Hampton v. Aqua Metals, Inc. et al

Filing 113

ORDER by Judge Haywood S. Gilliam, Jr. GRANTING IN PART AND DENYING IN PART 93 MOTION TO DISMISS AND 97 MOTION TO STRIKE. Amended Pleadings due by 9/11/2019. (ndrS, COURT STAFF) (Filed on 8/14/2019)

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1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 IN RE AQUA METALS, INC. SECURITIES LITIGATION Case No. 17-cv-07142-HSG This Document Relates To: ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS AND MOTION TO STRIKE 8 9 ALL ACTIONS 10 Re: Dkt. Nos. 93, 97 United States District Court Northern District of California 11 This is a consolidated securities class action brought by Plymouth County Retirement 12 13 Association and Denis and Theresa Taillefer’s private company 1103371 Ontario Ltd. 14 (collectively, the “Plymouth Group”) against Defendant Aqua Metals, Inc. (“Aqua Metals” or the 15 “Company”) and its co-founders Stephen R. Clarke, Thomas Murphy, and Selwyn Mould 16 (“Officer Defendants” and collectively with Aqua Metals, “Defendants”). In its consolidated class 17 action complaint, Plaintiff alleges violations of Sections 10(b) and 20(a) of the Securities 18 Exchange Act of 1934 (the “Exchange Act”) and Sections 11 and 15 of the Securities Act of 1933 19 (the “Securities Act”). Dkt. No. 83 (“CCAC”) at 1. Pending before the Court is Defendants’ 20 motion to dismiss the consolidated class action complaint. Dkt. No. 93 (“Mot.”). Plaintiff also 21 filed a motion to strike exhibits for which Defendants requested judicial notice and incorporation 22 by reference. Dkt. No. 97. For the following reasons, the Court GRANTS IN PART AND 23 DENIES IN PART Defendants’ motion to dismiss and Plaintiff’s motion to strike. 24 25 I. BACKGROUND Lead Plaintiff Plymouth Group brings this securities class action “on behalf of investors 26 who purchased or otherwise acquired common stock of Aqua Metals” between May 19, 2016 and 27 November 9, 2017, inclusive (the “Class Period”). CCAC at 1. The following facts are taken 28 from the CCAC and judicially noticeable documents. A. AquaRefining Technology 1 Aqua Metals is a Delaware corporation with its principal place of business in California. 2 3 CCAC ¶ 30. Officer Defendants Stephen R. Clarke (President, CEO, and Chairman of the Board), 4 Thomas Murphy (Chief Financial Officer and Director), and Selwyn Mould (Chief Operating 5 Officer) founded the Company to provide a lower cost and environmentally-conscious alternative 6 to lead-acid battery (“LAB”) recycling. Id. ¶¶ 31–33, 46–47. This alternative method involves a 7 process called “AquaRefining,” in which Aqua Metals’ proprietary machines, modules with 8 electrolyzer units, separate and recycle the lead components in LABs. Id. ¶¶ 46–49. The 9 AquaRefining modules use “electroplating” to continuously separate the lead from other components, and through an electrolyte-chemical process the lead is processed and digested to 11 United States District Court Northern District of California 10 create pure lead. Id. ¶ 49. This differs from smelting, the traditional method of LAB recycling, in 12 that it does not require a high-temperature chemical reaction (which results in significant 13 emissions), thereby making AquaRefining more efficient and non-polluting. Id. ¶ 45. B. Summary of Alleged False and Misleading Statements 14 On May 19, 2016, at the beginning of the Class Period, Aqua Metals announced its 15 16 agreement with Interstate Batteries Systems International, Inc. (“Interstate Batteries”), a leading 17 battery recycler. Dkt. No. 93-15, Ex. 14;1 CCAC ¶¶ 8, 115. Interstate Batteries agreed to supply 18 more than a million automotive batteries and other LABs to Aqua Metals as “feedstock” for the 19 Company’s “AquaRefineries,” the first of which was located in Nevada’s Tahoe-Reno Industrial 20 Complex (“TRIC” or “Reno Plant”). Dkt. No. 93-15, Ex. 14 at 1; CCAC ¶ 115. In the press 21 release, Defendant Clarke commented that Interstate Business “is an ideal partner for us as we 22 scale our business.” Dkt. No. 93-15, Ex. 14 at 2; CCAC ¶ 115. The press release also announced 23 that the AquaRefinery in TRIC was “set to open in July 2016.” Dkt. No. 93-15, Ex. 14 at 1. 24 That same day, Aqua Metals filed its Form 10-Q for the quarter ending March 31, 2016 25 (“Q1’16 10-Q”) with the Securities and Exchange Commission (“SEC”). Dkt. No. 93-3, Ex. 2; 26 27 28 1 All numbered exhibits referenced are attached to the Declaration of Michael R. Hogue, Dkt. No. 93-1 (“Hogue Decl.”), and all lettered exhibits referenced are attached to the Declaration of Nicole Lavallee, Dkt. No. 96 (“Lavallee Decl.”). 2 1 2 3 4 5 6 7 8 9 10 United States District Court Northern District of California 11 CCAC ¶ 116. The Q1’16 10-Q disclosed Aqua Metal’s plan of operations as follows: As of the date of this report, we believe that interest in our first recycling facility and demand for our recycling capacity is strong. Consequently, we have implemented a plan to achieve production at the rate of 80 tons of recycled lead per day by the fourth quarter of 2016 and, over time, expand to 160 tons per day. Our TRIC facility is designed and is being constructed in order to accommodate a total of 32 AquaRefining modules and additional battery breaking and component separations equipment sufficient to support expansion to 160 tons of recycled lead per day. Construction of the TRIC facility began on August 17, 2015 and is progressing with a completion expected in the second quarter of 2016. We expect to install our first AquaRefining modules in approximately the second quarter of 2016 and to install a total of 16 AquaRefining modules to support an initial lead production capacity of 80 tons per day by the close of the third quarter of 2016. In keeping with our modular approach, we intend to commence commercial LAB recycling operations shortly after the first AquaRefining module is delivered. 