
Form 10-Q for the second quarter of fiscal year 2006, filed August 14, 2006; (v) Tronox’s Form
10-Q for the third quarter of fiscal year 2006, filed November 14, 2006; (vi) Tronox’s Form 10-
K for the year ended December 31, 2006, filed March 16, 2007; (vii) Tronox’s Form 10-Q for
the first quarter of fiscal year 2006, filed May 8, 2007; (viii) Tronox’s Form 10-Q for the second
quarter of fiscal year 2006, filed August 7, 2007; (ix) Tronox’s Form 10-Q for the third quarter
of fiscal year 2007, filed November 7, 2007; (x) Tronox’s Form 10-K for the year ended
December 31, 2007, filed March 14, 2008; (xi) Tronox’s Form 10-Q for the first quarter of fiscal
year 2008, filed May 7, 2008; and (xii) Tronox’s Form 10-Q for the second quarter of fiscal year
2008, filed August 11, 2008. Adams also signed certifications pursuant to Sections 302 and 906
of the Sarbanes-Oxley Act of 2002, 18 U.S.C. §1350, contained in the foregoing quarterly
reports and Form 10-Ks issued by Tronox during the Class Period, which attested to the
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adequacy of the Company’s internal controls and accounting systems. Adams had previously
served in various executive positions for Old Kerr-McGee, including President of Tronox LLC
since September 2004, Vice President and General Manager of the Pigment Division from May
2004 to September 2040, Vice President of Strategic Planning and Business Development of
Kerr-McGee Shared Services from 2003-2004, Vice President of Acquisitions from March 2003
to September 2003, and Vice President of Information Management and Technology from 2002
to 2003. Adams was a control person of Tronox during the Class Period.
32. Defendant Marty J. Rowland (“Rowland”) was the Chief Operating Officer of
Tronox and a Director during the Class Period. During the Class Period, Rowland signed the
following Tronox SEC filings: (i) Registration Statement for Tronox’s IPO, dated November 21,
2005; and (ii) Tronox’s Form 10-K for the year ended December 31, 2005, filed March 29, 2006.
Rowland had previously served in various executive positions for Old Kerr-McGee, including as
Vice President, Global Pigment Operations, for Tronox LLC, a division of Old Kerr-McGee,
from August 2004 to September 2005, and Director of North American Operations from May
2004. Rowland was a control person of Tronox during the Class Period.
33. Defendant Mary Mikkelson (“Mikkelson”) was the Senior Vice President and
Chief Financial Officer (“CFO”) of Tronox during the Class Period. Mikkelson was terminated
by Tronox as of May 31, 2009. During the Class Period, Mikkelson signed the following Tronox
SEC filings: (i) Registration Statement for Tronox’s IPO, dated November 21, 2005; (ii)
Tronox’s Form 10-Q for the year ended December 31, 2005, filed March 29, 2006; (iii) Tronox’s
Form 10-Q for the first quarter of fiscal year 2006, filed May 15, 2006; (iv) Tronox’s Form 10-Q
for the second quarter of fiscal year 2006, filed August 14, 2006; (v) Tronox’s Form 10-Q for the
third quarter of fiscal year 2006, filed November 14, 2006; (vi) Tronox’s Form 10-K for the year
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ended December 31, 2006, filed March 16, 2007; (vii) Tronox’s Form 10-Q for the first quarter
of fiscal year 2006, filed May 8, 2007; (viii) Tronox’s Form 10-Q for the second quarter of fiscal
year 2006, filed August 7, 2007; (ix) Tronox’s Form 10-Q for the third quarter of fiscal year
2007, filed November 7, 2007; (x) Tronox’s Form 10-K for the year ended December 31, 2007,
filed March 14, 2008; (xi) Tronox’s Form 10-Q for the first quarter of fiscal year 2008, filed
May 7, 2008; (xii) Tronox’s Form 10-Q for the second quarter of fiscal year 2008, filed August
11, 2008; and (xiii) Tronox’s Form 10-Q for the third quarter of fiscal year 2008, filed November
7, 2008. Mikkelson also signed certifications pursuant to Sections 302 and 906 of the Sarbanes-
Oxley Act of 2002, 18 U.S.C. §1350, contained in the foregoing quarterly reports and Form 10-
Ks issued by Tronox during the Class Period, which attested to the adequacy of the Company’s
internal controls and accounting systems. Mikkelson was responsible during the Class Period for
the oversight of Tronox’s financial reporting and management. Mikkelson had previously served
as Vice President and Controller of Tronox LLC, a division of Old Kerr-McGee, from December
2004 and Assistant Corporate Controller of Kerr-McGee Shared Services from February 2004 to
December 2004. Mikkelson had 20 years of experience as a certified public accountant.
Mikkelson was a control person of Tronox during the Class Period.
34. Defendant Robert M. Wohleber (“Wohleber”) served as Chairman of the Board
and a Director of Tronox during the Class Period through March 31, 2006. Wohleber served on
the Audit Committee, the Corporate Governance Committee and the Executive Compensation
Committee of the Tronox Board. During the Class Period, Wohleber signed the following
Tronox SEC filings: (i) Registration Statement and Prospectus for Tronox’s IPO, dated
November 21, 2005; and (ii) Tronox’s Form 10-K for the year ended December 31, 2005, filed
March 29, 2006. Wohleber also was a member of the Audit Committee of the Tronox Board
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during the Class Period. Wohleber served as Senior Vice President and Chief Financial Officer
(“CFO”) of Kerr-McGee since December 1999 and was instrumental in planning and
effectuating the transfer of the Legacy Liabilities to Tronox, the Tronox IPO, and the Spin-Off of
all remaining Tronox shares held by Kerr-McGee. Wohleber was a control person of Tronox and
Kerr-McGee during the Class Period.
35. Defendant J. Michael Rauh (“Rauh”) served as a Director of Tronox during the
Class Period through March 31, 2006. Rauh served on the Audit Committee, the Corporate
Governance Committee and the Executive Compensation Committee of the Tronox Board.
During the Class Period, Rauh signed the following Tronox SEC filings: (i) Registration
Statement and Prospectus for Tronox’s IPO, dated November 21, 2005; and (ii) Tronox’s Form
10-K for the year ended December 31, 2005, filed March 29, 2006. Rauh had previously served
in various positions for Old Kerr-McGee, including Vice President from 1987, Controller from
1987 to 1996 and from January 2002 to the present, and Treasurer from 1996 to 2002. Rauh was
a control person of Tronox and Kerr-McGee during the Class Period.
36. Defendants Adams, Rowland, Mikkelson, Wohleber, and Rauh are sometimes
collectively referred to herein as the “Tronox Individual Defendants.”
37. Defendant Luke R. Corbett (“Corbett”) was the Chairman and CEO of Kerr-
McGee at all relevant times. Corbett was a control person of Tronox based on his involvement
in developing the plan to create Tronox, dumping the Legacy Liabilities on Tronox, entering into
the Master Separation Agreement, and planning the Tronox IPO and subsequent Spin-Off.
Corbett was also a control person of Kerr-McGee at relevant times.
38. Defendant Gregory F. Pilcher (“Pilcher”) was the Senior Vice President,
Secretary, and General Counsel of Kerr-McGee at all relevant times. Pilcher was a control
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person of Tronox based on his involvement in developing the plan to create Tronox, dumping the
Legacy Liabilities on Tronox, entering into the Master Separation Agreement, and planning the
Tronox IPO and subsequent Spin-Off. Pilcher was also a control person of Kerr-McGee at
relevant times.
39. Because of the individually named defendants’ positions with Tronox and Kerr-
McGee, they had access to the material adverse undisclosed information about the true extent of
the Legacy Liabilities and the material deficiency in reserves recorded by Tronox. These
defendants had access to internal Tronox and Kerr-McGee corporate documents, including drafts
and final copies of Tronox’s press releases and its Forms 10-K and Forms 10-Q, as well as the
operating plans, budgets, forecasts and reports of operations prepared by Defendants, and had
conversations and connections with other corporate officers and employees, attended
management and/or Board of Directors meetings of Tronox and/or Kerr-McGee and committees
thereof, and had reports and other information provided to them in connection with their duties at
both Tronox and Kerr-McGee.
40. It is appropriate to treat the Tronox Individual Defendants as a group for pleading
purposes and to presume that the false, misleading and incomplete information conveyed in
Tronox’s public filings, press releases and other publications as alleged herein during the
respective periods these individuals served on the Tronox Board are the collective actions of the
Tronox Individual Defendants.
41. The Tronox Individual Defendants participated in the drafting, preparation, and/or
approved of the various public, shareholder and investor reports and other communications
complained of herein, and were aware of, or recklessly disregarded, the misstatements contained
therein and omissions therefrom, and were aware of and/or recklessly disregarded their
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materially false and misleading nature. Because of their Board membership and/or executive and
managerial positions with Tronox and Kerr-McGee, each of the Tronox Individual Defendants
had access to the adverse undisclosed information about the true extent of the Legacy Liabilities
as particularized herein, and knew or recklessly disregarded that these adverse facts rendered the
representations made by or about Tronox and its financial condition, and specifically the Legacy
Liabilities and the Company’s reserves for these liabilities, materially false and misleading
throughout the Class Period.
42. As officers and/or directors and controlling persons of a publicly held company
whose common stock was registered with the SEC pursuant to the Exchange Act, traded on the
New York Stock Exchange under the symbols TRX and TRX.B, and governed by the provisions
of the federal securities laws, the Tronox Individual Defendants each had a duty to promptly
disseminate accurate and truthful information with respect to the Company’s financial condition
and to correct any previously issued statements that had become materially misleading or untrue,
so that the market price of the Company’s common stock would be based upon truthful and
accurate information. The Tronox Individual Defendants’ misrepresentations and omissions
during the Class Period violated these requirements and obligations.
43. The Tronox Individual Defendants, because of their positions of control and
authority as officers and/or directors of the Company, were able to and did control the content of
the various SEC filings, press releases and other public statements pertaining to the Company
during the Class Period. Each Tronox Individual Defendant was provided with copies of the
documents alleged herein to be misleading prior to or shortly after their issuance, and/or had the
ability and/or opportunity to prevent their issuance or cause them to be corrected. Accordingly,
each of the Tronox Individual Defendants is responsible for the accuracy of the Company’s
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financial reports and releases detailed herein and is therefore primarily liable for the
representations contained therein.
44. Each of the individually named Defendants, both individually and collectively, is
liable as a participant in a fraudulent scheme and course of business, which deceived purchasers
of the common stock and Bonds of Tronox through the distribution of materially false and
misleading information and concealment of the true financial condition of Tronox based on the
undisclosed obligations represented by the Legacy Liabilities, the recording of insufficient
reserves for these liabilities, and the implementation of an improper reserving methodology
which had the effect of understating reserves. The fraudulent conduct: (i) deceived the investing
public regarding the extent of Tronox’s environmental and tort liabilities and their effect on the
company’s publicly reported financial condition; (ii) deceived the investing public regarding
Tronox’s business, management, operations, the value of Tronox securities, and its ability to
continue as a going concern; (iii) enabled Kerr-McGee to receive at least $575 million from the
investing public based on the fraudulent acts alleged herein; (iv) enabled Kerr-McGee to free
itself from billions of dollars of environmental remediation and related tort liabilities and thus
permit Kerr-McGee to be sold to Anadarko for $18 billion; and (v) caused Plaintiffs and Class
members to purchase the securities of Tronox at artificially inflated prices and to thereafter
sustain damages following the full disclosure of the fraud herein complained of upon Tronox’s
bankruptcy.
KERR-McGEE DOMINATES AND CONTROLS TRONOX
45. From the beginning of the Class Period, Tronox was dominated and controlled by
Defendant Kerr-McGee. Key Tronox personnel as of the date of the IPO, CEO Adams, and
Chairman of the Board Wohleber, were or had been high ranking executives within Kerr-McGee.
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Adams had been CEO of Tronox LLC up to the time of the IPO, and Wohleber was the CFO of
Kerr-McGee at the time of the IPO and continuing into the Class Period.
46. The Registration Statement and Prospectus for the IPO acknowledged the
complete control exercised by Kerr-McGee over Tronox, as follows:
As long as Kerr-McGee owns shares of our common stockrepresenting a majority of the voting power of our commonstock, it will control us and the influence of our otherstockholders over significant corporate actions will be limited.
Upon the closing of this offering, Kerr-McGee will own allof our Class B common stock, which will represent amajority of the combined voting power of all outstandingclasses of our common stock. As a result, Kerr-McGee willbe entitled to nominate a majority of our board of directorsand will have the ability to control the vote in any electionof directors. Kerr-McGee will also have control over ourdecisions to enter into significant corporate transactionsand, in its capacity as our majority stockholder, will havethe ability to prevent any transactions that it does notbelieve are in Kerr-McGee’s best interest. As a result,Kerr-McGee will be able to control, directly or indirectlyand subject to applicable law, all matters affecting us,including the following:
• any determination with respect to our business directionand policies, including the appointment and removal of officers;
• any determinations with respect to mergers, businesscombinations or dispositions of assets;
• our capital structure;
• compensation, option programs and other human resourcespolicy decisions;
• changes to other agreements that may adversely affect us;and
• the payment of dividends on our common stock.
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47. Tronox described itself in the Registration Statement as a “controlled company”
within the meaning of the New York Stock Exchange corporate governance standards.
48. Defendant Kerr-McGee continued to control Tronox throughout the entirety of the
Class Period as a result of, among other things, implementation of provisions of the Master
Separation Agreement. The Master Separation Agreement, dated as of November 28, 2005, had
a term of seven (7) years, fully encompassing the Class Period. Pursuant to this contract, Kerr-
McGee exercised control over Tronox’s management of the environmental remediation sites
which gave rise to the Legacy Liabilities, as well as the public reporting in quarterly and annual
SEC filings of Tronox’s environmental remediation reserve, which Tronox has admitted was
materially misstated throughout the Class Period. Accordingly, Kerr-McGee and, after its
acquisition, Anadarko, had the power to control and direct the amount of reserves set by
Tronox.4
49. Pursuant to the agreement between Tronox and Kerr-McGee, the two companies
conducted quarterly meetings to evaluate Kerr-McGee’s reimbursement and indemnification
obligations for environmental remediation. 5 These meetings were required to be conducted prior
to the delivery by Tronox to Kerr-McGee of reserve estimates and any changes thereto. In other
words, Kerr-McGee had the power to determine Tronox’s reserve estimates and exercised the
same to limit its potential liability for these obligations. Further, the agreement required Tronox
to keep Kerr-McGee continually informed of all Tronox remediation activities, including but not
4 All references herein to Kerr-McGee also refer to Anadarko following their August 10, 2006merger.
5 As of June 29, 2010, Anadarko paid Tronox, pursuant to the Master Separation Agreement,approximately $4.1 million in environmental response costs, the total amount requested byTronox. In addition, Andarko has reserved approximately $96 million in remainingreimbursement obligations under the Master Separation Agreement.
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limited to providing copies of all documents, making relevant Tronox employees available to
meet with and provide information to Kerr-McGee, and to provide Kerr-McGee with access to
all remediation sites. As alleged herein below, numerous confidential witnesses confirm that
Kerr-McGee exercised its rights under the agreement and made repeated demands upon Tronox
for such information and access throughout the Class Period all for the express purpose of
controlling Tronox’s management and reporting as it related to the remediation sites and the
recording of reserves therefor.
50. CW 13 is a Manager of Hydrologic Services and has worked for Tronox since
March 2006. CW 13 confirmed that there was regular communication with both Kerr-McGee
and Anadarko at least quarterly, and often once a month by email and telephone, all addressing
environmental remediation and reserve issues, including obtaining approvals from Kerr-McGee
and Anadarko for budgets, remediation cost estimates, and providing regular updates regarding
remediation sites.
51. Kerr-McGee further exercised control over Tronox throughout the term of the
Master Separation Agreement by virtue of the fact that, pursuant to the agreement, Kerr-McGee
had no reimbursement obligation whatsoever for environmental liabilities without Kerr-McGee’s
prior written consent to any material change made by Tronox in its remediation activities or
actions which increased any reserve amount by $2.5 million or more, or if Tronox established
any reserve for a site where none had been previously recorded.
52. Under their contract, Tronox was required to manage all remediation activities
consistent with the past practices of Kerr-McGee. Kerr-McGee also contractually imposed on
Tronox all of Kerr-McGee’s policies, procedures, and management practices with regard to the
recording of reserves. Further, according to the terms of the contract, Kerr-McGee had no
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environmental remediation reimbursement obligation if Tronox affirmatively sought any change
in the use of any particular remediation site.
53. Tronox was also required throughout the Class Period to obtain the written
consent of Kerr-McGee for testing, investigation, and sampling at any site, and in all such
circumstances Kerr-McGee personnel were to be physically present and to get copies of all
relevant records. Tronox was thereafter required to obtain the written consent of Kerr-McGee
for any physical change to any remediation site, and Kerr-McGee personnel were required to be
present at the time any physical changes were made to any site.
54. Kerr-McGee further had the power to control, and in fact exercised control over
Tronox throughout the Class Period, by virtue of Tronox’s reporting obligations to Kerr-McGee.
Specifically, no later than eight business days following the end of each quarter – but prior to the
public announcement of any financial results in an SEC filing or press release – Tronox was
required to provide Kerr-McGee with reserve estimates and any changes in reserve estimates, for
purposes of obtaining Kerr-McGee’s comments and approval. No later than 10 business days
prior to filing a 10-Q and 12 business days prior to filing a 10-K, Tronox was required to deliver
drafts to Kerr-McGee of any discussion or analysis of contingent obligations to pay
environmental recovery costs (as defined in the Master Separation Agreement) for purposes of
obtaining Kerr-McGee’s comments and approval. Another clause of their agreement required
Tronox not to aid any legal action or investigation relating to any environmental law that may
have been brought against Tronox and/or Kerr-McGee relating to any of the subject
environmental remediation sites.
55. Several additional confidential witnesses have likewise confirmed that Kerr-
McGee exercised control over Tronox throughout the Class Period. CW 14 was a Tronox Safety
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& Environmental Affairs (“SEA”) Project Manager who reported to Tronox’s Vice-President,
SEA. He retired from Tronox in February 2010. CW 14 was involved in writing at least six
“notifications” to Kerr-McGee regarding changes to environmental remediation sites, and did so
through the end of 2008. The notifications he helped to prepare and which were transmitted to
Kerr-McGee (and Anadarko) were needed to obtain their approval regarding specific
remediation events and cost estimates. According to CW14, Tronox was very careful to
continually inform Kerr-McGee and Anadarko regarding changes to remediation sites and cost
estimates so that Kerr-McGee and Anadarko could never say that “you never told us.” He also
stated that Kerr-McGee and Anadarko engaged in a cover-up so that the control they exercised
over Tronox could not be revealed. More specifically, according to CW 15, Kerr-McGee and
Anadarko made it a point to not generate any documents that might appear to confirm their
exercise of control, and that this fact was also apparent to other Tronox personnel interacting
with these companies.
56. CW15 served as Vice-President, SEA for Tronox throughout the Class Period.
His employment terminated in 2009. This witness interacted with several high level Kerr-
McGee and Anadarko personnel who were constantly concerned with possible environmental
remediation liabilities and limiting Kerr-McGee and Anadarko’s exposure. To that end, CW 15
provided drafts of notification letters from Tronox to Kerr-McGee and Anadarko for their
comment and revision prior to the transmittal of the final versions. In other words, Kerr-McGee
and Anadarko controlled the content of Tronox’s notification letters to Kerr-McGee and
Anadarko regarding all material environmental reserve issues. The Kerr-McGee and Anadarko
employees made extensive revisions to the draft notification letters, and were constantly
concerned with limiting assumable liabilities and made changes to the drafts that were ultimately
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incorporated, so that the letters were more favorable to Kerr-McGee and Anadarko’s positions.
Tronox employees who interacted with Kerr-McGee and Anadarko personnel on these letters
were constantly frustrated with the numerous changes made to the drafts but were powerless to
avoid them. This confidential witness further confirmed the conscious efforts of Kerr-McGee
and Anadarko to avoid documentation of their exercise of control over Tronox. Likewise, both
CW15 and 16, a Director of Environmental Remediation at Tronox during the Class Period,
related that at a certain point in time, a directive was issued by senior Kerr-McGee and Anadarko
personnel, to avoid creating a record of revisions made to the letters so as to limit any
documentation that showed Kerr-McGee and Anadarko’s control of Tronox. CW15 confirmed
that draft environmental remediation liabilities were shown to Anadarko formally once per
quarter.
57. CW 17 was Vice-President, Governmental Affairs for Tronox from the beginning
of the Class Period through October 2008. He recalled having numerous conversations while at
Tronox with Kerr-McGee and Anadarko personnel in 2006, 2007, and 2008 regarding Kerr-
McGee’s and then Anadarko’s continuous attempts to influence the reserving process. In
addition, CW 17 stated that, at least through 2008, Tronox took direction from Kerr-McGee on
what legal positions it would take in response to claims made by citizens alleging injury from
environmental pollution, was required by Kerr-McGee to adopt those positions as its own and
did so.
58. Indeed, the deep involvement of Anadarko in the reserving process following its
acquisition of Kerr-McGee in August 2006 was confirmed by Defendant Adams, the CEO of
Tronox, during a conference call with analysts on February 3, 2008 regarding Tronox’s fourth
quarter and year end 2007 results. Specifically, during the conference call, Adams stated that,
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“under the Master Separation Agreement, we continually have dialogues with Anadarko
concerning our ongoing programs and legacy environmental [sic]... [W]e work with [Anadarko]
continuously.”
59. Based on the foregoing, Kerr-McGee and Anadarko were controlling persons of
Tronox within the meaning of Section 20(a) of the Exchange Act, 15 U.S.C. §78t(a), during the
entire Class Period.
ANADARKO IS LIABLE AS THE SUCCESSOR-IN-INTEREST TO KERR-McGEE
60. Defendant Anadarko is liable as the successor-in-interest to Kerr-McGee. On
August 10, 2006, Anadarko acquired Kerr-McGee for total consideration of $18 billion, and
Kerr-McGee became a wholly-owned subsidiary of Anadarko. In its Annual Report on Form 10-
K for the year ending December 31, 2006 Anadarko represented that, “On August 10, 2006,
Anadarko completed the acquisition of Kerr-McGee Corporation...” This representation is
repeated in multiple Anadarko SEC filings from 2006 forward. As a result of the merger, and
based on the allegations herein set forth, Anadarko is liable to the same extent as is Kerr-McGee
for the violations of law herein alleged, in its capacity as the successor-in-interest to Kerr-
McGee.
61. Anadarko is liable as Kerr-McGee’s successor-in-interest because their merger
operated as a fraud on the shareholders and creditors of Tronox, as well as the creditors of Kerr-
McGee. The merger was the culmination of a series of corporate transactions which had the
purpose and effect of foisting the massive, undisclosed Legacy Liabilities, which were known to
Anadarko as early as 2002, onto Tronox and its shareholders. It was only upon learning of the
successful excision of the Legacy Liabilities out of Kerr-McGee that Anadarko formally agreed
to acquire the Kerr-McGee oil and gas assets which it had coveted, free and clear of the burden
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of the Legacy Liabilities, while, as alleged herein, simultaneously enriching defendants Corbett,
Wohleber, and Pilcher.
62. As alleged in the amended Adversary Complaint, Anadarko had decided by 2001
that it wanted to acquire Kerr-McGee’s oil and gas assets. Its due diligence work in connection
with a potential deal led it to conclude that the Legacy Liabilities constituted a multi-billion
dollar liability which Anadarko would not assume. Anadarko learned that Kerr-McGee had
already spent over $1 billion on “clean-up,” was spending $150 million per year, with potentially
billions more to pay over the next 20-30 years. Anadarko further learned that there were 500
active Kerr-McGee pollution sites, and potentially more than 1,000 total problem sites.
Anadarko, through its due diligence, also pinpointed a material error in how Kerr-McGee was
reserving for these obligations. It found that Kerr-McGee generally reserved to fund two years’
worth of current remediation efforts whereas Anadarko reserved for the total life of a
remediation project. Anadarko’s analysis showed that while it was spending approximately $5
million per year for environmental remediation and had total environmental reserves of $67
million, more than 13 times its average annual remediation costs, Kerr-McGee was spending
approximately $115 million per year for environmental remediation but had reserves for $227
million, less than twice Kerr-McGee’s annual remediation costs.
63. Based on these findings, Anadarko communicated to Kerr-McGee its ongoing
interest in the oil and gas assets, but only if they came free and clear of the Legacy Liabilities.
This caused Kerr-McGee to effectuate the Tronox IPO and subsequent spin-off for the purpose
of obtaining the windfall represented by the Anadarko acquisition, to the detriment and injury of
Tronox shareholders, who bore the burden of the Legacy Liabilities, as well as the creditors of
Tronox and Kerr-McGee.
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64. Kerr-McGee’s Proxy Statement for the Kerr-McGee/Anadarko merger
acknowledged that Anadarko’s CEO contacted defendant Corbett about completing an
acquisition of Kerr-McGee prior to the Kerr-McGee Board meeting of March 8, 2006 at which
the March 31, 2006 spin-off was approved.
65. Because the merger of Kerr-McGee and Anadarko was the culmination of a fraud
which had the purpose and effect of stripping the Legacy Liabilities out of Kerr-McGee without
adequate disclosure thereof to the harm of Tronox’s shareholders and creditors, as well as Kerr-
McGee’s creditors, Anadarko is liable as a successor-in-interest to Kerr-McGee.
66. In the alternative, Anadarko is liable as the successor-in-interest to Kerr-McGee
because it expressly or impliedly assumed the liabilities of Kerr-McGee as a result of the merger.
Specifically, Anadarko acknowledged its liability based on its status as successor-in-interest to
Kerr-McGee, for environmental remediation costs of Tronox in the event Tronox was unable to
pay for such obligations as a result of its becoming insolvent ( see paragraph 128 infra).
Anadarko further agreed to indemnify Kerr-McGee’s officers and directors for their acts or
omissions occurring before the acquisition date of August 10, 2006. Specifically, in the
Agreement and Plan of Merger dated as of June 22, 2006 among Anadarko, APC Acquisition
Sub, Inc. and Kerr-McGee Corporation, pursuant to Section 5.9(a) thereof, all existing rights to
indemnification by Kerr-McGee in favor of its officers, directors, and employees in effect as of
the date of the agreement, survive the merger and remain in full force and effect. Section 5.9(a)
provides for joint and several liability of Anadarko and Kerr-McGee for such indemnification
obligations. In addition, Section 5.9(b) of the merger agreement provides that for six years
following the effective date of the merger, both Anadarko and Kerr-McGee shall jointly and
severally indemnify, defend and hold harmless each officer, director, and employee pursuant to
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then existing indemnification agreements, for actions or omissions in their capacities as such
occurring at or prior to the effective date of the merger. As a result of these agreements,
Anadarko expressly assumed these Kerr-McGee liabilities and is therefore liable as a successor-
in-interest to Kerr-McGee.
CLASS ACTION ALLEGATIONS
67. Plaintiffs bring this action as a class action pursuant to Federal Rules of Civil
Procedure 23(a) and 23(b)(3) on their own behalf and on behalf of a Class consisting of all
persons and entities who purchased or otherwise acquired Tronox common stock and Bonds
between November 21, 2005 and January 12, 2009, inclusive (the “Class Period”), and who were
damaged thereby.
68. Excluded from the Class are the Defendants, officers and directors of Tronox,
Kerr-McGee, and Anadarko at all relevant times, members of their immediate families and their
legal representatives, heirs, successors or assigns, and any entity in which an excluded person
has or had a controlling interest.
69. The members of the Class are so numerous that joinder of all members is
impracticable. Throughout the Class Period up to September 30, 2008, Tronox common stock
was actively traded on the NYSE, an efficient market, under the symbols “TRX” and “TRX.B.”
Thereafter, Tronox common stock traded on the Over The Counter Bulletin Board (“OTCBB”),
also an efficient market. Throughout the Class Period, Tronox Bonds were actively traded on the
OTCBB and on The PORTAL Market, both efficient markets. While the exact number of Class
members is unknown to Lead Plaintiffs at this time and can only be ascertained through
appropriate discovery, Lead Plaintiffs believe that there are thousands of members in the
proposed Class who are geographically dispersed. Members of the Class can be identified from
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records maintained by Tronox or its transfer agent and can be notified of the pendency of this
action by mail and through the Internet, using a form of notice similar to that customarily used in
securities class action lawsuits. As of December 31, 2008, Tronox had 19,107,367 outstanding
shares of class A common stock and 22,889,431 outstanding shares of class B common stock.
70. Plaintiffs’ claims are typical of the claims of the Class as all members of the Class
are similarly affected by Defendants’ wrongful conduct in violation of federal securities laws as
alleged herein. Lead Plaintiffs, the Named Plaintiffs, and all members of the Class have
purchased and/or acquired common stock or Bonds of Tronox during the Class Period and have
sustained damages arising out of Defendants’ wrongful conduct as alleged herein upon the full
disclosure of the wrongdoing.
71. Plaintiffs will zealously prosecute the claims and will fairly and adequately
protect the interests of the members of the Class and have retained counsel competent and
experienced in securities litigation and class actions. Lead Plaintiffs and the Named Plaintiffs do
not have any interests antagonistic to or in conflict with the other members of the Class.
72. Common questions of law and fact exist as to all members of the Class and
predominate over any questions affecting only individual Class members. Among the questions
of law and fact common to the Class are the following:
a. Whether the Defendants violated the federal securities laws through their
acts and/or omissions as alleged herein;
b. Whether Defendants directly or indirectly participated in and pursued the
fraudulent plan and scheme and common course of conduct as alleged herein;
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c. Whether the filings, reports, documents, statements, and attestations made
by Defendants during the Class Period omitted or misrepresented material facts about the
business, operations, performance, and/or financial condition of Tronox;
d. Whether the public statements issued by Tronox and the Tronox
Individual Defendants, including Tronox’s financial statements and filings with the SEC,
contained material misrepresentations and/or omitted to state material facts;
e. Whether the Defendants acted knowingly or with reckless disregard for
the truth in misrepresenting and omitting material facts in committing the wrongful acts
complained of herein;
f. Whether the market price of Tronox common stock and the Bonds during
the Class Period was manipulated or artificially inflated due to the misrepresentations and/or
omissions complained of herein; and
g. Whether Plaintiffs and other members of the Class have sustained
damages and, if so, the proper measure of such damages.
73. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all Class 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 complained of herein. There will be no difficulty in the
management of this action as a class action.
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HOW THE FRAUD WAS ACCOMPLISHED
A. Old Kerr-McGee Creates The Legacy Liabilities
74. Old Kerr-McGee was founded in 1929 as Anderson & Kerr Drilling Company
near Oklahoma City, Oklahoma. As the company grew its oil and gas exploration activities and
drilling operations, it moved into downstream operations with the purchase of its first refinery in
1945.
75. Old Kerr-McGee continued to expand in the 1950s into various other energy-
related businesses. In 1952, Old Kerr-McGee entered the uranium industry when it acquired
mining properties in Arizona. Shortly thereafter, it constructed the country’s largest uranium-
processing mill. Also in the 1950s, Old Kerr-McGee expanded its retail operations into owning
and operating gasoline service stations, and further expanded its refining operations.
76. In the early 1960s, Old Kerr-McGee entered the forestry business through a series
of asset purchases, and acquired several fertilizer-marketing companies.
77. In 1967, Old Kerr-McGee completed a merger with American Potash and
Chemical Corporation, and began to manufacture and market a variety of ammonium perchlorate
chemicals (such as fertilizers, potash, and sodium chlorate), boron, titanium dioxide, and
manganese. That same year, Old Kerr-McGee started construction of its first coal mine shaft in
Stigler, Oklahoma.
78. In the 1970s, Old Kerr-McGee became involved in various aspects of the nuclear
industry, including exploration, mining, milling, and conversion of uranium oxide into uranium
hexafluoride, palletizing of these materials, and fabrication of fuel elements.
79. By 2000, Old Kerr-McGee had exited most of these historic business operations
(collectively, the “Legacy Businesses”) and was left with two core operating businesses: (a) oil
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and gas exploration and production; and (b) chemicals. Although it had discontinued the Legacy
Businesses, Old Kerr-McGee remained legally responsible for the Legacy Liabilities associated
with these businesses. The overwhelming majority of the Legacy Liabilities – including some
that are the direct result of oil and gas operations – are unrelated to the titanium dioxide and
other operations that were Tronox’s primary businesses during the Class Period.
B. Old Kerr-McGee Formulates A Plan To Free Itself From The LegacyLiabilities
80. In the late 1990s, consolidation in the oil and gas industry increased valuations of
exploration and production companies like Old Kerr-McGee. Old Kerr-McGee, however, was
unable to take advantage of this situation because potential merger and acquisition partners were
unwilling to take on the Legacy Liabilities. Old Kerr-McGee’s executives persisted in trying to
find a way to benefit from the increasing concentration in the oil and gas business.
81. By 1998, Old Kerr-McGee began considering various transactions through which
it could eliminate its Legacy Liabilities – its primary obstacle to a deal. This goal was
heightened in importance when, on July 6, 1999, EPA sent a letter to Old Kerr-McGee stating
that “EPA has documented the release and threatened release of hazardous substances into the
environment” at Manville, New Jersey, that the site “is currently the location of a residential
community of single-family homes, and is bordered by various commercial and residential
areas,” and that “hazardous substances have been detected at the Site in homes, soils and
groundwater.” The letter also stated that EPA has “reason to believe that, for purposes of
Section 107(a) of CERCLA, 42 U.S.C. §9607(a), Kerr-McGee is a potentially responsible party
(“PRP”) with respect to the Site.”6
6 “CERCLA” refers to the Comprehensive Environmental Response, Compensation, andLiability Act enacted in 1980 to facilitate the remediation of abandoned waste sites.
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82. On October 18, 1999, EPA sent another letter to Old Kerr-McGee stating that it
had selected a remedy for Manville that included permanent relocation of residents, excavation
of source material, and off-site thermal treatment and disposal. EPA estimated the cost of the
remedy at $59,100,000. EPA also warned that because the site “consists of residential housing
and is directly affecting this community, it is particularly important that this remedial action be
conducted on an expedited basis.” EPA requested that Old Kerr-McGee determine whether it
would voluntarily finance or perform the proposed remediation.
83. The July and October 1999 EPA letters caused significant concern within Old
Kerr-McGee, including among its Board of Directors. As a result of the EPA letters, Old Kerr-
McGee launched an investigation into the Manville site, including determining the nature and
extent of Old Kerr-McGee’s potential exposure. Old Kerr-McGee also met with EPA, among
other things, to try to determine the scope of the remediation project and whether a final remedy
had been selected for the site. Old Kerr-McGee management frequently updated the Company’s
Board of Directors regarding its investigation and communications with EPA. These interactions
indicated that there was a probability that Old Kerr-McGee would be responsible in significant
amounts for the Manville clean-up.
84. According to a cost recovery lawsuit that EPA and the State of New Jersey have
since filed against Tronox as Old Kerr-McGee’s successor-in-interest, 7 these governmental
entities have spent approximately $280 million in clean-up costs at Manville, which is referred to
as a “Federal Creosote Superfund Site.”
85. Notably, Manville was only one of numerous problem wood treatment and
agricultural chemical sites that posed the threat of debilitating environmental and tort liabilities
7 United States of America v. Tronox, LLC, No. 08-cv-4368 (FLV) (D.N.J. Aug. 29, 2008).
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to Old Kerr-McGee. Given the scope of the potential liabilities at Manville and other similar
wood treatment sites as well as its numerous other legacy environmental sites – many of which
were not disclosed to the investing public – Old Kerr-McGee decided that it would not agree to
any transaction that required it to provide a guarantee or an indemnification equal to the likely
costs of the Legacy Liabilities.
C. Kerr-McGee And Its Officers Devise The Tronox Fraud
86. To avoid potentially massive liabilities from its Legacy Businesses, including
those associated with Manville, and allow a sale to a larger oil and gas concern to come to
fruition, Defendants Corbett, Wohleber, Pilcher, Adams, Mikkelson, Rowland, and Rauh
developed and/or assisted in effectuating a plan to use the public securities markets as a vehicle
to accomplish their goal to immunize Kerr-McGee from the Legacy Liabilities without making
disclosure of the true scope of these obligations.
