PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT — PREPARED AT THE DIRECTION OF COUNSEL IN ANTICIPATION OF LITIGATION
CALDERWOOD & HARKNESS LLP Antitrust & Competition Practice Group
PRIVILEGED & CONFIDENTIAL MEMORANDUM ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
FROM: Elaine Forsythe, Partner, Antitrust & Competition Practice Group, Calderwood & Harkness LLP
TO: Janet Moreau-Shaw, Chair, Audit Committee, Board of Directors, Torchlight Mining Corp.
CC: Priya Anand, General Counsel, Torchlight Mining Corp. Søren Dalmqvist, CEO, Torchlight Mining Corp. Richard Fong, Chief Financial Officer, Torchlight Mining Corp. Howard Bellamy, Billing Partner, Calderwood & Harkness LLP
DATE: August 20, 2023
RE: Updated Litigation Reserve Analysis — DOJ Antitrust Division Grand Jury Investigation (Grand Jury No. GJ-22-0194, N.D. Cal.); C&H Matter No. 1039-00001
This memorandum is a privileged and confidential communication prepared by Calderwood & Harkness LLP at the direction of counsel and in anticipation of litigation. It is protected by the attorney-client privilege and the work-product doctrine. This memorandum should not be disclosed, distributed, or otherwise made available to any third party without the prior written consent of Calderwood & Harkness LLP. Unauthorized disclosure may result in waiver of applicable privileges.
I. Executive Summary
This memorandum is prepared for the purpose of updating and superseding the Litigation Reserve Analysis Memorandum dated October 15, 2022 (the "Prior Memorandum"), which Calderwood & Harkness LLP ("C&H" or the "Firm") previously provided to the Audit Committee of the Board of Directors of Torchlight Mining Corp. ("TMC" or the "Company") in connection with the ongoing grand jury investigation by the Antitrust Division of the United States Department of Justice ("DOJ"). Based upon the material developments that have occurred since the issuance of the Prior Memorandum, and for the reasons set forth in detail below, we respectfully recommend that the Audit Committee approve an increase in TMC's litigation reserve from USD 30 million to USD 50 million.
The recommendation to increase the reserve by USD 20 million is driven by several significant developments that have materially altered the risk profile facing the Company since October 2022. These developments include, but are not limited to, the following:
(a) TMC's receipt of a DOJ target letter dated May 20, 2022, which elevated the Company's status from that of a grand jury subpoena recipient to a formal target of the investigation — a development that was addressed in preliminary form in the Prior Memorandum but whose implications have continued to crystallize;
(b) the completion of C&H's internal investigation on behalf of TMC and the presentation of findings to the TMC Board of Directors on January 20, 2023, which confirmed the existence of anticompetitive conduct attributable to the Company through the actions of Gavin Holt, former Vice President, U.S. Specialty Minerals Sales;
(c) the completion of voluntary witness proffer sessions with the DOJ by Sandra Chu (Director, Pricing Analytics) and Thomas Eriksen (Regional Sales Manager, Western Region), which sessions advanced TMC's cooperation posture but also resulted in further refinement of the DOJ's understanding of the relevant conduct;
(d) the issuance by the grand jury of a second subpoena duces tecum (Subpoena No. GJ-22-0194-SD-007) on May 15, 2023, requesting additional pricing data, customer contract files, and communications related to the North American Specialty Minerals Council ("NASMC"), and TMC's completion of compliance with that subpoena on June 30, 2023; and
(e) the updated penalty-range analysis prepared in consultation with Hargrove Forensic Advisory LLC ("Hargrove"), under the direction of Dr. Vanessa Tremblay, which has refined the estimate of TMC's share of affected commerce and the corresponding base fine calculation.
Based upon C&H's assessment of these developments, and applying the relevant accounting standards discussed in Section III below, we conclude that a loss arising from this matter is "probable" within the meaning of both ASC 450-20 (Loss Contingencies) under U.S. GAAP and IAS 37 (Provisions, Contingent Liabilities, and Contingent Assets) under IFRS, and that the amount of such loss is reasonably estimable within a range.
Specifically, C&H estimates that the most likely resolution of this matter will involve a non-prosecution agreement ("NPA") requiring a monetary payment by TMC in the range of approximately USD 30 million to USD 60 million, with a midpoint of approximately USD 45 million. When combined with a modest buffer to account for residual uncertainty — and taking into consideration the applicable accounting standard requirements regarding the accrual of loss contingencies — we recommend that the litigation reserve be set at USD 50 million.
The revised reserve of USD 50 million should be reflected in TMC's Q3 2023 interim financial statements filed with the U.S. Securities and Exchange Commission ("SEC") on Form 40-F and Form 6-K, and with the Canadian Securities Administrators on SEDAR+. We further recommend that TMC's loss contingency footnote disclosure be updated to reflect the increased reserve and the evolving posture of the investigation, as discussed in greater detail in Section VII below.
We have begun coordination with Calvert & Associates LLP ("Calvert"), TMC's independent auditor, through engagement partner Daniel Moreau, regarding the adequacy of the revised reserve amount and the appropriateness of the related disclosure language. That coordination is ongoing and will require the active involvement of TMC's General Counsel and Chief Financial Officer, as discussed in Section VIII below.
II. Background and Procedural History
A. The Investigation
The DOJ Antitrust Division formally opened a grand jury investigation on or about February 10, 2022, convening 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) in the North American specialty-minerals sector. Specifically, the DOJ's investigation is focused on alleged price-fixing, market allocation, and bid-rigging among competitors engaged in the production, distribution, and sale of high-purity feldspar, industrial talc, and rare-earth concentrates in North America.
The alleged conspiracy period, as reflected in the DOJ's communications and grand jury subpoenas, spans approximately January 2017 through August 2021 — a period of roughly four and one-half years. During this period, the participating companies and their representatives allegedly coordinated pricing, allocated customers and geographic markets, and rigged bids in connection with certain large-volume procurement contracts.