12 CCAC ¶ 117. In its Q1’16 10-Q, Aqua Metals included risk factors warning investors that 13 “[w]hile the testing of our AquaRefining process has been successful to date, there can be no 14 assurance that we will be able to replicate the process, along with all of the expected economic 15 advantages, on a large commercial scale.” Dkt. No. 93-3, Ex. 2 at 6. 16 The Company made substantially similar statements in a May 24, 2016 corporate update 17 press release and during its quarterly earnings call (“Q1’16 Conference Call”). See Dkt. No. 93- 18 16, Ex. 15; Dkt. No. 93-47, Ex. 46. During the Q1’16 Conference Call, Defendant Clarke stated 19 that he believed Aqua Metals was “ready to compete in the global $22 billion market,” as the 20 company was “generating massive interest in the market.” CCAC ¶ 125. He went on to inform 21 analysts that the TRIC plant remained “on track to achieve 80 metric tons of lead per day output 22 by the end of 2016 and on track to expand that to 160 metric tons per day by 2018.” Id. 23 In November 2016, Aqua Metals announced that it had produced the “first-ever 24 AquaRefined lead” at the TRIC plant. Dkt. No. 93-22, Ex. 21; CCAC ¶ 153. The lead was 25 reported to be more than 99.99% pure. Id. “[W]hen fully commissioned, the TRIC facility will 26 have the capacity to produce 120 metric tons per day (T/day) of lead; a 50% improvement over the 27 previously announced 80 T/day capacity.” Dkt. No. 93-22, Ex. 21. Aqua Metals also filed its 28 Form 10-Q for the third quarter disclosing to investors that: 3 1 2 3 4 5 6 7 8 9 10 United States District Court Northern District of California 11 While the testing of our AquaRefining process has been successful to date, there can be no assurance that we will be able to replicate the process, along with all of the expected economic advantages, on a large commercial scale. As of the date of this report, we have built and operated both a small-scale unit of our AquaRefining process and a full-size production prototype. In addition, on October 28, 2016, we commenced limited operations at our TRIC facility through the processing of recycled lead through a single AquaRefining module. While we believe that our development, testing and limited production to date has proven the concept of our AquaRefining process, we have not undertaken the processing of used LABs nor have we commenced the production of lead in large commercial quantities. We expect to commence the commercial recycling of used LABs during the fourth quarter of 2016 and increase our production of lead to 120 tonnes per day early in 2017. However, there can be no assurance that as we commence large scale operations at our TRIC facility that we will not incur unexpected costs or hurdles that might restrict the desired scale of our intended operations or negatively impact our projected gross profit margin. 12 Dkt. No. 93-5, Ex. 4 at 21. A substantially similar statement was repeated in Aqua Metals’ Form 13 Prospectus in connection with its November 21, 2016 public offering. See CCAC ¶¶ 181–83. 14 On February 9, 2017, Aqua Metals announced through a press release that it had secured a 15 partnership with Johnson Controls International plc (“Johnson Controls”), the world’s largest 16 manufacturer of automotive batteries. Id. ¶ 192. Under the agreement, Johnson Controls would 17 be the first licensee for AquaRefining technology, supply Aqua Metals with batteries to recycle, 18 purchase AquaRefined metals, and acquire just under 5% of Aqua Metals’ outstanding shares. Id. 19 ¶ 193. Less than a week after this announcement, the Company released its quarterly corporate 20 update, summarizing the highlights from the fiscal year ended December 31, 2016. Id. ¶¶ 201–02. 21 That same day, Aqua Metals held its fiscal year-end conference call, where Defendant Clarke 22 announced that the TRIC AquaRefinery “moved from commissioning to operational.” Id. ¶ 205. 23 He also disclosed that the Company was expanding the refinery’s capacity from “120 tons to 160 24 tons” of pure lead per day, and that the Company was “making lead from batteries” they had 25 “broken.” Id. ¶¶ 207, 210. Defendant Clarke also said that the Company had “products ready to 26 ship.” Id. ¶ 210. 27 28 By the middle of the second quarter in 2017, the TRIC AquaRefinery was “in commercial operation and generating revenue.” Id. ¶ 229. Defendant Clarke on May 9, 2017 disclosed that 4 Aqua Metals was “aggressively scaling up operations and ramping [its] capacity to reach 120 2 metric tonnes per day by the end of 2017.” Id. He also outlined that for the rest of 2017, the 3 Company planned to “ramp up production at AquaRefinery 1 [TRIC] and to prepare for 4 accelerated build-out of additional facilities, while concurrently moving forward with our plans for 5 additional AquaRefineries . . . and finalizing our plan to retrofit a to-be-named recycling facility 6 with our strategic partner in 2018.” Id. ¶ 232. During the quarterly conference call that same day, 7 Defendant Clarke reiterated that the TRIC plant was operating and “in revenue.” Dkt. No. 93-51, 8 Ex. 50 at 2. Defendant Clarke also disclosed some of the challenges and issues Aqua Metals was 9 facing, including the difficulty of achieving a “much higher degree of separation [of the 10 compounds] than is normal in this industry.” Id. at 5–6; CCAC ¶ 234. After the May 9 11 United States District Court Northern District of California 1 disclosures, Plaintiff alleges that the stock price declined by $4.34 or 26%, from $16.65 per share 12 on May 9, 2017 to $12.31 per share on May 10, 2017. CCAC ¶ 243. 