PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / WORK PRODUCT DOCTRINE DO NOT FORWARD WITHOUT COUNSEL APPROVAL
CALDERWOOD & HARKNESS LLP Antitrust & Competition Practice Group 555 California Street, 40th Floor San Francisco, California 94104
July 15, 2022
MEMORANDUM
TO: Priya Anand, General Counsel Torchlight Mining Corp. 200 Bay Street, Suite 3400 Toronto, ON M5J 2J2, Canada
FROM: Elaine Forsythe, Partner Antitrust & Competition Practice Group Calderwood & Harkness LLP
RE: Quarterly Status Report — Q2 2022: U.S. Department of Justice Antitrust Division Grand Jury Investigation (Grand Jury No. GJ-22-0194, N.D. Cal.)
Matter No.: 1039-00001
This memorandum constitutes a privileged and confidential attorney-client communication and attorney work product prepared in anticipation of litigation. It is intended solely for the use of the addressee and authorized recipients. This memorandum should not be forwarded, distributed, or disclosed to any person or entity without the prior written approval of Calderwood & Harkness LLP. Inadvertent disclosure does not constitute a waiver of any applicable privilege.
Right-click to update Table of Contents
I. Executive Summary
This memorandum provides Torchlight Mining Corp. ("TMC" or the "Company") with a comprehensive quarterly status report covering developments in the above-referenced matter during the period from approximately April 1, 2022 through June 30, 2022 (the "Reporting Period" or "Q2 2022"). This report is provided pursuant to the quarterly reporting protocol established in the engagement letter dated February 18, 2022, and is intended to keep TMC's General Counsel apprised of all material developments in the U.S. Department of Justice ("DOJ") Antitrust Division grand jury investigation and in the related internal investigation being conducted by Calderwood & Harkness LLP ("C&H").
The second quarter of 2022 was a period of significant and consequential developments in this matter. The following are the key highlights for the Reporting Period:
Target Letter. On May 20, 2022, TMC received a target letter from the DOJ Antitrust Division, formally elevating TMC's status from that of a subpoena recipient to a target of the grand jury investigation. This development represents a material escalation of the government's posture toward TMC and signals that the Antitrust Division has concluded, at least preliminarily, that it possesses substantial evidence linking TMC to the commission of a criminal antitrust violation. We address the legal significance and strategic implications of this development in detail in Section III below.
Document Production. TMC's first rolling document production of approximately 42,000 documents was completed and delivered to the DOJ on April 4, 2022, in compliance with Grand Jury Subpoena No. GJ-22-0194-SD-003. Additional rolling productions were commenced during the Reporting Period and remain ongoing. Through the end of Q2 2022, TMC has produced a cumulative total of approximately 120,000 documents to the government. The document production process, managed in coordination with Redstone Digital Forensics Inc. ("Redstone"), is projected to continue through the remainder of 2022, with an estimated cumulative production of approximately 487,000 documents totaling approximately 3.2 million pages. Further detail is provided in Section IV.
Internal Investigation — Witness Interviews. The internal investigation witness interview program was initiated during the latter portion of the Reporting Period. Preliminary interviews have commenced, and interviews of Sandra Chu (Director, Pricing Analytics) and Thomas Eriksen (Regional Sales Manager, Western Region) are in progress or imminently scheduled. Ms. Chu's formal interview is scheduled for July 18, 2022 — slightly beyond the close of the Reporting Period, but the interview preparation work was substantially completed during Q2. Additional interviews of TMC personnel, including General Counsel Priya Anand and CFO Richard Fong, are being scheduled for Q3 2022.
Gavin Holt — Separate Representation and Fifth Amendment Assertion. Gavin Holt, the former Vice President of U.S. Specialty Minerals Sales and the individual most directly implicated in the alleged inter-competitor communications, retained personal counsel — Patrick Dunleavy of Briarcliff Law Group PLLC — on approximately June 10, 2022. On June 14, 2022, Mr. Holt appeared before the grand jury and asserted his Fifth Amendment privilege against self-incrimination, declining to testify. This development has significant implications for the trajectory of the investigation and for TMC's defense strategy, as discussed in Section V.D below.
D&O Insurance. As reported in the Q1 status report, notice of the investigation was tendered to Northland Mutual Insurance Co. ("Northland") on March 4, 2022. During Q2, Northland responded with a reservation-of-rights letter asserting potential applicability of the regulatory/criminal-act exclusion to entity-level coverage. C&H responded on April 28, 2022, contesting the applicability of the criminal-act exclusion at the pre-adjudication stage and preserving TMC's coverage rights. The coverage dispute remains pending. Section VII provides a detailed update.
Public Disclosure and Litigation Reserve. TMC's first public disclosure of the investigation was made in its FY 2021 annual report filed on SEDAR+ and with the U.S. Securities and Exchange Commission ("SEC") on Form 40-F on March 28, 2022. At that time, TMC established a litigation reserve of USD 30 million. The adequacy of this reserve will require reassessment as the matter progresses, particularly in light of the receipt of the target letter.
Overall Assessment. The matter remains in an active investigative phase. The receipt of the target letter is the most significant development of the quarter and represents a meaningful escalation in the DOJ's posture toward TMC. That said, receipt of a target letter does not necessarily mean that charges will be brought, and the path to a negotiated resolution — potentially a non-prosecution agreement ("NPA") — remains open. TMC's full cooperation with the investigation continues to be the cornerstone of our recommended defense strategy, and we believe that TMC's cooperation posture, combined with vigorous compliance remediation and the identification of individual accountability (principally, Gavin Holt), positions the Company to pursue the most favorable available outcome. C&H will continue to monitor developments closely and will provide TMC with an immediate update in the event of any material developments outside the quarterly reporting cycle.
II. Background and Matter Overview
For the benefit of providing a complete record and context for the Q2 developments discussed herein, we briefly summarize the background of this matter. A more detailed background was provided in the Q1 2022 status report dated April 12, 2022.