The investigation was triggered by a cooperation agreement entered into by Cascade Chemical Supply Co. ("Cascade"), through its President, Leonard Massey, with the DOJ in approximately September 2021. Cascade is represented in this matter by Whitfield, Strauss & Tully LLP, under the direction of partner Rebecca Ostrander. It is C&H's understanding, based on information obtained in the course of the investigation and through discussions with DOJ counsel, that Cascade approached the DOJ under the Antitrust Division's Leniency Program and provided substantial evidence of the alleged conspiracy in exchange for leniency consideration. Cascade's cooperation has provided the DOJ with the foundational evidentiary basis for the broader investigation.
In addition to TMC, the following entities and individuals are known to be co-subjects or co-targets of the investigation:
•  Ridgecrest Minerals Inc. — a Delaware corporation headquartered in Denver, Colorado. Its CEO, Brian Novotny, and Vice President of Sales, Carl Edgerton, are believed to be individual targets. Ridgecrest is represented by Davenport, Kline & Archer LLP, under the direction of partner Helen Marchetti.
•  Pinnacle Earth Resources Ltd. — an Ontario corporation headquartered in Sudbury, Ontario, with U.S. operations based in Salt Lake City, Utah. Its CEO, Douglas Harlowe, and former Senior Vice President, Commercial Operations, Kevin Tsang, are believed to be individual targets. Pinnacle is represented by Ashford Whitmore LLP, under the direction of partner George Nakamura.
The lead DOJ prosecutors assigned to the investigation are Trial Attorney Denise Kowalski and Senior Trial Attorney Marcus Reeves, both based in the DOJ Antitrust Division's San Francisco Field Office. The investigation is supervised by Deputy Assistant Attorney General Julia Stafford-Hayes.
B. TMC's Engagement of Calderwood & Harkness
TMC first became involved in this matter upon receiving Grand Jury Subpoena Duces Tecum No. GJ-22-0194-SD-003 on February 14, 2022. The subpoena was broad in scope, requiring the production of documents relating to, among other things, TMC's pricing practices, customer communications, trade-association activities, competitor contacts, and internal pricing analyses for the specialty-minerals product categories at issue, spanning the period from January 2015 through the date of the subpoena.
TMC engaged Calderwood & Harkness LLP on February 18, 2022, four days after receipt of the subpoena, to represent the Company in connection with the investigation and all related matters. The C&H team assembled for this engagement consists of:
•  Elaine Forsythe — Partner, Antitrust & Competition Practice Group (San Francisco office); Responsible Partner
•  Howard Bellamy — Partner (New York office); Billing Partner
•  Aaron Liu — Lead Associate
•  Monica Reyes — Working Associate
A litigation hold memorandum was issued by TMC's General Counsel, Priya Anand, on March 1, 2022, directing all relevant custodians to preserve documents and electronically stored information ("ESI") potentially responsive to the subpoena or otherwise relevant to the investigation. The litigation hold covered approximately 43 custodians and was subsequently expanded on two occasions to encompass additional individuals and data sources identified during the course of document review and the internal investigation.
C. Key Developments Since October 15, 2022 Memorandum
The Prior Memorandum, dated October 15, 2022, established the initial framework for the litigation reserve analysis and recommended the then-existing reserve of USD 30 million. Since that date, a number of material developments have occurred, each of which has informed the updated analysis presented in this memorandum. These developments are summarized chronologically below.
May 20, 2022 — DOJ Target Letter. As discussed in the Prior Memorandum, TMC received a target letter from the DOJ Antitrust Division on May 20, 2022, signed by Senior Trial Attorney Marcus Reeves. The target letter formally advised TMC that it was a target — as distinguished from a mere subject or witness — of the grand jury investigation. Although this development predated the Prior Memorandum, its significance continues to evolve. Receipt of a target letter indicates that, in the view of the DOJ, the evidence is sufficient to support the return of an indictment. While a target letter does not guarantee that charges will be brought, it substantially increases the probability of a formal charge absent a negotiated resolution. Since October 2022, the implications of the target-letter designation have become clearer as the investigation has progressed and NPA discussions have commenced.
June 10, 2022 — Gavin Holt Retains Personal Counsel. Gavin Holt, TMC's former Vice President of U.S. Specialty Minerals Sales, who resigned from the Company effective September 30, 2021, retained personal counsel, Patrick Dunleavy of Briarcliff Law Group PLLC, on or about June 10, 2022. Mr. Holt's retention of independent counsel was not unexpected given his apparent central role in the conduct under investigation.
June 14, 2022 — Holt Invokes Fifth Amendment. Mr. Holt appeared before the grand jury on June 14, 2022, and asserted his Fifth Amendment privilege against self-incrimination, declining to testify on all substantive matters. Mr. Holt's assertion of the Fifth Amendment, while well within his constitutional rights, is a factor that the DOJ may consider in evaluating the scope and nature of the alleged conspiracy and the adequacy of TMC's cooperation. From TMC's perspective, Holt's refusal to testify reinforces the importance of the Company's own cooperation through document production and voluntary witness proffers.
December 15, 2022 — Completion of Rolling Document Productions Under First Subpoena. TMC completed its rolling productions of documents responsive to Grand Jury Subpoena No. GJ-22-0194-SD-003 on December 15, 2022. The productions were cumulative in nature, conducted over a period of approximately ten months, and encompassed approximately 487,000 documents (representing approximately 3.2 million pages). The document review was conducted by C&H with the assistance of Redstone Digital Forensics Inc. ("Redstone"), which provided forensic data collection and processing services.
January 20, 2023 — Internal Investigation Findings Presented to TMC Board. C&H completed its internal investigation and presented its findings to the TMC Board of Directors on January 20, 2023. The key findings of that investigation are discussed in detail in Section IV.B below. In summary, the investigation confirmed that Gavin Holt engaged in anticompetitive communications with representatives of Ridgecrest and Pinnacle on at least 37 documented occasions during the alleged conspiracy period, and that his conduct is attributable to TMC under principles of respondeat superior.
February 15, 2023 — Cooperation Proffer Submitted to DOJ. C&H, on behalf of TMC, submitted a detailed cooperation proffer to the DOJ on February 15, 2023. The proffer outlined the key findings of the internal investigation, identified the principal actors involved, described the nature and scope of the anticompetitive conduct, and detailed the remedial measures TMC had undertaken and planned to undertake. The cooperation proffer was designed to demonstrate TMC's commitment to full cooperation and to support the Company's candidacy for a non-prosecution agreement with the most favorable terms achievable.