13 Aqua Metals hosted its first “Analyst Visitor Day” at the end of May 2017 and “Investor 14 Day” at the beginning of August 2017. Id. ¶¶ 249, 264. Selected analysts and investors were 15 given a tour of the AquaRefinery located in TRIC. Id. A May 31, 2017 press release regarding 16 the visit stated that the analysts were able to “view the critical processes at the AquaRefinery as 17 they happened.” Id. ¶ 249. The August 2, 2017 press release similarly stated that the investors 18 were able to “view the full production process at the AquaRefinery as it happened.” Id. ¶ 264. 19 One investor was quoted as saying he was “impressed with the accelerating progress in the 20 commission process.” Id. ¶ 265. 21 A week after the August visit, on August 9, 2017, the Company, in its Form 10-Q for the 22 second quarter ending June 30, 2017, announced that given the limitations in processing capacity 23 for the current AquaRefining modules, the Company might begin producing lead compounds 24 (versus primary grade lead). Dkt. No. 93-8, Ex. 7 at 14. Because there was uncertain demand for 25 lead compounds, the Company stated it might choose to run the modules at “less than 120 tonnes 26 per day.” Id. Specifically, the Company disclosed: 27 28 We have implemented numerous process improvements and expect to be capable of producing significantly more than 120 metric tonnes of recycled lead per day by the end of 2017. This is more 5 1 2 3 4 battery processing capacity than we can utilize with 16 AquaRefining modules. As such, until we have increased our AquaRefining capacity, we will have the option of producing lead compounds from un-used AquaRefining feedstock. The lead compounds have a less established market and some demand uncertainty. For this reason, following the commission of all 16 modules, we may choose to run TRIC at less than 120 tonnes per day, should this provide for a more optimal product mix. 5 Id. Plaintiff alleges that after release of this news, Aqua Metals’ stock price dropped again, from 6 $10.87 to $8.31. CCAC ¶ 283. 7 On September 27, 2017, Aqua Metals filed a Form 8-K with the SEC updating the market 8 on its partnership with Johnson Controls. Dkt. No. 93-9, Ex. 8; CCAC ¶ 285. According to the 8- 9 K, Aqua Metals delivered written notice of its “readiness to commence discussions to convert or retrofit a Johnson Controls facility to be capable of using AquaRefining to produce lead.” Id. The 11 United States District Court Northern District of California 10 two companies had commenced meetings to further the discussions surrounding the conversion or 12 retrofit of the Johnson Controls facility. Id. 13 Towards the end of the year, on October 23, 2017 and November 9, 2017, the Company 14 provided the market with an update on its plant’s operations. CCAC ¶¶ 289–97. Plaintiff alleges 15 that these two disclosures were corrective disclosures. Id. In the October 23, 2017 press release, 16 Aqua Metals stated that it had a total of 15 AquaRefining modules “on-site and in-place, with one 17 to be shipped.” Dkt. No. 93-35, Ex. 34. Aqua Metals expected that all 16 modules would be 18 “installed and commissioned by the end of the year [2017], and “[r]amp up of AquaRefined lead 19 production is expected to continue through the fourth quarter of 2017 and into 2018.” Id. 20 However, Plaintiff alleges that Defendants “admitted” they had “only produced ‘small quantities 21 of AquaRefined lead’” and the Company was purportedly still in the process of “trying to 22 commission AquaRefining.” CCAC ¶¶ 289–90. Plaintiff claims that on release of this news, the 23 stock price declined 17.9%, from $5.37 to $4.41. Id. ¶ 292. 24 At the end of the Class Period on November 9, 2017 Aqua Metals issued its third quarter 25 corporate update and repeated updates similar to those in the October 23, 2017 press release. Dkt. 26 No. 93-36, Ex. 35. Defendant Clarke was quoted as saying that Aqua Metals had many challenges 27 scaling their operations on a commercial level, a topic Defendants elaborated on during the 28 quarterly conference call that same day. See id.; see also Dkt. No. 93-53, Ex. 52. One such 6 1 challenge disclosed during the conference call was that the lead produced by the modules was 2 “sticky,” meaning that in some cases, manual assistance was required to separate the elements. 3 Dkt. No. 93-53, Ex. 52 at 4; CCAC ¶ 296. In response to this news, Plaintiff alleges that the 4 Company’s stock price fell 20.8% over a period of three trading days, from $3.79 to $3.00. 5 CCAC ¶ 297. 6 7 II. REQUEST FOR JUDICIAL NOTICE AND MOTION TO STRIKE Defendants request that the Court take judicial notice of or consider incorporated by reference the following 54 documents: (1) SEC filings (Exs. 1–12); (2) press releases (Exs. 13– 9 45); (3) earnings calls transcripts (Exs. 46–53); and (4) an online article (Ex. 54). Dkt. No. 93 at 5 10 n.2; Hogue Decl., Exs. 1–54. Plaintiff filed a motion to strike, objecting to Defendants’ request as 11 United States District Court Northern District of California 8 to 46 of the 54 documents. Dkt. No. 97 at 1–2. Plaintiff also requests that the Court take judicial 12 notice of four documents: (1) a historical stock chart generated by Bloomberg; (2) Aqua Metals’ 13 August 8, 2018 press release; (3) Aqua Metals’ October 12, 2018 press release; and (4) a Schedule 14 13D amendment filed with the SEC on May 16, 2017. Dkt. No. 95; Lavallee Decl., Exs. A–D. 15 In Khoja v. Orexigen Therapeutics, the Ninth Circuit clarified the judicial notice rule and 16 incorporation by reference doctrine. See 899 F.3d 988 (9th Cir. 2018). Under Federal Rule of 17 Evidence 201, a court may take judicial notice of a fact “not subject to reasonable dispute because 18 it … can be accurately and readily determined from sources whose accuracy cannot reasonably be 19 questioned.” Fed. R. Evid. 201(b)(2). Accordingly, a court may take “judicial notice of matters of 20 public record,” but “cannot take judicial notice of disputed facts contained in such public records.” 