A. The Investigation
The DOJ Antitrust Division, through its San Francisco Field Office, is conducting a federal grand jury investigation, designated Grand Jury No. GJ-22-0194, in the United States District Court for the Northern District of California, into suspected violations of Section 1 of the Sherman Antitrust Act (15 U.S.C. § 1). Specifically, the investigation concerns suspected price-fixing, market allocation, and bid-rigging conspiracies in the North American specialty-minerals sector. The products at issue include high-purity feldspar, industrial talc, and rare-earth concentrates — all product lines in which TMC is a significant market participant through its U.S. Specialty Minerals Division.
The investigation was formally opened on or about February 10, 2022. TMC received Grand Jury Subpoena No. GJ-22-0194-SD-003 on February 14, 2022, commanding the production of documents and records relating to TMC's pricing, sales, customer communications, competitor communications, trade-association activities, and internal pricing-policy documents for the period from January 1, 2015 through February 14, 2022.
TMC engaged Calderwood & Harkness LLP to serve as its defense counsel in connection with the investigation on February 18, 2022. C&H has since been responsible for all aspects of the Company's grand jury defense, cooperation strategy, internal investigation, and related advisory matters.
B. Government Prosecution Team
The investigation is being led by the following DOJ personnel:
• Trial Attorney Denise Kowalski, DOJ Antitrust Division, San Francisco Field Office — lead prosecutor assigned to the matter.
• Senior Trial Attorney Marcus Reeves, DOJ Antitrust Division, San Francisco Field Office — co-lead prosecutor.
• Deputy Assistant Attorney General Julia Stafford-Hayes — supervising official within the Antitrust Division.
All substantive communications with the government have been directed through Trial Attorney Kowalski, with Senior Trial Attorney Reeves participating in key conferences and correspondence. Deputy AAG Stafford-Hayes has not yet been directly involved in any communications with TMC or its counsel, though her participation in future resolution discussions is anticipated.
C. Co-Subjects and Co-Targets
Based on information currently available to C&H, the following entities and individuals are subjects or targets of the investigation:
Ridgecrest Minerals Inc. (incorporated in Delaware; headquartered in Phoenix, Arizona). Ridgecrest is the second-largest producer of high-purity feldspar in North America and a significant competitor of TMC in all three relevant product markets. Ridgecrest received a target letter from the DOJ on January 12, 2022, approximately four months before TMC received its target letter. Key individuals at Ridgecrest who are believed to be subjects or targets include:
• Brian Novotny, Chief Executive Officer
• Carl Edgerton, Vice President of Sales — the primary Ridgecrest participant in the alleged inter-competitor communications with Gavin Holt
Ridgecrest is represented by Davenport, Kline & Archer LLP, with Helen Marchetti serving as lead counsel.
Pinnacle Earth Resources Ltd. (incorporated in Ontario, Canada; headquartered in Vancouver, British Columbia). Pinnacle is the third-largest specialty minerals producer operating in the North American market. Key individuals at Pinnacle who are believed to be subjects or targets include:
• Douglas Harlowe, Chief Executive Officer
• Kevin Tsang, former Senior Vice President (departed Pinnacle in approximately October 2021) — the primary Pinnacle participant in the alleged inter-competitor communications with Gavin Holt
Pinnacle is represented by Ashford Whitmore LLP, with George Nakamura serving as lead counsel.
D. Cooperating Witness Entity
Cascade Chemical Supply Co. (incorporated in Washington; headquartered in Tacoma, Washington). Cascade is a mid-market distributor and processor of specialty minerals. Based on information available to C&H, Cascade, through its President Leonard Massey, entered into a cooperation agreement with the DOJ Antitrust Division on or about September 15, 2021 — approximately five months before the grand jury investigation was formally opened. Cascade is represented by Whitfield, Strauss & Tully LLP, with Rebecca Ostrander serving as lead counsel.
It is our assessment that Cascade's cooperation was the catalyst for the DOJ's initiation of the grand jury investigation. Cascade appears to have provided the government with information regarding its participation in or knowledge of pricing discussions and customer allocation arrangements involving personnel at TMC, Ridgecrest, and Pinnacle. The scope and detail of the information Cascade has provided to the government remains unknown to C&H at this time.
E. Alleged Conspiracy — Summary
The alleged conspiracy, as C&H understands it based on the grand jury subpoena, the target letter, and information developed through the internal investigation, encompasses the following:
• Alleged Conspiracy Period: Approximately January 2017 through August 2021.
• Products at Issue: High-purity feldspar, industrial talc, and rare-earth concentrates.
• Alleged Conduct: Price-fixing (coordinated pricing of specialty mineral products sold to North American customers), market allocation (division of customers and geographic territories among competitors), and bid-rigging (coordination of bids submitted in response to customer requests for proposals).
• Affected Commerce: The DOJ has estimated total affected commerce during the conspiracy period at approximately USD 1.34 billion. TMC's share of affected commerce is estimated at approximately USD 478 million, representing approximately 35.7% of the total.
The alleged conduct is a per se violation of Section 1 of the Sherman Act. If charges are brought and a conviction obtained, TMC would face substantial criminal fines and potential sentencing enhancements under the U.S. Sentencing Guidelines. Individual defendants, including Gavin Holt, could face imprisonment of up to ten years per count under 15 U.S.C. § 1 (as amended by the Antitrust Criminal Penalty Enhancement and Reform Act of 2004).
III. Target Letter — Receipt and Analysis
A. Receipt of Target Letter (May 20, 2022)
On May 20, 2022, TMC received a target letter from the DOJ Antitrust Division, signed by Trial Attorney Denise Kowalski and Senior Trial Attorney Marcus Reeves. The letter was addressed to Elaine Forsythe as counsel for TMC and was delivered via email and overnight courier simultaneously.