March 10, 2023 — Sandra Chu Voluntary Proffer Session. Sandra Chu, TMC's Director of Pricing Analytics, participated in a voluntary proffer session with DOJ prosecutors Kowalski and Reeves on March 10, 2023, at the DOJ's San Francisco Field Office. Ms. Chu was accompanied by C&H counsel Aaron Liu. During the session, Ms. Chu provided testimony regarding her role in implementing pricing adjustments directed by Gavin Holt, her understanding of market dynamics, and her lack of knowledge regarding any inter-competitor communications. The proffer session was conducted pursuant to a proffer agreement providing customary use-immunity protections.
April 22, 2023 — Thomas Eriksen Voluntary Proffer Session. Thomas Eriksen, TMC's Regional Sales Manager for the Western Region, participated in a voluntary proffer session with DOJ prosecutors on April 22, 2023, also at the San Francisco Field Office. Mr. Eriksen was accompanied by C&H counsel Monica Reyes. During the session, Mr. Eriksen described his attendance at four NASMC quarterly conferences at which side meetings among competitors allegedly occurred. Mr. Eriksen denied direct knowledge of any anticompetitive agreements, and his testimony was generally consistent with the findings of C&H's internal investigation regarding his ambiguous level of involvement.
May 15, 2023 — Second Grand Jury Subpoena. The grand jury issued a second subpoena duces tecum, designated Subpoena No. GJ-22-0194-SD-007, on May 15, 2023. The second subpoena sought additional categories of documents not fully covered by the initial subpoena, including: (i) detailed pricing data for specific product lines and customer accounts for the period 2016–2022; (ii) customer contract files, including requests for proposal ("RFPs"), bids, and award notifications; and (iii) all communications related to NASMC activities, including board meeting minutes, committee correspondence, and conference attendee lists. The issuance of a second subpoena, while not uncommon in investigations of this nature, indicates that the DOJ continues to develop its evidentiary record and that the investigation remains active.
June 30, 2023 — Completion of Second Subpoena Compliance. TMC completed its production of documents responsive to the second subpoena on June 30, 2023. This production encompassed an additional approximately 68,000 documents, bringing the cumulative total of documents produced by TMC in connection with this investigation to approximately 555,000 documents.
August 1, 2023 — Retention of Meridian Compliance Partners LLC. At C&H's recommendation, TMC retained Meridian Compliance Partners LLC ("Meridian"), under the direction of engagement lead Claudia Ferraro, on August 1, 2023, to design and implement an enhanced antitrust compliance program for the Company. The retention of an independent compliance consultant is a recognized best practice in DOJ enforcement matters and is expected to be a significant positive factor in TMC's negotiations for favorable NPA terms.
September 15, 2023 — Enhanced Compliance Program Proposal Submitted to DOJ. Meridian's initial proposal for an enhanced antitrust compliance program was submitted to the DOJ on September 15, 2023, contemporaneously with the final preparation of this memorandum. The compliance program proposal includes, among other elements, mandatory annual antitrust compliance training for all employees at the manager level and above, a trade-association interaction monitoring protocol, a competitor-contacts audit and reporting system, and a confidential reporting hotline. This submission is intended to demonstrate TMC's good-faith commitment to remediation and to support the case for maximum cooperation credit in NPA negotiations.
III. Applicable Accounting Standards
The determination of the appropriate litigation reserve for this matter requires analysis under two accounting frameworks: ASC 450 (Contingencies) under U.S. Generally Accepted Accounting Principles ("U.S. GAAP"), which applies to TMC's SEC filings, and IAS 37 (Provisions, Contingent Liabilities, and Contingent Assets) under International Financial Reporting Standards ("IFRS"), which applies to TMC's primary filings on the Toronto Stock Exchange and SEDAR+. Both standards are addressed below, together with a discussion of the reconciliation between the two for TMC's reporting purposes.
A. ASC 450 (Contingencies) — U.S. GAAP
TMC files an annual report with the SEC on Form 40-F and periodic reports on Form 6-K. For purposes of these filings, the applicable standard governing loss contingencies is Accounting Standards Codification Topic 450 ("ASC 450"), and specifically ASC 450-20 (Loss Contingencies).
Under ASC 450-20-25-2, an estimated loss from a loss contingency shall be accrued by a charge to income if two conditions are met:
(1) Information available before the financial statements are issued (or are available to be issued) indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements; and
(2) The amount of the loss can be reasonably estimated.
The term "probable" under ASC 450 is defined as meaning that the future event or events are "likely to occur." While FASB has not assigned a specific numerical probability threshold to this term, it is generally understood to require a level of likelihood that is significantly higher than "reasonably possible" (defined as "more than remote but less than likely") and is commonly interpreted in practice as requiring a probability of occurrence in the range of approximately 70% or higher.
Importantly, ASC 450-20-30-1 provides guidance for situations in which a range of loss is established but no single amount within the range appears to be a better estimate than any other amount. In such circumstances, the minimum amount in the range shall be accrued, and the nature of the contingency and the fact that an additional loss up to the high end of the range is reasonably possible should be disclosed.
Even where the conditions for accrual are not met — that is, where a loss is "reasonably possible" but not "probable" — ASC 450-20-50-3 requires disclosure of the nature of the contingency and an estimate of the possible loss or range of loss, or a statement that such an estimate cannot be made.
B. IAS 37 (Provisions, Contingent Liabilities, and Contingent Assets) — IFRS
TMC's primary financial statements, filed on the Toronto Stock Exchange and through SEDAR+ with the Canadian Securities Administrators, are prepared in accordance with IFRS as issued by the International Accounting Standards Board ("IASB"). The applicable standard for litigation reserves under IFRS is IAS 37 (Provisions, Contingent Liabilities, and Contingent Assets).
Under IAS 37.14, a provision shall be recognized when all three of the following conditions are satisfied:
(a) The entity has a present obligation (legal or constructive) as a result of a past event;
(b) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
(c) A reliable estimate can be made of the amount of the obligation.
The term "probable" under IAS 37 is defined as meaning "more likely than not" — i.e., the probability that the event will occur is greater than 50%. This is a materially lower threshold than the commonly understood interpretation of "probable" under ASC 450, which, as noted above, is generally taken to require a likelihood of approximately 70% or higher.
IAS 37.36 provides that the amount recognized as a provision shall be the "best estimate" of the expenditure required to settle the present obligation at the end of the reporting period. IAS 37.39 further provides that where a range of possible outcomes exists and each point in the range is equally likely, the midpoint (expected value) of the range should be used. For a single obligation — as distinct from a large population of items — the most likely outcome may be the best estimate, although other possible outcomes should also be considered. If other outcomes are either mostly higher or mostly lower than the most likely outcome, the best estimate will be higher or lower, respectively.
In contrast to ASC 450, which defaults to accruing the minimum of the range absent a better estimate, IAS 37 requires accrual of the best estimate — typically the midpoint or most likely outcome — which may result in a higher accrual under IFRS than under U.S. GAAP for the same set of underlying facts.
C. Reconciliation for TMC
TMC reports under IFRS for its primary TSX and SEDAR+ filings but, as a Canadian foreign private issuer, files its annual report with the SEC on Form 40-F and provides periodic reports on Form 6-K that incorporate its IFRS financial statements. In practice, this means that TMC's financial statements as filed with the SEC utilize IFRS, and a separate U.S. GAAP reconciliation is not required under the SEC's accommodation for foreign private issuers filing on Form 40-F. However, the disclosure of loss contingencies must satisfy the requirements of both IAS 37 and the SEC's disclosure expectations, and investors and analysts in both Canadian and U.S. markets will evaluate the adequacy of the reserve and related disclosures.
Under the current factual posture of this matter, both ASC 450 and IAS 37 require recognition of a loss provision. As discussed in Section IV below, C&H concludes that the probability of a material financial liability is well above both the "probable" threshold under ASC 450 (approximately 70% or higher) and the "more likely than not" threshold under IAS 37 (greater than 50%). The amount of the loss is reasonably estimable within a range under both standards. The principal difference between the two standards lies in the amount to be accrued: ASC 450 defaults to the minimum of the range absent a better estimate, while IAS 37 requires the best estimate (typically the midpoint). As discussed in Section V.D below, the recommended reserve of USD 50 million is consistent with the requirements of both standards.
Coordination with Calvert & Associates LLP, TMC's independent auditor, is essential to ensure that the revised reserve amount and the related disclosure language are acceptable for auditor sign-off purposes under both IFRS and, to the extent relevant, U.S. GAAP. C&H has begun that coordination process, as discussed in Section VIII below.
IV. Assessment of Liability Probability
A. Target Letter Significance
As noted above, TMC received a formal target letter from the DOJ Antitrust Division on May 20, 2022. The target letter, signed by Senior Trial Attorney Marcus Reeves, advised TMC that the Company is a "target" of the grand jury investigation — meaning that, in the DOJ's assessment, there is substantial evidence linking TMC to the commission of a federal crime, and that the DOJ has identified TMC as a putative defendant.
The significance of a target letter in the context of a DOJ antitrust investigation cannot be overstated. A target designation reflects the DOJ's considered judgment, based upon the evidence gathered to date, that the subject entity is a proper defendant. While receipt of a target letter does not guarantee that an indictment will be returned — indeed, many target-letter recipients ultimately resolve their matters through negotiated agreements such as NPAs or deferred prosecution agreements ("DPAs") — it does substantially increase the probability of a material adverse financial outcome for the target entity. In C&H's experience representing corporate targets in DOJ Antitrust Division investigations, it is exceedingly rare for a target-letter recipient to avoid all financial liability. In the vast majority of cases, the matter resolves through a negotiated agreement that includes a monetary penalty or payment, remedial obligations, and cooperation requirements.
Accordingly, the target-letter designation is a primary basis for C&H's conclusion that a material financial loss is "probable" within the meaning of both ASC 450 and IAS 37.
B. Internal Investigation Findings
C&H conducted a comprehensive internal investigation on behalf of TMC over a period of approximately eleven months, from February 2022 through January 2023. The investigation encompassed the review of hundreds of thousands of documents, interviews of current and former TMC employees, forensic analysis of electronic communications (including encrypted messaging platforms), and analysis of pricing data and market dynamics. The key findings of the internal investigation were presented to the TMC Board of Directors on January 20, 2023. Those findings are summarized below.
Gavin Holt's Anticompetitive Communications. The investigation established that Gavin Holt, during his tenure as TMC's Vice President of U.S. Specialty Minerals Sales (approximately 2015 through September 30, 2021), exchanged competitively sensitive pricing information with representatives of TMC's two principal competitors on at least 37 documented occasions between March 2017 and July 2021. Specifically, Mr. Holt communicated with Carl Edgerton, Vice President of Sales at Ridgecrest Minerals Inc., and Kevin Tsang, Senior Vice President of Commercial Operations at Pinnacle Earth Resources Ltd. The first documented communication occurred on March 14, 2017, via the VaultChat encrypted messaging platform. Subsequent communications occurred through a combination of VaultChat exchanges and in-person meetings at NASMC quarterly conferences held in Arlington, Virginia; Scottsdale, Arizona; and Orlando, Florida, among other locations.
The substance of these communications included the sharing of current and planned pricing for specific product grades, discussions of customer-allocation arrangements, and coordination of responses to customer RFPs. The pattern and frequency of these communications, combined with the correlation between the communications and subsequent pricing actions by the participating companies, provide strong evidence of a per se unlawful agreement to fix prices and allocate markets in violation of Section 1 of the Sherman Act.
Sandra Chu's Role. Sandra Chu, TMC's Director of Pricing Analytics, received pricing-adjustment instructions from Holt on at least 12 occasions that correlated temporally with known competitor price movements. Ms. Chu implemented these instructions in the ordinary course of her duties, adjusting pricing schedules and preparing revised customer proposals as directed. The investigation did not uncover direct evidence that Ms. Chu was aware of the inter-competitor communications underlying Holt's pricing instructions. Ms. Chu has consistently maintained that she believed the pricing adjustments were based on legitimate market intelligence and competitive analysis.
Thomas Eriksen's Involvement. Thomas Eriksen, TMC's Regional Sales Manager for the Western Region, attended four NASMC quarterly conferences at which side meetings among competitors allegedly occurred. Documentary evidence of Mr. Eriksen's direct participation in anticompetitive discussions is ambiguous. Certain calendar entries and expense reports place Mr. Eriksen in proximity to meetings between Holt and competitor representatives, but no communications or notes directly attributable to Eriksen reference the substance of any anticompetitive agreement. Mr. Eriksen has denied knowledge of any agreements between TMC and its competitors. C&H assesses Mr. Eriksen's involvement as uncertain and has advised the DOJ accordingly.
Absence of C-Suite or Board Involvement. The internal investigation found no evidence that any member of TMC's senior leadership — including CEO Søren Dalmqvist, General Counsel Priya Anand, or CFO Richard Fong — had knowledge of, authorized, or participated in the alleged anticompetitive conduct. Similarly, there is no evidence of Board-level awareness or approval. The conduct appears to have been confined to the U.S. Specialty Minerals Sales division and to have been driven principally by Holt's individual actions, albeit in his capacity as a senior officer of the Company.
Inadequacy of TMC's Antitrust Compliance Program. TMC maintained an antitrust compliance program that had been adopted in approximately 2014. However, the investigation revealed significant deficiencies in the program's implementation and maintenance. Annual antitrust compliance training had not been conducted since 2018 — a period of approximately four years preceding the opening of the DOJ investigation. The compliance program did not include any protocol for monitoring trade-association interactions, any audit or reporting mechanism for competitor contacts, or any requirement for pre-clearance of attendance at industry events. These deficiencies are relevant both to TMC's corporate culpability and to the DOJ's evaluation of the adequacy of TMC's remediation efforts.
Corporate Liability Under Respondeat Superior. The weight of the evidence supports a finding that anticompetitive conduct occurred during the alleged conspiracy period, and that such conduct is attributable to TMC as a corporate entity under the doctrine of respondeat superior. Mr. Holt engaged in the relevant communications during the course of his employment and within the scope of his authority as the Company's most senior sales executive in the United States. His conduct was undertaken, at least in part, for the benefit of TMC (e.g., by coordinating pricing to maintain margins). Under established federal criminal law principles, an employer corporation is liable for the criminal acts of its employees when such acts are committed within the scope of employment and with the intent, at least in part, to benefit the corporation. See, e.g., New York Central & Hudson River Railroad Co. v. United States, 212 U.S. 481 (1909). The absence of C-suite knowledge or authorization does not negate corporate liability under respondeat superior.
C. Cooperation Posture and Mitigating Factors
TMC has, at C&H's recommendation and under C&H's direction, pursued a strategy of substantial cooperation with the DOJ throughout the investigation. The cooperation provided to date includes the following:
•  Production of approximately 555,000 documents (approximately 3.6 million pages) in response to two grand jury subpoenas, completed in a timely manner.
•  Voluntary proffer sessions by Sandra Chu (March 10, 2023) and Thomas Eriksen (April 22, 2023), conducted at the DOJ's San Francisco Field Office and providing substantive testimony regarding the operations of TMC's specialty-minerals business and the relevant pricing practices.
•  Submission of a detailed cooperation proffer to the DOJ on February 15, 2023, outlining the key findings of the internal investigation and identifying the principal individuals involved in the alleged anticompetitive conduct.
•  Submission of an enhanced antitrust compliance program proposal, prepared by Meridian Compliance Partners LLC, to the DOJ on September 15, 2023.
•  Prompt and transparent engagement with the DOJ throughout the investigation, including regular counsel-to-counsel communications and responsive handling of all DOJ inquiries.
The cooperation posture supports the viability of a non-prosecution agreement, rather than indictment, as the likely vehicle for resolution. The DOJ Antitrust Division has increasingly utilized NPAs and DPAs in corporate cases where the target has demonstrated genuine cooperation, remediation, and a commitment to compliance. However, even the most favorable NPA will require a substantial monetary payment. No resolution that involves zero financial liability is a realistic outcome in this matter.
Several mitigating factors strengthen TMC's position in NPA negotiations:
•  The anticompetitive conduct was attributable to a single division-level employee (Gavin Holt) and did not involve the participation or knowledge of the Company's C-suite executives or Board of Directors.
•  TMC's cooperation has been extensive, timely, and genuine, going beyond the mere production of documents to include voluntary witness proffers and proactive submission of a compliance program proposal.
•  TMC has retained independent compliance consultants and is actively implementing an enhanced antitrust compliance program.
•  TMC had a pre-existing (albeit inadequate) antitrust compliance program, which evidences at least a baseline corporate commitment to legal compliance.
At the same time, certain factors weigh against TMC's position:
•  TMC did not self-report the anticompetitive conduct. The investigation was triggered by Cascade's cooperation with the DOJ, not by TMC's own disclosure. Under the DOJ's revised Leniency Policy, self-reporting is the most significant factor in determining the degree of cooperation credit. TMC's failure to self-report limits the maximum cooperation credit the Company can realistically expect to achieve.
•  The duration of the alleged conspiracy (approximately four and one-half years) is substantial, and TMC's share of the affected commerce is significant (approximately 35.7% of the total).
•  The inadequacy of TMC's existing compliance program may be viewed by the DOJ as an aggravating factor.
On balance, C&H assesses that the mitigating factors are substantial and that the most likely resolution is an NPA with a monetary payment in the range discussed in Section V below — a result that, while involving a significant financial cost to TMC, avoids the more severe consequences of an indictment (including potential debarment, loss of government contracts, and reputational harm associated with a criminal conviction).
D. Conclusion on Probability
For the reasons set forth above, Calderwood & Harkness concludes that a material financial loss arising from the DOJ's grand jury investigation is "probable" within the meaning of both ASC 450 (i.e., the future loss event is "likely to occur," at a probability well in excess of 70%) and IAS 37 (i.e., it is "more likely than not" that an outflow of resources will be required, at a probability well in excess of 50%). Furthermore, the amount of the probable loss is "reasonably estimable" within a range, as discussed in Section V below.
V. Estimated Loss Range and Recommended Reserve
A. Penalty Calculation Framework
The DOJ Antitrust Division employs a well-established methodology for calculating corporate penalties in antitrust cases resolved through plea agreements, NPAs, and DPAs. The starting point for the penalty calculation is the determination of the "base fine," which is calculated as 20% of the volume of affected commerce attributable to the defendant entity. This percentage reflects the DOJ's long-standing application of Section 2R1.1 of the United States Sentencing Guidelines, which sets the base offense level for antitrust offenses and provides a fine range calculated by reference to the volume of commerce.
The DOJ has estimated that the total volume of affected commerce attributable to all participants in the alleged conspiracy during the period January 2017 through August 2021 is approximately USD 1.34 billion. This figure represents the aggregate revenue generated by the participating companies from the sale of the implicated products (high-purity feldspar, industrial talc, and rare-earth concentrates) in the North American market during the conspiracy period.
TMC's share of the total affected commerce is estimated at approximately USD 478 million, representing approximately 35.7% of the total. This estimate is derived from TMC's internal sales records, validated by Hargrove Forensic Advisory's independent analysis. The precision of this figure may be refined as NPA negotiations progress and as Hargrove completes its final report (expected in early 2024), but C&H considers the estimate to be reliable for purposes of this reserve analysis.
Applying the 20% base-fine percentage to TMC's share of affected commerce yields a base fine of:
USD 478 million × 20% = USD 95.6 million
This base-fine figure represents the starting point for penalty negotiations. In practice, the final penalty imposed through an NPA or plea agreement is typically lower than the base fine, reflecting credits for cooperation, remediation, and other mitigating factors. The DOJ Antitrust Division has acknowledged, in published speeches and policy statements, that cooperation credits in the range of 25% to 50% or more of the base fine may be available to companies that demonstrate genuine cooperation, timely remediation, and a commitment to compliance — though the maximum credits are generally reserved for companies that self-report under the Leniency Program, which TMC did not do.
B. Estimated Penalty Range
Based on the penalty calculation framework described above, and applying a range of cooperation credits consistent with DOJ precedent, C&H estimates the following penalty range for TMC:
Low End (Maximum Cooperation Credit):
USD 95.6 million × (1 – 50%) = USD 47.8 million, rounded to approximately USD 48 million.
This figure assumes a cooperation credit of 50%, which would reflect the DOJ's recognition of TMC's extensive cooperation, voluntary proffers, and proactive remediation efforts. A credit of this magnitude is at the upper bound of what is achievable for a company that did not self-report, and C&H considers it to be optimistic but not unrealistic.
High End (Conservative Cooperation Credit):
USD 95.6 million × (1 – 25%) = USD 71.7 million, rounded to approximately USD 72 million.
This figure assumes a more conservative cooperation credit of 25%, reflecting a scenario in which the DOJ grants only modest credit for TMC's cooperation and remediation — for example, if the DOJ concludes that TMC's cooperation, while timely, was reactive rather than proactive, or if the DOJ views the inadequacy of TMC's prior compliance program as a significant aggravating factor.
Midpoint:
Approximately (USD 48 million + USD 72 million) / 2 = USD 60 million.
The penalty-range analysis has been prepared in consultation with Dr. Vanessa Tremblay of Hargrove Forensic Advisory LLC, who has independently validated the affected-commerce calculation and reviewed the cooperation-credit assumptions. Dr. Tremblay's final written report is expected in early 2024, but her preliminary analysis supports the range stated above. C&H will provide an updated reserve recommendation if the final Hargrove report indicates a material change to the affected-commerce figure or the penalty range.
In addition to the Sentencing Guidelines-based analysis described above, C&H has conducted its own assessment of the most likely outcome based upon the specific facts and circumstances of this matter, including the strength of TMC's cooperation, the scope and duration of the alleged conduct, the absence of C-suite involvement, the cooperation-credit precedents in recent Antitrust Division NPA resolutions, and the current posture of NPA discussions with the DOJ. Based on this assessment, C&H estimates the most likely penalty outcome in the range of USD 30 million to USD 60 million, with a midpoint of approximately USD 45 million. This range reflects C&H's judgment that a cooperation credit somewhat above 50% is achievable, given the totality of TMC's cooperation and remediation efforts, which would place the low end of the expected penalty in the vicinity of USD 30 million.
C. Professional Fees and Costs
While the litigation reserve is intended to address the expected penalty or monetary payment arising from the resolution of the DOJ investigation, it is important for the Audit Committee to have visibility into the total financial exposure to TMC, which includes the significant professional fees and costs that have been and will continue to be incurred in connection with this matter.
As of August 2023, total professional fees and costs incurred to date, and projected through matter close, are as follows:
Estimated remaining professional fees from the date of this memorandum through resolution of the matter are approximately USD 7 million to USD 9 million, depending on the pace and complexity of the NPA negotiations, the extent of additional document review or witness preparation required, and the scope of Meridian's compliance program implementation work.
The grand total of projected professional fees across all vendors and counsel through matter close is approximately USD 23.95 million.
It should be noted that professional fees are expensed as incurred under both IFRS and U.S. GAAP and are not included in the litigation reserve. The reserve addresses exclusively the expected monetary penalty or payment to be made to the DOJ as part of the anticipated NPA resolution. However, for purposes of evaluating the total financial impact of this matter on TMC, the Audit Committee should consider both the reserve (for the expected penalty) and the projected professional fees, which together represent total anticipated financial exposure in the range of approximately USD 54 million to USD 84 million (USD 30–60 million estimated penalty plus approximately USD 24 million in professional fees).
D. Recommended Reserve Amount
Prior Reserve. The prior litigation reserve of USD 30 million was established in March 2022 and was first reflected in TMC's FY 2021 annual report filed on SEDAR+ and with the SEC on Form 40-F on March 28, 2022. At the time the prior reserve was established, TMC had not yet received the DOJ target letter, the internal investigation was in its early stages, the scope of the alleged conduct had not been fully ascertained, and the range of possible outcomes was correspondingly wider. The USD 30 million reserve represented a reasonable estimate at that time, consistent with the limited information then available.
Updated Recommendation. Based upon the developments that have occurred since March 2022, the completion of the internal investigation, the refinement of the penalty-range analysis, and the updated assessment of liability probability described above, Calderwood & Harkness recommends that the Audit Committee approve an increase in the litigation reserve from USD 30 million to USD 50 million.
The rationale for the recommended USD 50 million reserve is as follows:
(1) Under ASC 450, where a range of loss exists and no single amount within the range is a better estimate than any other amount, the minimum of the range should be accrued. The minimum of the C&H estimated penalty range is USD 30 million. However, accruing only the minimum of the range in the current posture would likely understate the probable loss, given the weight of the evidence developed through the internal investigation, the target-letter designation, and the advanced stage of the matter. In practice, the ASC 450 "minimum of the range" guidance is intended for situations in which there is genuine uncertainty as to the ultimate amount within a broad range. Here, the evidence supports a loss above the minimum, and C&H's assessment is that a reserve at the USD 50 million level is more consistent with the overall probability distribution of outcomes.
(2) Under IAS 37, the standard requires accrual of the "best estimate" of the expenditure required to settle the present obligation. For a single obligation, the best estimate is the most likely outcome, and where a range of outcomes exists, the midpoint or expected value is typically used. The midpoint of C&H's estimated penalty range of USD 30 million to USD 60 million is USD 45 million. A reserve of USD 50 million provides a modest buffer above the midpoint, which is appropriate given the residual uncertainty inherent in NPA negotiations and the possibility that the DOJ's penalty demand may exceed C&H's current midpoint estimate.
(3) Practical Considerations. A reserve of USD 50 million is a round figure that is appropriate for financial-statement disclosure purposes, provides adequate coverage if the ultimate penalty falls in the expected range of USD 45–50 million, and avoids the need for a further near-term reserve adjustment that could create additional market uncertainty.
If the ultimate NPA monetary payment falls in the range of USD 45–50 million, the reserve will be adequate. If the penalty is lower than anticipated — for example, in the range of USD 30–35 million due to a more favorable cooperation credit — TMC will record a favorable reserve adjustment (i.e., a reversal of the excess reserve), resulting in a positive income-statement impact. Conversely, if the penalty exceeds USD 50 million — for example, if cooperation credit is more limited and the penalty approaches the theoretical high end of USD 72 million — TMC would need to record an additional charge at that time. C&H considers the probability of a penalty exceeding USD 50 million to be less than the probability of a penalty at or below USD 50 million, based on current circumstances, but the possibility cannot be excluded.
VI. D&O Insurance Considerations
TMC tendered notice of the DOJ investigation to its directors and officers ("D&O") insurance carrier, Northland Mutual Insurance Co. ("Northland"), on March 4, 2022, under D&O Policy No. NMI-DO-2021-5547. The policy was in effect for the period July 1, 2021, through July 1, 2022, and has been renewed annually since that date. The policy provides an aggregate limit of USD 50 million, with a self-insured retention of USD 2.5 million.
TMC's D&O insurance program also includes two excess-layer policies:
•  Layer 2: Greystone Specialty Insurance Ltd. — USD 25 million excess of USD 50 million (i.e., coverage in the layer from USD 50 million to USD 75 million).
•  Layer 3: Sentinel Re Ltd. — USD 25 million excess of USD 75 million (i.e., coverage in the layer from USD 75 million to USD 100 million).
Notice of the investigation was provided to both excess-layer carriers on or about March 8, 2022.
Northland acknowledged TMC's notice and confirmed that the investigation constitutes a "Claim" under the policy with respect to the defense costs of individual directors and officers. However, Northland simultaneously issued a reservation of rights regarding: (i) entity-level coverage for TMC itself, and (ii) the applicability of the policy's regulatory/criminal-act exclusion. The criminal-act exclusion in the Northland policy excludes from coverage any loss arising from or attributable to any deliberate criminal or deliberately fraudulent act, but the exclusion contains a standard "final adjudication" carve-back — i.e., the exclusion applies only upon a final adjudication establishing that the insured committed such an act.
C&H responded to Northland's reservation of rights by letter dated April 28, 2022, contesting the applicability of the criminal-act exclusion at the pre-adjudication stage. C&H's position is that, under the plain language of the policy and governing law, the criminal-act exclusion cannot be invoked until a final adjudication has occurred and that Northland is obligated to advance defense costs in the interim. This dispute remains unresolved, though Northland has continued to advance individual defense costs subject to the reservation of rights.
For purposes of the litigation reserve analysis, the following points are relevant:
•  D&O coverage is primarily relevant to the defense costs of individual directors and officers. To the extent that individual directors or officers incur personal defense costs — for example, in connection with grand jury testimony, personal exposure to criminal charges, or derivative litigation — those costs would be claimed under Side A (non-indemnifiable loss to individuals) or Side B (reimbursement to the entity for indemnified individual defense costs) of the D&O policy, subject to the policy retention.
•  The NPA monetary payment that TMC is expected to make to the DOJ is an entity-level regulatory penalty. Such payments are generally not covered under D&O insurance policies, which are designed to protect individual directors and officers, not to indemnify the corporate entity against regulatory fines and penalties. Accordingly, the reserve analysis does not assume any D&O insurance recovery to offset the anticipated NPA monetary payment.
•  Should the investigation expand to include personal charges against individual TMC directors or officers — an outcome that C&H currently considers unlikely given the absence of evidence of C-suite involvement — the D&O insurance program would become materially more significant. In that scenario, a separate analysis of available coverage would be warranted.
VII. Disclosure Considerations
A. Current Disclosure
TMC first disclosed the existence of the DOJ investigation in its FY 2021 annual report, filed simultaneously on SEDAR+ (for Canadian regulatory purposes) and with the SEC on Form 40-F, on March 28, 2022. The initial disclosure included the following key elements:
•  A description of the investigation as a DOJ Antitrust Division grand jury investigation into pricing practices in the North American specialty-minerals sector;
•  A statement that TMC had received a grand jury subpoena and was cooperating with the investigation;
•  Establishment of a litigation reserve of USD 30 million, disclosed in the loss contingency footnote to the financial statements; and
•  A cautionary statement that the ultimate outcome of the investigation could not be predicted with certainty and that actual results could differ materially from the estimated reserve.
The initial disclosure was reviewed and approved by TMC's General Counsel, CFO, and Audit Committee, and was coordinated with Calvert & Associates LLP as part of the FY 2021 audit process. The disclosure has been repeated, with minor updates, in each subsequent interim filing.
B. Recommended Updated Disclosure
In light of the recommended increase in the litigation reserve from USD 30 million to USD 50 million, C&H recommends that TMC update its loss contingency disclosure in the Q3 2023 interim financial statements (filed with the SEC on Form 6-K and on SEDAR+). The updated disclosure should include the following elements:
(1) An increase in the disclosed litigation reserve from USD 30 million to USD 50 million;
(2) A statement that the Company received a target letter from the DOJ in connection with the investigation (to the extent not previously disclosed in interim filings);
(3) A description of the evolving posture of the investigation, including that the investigation is ongoing and that the Company continues to cooperate fully with the DOJ;
(4) A statement that the Company believes the reserve reflects a reasonable estimate of the probable loss within a range of reasonably estimable outcomes, but that the ultimate resolution could result in a loss that is higher or lower than the accrued amount;
(5) Retention of the cautionary language regarding the inherent uncertainty of the outcome; and
(6) As applicable, disclosure that the range of reasonably possible loss above the accrued amount extends up to approximately USD 72 million (the high end of the penalty range), consistent with the ASC 450 requirement to disclose the reasonably possible loss in excess of the accrued amount.
Caution Regarding Disclosure Language. C&H strongly advises that the updated disclosure language be drafted with care to avoid any language that could be interpreted as an admission of wrongdoing, a concession of liability, or a characterization of the evidence that could compromise TMC's negotiating position with the DOJ. The disclosure should be factual and neutral in tone, describing the procedural posture of the investigation and the basis for the reserve without characterizing the merits of the DOJ's case or the strength of the evidence.
C&H will prepare a draft of the recommended disclosure language for review by TMC's General Counsel, CFO, and Audit Committee, and for coordination with Calvert & Associates LLP. In addition, C&H recommends that the disclosure be coordinated with Ironbridge Capital Markets Inc. (Alan Kirkwood, engagement lead), TMC's investor relations and capital markets advisor, to ensure that the disclosure strategy is aligned with any broader market-communication objectives and to prepare for potential investor and analyst inquiries following the filing.
VIII. Coordination with Auditor
Coordination with TMC's independent auditor, Calvert & Associates LLP, is an important element of the reserve-adjustment process. C&H recommends that Priya Anand (General Counsel) and Richard Fong (CFO) schedule a call with Daniel Moreau, the Calvert engagement partner, at the earliest practicable date to discuss the following:
(1) The basis for the recommended increase in the litigation reserve from USD 30 million to USD 50 million, including the developments that have occurred since the prior reserve was established;
(2) The adequacy of the revised reserve amount under both IFRS (IAS 37) and, to the extent relevant, U.S. GAAP (ASC 450);
(3) The appropriateness of the proposed disclosure language for inclusion in the Q3 2023 interim financial statements; and
(4) Any additional information or documentation that Calvert may require to support its review and sign-off on the revised reserve.
In connection with this process, C&H is prepared to provide an audit response letter to Calvert, if requested, confirming the status of the DOJ investigation and the range of reasonably estimable loss, consistent with the American Bar Association's Statement of Policy Regarding Lawyers' Responses to Auditors' Requests for Information (the "ABA Statement of Policy") and the professional standards governing attorney responses to auditor inquiries under both U.S. and Canadian auditing standards.
The audit response letter will be carefully crafted to fulfill C&H's professional obligations to the auditor while preserving the attorney-client privilege and the work-product doctrine protections that apply to the substance of C&H's legal analysis and strategic advice. In particular, the audit response letter will:
•  Confirm the existence and general nature of the DOJ investigation;
•  Describe the current procedural posture in general terms;
•  Confirm that a loss is probable and that the amount is reasonably estimable within a range;
•  Provide the range of reasonably estimable loss, consistent with the information in this memorandum;
•  Avoid disclosure of specific legal strategy, negotiating positions, privileged communications, or attorney work-product analysis; and
•  Include customary limitations and qualifications consistent with the ABA Statement of Policy.
C&H will coordinate directly with Daniel Moreau and the Calvert engagement team on the scope and content of the audit response letter, and will consult with Priya Anand before the letter is finalized and delivered.
IX. Summary of Recommendations
Based upon the foregoing analysis, Calderwood & Harkness respectfully recommends that the Audit Committee take the following actions:
1.  Increase Litigation Reserve from USD 30 Million to USD 50 Million. The Audit Committee should approve an increase in TMC's litigation reserve for the DOJ Antitrust Division grand jury investigation from USD 30 million to USD 50 million. The revised reserve should be reflected in TMC's Q3 2023 interim financial statements filed with the SEC (Form 40-F / Form 6-K) and on SEDAR+. The USD 50 million reserve reflects a prudent estimate within the probable loss range and is consistent with the requirements of both IAS 37 and ASC 450.
2.  Update Public Disclosure. TMC should revise its loss contingency footnote in the Q3 2023 interim financial statements to reflect the increased reserve, the receipt of the target letter, and the evolving posture of the investigation, using carefully drafted disclosure language that avoids any statement that could be construed as an admission of wrongdoing or that could compromise TMC's negotiating position.
3.  Coordinate with Calvert & Associates LLP. TMC management, through the General Counsel and CFO, should schedule a call with Daniel Moreau at Calvert & Associates LLP to discuss the revised reserve, the basis for the increase, and the adequacy of the reserve and disclosure language under both IFRS and U.S. GAAP. C&H will provide an audit response letter as requested.
4.  Continue Monitoring. C&H will continue to monitor all developments in the DOJ investigation, including the progress of NPA negotiations, the completion of Hargrove Forensic Advisory's final report, and any additional DOJ requests or actions. C&H will advise the Audit Committee promptly if further adjustments to the litigation reserve are warranted in light of new developments.
5.  Board Authorization. The Audit Committee should formally authorize the reserve increase and direct TMC management to implement the revised disclosure in the Q3 2023 interim financial statements, in coordination with C&H, Calvert & Associates, and Ironbridge Capital Markets.
X. Reservation and Disclaimer
This memorandum and the analysis contained herein are based upon information available to Calderwood & Harkness LLP as of August 20, 2023. The analysis reflects C&H's professional judgment regarding the probable outcomes of the DOJ Antitrust Division grand jury investigation and the appropriate litigation reserve for TMC's financial statements. Actual outcomes may differ materially from the estimates and assessments set forth in this memorandum.
The estimated loss range is inher