21 Khoja, 899 F.3d at 999 (citation and quotations omitted). The Ninth Circuit has clarified that if a 22 court takes judicial notice of a document, it must specify what facts it judicially noticed from the 23 document. Id. at 999. Separately, the incorporation by reference doctrine is a judicially-created 24 doctrine that allows a court to consider certain documents as though they were part of the 25 complaint itself. Id. at 1002. This is to prevent plaintiffs from cherry-picking certain portions of 26 documents that support their claims, while omitting portions that weaken their claims. Id. 27 However, it is improper to consider documents “only to resolve factual disputes against the 28 plaintiff’s well-pled allegations in the complaint.” Id. at 1014. 7 1 Plaintiff objects to Defendants’ request to the extent that Defendants seek to introduce the 2 documents “for the truth of the matters asserted therein, to dispute factual issues, or for any other 3 purpose.” Dkt. No. 97 at 5. The Court will only consider the SEC filings, press releases, and 4 conference call transcripts that Plaintiff alleges contain false and/or misleading statements for the 5 purpose of determining what was disclosed to the market. Therefore, the Court GRANTS 6 Defendants’ request for judicial notice as to Exhibits 2–9, 14–21, 23–35, and 46–52. See Metzler 7 Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1064 n.7 (9th Cir. 2008) (SEC filings 8 subject to judicial notice); Dreiling v. Am. Exp. Co., 458 F.3d 942, 946 n.2 (9th Cir. 2006) (same); 9 Brodsky v. Yahoo! Inc., 630 F. Supp. 2d 1104, 1111 (N.D. Cal. 2009) (taking judicial notice of press releases); In re Century Aluminum Co. Sec. Litig., 749 F. Supp. 2d 964, 979–80 (N.D. Cal. 11 United States District Court Northern District of California 10 2010) (taking judicial notice of slide presentations to analysts). Defendants’ Exhibits 1, 10–13, 22, 36–45, and 53–54 are not relevant to the Court’s 12 13 analysis. The Court also did not consider the eight additional documents Defendants offered in 14 their opposition to Plaintiff’s motion to strike, Exhibits 55–62. See Dkt. No. 103. Therefore, 15 Defendants’ request as to those exhibits is DENIED AS MOOT. Because the Court also does not 16 consider Plaintiff’s Exhibits A–D in resolving Defendants’ motion to dismiss, it DENIES AS 17 MOOT Plaintiff’s request for judicial notice. The Court thus DENIES IN PART AND GRANTS IN PART Plaintiff’s motion to strike. 18 19 20 III. LEGAL STANDARD A. Rule 12(b)(6) Standard 21 Federal Rule of Civil Procedure 8(a) requires that a complaint contain “a short and plain 22 statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). A 23 defendant may move to dismiss a complaint for failing to state a claim upon which relief can be 24 granted under Federal Rule of Civil Procedure 12(b)(6). “Dismissal under Rule 12(b)(6) is 25 appropriate only where the complaint lacks a cognizable legal theory or sufficient facts to support 26 a cognizable legal theory.” Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th 27 Cir. 2008). To survive a Rule 12(b)(6) motion, a plaintiff must plead “enough facts to state a 28 claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). 8 1 A claim is facially plausible when a plaintiff pleads “factual content that allows the court to draw 2 the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 3 556 U.S. 662, 678 (2009). In reviewing the plausibility of a complaint, courts “accept factual allegations in the 4 5 complaint as true and construe the pleadings in the light most favorable to the nonmoving party.” 6 Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). Nonetheless, 7 Courts do not “accept as true allegations that are merely conclusory, unwarranted deductions of 8 fact, or unreasonable inferences.” In re Gilead Scis. Secs. Litig., 536 F.3d 1049, 1055 (9th Cir. 9 2008). 10 United States District Court Northern District of California 11 B. Heightened Pleading Standard Section 10(b) of the Securities Exchange Act of 1934 provides that it is unlawful “[t]o use 12 or employ, in connection with the purchase or sale of any security registered on a national 13 securities exchange or any security not so registered . . . any manipulative or deceptive device or 14 contrivance . . . . ” 15 U.S.C. § 78j(b). Under this section, the SEC promulgated Rule 10b–5, 15 which makes it unlawful, among other things, “[t]o make any untrue statement of a material fact or 16 to omit to state a material fact necessary in order to make the statements made, in the light of the 17 circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b–5(b). To 18 prevail on a claim for violations of either Section 10(b) or Rule 10b–5, a plaintiff must prove six 19 elements: “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a 20 connection between the misrepresentation or omission and the purchase or sale of a security; (4) 21 reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” 22 Stoneridge Inv. Partners, LLC v. Scientific–Atlanta, Inc., 552 U.S. 148, 157 (2008). 23 At the pleading stage, a complaint alleging claims under Section 10(b) and Rule 10b–5 24 must not only meet the requirements of Federal Rule of Civil Procedure 8, but also satisfy the 25 heightened pleading requirements of both Federal Rule of Civil Procedure 9(b) and the Private 26 Securities Litigation Reform Act (“PSLRA”). In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869, 27 876 (9th Cir. 2012). Under Rule 9(b), claims alleging fraud are subject to a heightened pleading 28 requirement, which requires that a party “state with particularity the circumstances constituting 9 1 fraud or mistake.” Fed. R. Civ. P. 9(b). Additionally, all private securities fraud complaints are 2 subject to the “more exacting pleading requirements” of the PSLRA, which require that the 3 complaint plead with particularity both falsity and scienter. Zucco Partners, LLC v. Digimarc 4 Corp., 552 F.3d 981, 990 (9th Cir. 2009). 