The target letter identifies TMC as a "target" of the grand jury investigation designated Grand Jury No. GJ-22-0194. The letter states that the grand jury is investigating possible violations of Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, in connection with the sale of specialty mineral products in the United States, including high-purity feldspar, industrial talc, and rare-earth concentrates, during the period from approximately January 2017 through August 2021.
Consistent with standard DOJ practice, the target letter invites TMC, through counsel, to appear before the grand jury to present testimony, to submit a written statement or memorandum to the grand jury, or both. The letter also notes that TMC is not obligated to appear before the grand jury or to provide any statement.
It should be noted that Ridgecrest Minerals Inc. received a target letter from the DOJ on January 12, 2022, approximately four months before TMC. The timing suggests that the DOJ may have initially focused its investigation more intensively on Ridgecrest — potentially due to information provided by the cooperating witness entity, Cascade Chemical Supply Co. — before developing sufficient evidence to designate TMC as a target. We do not have confirmed information as to whether Pinnacle Earth Resources Ltd. has received a target letter.
B. Legal Significance
The designation of TMC as a "target" carries significant legal and strategic implications. Under DOJ policy, as set forth in the U.S. Attorneys' Manual § 9-11.153 (now incorporated into the Justice Manual at JM 9-11.153), a "target" is defined as:
"a person as to whom the prosecutor or the grand jury has substantial evidence linking him or her to the commission of a crime and who, in the judgment of the prosecutor, is a putative defendant."
This is to be distinguished from a "subject," defined as a person whose conduct is within the scope of the grand jury's investigation, and a "witness," who is a person with information relevant to the investigation but whose own conduct is not under scrutiny.
The elevation of TMC's status from subpoena recipient — which is functionally analogous to a "subject" — to a target reflects the DOJ's developing view that there is substantial evidence of TMC's involvement in the alleged conspiracy. While receipt of a target letter does not constitute a formal charge, does not give rise to any legal obligation to appear or cooperate, and does not guarantee that charges will ultimately be brought, it is a strong indication that the prosecution team is seriously considering seeking an indictment against TMC.
Several specific observations regarding the target letter warrant emphasis:
1. Timing. The target letter was issued approximately three months after TMC's first document production (April 4, 2022), suggesting that the DOJ's review of TMC's produced documents — or, potentially, documents produced by other parties or the cooperating witness — yielded evidence that strengthened the government's case against TMC during this period.
2. Scope. The target letter references all three product categories (feldspar, talc, and rare-earth concentrates) and the full alleged conspiracy period (January 2017 through August 2021). This is consistent with a broad theory of TMC's involvement, rather than a narrow focus on isolated conduct.
3. Entity-Level Targeting. The target letter is addressed to TMC as an entity, not to any individual employee. This is consistent with the DOJ's standard practice in antitrust investigations of targeting both the corporate entity and responsible individuals. We anticipate that individual target letters may be issued to Gavin Holt and potentially other TMC employees as the investigation progresses.
C&H provided a detailed legal and strategic analysis of the target letter and its implications to CEO Søren Dalmqvist and General Counsel Priya Anand in a separate memorandum entitled Memorandum re Receipt of Target Letter and Implications, dated May 22, 2022. That memorandum, which is incorporated by reference herein, addresses the full range of strategic options available to TMC in light of the target designation.
C. Recommended Response
Following receipt of the target letter, C&H engaged in internal deliberation regarding the appropriate response. Consistent with the cooperation strategy that C&H has recommended since the outset of the engagement, and as authorized by TMC's General Counsel and CEO, C&H communicated TMC's willingness to continue cooperating with the investigation via a formal letter to DOJ Trial Attorneys Kowalski and Reeves, dated June 8, 2022.
The June 8 letter conveyed the following key points:
(a) TMC takes the investigation seriously and is committed to full cooperation with the DOJ Antitrust Division.
(b) TMC is continuing to make timely and complete document productions in response to the grand jury subpoena.
(c) TMC is prepared to make current employees available for voluntary proffer sessions at mutually agreeable times, subject to appropriate protections including Queen-for-a-Day (proffer) agreements.
(d) TMC is conducting a thorough internal investigation and is committed to disclosing relevant findings to the DOJ as the investigation progresses.
(e) TMC is undertaking significant remedial measures to strengthen its antitrust compliance program.
The cooperation posture remains the core of our defense strategy. In our assessment, a non-prosecution agreement ("NPA") remains the most favorable achievable outcome for TMC in light of the evidence currently available. An NPA would resolve the matter without criminal charges being brought against TMC or its current employees, while preserving the DOJ's ability to pursue individual charges against Gavin Holt. The pathway to an NPA, however, depends on TMC's continued demonstration of genuine and comprehensive cooperation, as well as the nature and strength of the evidence that the DOJ continues to develop.
We note that cooperation does not guarantee that charges will not be brought. If the DOJ concludes that the evidence supports charges against TMC and that the circumstances do not warrant an NPA — for example, if the evidence ultimately demonstrates knowledge or authorization by senior management — then a plea agreement or even an indictment remains possible. At this stage, however, C&H does not believe that the evidence supports such a conclusion, and we continue to recommend the cooperation path.
IV. Grand Jury Subpoena Compliance and Document Production
A. First Rolling Production (Completed April 4, 2022)
As reported in the Q1 status report, TMC completed its first rolling document production to the DOJ on April 4, 2022. This production consisted of approximately 42,000 documents and was accompanied by a cover letter from C&H to Trial Attorney Kowalski and a privilege log identifying documents withheld on the basis of attorney-client privilege and the work-product doctrine.
Grand Jury Subpoena No. GJ-22-0194-SD-003, received by TMC on February 14, 2022, commands the production of a broad range of documents and records, including:
(a) Pricing data, price lists, price-adjustment records, and pricing-policy documents for high-purity feldspar, industrial talc, and rare-earth concentrates for the period from January 1, 2015 through February 14, 2022.
(b) Communications with customers, including contract files, bid submissions, and correspondence regarding pricing and terms.
