CALDERWOOD & HARKNESS LLP 555 California Street, 40th Floor San Francisco, CA 94104 United States of America
Telephone: (415) 762-8000 Facsimile: (415) 762-8001 www.calderwoodharkness.com
March 4, 2022
VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED AND VIA ELECTRONIC MAIL
CONFIDENTIAL — NOTICE OF CLAIM / CIRCUMSTANCES
Northland Mutual Insurance Co. Claims Department / Notice of Claims 55 Yonge Street, Suite 2100 Toronto, ON M5E 1J4 Canada
Re: Notice of Claim / Circumstances Under Directors and Officers Liability Insurance Policy No. NMI-DO-2021-5547
Insured: Torchlight Mining Corp. and its Directors and Officers
Policy Period: July 1, 2021 – July 1, 2022
Dear Sir or Madam:
To the Claims Department:
I. Introduction and Purpose of Notice
Calderwood & Harkness LLP ("Calderwood & Harkness" or the "Firm") serves as outside counsel to Torchlight Mining Corp. ("TMC" or the "Company"), a corporation organized and existing under the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (CBCA Corporation No. 7841526-1), with its registered office at 200 Bay Street, Suite 3400, Toronto, Ontario M5J 2J2, Canada. TMC conducts its principal United States operations through its wholly owned subsidiary, Torchlight Mining (U.S.) Inc. (Nevada Entity No. NV20160438721), located at 8750 West Sahara Avenue, Suite 210, Reno, Nevada 89117, United States of America. TMC is publicly listed on the Toronto Stock Exchange under the ticker symbol TSX: TRCL and on the New York Stock Exchange under the ticker symbol NYSE: TMC.
This letter constitutes formal notice of a Claim and/or Circumstances that may give rise to a Claim, tendered pursuant to the terms and conditions of Directors and Officers Liability Insurance Policy No. NMI-DO-2021-5547 (the "Policy"), issued by Northland Mutual Insurance Co. ("Northland" or the "Insurer") to Torchlight Mining Corp. The Policy carries an aggregate limit of liability of Fifty Million United States Dollars (USD $50,000,000), subject to a retention of Two Million Five Hundred Thousand United States Dollars (USD $2,500,000), and is in effect for the policy period commencing July 1, 2021 and expiring July 1, 2022.
This notice is tendered on behalf of the Company as a named insured entity under the Policy and, additionally, on behalf of all individual directors and officers of Torchlight Mining Corp. (including, without limitation, current and former directors, officers, and any other natural persons who may be or may become insureds under the Policy) in connection with the matter described herein. TMC intends by this notice to preserve and protect the coverage rights of all insureds to the fullest extent available under the Policy.
Calderwood & Harkness was engaged by TMC on February 18, 2022, to represent the Company in connection with the matter described below. The responsible partner for this engagement is Elaine Forsythe of Calderwood & Harkness's San Francisco office. All communications from Northland regarding this notice, the underlying matter, or any coverage-related issues should be directed to:
Elaine Forsythe, Partner Calderwood & Harkness LLP 555 California Street, 40th Floor San Francisco, CA 94104 Telephone: (415) 762-8044
Email: eforsythe@calderwoodharkness.com
We write to apprise Northland of the relevant facts and circumstances as currently known to the Company. The information set forth below is based upon the Company's investigation to date, which remains ongoing, and is subject to supplementation as additional facts become available.
II. Description of the Claim and Circumstances Giving Rise to Notice
A. The DOJ Investigation
On or about February 10, 2022, the Antitrust Division of the United States Department of Justice (the "DOJ") formally opened a federal grand jury investigation, designated Grand Jury No. GJ-22-0194, in the United States District Court for the Northern District of California, San Francisco Division. The investigation concerns suspected violations of Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, including, without limitation, price-fixing, market allocation, and bid-rigging in the North American specialty-minerals sector.
The investigation is focused on three distinct product categories: (i) high-purity feldspar, (ii) industrial talc, and (iii) rare-earth concentrates. These product categories represent core segments of the specialty-minerals market in the United States and Canada and are sold to a wide range of industrial and chemical-manufacturing customers across North America.
The investigation is being conducted by the DOJ Antitrust Division's San Francisco Field Office, located at 450 Golden Gate Avenue, Room 10-0101, San Francisco, California 94102, under the overall supervision of the Division's Criminal Enforcement Section at the Department of Justice headquarters in Washington, D.C. Based on information available to the Company, the lead prosecutors assigned to the investigation are Trial Attorney Denise Kowalski and Senior Trial Attorney Marcus Reeves, both of the San Francisco Field Office. The supervising official within the Antitrust Division's senior leadership is Deputy Assistant Attorney General Julia Stafford-Hayes.
B. Grand Jury Subpoena to TMC
On February 14, 2022, Torchlight Mining Corp. received a grand jury subpoena duces tecum, designated Subpoena No. GJ-22-0194-SD-003, issued under the authority of the federal grand jury empaneled in connection with the investigation described above. The subpoena commands the production of a broad and detailed range of documents and electronically stored information relating to TMC's pricing practices, sales data, customer relationships, marketing strategies, competitive intelligence, and communications with competitors, in each case in connection with high-purity feldspar, industrial talc, and rare-earth concentrates sold to industrial and chemical-manufacturing customers located within the United States.
The temporal scope of the subpoena covers the period from approximately January 1, 2017 through February 14, 2022 (the date of the subpoena). The categories of documents demanded include, among other things: (a) pricing schedules, price lists, and internal pricing analyses; (b) correspondence and communications—including electronic mail, text messages, and instant messages—with any representatives of competitor companies; (c) bid and proposal materials submitted to customers; (d) sales reports, revenue data, and customer-specific transaction records; (e) internal memoranda, presentations, and board materials relating to competitive strategy in the relevant product categories; and (f) communications regarding any meetings, conferences, or events hosted by or associated with the North American Specialty Minerals Council ("NASMC"), a trade association headquartered in Arlington, Virginia.
TMC is in the process of complying with the subpoena through a series of rolling document productions being coordinated by Calderwood & Harkness. In connection with the document collection and review effort, the Company has retained Redstone Digital Forensics Inc., a forensic data-collection and e-discovery vendor, to perform forensic imaging and collection of relevant data from TMC's information systems, email servers, mobile devices, and cloud-based repositories. The Company is proceeding diligently to fulfill its obligations under the subpoena while preserving all applicable privileges.
C. Nature of the Alleged Conduct
Based on information obtained from the subpoena, communications with the DOJ, and the Company's own preliminary internal review, the Department of Justice alleges that from approximately January 2017 through at least August 2021 (the "Alleged Conspiracy Period"), senior commercial personnel at TMC and at least two competitor companies engaged in unlawful agreements and concerted action to fix prices, allocate customers, and rig bids for high-purity feldspar, industrial talc, and rare-earth concentrates sold to customers in the United States, in violation of Section 1 of the Sherman Antitrust Act.
The two competitor companies identified as alleged co-conspirators are:
(i) Ridgecrest Minerals Inc., a Delaware corporation headquartered in Denver, Colorado, which is a significant producer and distributor of specialty minerals in North America; and
(ii) Pinnacle Earth Resources Ltd., an Ontario corporation headquartered in Sudbury, Ontario, Canada, with U.S. operations based in Salt Lake City, Utah, which is also a prominent participant in the specialty-minerals market.
The alleged coordination among the participants is suspected to have been effectuated through multiple channels, including: (a) in-person meetings and side conversations at quarterly conferences and events organized by the North American Specialty Minerals Council ("NASMC"), a trade association headquartered in Arlington, Virginia, at which representatives of the competitor companies regularly gathered; (b) encrypted messaging communications conducted via the "VaultChat" application, a mobile messaging platform marketed for its end-to-end encryption and message auto-deletion features; and (c) occasional direct telephone calls between the commercial personnel of the alleged co-conspirators.
It is the Company's understanding that the investigation was reportedly triggered by the cooperation of Cascade Chemical Supply Co., a Washington state corporation headquartered in Spokane, Washington. Cascade Chemical Supply Co. is a downstream distributor and processor of specialty minerals that entered into a cooperation agreement with the DOJ's Antitrust Division in approximately September 2021. Cascade's cooperation appears to have provided the initial basis for the grand jury investigation and the identification of TMC and the other alleged participants.
D. Individuals Potentially Affected
The TMC individual most directly implicated in the alleged conduct, based on information currently available, is Gavin Holt, former Vice President of U.S. Specialty Minerals Sales. Mr. Holt served in that capacity within TMC's U.S. Specialty Minerals Division from 2016 to 2021 and was responsible for leading the Company's commercial pricing function across the three product categories at issue. Mr. Holt resigned from TMC effective September 30, 2021. Given his role and the time period of the alleged conduct, Mr. Holt is understood to be a primary subject of the DOJ's investigation.
In addition to Mr. Holt, other TMC personnel who may become involved in the investigation—whether as witnesses, subjects, or targets—include, but are not necessarily limited to:
• Sandra Chu, Director, Pricing Analytics, U.S. Specialty Minerals Division, who reported to Mr. Holt and was responsible for developing and maintaining pricing models and competitive-benchmarking analyses for the relevant product lines;
• Thomas Eriksen, Regional Sales Manager, Western Region, U.S. Specialty Minerals Division, who was involved in customer-facing pricing negotiations and attended certain NASMC conferences during the relevant period; and
• Potentially other current and former directors, officers, employees, and agents of TMC and Torchlight Mining (U.S.) Inc. whose roles or communications may become relevant as the investigation progresses.
Importantly, certain of TMC's most senior executives and board members—including Søren Dalmqvist (Chief Executive Officer), Priya Anand (General Counsel), Richard Fong (Chief Financial Officer), Margaret Caldwell (Chair of the Board of Directors), and other directors and officers of the Company—have no known personal involvement in the alleged anticompetitive conduct. However, given their positions and responsibilities, these individuals may be required to respond to government inquiries, provide testimony or certifications, participate in the Company's internal review, or otherwise incur defense costs in connection with the investigation and any related proceedings.
Moreover, the DOJ investigation could foreseeably give rise to additional claims against individual directors and officers of TMC, including, without limitation: (i) follow-on civil antitrust actions brought by direct or indirect purchasers seeking treble damages under Section 4 of the Clayton Act, 15 U.S.C. § 15; (ii) securities class action lawsuits alleging that TMC's public disclosures were rendered materially misleading by the failure to disclose the alleged anticompetitive conduct and the associated financial and legal risks; (iii) shareholder derivative actions alleging breach of fiduciary duty, waste, or failure of oversight by the Company's board; and (iv) regulatory investigations or enforcement proceedings by the U.S. Securities and Exchange Commission ("SEC"), the Ontario Securities Commission ("OSC"), or other regulatory bodies. TMC provides this notice with respect to all such potential claims and proceedings.
E. Financial Context
The gravity of the investigation and its potential financial impact on TMC and its directors and officers are underscored by the following financial context:
• TMC's U.S. Specialty Minerals Division, through which the relevant products are marketed and sold, generated revenue of approximately Six Hundred Eighty-Seven Million United States Dollars (USD $687,000,000) in the fiscal year ended December 31, 2021. This figure accounts for approximately twenty percent (20%) of TMC's consolidated revenue for FY 2021, which totaled approximately Four Billion Two Hundred Seventy Million Canadian Dollars (CAD $4.27 billion) (approximately Three Billion Three Hundred Eighty Million United States Dollars (USD $3.38 billion) at prevailing exchange rates).
• Based on information provided by the DOJ and the Company's own analysis, the DOJ's estimated total volume of affected commerce across all alleged participants during the Alleged Conspiracy Period (January 2017 through August 2021) is approximately One Billion Three Hundred Forty Million United States Dollars (USD $1.34 billion). TMC's estimated share of the affected commerce during this period is approximately Four Hundred Seventy-Eight Million United States Dollars (USD $478,000,000).
• The potential financial exposure to TMC and its directors and officers—including criminal fines and penalties, restitution, defense costs, civil damages (including potential treble damages in private antitrust actions), regulatory penalties, and costs associated with internal investigations and compliance remediation—is material and not yet fully quantifiable. Counsel is not in a position at this time to provide a reliable estimate of the Company's total potential liability, but the amounts at issue are expected to be substantial.