5 IV. 6 DISCUSSION The crux of Plaintiff’s complaint is that Defendants allegedly made materially false and misleading statements and failed to disclose problems Aqua Metals was having in ramping up its 8 lead recycling process. CCAC ¶¶ 3–5. Specifically, Plaintiff alleges that Defendants concealed 9 that the “technology had not been successfully tested in the California Testing Facilities, the Reno 10 Plant was not operating, the critical modules could not run for any length of time and Aqua Metals 11 United States District Court Northern District of California 7 had not commissioned its process, commercialized AquaRefining or sold any AquaRefined lead 12 during the Class Period.” Id. ¶ 16. Plaintiff also alleges that per confidential witnesses (“CWs”), 13 the May and August 2017 site visits were “dog and pony shows carefully orchestrated to conceal” 14 problems in the AquaRefining process. Id. ¶ 152(b)(i). 15 In their motion to dismiss, Defendants contend that the CCAC should be dismissed 16 because it violates the prohibition on puzzle pleading. Mot. at 10–11. Defendants also argue that 17 Plaintiff fails to satisfy the heightened pleading standard under the PSLRA, as the CCAC fails to 18 plead particularized facts showing any statement was false when made and that Defendants made 19 the public statements with scienter. Id. at 11–35. 20 A. Exchange Act Claims 21 22 i. Section 10(b) and Rule 10b–5(b) Plaintiff’s first claim alleges that Defendants made false and misleading statements to the 23 public, in violation of Section 10(b) and Rule 10b–5(b) of the Exchange Act. To assert a claim 24 under the PSLRA for false and misleading statements, a plaintiff must identify “each statement 25 alleged to have been misleading” and “the reason or reasons why the statement is misleading.” 15 26 U.S.C. § 78u–4(b)(1); see Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir. 2001). Allegations of 27 misleading statements based on omissions must meet the materiality requirement—that is, a 28 plaintiff must show that there is “a substantial likelihood that the disclosure of the omitted fact 10 1 would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ 2 of information available.” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 38 (2011) (quoting 3 Basic v. Levinson, 485 U.S. 224, 231–32 (1988)). 4 Defendants contend that the CCAC is a “puzzle pleading,” in violation of the requirement 5 of Federal Rule of Civil Procedure 8 that the complaint contain “a short and plain statement of the 6 claim showing that the pleader is entitled to relief.” See Fed. R. Civ. P. 8(a); Mot. at 10–11. 7 Courts have routinely dismissed claims for puzzle pleading based on plaintiff’s failure to set forth 8 a “short and plain statement” in violation of Rule 8(a), and failure to make each allegation 9 “simple, concise and direct” in violation of Rule 8(d). See Wenger v. Lumisys, Inc., 2 F. Supp. 2d 1231, 1244 (N.D. Cal. 1998) (quotations omitted). “In the securities fraud context, the term 11 United States District Court Northern District of California 10 ‘puzzle pleading’ refers to a pleading that requires the defendant(s) and the court to ‘match up’ the 12 allegedly false and misleading statements that form the basis of the plaintiff’s claims with the 13 reasons those statements are misleading.” Tarapara v. K12 Inc., No. 16-CV-4069-PJH, 2017 WL 14 3727112, at *9 (N.D. Cal. Aug. 30, 2017). Courts “have repeatedly lamented plaintiffs’ counsels’ 15 tendency to place the burden [ ] on the reader to sort out the statements and match them with the 16 corresponding adverse facts to solve the ‘puzzle’ of interpreting Plaintiffs’ claims.” Wenger, 2 F. 17 Supp. 2d at 1244 (quotations omitted and alterations in original). 18 The Court agrees with Defendants that the Rule 10b–5(b) allegations employ 19 impermissible “puzzle pleading” and should be dismissed for this reason. See Mot. at 10–11. The 20 CCAC references over 45 public disclosures, which are summarized and quoted over a span of 21 203 paragraphs, without alleging in detail exactly which statement is misleading and why the 22 alleged misstatement is misleading and/or false. Instead, the CCAC follows each group of 23 allegedly false or misleading statements with broad, general explanations that largely fail to 24 identify the specific statements to which they apply. See, e.g., CCAC ¶¶ 130, 152, 179, 187, 191, 25 200, 221, 228, 248, 257, 260, 263, 269, 284, 288. For example, with respect to statements in 26 paragraphs 115 through 129 of the CCAC, Plaintiff provides an explanation of why it contends the 27 statements are misleading, but this explanation broadly applies to statements “above regarding the 28 then-existing status, success and commercialization of the AquaRefining process.” Id. ¶ 130(a). It 11 1 is not obvious to the Court what subset of the dozens of allegedly false and misleading statements 2 listed in paragraphs 115 through 129 were made “regarding the then-existing status, success and 3 commercialization of the AquaRefining process.” Any or all of the statements listed in the 4 preceding paragraphs arguably could be so characterized. See McCasland v. FormFactor Inc., No. 5 C 07-5545 SI, 2008 WL 2951275, at *7 (N.D. Cal. July 25, 2008) (“[T]he complaint here 6 contravenes applicable pleading standards by juxtaposing the same series of generic conclusions 7 against each set of block quotes, without differentiation or specificity.”) While the length and scope of the CCAC do not, by themselves, result in a “puzzle 9 pleading” warranting dismissal, see Tarapara, 2017 WL 3727112, at *10, Plaintiff asks the Court 10 to match hundreds of individual statements with corresponding allegations of falsity presented in a 11 United States District Court Northern District of California 8 web of inter-referenced paragraphs strewn throughout the complaint. See, e.g., CCAC ¶ 260(a) 12 (statements “regarding