(c) Communications with competitors, including email, instant messages, text messages, chat logs, and any other form of written or electronic communication.
(d) Trade-association materials, including meeting agendas, minutes, presentations, attendance lists, and communications related to the National Association of Specialty Mineral Companies ("NASMC") and any other trade associations.
(e) Internal pricing-policy documents, including pricing guidelines, margin targets, pricing-approval workflows, and records of pricing decisions.
(f) Corporate organizational charts, job descriptions, and personnel files for individuals involved in the pricing and sale of the subject products.
The production was prepared in accordance with DOJ specifications and was delivered in load-file format compatible with concordance, with Bates-stamped TIFF images and extracted text files. Metadata was included in accordance with the Antitrust Division's standard production specifications.
B. Ongoing Rolling Productions (Q2 2022)
Following the completion of the first rolling production, additional rolling productions have been made to the DOJ on an ongoing basis throughout Q2 2022. These productions have been managed by C&H in coordination with Redstone Digital Forensics Inc. ("Redstone"), the e-discovery vendor retained by C&H to process, host, and facilitate the review of TMC's electronic data.
Redstone, under the direction of Project Director Neil Ashworth, continues to collect, process, and host TMC's electronic data for review and production. The following key metrics summarize the current state of the document production effort:
• Custodians Identified: 34 current and former TMC employees have been identified as custodians for purposes of document collection and preservation.
• Data Sources: Electronic data has been collected from the following sources: Strathmore Data Systems email accounts, shared network drives maintained by the TMC U.S. Specialty Minerals Division, VaultChat encrypted messaging archives, personal mobile devices (where voluntarily surrendered or subject to forensic imaging pursuant to TMC's preservation obligations), and cloud storage accounts (including Cobalt Ridge Systems and Aldermere Systems).
• Cumulative Production (Through End of Q2 2022): Approximately 120,000 documents have been produced to the DOJ through the end of the Reporting Period.
• Projected Cumulative Production (Through Year-End 2022): C&H and Redstone project a cumulative production of approximately 487,000 documents totaling approximately 3.2 million pages by December 15, 2022. This projection is based on the volume of data collected to date and the current pace of processing and review. The projection is subject to revision as additional custodians or data sources are identified.
All documents designated for production have been subjected to a rigorous privilege review conducted in accordance with the Privilege Review Protocol established by C&H on March 10, 2022. The protocol includes the following key elements:
• First-level review for responsiveness and privilege by contract attorneys supervised by C&H associates.
• Second-level review by C&H associates (Aaron Liu and Monica Reyes) of all documents flagged for potential privilege.
• Escalation procedures for complex privilege determinations, with final decisions made by the responsible partner (Elaine Forsythe).
• Maintenance of a detailed privilege log, updated on a rolling basis with each production tranche.
• Reliance on the protections afforded by Federal Rule of Evidence 502(d), which permits the court to enter an order providing that the disclosure of privileged information in connection with the litigation does not constitute a waiver of privilege. C&H has obtained a stipulated FRE 502(d) clawback order from the grand jury supervising judge, which provides additional protection against inadvertent privilege waiver.
C. DOJ Engagement on Production Issues
The relationship between C&H and the DOJ prosecution team regarding production matters has been constructive during Q2. C&H proposed a rolling production schedule to the DOJ via email from Elaine Forsythe to Trial Attorney Denise Kowalski on March 28, 2022, proposing monthly production tranches through the end of 2022. The DOJ accepted this schedule, and C&H has adhered to the agreed-upon production cadence throughout the Reporting Period.
No significant disputes have arisen regarding the scope, format, or completeness of TMC's document productions during Q2. The DOJ has not raised objections to any privilege assertions or challenged any entries on TMC's privilege log to date.
The DOJ has indicated, in informal communications, that it may issue additional grand jury subpoenas as the investigation develops — for example, to expand the document request to cover additional time periods, custodians, or product categories. No additional subpoena has been received by TMC as of the end of Q2 2022. We will promptly advise TMC in the event that any additional subpoena is issued.
V. Internal Investigation — Progress Update
A. Scope and Methodology
C&H's internal investigation of the alleged conduct was initiated concurrently with the commencement of the engagement, and a formal internal investigation plan was established on March 5, 2022. The internal investigation is being conducted for the purpose of (a) understanding the facts and circumstances underlying the DOJ's investigation, (b) assessing TMC's legal exposure, (c) informing TMC's defense and cooperation strategy, (d) identifying individual accountability, and (e) developing evidence to support potential cooperation credit with the DOJ.
The scope of the internal investigation encompasses the following principal workstreams:
1. Document Review. A comprehensive review of all responsive documents collected from TMC custodians, with a particular focus on inter-competitor communications, pricing-related documents, and trade-association materials.
2. Witness Interviews. A systematic program of interviews of current and former TMC employees with knowledge relevant to the investigation, including individuals in the U.S. Specialty Minerals Division, the finance function, and the legal and compliance function.
3. Pricing Data Analysis. A forensic analysis of TMC's pricing data for high-purity feldspar, industrial talc, and rare-earth concentrates for the period from 2015 through 2022, with the objective of identifying patterns of price movements that are consistent or inconsistent with coordinated pricing behavior.
4. Compliance Program Assessment. An assessment of the adequacy and effectiveness of TMC's existing antitrust compliance program, with recommendations for remediation.
In connection with the pricing data analysis workstream, C&H has retained Hargrove Forensic Advisory LLC ("Hargrove") to provide forensic accounting and economic analysis services. Dr. Vanessa Tremblay, a partner at Hargrove with extensive experience in antitrust damages and pricing analysis, has been designated as the Engagement Partner. The Hargrove engagement was formalized on July 1, 2022, and is being conducted under Kovel-letter protections (pursuant to United States v. Kovel, 296 F.2d 918 (2d Cir. 1961)), which ensures that communications between Hargrove and C&H are protected by the attorney-client privilege and the work-product doctrine.