III. Coverage Sought and Basis for Notice
Based on the foregoing facts and circumstances, TMC hereby tenders notice under all applicable insuring agreements, coverage parts, and endorsements of the Policy, including but not limited to the following:
(a) Side A Coverage (Non-Indemnifiable Loss). TMC tenders notice on behalf of all individual directors and officers who may incur Loss (as defined in the Policy) for which the Company is unable or not permitted to provide indemnification. Such Loss may include, among other things, defense costs, settlements, judgments, and other covered amounts arising from the investigation and any related claims, to the extent that such amounts constitute non-indemnifiable Loss within the meaning of the Policy's Side A insuring agreement.
(b) Side B Coverage (Corporate Reimbursement). TMC tenders notice under the Policy's Side B insuring agreement for reimbursement of amounts paid or payable by the Company as indemnification to its directors and officers for Loss arising from the investigation and any related claims, to the extent such indemnification is required or permitted by applicable law, the Company's charter documents, bylaws, or indemnification agreements.
(c) Side C / Entity Coverage. To the extent the Policy provides entity coverage for securities claims or related proceedings, TMC tenders notice under the applicable Side C or entity coverage insuring agreement for any Loss that may be sustained by the Company as an entity in connection with securities-related claims or proceedings arising from or related to the matters described herein.
(d) Defense Costs Coverage. TMC tenders notice for defense costs incurred or to be incurred by the Company and by all individual insured directors and officers in connection with the investigation, the grand jury proceedings, any related government investigations or enforcement actions, any follow-on civil litigation, and any other claims or proceedings arising from or related to the circumstances described in this letter, to the extent such defense costs are covered under the Policy.
The DOJ's grand jury investigation, including the issuance of Grand Jury Subpoena No. GJ-22-0194-SD-003 to TMC, constitutes a "Claim" as defined in the Policy and/or constitutes "Circumstances" (or an equivalent defined term under the Policy) that could reasonably be expected to give rise to a Claim against one or more insureds under the Policy. TMC tenders notice of both the existing Claim and the underlying Circumstances, and reserves the right to supplement this notice as additional Claims are made or additional Circumstances arise.
TMC expressly reserves all rights under the Policy, including but not limited to the right to seek coverage for any and all Claims and Loss arising from or related to the matters described herein, and does not waive any coverage, rights, or defenses by the manner, timing, or content of this notice. Nothing in this notice shall be construed as an admission by TMC or any insured individual that any of the alleged conduct occurred or that any liability has been established.
TMC respectfully requests that Northland confirm coverage under the Policy and acknowledge this notice in writing at the earliest opportunity. Given the urgency and magnitude of the matter, TMC requests that Northland provide its initial coverage position within ten (10) business days of receipt of this notice.
IV. Notice to Excess-Layer Carriers
TMC notes that this notice is being provided to Northland in its capacity as the lead (primary) carrier on TMC's directors and officers liability insurance tower. In accordance with the terms of the relevant excess policies and as a matter of prudent practice, contemporaneous notice of the matters described herein is being provided to the following excess-layer carriers:
• Greystone Specialty Insurance Ltd. — Layer 2 (USD $25,000,000 in excess of USD $50,000,000), via separate notice letter of even date herewith; and
• Sentinel Re Ltd. — Layer 3 (USD $25,000,000 in excess of USD $75,000,000), via separate notice letter of even date herewith.
TMC expressly reserves all rights under the excess policies, including all rights to coverage, indemnity, and defense costs thereunder, to the same extent as TMC reserves its rights under the primary Policy.
V. Cooperation and Further Information
TMC and Calderwood & Harkness are committed to cooperating fully and in good faith with Northland in connection with Northland's investigation, evaluation, and administration of coverage for this matter. The Company will provide supplemental information regarding the DOJ investigation, any related claims or proceedings, and the status of the Company's defense as such information becomes available and as is reasonably requested by Northland.
The Company's obligation to provide supplemental information is subject to, and shall not constitute a waiver of, any attorney-client privilege, attorney work-product protection, joint defense or common interest privilege, or other applicable privilege, protection, or confidentiality obligation. TMC reserves all such privileges and protections in full and does not intend, by the provision of information to Northland, to waive any privilege or protection.
All communications from Northland regarding this matter should be directed to:
Elaine Forsythe Partner Calderwood & Harkness LLP 555 California Street, 40th Floor San Francisco, CA 94104
Telephone: (415) 762-8044 Facsimile: (415) 762-8001
Email: eforsythe@calderwoodharkness.com
Please do not contact TMC's directors, officers, or employees directly without first coordinating through counsel.
VI. Reservation of Rights
TMC expressly reserves all rights, remedies, and defenses available to the Company and to each individual insured director and officer under the Policy, under any applicable excess policy, and under all applicable laws and regulations, whether of the United States, Canada, or any other jurisdiction. Without limiting the generality of the foregoing:
(a) This notice shall not be construed as a waiver, limitation, release, or forfeiture of any coverage, rights, benefits, or defenses available to TMC or any insured individual under the Policy or any excess policy, whether by virtue of the manner, timing, scope, or content of this notice or otherwise.
(b) TMC does not concede or acknowledge that any exclusion, condition, limitation, or other restrictive provision of the Policy applies to any of the matters described herein, and expressly reserves the right to contest the application of any such provision.
(c) TMC further reserves the right to supplement, amend, correct, or update this notice at any time as additional information becomes available, additional Claims are made, additional Circumstances arise, or TMC otherwise deems it necessary or appropriate to do so. Any such supplementation or amendment shall relate back to the date of this initial notice to the fullest extent permitted by the Policy and applicable law.
(d) The provision of this notice shall not create any obligation on the part of TMC to accept or be bound by any coverage determination, reservation of rights, or denial issued by Northland, except to the extent required by the express terms of the Policy and applicable law.
VII. Request for Acknowledgment
TMC respectfully requests that Northland acknowledge receipt of this notice in writing within ten (10) business days of receipt. In its acknowledgment, TMC requests that Northland:
(i) Confirm the assignment of a dedicated claims adjuster or claims handler to this matter and provide that individual's name, telephone number, and email address;
(ii) Confirm the assignment of a claim number or reference number for this matter;
(iii) Identify any additional information that Northland requires from TMC in order to evaluate coverage; and
(iv) Promptly advise whether Northland intends to accept coverage, deny coverage, or issue a reservation of rights in connection with this matter, so that TMC and its directors and officers may make informed decisions regarding the defense and management of this matter.
TMC emphasizes the time-sensitive nature of this matter and the importance of prompt and clear communication between the parties regarding coverage. The Company and its directors and officers are incurring, and will continue to incur, substantial defense costs in connection with the DOJ investigation, and the availability of coverage under the Policy is a matter of critical importance to the Company and the individual insureds.
We appreciate your prompt attention to this notice and look forward to Northland's timely response. Should you have any questions or require additional information, please do not hesitate to contact the undersigned.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Elaine Forsythe Partner Telephone: (415) 762-8044
Email: eforsythe@calderwoodharkness.com
Noted:
________________________________________
Howard Bellamy Partner Calderwood & Harkness LLP (New York) Telephone: (212) 504-6200
Email: hbellamy@calderwoodharkness.com
Enclosures:
1. Copy of Grand Jury Subpoena No. GJ-22-0194-SD-003 (redacted as necessary to preserve privilege and protect confidential grand jury material)
2. Copy of relevant Policy declarations page, Policy No. NMI-DO-2021-5547 (for reference)
cc: (via email and/or hand delivery, as applicable)
Priya Anand, General Counsel, Torchlight Mining Corp., 200 Bay Street, Suite 3400, Toronto, ON M5J 2J2, Canada
Søren Dalmqvist, Chief Executive Officer, Torchlight Mining Corp.
Janet Moreau-Shaw, Chair, Audit Committee, Torchlight Mining Corp. Board of Directors
Richard Fong, Chief Financial Officer, Torchlight Mining Corp.
Howard Bellamy, Partner, Calderwood & Harkness LLP (New York)
Greystone Specialty Insurance Ltd. (via separate notice letter of even date)
Sentinel Re Ltd. (via separate notice letter of even date)