building additional facilities” are “false and misleading when made for the 13 reasons discussed in paragraphs 130(a), 130(b), 152(a)(i)–(iii),” as well as “the reasons discussed 14 in paragraphs 130(e), 152(d)(i)–(iii)”). And merely bolding and italicizing swaths of text does not 15 assist the Court in determining which statements are allegedly misleading and why, in light of the 16 multitude of reasons Plaintiff lists. See In re ECOtality, Inc. Sec. Litig., No. 13-03791-SC, 2014 17 WL 4634280, at *3 (N.D. Cal. Sept. 16, 2014) (“[Plaintiff’s complaint] highlight[s] certain 18 portions of those documents with bold and italic type. The quotations are followed by paragraphs 19 describing various alleged deficiencies. However, not a single sentence connects any of the 20 allegedly misleading statements with contradictory facts known to defendants at the time. The 21 Court will not attempt to divine Plaintiffs’ intentions by trying to match potentially misleading 22 statements with the alleged problems facing [Defendant].”). 23 Because Plaintiff’s CCAC contains a myriad of purported false statements with no specific 24 explanation as to which specific statement in the long blocks of text is alleged to be false or 25 misleading, Plaintiff fails to meet the exacting pleading requirements of the PSLRA. Therefore, 26 the Court GRANTS Defendants’ motion to dismiss Plaintiff’s Section 10(b) and Rule 10b–5(b) 27 claim WITH LEAVE TO AMEND. If Plaintiff chooses to file an amended complaint, Plaintiff 28 must identify and specify each allegedly false or misleading statement, whether such statement is 12 1 alleged to be an affirmative misrepresentation or false or misleading by omission, and describe 2 why the specific statement was materially false or misleading when made. For any statements that 3 are alleged to be false or misleading by omission, Plaintiff must clearly specify what the omission 4 is and why the omission is material. This must be done on a statement-by-statement basis. 2 ii. 5 Section 10(b) and Rule 10b–5(a) and (c) Scheme Liability Claim Plaintiff’s CCAC also alleges that Defendants violated Rules 10b–5(a) and (c) by engaging 6 7 in a “plan, scheme and course of conduct which was intended to . . . deceive[] the investing 8 public” and “cause[] Lead Plaintiff and other members of the Class to purchase Aqua Metals’ 9 securities at artificially inflated and distorted prices.” CCAC ¶ 365; see also id. ¶¶ 366–72. As Plaintiff points out, Defendants did not challenge the scheme liability claim in their opening brief, 11 United States District Court Northern District of California 10 and for this reason alone the Court could deny their motion to dismiss this claim. See Eberle v. 12 City of Anaheim, 901 F.2d 814, 817-18 (9th Cir. 1995) (ruling that issues not raised in opening 13 brief may not properly be raised for the first time in reply brief). Nonetheless, because Defendants 14 contend that they did not separately address this claim because it is “a dressed-up 15 misrepresentation/omission claim which Defendants addressed in detail” in their opening brief, the 16 Court addresses that argument. See Dkt. No. 101 (“Reply”) at 2. To allege a violation of Rule 10b–5(a) and (c) and 17 C.F.R. § 240.10b–5(a) and (c), a 17 18 plaintiff must allege the same elements as a Rule 10b–5(b) claim, except that a scheme liability 19 claim cannot be based solely on false or misleading statements, but must instead involve deceptive 20 conduct “beyond those misrepresentations or omissions.” WPP Luxembourg Gamma Three Sarl 21 v. Spot Runner, Inc., 655 F.3d 1039, 1057 (9th Cir. 2011). Thus, to plead a scheme liability claim, 22 a plaintiff must allege: “(1) the defendant committed a deceptive or manipulative act in 23 furtherance of the alleged scheme; (2) scienter; (3) a connection between the alleged deceptive or 24 manipulative act and the purchase or sale of a security; (4) reliance upon the alleged deceptive or 25 26 27 28 Because Defendants argue that the majority of Plaintiff’s alleged misstatements are nonactionable forward-looking statements, the Court strongly advises Plaintiff, if it chooses to amend, to clearly identify which potentially forward-looking statements it believes are unprotected “mixed” statements and what the alleged “present fact[s]” in those statements are. See Opp. at 26– 28. 13 2 1 manipulative act; (5) economic loss; and (6) loss causation.” Rabkin v. Lion Biotechnologies, Inc., 2 No. 17-CV-02086-SI, 2018 WL 905862, at *16 (N.D. Cal. Feb. 15, 2018); see also New York City 3 Employees’ Ret. Sys. v. Berry, 616 F. Supp. 2d 987, 996 (N.D. Cal. 2009). Scheme liability 4 allegations are subject to Rule 9(b)’s heightened pleading standards. In re Bank of Am. Corp., No. 5 09-MD-02014 JSW, 2011 WL 740902, at *6 (N.D. Cal. Feb. 24, 2011) (citing ATSI Commc’ns, 6 Inc. v. Shaar Fund, Ltd., 498 F.3d 87, 102 (2d. Cir. 2007)). 3 The Court finds that the alleged misconduct is distinct from and goes beyond the making 7 8 of the alleged misrepresentations. The purportedly deceptive conduct at issue here is the 9 “orchestrat[ed] on-site visits and demonstrations” that “deliberately concealed problems concerning the commercialization of the Company’s AquaRefining process.” CCAC ¶ 367. As 11 United States District Court Northern District of California 10 alleged, Defendants used these invitational site visits to assuage analysts’ concerns in response to 12 skepticism in the market about whether the AquaRefining process was viable. Id. ¶¶ 224–25 13 (Defendant Clarke stating: “We believe the best way to address this misinformation is to openly 14 show analysts and investors our facility in operation as we continue to scale it up.” (emphasis in 15 original)). However, according to CWs, the modules were not actually able to operate for more 16 than an hour before they broke down. Id. ¶¶ 75, 78, 95. Plaintiff alleges that in light of that fact, 17 employees were told not to run the “machines until [the visitors] show up” and would receive a 18 call to start the machines about five minutes before visitors arrived. Id. ¶¶ 82, 84; see also id. 19 ¶¶ 82 (CW2 claiming they “only ran the machines when investors came to the plant”), 100 (“CW4 20 said, because the module could not operate for more than about an hour before it would break 21 down, CW4 had to start it at a time where it would run during the investors’ visit and not break 22 down.”). Defendants Clarke and Mould “ran the show” and would escort visitors around the plant 23 for only five to ten minutes and spend their remaining time in a conference room. Id. ¶¶ 90, 100. 