B. Document Review Progress
The document review component of the internal investigation has made substantial progress during Q2 2022. As of the end of the Reporting Period, approximately 120,000 documents have been reviewed by the C&H review team, out of a projected total universe of approximately 555,000 documents (which includes documents that have been collected but not yet processed, as well as documents projected to be collected from additional custodians in Q3 and Q4 2022).
The following document categories are under intensive review and are considered to be of the highest relevance to the investigation:
VaultChat Encrypted Messages Involving Gavin Holt. The VaultChat messaging platform is an encrypted, end-to-end communication tool that was used by Gavin Holt to communicate with counterparts at Ridgecrest and Pinnacle. Redstone's forensic collection efforts have successfully recovered VaultChat message archives from TMC's server backups and from the forensic image of Holt's TMC-issued laptop. Preliminary review of the recovered VaultChat messages reveals at least 37 documented exchanges between Gavin Holt and counterparts Carl Edgerton (Ridgecrest) and Kevin Tsang (Pinnacle) during the period from March 2017 through July 2021. The substance of these exchanges encompasses pricing information (including advance notice of planned price changes), customer allocation discussions (including agreements to refrain from soliciting specified customer accounts), and bid coordination (including pre-submission discussions regarding pricing levels for specific competitive bids). The first documented VaultChat exchange between Holt and Edgerton is dated March 14, 2017.
The VaultChat evidence is highly significant and, in our assessment, constitutes the most incriminating category of evidence identified to date. The messages provide direct evidence of competitor communications that, if credited by the DOJ, would support a per se price-fixing charge. A detailed analysis of the VaultChat message content is being prepared by C&H and will be provided in a separate memorandum.
NASMC Conference-Related Communications. The National Association of Specialty Mineral Companies ("NASMC") held annual conferences during the relevant period, and TMC personnel — including Gavin Holt and Thomas Eriksen — attended multiple NASMC conferences between 2017 and 2021. Document review has identified internal TMC emails and calendar entries reflecting attendance at NASMC conferences, as well as communications between TMC personnel and competitors in the days immediately preceding and following such conferences. Preliminary analysis suggests that at least some of the side meetings at NASMC conferences may have been used as occasions for the alleged coordination among Holt, Edgerton, and Tsang.
Internal Pricing Memoranda and Price-List Adjustment Records. The review of TMC's internal pricing memoranda and records of price-list adjustments has revealed a pattern of price adjustments that appear to correlate with competitor price movements during the alleged conspiracy period. The forensic pricing analysis to be conducted by Hargrove will provide a more rigorous assessment of these correlations.
Customer Contract Files. Review of customer contract files is ongoing and is expected to provide evidence relevant to the market-allocation and bid-rigging allegations.
C. Witness Interviews — Status
C&H has planned a program of 23 interviews of current and former TMC employees over the course of the internal investigation. The interview program was initiated during the latter portion of Q2 2022, with early interviews focused on personnel within the U.S. Specialty Minerals Division — the business unit most directly connected to the alleged conduct.
The following is the current status of key witness interviews:
Sandra Chu (Director, Pricing Analytics). Ms. Chu's formal interview is scheduled for July 18, 2022. Although this date falls slightly beyond the close of the Reporting Period, the interview preparation was substantially completed during Q2. Ms. Chu reported directly to Gavin Holt during his tenure as VP of U.S. Specialty Minerals Sales and is a key fact witness regarding TMC's internal pricing processes. Preliminary indications from the document review suggest that Ms. Chu received instructions from Mr. Holt to adjust published price lists on at least 12 occasions during the alleged conspiracy period, with the timing of those adjustments correlating with competitor price movements. Importantly, however, the document review has not identified any direct evidence, at this stage, that Ms. Chu was aware of or had knowledge of the inter-competitor communications between Holt and his counterparts at Ridgecrest and Pinnacle. The interview of Ms. Chu will be critical to understanding the extent of her knowledge and to assessing her potential exposure.
Thomas Eriksen (Regional Sales Manager, Western Region). Mr. Eriksen's interview is currently being scheduled and is expected to take place in early Q3 2022. Mr. Eriksen attended four NASMC conferences during the alleged conspiracy period — specifically, conferences in Arlington, Virginia; Scottsdale, Arizona; and Orlando, Florida — at which side meetings between TMC, Ridgecrest, and Pinnacle personnel allegedly occurred. Whether Mr. Eriksen directly participated in any competitor agreements or coordination is a key factual question that the interview is intended to address. Document review to date has not revealed direct communications between Mr. Eriksen and competitor personnel regarding pricing or customer allocation, but his presence at the NASMC conferences where such discussions allegedly occurred necessitates a thorough examination.
Priya Anand (General Counsel). Ms. Anand's interview is to be scheduled in Q3 2022. The interview will focus on the initial document preservation steps taken following receipt of the grand jury subpoena, the history and implementation of TMC's antitrust compliance program, and Ms. Anand's knowledge (or lack thereof) of the alleged conduct. As with all interviews of senior TMC officers, the interview will be conducted with sensitivity to the dual role of the interviewee as both a witness and the Company's General Counsel.
Richard Fong (Chief Financial Officer). Mr. Fong's interview is to be scheduled in Q3 2022. The interview will focus on Mr. Fong's financial oversight of the U.S. Specialty Minerals Division, including his knowledge of pricing strategies and margin targets, and his awareness (or lack thereof) of the alleged competitor communications.
Additional interviews of U.S. Specialty Minerals Division personnel are being planned and will be reported in subsequent quarterly status reports.
D. Gavin Holt — Separate Representation and Fifth Amendment Assertion
Gavin Holt is the individual most directly implicated in the alleged pricing communications that are the subject of the DOJ's investigation. Mr. Holt served as Vice President of U.S. Specialty Minerals Sales from approximately 2016 through his resignation, effective September 30, 2021. As noted in Section V.B above, the document review has identified at least 37 VaultChat exchanges between Mr. Holt and counterparts at Ridgecrest and Pinnacle during the period from March 2017 through July 2021, the substance of which encompasses pricing information, customer allocation discussions, and bid coordination.