87. The fraud involved isolating the Legacy Liabilities in a subsidiary that included
the Chemical Business (to become Tronox) in order to free up the valuable oil and gas assets
from any connection with the Legacy Liabilities.
88. In 2001, Old Kerr-McGee launched “Project Focus,” the effort to create a
corporate structure to isolate and separate the Legacy Liabilities from Kerr-McGee’s oil and gas
operations.
89. On May 13, 2001, the Old Kerr-McGee Board of Directors approved creation of a
new “clean” holding company – New Kerr-McGee – and a new “clean” subsidiary – the Oil and
Gas Business. Old Kerr-McGee became a wholly owned subsidiary of New Kerr-McGee.
90. Project Focus continued in December 2002 with numerous internal transactions
that effectively isolated the Legacy Liabilities in the Chemical Business. On December 31,
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2002, Old Kerr McGee’s Board (which included New Kerr-McGee Chairman and CEO Luke
Corbett) approved by unanimous written consent numerous transactions that lacked any
independent economic substance or legitimate business purpose, but instead were simply a
means to strip the oil and gas assets from Old Kerr-McGee and isolate in the Chemical Business
the Legacy Liabilities that Old Kerr-McGee created during its more than 70-year history.
91. As stated in a Supplemental Bond Indenture dated December 31, 2002, New Kerr-
McGee caused “substantially all” of the valuable oil and gas assets to be distributed to the Oil
and Gas Business. The Legacy Liabilities, including many that were directly related to the oil
and gas assets that had been transferred, were left in the Chemical Business, which ultimately
was spun-off as Tronox.
92. As Project Focus continued throughout 2003 and 2004, New Kerr-McGee
continued to remove assets from the Chemical Business. In late November 2004, New Kerr-
McGee began drafting an Assignment and Assumption Agreement that would identify which
assets had been kept by New Kerr-McGee and also list the environmental remediation and tort
liability for which New Kerr-McGee was responsible. All environmental remediation and tort
liabilities which were not on this truncated list would ultimately become the responsibility of
Tronox. By drafting the Assignment and Assumption Agreement (which was an exhibit to
Tronox’s Registration Statement) in this manner, New Kerr-McGee was able to hide from public
investors the full extent of the liabilities to be assumed by Tronox. The agreement was signed in
2005 but made effective as of December 31, 2002.
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D. Prospective Purchasers Of Kerr-McGee’s Chemical Business Spurn TakingOn The Legacy Liabilities
93. On February 23, 2005 New Kerr-McGee announced that it had hired Lehman
Brothers to consider alternatives for separating the Chemical Business and that the Board of
Directors would formally consider the issue at its meeting on March 8, 2005.
94. On March 8, 2005, the New Kerr-McGee Board of Directors authorized New
Kerr-McGee to separate the Chemical Business through either a sale or spin-off. In a March 8
press release, New Kerr-McGee Chairman and CEO Luke Corbett stated: “For some time, the
Board has been considering the separation of chemical (sic), current market conditions for this
industry now make it an ideal time to unlock this value for our stockholders.” Corbett similarly
explained in a letter to employees that “[i]t’s clear to us that, with the inorganic chemical and
energy markets being as strong as they are today, the timing now is ideal to consider this
separation.”
95. On April 15, 2005, while the Chemical Business executives were touting the
business to potential third party purchasers, New Kerr-McGee received a demand from the EPA
for $178,800,000 in clean-up costs that EPA had incurred at Manville through 2004 plus interest.
96. Even before the EPA demand, potential purchasers were expressing concerns
about the Legacy Liabilities and questioning why the Chemical Business had been saddled with
all of them – even those created by oil and gas operations or otherwise not related to the
operations of the Chemical Business. For example, one potential purchaser said the magnitude
of the Legacy Liabilities was “criminal.” The EPA demand only added to these concerns among
potential purchasers.
97. By late April-early May 2005, at least four (4) potential purchasers had informed
New Kerr-McGee or Lehman that they were not interested in acquiring the Chemical Business as
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long as the Legacy Liabilities were a part of the transaction. These were Apollo, Bain Capital,
J.P. Morgan Partners, and Madison Dearborn Partners. One prospective purchaser conveyed a
$1.2 billion bid if the Legacy Liabilities were not included, but otherwise only a $300 million bid
if they were. From these offers, Kerr-McGee was put on notice of the true extent of its Legacy
Liabilities and that its reserves for these obligations were materially deficient. These events also
made clear to New Kerr-McGee that the Legacy Liabilities precluded an arm’s-length sale of the
Chemical Business to a third party. Kerr-McGee failed to ever disclose these facts to the market.
Indeed, it was not until the filing of the Adversary Complaint in the bankruptcy proceeding that
these facts became known to the market.
98. In early April 2005, in-house counsel for New Kerr-McGee circulated a draft of
the Assignment and Assumption Agreement that was designed to “finish off” Project Focus. The
April 10 draft of the Assignment and Assumption Agreement did not include an indemnity
provision.
99. When it received the $179 million EPA demand for Manville on April 15, 2005,
however, New Kerr-McGee realized that it had not completely isolated its Legacy Liabilities in
the Chemical Business. Even following a sale or spin-off, the Chemical Business potentially
could seek contribution from New Kerr-McGee for the Legacy Liabilities. To eliminate that
risk, New Kerr-McGee put in place an indemnity in the form of the Assignment, Assumption and
Indemnity Agreement, made retroactive to December 31, 2002 (when certain of the Project
Focus transactions were purportedly consummated) to ensure that the $179 million Manville
demand would be included within its scope.
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E. New Kerr-McGee Offers A $400 Million Indemnity To Apollo To Take TheEnvironmental Liabilities
100. While the existence of the Legacy Liabilities precluded numerous potential
purchase transactions, New Kerr-McGee had extensive negotiations with Apollo Investment
Corporation (“Apollo”) regarding the purchase of the Chemical Business throughout the summer
of 2005. Apollo’s initial bid of $1.6 billion for the Chemical Business excluded all liabilities
related to wood treatment facilities, including Manville. In other words, Apollo did not want the
Legacy Liabilities which, as has been revealed in the Adversary Complaint, they determined
were a $400 to $900 million dollar problem facing the Company. To complete the transaction
with Apollo, New Kerr-McGee had considered offering Apollo a $400 million indemnity to
purchase the Legacy Liabilities, including the wood treatment facilities. Ultimately, New Kerr-
McGee decided against the sale to Apollo because of the cost of the indemnity obligation.
Instead, New Kerr-McGee pursued the Tronox IPO and subsequent Spin-Off, which would
enable New Kerr-McGee to avoid the Legacy Liabilities without any significant indemnity
obligation.
F. New Kerr-McGee And Its Officers Who Became Tronox Board MembersEngineer The IPO Fraud
101. On July 8, 2005, Lehman made a presentation to New Kerr-McGee comparing the
Apollo bid to a potential spin-off. Based on Lehman’s analysis, the Apollo bid would provide
more than $500 million in additional after-tax cash proceeds to New Kerr-McGee as compared to
a spin-off. But the Apollo deal did not allow New Kerr-McGee to offload the Legacy Liabilities,
including what Lehman termed “Unidentified Liabilities” that no knowledgeable, arm’s-length
purchaser would accept without, at a minimum, hundreds of millions of dollars in indemnities.
In effect, by choosing to proceed with the Spin-Off, New Kerr-McGee was foregoing $500
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million in cash so long as the Legacy Liabilities were eliminated as a Kerr-McGee obligation. It
did so while at the same time it was only reserving approximately $200 million for these same
obligations.
102. In fact, as has only been recently revealed in connection with the Adversary
Complaint in the bankruptcy proceeding, the due diligence performed by Apollo in connection
with its offer to purchase the Chemical Business had uncovered that the Legacy Liabilities were,
at a minimum, at least a $400 million to $900 million problem. New Kerr-McGee, including its
senior officers, knew the scope and extent of the Legacy Liabilities. They also knew that the
Chemical Business did not have sufficient assets as a stand-alone entity to support the ongoing
maintenance of those Legacy Liabilities. Indeed, New Kerr-McGee and its financial advisor,
Lehman Brothers, warned that one of the risks of the proposed transaction was that the
“[s]eparation from legacy liabilities” would be “[c]omplicated under [a] bankruptcy scenario.”
103. Nevertheless, New Kerr-McGee then determined that a spin-off of the Chemical
Business would be effectuated to protect itself from the Legacy Liabilities. This transaction
allowed New Kerr-McGee to accomplish the following goals: 1) dump the Chemical Business
together with the Legacy Liabilities; 2) avoid disclosure of the magnitude of Legacy Liabilities
that would result from third-party due diligence; 3) avoid making significant representations and
warranties regarding the Chemical Business’ assets, liabilities, business, and operations – in
particular, the Legacy Liabilities; 4) avoid expensive indemnities for the environmental and tort
liabilities that Apollo or any other arm’s-length buyer would demand; and 5) remove all
remaining impediments to a subsequent transaction that would allow New Kerr-McGee senior
executives to obtain massive windfall profits.
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104. On September 12, 2005, New Kerr-McGee incorporated the entity that would be
used for the Spin-Off –Tronox – by filing an Amended and Restated Certificate of Incorporation
with the Delaware Secretary of State.
105. On October 6, 2005, the New Kerr-McGee Board of Directors, including
Defendants Corbett and Wohleber, approved the separation of the Chemical Business through a
two-part transaction. First, New Kerr-McGee would sell a minority stake in the Chemical
Business through an IPO of the Class A common stock of Tronox. Following the IPO, New
Kerr-McGee would maintain a controlling interest in Tronox through ownership of Tronox’s
Class B common stock, which New Kerr-McGee then would distribute to its stockholders in
spring 2006.
106. As part of the transaction, New Kerr-McGee determined that it would provide
Tronox with an indemnity for only up to $100 million for environmental Legacy Liabilities.
Even then, New Kerr-McGee would indemnify Tronox for only 50 percent of certain
environmental costs actually paid above the amount reserved for specified sites for a seven-year
period following the Spin-Off.
107. In another unilateral decision, New Kerr-McGee determined that it would require
Tronox to assume $550 million in debt with the IPO – the proceeds of which would go
exclusively to New Kerr-McGee – that would saddle Tronox with more than $30 million per
year in interest expense.
108. New Kerr-McGee also decided to strip out all cash from the Chemical Business in
excess of $40 million, leaving Tronox with less cash than the amount Tronox would be required
to spend in the first year following the IPO just to service the Legacy Liabilities and debt it was
forced to assume. New Kerr-McGee knew this amount was insufficient as in each year from
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2000 to 2004, New Kerr-McGee had spent between $35 million and $126 million (net of
recovery) just on legacy environmental liabilities.
109. The terms imposed on Tronox provided New Kerr-McGee with total control over
Tronox. Projects, plans, activities and negotiations that had been approved by New Kerr-McGee
for the Chemicals Business and commenced as of the date of the IPO needed to be re-approved
following its completion. As alleged in the Adversary Complaint, based on the terms of the
overall transaction, one Tronox senior manager believed that he could not change the method by
which Tronox would take environmental reserves – which was the practice used by Kerr-McGee
and approved by E&Y – or the company risked losing whatever indemnity it had. These
constraints were designed to prevent Tronox from ever being able to collect on the $100 million
paper indemnity. At the same time, New Kerr-McGee had purported to impose on Tronox an
indemnification obligation for any misleading statements in the IPO, even though this was
effectively a Kerr-McGee transaction.
G. Materially Misleading Information Regarding Tronox Was Disseminated ToThe Market
110. In November 2005, the future Tronox management team (which included senior
Kerr-McGee personnel, Defendants Wohleber, Adams, and Mikkelson), made a series of road
show presentations to potential investors in connection with the IPO. These presentations were
prepared with the involvement of New Kerr-McGee and its investment banker, Lehman
Brothers.
111. According to the Adversary Complaint, on several occasions while preparing for
these presentations, a Lehman Brothers banker (who was responsible for marketing the IPO to
the public) drew a picture of a potted flower on a white board. He said that the flower
represented Tronox. He then drew a weed growing from the flower pot, which he said
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represented the Legacy Liabilities. The Lehman Brothers banker indicated that the weed would
choke the flower.
112. New Kerr-McGee, including its officers who would serve on the Tronox Board
(Defendants Wohleber, Adams, Mikkelson, and Rauh), knew that following extensive due
diligence, Apollo had asserted that Tronox should not go public because it could not survive as a
stand-alone company in the face of the Legacy Liabilities. Apollo’s due diligence teams had
concluded that New Kerr-McGee was attempting to offload hundreds of millions of dollars of
legacy environmental and tort claims through the sale process. This information was not
disclosed to the investing public. New Kerr-McGee needed to make sure that other potential
investors did not reach the same conclusion.
113. New Kerr-McGee also materially understated in the IPO Registration Statement
and Prospectus the reserves required for the Legacy Liabilities that it dumped on Tronox. Its
methodology for setting environmental and tort reserves was known to be inconsistent with
GAAP and industry practice. New Kerr-McGee ignored known information in setting reserves
and applied a threshold for taking a reserve that was materially higher than what was appropriate
under GAAP. As a result, the environmental and tort reserves set forth in the Registration
Statement for Tronox’s IPO were materially understated.
114. In addition, as later revealed through the bankruptcy proceedings, the Registration
Statement failed to disclose numerous wood treatment sites where a Kerr-McGee entity may
have been responsible for substantial clean-up costs similar to Manville even though New Kerr-
McGee was aware of these sites at the time of the IPO. Old Kerr-McGee and New Kerr-McGee
referred to these sites internally as the “Secret Sites.” In 2002, Old Kerr-McGee undertook a
“confidential” investigation of these sites by examining corporate records, published historical
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information about the wood treatment industry, and public property ownership records. Old
Kerr-McGee employees also made visits to the Secret Sites and were told they should not
disclose the purpose of their visit. Through this investigation, Old Kerr-McGee identified
approximately eleven additional wood treatment sites where it potentially could have liability
akin to that asserted by EPA at Manville. Based on these visits and information circulated to
them regarding the Secret Sites, New Kerr-McGee and the officers who would serve as Tronox
Board members knew or recklessly disregarded at the time of the IPO that several of these sites
were under investigation for potential remediation, and represented obligations of enormous
magnitude. These Secret Sites were never disclosed.
115. As was later revealed through the bankruptcy proceedings, New Kerr-McGee
considered doing a similar investigation shortly before the IPO regarding approximately 260
undisclosed agricultural chemical sites, 8 five undisclosed former chemical manufacturing sites,
two undisclosed former fertilizer manufacturing sites, and several other undisclosed sites. That
investigation intentionally never occurred and these sites were never disclosed in the Registration
Statement. An August 2005 New Kerr-McGee memorandum listing these sites was
subsequently created. By virtue of their positions in both Old Kerr-McGee and Tronox, the
Kerr-McGee representatives on the Tronox Board, defendants Wohleber, Adams, Mikkelson,
and Rauh, were dutibound to be fully informed regarding these sites and knew of their, or were
reckless in not knowing.
116. New Kerr-McGee went to great lengths to ensure that the true magnitude of the
Legacy Liabilities was never properly disclosed. At one point, two senior members of the New
Kerr-McGee environmental group raised concerns regarding the sufficiency of the environmental
8 These sites are identified on Appendix A.
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reserves for the Legacy Liabilities. Instead of being rewarded for their diligence, they were both
disciplined.
117. New Kerr-McGee controlled the content of the Registration Statement for the
IPO. Counsel for New Kerr-McGee’s underwriters for the IPO, Akin Gump Strauss Hauer &
Feld LLP, raised concerns regarding the sufficiency of disclosures of risk factors in the
Registration Statement. Akin Gump proposed certain changes to the disclosures yet encountered
a refusal to do so.
118. The disclosures in the Registration Statement and throughout the Class Period
regarding tort liabilities were materially misleading. The following disclosure was made in the
Registration Statement regarding lawsuits related to former wood treatment sites, identified in
the public filings as “Forest Products Litigation:”
Between 1999 and 2001, KM Chemical was named in 22 lawsuitsin three states (Mississippi, Louisiana and Pennsylvania) inconnection with former forest products operations located in thosestates (in Columbus, Mississippi; Bossier City, Louisiana; andAvoca, Pennsylvania). The lawsuits sought recovery under avariety of common law and statutory legal theories for personalinjuries and property damages allegedly caused by exposure toand/or release of creosote and other substances used in the wood-treatment process. KM Chemical has executed settlementagreements that are expected to resolve substantially all of theLouisiana, Pennsylvania and Mississippi lawsuits described above.Resolution of the remaining cases is not expected to have amaterial adverse effect on the company.
119. Defendants omitted to disclose at this time and throughout the Class Period that it
had settled these wood treatment claims for approximately $70 million prior to the IPO. This
omission was particularly significant in light of the nearly 11,000 additional claims related to
wood treatment sites that had been filed as of the time of the IPO. Although disclosing that these
claims were similar to the ones that had been resolved, there was no disclosure as to their
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potential size and no reference to the $70 million paid before the IPO to settle similar claims.
The Registration Statement for the IPO misleadingly stated: “The company has not provided a
reserve for these lawsuits because at this time it cannot reasonably determine the probability of a
loss, and the amount of loss, if any, cannot be reasonably estimated. The company believes that
the ultimate resolution of the forest products litigation will not have a material adverse effect on
the company’s financial condition or results of operations.” Tronox began reserving for these
claims in the fourth quarter of 2005 but the reserve never rose above $11 million during the
Class Period, a materially deficient amount given the claims history.
120. Based on the information provided to it during its due diligence process, Apollo’s
due diligence team from the law firm of Morgan Lewis & Bockius had concluded that New Kerr-
McGee “may be significantly under-reserved for these cases” and the “total potential exposure
could be well over $500 million.” Similarly, according to the Adversary Complaint, E&Y also
questioned the sufficiency of the tort disclosures in the Registration Statement. Specifically,
during a meeting in the first week of January 2006, E&Y challenged a New Kerr-McGee
executive regarding the accuracy of the Registration Statement in light of tort settlements in mid-
December 2005.
121. The Kerr-McGee representatives on the Tronox Board knew or were reckless in
not knowing that had there been full and truthful disclosure of the material exposures for
environmental remediation and tort claims based on the Legacy Liabilities, the IPO would not
have succeeded and Tronox could not survive.
122. On November 21, 2005, Tronox completed the IPO of its Class A Common
Stock. New Kerr-McGee, however, continued to exert control over Tronox through its majority
ownership of Tronox and the New Kerr-McGee officers who served on Tronox’s Board of
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Directors, including defendant Wohleber as Chairman of the Board. The Spin-Off was
completed on March 31, 2006 when New Kerr-McGee distributed its shares of Class B Common
Stock to New Kerr-McGee shareholders.
H. New Kerr-McGee Is BouUht For $18 Billion
123. Less than three months after New Kerr-McGee completed the Spin-Off, on June
22, 2006, Anadarko offered to acquire New Kerr-McGee for $16.4 billion in cash and agreed to
assume $1.6 billion of New Kerr-McGee’s debt. The purchase price represented a 40% premium
to New Kerr-McGee’s stock price.
124. The shareholders of New Kerr-McGee voted to approve the offer on August 10,
2006, and New Kerr-McGee Corporation was integrated into Anadarko.
125. New Kerr-McGee senior executives, including its Chairman and Chief Executive
Officer Defendant Luke R. Corbett (a primary architect of the fraud herein alleged), its CFO,
Defendant Robert M. Wohleber (who also served as Chairman of the Board of Tronox until the
completion of the Spin-Off and was an architect of the fraud), and General Counsel Defendant
Gregory F. Pilcher (another architect of the fraud herein alleged) personally pocketed over $270
million between them upon the sale to Anadarko.
126. As part of its acquisition of New Kerr-McGee, Anadarko agreed to indemnify
New Kerr-McGee’s officers and directors for acts and omissions occurring before the acquisition
date.
127. Since acquiring New Kerr-McGee, Anadarko has admitted its potential
responsibility for the Legacy Liabilities in the event Tronox should fail. In both its 2006 and
2007 Annual Reports, Anadarko stated: “Kerr-McGee could be subject to joint and several
liability for certain costs of cleaning up hazardous substance contamination attributable to the
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facilities and operations conveyed to Tronox if Tronox becomes insolvent or otherwise unable to
pay for certain remediation costs. As a result of the merger, we will be responsible to provide
reimbursements to Tronox pursuant to the [Master Separation Agreement], and we may be
subject to potential joint and several liability, as the successor to Kerr-McGee, if Tronox is
unable to perform certain remediation obligations.”
128. In its 2008 Annual Report, Anadarko similarly stated:
We may incur substantial environmental and other costsarising from Kerr-McGee’s former chemical business.
Prior to its acquisition by the Company, Kerr-McGee through aninitial public offering, spun off its chemical manufacturingbusiness to a newly created and separate company, TronoxIncorporated (Tronox). Under the terms of a Master SeparationAgreement (MSA), Kerr-McGee agreed to reimburse Tronox forcertain qualifying environmental remediation costs, subject tocertain limitations and conditions and up to a maximum aggregatereimbursement of $100 million. However, Kerr-McGee could besubject to liability for certain costs of cleaning up hazardoussubstance contamination attributable to the facilities and operationsconveyed to Tronox if Tronox becomes insolvent or otherwiseunable to pay for certain remediation costs. As a result of theacquisition of Kerr-McGee, we will be responsible to providereimbursements to Tronox pursuant to the MSA, and we may besubject to potential liability, as the successor-in-interest to Kerr-McGee, if Tronox is unable to perform certain remediationobligations.
On January 12, 2009, Tronox and certain of its subsidiaries filedvoluntary petitions to restructure under Chapter 11 of the UnitedStates Bankruptcy Code. As a result of this filing, third partiesmay seek to impose liability upon Kerr-McGee that is otherwiseattributable to Tronox due to Kerr-McGee’s status as the formerparent of Kerr-McGee Chemical Worldwide LLC, a predecessor-in-interest to Tronox. In addition, based on the informationcontained in the Tronox bankruptcy filings, it is also possible thatthird parties may pursue other claims against Kerr-McGeeassociated with the separation of Kerr-McGee’s former chemicalbusiness and the initial public offering of Tronox. Currently, weare unable to estimate the amount of these potential liabilities.
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I. Tronox Goes Bankrupt
129. Tronox was overwhelmed by the financial burdens associated with the Legacy
Liabilities and debt obligations which negatively impacted the cost and terms on which Tronox
was able to raise capital. The Legacy Liabilities also prevented Tronox from taking advantage of
favorable market conditions by participating in mergers or acquisitions in the chemical sector. In
sum, the Legacy Liabilities made it impossible for Tronox to survive.
130. On January 12, 2009, Tronox, and certain related entities filed voluntary petitions
for relief under Chapter 11, Title 11 of the United States Code, 11 U.S.C. §1101 et seq. Tronox
continues to operate as a debtor in possession pursuant to Sections 1107(a) and 1108 of the
Bankruptcy Code.
TRONOX ADMITS MULTIPLE MATERIAL ACCOUNTINGMISSTATEMENTS THROUGHOUT THE CLASS PERIOD
131. Tronox reported artificially inflated financial results during the Class Period by
knowingly or recklessly filing inaccurate financial statements with the SEC which failed to
properly reserve for environmental remediation and tort liabilities. The recording of a reserve is
a liability expense and represents a charge to income. The higher the reserve the lower the
reported income. By failing to record the appropriate liability expenses for the Company’s
environmental remediation and tort liabilities, Tronox both understated its liabilities and
overstated its reported income.
132. The Tronox Individual Defendants were motivated to understate Tronox’s
reserves throughout the Class Period. Any material deviation from the environmental reserve
balance that had been reported in connection with the IPO would have caused an immediate and
devastating adverse market reaction, severely harmed Tronox’s ability to continue its normal
business activities, and generated significant litigation. Yet, New Kerr-McGee’s and Tronox’s
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reserves were materially understated throughout the Class Period and a knowing violation of
GAAP, as alleged herein, because the Defendants ignored known information in setting reserves
and applied a threshold for taking reserves that was materially higher than what is permitted
under GAAP. In the Registration Statement, Tronox misleadingly stated that, in accordance with
applicable accounting rules, “when it is probable that a liability has been incurred and reasonable
estimates of the liability can be made” it established a reserve. The Tronox Individual
Defendants who signed the Registration Statement knew or recklessly disregarded the fact that
Kerr-McGee had not taken reserves in accordance with this policy. The Registration Statement
incorporated the financial results of the chemicals segment of Kerr-McGee for the years ended
December 31, 2001, 2002, 2003, and 2004 and reflected reserve balances as follows:
Kerr-McGee Chemicals SegmentEnvironmental Remediation Reserve Balances
(in millions)
Date ReserveDecember 31, 2001 162.3December 31, 2002 229.3December 31, 2003 219.6December 31, 2004 215.8
133. These recorded reserve balances remained essentially consistent in years 2002-
2004. This pattern was repeated during the Class Period when Tronox recorded remarkably
similar environmental remediation reserve balances as indicated on the following chart:
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Tronox IncorporatedEnvironmental Remediation Reserve Balances
(in millions)
Date ReserveDecember 31, 2004 215.8November 2005 239.4December 31, 2005 223.7March 31, 2006 216.5June 30, 2006 221.0September 30, 2006 242.2December 31, 2006 223.9March 31, 2007 221.1June 30, 2007 214.3September 30, 2007 203.6December 31, 2007 188.8March 31, 2008 181.8June 30, 2008 183.8September 30, 2008 170.7
Throughout the years 2002-2008, the same improper reserving methodology was employed by
Kerr-McGee and then Tronox. The terms of the Master Separation Agreement effectively
precluded Tronox from changing reserving methodologies by placing at risk Kerr-McGee’s
indemnity if it did so.
134. The recorded reserve balances throughout the Class Period were known or
recklessly disregarded to be materially deficient for several reasons. As of the time of the IPO
Tronox ascribed a zero reserve to the Manville, New Jersey wood-treatment site, even though the
Defendants knew that a significant and material demand had been made upon Tronox, LLC for
environmental remediation and reimbursement of in excess of $100 million by the EPA.
Beginning in the third quarter of 2006, Tronox began recording a reserve for the Manville site in
the amount of $35 million and did so throughout the remainder of the Class Period, but knew or
recklessly disregarded that this reserve was materially deficient in light of the EPA demand.
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Accordingly, Defendants knew that the probable and reasonably estimable reserve for Manville
was materially larger than what was recorded.
135. The Defendants also knew of or recklessly disregarded in determining the
foregoing reserve balances the existence of the Secret Sites, which were wood-treatment sites
similar to Manville, as well as the related Forest Products Litigation. Appropriate reserves for
these obligations would have been material in amount.
136. Even where no reserve was recorded as with the Manville site through the third
quarter of 2006, and the Secret Sites, Tronox was nonetheless required by GAAP to provide
meaningful disclosure to users of its financial statements as to the potential range of a reserve
balance that may become necessary for these potential obligations. The results set forth in the
financial statements issued throughout the Class Period failed to provide adequate disclosures as
to such potential liabilities. Tronox essentially had continued the flawed and improper reserving
methodology that had been employed pre-Class Period by the Kerr-McGee chemicals businesses
and approved by Defendant E&Y which had the effect of deliberately understating the reserve.
These improper reserving policies were simply carried over to Tronox and used throughout the
Class Period to distort Tronox’s financial results and deliberately misinform users of its financial
statements.
137. On May 5, 2009, Tronox announced that its previously issued financial statements
for the years ended December 31, 2005, 2006, and 2007, and the first three quarters of 2008, the
Selected Consolidated Financial Data for 2003 and 2004 (included in the Registration Statement)
were materially misstated should no longer be relied upon because the Company failed to set
aside adequate environmental remediation and other liability reserves.
138. The falsely reported financial results of Tronox for fiscal years 2005 through 2007
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and the first three quarters of 2008 were included in the 10-Qs, 10-Ks and press releases
disseminated by defendants to the public during the Class Period. Defendants knew or recklessly
disregarded that the Company had pervasive and material errors in the calculation of its
environmental remediation and tort liability reserves which caused its financial results to be
materially misstated.
ADDITIONAL SCIENTER ALLEGATIONS AS TO THE INDIVIDUALLY NAMEDDEFENDANTS WHO SERVED ON TRONOX’S BOARD OF DIRECTORS
139. Each Tronox Individual Defendant knew or recklessly disregarded the extent of
the financial obligation which the Legacy Liabilities represented and that Tronox had recorded
inadequate reserves for these exposures. Each such defendant was motivated to conceal and/or
understate these liabilities, in order to allow Tronox to maintain the illusion of a company with a
successful business not unduly burdened by the liabilities imposed upon it by Kerr-McGee.
140. As alleged herein, Defendants acted with scienter in that they knew and/or
recklessly disregarded that the public documents and statements issued or disseminated in the
name of the Company were materially false and misleading; knew or recklessly disregarded that
such statements or documents would be issued or disseminated to the investing public; and
knowingly and substantially participated or acquiesced in the issuance or dissemination of such
statements or documents as primary violations of the federal securities laws. As set forth
elsewhere herein in detail, Defendants, by virtue of their receipt of information reflecting the true
facts regarding Tronox, their control over, and/or receipt and/or modification of Tronox’s
allegedly materially misleading misstatements and/or their associations with the Company which
made them privy to confidential proprietary information concerning Tronox, made materially
misleading statements and/or failed to disclose material information required to render their
statements not misleading.
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141. Defendants knew and/or recklessly disregarded the falsity and misleading nature
of the financial information which they caused to be disseminated to the investing public. The
ongoing fraudulent acts described in this Complaint could not have been perpetrated over a
substantial period of time, as has occurred, without the knowledge and complicity of the
personnel at the highest level of the Company, including the Tronox Individual Defendants
142. The Tronox Individual Defendants had the opportunity to perpetrate the fraud
described herein because they included the most senior officers and, in all instances, were
directors of Tronox, and at various times they issued statements on behalf of Tronox.
143. In addition to the facts showing their intentional and/or reckless application of a
reserving policy which materially understated the required environmental remediation and tort
liability reserve in violation of the Company’s own stated reserving policy and GAAP, several
confidential witnesses (“CW”) have confirmed that the Tronox Individual Defendants acted
knowingly and/or recklessly with regard to the fraud herein alleged.
A. Reasons For The IPO Fraud
144. The Tronox Individual Defendants knew or recklessly disregarded that with the
burden of the Legacy Liabilities, Tronox would ultimately not be able to survive. CW1, a
Technical Specialist II in Electron Microscopy and Analytical Chemistry at Kerr-McGee and
Tronox from February 2001 through October 2008, stated that Kerr-McGee’s senior
management, including defendant Corbett, would not permit Tronox “to IPO unless we took on
all those liabilities. Specifically, she stated that it was in Defendant Corbett’s and the other “big
wigs” interests “to get their millions of benefit and leave Tronox, the red headed step child, with
[the] chemical liabilities.” CW1 recounted a meeting at the Tech Center in Oklahoma City that
she attended right before the IPO where senior management, including David Marshall, the
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director of Research & Development and Defendant Thomas Adams stated that “is the only way
we will get [to] IPO.” CW 1 stated that during this meeting concern was raised that, “We don’t
know how we’re going to make it (after the IPO) but we’ll give it a shot.” Concern was also
raised that Tronox could not survive paying its bills. CW1 further stated that right after Tronox
was spun off from Kerr-McGee, it was discussed throughout the Company that the Legacy
Liabilities “would probably be the death of Tronox.” CW 1 further confirmed that “spinning off
Tronox was the only way that Anadarko would buy Kerr-McGee because they would not take
Kerr-McGee’s chemical division. She reiterated, “the only way Anadarko would buy the Oil and
Gas business was if they got rid of the chemical business.” CW1 said that the reason why the
chemical business could not be sold was that no one wanted to take on all the liabilities they had
because it was “too much for one tiny company” and that “Kerr-McGee purposely gave those
liabilities to Tronox.”
145. CW2, an Environmental Manager and Business Manager for the Health, Safety,
and Environmental Group at both Kerr-McGee and Tronox between 1984 and 2008 confirmed
that there was “definitely a deliberate effort to dump Kerr-McGee’s legacy liabilities onto
Tronox.” He explained, “that’s how they cleaned up Kerr-McGee Oil and Gas, was to put the
liabilities into Kerr-McGee Chemical and that made shareholder value for Kerr-McGee stock.”
CW2 also confirmed that “Luke [Corbett] and Wohleber were very heavily involved” in that
decision.
146. CW7, a Vice-President, Treasurer and Manager at Kerr-McGee and Tronox from
the early 1980s through July 2008, who reported directly to Defendant Wohleber and was a
member of the “Project Focus” Team, explained that Apollo refused to purchase Kerr-McGee’s
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chemical business because “it didn’t want to take enough liabilities to the price Kerr-McGee
wanted.”
147. CW6 worked in the Research & Development Group at Tronox from 1996
through 2007. This witness reported that the legacy liability fraud was common knowledge
within the Company. He stated, “We and other employees always believed that the legacy
liabilities were understated. We could not prove it but it was assumed. We knew when the
offers to sell the chemical business unit prior to the IPO were unsuccessful – this confirmed our
belief about the legacy liabilities being the cause. We knew what price the Company wanted to
receive out of the sale because it was disclosed and talked about internally and when the private
sale did not occur the reason was clearly the size and scope of the legacy liabilities – no buyer
who knew the extent of the legacy liabilities wanted to take on the risk of these liabilities and
meet the company’s price – so no private sale was ever possible.” He further stated that, “the
Company did not fail because of business conditions or the economy, it failed because of the
extent of the legacy liabilities.”
148. CW9 explained that the Tronox spin off occurred “because of discussions
between Corbett and the CEO of Anadarko” and that these discussions took place “well before it
all went through.” This was confirmed by CW 1 who confirmed that “spinning off Tronox was
the only way that Anadarko would buy Kerr-McGee because they would not take Kerr-McGee’s
chemical division.” She reiterated, “[t]he only way Anadarko would buy the Oil and Gas
business was if they got rid of the chemical business.”
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B. Fraud In The Environmental Remediation Reserve
149. The Tronox Individual Defendants knew or recklessly disregarded the fact that
Tronox materially under-reserved for its environmental remediation obligations and reported
reserves in its financial statements that did not comply with applicable accounting rules. The
reported reserves were the product of a methodology that deliberately failed to recognize the
probable and reasonably estimable costs to be incurred by Tronox. Implementation of this
improper reserving methodology allowed Tronox to report income in each of the quarters during
the Class Period that was materially greater than it would have been had proper reserves been
recorded. The Tronox Individual Defendants, as a result of their extensive history with Kerr-
McGee, were fully aware that the issue of environmental remediation liabilities and reserves was
a constant source of concern within Kerr-McGee given its lengthy history in the oil and gas and
chemicals business, especially in the face of increasing legislative efforts since the passage of
CERCLA to address the problem associated with environmental pollution. These officers of
Kerr-McGee’s chemicals subsidiaries and the company’s controller had repeatedly been required
to deal with this issue, respond to inquiries from Kerr-McGee’s auditor regarding this subject,
and provide information necessary to formulate the quarterly reserve number. Each of these
individuals understood that each dollar of recorded reserves represented less reportable income.
Thus, they were constantly motivated and encouraged to find means to “manage” the reserve in
such a way as to ensure that, in light of cash flow, the reserve would never create a dramatic
change in income. In their capacities as officers of chemical businesses within Kerr-McGee and
as controller, these defendants were aware of Project Focus and the efforts to sell the chemical
subsidiaries to third parties.
150. According to CW3, who served as Vice President for Human Resources for Kerr-
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McGee Chemicals and Tronox, LLC in 2004 and 2005, and whose responsibilities included
scheduling meetings and facility visits, there were fourteen entities that expressed initial interest
in acquiring the chemicals businesses. In each instance, CW3 was aware that all complained
about the Legacy Liabilities being included in any transaction, including liabilities that
seemingly had no connection to the chemicals businesses, but related to gas stations, oil and gas
drilling sites, and oil terminals. According to CW3, the policy of Kerr-McGee was to record a
reserve only upon receipt of a specific demand for payment by way of letter or lawsuit and that
the amount of the demand had to be specific before it was to be reserved for. CW3 confirmed
that Defendants Adams, Mikkelson, and Rowland met with prospective purchasers of the
chemicals businesses in 2005. These Defendants were also aware that no transaction was
consummated with any of these entities and that the deal breaker was the Legacy Liabilities.
151. CW4 served at Kerr-McGee’s chemicals business from February 2004 until
March 2006, and was an executive assistant to defendant Mikkelson. According to CW4,
Mikkelson “prepared financial documents which were earnings related and produced documents
that were intentionally done wrong. Things weren’t what they appeared to be. Mikkelson
changed financial documents and did it by herself.” CW4 stated that she believed this to be true
based on her own observations and comments made to her by other Tronox finance department
accountants. CW4 identified Joe Regan as an accountant who had conflicts with Mikkelson
about the accuracy of financial reporting done by Mikkelson, including with regard to
environmental reserves. At one point CW4 was instructed by Mikkelson not to give any
financial documents to Regan. CW4 stated that other Tronox accounting personnel also believed
that the Tronox accounting department was generating inaccurate financial information,
including an individual responsible for Sarbanes-Oxley compliance issues. At least four or five
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financial department accountants commented to CW4 that the financial documents were wrong
and that changes made by Mikkelson were “illegal.” CW4 stated that she was aware in early
2005 of documents reflecting approximately 260 undisclosed sites where Tronox had
environmental liabilities. These sites were kept top secret, according to CW4, and the
documents referring to them were copied to Defendants Adams and Mikkelson. According to
CW4, ‘I knew something was wrong when Tom Adams walked by and his assistant would cover
these documents up.”
152. CW9 was a Director of Financial Services at Kerr-McGee and Tronox from 1976
through October 2008 who reported directly to Defendant Mikkelson and was a member of the
Project Focus team. He stated that Tronox was “very under-reserved” as of September 2005. He
explained that the Company was under-reserving because “it was a new company trying to play
the quarterly earnings game with the ratings agencies” and that there was “a lot of pressure on
the officers to value the reserves at the minimum value.” CW9 also stated that a number of
people within the SEA group were “concerned and didn’t agree with the [reserve] values being
produced.”
153. CW10 was a Controller and Manager of Accounting at Tronox from June 2006
through May 2008. He explained that the debts and liabilities that Tronox had on its books were
“over a billion [dollars].” According to CW10, this amount included “environmental
contamination liabilities” from Kerr-McGee that “went as assets and liabilities,” and included
“plants in New York, Boston [and] all over the West.” CW10 stated that the Henderson, Nevada
site alone had liabilities of “$400-$500 million [of remediation costs to pay] over 30 years.”
This witness also stated that the Henderson liability “probably shouldn’t have gone to Tronox”
because it was not related to the chemical business.” CW10 stated that there “absolutely” was
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concern over potential liabilities similar to those of the Manville, New Jersey site and that
Defendant Mikkelson and the Board of Directors “would have been aware of them.”
154. The threat represented by the environmental liabilities from the Manville site
raised significant concern about Tronox’s liabilities for similar wood treatment sites. CW2 who
had served as a corporate witness in numerous lawsuits brought against both Kerr-McGee and
Tronox regarding environmental liabilities, stated that Kerr-McGee conducted a review of other
wood treatment sites after the Manville problem erupted in the late 1990s. The review was
ordered by the Vice President of the Environmental Group, George Christensen. CW5
confirmed that Manville “came on the radar” in 1999 or 2000 and that it “no doubt ... raised
concerns about cleanup costs at other similar sites as well.” CW 10 stated that there “absolutely”
was concern over potential liabilities similar to those of the Manville site and that Defendant
Mikkelson and the Board of Directors “would have been aware of them.”
155. CW3, who also worked closely with the Company’s accounting department on the
costs for certain legacy liability projects that were under his control, made clear that the
Company was “not on the leading edge” in its application of relevant accounting principles for
environmental reserves. According to CW3 other companies in the chemical business were
“more forward process” than Kerr-McGee and Tronox. For example, CW3 explained that while
attending a conference for International Paper, he learned that as soon as Kerr-McGee’s
competitors “had a site identified, for example, a gas station, history would show that costs
associated with a gas station are typically $1 million. They would therefore already accrue for
$1 million once the site has been identified. Kerr-McGee’s view, on the other hand, would be a
more conservative view from a fiscal liability standpoint. That view is, ‘If I don’t know what it
is, I can’t estimate it.’ The thought [at the Company] would be, if we need to do a study we will
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accrue for the dollars for the study because that much is known, but we are not going to account
for things we don’t know.” CW3 explained that Kerr-McGee and Tronox followed this practice
because “from a balance sheet standpoint it benefited them. You’d have a higher net worth if
you did it the way Kerr-McGee did it.”
156. CW5 was an analyst in the Safety and Environmental Affairs Group (“SEA”) at
Kerr-McGee and Tronox who managed the analytical and hydrological data for over 40
environmental remediation projects, including refining, chemical, and nuclear sites, and
specifically, the Company’s legacy sites, from November 1997 through October 2008. She
stated that the legacy sites were a multi-million dollar expense for the company every year.
CW5 added that the annual budget for remediating those cites was $60 - $70 million per year
when the legacy liabilities were held by Kerr-McGee and then suddenly became $30-$35 million
when they were transferred to Tronox. CW5 explained that Tronox simply did not have the
necessary money to remediate the legacy sites. Accordingly, that is why the budget at Tronox
for remediation was approximately half of what it had been at Kerr-McGee, not that the amount
of money necessary for remediation per year was in reality any smaller.
157. CW5 also confirmed that Kerr-McGee officers were aware of the costs associated
with environmental projects at the legacy sites because “of the huge invoices” associated with
the site remediation. She explained that “it would not be uncommon, for example at the
Cushing, OK site, to get a monthly invoice from VFL [a consultant] for over a million dollars...
This would go on for months and all the project managers and program managers would all have
a signature limit on invoices.” According to CW5, those project and program managers would
need to get approval on such large invoices by the Company’s senior most executives. In fact,
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CW5 stated that “she did not know how Corbett and all of the other executives could have
avoided awareness of these ‘mammoth invoices.’”
158. CW12 worked in the SEA Group on the environmental/technical side at both
Kerr-McGee and Tronox. He started in the hydrology group in SEA then held a staff position in
operations and at Tronox he had site monitoring and regulatory oversight responsibility and
managed closed locations. He stated that he left Tronox “because it looked like the company
would not make it – it did not look to be viable. It is tough to start a new chemical company with
extensive liabilities – especially with all of the legacy liabilities such as gas stations, oil terminals
and the like that K-M dumped on Tronox – it was common knowledge in the company that the
legacy liabilities being dumped on Tronox were set up for K-M to merge with Anadarko.”
CW12 stated regarding undisclosed sites: “I had knowledge that there were wood treatment sites
referred to as ‘secret sites.’ I knew this from a hydrologist. I am certain that he went to one of
these sites specifically Jackson, MS because he told me so. We had worked together and he was
a friend. He told me about this on an airplane trip. There were ten or less members of the
hydrologist group that went out to these secret sites. By secret sites it was meant that they were
not listed or disclosed regularly on the company’s chain of sites. The investigations were
comprised basically of a Phase 1 environmental technical evaluation including a visible walk-
over, including tanks and the like and sampling. There was also research ongoing as to whether
these sites even belonged to us. Tom was going to these sites from 1999 to 2001. I was not
aware who specifically requested Tom to go or what he learned from his reconnaissance.”
Regarding undisclosed agricultural chemical sites, CW12 stated: “I was aware that there were
some ag-chemical sites that had been investigated but not disclosed. The sites that I was aware
of were in Indiana but not all of these sites were in Indiana. I had a wood treatment site in
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Indianapolis which was closed in 2001. I knew about the undisclosed ag-chemical sites from a
fellow SEA employee who I had a conversation with about them.”
159. With regard to reserving, CW12 offered the following information: “One practice
that I was not comfortable with involved our budgeting process. I was given an annual budget
for costs and reserves. I was asked to sign-off monthly on a reserve number that I did not
allocate for my environmental locations. The reserve number that I was given would have fallen
short of what costs were needed. I did not know how the reserve I was given was calculated. At
any one time my budget and its overview was comprised of 5-6 sites which I was responsible for.
Certain regulatory requirements stipulated a 30 year monitoring program. The company
approach to reserving was to make the environmental reserves as minimal as possible. The
general statement given by the company was that there was not a lot of money for the clean-up. I
was not comfortable with being asked to sign-off on sites which were to be monitored monthly
on a budget with the reserve number already provided and my knowing that the costs were going
to be much higher.”
C. Special Compensation Arrangements For Tronox Executives And CertainEmployees
160. Several confidential witnesses noted that there were special compensation
arrangements in place for the Tronox officers to encourage them to serve the interests of Kerr-
McGee in completing the Tronox transaction. CW6 stated that “Tronox management were paid
higher and extra salary comparable to others in the chemical industry and especially for
executives living in Oklahoma City - they were issued stock and paid high bonuses. It was a
form of hush money coming from Kerr-McGee to stay the course and conform - employees of
the Company felt this way that the Company’s leadership at the VP level was being overly
compensated and manipulated by Kerr-McGee to look the other way.” CW6 elaborated that,
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“the Company’s executives were of the kind that could be intimidated into doing what they knew
they should not be doing. The Company was losing money from the onset of its existence even
when things were going good yet high bonuses were always being paid. Stock awards, high
salaries, and high bonuses were the motivation for management to go along. Employees knew at
the very onset of the IPO that due to the legacy liabilities being loaded onto Tronox that the
company was doomed to fail and would go bankrupt.”
161. In Tronox’s Proxy Statement pursuant to Section 14(A), filed April 10, 2006, the
Company disclosed individual compensation information for the fiscal years ended
December 31, 2005 and 2004, summarized in the following chart, with respect to Defendants
Adams, Rowland, and Mikkelson. This chart reflects massive increases in compensation for the
Tronox executives from 2004 through 2005, representing in effect a commercial bribe to induce
these individuals to assume senior management positions with Tronox in the face of their
knowledge of the massive burdens represented by the Legacy Liabilities.
[CHART APPEARS ON FOLLOWING PAGE]
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SUMMARY COMPENSATION TABLEAnnual Long-Term
Compensation Compensation AwardsName and Year Salary9 Bonus10Restricted No. of All OtherPrincipal Position Stock Securities Compensation
Award(s)11 , Underlying12 Options13
Thomas W. Adams, 2005 $365,519 $707,097 $1,324,350 116,650 $27,943Chief Executive 2004 285,600 169,513 81,625 5,155 23,780OfficerMarty J. Rowland, 2005 231,694 412,341 392,256 34,600 42,186Chief Operating 2004 189,137 74,127 21,799 1,357 55,185OfficerMary Mikkelson, 2005 212,594 397,135 309,612 27,300 13,616Senior Vice 2004 131,592 85,648 --- --- 7,507President
162. CW6 further explained that financial statement manipulation was also related to
compensation issues. “I believe strongly that the company’s financial statements were also
manipulated in order that senior managers would make their bonuses. Their bonuses were tied to
the ‘SCORE’ numbers – SCORE was a compensation program whose metrics were tied to the
business for instance how the year finished performance-wise; and how the Company did against
competition and others. The motivation to manipulate the financials by management lay in the
magnitude of the differences in bonuses.”
9 Salary for 2005 includes the following amounts paid on Tronox’s payroll: $56,634 for Mr.Adams; $231,694 for Mr. Rowland; and $28,034 for Ms. Mikkelson. The balance of theamounts for 2005 was paid by companies affiliated with Tronox. Ms. Mikkelson was hired byKerr-McGee in February of 2004.
10 Includes bonuses paid under the Kerr-McGee 2005 Success Bonus Program in the amountsof $335,000 for Mr. Adams; $220,704 for Mr. Rowland; and $202,219 for Ms. Mikkelson.
11 Restricted stock grants are valued based on the closing price of common stock on the NYSEon the grant date.
12 For 2005, restricted stock includes grants of Tronox stock valued as follows: $1,139,880 forMr. Adams; $329,820 for Mr. Rowland; and $241,500 for Ms. Mikkelson.
13 For 2005, stock option amounts include grants of Tronox stock options as follows: 102,200for Mr. Adams; 29,600 for Mr. Rowland; and 21,700 for Ms. Mikkelson.
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163. CW7, who worked in IT server support, and had started at Kerr-McGee in 1989
and was released by Tronox on October 8, 2008, related information about special compensation
for the Tronox CEO: “I found it incredible to find out that [defendant] Tom Adams, our CEO,
was offered a bonus if he could keep the company alive for one year after the IPO. This was
common knowledge in our IT group which had 50-60 employees and was also known at the
Technical Center. This issue bothered a lot of people and it was talked about regularly. I first
heard about it from others in my department perhaps several months after the Company’s IPO in
November 2005.”
164. CW 11 was a Contract Specialist in the SEA group who started at Kerr-McGee in
1987, transitioned to Tronox, and was laid off in October 2008. The reserve setting process
would begin with SEA. Her responsibilities included managing environmental work orders,
contracts with outside vendors for environmental assessment and remediation, and insurance.
She stated that “there were selective executives and employees who were rewarded and given
extra monies just after the IPO to joining Tronox. I was given 25% of my annual salary to join
Tronox. I was sworn to secrecy not to reveal this information and was asked to sign a document
to keep the bonus money confidential.
D. Motive And Opportunity Of Defendants Corbett, Wohleber and Pilcher ToPerpetrate The Fraudulent Scheme
165. Defendants Corbett, Wohleber and Pilcher also had both motive and opportunity
to perpetrate the fraudulent scheme herein alleged. As explained above, Kerr-McGee was able to
pass its environmental remediation and related tort liabilities onto Tronox and generate in excess
of $500 million in cash for itself from the IPO. Additionally, Kerr-McGee was thereafter able to
sell itself within just three months after the IPO to Anadarko for $18 billion and in the process
richly reward key architects of the fraud. Defendants Corbett, Wohleber and Pilcher each had a
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huge financial stake in the sale of Kerr-McGee to Anadarko which, as alleged more fully above,
would not have occurred had Kerr-McGee retained the hundreds of millions of dollars in
environmental remediation liabilities, which the Legacy Liabilities represented.
Specifically, according to Kerr-McGee’s Form DEFM14A filed with the SEC on July 12, 2006,
under the heading “Interests of the Company Directors and Executive Officers in the Merger,”
Defendants Corbett, Wohleber and Pilcher reaped more than $270,019,216.40 as a result of the
sale of Kerr-McGee to Anadarko. As the following chart shows, Defendant Corbett profited by
more than $237,739,053.50, Defendant Wohleber profited by more than $26,018,423.30 and
Defendant Pilcher profited by more than $32,184,589.60. Accordingly, these Defendants were
highly motivated to perpetrate the fraudulent IPO and ensuing Spin-Off in order to cleanse Kerr-
McGee of the Legacy Liabilities prior to the sale to Anadarko.
Corbett Wohleber PilcherUnvested Stock $19,352,822.00 $5,729,409.80 $3,424,653.60Options
(447,982 shares x (122,738 shares x (73,192 shares x$43.20 ($70.50-27.30) $46.68) ($70.50-23.82) $46.79 ($70.50-23.71)
Payout $8,984,500.00 $2,599,000.00 $1,486,800.00Retirement Payout $5,595,055.00 n/a n/aSeverance $9,623,253.00 $3,466,494.00 $3,020,889Prorated Bonus $1,035,500.00 $323,775.00 $293,071.00Lump Sum $3,313,178.00 n/a n/a
(plus office space and$60 k secretary)
Retirement $43,745,842.00 $8,434,373.00 $6,169,418.00BenefitsSale of Shares $127,949,253.50 $452,821.50 $15,019,108BeneficiallyOwned (2,404,709 shares - (129,161 shares - (286,229 shares -
447,982 shares = 122,738 shares = 6,423 73,192 shares =1,956,727 shares x shares x $70.50) 213,037 shares x$70.50) $70.50)
TOTAL $219,599,403.50 $21,005,873.30 $29,413,939.60
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GAAP VIOLATIONS
166. The financial statements issued by Tronox during the Class Period were not
prepared in conformity with GAAP despite representations to the contrary, nor was the financial
information a fair presentation of the results of the Company’s operations due to the Company’s
improper accounting for environmental remediation liabilities and tort claim reserves.
167. The representations by Defendants that Tronox’s financial statements were
prepared in accordance with GAAP were materially false and misleading because the Defendants
engaged in fraudulent accounting practices which materially understated the environmental
remediation and related tort costs associated with the Legacy Liabilities. Tronox’s restatement
announcement has admitted that there were GAAP violations.
168. GAAP are those principles recognized by the accounting profession as the
conventions, rules and procedures necessary to define accepted accounting practice at a
particular time. Regulation S-X (17 C.F.R. §210.4-01(a) (1)) states that financial statements
filed with the SEC which are not prepared in compliance with GAAP are presumed to be
misleading and inaccurate. Regulation S-X requires that interim financial statements must also
comply with GAAP, with the exception that interim financial statements need not include all
disclosure which would be duplicative of disclosures accompanying annual financial statements.
17 C.F.R. §210.10-01(a).
169. The responsibility for preparing financial statements that conform to GAAP rests
with corporate management as set forth in AU § 110.03 of the Public Company Accounting
Oversight Board (“PCOAB”) Standards and Related Rules:
The financial statements are management's responsibility....Management is responsible for adopting sound accounting policiesand for establishing and maintaining internal controls that will,among other things, initiate, record, process, and report
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transactions (as well as events and conditions) consistent withmanagement's assertions embodied in the financial statements.The entity's transactions and the related assets, liabilities, andequity are within the direct knowledge and control ofmanagement.... Thus, the fair presentation of financial statementsin conformity with [GAAP] is an implicit and integral part ofmanagement's responsibility.
170. Tronox’s disclosure that its financial statements included in the Company’s
Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K filed with the SEC during
the Class Period should no longer be relied upon constitutes an admission that each of the
Company press releases and Forms 10-K and 10-Q issued during the Class Period were
materially false and misleading when issued. Pursuant to GAAP, as set forth in Statement of
Financial Standards (“SFAS”) No. 154, the type of restatement announced by Tronox was to
correct for material errors in its previously issued financial statements. See SFAS 154 ¶¶2(h),
25-26. The restatement of past financial statements is a disfavored method of recognizing an
accounting change as it dilutes confidence by investors in the financial statements, it makes it
difficult to compare financial statements and it is often difficult, if not impossible, to generate the
numbers when restatement occurs. Thus, financial statements should only be restated in limited
circumstances. Additionally, under SFAS 16, Prior Period Adjustments, restatements are only
permitted – and are required – for material accounting errors or fraud. AU §316 of the PCAOB
Standards and Related Rules defines fraud as “an intentional act that results in a material
misstatement in financial statements that are the subject of an audit.”
171. Due to its accounting improprieties, the Company presented its financial results
and statements in a manner which violated GAAP, including the following fundamental
accounting principles:
a. the principle that interim financial reporting should be based upon the
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same accounting principles and practices used to prepare annual financial statements was
violated (APB No. 28, ¶10);
b. the principle that financial reporting should provide information that is
useful to present and potential investors and creditors and other users in making rational
investment, credit and similar decisions was violated (FASB Statement of Concepts No. 1, ¶34);
c. the principle that financial reporting should provide information about the
economic resources of an enterprise, the claims to those resources, and effects of transactions,
events and circumstances that change resources and claims to those resources was violated
(FASB Statement of Concepts No. 1, ¶40);
d. the principle that financial reporting should provide information about
how management of an enterprise has discharged its stewardship responsibility to owners
(stockholders) for the use of enterprise resources entrusted to it was violated. To the extent that
management offers securities of the enterprise to the public, it voluntarily accepts wider
responsibilities for accountability to prospective investors and to the public in general (FASB
Statement of Concepts No. 1, ¶50);
e. the principle that financial reporting should provide information about an
enterprise’s financial performance during a period was violated. Investors and creditors often
use information about the past to help in assessing the prospects of an enterprise. Thus, although
investment and credit decisions reflect investors’ expectations about future enterprise
performance, those expectations are commonly based at least partly on evaluations of past
enterprise performance (FASB Statement of Concepts No. 1, ¶42);
f. the principle that financial reporting should be reliable in that it represents
what it purports to represent was violated. That information should be reliable as well as
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relevant is a notion that is central to accounting (FASB Statement of Concepts No. 2, ¶¶58-59);
g. the principle of completeness, which means that nothing material is left
out of the information that may be necessary to insure that it validly represents underlying events
and conditions was violated (FASB Statement of Concepts of No. 2, ¶79); and
h. the principle that conservatism be used as a prudent reaction to uncertainty
to try to ensure that uncertainties and risks inherent in business situations are adequately
considered was violated. The best way to avoid injury to investors is to try to ensure that what is
reported represents what it purports to represent (FASB Statement of Concepts No. 2, ¶¶95, 97).
A. Specific GAAP Relating To Reserve Calculations Violated By Defendants
172. In preparing the financial statements which Tronox has now admitted were
materially misstated, defendants violated the following specific provisions of GAAP.
B. SFAS 5
173. GAAP provides that an estimated loss from a loss contingency such as
environmental remediation costs “shall be accrued by a charge to income” if: (i) information
available prior to issuance of the financial statements indicated that it is probable that an asset
had been impaired or a liability had been incurred at the date of the financial statements; and (ii)
the amount of the loss can be reasonably estimated. SFAS No. 5, at ¶8. SFAS No. 5, at ¶10 also
requires that financial statements disclose contingencies when it is at least reasonably possible
(i.e., more than remote) that a loss may have been incurred. The disclosure shall indicate the
nature of the contingency and shall give an estimate of the possible loss, a range of loss or state
that such an estimate cannot be made. The SEC considers the disclosure of loss contingencies to
be so important to an informed investment decision that it promulgated Regulation S-X, which
provides that disclosures in interim period financial statements may be abbreviated and need not
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duplicate the disclosure contained in the most recent audited financial statements, except that,
“where material contingencies exist, disclosure of such matters shall be provided even though a
significant change since year end may not have occurred.” 17 C.F.R. §210.10-01.
C. FIN 14
174. Guidance for SFAS 5 is provided in FASB Interpretation No. 14 (“FIN 14”).
Contrary to the reserving methodology employed by Tronox, FIN 14 makes clear that accrual of
a loss is not to be delayed until only a single amount can be reasonably estimated.
175. Furthermore, FIN 14 indicates that disclosure is required of the nature of the
contingencies that exist when the reasonable estimate of a loss is a range and that there should be
disclosure of the nature of the contingency and the additional exposure to loss if there is at least a
reasonable possibility of loss in excess of the amount accrued. In numerous instances Tronox
failed to disclose such additional exposure to loss in circumstances where there was a reasonable
possibility of loss in excess of the accrual.
D. SOP 96-1
176. Further guidance as to reserving requirements for environmental conditions is set
forth in Statement of Position 96-1 (“SOP 96-1”):
Statement of Position 96-1,Environmental Remediation Liabilities, Recognition of
Environmental Remediation Liabilities
Overall Approach
.105 FASB Statement No. 5, Accounting forContingencies, requires the accrual of a liability if (a) informationavailable prior to issuance of the financial statements indicates thatit is probable that an asset has been impaired or a liability has beenincurred at the date of the financial statements and (b) the amountof the loss can be reasonably estimated.
* * *
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.114 . . . [T]he components of the liability that can bereasonably estimated should be viewed as a surrogate for theminimum in the range of the overall liability. . . . This lack ofability to quantify the total costs of the remediation effort,however, should not preclude recognition of the estimated cost ofthe RI/FS [remedial investigation and feasibility study]. In thiscircumstance, a liability for the best estimate (or, if no bestestimate is available, the minimum amount in the range) of the costof the RI/FS and for any other component remediation coststhat can be reasonably estimated, should be recognized in theentity’s financial statements. (Emphasis added).
E. SAB No. 92
177. SEC Staff Accounting Bulletin No. 92 (“SAB No. 92”), Accounting and
Disclosures Relating to Loss Contingencies, provides additional guidance regarding appropriate
disclosure for loss contingencies such as environmental remediation obligations. As relevant
here, SAB No. 92 provides as follows:
Question 5: What financial statement disclosures should befurnished with respect to recorded and unrecorded product orenvironmental liabilities?
Interpretive Response: Paragraphs 9 and 10 of SFAS 5 identifydisclosures regarding loss contingencies that generally arefurnished in notes to financial statements. The staff believes thatproduct and environmental liabilities typically are of suchsignificance that detailed disclosures regarding the judgmentsand assumptions underlying the recognition andmeasurements of the liabilities are necessary to prevent thefinancial statements from being misleading and to informreaders fully regarding the range of reasonably possibleoutcomes that could have a material effect on the registrant’sfinancial condition, results of operations, or liquidity.(Emphasis added).
178. Defendants violated SAB No. 92 by failing to provide meaningful detailed
disclosure to investors as to the potential scope of the remediation and tort liabilities associated
with the Legacy Liabilities, and employing a methodology that had the effect of intentionally
and/or recklessly understating the liabilities. Each of the defendants who signed Tronox’s
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disclosures reflecting the reserve for environmental remediation and tort liabilities knowingly
and/or recklessly violated the foregoing provisions of GAAP applicable to the recording of
reserves. These defendants materially understated Tronox’s environmental remediation and tort
obligations based on existing facts. For example, they failed to record any reserve for the
multitude of “Secret Sites” that had been investigated by Defendant Kerr-McGee and which
were known to or recklessly disregarded by the Tronox Individual Defendants. As to the
Manville, New Jersey site, Tronox failed to record any reserve for this known obligation until the
third quarter of 2006 and even at that time, the reserve that was recorded was materially deficient
under applicable accounting standards because it understated the probable and reasonably
estimable exposure. Further, these Defendants deliberately understated the potential exposure to
tort liabilities based on the $70 million paid to settle just 11 claims and the fact that Tronox had
inherited the liability for literally thousands of similar claims.
179. Defendants often represented that they could not reasonably estimate all
environmental remediation liabilities that Tronox faced, yet the environmental remediation
reserve reported throughout the Class Period remained remarkably consistent and showed little
fluctuation even as circumstances changed and additional information was obtained. This
reflects that Defendants were simply “managing” the environmental remediation reserve to avoid
any negative responses in the market’s perception of the Company. Further, Tronox’s financial
statements indicated that cash spending for environmental remediation obligations had been
declining in years 2002-2006 and gave no indication that this decline was due to an inability to
pay rather than a decline in actual payment obligations. Defendants ignored the gradual
accumulation of data that led to Tronox’s collapse and that the bankruptcy was necessitated by
the fact that the appropriate reserve was more than double what had been recorded.
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180. Tronox claimed that it could not establish a range of potential liabilities for
several sites for purposes of recording a reserve, and eschewed the obligation to retain an expert
in environmental remediation to assist in developing a range. The reserve policy implemented for
purposes of Tronox’s Class Period financial statements also resulted in an insufficient reserve
being recorded in light of the fact that Tronox was a potentially responsible party (“PRP”) for at
least twelve (12) Superfund sites, and that United States law imposes “joint and several liability”
on all PRP’s under CERCLA. Tronox reserved only $224 million as of December 31, 2005, a
facially deficient amount given the defendants’ extensive history with this issue and their
knowledge of the potential size of the exposures Tronox faced. Even where Tronox indicated
that it could not reliably estimate a range of future additions to its reserve for any individual site
or all sites collectively, the accounting literature required that some reserve amount be recorded,
even if it was at the low end of a range, rather than failing to record any amount. SOP 96-1
requires that in the early stages of the remediation process, where certain components of the
liability can be estimated but others cannot, the known components and an estimate of the
obligation associated therewith must be disclosed. Further, SAB 92 requires that judgments and
assumptions used in establishing and/or failing to establish a reserve must be meaningfully
disclosed to prevent the financial statements from being misleading and to provide full
information to users of the financial statements. Defendants failed to include in Tronox’s Class
Period financial statements such meaningful disclosure to allow users of its financials to
understand the true scope of the Company’s existing and potential obligations for environmental
remediation reserves.
181. Further, the undisclosed adverse information regarding reserve obligations
concealed by Defendants during the Class Period is the type of information which, because of
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SEC regulations, regulations of the national stock exchanges and customary business practice, is
expected by investors and securities analysts to be disclosed and is known by corporate officials
and their legal and financial advisors to be the type of information which is expected to be and
must be disclosed.
182. The magnitude, duration and pervasiveness of the misstatements regarding
Tronox’s environmental remediation and tort liability reserves, which were repeated over four
(4) years and which violated GAAP, compels the conclusion that these methods were
implemented by Defendants intentionally, or that, at a minimum, Defendants recklessly
disregarded the overwhelming prevalence of these improper procedures and the resulting
material falsifications of Tronox’s financial statements issued during the Class Period.
DEFENDANTS’ MATERIALLY FALSE AND MISLEADINGSTATEMENTS MADE DURING THE CLASS PERIOD
183. Throughout the Class Period, Defendants issued false financial statements and
made other false and misleading statements to investors which failed to fully disclose the extent
of the environmental remediation and tort claim liabilities faced by Tronox. In addition, the
Defendants failed to inform investors that they were improperly determining the amounts that
should have been reserved each quarter for those remediation and tort claims. In doing so, the
Defendants misled the market as to the true financial condition of Tronox and deprived investors
of material information that was necessary to understand the Company’s financial condition.
A. Registration Statement
184. On November 21, 2005, the Registration Statement for the Company’s IPO was
filed with the SEC and declared effective. The Registration Statement assured investors:
As of September 30, 2005, our financial reserves for all active andinactive sites totaled $239.4 million, $160.6 million of which areclassified as noncurrent liabilities. We believe we have reserved
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adequately for the reasonably estimable costs of knownenvironmental contingencies. However, additional reserves maybe required in the future due to the previously noted uncertainties.(Emphasis added).
185. This statement was materially false and misleading at the time it was made. The
Defendants knew, or were reckless in not knowing, that the $239.4 million reserve was grossly
insufficient to cover the environmental remediation costs associated with the Legacy Liabilities.
Tronox has now admitted that this reserve was determined using a methodology that was not in
accordance with GAAP. Defendants also knew that the recorded reserves did not account for the
Secret Sites that had been identified. In addition, as was later revealed in the bankruptcy
proceedings, the Defendants had discussions with third parties who conducted due diligence and
reviewed internal, non-public information regarding Tronox’s potential environmental liability.
From these discussions, the Defendants knew that exposure for the Legacy Liabilities was, at a
minimum, between $400 million and $900 million.
186. Regarding Tronox’s other sites with environmental remediation and restoration
exposure, the Registration Statement represented that:
There may be other sites where we have potential liability forenvironmental-related matters but for which we do not havesufficient information to determine that the liability is probable orreasonably estimable. We have not established reserves for suchsites. One such site involves a former wood treatment plant inNew Jersey.
This statement was materially misleading because it failed to reveal, as was ultimately disclosed
in the bankruptcy proceedings, that Kerr-McGee had confidentially investigated numerous wood
treatment sites similar to the one in Manville, New Jersey, at which Kerr-McGee faced liability
for substantial environmental clean-up costs. Kerr-McGee, and Kerr-McGee’s representatives
on the Tronox Board, knew that this investigation had identified at least eleven wood treatment
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sites at which the Company faced exposures similar to those at the Manville, New Jersey site.
187. The Registration Statement also failed to disclose that, prior to the IPO, Kerr-
McGee had considered conducting a wide scale investigation of other sites where it faced
potential liability. These additional sites included approximately 260 agricultural chemical sites,
two former fertilizer plants, five former chemical manufacturing sites, and several other
locations. Despite the questions surrounding these sites, Kerr-McGee chose not to follow
through with the investigation. Instead, it chose to spin-off Tronox without disclosing its
concerns regarding these sites or the reasons why Kerr-McGee initially believed an investigation
might be necessary. Kerr-McGee wanted to avoid creating documentary evidence that would
demonstrate the need for additional reserves.
188. The Registration Statement also made material misrepresentations regarding
Tronox’s tort liabilities. Regarding the former forest products sites, the Registration Statement
stated that:
Between 1999 and 2001, Tronox LLC was named in 22 lawsuits inthree states (Mississippi, Louisiana and Pennsylvania) inconnection with former forest products operations located in thosestates (in Columbus, Mississippi; Bossier City, Louisiana; andAvcoa, Pennsylvania) . . .
* * *
Tronox LLC has executed settlement agreements that are expectedto resolve substantially all of the Louisiana, Pennsylvania andMississippi lawsuits described above. Resolution of the remainingcases is not expected to have a material adverse effect on us.
189. This representation was materially false and misleading because, as disclosed in
the bankruptcy proceedings, Kerr-McGee’s settlement of the earlier claims had cost
approximately $70 million, but this fact was omitted from the Registration Statement. The
omission was glaring because approximately 11,000 additional claims relating to wood treatment
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sites had been filed prior to the IPO. Thus, representing that these additional claims were “not
expected to have a material adverse effect” was materially false and misleading because the prior
settlements indicated, according to Apollo’s due diligence team from the law firm of Morgan
Lewis & Bockius, potential exposure of up to $500 million for these claims.
190. The Registration Statement also stated the following regarding the Company’s
policy for recording reserves for environmental remediation:
As sites of environmental concern are identified, the companyassesses the existing conditions, claims, and assertions, and recordsan estimated undisclosed liability when environmental assessmentsand/or remedial efforts are probable and/or remedial efforts areprobable and the associated costs can be reasonably estimated.
This statement was false and misleading because, as discussed in paragraphs 186-187, there were
numerous sites of environmental concern identified for which the Company knowingly did not
properly assess the existing conditions and did not record a reserve even though remedial efforts
were probable and the costs estimable.
191. In addition, the financial statements in the Registration Statement were false and
misleading because the environmental remediation reserve was materially deficient. The reserve
calculation was based on an admittedly incorrect methodology that was not in accordance with
GAAP or industry practice. It also violated Tronox’s own publicly stated accounting policies
regarding reserves.
192. The Registration Statement also created the materially misleading impression that
Tronox was in sound financial condition and prepared to be a competitive business. However,
Tronox was doomed to fail for several reasons. First, the Defendants concealed the extent of the
Legacy Liabilities with which Tronox was burdened. Second, Kerr-McGee left Tronox with
only $40 million in cash following the IPO, which was insufficient given Tronox's undisclosed
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liabilities and debt. Third, Kerr-McGee had advised Tronox to raise cash by selling assets, but
knew this would raise insufficient funds. Fourth, Kerr-McGee rushed the IPO to capitalize on
the upswing of the chemicals business, knowing that Tronox could never meet the projections
presented to investors. Indeed, after conducting significant due diligence, a third-party had
informed Kerr-McGee that Tronox could not survive due to its overwhelming liabilities.
B. December 21, 2005 Investor Presentation
193. On December 21, 2005, Defendant Adams made a presentation to securities
analysts and investors. A slide titled “Legacy Sites” stated that the “Company actively manages
environmental issues related to legacy businesses” and offered the following assurance that these
issues were properly accounted for and under control:
• In 1994, a centralized Safety and Environmental Affairs(S&EA) unit was formed to manage environmental issues.
• Financial reserves for probable and estimableenvironmental costs were reviewed and updated quarterly.As of September 30, 2005, reserves were $239.4 million.
• Kerr-McGee had agreed to a 7-year remediation costreimbursement program which “[r]eimburses Tronox for50% of remediation cost in excess of the reserves up to$100 million.”
• “Additional mitigating items: insurance policies,government reimbursements (W. Chicago/Kress Creek andHenderson, Nevada) and land asset sales.”
194. At the time this presentation was made, the Defendants knew, or were reckless in
not knowing, that the environmental remediation reserves were inadequate. They also knew, or
were reckless in disregarding, that these reserves were determined through an inappropriate
methodology that resulted in deficient reserves. Potential reimbursements from Kerr-McGee,
insurance policies, funds from the U.S. government and the stated reserves, could not
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conceivably cover the known and probable obligations. The false and misleading slides from the
December 21, 2005 presentation were also attached to a Form 8-K that was filed with the SEC
that same day.
C. Announcement Of Navy Settlement Related To Henderson, Nevada Site
195. On January 17, 2006, Tronox announced it would receive $20.5 million from the
U.S. government to settle litigation related to perchlorate remediation at the Company's
Henderson, Nevada site. Pursuant to the settlement, the U.S. government would also pay 21 % of
the future remediation costs at a future date. However, Tronox failed to state that the payments
from the U.S. government, Kerr-McGee, and the Company’s insurance policies were insufficient
to cover the full amount of the liability. By omitting this critical information from the January
17, 2006 announcement, the Defendants misled investors regarding the true extent of future
liability for this site.
D. 2005 Year End Results And Related Press Release
196. On January 24, 2006, Tronox issued a press release announcing its financial
results for fourth quarter 2005 and the fiscal year-ended December 31, 2005. The Company
reported a “provision for environmental remediation and restoration” of $17.1 million for fiscal
year 2005, which materially understated the amount that Tronox should have reserved. By
understating this expense, the reported net income of $18.1 million and earnings per share of
$0.45 for fiscal year 2005 were therefore also materially false.
197. In the January 24, 2006 press release, Defendant Adams stated that “[w]e
completed our initial public offering in November and continue to focus on the execution of our
strategy to add value for shareholders through increased cash flow, profits, and returns.” The
press release further noted that “[d]iscontinued items in the 2005 fourth quarter include a
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provision for litigation matters related to the company's historical creosote and refining
operations of $5.7 million, after tax.” This representation was materially false and misleading
because it failed to reveal Kerr-McGee’s settlement of similar claims had cost the Company
approximately $70 million, and there remained approximately 11,000 additional similar claims
related to creosote and wood-treatment. This representation was also materially misleading
because it failed to mention the Legacy Liabilities and their effect on the financial condition of
the Company.
198. The Company also made false and misleading statements during the Company’s
Q4 2005 conference call held on January 24, 2006. The call was led by Defendants Adams and
Mikkelson. Defendant Mikkelson stated that Tronox’s “environmental remediation accruals at
the end of the year were $223 million.” When asked about the EPA letters to the Company
regarding Manville, Defendant Adams failed to disclose the substantial and costly liabilities the
Company faced. Instead, he stated that reimbursement to the Company “is still to be determined
in the future. Actually we are in a position now of starting to gather some more information
from them, but at this time there is really not any change in status from what we previously
discussed or announced in the S1 [Offering prospectus].” When asked about other suspected
liabilities at the Company, Defendant Adams claimed that Tronox’s liabilities were adequately
disclosed and accurate because the Company “review[s] every quarter, our reserves and we
follow standard SEC guidelines and we basically make provisions for anything that is
estimable and probable at this time.”
199. Each of the above statements from the Company’s fourth quarter 2005 conference
call were false and misleading. They misrepresented and omitted the true extent of the
environmental liabilities facing the Company as well as the size of the necessary environmental
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provision. These statements failed to disclose the material impact the Company’s environmental
liabilities would have on its financial condition and the extent of the Company’s liability with
respect to Manville.
E. February 22, 2006 Investor Presentation
200. On February 6, 2006, Defendant Adams made a presentation to investors and
securities analysts. A slide titled “Legacy Sites” represented that the “Company actively
manages environmental issues related to legacy businesses.” It also offered the following
assurance that these issues were properly accounted for and were under control, stating that:
• In 1994, a centralized Safety and Environmental Affairs (S&EA) unitwas formed to manage environmental issues. The S&EA wasstaffed with 34 experts in environmental remediation.
• Financial reserves have been established for probable andestimable environmental costs, which are reviewed andupdated quarterly. As of December 31, 2005, gross reserveswere $223.7 million.
• “U.S. Navy settlement of $20.5 million to Tronox in Q1, 2006, andwill pay 21 % of future perchlorate remediation after 2011.”
• “Insurance coverage covering majority of perchlorate until Dec 31,2010.”
• “Insurance coverage for five former forest product sites.”
• “Department of Energy (DOE) reimburses Tronox for 55.2% ofmoney spent to clean up West Chicago and Kress Creek sites.”
201. The foregoing representations were materially misleading. At the time this
presentation was made, the Defendants knew, or were reckless in not knowing, that the financial
reserves were inadequate. They also knew, or were reckless in not knowing, that these reserves
were determined through an inappropriate accounting methodology that resulted in inadequate
reserves. Potential reimbursements from Kerr-McGee, insurance policies, and funds from the
U. S. government could not satisfy the known and probable obligations. The false and
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misleading slides from the February 6, 2006 presentation were also attached to a Form 8-K and
filed with the SEC that same day.
202. On February 22, 2006, Defendant Adams made a presentation at the Morgan
Stanley Basic Materials Conference in New York City. A slide titled “Legacy Sites” addressed
the Company’s management of environmental issues at legacy businesses. The slide indicated
that financial reserves were in place “for probable and estimable environmental costs.”
However, the representation that Tronox had recorded adequate reserves was false at the time it
was made, for the reasons detailed above, i.e., paragraphs 186-187. The same false and
misleading presentation slides were also submitted to the SEC attached to a Form 8-K filed on
February 21, 2006.
F. Annual Report On Form 10-K For Fiscal Year 2005
203. On March 29, 2006, Tronox filed its Annual Report on Form 10-K for the fiscal
year ended December 31, 2005 (“2005 Form 10-K”). It included financial statements for periods
prior to November 2005 that were “derived from the accounting records of Kerr-McGee,
principally representing the Chemical - Pigment and Chemical - Other segments of Kerr-McGee,
using the historical results of operations, and historical basis of assets and liabilities of the
subsidiaries that the company did not own but currently owns and the chemical business the
company operates.”
204. The 2005 Form 10-K, signed by Defendants Adams and Mikkelson, stated that
“Management believes the assumptions underlying the financial statements to be true.” Among
other things, the Company stated that it had reserves for costs of environmental remediation and
restoration in the amount of $223.7 million. The financial statements also included a “provision
for environmental remediation and restoration” of $17.1 million for fiscal year 2005, which
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materially understated the amount that Tronox should have reserved. By understating this
expense, the reported net income of $18.8 million and earnings per share of $0.77 for fiscal year
2005 were also materially false.
205. In addition, the 2005 Form 10-K stated that “there may be other sites where we
have potential liability for environmental-related matters but for which we do not have sufficient
information to determine that the liability is probable and/or reasonably estimable. We have not
established reserves for such sites.” Regarding sites that were not specifically identified, the
2005 Form 10-K represented that:
In addition to the sites described above, the company is responsiblefor environmental costs related to certain other sites. These sitesrelate primarily to wood-treating, chemical production, landfills,mining, and oil and gas refining, distribution and marketing. As ofDecember 31, 2005, the company had reserves of $32.5 million forthe environmental costs in connection with these other sites.Although actual costs may differ from current estimates, theamount of any revisions in remediation costs cannot be reasonablyestimated at this time.
In addition, the 2005 Form 10-K stated that: “No reserve for reimbursement of cleanup costs at
the [New Jersey Wood Treatment] site has been recorded because it is not possible to reliably
estimate the liability, if any, the company may have for the site because of the aforementioned
defenses and uncertainties.” The representations that remediation costs could not reasonably be
estimated were false and misleading at the time they were made. Liability at other sites was, in
fact, “probable and reasonably estimable” and the reserves failed to account for the “Secret
Sites,” as alleged above. The Defendants knew, or recklessly disregarded, undisclosed
information indicating that the remediation costs would be substantially higher than they publicly
announced.
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206. Defendants Mikkelson and Adams signed the 2005 Form 10-K on their own
behalf and on behalf of Defendants Rowland, Wohleber, and Rauh. Defendants Adams,
Rowland, Wohleber, Rauh, and Mikkelson reviewed, approved, and caused the 2005 Form 10-K
to be filed with the SEC. Despite the foregoing false and misleading statements contained
therein, these Defendants represented that they “believe the assumptions underlying our
consolidated and combined financial statements are reasonable.” In addition, they made the
untrue representation that:
We provide for costs related to environmental contingencies whena loss is probable and the amount is reasonably estimable.
* * *
We believe that we have reserved adequately for the reasonablyestimable costs of known contingencies.
207. The 2005 Form 10-K also included certifications signed by Defendants Adams
and Mikkelson pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, verifying that:
1. I have reviewed this report on Form 10-K of TronoxIncorporated;
2. Based on my knowledge, this report does not contain anyuntrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of thecircumstances under which such statements were made, notmisleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, andother financial information included in this report, fairly present inall material respects the financial condition, results of operationsand cash flows of the registrant as of, and for, the periodspresented in this report;
4. The registrant’s other certifying officer and I areresponsible for establishing and maintaining disclosure controlsand procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) and internal control over financial reporting (as defined
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in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrantand have:
(a) designed such disclosure controls and procedures,or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that materialinformation relating to the registrant, including itsconsolidated subsidiaries, is made known to us by otherswithin those entities, particularly during the period inwhich this report is being prepared;
(b) designed such internal control over financialreporting, or caused such internal control over financialreporting to be designed under our supervision, to providereasonable assurance regarding the reliability of financialreporting and the preparation of financial statements forexternal purposes in accordance with generally acceptedaccounting principles;
(c) evaluated the effectiveness of the registrant’sdisclosure controls and procedures and presented in thisreport our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of theperiod covered by this report based on our evaluation; and
(d) disclosed in this report any change in theregistrant’s internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f))that occurred during the registrant’s most recent fiscalquarter that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control overfinancial reporting; and
5. The registrant’s other certifying officer and I havedisclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant’s auditors and the auditcommittee of the registrant’s board of directors:
(a) all significant deficiencies and material weaknessesin the design or operation of internal control over financialreporting which are reasonably likely to adversely affectthe registrant’s ability to record, process, summarize andreport financial information; and
(b) any fraud, whether or not material, that involvesmanagement or other employees who have a significant
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role in the registrant’s internal control over financialreporting.
208. In addition, the 2005 Form 10-K included certifications signed by Defendants
Adams and Mikkelson pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 in which they
further verified that:
[I]n connection with the registrant’s report on Form 10-K for theperiod that ended December 31, 2005 as filed with the Securitiesand Exchange Commission (the “Report”) that:
• the Report fully complies with the requirements of Section13(a) of the Securities Exchange Act of 1934; and
• information contained in the Report fairly presents, in allmaterial respects, the financial condition and results ofoperations of the Issuer.
209. In its Form 8-K filed with the SEC on May 5, 2009, Tronox admitted that its
financial statements were false and must be restated. Indeed, all of the foregoing statements in
the 2005 Form 10-K were false and misleading at the time they were made. The Defendants
knew, or were reckless in not knowing, that the reserves for environmental liabilities were
grossly understated. Furthermore, by not referring to the “Secret Sites,” the Defendants hid
material information that was necessary to understand the extent of Tronox’s exposure.
G. First Quarter 2006
210. On May 3, 2006, Tronox issued a press release with the Company’s preliminary
financial results for the first quarter of 2006, which ended March 31, 2006. The Company
reported a “provision for environmental remediation and restoration” of a $20.5 million for first
quarter 2006, which materially understated the amount Tronox should have reserved. By
understating this expense, the reported net income of $20.6 million and earnings per share of
$0.51 for first quarter 2006 were therefore also materially overstated.
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211. In the May 3, 2006 press release, Defendant Adams made positive comments,
representing that the results were “solid.” The press release also noted that net income was
“$20.6 million in the 2006 first quarter, compared with $4.0 million in the 2005 first quarter” and
that the environmental remediation reserves were currently $216.5 million, which was “a $7.2
million decline from Dec. 31, 2005.”
212. The Company held its first quarter 2006 conference call on May 3, 2006. The call
was led by Defendants Adams and Mikkelson. Defendant Adams stated that: “ we continue to
see reductions in our environmental reserves. I am proud to say our physical separation
from Kerr-McGee is going well, and is actually ahead of schedule.” Defendant Mikkelson
stated that “financial reserves for environmental remediation at March 31, 2006 for all active and
inactive sites totaled $216.5 million, down 7.2 million from December 31, 2005. . . . We
continue to forecast a net cash spend of approximately $35 to $40 million for 2006.”
213. The above statements regarding the first quarter 2006 results were false and
misleading. They misrepresented and omitted the true extent of the environmental liabilities
facing the Company, as well as the size of the necessary environmental provision. The
Defendants failed to disclose the material impact the Company’s environmental liabilities would
have on its financial condition and misleadingly represented that the Company’s separation from
Kerr-McGee was handled appropriately.
214. On May 15, 2006, Tronox filed a Form 10-Q with the Company’s financial results
for the first quarter of 2006. The Form 10-Q, signed by Defendants Adams and Mikkelson,
stated that the financial statements included therein provided a “fair statement of the results of
the interim periods presented.” It also stated that “the company believes that the disclosures are
adequate to make the information presented not misleading.” Among other things, the financial
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statements included a “provision for environmental remediation and restoration” of negative
$20.5 million, which materially understated the amount that Tronox should have reserved. By
understating this expense, the reported net income of $20.6 million and earnings per share of
$0.51 were therefore also materially overstated.
215. Nonetheless, the Form 10-Q assured investors that all probable and reasonable
costs known to the Defendants had been properly accounted for:
Management believes, after consultation with its internal legalcounsel, that the company is currently reserved adequately for theprobable and reasonably estimable costs of known environmentalmatters and other contingencies. However, additions to thereserves may be required as additional information is obtained thatenables the company to better estimate its liabilities, includingliabilities at sites now under review. At this time, however, thecompany cannot reliably estimate a range of future additions to thereserves for any individual site or for all sites collectively.
216. The Defendants also repeated their false statements regarding reserves for other
remediation sites:
In addition to the sites described above, the company is responsiblefor environmental costs related to certain other sites. These sitesrelate primarily to wood-treating, chemical production, landfills,mining, and oil and gas refining, distribution and marketing. As ofMarch 31, 2006, the company had reserves of $33.7 million for theenvironmental costs in connection with these other sites. Althoughactual costs may differ from current estimates, the amount of anyrevisions in remediation costs cannot be reasonably estimated atthis time.
217. The representations that all probable and reasonably estimable remediation costs
had been properly accounted for were false and misleading at the time they were made. The
Defendants knew, or recklessly disregarded, undisclosed information indicating that the
remediation costs for the other sites would be substantially higher than they publicly announced.
For example, the Company did not a record a reserve for the known New Jersey wood treatment
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site in this period.
218. The Form 10-Q included certifications signed by Defendants Adams and
Mikkelson pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-
Oxley Certifications”) that were substantially identical to those quoted in full in Paragraphs 207-
208 above. As Tronox’s Form 10-Q filed May 15, 2006 contained several misstatements,
Adams’s and Mikkelson’s certifications were materially false when made.
219. In its Form 8-K filed with the SEC on May 5, 2009, Tronox admitted that its
financial statements for the entire Class Period were false and must be restated. Indeed, all of the
foregoing statements in the Form 10-Q for first quarter 2006 were false and misleading at the
time they were made. The Defendants knew, or were reckless in not knowing, that the reserves
for environmental liabilities were grossly underestimated. Furthermore, by not referring to the
“Secret Sites,” the Defendants hid material information that was necessary to understand the
extent of Tronox’s exposure.
220. On May 23, 2006, eight days after filing the Form 10-Q, Defendant Adams made
a presentation to investors and securities analysts. A slide titled “Legacy Environmental” stated
that environmental remediation reserves were currently $216.5 million, an amount known or
recklessly disregarded to be insufficient. Defendant Adams repeated other representations made
in the Form 10-Q for first quarter 2006 as well. The false and misleading presentation slides
were also attached to a Form 8-K which was filed with the SEC that same day.
H. Second Quarter 2006
221. On August 2, 2006, Tronox issued a press release with the Company’s
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preliminary financial results for the second quarter of 2006, which ended June 30, 2006. Among
other things, the press release represented that no “provision for environmental remediation and
restoration” had been taken, which materially understated the amount that Tronox should have
reserved. By understating this expense, the reported net loss of $14.4 million and loss per share
of $0.36 for second quarter 2006 were therefore also materially false.
222. The Company made false and misleading statements during the Company’s
second quarter 2006 conference call held on August 2, 2006 as well. The call was led by
Defendants Adams and Mikkelson. Defendant Mikkelson stated that:
Financial reserves for environmental remediation at June 30, 2006for all active and inactive sites totaled $221 million. . . . We havelowered our 2006 forecast for net cash spend on environmentalprojects approximately $5 million, to be in the range of $30 millionto $35 million, which is net of all reimbursements . . .
223. The above statements from the Company’s second quarter 2006 conference call
were false and misleading. They misrepresented and omitted the true extent of the
environmental remediation liabilities facing the Company, as well as the size of the necessary
environmental provision. The Defendants also failed to disclose the material impact the
Company’s environmental liabilities would have on its financial condition.
224. On August 14, 2006, Tronox filed a Form l0-Q for the second quarter of 2006.
The Form 10-Q, signed by Defendants Adams and Mikkelson, stated that the financial
statements contained therein provided a “fair statement of the results for the interim periods
presented.” It also stated that “the company believes that the disclosures are adequate to make
the information presented and misleading.” Among other things, the financial statements
included no “provision for environmental remediation and restoration,” which materially
understated the amount that Tronox should have reserved. By understating this expense, the
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reported net loss of $14.4 million and loss per share of $0.36 were therefore also materially
understated.
225. Nonetheless, the Form 10-Q assured investors that all probable and reasonable
costs known to the Defendants had been properly accounted for:
Management believes, after consultation with its internal legalcounsel, that the company is currently reserved adequately for theprobable and reasonably estimable costs of known environmentalmatters and other contingencies. However, additions to thereserves may be required as additional information is obtained thatenables the company to better estimate its liabilities, includingliabilities at sites now under review. At this time, however, thecompany cannot reliably estimate a range of future additions to thereserves for any individual site or for all sites collectively.
226. The Defendants also repeated their representations regarding reserves for other
remediation sites:
In addition to the sites described above, the company is responsiblefor environmental costs related to certain other sites. These sitesrelate primarily to wood-treating, chemical production, landfills,mining, and oil and gas refining, distribution and marketing. As ofJune 30, 2006, the company had reserves of $30.7 million for theenvironmental costs in connection with these other sites. Althoughactual costs may differ from current estimates, the amount of anyrevisions in remediation costs cannot be reasonably estimated atthis time.
227. The representations that all probable and reasonably estimable remediation costs
had been properly accounted for were false and misleading at the time they were made. The
Defendants knew, or recklessly disregarded, undisclosed information indicating that remediation
costs for the other sites would be substantially higher than they publicly announced. For
example, the Company did not a record a reserve for the known New Jersey wood treatment site
in this period.
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228. The Form 10-Q included certifications signed by Defendants Adams and
Mikkelson pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-
Oxley Certifications”) that were substantially identical to those quoted in full in Paragraphs 207-
208 above. As Tronox’s Form 10-Q filed August 14, 2006 contained several misstatements,
Adams’s and Mikkelson’s certifications were materially false when made.
229. In its Form 8-K filed with the SEC on May 5, 2009, Tronox admitted that its
financial statements for the entire Class Period were false and must be restated. Indeed, all of the
foregoing statements in the Form 10-Q for second quarter 2006 were false and misleading at the
time they were made. The Defendants knew, or were reckless in not knowing, that the reserves
for environmental liabilities were grossly underestimated. Furthermore, by not referring to the
“Secret Sites,” the Defendants hid material information that was needed to understand the extent
of Tronox’s exposure.
I. Third Quarter 2006
230. On November 1, 2006, Tronox issued a press release with the Company’s
preliminary financial results for third quarter 2006, which ended September 30, 2006. Among
other things, the attached financial statements included a “provision for environmental
remediation and restoration” of $100,000, which materially understated the amount that Tronox
should have reserved. By understating this expense, the reported net loss of $14.0 million and
loss per share of $0.35 were therefore also materially false.
231. In addition, the Company made false and misleading statements during the
Company’s third quarter 2006 conference call held on November 1, 2006. The call was led by
Defendants Adams and Mikkelson. Defendant Adams stated that the Company’s $11 million
reserve for the Manville site was appropriate and reasonable: “[t]he mediation process is
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continuing and we still believe we have legitimate defenses. . . . If this meditation does not lead
to an acceptable solution, we intend to vigorously defendant against the EPA’s demand.”
Defendant Adams continued, “the current reserve that we have taken [for Manville] is . . . based
on a reasonable assessment . . .” Defendant Mikkelson also stated that Tronox’s “financial
reserves for environmental remediation at September 30, 2006, for all active and inactive sites
totaled $242 million . . . We have lowered our 2006 forecast for net cash spend on
environmental projects approximately $10 million to a range of $20 million to $25 million. . . .”
Defendant Adams added that, “[i]f you take out the reserve that we just took for the New Jersey
forest products side, we would have ended the quarter about $207 million, so down
significantly.”
232. The above statements from the Company’s third quarter 2006 conference call
were materially false and misleading. They misrepresented and omitted the true extent of the
environmental liabilities facing the Company, as well as the size of the necessary environmental
provision. The Defendants failed to disclose the material impact the Company’s environmental
liabilities would have on its financial condition, including the Company’s liability with respect to
Manville.
233. On November 14, 2006, Tronox filed a Form 10-Q with the Company’s financial
results for third quarter 2006. The Form 10-Q, signed by Defendants Adams and Mikkelson,
stated that the financial statements contained therein provided a “fair statement of the results for
the periods presented.” It also stated that “the company believes that the disclosures are
adequate to make the information presented not misleading.” Among other things, the financial
statements included a “provision for environmental remediation and restoration” of $100,000,
which materially understated the amount that Tronox should have reserved. By understating this
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expense, the reported net loss of $14.0 million and loss per share of $0.35 were therefore also
materially understated.
234. Nonetheless, the Form 10-Q assured investors that all probable and reasonable
costs known to the Defendants had been properly accounted for:
Management believes, after consultation with its internal legalcounsel, that the company is currently reserved adequately for theprobable and reasonably estimable costs of known environmentalmatters and other contingencies. However, additions to thereserves may be required as additional information is obtained thatenables the company to better estimate its liabilities, includingliabilities at sites now under review. At this time, however, thecompany cannot reliably estimate a range of future additions to thereserves for any individual site or for all sites collectively.
235. The Defendants also repeated their false statements regarding reserves for other
remediation sites:
In addition to the sites described above, the company is responsiblefor environmental costs related to certain other sites. These sitesrelate primarily to wood-treating, chemical production, landfills,mining, and oil and gas refining, distribution and marketing. As ofSeptember 30, 2006, the company had reserves of $29.3 millionfor the environmental costs in connection with these other sites.Although actual costs may differ from current estimates, theamount of any revisions in remediation costs cannot be reasonablyestimated at this time.
236. The representations that all probable and reasonably estimable remediation costs
had been properly accounted for were false and misleading at the time they were made. The
Defendants knew, or recklessly disregarded, undisclosed information indicating that the
remediation costs for the other sites would be substantially higher than they publicly announced.
237. The Form 10-Q included certifications signed by Defendants Adams and
Mikkelson pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-
Oxley Certifications”) that were almost identical to those quoted in full in Paragraphs 207-208
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above. As Tronox’s Form 10-Q filed November 14, 2006 contained several misstatements,
Adams’s and Mikkelson’s certifications were materially false when made.
238. In its Form 8-K filed with the SEC on May 5, 2009, Tronox admitted that its
financial statements for the entire Class Period were false and must be restated. Indeed, all of the
foregoing statements in the Form 10-Q for third quarter 2006 were false and misleading at the
time they were made. The Defendants knew, or were reckless in not knowing, that the reserves
for environmental liabilities were grossly underestimated. Furthermore, by not referring to the
“Secret Sites,” the Defendants hid material information that was necessary to understand the
extent of Tronox’s exposure.
J. 2006 Year End Results And Related Press Release
239. On February 22, 2007, Tronox issued a press release announcing its financial
results for fourth quarter 2006 and the fiscal year ended December 31, 2006. The Company
reported that no “provision for environmental remediation and restoration” had been taken in the
fourth quarter 2006, which materially understated the amount that Tronox should have reserved.
By understating this expense, the reported net income of $7.6 million and earnings per share of
$0.19 for fourth quarter 2006 were therefore also materially overstated. For fiscal year 2006, the
press release indicated that the “provision for environmental remediation and restoration” was
negative $20.4 million, which materially understated the amount that Tronox should have
reserved. By understating this expense, the reported net income of negative $200,000 and zero
earnings per share for fiscal year 2006 were therefore also materially false.
240. In addition, the Company made false and misleading statements during the
Company’s fourth quarter 2006 conference call held on February 22, 2007. The call was led by
Defendants Adams and Mikkelson. Defendant Mikkelson stated that:
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On environmental matters, our financial reserves for environmentalremediation at December 31, 2006 for all active and inactive sitestotaled $224 million, a decrease from the prior quarter due topayments made during the quarter. . . . During 2006, we spent $57million against our environmental reserves and receivedreimbursements of $38 million for a net cash spend of $19 million.This was at the low end of the range we had previously providedfor the year and was lower than originally anticipated . . . we arecurrently estimating a net cash spend on environmental projects of$40 million to $45 million for 2007.
241. The above statement from the Company’s fourth quarter 2006 conference call was
false and misleading. It misrepresented and omitted the true extent of the environmental
liabilities facing the Company, as well as the size of the necessary environmental provision. The
Defendants failed to disclose the material impact the Company’s environmental liabilities would
have on its financial condition.
K. Annual Report On Form 10-K For Fiscal Year 2006
242. On March 16, 2007, Tronox filed its Annual Report on Form 10-K for the fiscal
year ended December 31, 2006 (“2006 Form 10-K” ). The 2006 Form 10-K, signed by
Defendants Adams and Mikkelson, stated that “Management believes the assumptions
underlying the financial statements are reasonable.” Among other things, the Company reported
reserves for costs of environmental remediation and restoration in the amount of $223.9 million.
The financial statements also included a “provision for environmental remediation and
restoration” of negative $20.4 million for fiscal year 2006, which materially understated the
amount that Tronox should have reserved. By understating this expense, the reported net loss of
$200,000 and zero earnings per share for fiscal year 2006 were therefore also materially
misstated.
243. In addition, in the 2006 Form 10-K, the Defendants represented that:
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We believe that we have reserved adequately for the reasonablyestimable costs of known contingencies. However, additions to thereserves may be required as additional information is obtained thatenables us to better estimate our liabilities, including any liabilitiesat sites now under review. We cannot reliably estimate the amountof future additions to the reserves at this time. Additionally, theremay be other sites where we have potential liability forenvironmental-related matters for which we do not have sufficientinformation to determine that the liability is probable and/orreasonably estimable.
244. However, liability at other sites was, in fact, “probable and/or reasonably
estimable” and the reserves failed to account for the “Secret Sites,” as alleged above. The 2006
Form 10-K also failed to provide meaningful disclosure regarding the range of reserves that may
ultimately be necessary.
245. Regarding sites that were not specifically identified, the 2006 Form 10-K
represented that:
In addition to the sites described above, the company is responsiblefor environmental costs related to certain other sites. These sitesrelate primarily to wood-treating, chemical production, landfills,mining, and oil and gas refining, distribution and marketing. As ofDecember 31, 2006, the company had reserves of $40.0 million forthe environmental costs in connection with these other sites.Although actual costs may differ from current estimates, theamount of any revisions in remediation costs cannot be reasonablyestimated at this time.
246. This statement was false and misleading as the Defendants knew, or recklessly
disregarded, undisclosed information indicating that the remediation costs for the other sites
would be substantially higher than they publicly announced.
247. Defendants Adams and Mikkelson signed the 2006 Form 10-K. They also
reviewed, approved, and caused the 2006 Form 10-K to be filed with the SEC. Despite the
foregoing false and misleading statements contained therein, these Defendants represented that
they “believe the assumptions underlying our consolidated and combined financial statements
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are reasonable.” In addition, they made the untrue representations that:
As of December 31, 2006, we had reserves in the amount of$223.9 million for environmental remediation and restoration.We reserve for costs related to environmental remediation andrestoration only when a loss is probable and the amount isreasonably estimable.
248. The Form 10-K included certifications signed by Defendants Adams and
Mikkelson pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-
Oxley Certifications”) that were substantially identical to those quoted in full in Paragraphs 207-
208 above. As Tronox’s 2006 Form 10-K contained several misstatements, Adams’s and
Mikkelson’s certifications were materially false when made.
249. In its Form 8-K filed with the SEC on May 5, 2009, Tronox admitted that its
financial statements for the entire Class Period were false and must be restated. Indeed, all of the
foregoing statements in the Form 10-K for fiscal year 2006 were false and misleading at the time
they were made. The Defendants knew, or were reckless in not knowing, that the reserves for
environmental liabilities were grossly underestimated. Furthermore, by not referring to the
“Secret Sites,” the Defendants hid material information that was necessary to understand the
extent of Tronox’s exposure.
L. First Quarter 2007
250. On May 2, 2007, Tronox issued a press release with the Company’s preliminary
financial results for first quarter 2007, which ended March 31, 2007. The Company reported a
“provision for environmental remediation and restoration” of $200,000, which materially
understated the amount that Tronox should have reserved. By understating this expense, the
reported net loss of $9.4 million and loss per share of $0.23 were materially false.
251. In addition, the Company made false and misleading statements during the
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Company’s first quarter 2007 conference call held on May 2, 2007. The call was led by
Defendants Adams and Mikkelson. Defendant Mikkelson stated that, “[o]n environmental
matters, our financial reserves for environmental remediation at March 31, 2007 for all active
and inactive sites totaled $221 million . . . we continue to estimate a net cash spend of
environmental projects of $40 million to $45 million for 2007.”
252. This statement was false and misleading. It misrepresented and omitted the true
extent of the environmental liabilities and the size of the necessary environmental provision. It
also failed to disclose the material impact the Company’s environmental liabilities would have
on its financial condition.
253. On May 8, 2007, Tronox filed a Form 10-Q with the Company’s financial results
for first quarter 2007. The Form 10-Q, signed by Defendants Adams and Mikkelson, stated that
the financial statements included therein provided a “fair presentation” of the Company’s
financial condition. Among other things, the financial statements included a “provision for
environmental remediation and restoration” of $200,000, which materially understated the
amount that Tronox should have reserved. By understating this expense, the reported net loss of
$9.4 million and loss per share of $0.23 were therefore also materially understated.
254. Nonetheless, the Form 10-Q assured investors that all probable and reasonable
costs known to defendants had been properly accounted for:
Management believes, after consultation with its internal legalcounsel, that the company is currently reserved adequately for theprobable and reasonably estimable costs of known environmentalmatters and other contingencies. However, additions to thereserves may be required as additional information is obtained thatenables the company to better estimate its liabilities, includingliabilities at sites now under review. At this time, however, thecompany cannot reliably estimate a range of future additions to thereserves for any individual site or for all sites collectively.
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255. The Defendants also repeated their false statements regarding reserves for other
remediation sites:
In addition to the sites described above, the company is responsiblefor environmental costs related to certain other sites. These sitesrelate primarily to wood treating, chemical production, landfills,mining, and oil and gas refining, distribution and marketing. As ofMarch 31, 2007, the company had reserves of $37.7 million for theenvironmental costs in connection with these other sites. Althoughactual costs may differ from current estimates, the amount of anyrevisions in remediation costs cannot be reasonably estimated atthis time.
256. The representations that all probable and reasonably estimable remediation costs
had been properly accounted for were false and misleading at the time they were made. The
Defendants knew, or recklessly disregarded, undisclosed information indicating that the
remediation costs for the other sites would be substantially higher than they publicly announced.
257. The Form 10-Q included certifications signed by Defendants Adams and
Mikkelson pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-
Oxley Certifications”) that were substantially identical to those quoted in full in Paragraphs 207-
208 above. As Tronox’s Form 10-Q filed May 8, 2007 contained several misstatements,
Adams’s and Mikkelson’s certifications were materially false when made.
258. In its Form 8-K filed with the SEC on May 5, 2009, Tronox admitted that its
financial statements for the entire Class Period were false and must be restated. Indeed, all of the
foregoing statements in the Form 10-Q for first quarter 2007 were false and misleading at the
time they were made. The Defendants knew, or were reckless in not knowing, that the reserves
for environmental liabilities were grossly underestimated. Furthermore, by not referring to the
“Secret Sites,” the Defendants hid material information that was necessary to understand the
extent of Tronox’s exposure.
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M. Second Quarter 2007
259. On August 1, 2007, Tronox issued a press release with the Company’s
preliminary financial results for second quarter 2007, which ended June 30, 2007. The Company
reported a “provision for environmental remediation and restoration” of $1.5 million, which
materially understated the amount that Tronox should have reserved. By understating this
expense, the reported net loss of $21.2 million and loss per share of $0.52 were therefore also
materially false.
260. In addition, the Company made false and misleading statements during the
Company’s second quarter 2007 conference call held on August 1, 2007. The call was led by
Defendants Adams and Mikkelson. Investors were told that the Company’s $1.5 million
environmental provision “does not reflect the full amount of Kerr-McGee’s future
reimbursement obligation.” They were also told that the Company’s future net cash exposure
related to this new provision is “expected to be approximately $750,000 after estimating the 50%
future reimbursement obligation from Kerr-McGee.” It was emphasized that Tronox was “doing
the right thing long-term to position the Company for success by driving the fundamental
changes in our business. We continue to see positive results in baseline costs reductions and
working capital area.” With regard to the Company’s environmental liabilities, investors were
told that the Company was “continu[ing] to work to mitigate these matters through insurance,
reimbursements from PRPs or obligated parties, efficient management of ongoing projects, and
by defending our legal positions” and that the Company’s financial reserves for environmental
remediation totaled $214 million, “a decrease from the prior quarter,” which “does not include
$39 million in anticipated future reimbursements to Tronox by the Department of Energy for
work yet to be completed at the West Chicago site. It is expected that the DOE will continue to
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reimburse us 55% of our costs at this site.” It was also stated that its gross reserve of $35 million
would be adequate to cover Tronox’s liability for the New Jersey wood treatment site as a result
of the Company’s mitigation strategies:
[We] continue to actively pursue mitigation strategies to ensureobligated parties, insurance companies, and government agencyreimbursements are received to offset our remediation costs.Regarding the former wood treatment site in New Jersey,nonbinding mediation with the EPA is ongoing and we remainconfident about our defenses and position concerning this matter.
261. The above statements from the Company’s second quarter 2007 conference call
were false and misleading. They misrepresented and omitted the true extent of the
environmental liabilities facing the Company, as well as the size of the necessary environmental
provision. The Defendants failed to disclose the material impact the Company’s environmental
liabilities would have on its financial condition.
262. On August 7, 2007, Tronox filed a Form 10-Q with the Company’s financial
results for second quarter 2007. The Form 10-Q was signed by Defendants Adams and
Mikkelson and contained what was represented to be a “fair presentation” of Tronox's financial
position and standing. Among other things, the financial statements included a “provision for
environmental remediation and restoration” of $1.5 million, which materially understated the
amount that Tronox should have reserved. By understating this expense, the reported net loss of
$21.2 million and loss per share of $0.52 were therefore also materially false.
263. The Form 10-Q again assured investors that all probable and reasonable costs
known to defendants had been properly accounted for:
Management believes, after consultation with its internal legalcounsel, that currently the company is reserved adequately for theprobable and reasonably estimable costs of known environmentalmatters and other contingencies. However, additions to thereserves may be required as additional information is obtained that
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enables the company to better estimate its liabilities, includingliabilities at sites now under review. At this time, however, thecompany cannot reliably estimate a range of future additions to thereserves for any individual site or for all sites collectively.
264. The Defendants also repeated their false statements regarding reserves for other
remediation sites:
In addition to the sites described above, the company is responsiblefor environmental costs related to certain other sites. These sitesrelate primarily to wood treating, chemical production, landfills,mining, and oil and gas refining, distribution and marketing. As ofJune 30, 2007, the company had reserves of $35.5 million for theenvironmental costs in connection with these other sites. Althoughactual costs may differ from current estimates, the amount of anyrevisions in remediation costs cannot be reasonably estimated atthis time.
265. The representations that all probable and reasonably estimable remediation costs
had been properly accounted for were false and misleading at the time they were made. The
Defendants knew, or recklessly disregarded, undisclosed information indicating that the
remediation costs for the other sites would be substantially higher than they publicly announced.
266. The Form 10-Q included certifications signed by Defendants Adams and
Mikkelson pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-
Oxley Certifications”) that were substantially identical to those quoted in full in Paragraphs 207-
208 above. As Tronox’s Form 10-Q filed August 7, 2007 contained several misstatements,
Adams’s and Mikkelson’s certifications were materially false when made.
267. In its Form 8-K, filed with the SEC on May 5, 2009, Tronox admitted that its
financial statements for the entire Class Period were false and must be restated. Indeed, all of the
foregoing statements in the Form 10-Q for second quarter 2007 were false and misleading at the
time they were made. The Defendants knew, or were reckless in not knowing, that the reserves
for environmental liabilities were grossly underestimated. Furthermore, by not referring to the
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“Secret Sites,” the Defendants hid material information that was necessary to understand the
extent of Tronox’s exposure.
N. Third Quarter 2007
268. On October 31, 2007, Tronox issued a press release with the Company’s
preliminary financial results for third quarter 2007, which ended September 30, 2007. The
Company reported a “provision for environmental remediation and restoration” of $1.3 million,
which materially understated the amount that Tronox should have reserved. By understating this
expense, the reported net loss of $19.1 million and loss per share of $0.47 were therefore also
materially false.
269. In addition, the Company made false and misleading statements during the
Company’s third quarter 2007 conference call held on October 31, 2007. The call was led by
Defendants Adams and Mikkelson. Defendant Mikkelson stated that:
On environmental matters, our financial reserves for environmentalremediation at September 30, 2007 for all active and inactive sitestotaled $203.6 million, a net decrease from the prior quarter . . .
We estimate our net cash spend on environmental projects for 2007will be at the lower end of our range of $35 million to $40million. We continue to actively pursue mitigation strategies toensure obligated parties, insurance companies and governmentagency reimbursements are received to offset our remediationcosts.
270. Defendant Adams also stated that, “[c]oncerning our legacy environmental
business, we continue to spend significant time pursuing our risk mitigation strategies associated
with our legacy environmental business. These include proactively negotiating with regulators
concerning obligations, pursuing other [PRTs] or responsible parties, insurance and Anadarko
reimbursements and evaluating the opportunities to sell land with environmental obligations
included.” Defendant Adams continued by stating that Tronox “ currently ha[s] reserved what
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is probable and estimable at this time and obviously we can’t predict what will happen in the
future, around future requirements or regulations but we continue to accrue as required by
standard SEC guidelines. But I would just refer you to looking back at our track record,
you can see that the reserve numbers if you look back over the last four or five years have
decreased significantly.” He explained that Tronox is “going to be probably in the lower end of
our range this year in the $35 million to $40 million, and we’ve talk about the cash spend really
coming down to kind of that $25 million range over the four to five year period.”
271. The foregoing statements from the Company’s third quarter 2007 conference call
were false and misleading. They misrepresented and omitted the true extent of the
environmental liabilities facing the Company, as well as the size of the necessary environmental
provision. The Defendants failed to disclose the material impact the Company’s environmental
liabilities would have on its financial condition.
272. On November 11, 2007, Tronox filed a Form 10-Q with the Company’s financial
results for third quarter 2007. The Form 10-Q, signed by Defendants Adams and Mikkelson,
stated that the financial statements included therein provided a “fair presentation” of the
Company’s financial condition. Among other things, the financial statements included a
“provision for environmental remediation and restoration” of $1.3 million, which materially
understated the amount that Tronox should have reserved. By understating this expense, the
reported net loss of $19.1 million and loss per share of $0.47 were therefore also materially
overstated.
273. Nonetheless, the Form 10-Q assured investors that all probable and reasonable
costs known to defendants had been properly accounted for:
Management believes, after consultation with its internal legalcounsel, that currently the company is reserved adequately for the
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probable and reasonably estimable costs of known environmentalmatters and other contingencies. However, additions to thereserves may be required as additional information is obtained thatenables the company to better estimate its liabilities, includingliabilities at sites now under review. At this time, however, thecompany cannot reliably estimate a range of future additions to thereserves for any individual site or for all sites collectively.
274. The Defendants also repeated their false statements regarding reserves for other
remediation sites:
In addition to the sites described above, the company is responsiblefor environmental costs related to certain other sites. These sitesrelate primarily to wood treating, chemical production, landfills,mining, and oil and gas refining, distribution and marketing. As ofSeptember 30, 2007, the company had reserves of $33.8 millionfor the environmental costs in connection with these other sites.Although actual costs may differ from current estimates, theamount of any revisions in remediation costs cannot be reasonablyestimated at this time.
275. The representations that all probable and reasonably estimable remediation costs
had been properly accounted for were false and misleading at the time they were made. The
Defendants knew, or recklessly disregarded, undisclosed information indicating that the
remediation costs for the other sites would be substantially higher than they publicly announced.
276. The Form 10-Q included certifications signed by Defendants Adams and
Mikkelson pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-
Oxley Certifications”) that were substantially identical to those quoted in full in Paragraphs 207-
208 above. As Tronox’s Form 10-Q filed November 11, 2007 contained several misstatements,
Adams’s and Mikkelson’s certifications were materially false when made.
277. In its Form 8-K, filed with the SEC on May 5, 2009, Tronox admitted that its
financial statements for the entire Class Period were false and must be restated. Indeed, all of the
foregoing statements in the Form 10-Q for third quarter 2007 were false and misleading at the
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time they were made. The Defendants knew, or were reckless in not knowing, that the reserves
for environmental liabilities were grossly underestimated. Furthermore, by not referring to the
“Secret Sites,” the Defendants hid material information that was necessary to understand the
extent of Tronox’s exposure.
O. 2007 Year End Results And Related Press Release
278. On February 13, 2008, Tronox issued a press release announcing its financial
results for the fourth quarter of 2007 and the fiscal year ended December 31, 2007. The
Company reported a “provision for environmental remediation and restoration” of negative
$600,000 for Q4 2007, which materially understated the amount that Tronox should have
reserved. By understating this expense, the reported net loss of $56.7 million and loss per share
of $1.39 for Q4 2007 were therefore also materially false. For fiscal year 2007, the financial
statements included a “provision for environmental remediation and restoration” of negative
$20.4 million, which materially understated the amount that Tronox should have reserved. By
understating this expense, the reported net loss of $106.5 million and earnings per share of
negative $2.61 for fiscal year 2007 were therefore also materially false.
279. In addition, the Company made false and misleading statements during the
Company’s fourth quarter 2007 conference call held on February 13, 2008. The call was led by
Defendants Adams and Mikkelson. Defendant Mikkelson stated that:
On environmental matters, our financial reserves for environmentalremediation at December 31, 2007 for all active and inactive sitestotaled $188.8 million, a net decrease of $14.8 million from theprior quarter. . . . our receivables do not include approximately$30 million in anticipated future reimbursements due Tronoxby the Department of Energy for work that’s yet to be completed atthe West Chicago site. It is expected that the DOE will continue toreimburse us 55% of our cost at this site. . . . For the year Tronox’sgross cash spend on environmental remediation was $52 million . .. resulting in a net cash spend for 2007 of $33 million. Our current
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estimate for net cash spend on environmental projects in 2008 is inthe range of $40 million to $45 million. . . . we continue toactively pursue mitigation strategies to ensure obligated parties,insurance companies and government agency reimbursements arereceived to offset our remediation costs.
280. Defendant Adams added that:
In the last few years our reserves for environmentalremediation have decreased from $239 million in late 2005 to$189 million at the end of 2007.
Considering the current and future receivables we expect to receivefrom government and insurance agencies we have a future netcash liability of approximately $91 million based on ourcurrent probable and estimateable reserves. We have done a lotof heavy lifting at a number of our sites including West Chicagoand Henderson, Nevada.
Our focus continues to be on execution of the remediation plans toproperly clean up these sites as mandated by the governmentagencies and to work with state and federal governmentrepresentatives to reduce our future liability for sites where webelieve we have little or no liability.
For instance, the Manville, New Jersey site was cleaned up . . . Wefeel the audit will support our position coupled with the fact thatthere are additional PRPs now identified for this project will leadto a reasonable settlement in the future. . . .
We are also in the process of evaluating a number of ways toreduce or limit our legacy liability which I cannot provide in anydetail. But I just want to emphasize that we are being diligentwith regards to this critical issue. We are working each and everyday to reduce our future liability wherever we can while alsoadhering to our core values which includes protecting theenvironment.
281. The above statements from the Company’s fourth quarter 2007 conference call
were false and misleading. They misrepresented and omitted the true extent of the
environmental liabilities facing the Company, as well as the size of the necessary environmental
provision. The Defendants failed to disclose the material impact the Company’s environmental
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liabilities would have on its financial condition.
P. Annual Report On Form 10-K For Fiscal Year 2007
282. On March 14, 2008, Tronox filed its Annual Report on Form 10-K for fiscal year
2007 (“2007 Form 10-K” ). The 2007 Form 10-K, signed by Defendants Adams and Mikkelson,
reported reserves for costs of environmental remediation and restoration in the amount of $188.8
million. The financial statements also included a “provision for environmental remediation and
restoration” of $2.4 million, which materially understated the amount that Tronox should have
reserved. By understating this expense, the reported net loss of $106.4 million and loss per share
of $2.61 were therefore also materially understated.
283. In addition, in the 2007 Form 10-K, the Defendants represented that:
We believe that we have reserved adequately for the probable andreasonably estimable costs of known contingencies. However,additions to the reserves may be required as additional informationis obtained that enables us to better estimate our liabilities,including any liabilities at sites now under review. We cannotreliably estimate the amount of future additions to the reserves atthis time. In certain situations reserves are probable but notpresently estimable. Additionally, there may be other sites wherewe have potential liability for environmental-related matters forwhich we do not have sufficient information to determine that theliability is probable and/or reasonably estimable.
284. However, liability at other sites was, in fact, “probable and/or reasonably
estimable” and the reserves failed to account for the “Secret Sites,” as alleged above. The 2007
Form 10-K also failed to provide meaningful disclosure regarding the range of reserves that may
ultimately be necessary. The Defendants also repeated other false statements regarding reserves
for other remediation sites:
In addition to the sites described above, the company is responsiblefor environmental costs related to certain other sites. These sitesrelate primarily to wood-treating, chemical production, landfills,mining, and oil and gas refining, distribution and marketing.
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Although actual costs may differ from current estimates, theamount of any revisions in remediation costs cannot be reasonablyestimated at this time.
285. Although they recorded a reserve of $24.6 million for these sites, Defendants
knew, or recklessly disregarded, undisclosed information indicating that the remediation costs
would be substantially higher than they publicly announced.
286. Defendants Adams and Mikkelson signed the 2007 Form 10-K. They reviewed,
approved, and caused the 2007 Form 10-K to be filed with the SEC. Despite the foregoing false
and misleading statements contained therein, these Defendants represented that they “believe the
assumptions underlying our consolidated and combined financial statements are reasonable.” In
addition, they made the untrue representation that:
As of December 31, 2007, we had reserves in the amount of$188.8 million for environmental remediation and restoration. Wereserve for costs related to environmental remediation andrestoration only when a loss is probable and the amount isreasonably estimable.
287. The Form 10-K included certifications signed by Defendants Adams and
Mikkelson pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-
Oxley Certifications”) that were substantially identical to those quoted in full in Paragraphs 207-
208 above. As Tronox’s 2007 Form 10-K contained several misstatements, Adams’s and
Mikkelson’s certifications were materially false when made.
288. In its Form 8-K filed with the SEC on May 5, 2009, Tronox admitted that its
financial statements for the entire Class Period were false and must be restated. Indeed, all of the
foregoing statements in the Form 10-K for fiscal year 2007 were false and misleading at the time
they were made. The Defendants knew, or were reckless in not knowing, that the reserves for
environmental liabilities were grossly underestimated. Furthermore, by not referring to the
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“Secret Sites,” the Defendants hid material information that was necessary to understand the
extent of Tronox’s exposure.
Q. First Quarter 2008
289. On April 30, 2008, Tronox issued a press release with the Company’s preliminary
financial results for first quarter 2008, which ended March 31, 2008. The Company reported no
“provision for environmental remediation and restoration,” which materially understated the
amount that Tronox should have reserved. By understating this expense, the reported net loss of
$200,000 and zero earnings per share were therefore also materially false.
290. In addition, the Company also made false and misleading statements during the
Company’s first quarter 2008 conference call held on April 30, 2008. The call was led by
Defendants Adams and Mikkelson. Defendant Mikkelson stated that:
Our financial reserves for environmental remediation at March 31,2008, for all active and inactive sites totaled $181.8 million, a netdecrease of $7 million from the prior quarter . . . [which] do[es]not include approximately $28 million in anticipated futurereimbursements due Tronox by the Department of Energy for workyet to be completed at the West Chicago site. It is expected that theDOE will continue to reimburse us 55% of our cost at this site.
As we continue to manage our cash flows for 2008, we havereduced our forecasted spend. Our current estimate for net cashspend on environmental projects in 2008 is in the range of $30million to $35 million, a $10 million reduction from our previousforecast.
291. The above statements from the Company’s first quarter 2008 conference call were
false and misleading. They misrepresented and omitted the true extent of the environmental
liabilities facing the Company, as well as the size of the necessary environmental provision. The
Defendants failed to disclose the material impact the Company’s environmental liabilities would
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have on its financial condition.
292. On May 7, 2008, Tronox filed a Form 10-Q with the Company’s financial results
for first quarter 2008. The Form 10-Q, signed by Defendants Adams and Mikkelson, stated that
the financial statements included therein provided a “fair presentation” of the Company’s
financial condition. Among other things, the financial statements included no “provision for
environmental remediation and restoration,” which materially understated the amount that
Tronox should have reserved. By understating this expense, the reported net loss of $200,000
was materially understated and the zero earnings per share was materially overstated.
293. Nonetheless, the Form 10-Q assured investors that all probable and reasonably
estimable costs known to defendants had been properly accounted for:
Management believes, after consultation with its internal legalcounsel, that currently the company is reserved adequately for theprobable and reasonably estimable costs of known environmentalmatters and other contingencies. However, additions to thereserves may be required as additional information is obtained thatenables the company to better estimate its liabilities, includingliabilities at sites now under review. At this time, however, thecompany cannot reliably estimate a range of future additions to thereserves for any individual site or for all sites collectively.
294. The Defendants also repeated their false statements regarding reserves for other
remediation sites:
In addition to the sites described above, the company is responsiblefor environmental costs related to certain other sites. These sitesrelate primarily to wood treating, chemical production, landfills,mining, and oil and gas refining, distribution and marketing.Although actual costs may differ from current estimates, theamount of any revisions in remediation costs cannot be reasonablyestimated at this time.
295. The representations that all probable and reasonably estimable remediation costs
had been properly accounted for were false and misleading at the time they were made.
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Although they recorded a reserve of $29.8 million for these other sites, the Defendants knew, or
recklessly disregarded, undisclosed information indicating that the remediation costs for the
other sites would be substantially higher than they publicly announced.
296. The Form 10-Q included certifications signed by Defendants Adams and
Mikkelson pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-
Oxley Certifications”) that were substantially identical to those quoted in full in Paragraphs 207-
208 above. As Tronox’s Form 10-Q filed May 7, 2008 contained several misstatements,
Adams’s and Mikkelson’s certifications were materially false when made.
297. In its Form 8-K filed with the SEC on May 5, 2009, Tronox admitted that its
financial statements for the entire Class Period were false and must be restated. Indeed, all of the
foregoing statements from in the Form 10-Q for first quarter 2008 were false and misleading at
the time they were made. The Defendants knew, or were reckless in not knowing, that the
reserves for environmental liabilities were grossly underestimated. Furthermore, by not referring
to the “Secret Sites,” the Defendants hid material information that was necessary to understand
the extent of Tronox’s exposure.
R. Second Quarter 2008
298. On July 30, 2008, Tronox issued a press release with the Company’s preliminary
financial results for second quarter 2008, which ended June 30, 2008. The Company reported a
“provision for environmental remediation and restoration” of $500,000, which materially
understated the amount that Tronox should have reserved. By understating this expense, the
reported net loss of $34.4 million and loss per share of $0.84 were therefore also materially false.
299. In addition, the Company made false and misleading statements during the
Company’s second quarter 2008 conference call held on July 30, 2008. The call was led by
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Defendants Adams and Mikkelson. Defendant Mikkelson stated that “our financial reserves for
environmental remediation at June 30, 2008 . . . totaled $183.8 million.” Defendant Mikkelson
also misleadingly stated that Tronox was entitled to environmental remediation reimbursement
from the Department of Energy, Kerr-McGee/Anadarko, and insurance providers which it would
use to offset its environmental costs. Defendant Mikkelson stated that Tronox “believe[s] that
the insurance policy we have for this site [Henderson, Nevada] will cover the majority of these
costs,” and to “[p]lease keep in mind that our receivables do not include approximately $27
million in anticipated future reimbursements due Tronox.” Defendant Mikkelson also
represented stated that Tronox projected its spending for environmental liabilities to be in the
range of $30 million to $35 million.”
300. The above statements from the Company’s second quarter 2008 conference call
were false and misleading. They misrepresented and omitted the true extent of the
environmental liabilities facing the Company, as well as the size of the necessary environmental
provision. The Defendants failed to disclose the material impact the Company’s environmental
liabilities would have on its financial condition.
301. On August 11, 2008, Tronox filed a Form 10-Q with the Company’s financial
results for second quarter 2008. The Form 10-Q was signed by Defendants Adams and
Mikkelson and contained what was represented to be a “fair presentation” of Tronox's financial
position and standing. Among other things, the financial statements included a “provision for
environmental remediation and restoration” of $500,000, which materially understated the
amount that Tronox should have reserved. By understating this expense, the reported net loss of
$34.4 million and loss per share of $0.84 were therefore also materially false.
302. The Form 10-Q assured investors that all probable and reasonable costs known to
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defendants had been properly accounted for:
Management believes, after consultation with its internal legalcounsel, that currently the company is reserved adequately for theprobable and reasonably estimable costs of known environmentalmatters and other contingencies. However, additions to thereserves may be required as additional information is obtained thatenables the company to better estimate its liabilities, includingliabilities at sites now under review. At this time, however, thecompany cannot reliably estimate a range of future additions to thereserves for any individual site or for all sites collectively.
303. The Defendants also repeated their false statements regarding reserves for other
remediation sites:
In addition to the sites described above, the company is responsiblefor environmental costs related to certain other sites. These sitesrelate primarily to wood treating, chemical production, landfills,mining, and oil and gas refining, distribution and marketing.Although actual costs may differ from current estimates, theamount of any revisions in remediation costs cannot be reasonablyestimated at this time.
304. The representations that all probable and reasonably estimable remediation costs
had been properly accounted for were false and misleading at the time they were made.
Although they recorded a reserve of $27.3 million for these other sites, the Defendants knew, or
recklessly disregarded, undisclosed information indicating that the remediation costs for the
other sites would be substantially higher than they publicly announced.
305. The Form 10-Q included certifications signed by Defendants Adams and
Mikkelson pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-
Oxley Certifications”) that were substantially identical to those quoted in full in Paragraphs 207-
208 above. As Tronox’s Form 10-Q filed August 11, 2008 contained several misstatements,
Adams’s and Mikkelson’s certifications were materially false when made.
306. In its Form 8-K filed with the SEC on May 5, 2009, Tronox admitted that its
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financial statements for the entire Class Period were false and must be restated. Indeed, all of the
foregoing statements in the Form 10-Q for second quarter 2008 were false and misleading at the
time they were made. The Defendants knew, or were reckless in not knowing, that the reserves
for environmental liabilities were grossly underestimated. Furthermore, by not referring to the
“Secret Sites,” the Defendants hid material information that was necessary to understand the
extent of Tronox’s exposure.
S. Third Quarter 2008
307. On November 7, 2008, Tronox filed a Form 10-Q with the Company’s financial
results for third quarter 2008. The Form 10-Q, signed by Defendant Mikkelson, stated that the
financial results included therein provided a “fair presentation” of the Company’s financial
condition. Among other things, the financial statements included no “provision for
environmental remediation and restoration,” which materially understated the amount Tronox
should have reserved. By understating this expense, the reported net loss of $37.9 million and
loss per share of $0.92 were therefore also materially understated and reported liabilities were
materially understated.
308. Nonetheless, the Form 10-Q assured investors that all probable and reasonably
estimable costs known to defendants had been properly accounted for:
Management believes, after consultation with its internal legalcounsel, that currently the company is reserved adequately for theprobable and reasonably estimable costs of known environmentalmatters and other contingencies. However, additions to thereserves may be required as additional information is obtained thatenables the company to better estimate its liabilities, includingliabilities at sites now under review. At this time, however, thecompany cannot reliably estimate a range of future additions to thereserves for any individual site or for all sites collectively.
309. The Defendants also repeated their false statements regarding reserves for other
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remediation sites:
In addition to the sites described above, the company is responsiblefor environmental costs related to certain other sites. These sitesrelate primarily to wood treating, chemical production, landfills,mining, and oil and gas refining, distribution and marketing.Although actual costs may differ from current estimates, theamount of any revisions in remediation costs cannot be reasonablyestimated at this time.
310. The representations that all probable and reasonably estimable remediation costs
had been properly accounted for were false and misleading at the time they were made.
Although they recorded a reserve of $25.7 million for these other sites, the Defendants knew, or
recklessly disregarded, undisclosed information indicating that the remediation costs for the
other sites would be substantially higher than they publicly announced.
311. The Form 10-Q included certifications signed by Defendants Adams and
Mikkelson pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-
Oxley Certifications”) that were substantially identical to those quoted in full in Paragraphs 207-
208 above. As Tronox’s Form 10-Q filed November 7, 2008 contained several misstatements,
Adams’s and Mikkelson’s certifications were materially false when made.
312. In its Form 8-K, filed with the SEC on May 5, 2009, Tronox admitted that its
financial statements for the entire Class Period were false and must be restated. Indeed, all of the
foregoing statements in the Form 10-Q for third quarter 2008 were false and misleading at the
time they were made. The Defendants knew, or were reckless in not knowing, that the reserves
for environmental liabilities were grossly underestimated. Furthermore, by not referring to the
“Secret Sites,” the Defendants hid material information that was necessary to understand the
extent of Tronox’s exposure.
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DEFENDANT E&Y VIOLATED THE FEDERAL SECURITIES LAWS
A. Background
313. Defendant E&Y is a worldwide firm of certified public accountants, auditors and
consultants. Through its Oklahoma City, Oklahoma office, E&Y served as both Kerr-McGee’s
and Tronox’s auditor and principal accounting firm prior to and throughout the Class Period.
E&Y was required to audit Tronox’s financial statements in accordance with the standards
established by the PCAOB, which incorporates substantially the provisions of Generally
Accepted Accounting Standards (“GAAS”), and report the audit results to Kerr-McGee and
Tronox, their boards of directors, their audit committees and the members of the investing
public, including Plaintiffs and the other members of the Class. With knowledge of Tronox’s
true financial condition, or in reckless disregard thereof, E&Y certified the materially false and
misleading financial statements of Tronox described below and provided unqualified
Independent Auditors’ Reports, dated March 29, 2006, March 15, 2007, and March 13, 2008,
which were included in Tronox’s SEC filings and publicly disseminated statements. Without
these materially false and misleading unqualified audit opinions and reports, the fraud alleged
herein could not have been perpetrated.
314. Prior to the Spin-Off, Tronox’s revenues, expenses, assets, and liabilities had been
consolidated into Kerr-McGee’s financial statements, also audited by E&Y beginning in fiscal
year 2002. The same improper reserving methodologies for the businesses that became Tronox
after the IPO had been used to determine Kerr-McGee’s environmental remediation reserves.
Indeed, the information in the Tronox IPO Registration Statement and its Annual Report on
Form 10-K for the year ended December 31, 2005 contained the environmental remediation
reserve balances for the years ended December 31, 2002, 2003, 2004, and 2005 for the Kerr-
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McGee chemical businesses, which had been audited and approved by E&Y.
315. E&Y’s professional services for Kerr-McGee and Tronox generated significant
aggregate fees for E&Y during each of the years 2002-2007, as follows:
E&Y Audit & Tax FeesKerr-McGee and Tronox
(in millions)
Year Amount2002 6.1762003 5.6572004 7.3332005 10.1432006 4.42007 4.6
Of the 2005 fees, $2,485,000 was attributable to services related to the IPO and the audit of
Tronox.
316. The income of the E&Y partners responsible for the Kerr-McGee and Tronox
accounts benefited, and E&Y’s professional status was enhanced by its relationship with Kerr-
McGee and Tronox. Kerr-McGee and Tronox combined was one of the largest clients of E&Y’s
Oklahoma City office, if not the largest. It was a high priority for E&Y to keep Kerr-McGee and
Tronox as clients so that E&Y could continue to benefit financially. Because the compensation
of the E&Y partners is related to the fees produced by the clients for whom they are responsible,
the E&Y partners on the Kerr-McGee and Tronox engagements had a direct financial motive to
acquiesce in the accounting positions taken by their clients to ensure the retention of Kerr-
McGee and Tronox as E&Y clients and thereby ensure the continuation of millions of dollars in
annual fees.
B.
E&Y Had Full And Complete Access To Kerr-McGee’s And Tronox’sInformation
317. As a result of its relationship with Kerr-McGee and Tronox and the audit and tax
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services it rendered to both companies, E&Y’s personnel were regularly present at Kerr-
McGee’s and Tronox’s corporate headquarters. E&Y had continual access to, and had
knowledge of Kerr-McGee’s and Tronox’s confidential corporate financial and business
information through conversations with employees of Kerr-McGee and Tronox and through
review of Kerr-McGee’s and Tronox’s non-public documents. The close relationship between
E&Y and Kerr-McGee dated back to 2002.
318. In addition, E&Y personnel had the opportunity to observe and were obligated
under GAAS to review Kerr-McGee’s and Tronox’s business and accounting practices, and test
Kerr-McGee’s and Tronox’s internal and publicly reported financial statements, as well as its
internal controls and structures.
C. E&Y’s Materially False And Misleading Audit Reports
319. PCAOB standards and related rules provide that an audit report must state
whether a company’s financial statements are presented in conformity with GAAP. Statement
on Auditing Standards (codified and referred to as AU § ), AU § 110.01. The audit reports
issued and signed by defendant E&Y for fiscal years 2005, 2006, and 2007 falsely represented
that Tronox’s financial statements for the reported periods were presented in conformity with
GAAP when such financial statements violated GAAP with regard to the appropriate
environmental remediation reserve. Had these financial statements been prepared in accordance
with GAAP, Tronox’s total assets and net income (among other financial statement items) would
have been substantially and materially reduced and its liabilities would have been materially
increased.
320. Specifically, E&Y’s report annexed to the Company’s 2005 Form 10-K falsely
stated, in relevant part:
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We have audited the accompanying consolidated and combinedbalance sheets of Tronox Incorporated as of December 31, 2005and 2004, and the related consolidated and combined statements ofoperations, comprehensive income (loss) andbusiness/stockholders’ equity, and cash flows for each of the threeyears in the period ended December 31, 2005. . . .
We conducted our audits in accordance with the standards of thePublic Company Accounting Oversight Board (United States). . . .
We believe that our audits provide a reasonable basis for ouropinion.
* * *
In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated and combinedfinancial position of Tronox Incorporated at December 31, 2005and 2004, and the consolidated and combined results of theiroperations and their cash flows for each of the three years in theperiod ended December 31, 2005, in conformity with U.S.generally accepted accounting principles. Also, in our opinion, therelated financial statement schedule, when considered in relation tothe basic financial statements taken as a whole, presents fairly inall material respects the information set forth therein.
321. Similarly, E&Y’s reports annexed to the Company’s 2006 Form 10-K falsely
stated, in relevant part:
We have audited the accompanying consolidated balance sheets ofTronox Incorporated as of December 31, 2006 and 2005, and therelated consolidated and combined statements of operations,comprehensive income (loss) and business/stockholders’ equity,and cash flows for each of the three years in the period endedDecember 31, 2006. . . .
We conducted our audits in accordance with the standards of thePublic Company Accounting Oversight Board (United States). . . .
We believe that our audits and the report of other auditors providea reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors,the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Tronox
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Incorporated at December 31, 2006 and 2005, and the consolidatedand combined results of its operations and its cash flows for eachof the three years in the period ended December 31, 2006, inconformity with U.S. generally accepted accounting principles.Also, in our opinion, the related financial statement schedule, whenconsidered in relation to the basic financial statements taken as awhole, presents fairly in all material respects the information setforth therein.
* * *
We also have audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States), theeffectiveness of the Company’s internal control over financialreporting as of December 31, 2006, based on criteria established inInternal Control – Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission, andour report dated March 15, 2007, expressed an unqualified opinionthereon.
In addition, regarding the Company’s internal control over financial reporting, E&Y represented
as follows:
We conducted our audit in accordance with the standards of thePublic Company Accounting Oversight Board (United States). . . .We believe that our audit provides a reasonable basis for ouropinion.
In our opinion, management’s assessment that TronoxIncorporated maintained effective internal control over financialreporting as of December 31, 2006, is fairly stated, in all materialrespects, based on the COSO criteria. Also, in our opinion, TronoxIncorporated maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2006, based onthe COSO criteria.
322. E&Y’s reports annexed to the Company’s 2007 Form 10-K falsely stated, in
relevant part:
We have audited the accompanying consolidated balance sheets ofTronox Incorporated as of December 31, 2007 and 2006, and therelated consolidated and combined statements of operations,comprehensive income (loss) and business/stockholders’ equity,
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and cash flows for each of the three years in the period endedDecember 31, 2007.
* * *
We conducted our audits in accordance with the standards of thePublic Company Accounting Oversight Board (United States). . . .We believe that our audits and the report of other auditors providea reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors,the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of TronoxIncorporated at December 31, 2007 and 2006, and the consolidatedand combined results of its operations and its cash flows for eachof the three years in the period ended December 31, 2007, inconformity with U.S. generally accepted accounting principles.Also, in our opinion, the related financial statements schedule,when considered in relation to the basic financial statements takenas a whole, presents fairly in all material respects the informationset forth therein.
* * *
We also have audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States),Tronox Incorporated’s internal control over financial reporting asof December 31, 2007, based on criteria established in InternalControl – Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and ourreport dated March 13, 2008, expressed an unqualified opinionthereon.
In addition, regarding the Company’s internal control over financial reporting, E&Y represented
as follows:
We have audited Tronox Incorporated’s internal control overfinancial reporting as of December 31, 2007, based on criteriaestablished in Internal Control – Integrated framework issued bythe Committee of Sponsoring Organizations of the TreadwayCommission (the COSO criteria). . . .
We conducted our audit in accordance with the standards of thePublic Company Accounting Oversight Board (United States). . . .
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We believe that our audit provides a reasonable basis for ouropinion.
* * *
In our opinion, Tronox Incorporated maintained, in all materialrespects, effective internal control over financial reporting as ofDecember 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States), theconsolidated balance sheets of Tronox Incorporated as ofDecember 31, 2007 and 2006 and the related consolidated andcombined statements of operations, comprehensive income (loss)and business/stockholders’ equity, and cash flows for each of thethree years in the period ended December 31, 2007 and our reportdated March 13, 2008, expressed an unqualified opinion thereof.
323. The foregoing audit reports issued by E&Y were materially false and misleading
because the financial statements referred to therein were not in conformity with GAAP and the
Company did not maintain, in all material respects, effective internal control over financial
reporting particularly with regard to the environmental remediation reserve. The audit reports
were also materially false and misleading because the audits referred to therein were not
conducted in accordance with GAAS.
D. E&Y’s Audits Were Not Conducted In Conformity With GAAS
324. The SEC has stressed the importance of meaningful audits being performed by
independent accountants:
[T]he capital formation process depends in large part on theconfidence of investors in financial reporting. An investor’swillingness to commit his capital to an impersonal market isdependent on the availability of accurate, material and timelyinformation regarding the corporations in which he has invested orproposes to invest. The quality of information disseminated in thesecurities markets and the continuing conviction of individualinvestors that such information is reliable are thus key to theformation and effective allocation of capital. Accordingly, theaudit function must be meaningfully performed and the
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accountants’ independence not compromised. (Emphasisadded).
Relationship Between Registrants and Independent Accountants, SEC Accounting Series Release
No. 2961, 1981 SEC LEXIS 858 (Aug. 20, 1981).
325. GAAS, as approved and adopted by the American Institute of Certified Public
Accountants (“AICPA”), relate to the conduct of individual audit engagements. Statements on
Auditing Standards are recognized by the AICPA as the interpretation of GAAS. In conducting
the audits herein at issue, E&Y knowingly and/or recklessly violated GAAS.
E. E&Y Knew Or Recklessly Disregarded That Tronox’s Internal AccountingControls Were Materially Deficient With Regard To EnvironmentalRemediation Reserve Balances
326. E&Y issued unqualified audit opinions on Tronox’s financial statements for fiscal
years 2005, 2006, and 2007, turning a blind eye to, first, Kerr-McGee’s and, thereafter, Tronox’s
failure to properly record environmental remediation and tort liability reserves and the
implementation of an improper reserving methodology.
327. At all times relevant thereto, Tronox exhibited significant internal control
weaknesses, including the lack of appropriate policies and procedures to measure and record
environmental remediation reserves, which subjected the Company to significant risk of material
financial statement misstatements.
328. GAAS requires an auditor to determine three initial risk factors in order to obtain
an understanding of internal controls sufficient to plan the audit. An auditor must evaluate (i)
“control risk,” or whether a misstatement will be prevented or detected on a timely basis by the
entity’s internal control; (ii) “inherent risk,” or the susceptibility of an assertion to a material
misstatement assuming there are no internal controls; and (iii) “detection risk,” the risk that the
auditor will not detect a material misstatement. AU §319.63.
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329. GAAS also requires an auditor to assess risk factors relating to misstatements
arising from fraudulent financial reporting. AU §316.32-.33. The risk associated with an audit
determines the nature and extent of the evidentiary matter that must be obtained to assure the
auditor that the financial statements are free from material error.
330. GAAS and E&Y’s audit approach required E&Y to study Tronox’s internal
controls before issuing an opinion on its financial statements. With respect to internal controls,
GAAS requires the following:
AU §319, Consideration of Internal Control in a FinancialStatement Audit
In all audits, the auditor should obtain an understanding of each ofthe five components of internal control sufficient to plan the auditby performing procedures to understand the design of controlsrelevant to an audit of financial statements, and whether they havebeen placed in operation. In planning the audit, such knowledgeshould be used to –
• Identify types of potential misstatement.• Consider factors that affect the risk of material
misstatement.• Design substantive tests. [AU §319.19]• Design tests of controls, when applicable [AU §319.25]
The auditor should obtain sufficient knowledge of the controlenvironment to understand management’s and the board ofdirectors’ attitude, awareness, and actions concerning the controlenvironment, considering both the substance of controls and theircollective effect. The auditor should concentrate on the substanceof controls rather than their form, because controls may beestablished but not acted upon. For example, management mayestablish a formal code of conduct but act in a manner thatcondones violations of that code. [AU §319.35]
The auditor should obtain sufficient knowledge of the entity’s riskassessment process to understand how management considers risksrelevant to financial reporting objectives and decides about actionsto address those risks. This knowledge might includeunderstanding how management identifies risks, estimates the
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significance of the risks, assesses the likelihood of theiroccurrence, and relates them to financial reporting. [AU §319.39]
[* * *]
The auditor should obtain sufficient knowledge of the informationsystems relevant to financial reporting to understand –
• The classes of transactions in the entity’s operations thatare significant to the financial statements.
• The accounting records, supporting information, andspecific accounts in the financial statements involved in theinitiating, recording, processing and reporting of transactions.
• The financial reporting process used to prepare the entity’sfinancial statements, including significant accounting estimatesand disclosures . . . [AU §319.49]
In obtaining an understanding of controls that are relevant to auditplanning, the auditor should perform procedures to providesufficient knowledge of the design of the relevant controlspertaining to each of the five internal control components anddetermine whether they have been placed in operation. Thisknowledge is ordinarily obtained through previous experience withthe entity and procedures such as inquiries of appropriatemanagement, supervisory, and staff personnel; inspection of entitydocuments and records; and observation of entity activities andoperations.... [AU §319.58]
331. E&Y knew or recklessly disregarded that Tronox’s internal controls with respect
to the development and quantification of environmental remediation reserves were deficient and,
as a result, Tronox’s financial statements were materially false and misleading during the Class
Period based on Tronox’s failure to record an adequate reserve for environmental remediation
and related tort liabilities. In light of its role in auditing the environmental remediation reserve
for Kerr-McGee during the years 2002-2005, E&Y knew, or was reckless in not knowing, that
Kerr-McGee and Tronox relied primarily on significant subjective factors in determining the
environmental remediation reserve, greatly heightening the risk of misstatement and revealing an
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absence of adequate internal controls relating to this material item. This risk factor was of
special importance during the Class Period as E&Y was aware of Kerr-McGee’s intention to
divest itself of its chemical businesses together with the Legacy Liabilities, creating a powerful
motivation to minimize the magnitude of the environmental remediation reserve. Moreover,
pursuant to Section 2.5(e) of the Master Separation Agreement entered into between Kerr-
McGee and Tronox in connection with the Tronox IPO, Tronox was required to use the
environmental remediation policies that had historically been applied by Kerr-McGee or risk
losing its indemnity rights under the agreement. E&Y knew or should have known of this
provision in the agreement.
F.
E&Y Knew Of Or Recklessly Disregarded Significant Risk Factors InConducting Its Audits
332. E&Y knew of or recklessly disregarded significant risk factors relating to possible
misstatements arising from fraudulent financial reporting at Tronox. AU §316 ( see also AU
§316A) give examples of risk factors relevant to the audits of Tronox during the Class Period
including the use of unusually aggressive accounting policies with regard to estimates of
accruals, in this case amounts to be recorded as environmental remediation and tort liability
reserves.
333. E&Y was required under GAAS to devise an audit plan that would appropriately
address areas of audit risk. With regard to Tronox, the environmental remediation and tort
reserves were the single most significant area of risk. E&Y nonetheless continued to acquiesce
in the application of the improper reserving methodologies used by Kerr-McGee, in part, because
the Master Separation Agreement precluded Tronox from changing those policies as a condition
of retaining indemnity rights form Kerr-McGee. Indeed, according to the Adversary Complaint,
E&Y questioned the sufficiency of the tort disclosures in the Tronox IPO Registration Statement.
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Shortly after the IPO, Tronox settled certain wood treatment claims in mid-December 2005.
During a meeting in the first week of January 2006, E&Y challenged a New Kerr-McGee
executive regarding the accuracy of the Registration Statement in light of these tort settlements.
Despite recognizing the insufficiency of Tronox’s Registration Statement statements, E&Y failed
to either issue a qualified opinion on Tronox’s financial statements or resign as Tronox’s auditor.
334. Furthermore, given E&Y’s intimate knowledge of the magnitude of the Legacy
Liabilities, based on its years of audit work for Kerr-McGee, coupled with its knowledge that the
Legacy Liabilities were transferred to Tronox, E&Y knew, or was reckless in not knowing, that
these obligations would inevitably overwhelm Tronox. E&Y knew, or recklessly disregarded,
that Tronox lacked the cash resources and borrowing ability to deal with the monumental
financial burden which the Legacy Liabilities represented, and could not contemporaneously
adequately fund its ongoing business operations, including paying interest on the Bonds,
especially if it spent and reserved the amounts necessary to properly address its environmental
remediation obligations.
335. During the annual audits, E&Y also noted or deliberately turned a blind eye to the
existence of the following additional factors regarding the deficiency in Tronox’s reserving
methodology with regard to its environmental remediation reserves: (i) by virtue of its
longstanding relationship in providing audit, tax, and consulting services to Kerr-McGee, E&Y
had in depth knowledge as to the status of both the chemicals and oil and gas businesses, and
was knowledgeable about Kerr-McGee’s effort to sell the chemicals business and the fact that
those efforts were unsuccessful due to potential purchasers’ refusal to take on the Legacy
Liabilities in light of their enormous magnitude; (ii) E&Y knew, or was reckless in not knowing,
that the Tronox IPO was occurring because no third party would take on the Legacy Liabilities
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without an indemnity from Kerr-McGee in the hundreds of millions of dollars, while knowing
that the recorded reserve for Tronox was approximately $200 million and that Kerr-McGee had
structured the transaction so that the Legacy Liabilities became obligations of Tronox; (iii) E&Y
had signed off on the improper reserving policies that Kerr-McGee had employed for years and
that would be carried over to Tronox, and to secure the significant additional revenue that this
new engagement represented, E&Y was willing to turn a blind eye to the improper reserving
practices and defer to management with regard to recording of accruals and disclosure for
environmental remediation obligations; (iv) E&Y knew, or was reckless in not knowing, about
the impact on reserves of the dispute between the chemical subsidiaries of Kerr-McGee that
became Tronox as of the IPO, and the EPA with regard to the Manville, New Jersey wood
treatment site and that Tronox had received a demand for potentially up to $236 million to
remediate that location; nonetheless E&Y acquiesced in Tronox’s decision to not record a
reserve for that obligation until the third quarter of 2006 and, even at that date, the amount
recorded, $35 million, was far below the probable and reasonably estimable liability for the site;
(v) E&Y knew, or was reckless in not knowing, that $70 million had been paid by Kerr-McGee
to settle 11 wood treatment lawsuits and that there were thousands of analogous claims pending
which would require multi-millions of dollars to resolve, yet a materially inadequate reserve (of
no more than $11 million) was recorded during the Class Period for these obligations; (vi) where
Tronox stated that it was not possible to establish a range of potential liability for a particular
environmental remediation site, and for which no liability was recorded, E&Y, in violation of
GAAS, failed to insist on development of an estimate of liabilities which could then have been
recorded consistent with SAB 92, or issue a qualified opinion; (vi) in an environment of
increasingly stringent application of environmental laws and regulations E&Y provided
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unqualified opinions on the financial statements of Tronox for the years ended 2005, 2006, and
2007 even though it knew, or recklessly disregarded, that there were material uncertainties as to
the amount of the environmental remediation and tort liabilities Tronox faced; and (vii) E&Y
knew, or recklessly disregarded that Kerr-McGee’s total environmental remediation expenditures
through 2005 far exceeded the $224 million in reserves for all potential future liabilities which
Tronox recorded in 2005, a facially insufficient amount in light of the history of the Company
and the information known to E&Y regarding the Legacy Liabilities.
G. E&Y Failed To Obtain Sufficient Competent Evidential Matter Or IgnoredThe Audit Evidence It Did Gather In Violation Of GAAS
336. GAAS, as set forth in AU §326, Evidential Matter, requires auditors to obtain
sufficient, competent, evidential matter through inspection, observation, inquiries, and
confirmations to afford a reasonable basis for an opinion regarding the financial statements under
audit.
337. In violation of GAAS, and contrary to the representations in its reports on
Tronox’s financial statements, E&Y did not obtain sufficient, competent, evidential matter to
support Tronox’s assertions regarding its environmental remediation reserve for the periods
ending December 31, 2005, 2006, and 2007 and/or was reckless in ignoring audit evidence.
338. Based on its historical audit work for Kerr-McGee, E&Y was aware that the
Company’s estimate of this reserve was a material component of Kerr-McGee’s and Tronox’s
financial results and would be of critical importance to potential purchasers of the Company’s
securities. AU §312 regarding “Audit Risk and Materiality in Conducting an Audit” specifically
identifies the following as a potential source of a misstatement: “Management’s judgments
concerning an accounting estimate or the selection or application of accounting policies that the
auditor may consider unreasonable or inappropriate.” AU §342 entitled “Auditing Accounting
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Estimates” is also directly applicable here. This standard notes that because estimates are based
on subjective and objective factors, it may be difficult for management to establish controls over
them. Thus, “when planning and performing procedures to evaluate accounting estimates, the
auditor should consider, with an attitude of professional skepticism, both the subjective and
objective factors.” (Emphasis added). AU §342 is clear that it is the auditor’s obligation to
ensure that the accounting estimate (here the environmental remediation and tort liability
reserves) are reasonable in the circumstances and are presented in conformity with applicable
accounting principles and are properly disclosed. Based on the allegations set forth in
Paragraphs 333-335 hereof, E&Y’s audits of Tronox’s financial statements with regard to the
environmental remediation and tort liability reserves were, at a minimum, recklessly performed.
E&Y simply accepted management’s assumptions and estimates regarding the adequacy of the
reserve in the face of overwhelming competent evidential matter indicating that the recorded
reserves were materially deficient, and endorsed the Company’s use of a reserving methodology
that caused the recorded reserve to be materially understated.
339. To conduct its audits in accordance with GAAS, E&Y’s obligations included
visiting selected sites where significant mediation obligations either had been or may be
recorded, obtaining adequate documentation regarding Tronox’s potential liabilities arising from
demands made by governmental agencies and/or private businesses and individuals, confirming
the validity and likelihood of reimbursement sources for remediation obligations from potential
responsible parties, insurance, other third parties, and litigation claims, and generally conducting
detailed investigations into remediation sites where Tronox faced potentially material liability.
For example, in the case of government demands, such as the ones issued by the EPA for the
Manville, New Jersey wood-treatment site, given the size of the claim against Tronox, E&Y was
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required to become fully informed as to the specific demands made and the underlying basis for
the demand. In this regard, and based on the information available to it, E&Y knew and/or
recklessly disregarded that Tronox’s failure to record any reserve for this site until the second
quarter of 2006 materially understated its probable and reasonably estimable obligations, and
that the reserve that was recorded on and after the third quarter of 2006 was also materially
deficient under GAAP.
340. E&Y ignored the guidance in this professional literature, which required that
Tronox make adequate disclosure and proper accounting for the environmental remediation
reserve it recorded. Further, E&Y ignored the critical warning in PCAOB Release No. 2007-001
dated January 22, 2007 which stated among other things, “[f]raudulent financial reporting often
is accomplished through intentional misstatement of accounting estimates. Financial frauds have
been committed by management intentionally biasing assumptions and judgments used to
estimate account balances. In certain cases management also has used significant or unusual
accounting estimates to intentionally distort results of operations ...”
341. E&Y abandoned its role as independent auditor by turning a blind eye to each
indication of improper accounting. Despite its knowledge, E&Y did not insist upon adjustments
to Tronox’s audited financial statements. Pursuant to GAAS, E&Y should have issued qualified
or adverse reports, or it should have insisted that Tronox comply with GAAP.
342. E&Y’s failure to qualify, modify, or abstain from issuing its audit opinions on
Tronox Class Period financial statements, when it knew or deliberately turned a blind eye to
numerous facts that showed that those financial statements were materially false and misleading
caused E&Y to violate at least the following provisions of GAAS:
(a) E&Y violated the second general standard (AU §§150,220), which provides that “[i]n all matters relating to the
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assignment, an independence in mental attitude is to bemaintained by the auditor or auditors.”
(b) E&Y violated the third general standard (AU §§150, 230),which provides that “[d]ue professional care is to beexercised in the performance of the audit and thepreparation of the report.”
(c) E&Y violated the first standard of field work whichprovides that, “[t]he work is to be adequately planned . . .”
(d) E&Y violated the second standard of field work (AU§ 150), which provides that “[a] sufficient understanding ofinternal control is to be obtained to plan the audit and todetermine the nature, timing, and extent of tests to beperformed.” This standard requires the auditor to make aproper study of existing internal controls, includingaccounting, financial and managerial controls, to determinewhether reliance thereon was justified, and if such controlsare not reliable, to expand the nature and scope of theauditing procedures to be applied. In the course ofauditing, Tronox’s financial statements, E&Y either knewor recklessly disregarded facts that evidence that it failed tosufficiently understand Tronox’s internal control structureand/or it disregarded weaknesses and deficiencies inTronox’s internal control structure, and failed to adequatelyplan its audit or expand its auditing procedures.
(e) E&Y violated the third standard of field work (AU §§ 150,326), which provides that “[s]ufficient competent evidentialmatter is to be obtained through inspection, observation,inquiries, and confirmations to afford a reasonable basis foran opinion regarding the financial statements under audit.”
(f) E&Y violated the third standard of reporting (AU § § 150,431), which provides that “[i]nformative disclosures in thefinancial statements are to be regarded as reasonablyadequate unless otherwise stated in the report.”
(g) E&Y violated the fourth standard of reporting, whichprovides that “[t]he report shall either contain an expressionof opinion regarding the financial statements, taken as awhole, or an assertion to the effect that an opinion cannotbe expressed. When an overall opinion cannot beexpressed, the reasons therefore should be stated. In allcases where an auditor’s name is associated with financial
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statements, the report should contain a clear-cut indicationof the character of the auditor’s work, if any, and thedegree of responsibility the auditor is taking.” Thisstandard requires that when an opinion on the financialstatements taken as a whole cannot be expressed, thereasons therefore must be stated. E&Y should have statedthat no opinion could be issued by it on Tronox’s fiscal1997, 198, and 1999 financial statements or issued anadverse opinion stating that those financial statements werenot fairly presented. (AU §508)
(h) E&Y violated AU §316 (see also AU §316A), whichprovides that an auditor must consider the following factorsin assessing audit risk: (a) whether managementcompensation creates a motivation to engage in fraudulentfinancial reporting; (b) domination of management by asmall group; (c) one’s actions which are not supported byproper documentation or are not appropriately authorized;(d) reporting records or files that should be, but are not,readily available and are not promptly produced whenrequested; and (e) lack of timely inappropriatedocumentation for transactions.
(i) E&Y violated AU §316 (see also AU §316A), whichprovides that “[j]udgments about the risk of materialmisstatement due to fraud have an overall effect on how theaudit is conducted in the following ways:
(i) Professional skepticism. Due professional carerequires the auditor to exercise professionalskepticism – that is, an attitude that includes aquestioning mind and critical assessment of auditevidence (see §§230.07 through .09). Someexamples demonstrating the application ofprofessional skepticism in response to the auditor’sassessment of the risk of material misstatement dueto fraud include (a) increased sensitivity in theselection of the nature and extent of documentationto be examined in support of material transactions,and (b) increased recognition of the need tocorroborate management explanations orrepresentations concerning material matters – suchas further analytical procedures, examination ofdocumentation, or discussion with others within oroutside the entity.
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(ii) Accounting principles and policies. The auditormay decide to consider further management’sselection and application of significant accountingprinciples, particularly those related to subjectivemeasurements and complex transactions. In thisrespect, the auditor may have a greater concernabout whether the accounting principles selectedand policies adopted are being applied in aninappropriate manner to create a materialmisstatement of the financial statements.
(iii) Controls. When a risk of material misstatement dueto fraud relates to risk factors that have controlimplications, the auditor’s ability to assess controlrisk below the maximum may be reduced.However, this does not eliminate the need for theauditor to obtain an understanding of thecomponents of the entity’s internal controlsufficient to plan the audit (see §319). In fact, suchan understanding may be of particular importance infurther understanding and considering any controls(or lack thereof) the entity has in place to addressthe identified fraud risk factors. However, thisconsideration also would need to include an addedsensitivity to management’s ability to override suchcontrols.
(iv) E&Y violated AU §319.24, which provides that“when the nature of management incentivesincreases the risk of material misstatement offinancial statements, the effectiveness of controlactivities may be reduced.”
(v) E&Y violated AU§319.28, which provides that“[t]he auditor’s understanding of internal controlmay sometimes raise doubts about the auditabilityof an entity’s financial statements.” Indeed,“[c]oncerns about the integrity of the entity’smanagement may be so serious as to cause theauditor to conclude that the risk of managementmisrepresentation in the financial statements is suchthat an audit cannot be conducted.” Moreover,“[c]oncerns about the nature and extent of anentity’s records may cause the auditor to concludethat it is unlikely that sufficient competent
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evidential matter will be available to support anopinion on the financial statements.”
(vi) E&Y violated AU §380.09, which states that “[t]heauditor should inform the audit committee aboutadjustments arising from the audit that could, in hisjudgment, either individually or in the aggregate,have significant effect on the entity’s financialreporting process.” For purposes of this section,“an audit adjustment, whether or not recorded bythe entity, is a proposed correction of the financialstatements that, in the auditor’s judgment, may nothave been detected except through the auditingprocedures performed.” Indeed, “[m]attersunderlying adjustments proposed by the auditor butnot recorded by the entity could potentially causefuture financial statements to be materiallymisstated, even though the auditor has concludedthat the adjustments are not material to the currentfinancial statements.”
LOSS CAUSATION
343. Defendants’ wrongful conduct, as alleged herein, directly and proximately caused
the economic loss suffered by Plaintiffs and the Class. Throughout the Class Period, the market
prices of Tronox securities were inflated by the material omissions and materially false and
misleading statements made by the Defendants named herein, and, as a result, Plaintiffs and the
Class purchased Tronox securities at artificially inflated prices. When the truth about Tronox
was revealed to the market, the price of Tronox’s securities declined in response, as the artificial
inflation caused by Tronox and the Defendants’ material omissions and false and misleading
statements was removed from the price of Tronox’s securities, thereby causing substantial
damage to Plaintiffs and the Class.
344. During the Class Period, Tronox Class A common stock traded as high as $19 per
share, Class B common stock traded as high as $19.37 per share and Tronox bonds traded as
high as $107.75 per bond. In fact, just days before July 11, 2007, when the first partial
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disclosures about Tronox’s true financial condition were made, Tronox Class A common stock
was trading at $14.73 per share, Tronox Class B common stock was trading at $14.47 per share
and Tronox bonds were trading at $104. Over the next 18 months, in response to additional
partial disclosures that revealed more about the Company’s true financial condition, the market
reacted, and Tronox’s securities declined in value. Throughout those 18 months, however,
Defendants mitigated the impact of those disclosures and prevented the full truth about Tronox
from being revealed by making contemporaneous false and misleading statements and omissions
that minimized and denied the facts being revealed to the market. By the time the market finally
gained a complete understanding of the magnitude of the environmental and other liabilities
facing Tronox and the implications for Tronox’s financial condition with the filing of Tronox’s
bankruptcy, the price of Tronox Class A and Class B common stock had plummeted to just $0.03
per share and the price of Tronox bonds had plummeted to $16 per bond. Accordingly, as a
result, at least in part, of the truth emerging about the Company’s true financial condition and the
extent of the environmental remediation and other liabilities facing the Company, the market
price of Tronox Class A and Class B common stock fell a total of more than $14 per share, or
nearly 100%, and the market price of Tronox bonds fell more than $88 per bond, or more than
84%.
345. Specifically, on July 11, 2007, Tronox issued a press release titled “Tronox
Identifies Factors That Will Impact Second-Quarter Financial Results” which disclosed that one
of the factors that would impact the Company’s second quarter 2007 earnings was $2 million in
costs associated with “an ongoing environmental assessment at its Henderson, Nev. site.” In
response to this disclosure, numerous analysts reduced their earnings estimates for Tronox
specifically citing concerns over the Company’s ongoing remediation work at the Henderson,
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Nevada site. For example, on July 13, 2007, JPMorgan issued an analyst report lowering its
2007 earnings per share estimate for Tronox from $0.10 to a loss of ($0.30), explaining that
“ongoing remediation work at the Henderson Nevada site required an increase in environmental
reserves of $2M ($0.03/share). Similarly, in a July 16, 2007 analyst report, BB&T Capital
Markets (“BB&T”) lowered its second quarter 2007 earnings per share estimate for Tronox
“from ($0.15) to ($0.25), reflecting . . . a noncash environmental charge of -$2M (pretax) which
will also impact Q2 earnings.”
346. The Company’s July 11, 2007 disclosures caused a statistically significant
decline, net of market and industry factors, in the price of Tronox’s Class A and Class B
common stock. Specifically, Tronox Class A common stock dropped from a closing price of
$14.48 per share on July 10, 2007, to a closing price of $13.85 per share on July 11, 2007 and
Tronox Class B common stock dropped from a closing price of $14.21 per share on July 10,
2007, to a closing price of $13.62 per share on July 11, 2007.
347. Defendants prevented an even steeper decline in Tronox securities, however, by
falsely blaming the Company’s performance on “second-quarter softness in the United States
housing market in conjunction with rising input costs.” Defendants also mitigated the impact of
Tronox’s July 11, 2007 disclosures by misrepresenting and omitting the size of the necessary
environmental provision, the true extent of the environmental and other liabilities facing Tronox
and the effect these liabilities would have on the Company’s financial condition. Accordingly,
the Company’s July 11, 2007 disclosures were materially false and misleading, and only partially
disclosed the Company’s true condition.
348. Just two weeks later, on August 1, 2007, the Company issued a press release
announcing Tronox’s financial results for the second quarter of 2007. According to the press
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release, Tronox’s second quarter 2007 losses of $0.49 per share were caused, in part, by “an
environmental provision of $1.5 million for costs associated with environmental assessment at
the Henderson, Nev. site.”
349. On a conference call later that day run by Defendants Adams and Mikkelson,
Defendants acknowledged that one of the items negatively impacting the quarter “was the pre-
tax non-cash environmental provision of $1.5 million for costs associated with environmental
assessment at our Henderson, Nevada site.” Defendants succeeded, however, in partially
mitigating the impact of this disclosure by misleadingly stating that the $1.5 million provision
“does not reflect the full amount of Kerr-McGee’s future reimbursement obligation.”
Defendants explained that, “the Company’s future net cash exposure related to this new
provision is expected to be approximately $750,000 after estimating the 50% future
reimbursement obligation from Kerr-McGee.” Indeed, Defendants misleadingly omitted the true
extent of the environmental remediation and other liabilities facing Tronox and the effect these
liabilities would have on the Company’s financial condition. Defendants also falsely
emphasized that it was “doing the right things long-term to position the Company for success by
driving fundamental changes in our business. We continue to see positive results in baseline cost
reductions and working capital area.”
350. Specifically, with regard to the Company’s environmental remediation liabilities,
Defendants focused on the fact that they were “continu[ing] to work to mitigate these matters
through insurance, reimbursements from PRPs or obligated parties, efficient management of
ongoing projects, and by defending our legal positions” and that the Company’s financial
reserves for environmental remediation totaled $214 million, “a decrease from the prior quarter,”
which “does not include $39 million in anticipated future reimbursements to Tronox by the
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Department of Energy for work yet to be completed at the West Chicago site. It is expected that
the DOE will continue to reimburse us 55% of our costs at this site.” Defendants also
misleadingly stated that its gross reserve of $35 million would be adequate to cover Tronox’s
liability for the Manville, New Jersey Wood-Treatment Site as a result of the Company’s
mitigation strategies:
[We] continue to actively pursue mitigation strategies to ensureobligated parties, insurance companies, and government agencyreimbursements are received to offset our remediation costs.Regarding the former wood treatment site in New Jersey,nonbinding mediation with the EPA is ongoing and we remainconfident about our defenses and position concerning this matter.
351. A presentation filed in a Form 8-K that same day and referenced on the related
conference call repeated those false statements and also misleadingly stated that the Company’s
2007 projected net cash spend on environmental liabilities was just “$35MM to $40MM.”
352. The Company’s announcement unnerved analysts who raised concerns over the
Company’s future financial prospects. For example, the same day, JPMorgan issued an analyst
report stating that Tronox’s earnings loss was due to a “$1.5M pre-tax provision ($0.02/share)
related to environmental remediation costs and $1.2M after tax ($0.03/share) for environmental
remediation costs related to discontinued operations.” JPMorgan also noted that Tronox’s
GAAP earnings a year prior had already “included a $13.8M pre-tax provision ($0.22/share)
related to environmental remediation costs in discontinued operations.” As a result, JPMorgan
“include[d] provisions related to environmental remediation costs for continuing operations and
for discontinued operations” in its valuation of Tronox, “since these have been ongoing expenses
for the company.”
353. In response to these disclosures, the price of Tronox Class B common stock
declined in a statistically significant amount, net of market and industry factors, dropping from a
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closing price of $12.30 per share on July 31, 2007, to a closing price of $11.62 per share on
August 1, 2007.
354. Notwithstanding the partial disclosure of the Company’s true condition, the
Company’s conference call statements were materially false and misleading because they
continued to conceal the true extent of the Company’s environmental remediation and other
liabilities. In fact, these liabilities and their impact on the Company’s financial condition were
far more significant than the Company disclosed at that point and, by not revealing the true
extent and scope of the Company’s liabilities, Defendants prevented a much steeper drop in the
price of the Company’s securities. Indeed, the Company was partially successful in assuaging
investors’ concerns and continuing to conceal the true extent of the Company’s environmental
remediation liabilities. For example, in an analyst report issued the following day, August 2,
2008, BB&T wrote that it “believe[s] that Tronox’s earnings are sloooowly making the transition
from red ink to black ink.” BB&T also noted that “Tronox is actively defending itself from the
liability for the EPA’s Federal Creosote Superfund Project [the New Jersey Wood-Treatment
Site],” and that while the Environmental Protection Agency had identified Tronox as a
potentially responsible party (“PRP”), it “believe[s] that there are other PRPs” and that Tronox’s
reimbursement program with Kerr-McGee will require Kerr-McGee (now part of Anadarko
Petroleum) to reimburse TRX for 50% of environmental remediation costs, up to $100M.”
355. Then, on February 13, 2008, Tronox issued a press release and held a conference
call announcing the Company’s fourth quarter 2007 earnings, including that Tronox suffered a
loss of $57.4 million and that its net spend on environmental liabilities was $33 million in 2007.
During the conference call Tronox also stated that the Company’s net spend on environmental
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remediation would increase by more than 20%, from $33 million in 2007 to between $40 and
$45 million in 2008.
356. Defendants Mikkelson and Adams, however, once again attempted to diminish
the impact of this revelation by stressing that the Company has “been very successful” in
mitigating its legacy environmental liabilities, decreasing its reserves “from $239 million in late
2005 to $189 million at the end of 2007.” As Defendant Adams explained:
Our focus continues to be on execution of the remediation plans toproperly clean up these sites as mandated by the governmentagencies and to work with state and federal governmentrepresentatives to reduce our future liability for sites where webelieve we have little or no liability.
For instance, the Manville, New Jersey site was cleaned up by theU.S. EPA and we believe they grossly overpaid for this clean up. Iam very pleased to report that we have received political supportand have been successful in getting a General Accounting Officeaudit of the EPA’s cleanup of the Manville site. We feel the auditwill support our position coupled with the fact that there areadditional PRPs now identified for this project will lead to areasonable settlement in the future.
This is just one example of what we are doing to contain ourlegacy liability. We are also in the process of evaluating a numberof ways to reduce or limit our legacy liability which I cannotprovide in any detail. But I just want to emphasize that we arebeing diligent with regards to this critical issue. We are workingeach and every day to reduce our future liability wherever we canwhile also adhering to our core values which includes protectingthe environment.
357. Defendants’ misleading statements during the conference call were reinforced by
a slide show presentation accompanying the call. Specifically, the slides focused on the fact that
the Company’s environmental “reserves [were] down from $239MM at IPO to $189MM at end
of 2007” and that the Company’s environmental reserves were “$189MM” with receivables of
“$68MM . . . exclud[ing] anticipated future receivables of $39MM from DOE in West Chicago.”
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These same slides also misleadingly reiterated that the Company’s 2008 projected net cash spend
on environmental liabilities was now “$40 - 45,” but that the Company still expected to mitigate
that spending through “government reimbursements” from the DOE and DOD, pursuing other
PRPs, insurance policies, land sales and the Kerr-McGee 7-year remediation cost reimbursement
program in which Kerr-McGee “reimburses Tronox for 50% of remediation costs[s] in excess of
reserves at IPO up to $ 100MM.”
358. Defendants’ false and misleading statements and omissions had their intended
effect on the market. For example, in a February 14, 2008 analyst report, BB&T reiterated its
opinion that Tronox would not be subject to substantial environmental liabilities associated with
the Federal Creosote Superfund Project (otherwise known as the New Jersey Wood-Treatment
Site). Specifically, BB&T stated that “Tronox is actively defending itself from the liability for
the EPA’s Federal Creosote Superfund Project . . . and obtained political support for a GAO
audit of the EPA’s cleanup and identified other PRPs (potentially responsible parties).” In
addition, BB&T noted its belief that Tronox’s reimbursement program with Kerr-McGee will
require Kerr-McGee (now part of Anadarko Petroleum) to reimburse TRX for 50% of
environmental remediation costs, up to $100M.” Similarly, in a February 14, 2008 UBS
Securities analyst report, UBS Securities stated that Tronox’s “cash environmental legacy costs
should be in the range of $40mm to $45mm. However, the company is aggressively focused on
cost reduction and is targeting an additional $22mm in savings in 2008.” Nevertheless, UBS
noted that Tronox “should be cash flow challenged in the near term.”
359. Following the Company’s disclosures, the Company’s securities experienced
statistically significant decline, net of market and industry factors. Specifically, shares of Tronox
Class A common stock dropped from $7.55 per share on February 12, 2008 to $5.46 per share on
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February 14, 2008, and shares of Tronox Class B common stock dropped from $7.48 per share
on February 12, 2008 to $5.43 on February 14, 2008. Furthermore, the Tronox bonds dropped
from $92.50 on February 12, 2008 to $86.75 per share on February 14, 2008.
360. Throughout the Spring of 2008, the Company’s securities continued to decline in
response to news that Tronox had been downgraded by a number of rating agencies and that
Tronox had suspended its quarterly dividend. However, the Defendants were able to thwart a
huge declines with false assurances that the Company’s environmental liabilities were properly
reserved for. For example, at a March 13, 2008, Lehman Brothers High Yield Bond and
Syndicated Loan Conference, Defendant Adams falsely assured the market that the Company’s
environmental liabilities were in control by touting that its environmental reserves were down by
$50 million, or more than 20%, from “$239MM at IPO to $189MM at end of 2007” with
receivables of approximately “$68MM.” Defendant Adams again stressed that Tronox would
mitigate its spending on environmental costs through reimbursements from the Department of
Energy and Department of Defense, pursing potentially responsible parties, insurance, land sales
and from reimbursements from Kerr-McGee/Anadarko.
361. Then, in a Form 8-K filed with the SEC on April 30, 2008 announcing the
Company’s first-quarter 2008 earnings and signed by Defendants Adams and Mikkelson, Tronox
reported a smaller first quarter 2008 loss than expected and that its environmental reserves had
been reduced by more than 20%, from $239 million at the time of the IPO to $182 million in the
first quarter of 2008. In a conference call held the same day, Tronox repeated that its financial
reserves for environmental remediation had decreased and that its estimate for net cash spent on
environmental remediation in 2008 was in the range of $30 million to $35 million, “a $10
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million reduction from its previous forecast.” As set forth above, these statements were false and
misleading.
362. Just two weeks later, however, on May 13, 2008, Fitch downgraded Tronox’s
Senior Unsecured Notes to B/RR4 from B+/RR3 to “reflect Fitch’s view that environmental
claims would reduce the recovery for senior unsecured creditors in a distressed scenario.” The
next day, Tronox was forced to suspend its $0.05/share quarterly dividend “as part of its ongoing
efforts to improve financial flexibility.”
363. On June 4, 2008, Moody’s downgraded Tronox’s corporate family rating to B3
from B2, Tronox’s secured revolver and term loan to Ba3 and Ba2 and its unsecured notes to
Caa1 from B3 with a negative rating outlook. In its downgrade report, Moody’s stated that it
“believes the ratings are constrained by the prospect of . . . large legacy environmental liabilities
(even as reserves on existing active sites have been reduced). Moody’s believes that these legacy
liabilities are unique in size and complexity, and constitute a key negative factor when
determining the rating.”
364. On July 30, 2008, the market gained a fuller understanding of the magnitude and
severity of the environmental liabilities facing Tronox. On this date, Tronox announced its
second quarter of 2008 earnings, including a loss of $0.73 per share, and held a conference call
with analysts to discuss its results. On the conference call, Tronox disclosed that its
environmental expenses were continuing to mount:
Our financial reserves for environmental remediation at June 20,2008, for active and inactive sites totaled $183.8 million, a netincrease of $2 million from the prior quarter. This increase wasdue to an increase in our environmental reserves of $10.2million . . . [and] included a $6.2 million reserve for ourHenderson, Nevada facility for the estimated costs associatedwith the ongoing eco site investigation work where we are nowrequired by NDEP to perform four times the number of samples to
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complete testing and analysis. . . . We also increased our reservefor the former Cleveland, Oklahoma refinery site by $3.8million for recently completed engineering estimates to completethe necessary excavation and disposal of additional impacted soilfrom this site. (Emphasis added).
365. In an attempt to mitigate any further drops in the price of its securities, however,
Tronox continued to stress that it was entitled to environmental remediation reimbursements
from the Department of Energy, Kerr-McGee/Anadarko and insurance providers which it would
use to offset its costs. For example, Tronox told investors that it “believe[s] that the insurance
policy we have for [the Henderson, Nevada] site will cover the majority of these costs” and
to“[p]lease keep in mind that our receivables do not include approximately $27 million in
anticipated future reimbursements due to Tronox.” Tronox also continued to downplay its
anticipated spending for environmental liabilities, projecting the costs “to be in the range of $30
million to $35 million.”
366. Indeed, a slide distributed to investors in connection with the conference call,
misleadingly stated that the Company’s environmental reserves were down to “$183.8MM at end
of Q2 2008” with receivables of approximately $63MM and future receivables of “$27MM from
DOE for West Chicago.” The slide also stressed that Tronox would mitigate its spending on
environmental costs through reimbursements from the Department of Energy and Department of
Defense, pursuing potentially responsible parties, insurance, land sales and reimbursements from
Kerr-McGee/Anadarko.
367. On July 31, 2008, JPMorgan issued an analyst report lowering its Tronox GAAP
earnings per share estimate from a loss of ($1.00) to a loss of ($1.40), due, in part, to the fact that
Tronox’s reported “$0/5Mn in additional environmental reserves” which had an impact of
“0.01/share” and that Tronox’s losses included $4.5 million in losses “related to increased
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environmental provisions.” In this report, JPMorgan also noted that the Company’s
environmental reserves of $120.7 million net of receivables would offset the benefit of the $168
million in proceeds from possible land sales the Company was projecting over the next four
years.
368. Similarly, the same day, BB&T issued an analyst report entitled, “Not for the
Faint of Heart.” BB&T stated that “one must have a high risk tolerance to invest in this name,”
and noted that the Company’s “larger than-expected environmental remediation costs and
liabilities” were a risk. BB&T also noted the possibility of bankruptcy at the Company, stating
“[w]e believe fundamentals should improve and are hopeful that any changes made to the capital
structure are done outside of the Chapter 11 process.”
369. The next day, UBS Securities issued a report reiterating its “hold”
recommendation on Tronox, stating that it “urge[s] caution to investors on Tronox due to the
current risk associated with the company’s environmental dispute in New Jersey . . . The major
unknown in the credit is the environmental liability associated with the current dispute with the
New Jersey Department of Environmental Protection and Anadarko, which we expect should get
decided by the end of August. We would not recommend potentially adding exposure to the
credit until this issue is resolved.”
370. In addition, on August 1, 2008, Moody’s downgraded Tronox to Caa2 from B3
citing as a “key negative factor in determining the rating,” its belief that the Company’s legacy
liability “are unique in size and complexity.”
371. These announcements led to statistically significant declines, net of market and
industry factors, of Tronox securities. Specifically, the market price of Tronox Class A common
stock dropped from its close of $1.51 per share on July 29, 2008 to $1.20 per share on August 1,
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2008 and Tronox Class B common stock dropped from its close of $1.43 per share on July 29,
2008 to $1.06 per share on August 1, 2008.
372. Then, on August 18, 2008, BB&T issued an analyst report entitled “Error of
Olympic Proportions,” in which it lowered its rating of Tronox and expressed concern about a
potential bankruptcy. Specifically, BB&T stated that the surprise removal of Defendant Adams
as Tronox’s CEO “escalated the alarm that the Company might put itself into Chapter 11.”
However, BB&T cautioned that “[i]n and of itself, we do not believe that environmental
liabilities would be enough to trigger a Chapter 11 filing in the near and mid-term.”
373. These disclosures caused statistically significant declines, net of market and
industry factors, of Tronox securities. Specifically, the price of Tronox Class A common stock
dropped from $0.97 on August 15, 2008 (a Friday) to $0.70 on August 18, 2008 (a Monday) and
Class B common stock dropped from $0.78 on August 15, 2008 to $0.63 on August 18, 2008.
The bonds similarly dropped.
374. On August 21, 2008, Tronox announced after the close of market in a Form 8-K
that the NYSE had notified it on August 11, 2008 that Tronox was not in compliance with the
NYSE’s continued listing standards due to the fact that the Company’s market capitalization had
fallen below a required minimum of $75 million during the 30-day period, ending August 8,
2008.
375. This news caused statistically significant declines, net of market and industry
factors, in Tronox securities. Specifically, the market price of Tronox Class A common stock
dropped from its close of $0.45 per share on August 21, 2008, to $0.33 per share on August 22,
2008, and the market price of Tronox Class B common stock dropped from its close of $0.28 per
share on August 21, 2008, to $0.18 per share on August 22, 2008. Tronox bonds similarly
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dropped. Just a week later, on August 28, 2008, Tronox was notified by the NYSE that its Class
B common stock was also not in compliance with the NYSE’s listing standard.
376. On August 25, 2008, Moody’s downgraded Tronox again, from Caa2 to Caa3,
citing as a “key negative factor in determining the rating,” its belief that the Company’s legacy
liability “are unique in size and complexity.” In addition, Moody’s stated that its downgrade was
“in reaction to: 1) recent management changed replacing the former CEO; 2) the presence of
“going concern” language in the second quarter 1 0Q; 3) the discussion of possibility of filing
Chapter 11 appearing for the first time in the second quarter 1 0Q; and 4) the possibility of a
delisting of Tronox’s equity on the NYSE due to the rapid decline of Tronox’s market capital.”
The Tronox bonds declined in a statistically significant amount in response to this news.
377. On September 12, 2008, Tronox disclosed to investors in a Form 8-K that the
federal government had filed a $280 million claim against the Company for the costs of cleaning
up a wood treatment plant in New Jersey.
378. Days later, on September 17, 2008, Standard & Poor’s lowered Tronox’s Credit
Rating to CCC- from CCC+, citing concerns that Tronox’s reserves were inadequate to cover the
Company’s environmental liabilities. Specifically, in its report, Standard & Poor’s stressed that:
An additional, but potential longer-range concern, related toTronox’s recent announcement that it received notice of a lawsuitfor the recovery of $280 million incurred by the EPA in thecleanup of a New Jersey wood treatment site. . . . The amountTronox provides for in its reserves is far lower than the $280million claimed by the EPA in its lawsuit. Although the outcomeof the lawsuit is unlikely to result in a cash outflow in the nearterm, the lawsuit raises the possibility of additional financialpressure on Tronox’s already weakened financial profile at a timewhen the improvement of operating performance remainsuncertain and a breach of financial covenants is increasingly likely.
379. Tronox’s securities experienced statistically significantly declines, net of market
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and industry factors, in response to this news. Specifically, Tronox Class A common stock price
dropped from a closing price of $0.35 per share on September 16, 2008, to a closing price of
$0.29 per share on September 17, 2008, Class B common stock price dropped from a closing
price of $0.19 per share on September 16, 2008, to a closing price of $0.13 per share on
September 17, 2008, and the market price of Tronox bonds dropped from its close of $41.50 on
September 16, 2008, to $37.00 on September 17, 2008.
380. On September 22, 2008, BB&T filed an analyst report reporting on Standard &
Poor’s downgrade of Tronox, the EPA’s lawsuit against Tronox to recoup cleanup costs and that
“TRX is also facing a $128M lawsuit in New Mexico, as well as state claims in Avoca, PA,
Columbus, MS, and Texarkana, TX.” Notably, BB&T also stated that “[w]ith unsecured notes
trading in the high 30s range, we believe the debt markets are seriously concerned about a
potential bankruptcy filing.”
381. On September 30, 2008, Tronox was formally delisted from the New York Stock
Exchange.
382. On November 10, 2008, Fitch Ratings downgraded Tronox’s Issuer Default
Rating to ‘CC’ from ‘CCC.’ This disclosure caused a statistically significant decline, net of
market and industry factors, of the Tronox bonds. Specifically, Tronox bonds plummeted from a
close of $24 on November 7, 2008 (a Friday) to a close of $21.50 on November 10, 2008 (the
next trading day).
383. On January 12, 2009, Tronox filed for bankruptcy revealing that it spent more
than $118 million to satisfy the Legacy Liability obligations and still faced hundreds of
millions of dollars worth of additional claims. The bankruptcy petition also revealed hundreds
of Secret Sites that Defendants had known about, or recklessly disregarded, during the Class
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Period. On news of the bankruptcy filing, Fitch Ratings downgraded Tronox Issuer Default
Rating to ‘D’ from ‘C’. On this news, Tronox’s Class A and Class common stock dropped in
statistically significant amounts. Specifically, Class A common stock dropped from $0.06 per
share on January 9, 2009 to $0.03 per share on January 12, 2009, and Class B common stock
dropped from $0.05 per share on January 9, 2009 to $0.03 per share on January 12, 2009.
384. Tronox’s bankruptcy filing was the direct consequence of the wrongdoing in
which Defendants had engaged. It was entirely foreseeable to Defendants that concealing the
true extent of the Company’s environmental liabilities in violation of GAAP would artificially
inflate the price of Tronox securities. It was similarly foreseeable to Defendants that the
revelation of that misconduct, by way of the Company’s worsening financial condition, would
cause the price of Tronox securities to drop significantly as the inflation caused by their
misstatements and omissions was corrected. Accordingly, the conduct of the Company, Kerr-
McGee and the individually named Defendants, as alleged herein, proximately caused
foreseeable damages to Plaintiffs and members of the Class.
385. Specifically, the misleading omissions and statements detailed above falsely
assured investors, among other things, that Tronox’s environmental liabilities were adequately
“reserved for”; “successfully mitigated”; “offset”; “indemnified”; “reimbursable”; and
“contained.” Those statements were materially false and misleading due to the size and scope of
the Company’s undisclosed environmental remediation liabilities, the fatal impact the
environmental liabilities would have on the Company’s financial condition, the failure of Tronox
to report its financial statements in accordance with GAAP during the Class Period, and the
limitations of Kerr-McGee/Anadarko’s indemnification of Tronox’s environmental remediation
costs.
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386. Defendants’ material omissions and materially false and misleading statements
caused the market to believe that the Company’s environmental liabilities were contained and
properly managed; caused the Company’s financial reporting to be in violation of GAAP; and
conveyed the impression that the Company was financially stronger and more profitable than it
actually was. The prices of Tronox’s securities during the Class Period were affected by those
omissions and false statements, and were artificially inflated as a result thereof. Thus, the
declines in the value of Tronox’s securities purchased by the Class were a direct, foreseeable and
proximate result of the disclosures which slowly revealed the magnitude of the Company’s
environmental liabilities and true financial condition.
NO SAFE HARBOR
387. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pled in this complaint. The
specific statements alleged herein to be false and misleading were not identified as “forward-
looking statements” when made. To the extent there were any forward-looking statements, there
were no meaningful cautionary statements identifying important facts that could cause actual
results to differ materially from those in the purportedly forward-looking statements.
388. Alternatively, to the extent that the statutory safe harbor does apply to any
forward-looking statements pleaded herein, Defendants are liable for those false forward-looking
statements because at the time each of those forward-looking statements was made, the particular
speaker knew that the particular forward-looking statement was false, and/or the forward-looking
statement was authorized and/or approved by an executive officer of Tronox who knew that
those statements were false when made.
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APPLICATION OF THE PRESUMPTION OF RELIANCE:FRAUD ON THE MARKET
389. As to the claims asserted by Plaintiffs on behalf of the Class under Section 10(b)
of the Exchange Act, Plaintiffs rely, in part, on the presumption of reliance established by the
fraud-on-the-market doctrine. During the Class Period, the markets for Tronox common stock
and Bonds were, at all relevant times, efficient markets for the following reasons, among others:
a. During a substantial portion of the Class Period, Tronox’s common stock
met the requirements for listing and was listed on the NYSE, a highly efficient market that
quickly reflects all publicly available information concerning a listed company. Tronox Bonds
were actively traded over-the-counter and on The PORTAL Market, a trading portal set up by
NASDAQ for qualified institutional buyers (“QIBs”). 14 Trading information on the Bonds, such
as price and volume, was publicly available throughout the Class Period through TRACE(a
leading source for bond prices);
b. As a regulated issuer, Tronox is required to and has filed periodic public
reports with the SEC, including Forms 10-K for fiscal years 2005 through 2007 and other
financial statements and reports that contained material misrepresentations and/or omitted
material facts during the Class Period, as alleged herein, causing the price of Tronox common
stock and Bonds to trade at artificially inflated prices;
c. Tronox’s senior management regularly met with and provided Company-
related information to stock market analysts, fixed income analysts, institutional investors, fund
managers and other market professionals;
14 QIBs are large institutions that manage more than $100 million in securities. QIBs aresophisticated investors that are able to quickly analyze new, material information, understand theeconomic implications of the information, and then trade on the information, thereby ensuringthat the new, material information quickly becomes reflected in the security prices.
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d. Tronox was followed by several equity and fixed income analysts
employed by major brokerage firms who wrote research reports, which were distributed to the
sales force and customers of their respective brokerage firms. Each of these reports was publicly
available and entered the public marketplace;
e. The brokerage firms following Tronox during the Class Period included JP
Morgan, Lehman Brothers, Cathay Financial, Oppenheimer & Co., BB&T Capital Markets,
Soleil Securities and UBS Securities. Each of these companies relied upon Tronox’s financial
statements, as well as statements made by senior management during conference calls and
meetings with analysts, in compiling their reports and making their recommendations. The
analysts’ assessments of Tronox’s common stock and Bonds were based, in material part, upon
the honesty and accuracy of Tronox’s reported financial results;
f. The trading volume of Tronox’s common stock and Bonds during the
Class Period shows that there was a liquid market for Tronox’s common stock and Bonds during
the Class Period;
g. Tronox transmitted information on a market-wide basis through various
electronic media services, including issuing press releases through its own website, Business
Wire and Newswire;
h. The market for Tronox’s common stock and Bonds reacted efficiently to
new information entering the market;
i. Tronox and its Bonds, were rated by Moody’s, Standard & Poor’s, and
Fitch Ratings;
j. During the majority of the Class Period, Tronox met the SEC’s
requirements to register debt and equity securities filed on Form S-3.
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390. The above facts demonstrate the existence of an efficient market for trading
Tronox common stock and Bonds during the Class Period and allow the application of the fraud-
on-the-market doctrine. Accordingly, Plaintiffs are entitled to a presumption of reliance
established by the fraud-on-the-market doctrine for, but not limited to:
(a) Defendants’ public misrepresentations and misleading statements during
the Class Period;
(b) Defendants’ omissions of fact from their public statements during the
Class Period;
(c) The misrepresentations, misleading statements and omissions of fact were
material;
(d) The misrepresentations, misleading statements and omitted facts would
induce a reasonable investor to purchase the artificially-inflated common stock and Bonds;
(e) Plaintiffs made the purchases between the time that the Defendants first
made material misrepresentations or omissions of material facts and the true facts were fully
disclosed.
COUNT I
For Violations Of Section 10(b) Of The Exchange Act And Rule 10b-5(Against Defendants Adams, Wohleber, Mikkelson, and Rowland)
391. Lead Plaintiffs repeat and reallege each and every allegation contained above as if
fully set forth herein.
392. During the Class Period, Defendants Adams, Wohleber (through March 31,
2006), Mikkelson, and Rowland, each of whom served as a director of Tronox, disseminated or
approved the false statements specified herein, which they knew or recklessly disregarded were
false and misleading in that they contained misrepresentations and failed to disclose material
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facts necessary in order to make the statements made, in light of the circumstances under which
they were made, not misleading.
393. These Defendants violated Section 1 0(b) of the Exchange Act and Rule 10b-5 in
that they: (i) employed devices, schemes, and artifices to defraud; (ii) made untrue statements of
material facts or 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/or (iii) engaged in
acts, practices, and a course of business that operated as a fraud or deceit upon Lead Plaintiffs
and members of the Class in connection with their purchases or acquisitions of Tronox common
stock and/or Bonds during the Class Period. As detailed herein, the misrepresentations contained
in, or the material facts omitted from, Defendants’ public statements included, but were not
limited to, false and misleading misrepresentations and omissions regarding the amount of the
Legacy Liabilities imposed upon Tronox, the true reasons for the Tronox IPO, and the false
annual and quarterly financial statements in violation of GAAP which misrepresented the
environmental remediation reserve, and the ability of Tronox to continue as a going concern.
394. These Defendants, individually and in concert, directly and indirectly, by the use
of means or instrumentalities of interstate commerce and/or of the mails, engaged and
participated in a continuous course of conduct that operated as a fraud and deceit upon Lead
Plaintiffs and members of the Class; made various false and/or misleading statements of material
false 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; either made the above
statements with knowledge or a reckless disregard for the truth; and/or employed devices,
schemes and artifices to defraud in connection with the purchase or sale of securities, which were
intended to, and did: (i) deceive the investing public, including Lead Plaintiffs and members of
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the Class, regarding, among other things, (ii) the existence of the Legacy Liabilities and the
failure to properly record and disclose such liabilities in accordance with the requirements of the
federal securities laws and GAAP; (iii) artificially inflate and maintain the market price of
Tronox common stock; and (iv) cause Lead Plaintiffs and members of the Class to purchase
Tronox common stock at artificially inflated prices.
395. As described above, these Defendants had a duty to disclose Tronox’s Legacy
Liability obligations. These Defendants also had a duty to disclose the fact that Kerr-McGee and
Tronox applied an improper methodology to determine the proper environmental remediation
liability and tort liability reserve.
396. These Defendants also had a duty to disclose this information because they were
required to update and/or correct their prior misstatements and omissions. In the Registration
Statement for the IPO, these Defendants repeatedly misrepresented the true scope and extent of
the Legacy Liabilities and the related improper reserving methodology. Defendants were under a
duty to correct and update prior misstatements and statements that had become misleading, and
to speak completely and truthfully about Tronox and its inability to survive as a going concern in
light of the Legacy Liabilities.
397. Each of these Defendants’ primary liability arises from the fact that (i) they were
high level executives and/or directors of Tronox during the Class Period and were members of
the Company’ management team and had control of Tronox; (ii) each of these Defendants, by
virtue of his or her responsibilities and activities as a senior officer and/or director of Tronox was
privy to and participated in the creation, development and reporting of Tronox’s financial results;
(iii) each of these Defendants had significant personal contact and familiarity with the other
Defendants and was advised of and had access to other members of Tronox’s management team,
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internal report and other data and information about Tronox’s finances, operations, and
information regarding the environmental remediation reserve and related tort liabilities; (iv) each
of these Defendants was aware of Tronox’s dissemination of information to the investing public
which they know or recklessly disregarded was materially false and misleading.
398. As described above, these Defendants acted with scienter in committing the
wrongful acts and omissions alleged herein in that they either had actual knowledge of the
misrepresentations and omissions of material facts set forth herein, or acted with reckless
disregard for the truth in that they failed to ascertain and disclose the true facts, even though such
facts were available to them. Specifically, these Defendants knew or were reckless in not
knowing, inter alia, the true scope of the Legacy Liabilities imposed on Tronox, that Tronox
could not survive as a going concern in light of these obligations, that Kerr-McGee and Tronox
had understated their environmental remediation reserve and had applied an improper
methodology to determine the reserve and that throughout the Class Period Tronox reported to
the investing public a materially understated environmental remediation reserve, in annual and
quarterly financial statements which were false and misleading and violated GAAP.
399. These Defendants engaged in this scheme in order to maintain and/or inflate the
prices of Tronox common stock and the Bonds.
400. Lead Plaintiffs and members of the Class have suffered damages in that, in
reliance on the integrity of the market, they paid artificially inflated prices for Tronox common
stock and the Bonds. Lead Plaintiffs and the Class would not have purchased or otherwise
acquired Tronox common stock and/or the Bonds at the prices they paid, or at all, if they had
been aware that the market price had been artificially and falsely inflated by these Defendants’
effectuation of a fraudulent scheme and course of business and their materially false and
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misleading statements and/or omissions of material facts.
401. As a direct and proximate result of these Defendants’ wrongful conduct, Lead
Plaintiffs and other members of the Class suffered damages in connection with their purchases or
acquisitions of Tronox common stock and/or Bonds during the Class Period.
COUNT II
For Violation of Section 10(b) of the Exchange Act and Rule 10b-5(A2ainst Ernst & Youn2)
402. Lead Plaintiffs repeat and reallege each and every allegation contained
above as if fully set forth.
403. This Count is asserted against Defendant Ernst & Young LLP for violations of
Section 10(b) of the Exchange Act, 15 U.S.C. §78j(b) and SEC Rule 10b-5, 17 C.F.R. §240.10b-
5 promulgated thereunder.
404. E&Y individually and in concert, directly and indirectly, by the use of means or
instrumentalities of interstate commerce and/or of the mails, engaged and participated in a
continuous course of conduct to conceal adverse material information about the business,
business practices, reserves and reserving methodologies, performance, operations and future
prospects of Tronox, as specified herein.
405. E&Y: (a) employed devices, scheme, and artifices to defraud; (b) made untrue
statements of material fact and/or omitted to state material facts necessary to make the statements
not misleading; and (c) engaged in acts, practices, and a course of business which operated as a
fraud and deceit upon the purchasers of Tronox’s securities in an effort to maintain artificially
high market prices for Tronox securities in violation of Section 10(b) of the Exchange Act and
Rule 120b-5 promulgated thereunder.
406. During the Class Period, E&Y: (a) deceived the investing public, including Lead
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Plaintiffs and the members of the Class, as alleged herein; (b) artificially inflated and maintained
the market price of Tronox’s common stock and Bonds; and (c) caused members of the Class to
purchase Tronox’s common stock and Bonds at artificially inflated prices.
407. E&Y had actual knowledge of the misrepresentations and omissions of material
facts set forth herein, or acted with reckless disregard for the truth, in that it failed to ascertain
and disclose such facts, even though such facts were available to it. E&Y’s material
misrepresentations and/or omissions as reflected in its audit reports specified above were done
knowingly or recklessly and for the purpose and effect of concealing from the investing public
Tronox’s adverse financial condition based on its materially deficient environmental remediation
and tort liability reserves which had been set pursuant to an improper methodology, and thereby
supporting the artificially inflated price of Tronox securities. As demonstrated herein, E&Y had
actual knowledge of the misrepresentations and omissions alleged, or was reckless in failing to
obtain such knowledge, by deliberately refraining from taking those steps necessary to discover
whether those statements were false or misleading.
408. As a direct and proximate result of the fraudulent activities of E&Y described
above, the market price of Tronox’s securities were artificially inflated during the Class Period.
In ignorance of the fact that the market prices of Tronox common stock and Bonds were
artificially inflated, and relying on the false and misleading statements made by E&Y, or upon
the integrity of the market in which Tronox securities traded, and on the truth of the
misrepresentations made to the investing public, at the time when such statements were made,
and/or on the absence of material adverse information that was known or, with recklessness,
disregarded by E&Y during the Class Period, Plaintiffs and the other members of the Class
acquired Tronox common stock and Bonds during the Class Period at artificially inflated prices
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and were damaged thereby, as evidenced by, among others things, the stock price declines
identified herein that released the artificial inflation from Tronox securities.
409. At the time of said misrepresentations and omissions, Lead Plaintiffs and the
other members of the Class were unaware of their falsity, and believed the false statements to be
true. Had Lead Plaintiffs, the other members of the Class and the marketplace known the true
facts regarding Tronox’s environmental remediation and tort liabilities and their impact on the
Company’s ability to continue as a going concern, they would not have purchased or otherwise
acquired their Tronox securities during the Class Period, or they would not have done so at
artificially inflated prices which they paid.
410. As set forth above in Paragraphs 333-335, E&Y knowingly and/or recklessly
disregarded numerous facts that constituted red flags warning E&Y of material inaccuracies in
Tronox’s financial statements, including Tronox’s use of an improper methodology for recording
its environmental remediation and tort liability reserve and the concealment of the full scope and
magnitude of the Legacy Liabilities from the investing public. Tronox has admitted that all of its
Class Period financial statements audited and opined on by E&Y were materially false and
misleading.
411. As a direct and proximate result of E&Y’s wrongful conduct, Plaintiffs and the
other members of the Class suffered damages in connection with their purchases or acquisition of
Tronox common stock and/or Bonds during the Class Period.
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COUNT III
For Violations of Section 20(a) of the Exchange Act(Against Defendants Adams, Wohleber, Mikkelson, Rowland, and Rauh)
412. Lead Plaintiffs repeat and reallege each and every allegation contained above as if
fully set forth herein.
413. This Count is asserted against Defendants Adams, Wohleber (through March 31,
2006), Mikkelson, Rowland, and Rauh (through March 31, 2006), for violations of Section 20(a)
of the Exchange Act, 15 U.S.C. §78t(a).
414. During their tenures as officers and/or directors of Tronox, each of these
Defendants was a controlling person of Tronox within the meaning of Section 20(a) of the
Exchange Act. By reason of their positions of control and authority as officers and/or directors
of Tronox, these Defendants had the power and authority to cause Tronox to engage in the
wrongful conduct complained of herein. These Defendants were able to and did control, directly
and indirectly, the content of the public statements made by Tronox during the Class Period,
thereby causing the dissemination of the false and misleading statements and omissions of
material facts as alleged herein.
415. The Defendants who were members of the Tronox Board of Directors participated
in Tronox Board meetings and conference calls and signed the various SEC filings alleged herein
to be materially false and misleading. In their capacities as senior corporate officers and/or
directors of Tronox, and as more fully described above, these Defendants knew of and/or
recklessly disregarded the material adverse information regarding the size and scope of the
Legacy Liabilities, the improper reserving methodology employed by Tronox, the fact that
Tronox could not survive as a going concern in light of the reserves required to be recorded as a
result of the Legacy Liabilities, and the issuance of materially false and misleading annual and
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quarterly financial statements in violation of GAAP.
416. As a result of the foregoing, the Defendants named in this Count, as a group and
individually, were control persons of Tronox within the meaning of Section 20(a) of the
Exchange Act.
417. As set forth above, Tronox violated Section 10(b) of the Exchange Act by its acts
and omissions alleged in this Complaint. By virtue of their positions as controlling persons of
Tronox and, as a result of their own aforementioned conduct, the Defendants named in this
Count are liable pursuant to Section 20(a) of the Exchange Act, jointly and severally with, and to
the same extent as, Tronox is liable under Section 10(b) of the Exchange Act and Rule 1 0b-5
promulgated thereunder, to Lead Plaintiffs and other members of the Class who purchased or
otherwise acquired Tronox common stock and/or Bonds. Moreover, as detailed above, during
the respective times these Defendants served as officers and/or directors of Tronox, each of these
Defendants is responsible for the material misstatements and omissions made by Tronox.
418. As a direct and proximate result of these Defendants’ conduct, Lead Plaintiffs and
other members of the Class suffered damages in connection with their purchase or acquisition of
Tronox common stock and/or Bonds.
COUNT IV
For Violation of Section 20(a) of the Exchange Act and Respondeat Superior(Against Defendants Kerr-McGee, Anadarko, Corbett, Wohleber, and Pilcher)
419. Lead Plaintiffs repeat and reallege each and every allegation contained above as if
fully set forth.
420. This Count is asserted against defendants Kerr-McGee (for the entire Class
Period), Anadarko (as successor-in-interest to Kerr-McGee and pursuant to respondeat superior)
(for the period August 10, 2006 through the end of the Class Period), Corbett (for the entire
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Class Period), Wohleber (through August 10, 2006), and Pilcher (through August 10, 2006) for
violations of Section 20(a) of the Exchange Act, 15 U.S.C. §78t(a), on behalf of members of the
Class.
421. During the indicated times within the Class Period, Defendants Kerr-McGee,
Anadarko (as successor-in-interest to Kerr-McGee), Corbett, Wohleber, and Pilcher were
controlling persons of Tronox and the officers of Tronox who had previously held positions
within Kerr-McGee (Defendants Adams, Rowland, and Mikkelson) within the meaning of
Section 20(a) of the Exchange Act. Defendants Kerr-McGee, Corbett, Wohleber and Pilcher
devised and effectuated the fraudulent scheme and course of conduct alleged herein. They
created the plan to remove the Legacy Liabilities from Kerr-McGee and place them into Tronox
without making full and adequate disclosure to the investing public as to the size and scope of
the environmental remediation and related tort liability obligations, while at the same time
imposing these obligations on the public shareholders of Tronox by completing the Tronox IPO.
They also planned and effectuated Kerr-McGee’s extrication from further association with
Tronox except through a modest indemnification obligation reflected in the Master Separation
Agreement, by completing the Spin-Off. The Defendants named in this Count unilaterally
determined the content of all material agreements between Kerr-McGee and Tronox and dictated
the terms of the transactions described hereinabove. The Master Separation Agreement was
imposed on Tronox by the Defendants named in this Count. That agreement required Tronox to
indemnify Kerr-McGee for any material misstatements in the Tronox IPO Registration
Statement, a highly unusual provision given that the businesses that were to become Tronox had
been wholly owned and controlled subsidiaries of Kerr-McGee and the offering was effectively a
Kerr-McGee transaction. Further, the Master Separation Agreement effectively required Tronox
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to continue using the reserving methodology used by Kerr-McGee in connection with the
environmental remediation and tort liability reserves as a condition to preserving whatever
indemnity obligations Kerr-McGee had in favor of Tronox with regard to environmental
remediation costs. These obligations further reflect the domination and control exercised by the
Defendants named in this Count.
422. During his tenure as Chairman of the Board of Tronox and while with Kerr-
McGee until the merger, Defendant Wohleber was a controlling person of Tronox within the
meaning of Section 20(a) of the Exchange Act. By reason of his position of control and
authority as Tronox’s Chairman, Defendant Wohleber had the power and authority to cause
Tronox to engage in the wrongful conduct complained of herein. Defendant Wohleber was able
to and did control, directly and indirectly, the content of the public statements made by Tronox,
thereby causing the dissemination of the false and misleading statements and omissions of
material facts as alleged herein during that period. Moreover, as detailed above, during the time
that Wohleber served as Tronox’s Chairman, he was responsible for the material misstatements
and omissions made by Tronox.
423. In his capacity as Tronox’s Chairman, and contemporaneously as the Chief
Financial Officer of Kerr-McGee, and as more fully described above, Defendant Wohleber was
fully knowledgeable as to the scope of the Legacy Liabilities and the fact that both Kerr-McGee
and Tronox had failed to record adequate reserves for these environmental remediation and
related tort liabilities and had employed a reserving methodology that was known to improperly
understate these obligations. As a result of the foregoing, Wohleber was a controlling person of
Tronox within the meaning of Section 20(a) of the Exchange Act.
424. Anadarko is liable as a controlling person of Tronox pursuant to this Count to the
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same extent as Kerr-McGee in light of Anadarko’s status as the successor-in-interest to Kerr-
McGee. In addition, during the period from August 10, 2006, the date of the Kerr-McGee
merger, through the end of the Class Period, by virtue of their parent-subsidiary relationship,
Anadarko, as principal, is liable for the acts of its agent, Kerr-McGee, done within the scope of
its agency. Their agency relationship exists as a result of the merger agreement dated as of June
22, 2006 by which Anadarko acquired Kerr-McGee, and Anadarko at all relevant times exercised
control over the acts of Kerr-McGee. As such, Anadarko is liable under the doctrine of
respondeat superior for all violations of law of Kerr-McGee as alleged herein from August 10,
2006 through the end of the Class Period.
425. As set forth above, Tronox violated Section 10(b) of the Exchange Act by its acts
and omissions as alleged in this Complaint. By virtue of their positions as controlling persons of
Tronox and, as a result of their own conduct, Defendants Kerr-McGee, Anadarko (as successor-
in-interest to Kerr-McGee), Corbett, Wohleber, and Pilcher are liable pursuant to Section 20(a)
of the Exchange Act, jointly and severally with, and to the same extent as, Tronox is liable under
Section 10(b) of the Exchange Act and Rule 1 0b-5 promulgated thereunder, to Lead Plaintiffs
and other members of the Class who purchased or otherwise acquired Tronox common stock
and/or Bonds.
PRAYER FOR RELIEF
WHEREFORE, Lead Plaintiffs pray for relief and judgment, as follows:
A. That the Court determine that this action is a proper class action and certifying
Lead Plaintiffs as Class representatives under Rule 23 of the Federal Rules of Civil Procedure;
B. That the Court award compensatory damages in favor of Lead Plaintiffs and the
other Class members as appropriate against all defendants, jointly and severally, for all damages
#122791 172
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sustained as a result of defendants' wrongdoing, in an amount to be proven at trial, including
interest thereon;
C. That the Court award Lead Plaintiffs and the Class their reasonable fees and
expenses incurred in this action, including counsel fees and expert fees; and
D. That the Court award other and further relief as the Court may deem just and
proper.
JURY TRIAL DEMANDED
Lead Plaintiffs hereby demand a trial by jury.
Dated: July 30, 2010 Respectfully submitted,
COHEN STEIN SELLERS & TOhL, PLLC
By; ^" j/ f^_ cryChristopher Lometti88 Pine Street, 14 `h FloorNew York, NY 10005Telephone: (212) 838-7797Facsimile: (212) 838-7745
COHEN MILSTEIN SELLERS & TOLL, PLLCSteven J. Toll1100 New York Ave, Suite 500 WestWashington, DC 20005Telephone: (202) 408-4600Facsimile: (202) 408-4699
Liaison Counsel
GOLD BENNETT CERA & SIDENER LLPSolomon. B. Cera (Admitted Pro Hac Vice)Gwendolyn R. GiblinThomas C. Bright (Admitted Pro .Hac Vice)595 Market Street, Suite 2300San Francisco, CA 94105Telephone: (415) 777-2230Facsimile: (415) 7775189
Attorneys for Lead Plaintiffs
#122791 173
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BERNSTEIN LITOWITZ BERGER& GROSSMANN LLP
Hannah G. RossLaura H. Gundersheim1285 Avenue of the AmericasNew York, NY 10019Telephone: (212) 554-1400Facsimile: (212) 554-1444
Attorneys for Named Plaintiffs
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CERTIFICATE OF PLAINTIFF
I, Grange Johnson, on behalf of LaGrange Capital Management, LLC ("LaGrange"), the
General Partner of LaGrange Capital Partners, LP and LaGrange Capital Partners Offshore Fund,
Ltd. hereby certifies that:
1. I am the Managing Member of LaGrange. I am familiar with the matters set forth
herein and am duly authorized to make this Certification on behalf of LaGrange, as General
Partner of LaGrange Capital Partners, LP and LaGrange Capital Partners Offshore Fund, Ltd.
(collectively referred to herein as the "LaGrange Partnerships").
2. The LaGrange Partnerships have reviewed a complaint prepared by their
attorneys, Gold Bennett Cera & Sidener LLP, and the LaGrange Partnerships agree to be
representative plaintiffs in this action.
3. The LaGrange Partnerships did not purchase Tronox Incorporated Securities
("Tronox securities") that are the subject of the complaint at the direction of counsel or to
participate in any private action arising under the Securities Exchange Act of 1934 or the
Securities Act of 1933, as amended by the Private Securities Litigation Reform Act of 1995. The
LaGrange Partnerships invested in Tronox securities solely for their own business purposes.
4. The LaGrange Partnerships are willing to serve as representative parties on behalf
of a class, including providing testimony at deposition and trial, if necessary.
5. The LaGrange Partnerships purchased and/or sold Tronox securities in the
amounts and on the dates identified in the attachment hereto.
(SEE ATTACHED SCHEDULE]
#121383 _1-
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 181 of 203
6. In the three years preceding the date of this certificate, the LaGrange Partnerships
have not sought to serve as a representative party on behalf of a class in an action brought under
the federal securities laws.
7. The LaGrange Partnerships will not accept any payment for serving as
representative parties on behalf of the Class beyond their pro rata share of any recovery, except
such reasonable costs and expenses directly relating to the representation of the Class and the
LaGrange Partnerships' activities in the lawsuit, as ordered or approved by the Court.
8. Nothing herein shall be construed to be or constitute a waiver of LaGrange's
attorney-client privilege.
I certify under penalty of perjury that the foregoing is true and correct. Executed on
September 2009.
Grange JohnsonManaging MemberLaGrange Capital Management, LLCGeneral Partner ofLaGrange Capital Partners, LP andLaGrange Capital Partners Offshore Fund, Ltd.
#121383 _2_
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 182 of 203
LaGrange Capital Partners, LPClass A Shares
Reference Acct Trade Date Ticker Symbol Security Description Trans Type Quantity Price Net Amount (Settle)
48388525 9/12/2007 TRXAQ TRONOX INC- Buy 8,351 10.82140 (90,536.53)
48388525 0/13/2(x)7 TRXAQ TRONOX INC Buy 2,759 10.41000 (28,776.37)
48388525 9/14/2007 TRXAQ TRONOX INC Buy 2,908 10.40000 (30,301.36)
48388525 9/262007 TRXAQ TRONOX INC Buy 44,811 9.69080 (435,150.66)
48388525 9/28/2007 TRXAQ TRONOX INC Buy 1,268 9.27000 111,779.72)
48388525 10/1/2007 TRXAQ TRONOX INC Buy 5,219 9.25(8x) (48,380.13)
48388525 10/5/207 TRXAQ TRONOX INC Buy 8,183 9.45110 (77,50101)
48388525 10/10/2007 TRXAQ TRONOX INC Buy 7,578 4 .21000 (69,944,94)
48388525 10/12/2007 TRXAQ TRONOX INC Buy 7,578 8.93000 (67,823.10)
48388525 10/22/2007 TRXAQ TRONOX INC Buy 22,000 7.81230 (172,310.60)
48388525 10/23/2007 TRXAQ TRONOX INC Buy 7,578 7.71000 (58,577.94)
48388525 10/26/20)7 TRXAQ TRONOX INC Buy 530 7.78000 (4,134.(x))
48388525 11/30/2007 TRXAQ TRONOX INC Buy 13,282 8.09190 (107,742 26)
48388525 12/3/2007 TRXAQ TRONOX INC Buy 12,593 8.14040 (102,763.92)
48388525 12/12/2007 TRXAQ TRONOX INC Buy 18,760 7.90230 ( 148,622.35)
48388525 12/14/2007 TRXAQ TRONOX INC Buy 18,117 7.54230 (137,006.19)
48388525 12/1812007 TRXAQ TRONOX INC Buy 12,081 7.12420 (86,309.08)
48388525 12/20/2007 TRXAQ TRONOX INC Buy 17,935 7.02790 (126,404.09)
48388525 12/21/2007 TRXAQ TRONOX INC Buy 11.556 7.41790 (85,952.37)
48388525 12/26/2007 TRXAQ TRONOX INC Buy 19,886 8.12660 (162,003.29)
48388525 12/27/2007 TRXAQ TRONOX INC Buy 3,677 7.98W0 (29,416.00)
48388525 1/10/2008 TRXAQ TRONOX INC Buy 7,588 7.38020 (56,152.72)
48388525 2/14/2008 TRXAQ TRONOX INC Buy 64,900 5.49060 (357,637.94)
48388525 2/15/2008 TRXAQ TRONOX INC Buy 30.562 4.68090 (143,66891)
48388525 2/15/2008 TRXAQ TRONOX INC Buy 59,200 4.83560 (288,635.52)
48388525 2/20/2(x)8 TRXAQ TRONOX INC Buy 22,200 4.79670 (106,930.74)
48388525 2/21/2008 TRXAQ TRONOX INC Buy 14,134 4.74150 (67,299,04)
48388525 2,25/2008 TRXAQ TRONOX INC Buy 14,800 4.68500 (69,634.00)
48388525 2/26/2008 TRXAQ TRONOX INC Buy 22,200 4.69470 (104,666.34)
48388525 227/2008 TRXAQ TRONOX INC Buy 2,516 4.67000 (11,800.04)
48388525 2/28/2008 TRXAQ TRONOX INC Buy 23,458 4.68910 (110,466.07)
48388525 2/29/2008 TRXAQ TRONOX INC Buy 29,896 4.49170 (134,881.78)
48388525 3/3/2008 TRXAQ TRONOX INC Buy 25,500 3.85590 (98,835.45)
48388525 3/5/2008 TRXAQ TRONOX INC Buy 150 4.11000 (619.50)
48388525 3/10/2008 TRXAQ TRONOX INC Buy 2,025 3.19000 (6,500.25)
48388525 3/11/2008 TRXAQ TRONOX INC Buy 22,500 192330 (66,224.25)
48388525 511/2008 TRXAQ TRONOX INC Buy 10,000 3.12000 (31,400.00)
48388525 6/5/2008 TRXAQ TRONOX INC Sale (116,754) 5.02070 583,848.44
48388525 7/15/2008 TRXAQ TRONOX INC Sale (79) 1.22000 94.79
48388525 7/18/2008 TRXAQ TRONOX INC Sale (60,988) 1.40000 83,772.64
48388525 8/18/2008 TRXAQ TRONOX INC Sale (387,053) 0.72490 272,832.08
48388525 8/18/2008 TRXAQ TRONOX INC Sale (79) 0.75000 57.66
48388525 8/19/2008 TRXAQ TRONOX INC Sale (33,326) 0.70560 22,848.17
Total Shares Purchased 598,279 $ (3,736,789.46)
Less Shares Sold (598.279) $ 963,453.78
Net Capital Gain/Loss $ (2,773,335.68)LIFO Lass S (2,773,335.68)FIFO Loss $ (2,773,335.68)
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 183 of 203
LACrange Capital Partners, LPClass B Shares
Reference Acct Trade Date Ticker Symbol Security Description Trans Typt Quantity Price Net Amount (Settle) 48388525 12/31/2007 TRXBQ TRONOXINC Buy 8,768 8.45380 (74,298'8)
48388525 Ii10/2008 "I'RXBQ TRONOX INC Buy 10,894 7.06280 (77,160.02)
48388525 Ill I/2008 TRXBQ rRONOX INC Buy 7,530 .'.11000 (53,68490)
48388525 1/14/2008 TRXBQ TRONOXINC Buy 13,448 725670 (91,857.06)
48388525 Ii 1612008 TRXBQ TRONOXINC Buy 19,909 6.92130 (138,194.34)
49388525 Ii1T/2008 TRXBQ TRONOXINC Buy 52,591 6.75570 (356,340.84)
48388525 1/22,12008 I RXBQ IRONOX INC Buy 15,026 5.86400 (88,412.98)
48388525 1/23/2008 TRXBQ IRONOX INC Buy 67,500 5.7470 (389,313.(x))
48388525 1/2512008 TRXBQ rRONOX INC Buy 15,020 6?5(xx) (94? 13.02)
18388525 li28/2008 TRXBQ TRONOX INC Buy 10,668 6.74330 (72,150.88)
18388525 1/29/2008 TRXBQ TRONOXINC Buy 7,513 6.92000 (52,14022)
48388525 1130/2(08 TRXBQ TRONOXINC Buy 7,513 6.94000 (52,290.48)
48388525 2.512008 TRXBQ rRONOX INC Buy 4,871 7.17520 (35,047.82)
48388525 2i 13i2008 TRXBQ 1 RONOX INC Buy 33,300 5.79180 (194,531 94)
48388525 2/14i2008 TRXBQ IRONOX INC Buy 55,352 5.61570 (311,94227)
48388525 2/29/2408 TRXBQ 1RONOX INC Buy 14,800 4.44000 (66,008.()0)
49388525 3/3/2008 "TRXBQ TRONOXINC Buy 10,000 3.9600 (39,800.00)
48388525 3/122008 TRXBQ FRONOX INC Buy 7,5(x) 2.82000 (21,30).00)
48388525 4i29/2008 TRXBQ TRONOXINC Buy 20,000 2.75000 (55,400.00)
48388525 4/30/2008 TRXBQ TRONOX INC Buy 26,700 3.04470 (81,827.49)
48388525 5/1/2008 TRXBQ T'RONOX INC Buy 7,750 2.95000 (23,017.50)
48388525 5/2/2008 TRXBQ TRONOXINC Buy 388 2.95000 (1,156.24)
48388525 5i7/2008 TRXBQ IRONOX INC Buy 7.750 2.92000 (22,785.00)
48388525 61912008 "TRXBQ TRONOXINC Buy 30,458 4.18560 (128,094.16)
48388525 6/11/2008 TRXBQ TRONOX INC Buy 7,750 3.93000 (30,612.50)
48388525 6/25/2008 TRXBQ VRONOX INC Buy 3,100 3.69100 111,504.10)
18388525 6/26/2008 TRXBQ TRONOX INC Buy 19,375 3.42000 (66,650.00)
48388525 6/27/2008 rRXBQ rRONOX INC Buy 7,750 3.18000 (24,800.00)
48388525 7/1/2008 TRXBQ IRONOXINC Buy 11,625 2.72670 (31,930.39)
18388525 7/812008 TRXBQ I RONOX INC Buy 948 1.83000 (1,753.80)
48388525 7/8i2(08 TRXBQ rRONOX INC Buy 3,002 1.72170 (5,288.62)
48388525 7,9/2008 TRXBQ TRONOX INC Buy 43,450 1.49730 (65,926.69)
48388525 7/21/3(x)8 TRXBQ rRONOX INC Buy 30,780 1-3(N100 (40,946.63)
48388525 7/22/2008 TRXBQ TRONOXINC Buy 23,858 143610 (34,739.63)
48388525 7'23/2008 TRXBQ TRONOXINC Buy 47,400 1.50130 (72,109.62)
48388525 7/28/208 TRXBQ TRONOXINC Buy 14,220 1.31330 (18,959.53)
48388525 7/29/2008 TRXBQ TRONOX INC Buy 9,480 1.27500 (12,)76.60)
48388525 8/1/2008 TRXBQ TRONOXINC Buy 13,351 1.10650 (15,039.90)
48388525 8/18/2008 TRXBQ TRONOX INC Buy 44,983 0.59500 (27,664.55)
48388525 8/18/2008 TRXBQ TRONOX INC Buy 49,344 0.60800 (30,988.03)
48388525 8/19/2008 TRXBQ TRONOXINC Buy 11,938 0.58290 (7,197.42)
48388525 8/21/2008 TRXBQ TRONOXINC Buy 7,900 0.43500 (3,594.50)
48388525 8/25/2008 TRXBQ TRONOX INC Buy 11,850 0.28670 (3,634.40)
48388525 8/26/2008 TRXBQ TRONOX INC Buy 80,533 0.37610 (31,899.12)
48388525 8/27/2008 TRXBQ TRONOX INC Buy 68,212 0.38790 (27,823.67)
48388525 8/28/2008 TRXBQ TRONOXINC Buy 2-193 0.39000 (940.13)
48388525 9/2/2008 TRXBQ TRONOX INC Buy 3.1)50 046000 (1,896.)0)
48388525 9/3/2008 TRXBQ TRONOX INC Buy 1,578 0.45000 (741.66)
48388525 9/4/2008 TRXBQ TRONOXINC Buy 11.850 0.18670 (6.004.40)
48388525 9/9/2008 TRXBQ TRONOXINC Buy 3,950 0,28000 (1,185.00)
48388525 10/14/2008 TRXBQ TRONOX INC Buy 59,250 0.1400 (8.591.25)
48388525 3/4/2009 TRXBQ TRONOX INC Sale (12,600) 0.04000 503.99
48388525 3/ 1 1 /2009 TRXBQ TRONOXINC Sale (14,525) 0.03640 528.70
48388525 3;132009 TRXBQ TRONOX INC Sale (20,750) 0,03000 622.49
Total Shares Purchased 1048,975 $ (3,111,673.58)Shares Sold (47,875) $ 1,655.18
Shares Remaining 1,001,100 S (3,110,018.40)
Shares Remaining Cost Basis/LIFO (3,102,85938)Cost Basis Remaining Shares at .037167 (Avg Price 90 days after I; 12109 37.'_07.48
Net Loss bases on LIFO (3,065,651.56)
Shares Remaining Cost Basis, FIFO (2,582,754.42)Cost Basis Remaining Shares at .037167 (Avg Price 90 days after li 12/01) 37,207.88
Net Loss Based on FIFO (2545,546.54)
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 184 of 203
LaGrange Capital Partners Offshore Fund, Ltd.Class A Shares
Reference Acct Trade Date Ticker Symbol Security Description Trans Type Quantity Price Net Amount (Settle) 48384312 9,122007 TRXAQ IRONOX INC Buy 2,849 111.8214 (30,887.15)48384312 9/132007 TRXAQ TRONOX INC Buy 941 (0.4100 (9,814.63)48384312 9/142007 TRXAQ TRONOX INC Buy 992 I0.40M (10.336.64)48384312 9262007 TRXAQ TRONOX INC Buy 15,289 9,6908 (148,468.42)48384312 9,28/2007 TRXAQ TRONOX INC Buy 432 9.2700 (4,013.28)48384312 10/ 1i2007 TRXAQ TRONOX INC Buy 1,781 9,2500 (16,509.87)48384312 10/5/2007 TRXAQ TRONOX INC Buy 2,617 9.4511 (24,785.87)48384312 10/10/2007 TRXAQ TRONOX INC Buy 2,422 9,2100 122,355.06)48384312 10/12/2007 TRXAQ TRONOX INC Buy 2,422 8.9300 (21,676.90)48384312 10/22/2007 TRXAQ TRONOX INC Buy 5300 T8123 (41,511.19)48384312 102312007 TRXAQ TRONOX INC Buy 2,422 7.7100 (18,72106)48384312 10/26/2007 TRXAQ TRONOX INC Buy 170 7.781X) (1,326.00)48384312 11=30/2007 TRXAQ TRONOX INC Buy 4,518 8.0919 (36,649.56)48384312 12/3/2007 TRXAQ rRONOX INC Buy 4,207 8.1404 (34,330.80)48384312 1112/2007 TRXAQ TRONOX INC Buy 6,240 7.9023 (49,435.15)48384312 12/14/2007 TRXAQ TRONOX INC Buy 7,783 7.5423 (58,85738)48384312 12/18/2007 TRXAQ TRONOXINC Buy 4,019 7.1242 (28,712.54)48384312 12'20/2007 TRXAQ TRONOX INC Buy 5,965 7.0279 (42,040.72)48384312 12;212007 TRXAQ TRONOX INC Buy 3,844 7.4179 (28,591.29)48384312 12,26j2007 TRXAQ TRONOX INC Buy 6,614 8.1266 (53,881.61)48384312 12/272007 TRXAQ TRONOX INC Buy 1,223 7.9800 (9,784.00)48384312 V, 10/2008 TRXAQ TRONOX INC Buy 2,512 7.3802 (18,589.30)48384312 114/2008 TRXAQ TRONOX INC Buy 27,100 5.4906 (149,337_26)48384312 2/ 152008 TRXAQ TRONOX INC Buy 20,800 4.8356 ( 101,412.48)48384312 2/15/2008 TRXAQ TRONOX INC Buy 10,738 4.6809 (50,478 26)48384312 2,20/2008 TRXAQ TRONOX INC Buy 7,800 4.7967 (37,570.26)48384312 2/21:2008 TRXAQ TRONOX INC Buy 4,966 4.7415 (23,645.61)48384312 2,25/2008 TRXAQ TRONOX INC Buy 5,200 4.6850 (24,466-00)48384312 226/2008 TRXAQ TRONOX INC Buy 7,800 4.6947 (36,774.66)48384312 2127/2008 TRXAQ TRONOX INC Buy 884 4.6700 (4,145.96)48384312 2/282008 TRXAQ TRONOX INC Buy 8,242 4.6891 (38,812.40)48384312 2292008 TRXAQ TRONOX INC Buy 10,504 4.4917 (47,390.90)48384312 3!3/2008 TRXAQ TRONOX INC Buy 3,100 3.8559 (12.015 29)48384312 35,2008 TRXAQ TRONOX INC Buy 50 4.1100 (206.50)48384312 3,M2008 TRXAQ TRONOX INC Buy 675 3.1900 (2,166.75)48384312 3/1112008 TRXAQ TRONOX INC Buy 7,500 2.9233 (22.074.75)48384312 6/5,2008 TRXAQ TRONOX INC Sale (60,750) 5.0207 303,790.8238384312 715/2008 TRXAQ TRONOX INC Sale (21) 1,2200 25.1948384312 7/182008 TRXAQ TRONOX INC Sale (16,212) 1.4000 22 268.6748384312 8/18/2008 TRXAQ TRONOXINC Sale (21) 0.7500 15.3248384312 8/ 1812008 TRXAQ TRONOX INC Sale (102.887) 0.7249 72,524.6348384312 8/192008 TRXAQ TRONOX INC Sale (20,030) 0.7056 13,732.49
Total Shares Purchased 199,921 S (1,261,776.50)Less Shares Sold (199,921) S 412,357.12Net Capital Gain/Loss S (849,419.38)LIFO Loss S (849,419.38)FIFO Loss S (849,419.38)
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 185 of 203
LaGrange Capital Partners Offshore Fund, Ltd.Class B Shares
Reference Acct Trade Date Ticker Symbol Security Description 'Trans Type Quantity Price Net Amount (Settle) 48384312 12/31/2007 TRXBQ TRONOX INC Buy 2,923 8.4538 (24,768.92)48384312 1/10/2008 TRXBQ TRONOX INC Buy 3,606 7.0628 (25,540.58)48384312 1/1112008 TRXBQ TRONOX INC Buy 2,470 7.1100 (17.611.10)48384312 1/14/2008 TRXBQ TRONOX INC Buy 4,452 7.2567 (32,395.87)48384312 1/16/2008 TRXBQ TRONOX INC Buy 6.591 6.9213 (45.750.11)48384312 1/17/2008 TRXBQ TRONOX INC Buy 17,409 6.7557 (117,958.16)48384312 1/22/2008 TRXBQ TRONOX INC Buy 4,974 5.8640 (29,267.02)48384312 1/23/2008 TRXBQ TRONOX INC Buy 22,500 5.7476 (129,771.00)48384312 1/25/2008 TRXBQ TRONOX INC Buy 4,974 6.2500 (31,186.98)48384312 1/28/2008 TRXBQ TRONOX INC Buy 3,532 6.7433 (23,887.98)48384312 1/29/2008 TRXBQ TRONOX INC Buy 2.487 6.9200 (17.259.78)48384312 1/3012008 TRXBQ TRONOX INC Buy 2,487 6.9400 (17,309.52)48384312 2/5/2008 TRXBQ TRONOX INC Buy 7,029 7.1752 (50.575.06)48384312 2/13/2008 TRXBQ TRONOX INC Buy 11,700 53918 (68,349.06)48384312 2/14/2008 TRXBQ TRONOX INC Buy 19,448 5.6157 (109,603.09)48384312 2/29/2008 TRXBQ TRONOX INC Buy 5,200 4.4400 (23,192.00)48384312 3/12/2008 TRXBQ TRONOX INC Buy 2,500 2.8200 (7,100.00)48384312 5/1/2008 TRXBQ TRONOX INC Buy 2,250 2.9500 (6.682.50)48384312 5/2/2008 TRXBQ TRONOX INC Buy 112 2.9500 (333.76)48384312 5!7/2008 TRXBQ TRONOX INC Buy 2,250 2.9200 (6,615.00)48384312 6/5/2008 TRXBQ TRONOX INC Sale (6,117) 4.2000 25,568.9148384312 6/9/2008 TRXBQ TRONOX INC Buy 8,842 4.1856 (37,185.92)48384312 6/11/2008 TRXBO TRONOX INC Buy 2,250 19300 (8.88750)48384312 6/25/2008 TRXBQ TRONOX INC Buy 900 3.6910 (3,339.90)48384312 6/26/2008 TRXBQ TRONOX INC Buy 5,625 3.4200 (19,350.00)48384312 6/27/2008 TRXBQ TRONOX INC Buy 2,250 3.1800 (7,200.00)48384312 7/1/2008 TRXBQ TRONOX INC Buy 3,375 2.7267 (9,270.11)48384312 7/8/2008 TRXBQ TRONOX INC Buy 798 13217 (1,405 84)48384312 7/8/2008 TRXBQ TRONOX INC Buy 252 1.8300 (466.20)48384312 7(9/2008 TRXBQ TRONOX INC Buy 11,550 1.4973 (17,524.82)48384312 7121/2008 TRXBQ TRONOX INC Buy 8,182 1.3000 (10.884.51)48384312 7/22/2008 TRXBQ TRONOX INC Buy 6.342 1.4361 (9,234.59)48384312 7/23/2008 TRXBQ TRONOX INC Buy 12,600 1.5013 (19,16838)48384312 7/28/2008 TRXBQ TRONOX INC Buy 3,780 1.3133 5.039.87)48384312 7/29/2008 TRXBQ TRONOX INC Buy 2,520 1.2750 3,263.40)48384312 8/1/2008 TRXBQ TRONOX INC Buy 3.549 1.1065 3,997.95)48384312 8/18/2008 TRXBQ TRONOX INC Buy 13,117 0.6080 8,237.48)48384312 8/18/2008 TRXBQ TRONOX INC Buy 11,957 0.5950 7.353.56)48384312 8/19/2008 TRXBQ TRONOX INC Buy 3,174 0.5829 1,913.60)48384312 8/21/2008 TRXBQ TRONOX INC Buy 2,100 0.4350 (955.50)48384312 8/25/2008 TRXBQ TRONOX INC Buy 3,150 0.2867 (966.11)48384312 812612008 TRXBQ TRONOX INC Buy 21,408 0.3761 (8.479.71)48384312 8/27/2008 TRXBQ TRONOX INC Buy 18.132 0.3879 (7,396.04)48384312 8/28/2008 TRXBQ TRONOX INC Buy 610 0.3900 (250.10)48384312 9/2/2008 TRXBQ TRONOX INC Buy 1,050 0.4600 (504.00)48384312 9/3/2008 TRXBQ TRONOX INC Buy 420 0.4500 (19740)48384312 9/4/2008 TRXBO TRONOX INC Buy 3,150 0.4867 (1,596.11)48384312 9/9/2008 TRXBQ TRONOX INC Buy 1,050 0.2800 (315.00)48384312 10114/2008 TRXBQ TRONOX INC Buy 15,750 0.1400 (2,283.75)48384312 3/4/2009 TRXBQ TRONOX INC Sale (2.400) 0.0400 95.9948384312 3/1112009 TRXBQ TRONOX INC Sale (2,975) 0.0364 108.2848384312 311312009 TRXBQ TRONOX INC Sale (4,250) 0.0300 127.49
Total Shares Purchased 296,777 $ (981,824.84)Shares Sold (15,742) $ 25.900.67Shares Remaining 281,035 $ (955,924.17)Shares Remaining Cost Basis/LIFO (962,473)Cost Basis Remaining Shares at .037167 (Avg Price 90 days after 1/12/09 10,445 Net Loss based on LIFO (952,028)
Shares Remaining Cost Basis/FIFO (780,428)Cost Basis Remaining Shares at.037167 (Avg Price 90 days after 1/12/09 10,445 Net Loss Based on FIFO (769,983)
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 186 of 203
CERTIFICATION PURSUANT TOTHE FEDERAL SECURITIES LAWS
I, Warren J. Schott, on behalf of the San Antonio Fire & Police Pension Fund ("SanAntonio"), hereby certify, as to the claims asserted under the federal securities laws, that:
1. I am the Executive Director and Chief Investment Officer of San Antonio. I havereviewed the Consolidated Class Action Complaint for Violations of the FederalSecurities Laws filed concurrently in this matter.
2. San Antonio did not purchase the securities that are the subject of this action at thedirection of counsel or in order to participate in any action arising under the federalsecurities laws.
3. San Antonio is willing to serve as a representative party on behalf of the Class, includingproviding testimony at deposition and trial, if necessary. San Antonio fully understandsthe duties and responsibilities of a class representative, including overseeing theprosecution of the action for the Class.
4. San Antonio's transactions in the Tronox Incorporated securities that are the subject ofthis action are set forth in the chart attached hereto.
5. San Antonio has sought to serve as a lead plaintiff and representative party on behalf of aclass in the following actions under the federal securities laws filed during the three-yearperiod preceding the date of this Certification, but either withdrew its motions for leadplaintiff or was not appointed lead plaintiff:
In re Sterling Financial Corporation Securities Litigation, Case No. 07-cv-2171 (E.D. Pa.)In re The Bear Stearns Companies, Inc. Securities, Derivative, and ERISA Litigation,
Case No. 08-cv-2793 (S.D.N.Y.)
6. San Antonio will not accept any payment for serving as a representative party on behalfof the Class beyond San Antonio's pro rata share of any recovery, except such reasonablecosts and expenses (including lost wages) directly relating to the representation of theClass, as ordered or approved by the court.
I declare under penalty of perjury that the foregoing is true and correct. Executedthis .20 day of November, 2009.
arren J. SchottExecutive Director and Chief Investment OfficerSan Antonio Fire & Police Pension Fund
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 187 of 203
San Antonio Fire & Police Pension FundTransactions in Tronox Incorporated
Corporate BondCusip # 897053ABO
Transaction Date Par Amount Par ValuePurchases 10/16/2006 15,000 103.00Purchases 10/26/2006 10,000 103.75Purchases 10/27/2006 25,000 103.75Purchases 10/27/2006 15,000 103.75Purchases 10/31/2006 70,000 103.75Purchases 2/8/2008 20,000 92.75Purchases 2/8/2008 50,000 92.50Purchases 2/13/2008 25,000 90.50Purchases 2/13/2008 20,000 90.75Purchases 2/15/2008 15,000 86.25Purchases 8/6/2008 15,000 60.00Purchases 8/7/2008 15,000 59.50Purchases 8/7/2008 10,000 58.75Purchases 8/4/2008 20,000 60.25Purchases 8/20/2008 15,000 52.00Purchases 8/12/2008 15,000 57.40Purchases 8/13/2008 40,000 54.23Purchases 9/11/2008 20,000 44.25Purchases 10/17/2008 30,000 25.63
Class B Common StockCusip # 897051207
Transaction Date Shares PriceReceipt* 3/31/2006 401.67 16.99
Sales 4/7/2006 (401) 18.28Received cash in lieu of 4/17/2006 (0.67) 17.66fractional share
*Received as a result of the spin-off from Kerr-McGee Corp.
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 188 of 203
CERTIFICATION PURSUANT TOTHE FEDERAL SECURITIES LAWS
I, Kevin B. Lindahl, on behalf of the Fire & Police Pension Association ofColorado ("FPPAC"), hereby certify, as to the claims asserted under the federal securitieslaws, that:
1. I am the General Counsel for FPPAC. I have reviewed the Consolidated ClassAction Complaint for Violations of the Federal Securities Laws filedconcurrently.
2. FPPAC did not purchase the securities that are the subject of this action at thedirection of counsel or in order to participate in any action arising under thefederal securities laws.
3. FPPAC is willing to serve as a representative party on behalf of the Class,including providing testimony at deposition and trial, if necessary. FPPAC fullyunderstands the duties and responsibilities of a class representative, includingoverseeing the prosecution of the action for the Class.
4. FPPAC's transactions in the Tronox Incorporated securities that are the subject ofthis action are set forth in the chart attached hereto.
5. FPPAC has sought to serve as a lead plaintiff and representative party on behalfof a class in the following action under the federal securities laws filed during thethree-year period preceding the date of this Certification, but was not appointedlead plaintiff:
In re Lehman Brothers Equity/Debt Securities Litigation, Case No. 08-cv-5523 (S.D.N.Y.)
6. FPPAC will not accept any payment for serving as a representative party onbehalf of the Class beyond FPPAC's pro rata share of any recovery, except suchreasonable costs and expenses (including lost wages) directly relating to therepresentation of the Class, as ordered or approved by the court.
I declare under penalty of perjury that the foregoing is true and correct. Executed.,this ',day of November, 2009.
Kevin B. LindahlGeneral CounselFire & Police Pension Association of Colorado
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 189 of 203
Fire & Police Pension Association of ColoradoTransactions in Tronoz Incorporated
Corporate BondCusip # 897053ABO
Transaction Date Par Amount Par ValueExchange* 7/17/2006 300,000 103.50Purchases 9/13/2006 200,000 103.50Sales 4/19/2007 (75,000) 106.75Sales 4/19/2007 (25,000) 107.00Sales 11/160-007 (100,000) 95,50Sales 6/2/2008 (50,000) 81.00Sales 6/3/2008 (25,000) 81.00
*Received in exchange for private placement
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 190 of 203
APPENDIX A
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 191 of 203
SITE LOCATION SUE TYPE
Los Angeles,Hobart)
CaliforniaFormer chemical rnanufachnin(Vernon or Hobart) g
Los Angeles, CaliforniaFormer chemical manufacturingto
Loa Angeles, California Former chemical manufacturing(Culver City) g
Whittier, California Technical Information Center(R&D/ Lab) site
Los Angeles, California Office site
Tampa, Florida Fertilizer manufacturing
Fort Pierce, Florida Fertilizer manufacturing
Baltimore, Maryland Chemical manufacturing
?hiladelphia, Pennsylvania Chemical Manufacturing
Vineland, New jersey Land
Swedesboro, New Jersey Land
Jamesburg, New Jersey Land
Dover, New Jersey Land
Keymar, Maryland Blender - Farm Center
Waldorf, Maryland Farm Center
Mt. Airy, Maryland Farm Center
Chestertown, Maryland Farm Center
Massey, Maryland Farm Center
Centreville, Maryland Farm Center
Vineland, New Jersey Farm Center
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 192 of 203
SITE LOCATION S rl'E TYPE
Swedesboro, New jersey Warehouse
Jamesburg, New Jersey Warehouse
Dover, New Jersey Farm Center
BIoomsburg, Pennsylvania Farm Center
Germansville, Pennsylvania Warehouse
Honeybrook, Pennsylvania Farm Center
Milnor, Pennsylvania Farm Center
Winchester, Virginia Blender - farm Center
Courtland, Virginia Blender - Farm Center
Melford, Delaware Warehouse
Shelbyville, Delaware Warehouse
Delmar, Delaware DA Nitrogen
Whitehall, Maryland Warehouse
Chaptico, Maryland Warehouse
Hickman, Maryland Warehouse
Rigley, Maryland Warehouse
Preston, Maryland Warehouse
Reliance, Maryland. Warehouse
Secretary, Maryland Warehouse
Westover, Maryland Warehouse
Easton, Maryland Warehouse
Queen Ann, Maryland Warehouse
Powellville, Maryland Warehouse
Centreville, Maryland Maintenance & Equipment Center
2
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 193 of 203
SITE LOCATION SITE TYPE
Cohansey, New Jersey Warehouse
Aura, New Jersey Warehouse
Ringoes, New Jersey Warehouse
Cranbury, New Jersey Warehouse
Nattituck„ New York Warehouse
HOIland, Pennsylvania Warehouse
Millersville, Pennsylvania Warehouse
Russellville, Pennsylvania Warehouse
Atglen, Pennsylvania Warehouse
Soudertown, Pennsylvania Warehouse
Pottstown, Pennsylvania Warehouse
Everett, Pennsylvania Warehouse
Martinsburg, Pennsylvania Warehouse
Mt. Sidney, Virginia Warehouse
Stuarts Draft, Virginia Warehouse
Mt Solon, Virginia Warehouse
White Post, Virginia Warehouse
Maurertown, Virginia Warehouse
McConnellsburg, Pennsylvania Warehouse
East Windsor, Connecticut Blender - Farm Center
Portland, Connecticut Blender - Farm Center
North Haven, Connecticut Land
South Deerfield, Massachusetts Blender - Farm Center
Amenia, New York Blender - Farm Center
3
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 194 of 203
SITE LOCA I'TON SITE TYPE
Fonda, New York Warehouse
Goshen, New York Blender - Farm Center
North Collins, New York Land
Eagle Harbor, New York Land
Newark, New York Blender - Farm Center
West Kingston, Rhode Island Blender - Farm Center
West Concord, Massachusetts Warehouse
North Walpole, New Hampshire Blender - Farm Center
Chatham, New York Blender - Farm Center
Schoharie, New York Warehouse
Salem, New York Blender - Farm Center
Cato, New York Warehouse
Lawton, New York Warehouse
Elba, New York Warehouse
Hamlin, New York Warehouse
Albion, New York Warehouse
Vergennes, Vermont Blender - Farm Center
. Bradford,. Vermont ... Blender - Farm. Center
W. Springfield, Massachusetts Regional Office
Kingston, Illinois Blender - Farm Center
Richmond, Illinois Blender - Farm Center
Rushville, Indiana Warehouse
Laporte City, Iowa Blender - Farm Center
Farmersburg, Iowa Blender - Farm Center
4
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 195 of 203
SITE LOCATION SITE TYPR
Garnavillo, Iowa Blender - Farm Center
Mingo, Iowa Blender - Farm Center
Randolph, Minnesota Blender - Farm Center
Garvin, Minnesota band
Dassel, Minnesota Blender - Farm Center
Wabasso, Minnesota Blender - Farm Center
Winthrop, Minnesota Blender - Farm Center
Canton, Ohio Blender - Farm Center
Brandon, Wisconsin Blender- Farm Center
Livingston, Wisconsin Blender - Farm Center
Monroe, Wisconsin Blender - Farm Center
Lone Rock,, Wisconsin Blender - Farm Center
Sturtevant; Wisconsin Blender - Farm Center
Darien, Wisconsin Blender - Farm Center
Blooming Grove, Indiana Warehouse
Worthington, Indiana Blender - Farm Center
Huntington, Indiana Warehouse
_ Lynn; Indiana..-Warehouse _.
Milroy, Indiana Warehouse
Raleigh, Indiana .Warehouse
Shelbyville, Indiana Warehouse
Charles City, Iowa Warehouse
Hudson, Michigan Warehouse
Norwood, Minnesota Blender - Farm Center
5
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 196 of 203
SM LOCATION SM TYPE
Union City, Ohio Warehouse
Delta, Ohio Warehouse
Mt. Gilead, Ohio Warehouse
W. Alexandria, Ohio Warehouse
Portage, Wisconsin Maintenance & Equipment Centeri
Madison, Wisconsin Regional Office
Cartersville, Georgia Blender - Farm Center
New Bern, North Carolina Blender - Farm Center
Warsaw, North Carolina Blender - Farm Center
Princeton, North Carolina Blender - Farm Center
Robersonville, North Carolina Farm Center
WilIiamston, North Carolina Blender - Farm Center
Red Oak, North Carolina Farm Center
Woodland, North Carolina Land
Apden, North Carolina Farm Center
Davidson, North Carolina Blender - Farm Center
Aiken, South Carolina Farm Center
---------- Florence,. South. Carolina Farm Center .
Pantego, North Carolina Blender - Farm Center
Newport, North Carolina Blender - Farm Center
Aurelian Springs, North Carolina Farm Center
Enfield, North Carolina Farm Center
Como, North Carolina Warehouse
FIarrelsville, North Carolina Warehouse
6
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 197 of 203
SITE LOCATION SITE TYPE
Kingston, North Carolina Warehouse
Conway, North Carolina Warehouse
Gaston, North Carolina Warehouse
Rich Square, North Carolina Warehouse
Tyner, North Carolina Warehouse
Newton Grove, North Carolina Warehouse
Pikeville, North Carolina Warehouse
Goldsboro, North Carolina Warehouse
Mt. Olive, North Carolina Warehouse
Shelby, North Carolina Warehouse
Clarendon, North Carolina Warehouse
Fairbluff, North Carolina Warehouse
Bessemer City, North Carolina _ Warehouse
Liberty, North Carolina Warehouse
China Grove, North Carolina Warehouse
Monroe, North Carolina Warehouse
Orrum, North Carolina Warehouse
v...:. Minturn,.North Carolina.. - Warehouse..
Martin, South Carolina Warehouse
Sycamore, South Carolina Farm Center
Allendale, South Carolina Warehouse
Erhardt, South Carolina Warehouse
Elko, South Carolina Warehouse
Burton, South Carolina Warehouse
7
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 198 of 203
SM LOCATION SITE TYPE
Cameron, South Carolina Warehouse
Lone Star, South Carolina Warehouse
lslandton South Carolina Warehouse
Walterboro, South Carolina Warehouse
Darlington, South Carolina Warehouse
T mmonsville, South Carolina Warehouse
Lake City, South Carolina Warehouse
Loris, South Carolina Warehouse
Swansea, South Carolina Warehouse
Gastoon, South Carolina Warehouse
Leesville, South Carolina Warehouse
Fellm South Carolina Warehouse
Little Mountain, South Carolina Warehouse
Bowman, South Carolina Warehouse
Eutawville, South Carolina Warehouse
North, South Caroline Warehouse
Eastover, South Carolina Warehouse
Saluda, South Carolina Warehouse.
Dazell, South Carolina Warehouse
Sumpter, South Carolina Warehouse
O wesgo, South Carolina Warehouse
Kingstree, South Carolina Farm Center
Nesmeth, South Carolina Warehouse
Rockhill, South Carolina Warehouse
8
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 199 of 203
SITE LOCATION SITE TYPE
South Hill, Virginia Warehouse
Danville, Virginia Warehouse
Waverly, Virginia Warehouse
Foley, Alabama Farm Center
Loxley, Alabama Farm Center
Florala, Alabama Farm Center
Opp, Alabama Blender - Farm Center
Dothan, Alabama Blender - Farm Center
Brundidge, Alabama Blender - Farm Center
Keo, Arkansas Blender - Farm Center
Des Ark, Arkansas Land
jay, Florida Farm Center
CotbondaIe, Florida Farm Center
Greenwood, Florida Farm Center
Baker, Florida Farm Center
Paxton, Florida Farm Center
Pembroke, Kentucky Blender - Farm Center
__._,...:: _.:...... Guthrie, Kentucky. Blender --Farm. Center-
Cadiz, Kentucky Blender - Farm Center
Franklinton, Louisiana Blender - Farm Center
Ft. Cobb, Oklahoma Blender - Farm Center
Haskell, Oklahoma Blender- Farm Center
Dorchester, Texas Blender - Farm Center
Atmore, Alabama Farm Center
9
P
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 200 of 203
SITE LOCATION SITE TYPE
Huxford, Alabama Warehouse
Hartford, Alabama Warehouse
Samson, Alabama Warehouse
Wicksburg, Alabama Warehouse
Walnut Hill, Florida Warehouse
Gridley, Kansas Warehouse
Chanute, Kansas Blender - Farm Center
Hopkinsville, Kentucky District Office
Lucedale, Mississippi Farm Center
Macon, hssissippi Farm Center
Vicksburg, Mississippi Maintenance & Equipment Center
)Justin, Oklahoma Warehouse
Poteau, Oklahoma Blender- Farm Center
Talahina, Oklahoma Warehouse
Pryor, Oklahoma District Office
Sulphur, Oklahoma Warehouse
Boynton, Oklahoma Warehouse
Antlers;-Oklahoma Warehouse _ ...
Cedar Hill, Tennessee Warehouse
Jackson, Mississippi Regional OfSoe
Pensacola, Florida Warehouse
Sanford, Florida Warehouse
Ft. Lauderdale, Florida Warehouse
Homestead, Florida Farm Center
10
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 201 of 203
SITE LOCATION SITE TYPE
Belle Glade, Florida Warehouse
Fort Pierce, Florida Warehouse
Wanchula, Flcrida Land
Eustis, Florida Land
Umatilla, Florida Land
Orlando, Florida Warehouse
Winter Garden, Florida Farm Center
Lake Wales, Florida Farm Center
Davenport, Florida Land
Cocoa, Florida Land
Pensacola, Florida Farm Center
Ft. Myers, Florida Warehouse
Eagle Lake, Florida Warehouse
Lenox, Georgia Blender - Farm Center
Hastings, Florida Farm Center
Immokalee, Florida Farm Center
Plant City, Florida Warehouse
Miami; Florida _ . .... Warehouse .. _.. _ ...
St Petersburg, Florida Warehouse
Baxley, Georgia Warehouse
Douglas, Georgia Blender - Farm Center
Ambrose, Georgia Warehouse
Moultrie, Georgia Warehouse
Adel, Georgia Warehouse
11
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 202 of 203
SITE LOCATION SM TYPE
Ocilla, Georgia Warehouse
Blackshear, Georgia Warehouse
Jasper, Florida Warehouse
Lake Butler, Florida Warehouse.
I2
Case 1:09-cv-06220-SAS Document 93 Filed 07/30/10 Page 203 of 203
CERTIFICATE OF SERVICE
I, Kenneth M. Rehns, counsel for the Plaintiffs, hereby certify that on July 30, 2010, I
filed an original of the foregoing by hand With the Clerk of the Court and delivered a copy to
1+ unsul ful tllc p ltics lil tllc Wlthin dl t1V11 by cluLtl im, mall and first class mail.
Dated: New York, New YorkJuly 30, 2010
Kenneth M. Rehns
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