24 As alleged, these staged glimpses of the Company’s facilities and processes presented a different 25 picture than what the CWs describe as the true state of affairs. Despite Defendants’ arguments to 26 27 28 As noted, Defendants only challenge Plaintiff’s scheme liability claim for failure to properly plead a deceptive or manipulative act that is not a mere recasting of Plaintiff’s Rule 10b–5(b) claim. See Reply at 2. Defendants do not argue that Plaintiff has failed to plead any of the other elements, so the Court does not address arguments Defendants have not raised. 14 3 1 the contrary, these acts are sufficiently alleged to have been fraudulent in and of themselves, 2 without depending on the alleged misrepresentations. See Reply at 3 n.3. 3 Plaintiff also claims that Defendants orchestrated these sham visits with the deliberate aim 4 of artificially inflating the value of Aqua Metals stock. CCAC ¶ 365. According to Plaintiff, after 5 these visits, Defendants issued press releases informing the market that visitors “were able to view 6 the critical processes at the AquaRefinery as they happened,” and requested that “analysts who 7 attended the visitor day [ ] update their coverage reports to reflect findings from the site visit.” Id. 8 ¶¶ 249–51. Defendant Clarke, in an apparent response to an accusation that the AquaRefining 9 process did not work, responded by saying that there have been “about 90 people through the facility watching [the AquaRefining modules] work now at some point, [and] some of those 90 11 United States District Court Northern District of California 10 people will start communicating … and explaining actually it does work.” Id. ¶ 279. These 12 alleged sham visits purportedly led analysts, with the encouragement of Defendants, to 13 disseminate reports containing misleading information about the process, when in truth the visits 14 concealed “problems” with the viability of the AquaRefining process, such as the inability of the 15 modules to operate for more than an hour. Id. ¶ 367. 16 Plaintiff has sufficiently alleged that Defendants intentionally engaged in a fraudulent 17 scheme to conceal material facts, thereby leading to the dissemination of untrue statements about 18 the commercial viability of the process. This alleged scheme went beyond the making of any 19 alleged misrepresentations and statements. Accordingly, the Court DENIES Defendants’ motion 20 to dismiss Plaintiff’s Section 10(b) and Rule 10b–5(a) and (c) scheme liability claim. 21 22 iii. Section 20(a) Control Person Liability Claim Plaintiff alleges a Section 20(a) claim against the Officer Defendants on a “control person” 23 theory of liability. CCAC ¶¶ 373–78. To prove a prima facie case under Section 20(a), plaintiff 24 must prove: “(1) a primary violation of federal securities laws”; and “(2) that the defendant 25 exercised actual power or control over the primary violator.” See Howard v. Everex Sys., Inc., 228 26 F.3d 1057, 1065 (9th Cir. 2000). Defendants do not argue that the Officer Defendants did not 27 have control; rather, they contend that the Section 20(a) claim must be dismissed because there 28 was no primary violation of federal securities laws. Mot. at 36–37. The Court finds that Plaintiff 15 1 has adequately pled a primary violation of Section 10(b) and Rule 10b–5(a) and (c), and now 2 addresses whether Plaintiff adequately pled that the Officer Defendants had “control” over Aqua 3 Metals. 4 “Whether [the defendant] is a controlling person is an intensely factual question, involving 5 scrutiny of the defendant’s participation in the day-to-day affairs of the corporation and the 6 defendant’s power to control corporate actions.” Howard, 228 F.3d at 1065 (alterations in 7 original). “The plaintiff need not show the controlling person’s scienter or that they ‘culpably 8 participated’ in the alleged wrongdoing.” Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d 9 1151, 1161 (9th Cir. 1996). If the plaintiff establishes that the defendant is a controlling person, a defendant is entitled to a good faith defense if the defendant “acted in good faith and did not 11 United States District Court Northern District of California 10 directly or indirectly induce the act or acts constituting the violation or cause of action.” Id. 12 “Allegations of day-to-day oversight of a company’s operations and involvement” have 13 been found sufficient to “presume control over the transactions.” Rabkin, 2018 WL 905862, at 14 *19. “[A]lthough a person’s being an officer or director does not create any presumption of 15 control, it is a sort of red light.” Arthur Children’s Tr. v. Keim, 994 F.2d 1390, 1397 (9th Cir. 16 1993). Because of the intensely factual nature of the control inquiry, some courts have found that 17 control liability claims can be dismissed at the motion to dismiss stage only if a plaintiff fails to 18 adequately plead a primary violation. See Loritz v. Exide Techs., No. 2:13-CV-2607-SVW-EX, 19 2014 WL 4058752, at *15 (C.D. Cal. Aug. 7, 2014) (citing Zucco Partners, 552 F.3d at 990); see 20 also Rabkin, 2018 WL 905862, at *19 (relying on Loritz); In re CytRx Corp. Sec. Litig., No. 21 CV141956GHKPJWX, 2015 WL 5031232, at *17 (C.D. Cal. July 13, 2015) (same). 22 Plaintiff alleges that the Officer Defendants, by virtue of their “high-level positions,” 23 “participation in and/or awareness of Aqua Metals’ operations,” and “direct and supervisory 24 involvement in the day-to-day operations of Aqua Metals,” controlled and influenced the 25 Company. CCAC ¶¶ 374–75. Given the Officer Defendants’ high-level positions (CEO, CFO, 26 and COO, see CCAC ¶¶ 31–33) and the fact that Defendants Clarke and Mould allegedly were 27 direct participants in the orchestration of the “dog and pony shows,” the Court finds that Plaintiff 28 16 1 has sufficiently pled that the Officer Defendants had the requisite control over Aqua Metals.4 See 2 In re CytRx, 2015 WL 5031232, at *17 (plausible that defendants had control “given that Plaintiffs 3 have successfully alleged primary liability against each of these Defendants, as it would be 4 illogical to conclude that they were not in control of their own potential Exchange Act 5 violations.”) The Court therefore DENIES Defendants’ motion to dismiss Plaintiff’s Section 6 20(a) control liability claim. B. Securities Act Claims 7 i. 8 Section 11 Claim Under Section 11 of the Securities Act, issuers, underwriters, and other participants in a 10 public securities offering are liable for material misstatements of fact or material omissions in a 11 United States District Court Northern District of California 9 registration statement. 15 U.S.C. § 77k. Plaintiff alleges that the offering documents in 12 connection with the November 21, 2016 public offering were false and misleading. CCAC 13 ¶¶ 187, 413–20. The offering documents include the November 15, 2016 Form 424B5 14 Preliminary Prospectus (which incorporates the September 2, 2016 Registration Statement) and a 15 November 17, 2016 Form 424B5 Prospectus Supplement. Id. ¶¶ 180–81, 380–82. For the same 16 reasons as discussed in the Court’s analysis of Plaintiff’s Rule 10b–5(b) claim, the Court finds that 17 Plaintiff’s puzzle pleading fails to fulfill the exacting pleading requirements of the PSLRA and 18 GRANTS the motion to dismiss as to the Section 11 claim. 5 See Section IV(A)(i), supra. 19 20 21 22 23 24 25 26 27 28 The Court finds that Defendant Murphy’s control person liability is a closer call. But given his high-level position, allegations of day-to-day involvement, and Defendants’ failure to address the control inquiry, the Court finds his control is adequately pled at this stage. 5 Although Defendants do not argue in their motion that Plaintiff lacks standing to pursue a Section 11 claim, as a threshold issue, the Court notes that it does not appear that Plaintiff has sufficiently alleged standing. “To have standing to bring suit under Section 11, a plaintiff must have purchased stock in the offering at issue, or trace later-purchased stock back to that offering.” Plichta v. SunPower Corp., 790 F. Supp. 2d 1012, 1022 (N.D. Cal. 2011) (citing Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076, 1080 n.4 (9th Cir. 1999)). A plaintiff must “do more than simply state in conclusory terms that its shares are ‘directly traceable,’” but rather, “plead facts from which a court may ‘reasonably infer’ that this is the case.” Rabkin, 2018 WL 905862, at *20. Because there is no scienter requirement under Section 11, the standing provision is narrow. In re Century Aluminum, 749 F. Supp. 2d at 978. 4 There are no allegations in the CCAC from which the Court may “reasonably infer” that Plaintiff purchased shares pursuant to the November 2016 public offering. And because this was not the Company’s initial public offering, see CCAC ¶ 30 (“Aqua Metals completed its IPO in August 2015 and its common stock trades on the NASDAQ”), it is not clear to the Court how Plaintiff will 17 ii. 1 Section 15 Control Person Liability Claim Plaintiff’s claim under Section 15 of the Securities Act is expressly premised on the 2 3 Section 11 violation. CCAC ¶¶ 422–26. Since Plaintiff fails to allege a Section 11 claim against 4 Defendants, the Section 15 claim must be DISMISSED. See Plichta, 790 F. Supp. 2d at 1023. 5 V. CONCLUSION Accordingly, the Court GRANTS IN PART IN PART AND DENIES IN PART 7 Defendants’ motion to dismiss and Plaintiff’s motion to strike. The Court DENIES Defendants’ 8 motion to dismiss the Section 10(b), Rule 10b–5(a) and (c) scheme liability claim and Section 9 20(a) control person liability claim, and GRANTS the motion to dismiss the Section 10(b), Rule 10 10b–5(b) false and misleading statements claim, Section 11 claim, and Section 15 control person 11 United States District Court Northern District of California 6 liability claim WITH LEAVE TO AMEND. In amending, Plaintiff is directed to comply with 12 the standards stated above. Plaintiff should only replead its Section 11 and Section 15 claims if it 13 can, in good faith, allege a sufficient basis for standing to pursue its Section 11 claim. Any 14 amended complaint must be filed within twenty-eight (28) days of the date of this order. 15 16 17 18 19 IT IS SO ORDERED. Dated: 8/14/2019 ______________________________________ HAYWOOD S. GILLIAM, JR. United States District Judge 20 21 22 23 24 25 26 27 28 be able to prove that any of its purchased shares were traceable to the November 2016 offering. See Plichta, 790 F. Supp. 2d 1012, 1022–23 (N.D. Cal. 2011) (“Plaintiffs have not explained, however, how even with discovery, they hope to be able to prove that any of their shares are traceable to the original offering, given that the shares are fungible and that millions of shares were already being traded on the open market at the time of the offering.”). And Plaintiff’s certifications do not shed any light as to whether its shares were purchased pursuant to the November 2016 offering. See CCAC Exs. A, B. 18

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