Retention of Personal Counsel. On approximately June 10, 2022, Mr. Holt retained personal legal counsel: Patrick Dunleavy of Briarcliff Law Group PLLC, located at 50 California Street, Suite 2800, San Francisco, California 94111. The retention of personal counsel was anticipated given Mr. Holt's significant individual criminal exposure and the divergence between Mr. Holt's interests and those of TMC as an entity. C&H does not represent Mr. Holt in any capacity and has not had any direct communications with Mr. Holt since his retention of personal counsel, consistent with ethical obligations.
Fifth Amendment Assertion Before the Grand Jury. On June 14, 2022, Mr. Holt appeared before the grand jury and asserted his Fifth Amendment privilege against self-incrimination, declining to provide testimony. Mr. Holt's assertion of the privilege is not unexpected given the strength of the evidence against him and the potential criminal penalties (including imprisonment) that he faces. While the assertion of the Fifth Amendment is a constitutional right and may not be used as evidence of guilt, it does effectively prevent the DOJ from obtaining Mr. Holt's testimony before the grand jury unless Mr. Holt is subsequently granted immunity, enters a cooperation agreement, or otherwise agrees to testify.
Request for Internal Investigation Interview. C&H requested, through Mr. Holt's counsel Patrick Dunleavy, that Mr. Holt make himself available for an interview in connection with TMC's internal investigation. This request was communicated in a letter dated June 22, 2022, and remains pending as of the end of Q2 2022. We note, for purposes of this report, that Mr. Holt's counsel subsequently declined the interview request on August 2, 2022 — a development that will be addressed in the Q3 status report.
Internal Analysis of Holt's Exposure. C&H prepared an internal memorandum dated June 12, 2022, assessing Mr. Holt's individual criminal exposure and the implications for TMC's defense strategy. Key conclusions of that memorandum include: (a) the evidence, as currently understood, supports the conclusion that the alleged conduct was directed and executed by Mr. Holt, acting in his capacity as VP of U.S. Specialty Minerals Sales, without the knowledge or authorization of TMC's senior management or Board of Directors; (b) a resolution of the matter with the DOJ that includes a "Holt carve-out" — preserving the DOJ's rights to pursue individual charges against Mr. Holt while resolving the corporate-level matter through an NPA — is a viable and appropriate strategic objective; and (c) Mr. Holt's decision to retain personal counsel and to assert his Fifth Amendment privilege underscores the divergence of interests between Mr. Holt and TMC, which further supports TMC's cooperation strategy of demonstrating that the alleged conduct was attributable to a single rogue individual rather than to institutional direction.
Joint Defense Agreement Analysis. No joint defense agreement ("JDA") exists between TMC/C&H and Holt/Briarcliff Law Group. Given the divergence of interests between TMC and Mr. Holt, a JDA with Holt's counsel is not recommended. A separate question — whether TMC should enter into JDAs with counsel for Ridgecrest (Davenport, Kline & Archer LLP, Helen Marchetti) or Pinnacle (Ashford Whitmore LLP, George Nakamura) — is currently under analysis. A separate memorandum addressing the potential benefits and risks of entering into JDAs with co-target counsel is being prepared and will be provided in Q3 2022.
VI. Defense Strategy and Cooperation Posture
A. Cooperation Framework
The defense strategy that C&H has recommended since the commencement of this engagement is built on a foundation of full and genuine cooperation with the DOJ Antitrust Division. Following receipt of the target letter on May 20, 2022, C&H formally communicated TMC's willingness to cooperate with the investigation in a letter dated June 8, 2022, addressed to Trial Attorneys Kowalski and Reeves.
TMC's cooperation strategy is grounded in the following principal elements:
(a) Full Subpoena Compliance. TMC has complied and will continue to comply fully and in a timely manner with all grand jury subpoenas, producing all responsive, non-privileged documents and records in accordance with the agreed rolling production schedule.
(b) Voluntary Proffer Sessions. TMC is prepared to make current employees available for voluntary proffer sessions with the DOJ, subject to appropriate protections including the execution of Queen-for-a-Day (proffer) agreements. These proffer sessions will be scheduled at mutually agreeable times and will be coordinated through C&H.
(c) Thorough Internal Investigation. TMC, through C&H, is conducting a thorough and comprehensive internal investigation designed to develop a complete understanding of the facts. The internal investigation is being conducted with the rigor and independence that the DOJ expects from cooperating entities.
(d) Disclosure of Relevant Findings. TMC is committed to disclosing relevant findings of the internal investigation to the DOJ as appropriate. Such disclosures will be made in a manner designed to maximize TMC's cooperation credit while protecting TMC's legitimate legal interests, including the attorney-client privilege and the work-product doctrine to the extent applicable.
(e) Compliance Remediation. TMC is undertaking significant remedial measures to strengthen its antitrust compliance program, including the development of enhanced training protocols, monitoring systems, and reporting mechanisms. The compliance remediation effort will be detailed in a separate memorandum to be provided in Q3 2022.
Strategic Objective. The primary strategic objective of the cooperation framework is to secure a non-prosecution agreement ("NPA") that resolves the criminal investigation as to TMC and its current employees without the filing of criminal charges. An NPA would typically require TMC to acknowledge certain facts, cooperate fully with the DOJ's ongoing investigation (including any prosecutions of individuals), implement compliance remediation measures, and pay a monetary penalty. The NPA would include a carve-out reserving the DOJ's rights to pursue criminal charges against Gavin Holt individually.
We emphasize that the achievement of an NPA is not guaranteed. The DOJ retains full discretion in determining whether to offer an NPA, a deferred prosecution agreement ("DPA"), a plea agreement, or to proceed with an indictment. The factors that will influence the DOJ's decision include the quality and timeliness of TMC's cooperation, the strength of the evidence, the extent of TMC's culpability beyond the conduct of Gavin Holt, and the DOJ's broader enforcement priorities. C&H will continue to advocate vigorously on TMC's behalf for the most favorable resolution available.
B. Assessment of TMC's Exposure
C&H has conducted a preliminary assessment of TMC's legal exposure in the investigation. This assessment is based on the evidence reviewed to date and is subject to revision as the internal investigation progresses and as additional information becomes available.
Attribution of Conduct. Based on the evidence currently available, TMC's exposure is primarily attributable to the conduct of Gavin Holt, acting in his capacity as Vice President of U.S. Specialty Minerals Sales from approximately 2016 through September 2021. The VaultChat messages and other documentary evidence identified to date indicate that Mr. Holt was the primary TMC participant in the alleged inter-competitor communications and coordination activities. No evidence has been identified to date indicating that TMC's C-suite officers — CEO Søren Dalmqvist, General Counsel Priya Anand, or CFO Richard Fong — or any member of the Board of Directors (chaired by Margaret Caldwell) had knowledge of, authorized, or participated in the alleged conduct.
This is a favorable factual landscape for TMC's defense, as it supports the characterization of the alleged conduct as the work of a single rogue employee acting outside the scope of his authorized duties and without the knowledge or sanction of the Company's leadership. However, C&H notes that this assessment is preliminary. The witness interviews to be conducted in Q3 and Q4 2022 — particularly the interviews of Ms. Anand and Mr. Fong — will be important in confirming or revising this assessment.
Compliance Program Weakness. TMC's existing antitrust compliance program, which was adopted in 2014, presents a notable area of concern. While the program includes a written antitrust compliance policy and a designated compliance officer, our review has identified the following deficiencies:
• No annual antitrust compliance training has been conducted since 2018. The most recent training session was held in October 2018 and was limited to the U.S. Specialty Minerals Division.
• No monitoring or auditing of trade-association interactions was in place during the alleged conspiracy period. TMC employees were permitted to attend NASMC conferences and other industry events without any requirement to obtain prior approval, to report on the substance of competitor interactions, or to submit post-event certifications.
• No audit of competitor contacts was conducted at any time during the alleged conspiracy period. There was no mechanism in place for employees to report competitor contacts or for the Company to monitor the frequency and nature of communications between TMC personnel and competitors.
These deficiencies undermine TMC's ability to assert a robust compliance-program defense and may be cited by the DOJ as evidence of institutional failure to prevent anticompetitive conduct. The compliance remediation program being developed by C&H is intended to address these deficiencies comprehensively. We strongly recommend that TMC move promptly to implement the remediation measures, as the DOJ will view the Company's compliance remediation efforts as a significant factor in its cooperation and charging analysis.
Potential Monetary Penalties. Under the U.S. Sentencing Guidelines and the DOJ's standard penalty methodology for antitrust offenses, the starting point for calculating a fine is 20% of the volume of affected commerce attributable to the defendant. Based on the DOJ's estimated total affected commerce of USD 1.34 billion and TMC's estimated share of USD 478 million, the base penalty would be calculated as follows:
USD 478,000,000 × 20% = USD 95,600,000
This figure represents the base penalty before the application of any adjustments — upward or downward — under the Sentencing Guidelines or the DOJ's cooperation policies. We anticipate that TMC's cooperation, remediation efforts, and the localization of culpability to Gavin Holt would result in substantial cooperation and remediation credits that would reduce the final penalty figure significantly below the base level. However, the extent of any reduction will depend on the DOJ's assessment of the quality of TMC's cooperation and the completeness of its remediation.
For purposes of financial planning and disclosure, C&H recommends that TMC consider a potential penalty range of USD 30 million to USD 75 million, recognizing that this range is preliminary and subject to significant revision as the matter develops. The lower end of this range assumes maximum cooperation and remediation credit; the upper end assumes moderate credit. A resolution at the base penalty level (USD 95.6 million) or above is possible but would, in our assessment, reflect an unfavorable outcome that should be avoidable if TMC continues its current cooperation posture.
C. Parallel Proceedings and Coordination
C&H is coordinating with TMC's other professional advisors to manage the parallel dimensions of this matter.
Securities and Public Disclosure. TMC's public-disclosure obligations are being carefully managed. As noted above, the investigation was first disclosed in TMC's FY 2021 annual report filed on SEDAR+ and with the SEC on Form 40-F on March 28, 2022. The disclosure was drafted by C&H in coordination with TMC's internal legal team and was reviewed for compliance with applicable Canadian and U.S. securities laws.
A litigation reserve of USD 30 million was established in the FY 2021 annual report. This reserve was determined in consultation with TMC's external auditors and was based on a preliminary assessment of the range of potential outcomes available at that time. In light of the receipt of the target letter on May 20, 2022, and the ongoing development of the evidence in the internal investigation, the adequacy of the USD 30 million reserve will need to be reassessed. C&H is coordinating with Calvert & Associates LLP (Daniel Moreau, TMC engagement partner for audit) to evaluate the reserve under the applicable accounting standards — ASC 450 (Contingencies) under U.S. GAAP and IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) under IFRS. A revised reserve assessment is expected to be completed in Q3 or early Q4 2022 in connection with TMC's interim financial reporting.
Capital Markets Advisory. C&H is also coordinating with Ironbridge Capital Markets Inc. (Alan Kirkwood, TMC relationship partner) regarding the market-disclosure strategy associated with the investigation. The receipt of the target letter is a material development that may require supplemental disclosure, depending on the timing and content of TMC's next scheduled public filings. C&H and Ironbridge are evaluating the appropriate timing and format for any such disclosure.
VII. D&O Insurance Update
C&H continues to manage the D&O insurance coverage aspects of this matter. The following is a summary of the current status:
Policy Details. TMC maintains a directors and officers liability insurance program with the following structure:
The primary policy with Northland has a policy period of July 1, 2021 through July 1, 2022, and a retention (self-insured retention) of USD 2.5 million.
Notice and Coverage Dispute. Notice of the investigation was tendered to Northland on March 4, 2022, in accordance with the policy's notice provisions. Notice letters were also sent to the excess-layer carriers, Greystone Specialty Insurance Ltd. and Sentinel Re Ltd., as confirmed by internal memorandum dated March 8, 2022.
Northland acknowledged receipt of the notice and confirmed coverage for defense costs incurred by individual directors and officers in connection with the investigation. However, Northland issued a reservation-of-rights letter asserting the potential applicability of the regulatory/criminal-act exclusion contained in the policy to entity-level coverage. The criminal-act exclusion, in relevant part, excludes coverage for "loss arising from or in connection with any criminal act committed by or at the direction of any Insured Person or the Insured Entity," subject to a final adjudication requirement.
C&H responded to Northland's reservation of rights in a detailed letter dated April 28, 2022. In that letter, C&H contested the applicability of the criminal-act exclusion at the pre-adjudication stage on the following grounds:
(a) The criminal-act exclusion, by its express terms, requires a "final adjudication" of criminal liability before the exclusion can be applied to deny coverage. No charges have been filed, no plea has been entered, and no adjudication has occurred. TMC remains presumed innocent.
(b) The purpose of the criminal-act exclusion is to prevent the policy from indemnifying an insured for the consequences of finally adjudicated criminal conduct. It is not intended to relieve the insurer of its duty to advance defense costs during the pendency of an investigation or prosecution.
(c) C&H cited applicable case law supporting the position that D&O insurers may not rely on pre-adjudication invocation of criminal-act exclusions to deny coverage for defense costs.
(d) C&H preserved TMC's rights to pursue all available remedies in the event Northland improperly denies or delays coverage.
Current Status. The resolution of the coverage dispute with Northland remains pending. No claim payments have been made by Northland or any excess-layer carrier to date. C&H is continuing to engage with Northland's coverage counsel to seek a resolution of the dispute without litigation. However, coverage litigation remains a possibility if Northland continues to rely on the reservation of rights to withhold defense cost advancement.
Additionally, the primary policy period expires on July 1, 2022. TMC's insurance broker is in the process of negotiating the renewal of the D&O program. The pendency of the investigation and the receipt of the target letter may result in increased premiums, reduced limits, or the imposition of an antitrust-specific exclusion in the renewal policy. C&H will continue to monitor these developments.
VIII. Fees and Budget Status
Pursuant to the engagement letter dated February 18, 2022, C&H is providing the following update on fees and budget status for the matter.
Billing Rates. The applicable billing rates for this engagement are as follows:
All rates are subject to annual adjustment in accordance with the terms of the engagement letter. Disbursements (including travel, copying, courier services, and research databases) are billed at cost.
Initial Budget Estimate. At the commencement of the engagement, C&H provided an initial budget estimate of USD 12 million for the internal investigation and grand jury defense phase of the matter. This estimate was based on assumptions regarding the scope and duration of the investigation, the volume of documents to be reviewed and produced, the number of witness interviews, and the complexity of the legal and factual issues.
Fees Invoiced Through End of Q2 2022. C&H fees invoiced through the end of Q2 2022 total approximately USD 4.8 million. This figure is an estimate and is subject to final reconciliation. The matter is tracking within the initial budget pace, with approximately 40% of the estimated budget utilized through the first approximately four and a half months of the engagement.
Third-Party Vendor Costs. Fees invoiced by Redstone Digital Forensics Inc. through the end of Q2 2022 total approximately USD 900,000. The projected total cost for Redstone's services through the completion of the document production process is approximately USD 2.3 million. Hargrove Forensic Advisory LLC's engagement commenced on July 1, 2022; no material fees have been incurred by Hargrove as of the end of the Reporting Period.
Budget Assessment. The receipt of the target letter on May 20, 2022, and the expanding scope of the internal investigation — including the commencement of the Hargrove economic analysis engagement and the anticipated increase in witness interview activity in Q3 and Q4 2022 — may necessitate a revision to the initial budget estimate. C&H will provide an updated budget estimate in connection with the Q3 2022 status report. We anticipate that the revised estimate may reflect an increase of approximately 15–25% over the initial USD 12 million estimate, depending on the trajectory of the investigation and the pace of resolution discussions with the DOJ.
IX. Staffing
The following individuals constitute the core C&H team and third-party vendor team assigned to this matter:
Calderwood & Harkness LLP
Elaine Forsythe — Responsible Partner (C&H San Francisco). Ms. Forsythe leads the engagement and is responsible for all strategic decisions, government communications, witness interview planning and oversight, and reporting to TMC.
Howard Bellamy — Billing Partner (C&H New York). Mr. Bellamy serves as the engagement billing partner and provides senior advisory support on strategic matters, including resolution negotiations and D&O insurance coverage.
Aaron Liu — Lead Associate (C&H San Francisco). Mr. Liu manages the day-to-day operations of the engagement, including supervision of the document review process, preparation of grand jury subpoena responses, coordination with Redstone Digital Forensics, and witness preparation.
Monica Reyes — Working Associate (C&H San Francisco). Ms. Reyes is responsible for privilege review oversight, preparation of legal memoranda, coordination with Hargrove Forensic Advisory, and research and analysis on legal issues arising in the investigation.
Third-Party Vendors
Redstone Digital Forensics Inc. — Neil Ashworth, Project Director. Redstone is responsible for all e-discovery services, including forensic collection, data processing, document hosting, and production support.
Hargrove Forensic Advisory LLC — Dr. Vanessa Tremblay, Engagement Partner. Hargrove has been retained to provide forensic accounting and economic analysis services under Kovel-letter protections. The engagement commenced on July 1, 2022.
X. Key Actions and Next Steps for Q3 2022
The following key actions and deliverables are planned for Q3 2022: