Nakkhumpun v. Taylor, et al.,
ORDER denying 51 Motion to amend, and denying as moot 50 Motion to vacate or reconsider the final judgment entered in this case, by Judge Christine M. Arguello on 1/29/14.(dkals, )
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge Christine M. Arguello
Civil Action No. 12-cv-01038-CMA-CBS (Consolidated for all purposes with
Civil Action No. 12-cv-01521-CMA-CBS)
PATIPAN NAKKHUMPUN, Individually and on behalf of all others similarly situated,
DANIEL J. TAYLOR,
JOHN R. WALLACE,
CARL E. LAKEY, and
KEVIN K. NANKE,
ORDER DENYING PLAINTIFFS’ MOTION FOR LEAVE TO AMEND
This matter is before the Court on Plaintiffs’ motion for leave to amend their
consolidated complaint. (Doc. # 50.) Defendants filed their response on November 18,
2013 (Doc. # 53), and Plaintiffs filed their reply on December 5, 2013 (Doc. # 54).
Plaintiffs’ motion is ripe for review.
This is a securities fraud class action in which a class of former shareholders
of Delta Petroleum Corporation (“Delta” or the “Company”) alleges that some of the
Company’s former officers and directors violated Securities Exchange Act §§ 10(b) and
20(a) and S.E.C. Rule 10b-5. (Doc. # 36.) On September 30, 2013, the Court granted
Defendants’ Motion to Dismiss the entire complaint, concluding that Plaintiffs failed to
allege all elements 1 required to state a claim under Rule 10b-5 with respect to each
alleged instance of prohibited conduct. See Nakkhumpun v. Taylor, 2013 WL 5446081
(D. Colo. 2013) (unpublished). However, the Court also afforded Plaintiffs the
opportunity to overcome the pleading deficiencies via an amended complaint.
Accordingly, Plaintiffs filed the instant Motion for Leave to Amend on October 28, 2013,
along with their Proposed Amended Complaint (“PAC”). (Doc. # 51.)
II. STANDARD OF REVIEW
In considering whether to grant Plaintiffs’ motion for leave to amend their
complaint, the Court “should freely grant leave [if] justice so requires.” Fed. R. Civ. P.
15(a)(2). However, the Court “may refuse to allow amendment if it would be futile.”
Anderson v. Suiters, 499 F.3d 1228, 1238 (10th Cir. 2007) (citation omitted).
Amendment would be futile if, even after making the proposed amendments, the
complaint would be subject to dismissal. Id. (citation omitted).
This inquiry requires the Court to evaluate the PAC in its entirety, Adams v.
Kinder-Morgan, Inc., 340 F.3d 1083, 1092 (10th Cir. 2003), to accept the PAC’s wellpleaded allegations as true, and to construe them in the Plaintiffs’ favor. See Williams
v. Meese, 926 F.2d 994, 997 (10th Cir. 1991). But bare, conclusory allegations that lack
a factual basis will receive no favorable review or construction. See Brown v. Zavaras,
63 F.3d 967, 972 (10th Cir. 1995); see also Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
To state a claim under Rule 10b-5 for securities fraud, a plaintiff must allege that:
“(1) the defendant made an untrue or misleading statement of material fact, or failed to state
a material fact necessary to make statements not misleading; (2) the statement complained of
was made in connection with the purchase or sale of securities; (3) the defendant acted with
scienter, that is, with the intent to defraud or recklessness; (4) the plaintiff relied on the
misleading statements; and (5) the plaintiff suffered damages as a result of his reliance.”
Adams, 340 F.3d at 1095.
(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007)). To avoid dismissal
under Rule 12(b)(6), the PAC must contain “enough facts to state a claim to relief that
is plausible on its face.” Twombly, 550 U.S. at 570. The PAC must raise more than a
“sheer possibility” that Defendants violated Rule 10b-5. Iqbal, 556 U.S. at 678 (citations
and quotation marks omitted).
Because the PAC alleges securities fraud, it must “state with particularity the
circumstances constituting the fraud.” Fed. R. Civ. P. 9(b). That requires stating
the “time, place, and contents of the false representation, and the identity” of the
statement’s maker. United States ex rel. Sikkenga v. Regence Bluecross Blueshield,
472 F.3d 702, 726-27 (10th Cir. 2006) (quotation marks and citations omitted).
In addition, the PAC must specify “the reason or reasons the statement is misleading.”
15 U.S.C. § 78u-4(b)(1). With respect to the scienter requirement, the PAC must “state
with particularity facts giving rise to a strong inference that the defendant acted with the
required state of mind.” 15 U.S.C. § 78u-4(b)(2). Notwithstanding the heightened
pleading standards dictated by Rule 9(b) and 15 U.S.C. § 78u-4(b), pleadings should
be “simple, concise, and direct, and [should] be construed as to do substantial justice,”
Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1252 (10th Cir. 1997) (quotation
marks, citation, and lacuna omitted), and the “concept of notice pleading” remains
intact. Adams, 340 F.3d at 1095-96 (observing that the “PSLRA did not . . . purport to
move up the trial to the pleading stage”).
In seeking leave to amend, Plaintiffs argue that the PAC would overcome two
deficiencies that doomed several of their claims in the initial Amended Complaint (“AC”).
First, with respect to Defendants’ alleged misstatements concerning the reason Delta’s
negotiations with Opon ended, Plaintiffs offer a new theory of loss causation. Second,
they seek to revive claims based on alleged misstatements concerning improvements
in Delta’s liquidity and financial condition by articulating a new reason that those
statements were false or misleading. The Court considers each of these proposed
amendments in turn, ultimately concluding that none of the claims Plaintiffs seek to
revive could survive a motion to dismiss.
STATEMENTS CONCERNING REASONS OPON NEGOTIATIONS
Initial Allegations and the Court’s Order
On March 18, 2010, Defendants announced publicly that Delta had entered a
“non-binding letter of intent” to sell a portion of its Vega Assets to Opon International
(“Opon”) for $400 million. (Doc. # 36 at 36.) The announcement also indicated that
Delta and Opon were negotiating with hopes of reaching a definitive agreement. (Id.)
Defendants subsequently announced on May 10, 2010, and June 1, 2010, that those
negotiations were still moving forward. (Id. at 37, 43.) Then, on July 7, 2010,
Defendants announced that negotiations had ended, explaining that “Opon was unable
to obtain financing for the transaction on the agreed upon terms” and that “Opon was
unable to arrange financing for a transaction on terms acceptable to us.” (Id. at 44-45.)
In their AC, Plaintiffs alleged that Defendants’ July 7, 2010 announcement
misled the public concerning the reason negotiations ended. According to Plaintiffs,
Defendants’ explanations concealed the true reason negotiations ended, namely, that
Opon had backed away from the proposed $400 million price. (Id. at 44-45.) In its
September 30, 2013 Order (the “Order”), the Court agreed that Plaintiffs had adequately
alleged the statement was misleading, observing that it was bound to construe the
allegations in the light most favorable to the plaintiffs. Nakkhumpun, 2013 WL 5446081,
at *17. The Court reasoned that Defendants’ statements reasonably could have been
interpreted to mean that negotiations ended because financing was unavailable, which
would have been inconsistent with the reason Plaintiffs allege to be true. Id. 2
Nonetheless, the Court dismissed Plaintiffs’ claim based on the July 7, 2010
statement because Plaintiffs’ allegations failed to show that the misstatement caused
their losses. Id. at *17-18. Plaintiffs argued generally that the misstatement artificially
propped up Delta’s share price until November 9, 2011, when Defendants disclosed
the $420.1 million impairment of the Vega Assets and the likelihood of bankruptcy.
Plaintiffs alleged that those disclosures corrected the misstatement and caused the
share price to decline significantly the following day. (Doc. # 42 at 29.) The Court
rejected that argument, however, because neither the asset impairment nor the
announcement concerning the likelihood of bankruptcy related back to, and thus
corrected, the alleged misstatement. Nakkhumpun, 2013 WL 5446081, at *17-18.
The Court assumed, without deciding, that the AC adequately alleged scienter.
Id. at *17 n.7.
In the instant motion, Plaintiff packages essentially the same facts in a new
theory of loss causation called “materialization of the concealed risk.” (Doc. # 51
at 8-11.) See also In re Williams Sec. Litig., 558 F.3d 1130, 1137 (10th Cir. 2009);
Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161, 173 (2d Cir. 2005). Before evaluating
whether Plaintiff’s new theory could plausibly suggest that Defendants’ alleged
misstatement caused Plaintiffs’ losses, the Court will review the legal standards
applicable to the “materialization of the concealed risk” theory of loss causation.
Legal Standards of the “Materialization of the Concealed Risk” Theory
The Private Securities Litigation Reform Act of 1995 (“PSLRA”), Pub. L. No. 10467, 109 Stat. 737 (codified as amended in scattered sections of Title 15 of the United
States Code), requires a private plaintiff asserting a Rule 10b-5 action to prove that the
defendant’s act or omission “caused the loss for which the plaintiff seeks to recover
damages.” 15 U.S.C. § 78u-4(b)(4). This “loss causation” element establishes “the
causal link between the alleged misconduct and the economic harm ultimately suffered
by the plaintiff.” Emergent Capital Inv. Mgmt. LLC, v. Stonepath Group, Inc., 343 F.3d
189, 197 (2d Cir. 2003).
A plaintiff must allege loss causation in the complaint. Dura Pharmaceuticals,
Inc. v. Broudo, 544 U.S. 336, 346 (2005). That means alleging “something beyond the
mere possibility of loss causation.” Twombly, 550 U.S. at 557-58 (quoting Dura, 544
U.S. at 347). Indeed, the plaintiff must allege “a facially ‘plausible’ causal relationship
between the fraudulent statements or omissions and plaintiff’s economic loss.”
Lormand v. US Unwired, Inc., 565 F.3d 228, 255-58 (5th Cir. 2009) (discussing Dura
The materialization of the concealed risk theory allows a plaintiff to plead loss
causation by alleging that the defendant’s misstatement fraudulently concealed a risk
that subsequently materialized to cause the plaintiff’s loss. See Lentell, 396 F.3d at
172-73 (citations omitted). This theory requires a plaintiff to allege two things. First,
the plaintiff must allege that the risk that caused the loss was within the zone of risk
concealed by the misrepresentation. See id. at 173. Second, the plaintiff must allege
that the plaintiff’s security lost value because the concealed risk materialized. See id.
This causal “relationship between the plaintiff’s investment loss and the information
misstated or concealed by the defendant” must be “sufficiently direct” and not
“attenuated.” Id. at 174 (summarizing Second Circuit precedents).
The passage of time and intervening factors may preclude establishing that
a concealed risk caused a loss. In re Williams, 558 F.3d at 1143. In Williams, the
defendants—officers and directors of a parent company—allegedly misrepresented
(1) the reasons for spinning off a subsidiary; (2) the subsidiary’s chances of survival
after the spin-off; and (3) the adequacy of the subsidiary’s capitalization. 558 F.3d at
1133. They told the public that the subsidiary and parent each had great prospects
that could be pursued best as separate companies. Id. They also publicly cheered the
subsidiary’s strong position and adequate financial resources. Id. In fact, however, the
defendants wanted to get rid of the subsidiary, whose capital needs and growing debt
were a drain on the parent company’s balance sheet. Id. Nineteen months after the
spin-off was announced, the former subsidiary disclosed that it was considering
bankruptcy and, about two months after that, declared bankruptcy. The Tenth Circuit
held that the “causal relationship between the . . . false statements and [the
subsidiary’s] eventual bankruptcy years later [was] too remote to constitute a corrective
disclosure.” Id. at 1142-43. Although WCG’s bankruptcy may have been a likely
possibility at the time of the spin-off and misstatement, there were “too many intervening
causes to say that bankruptcy was [the subsidiary’s] legally foreseeable destiny such
that its trading price at bankruptcy equaled its true value on the day the spin-off was
announced.” Id. at 1143.
The Court must distinguish carefully between truly corrective disclosures and
“every bit of negative information” about Delta that is allegedly connected to the “initial
misrepresentation that overstated [Delta’s] chances of success.” See id. at 1140.
The federal securities laws’ anti-fraud provisions do not “provide investors with broad
insurance against market losses, but . . . protect[s] them against those market losses
that misrepresentations actually cause.” Dura, 544 U.S. at 345. At the same time,
the standard applied must not be too exacting. In re Williams, 558 F.3d at 1140.
Loss Causation Analysis of Plaintiff’s Proposed Amendments
The fact allegedly concealed by Defendants’ misstatement was that Delta’s
negotiations with Opon ended because Opon had backed away from the $400 million
price and offered a lower price that Delta would not accept. (Doc. # 48 at 36-37.)
In their motion to amend, Plaintiffs identify three specific risks that they argue were
within the zone of risk concealed by Defendants’ July 7, 2010 misstatement: (1) the
Vega Assets were not worth $400 million, (2) the Vega Assets were not marketable at
or near the $400 million price, and (3) Delta’s inability to sell the assets at a sufficiently
high price would force it to file for bankruptcy. (Doc. # 51 at 11.) According to Plaintiff,
those risks materialized when Defendants disclosed approximately sixteen months later,
on November 9, 2011, that (1) it had not received an offer to buy the assets for
an adequate price, and (2) it would have to file for bankruptcy as a result. (Id.)
Having considered these allegations, the Court concludes that only the second
risk was within the zone of risk concealed by Defendants’ misstatement. With respect
to the first risk alleged concerning the value of the Vega Assets, Defendants owed no
legal duty to disclose the value that Opon allegedly assigned to those assets. As the
Court observed in its Order, “the opinion of a separate entity about the value of a
corporation’s assets need not be disclosed. That is especially so when, as here, the
separate entity’s interest is directly opposed to that of the corporation.” Nakkhumpun,
2013 WL 5446081, at *15 n.6. Without a duty to disclose, this alleged omission cannot
support Plaintiffs’ Rule 10b-5 claim.
The third risk alleged—that Delta would enter bankruptcy—was not within the
zone of risk concealed by Defendants’ alleged misrepresentation. Though Delta’s
bankruptcy might have been possible or even likely on July 7, 2010, when Defendants
made the allegedly misleading statement, there were too many intervening events to
say that bankruptcy was a legally foreseeable result of that misstatement. See In re
Williams, 558 F.3d at 1143. For example, in July 2011, with the help of investment
banks Macquarie Capital and Evercore Group, Delta initiated another search for a
strategic transaction that would maximize shareholder value and reduce Delta’s debt.
(Doc. # 51-2 at 13.) That search included sending marketing materials to seventy-six
potential strategic partners, twenty of whom signed confidentiality agreements and
received offering memoranda. Eight of those twenty participated in data room
presentations and engaged in due diligence. Delta’s chief restructuring officer
described the marketing process, which lasted several months, as “extensive and
thorough.” (Id. at 14.) In fact, it was the unsuccessful end of this 2011 campaign, not
the 2010 campaign, that Delta referenced when disclosing on November 9, 2011, that
no adequate offer had materialized for Delta or its assets. (See id. at 88.) Considering
these intervening events, it is implausible that Delta’s eventual announcement of a likely
bankruptcy was the foreseeable result of Opon’s rejection of the $400 million price
sixteen months earlier.
Only the second risk alleged—the risk that Opon might not sell the Vega Assets
for a price at or near $400 million—was within the zone of risk concealed by
Defendants. See Nakkhumpun, 2013 WL 5446081, at *17 (Defendants’ “misstatement
concealed the risk that the assets might not fetch as high a price as Delta and its
shareholders hoped.”) In light of the “extensive and thorough” search for a strategic
transaction that occurred during the sixteen months between Defendants’ misstatement
and the announcement that allegedly constituted the materialization, it appears to the
Court that the relationship between the loss and the risk concealed was too “attenuated”
and insufficiently “direct.” See Lentell, 396 F.3d at 174. However, whether an
intervening event broke the chain of causation is a fact issue the Court should not
decide on a Rule 12(b)(6) motion to dismiss. See id.
Nevertheless, notwithstanding the causation issue, the PAC could not survive a
Rule 12(b)(6) motion because it fails to allege a strong inference that Defendants made
this statement with scienter.
Strong Inference of Scienter
Plaintiffs must allege facts that would give rise to a strong inference that
Defendants acted with scienter when they failed to disclose that negotiations with Opon
ended because Opon was unwilling to pay $400 million. 3 See 15 U.S.C. § 78u-4(b)(2).
To establish scienter, Plaintiffs must allege that Defendants acted with knowledge or
reckless indifference to the chance that the statement would mislead investors;
negligence does not suffice. See In re Level 3 Comm’s, Inc. Sec. Litig., 667 F.3d 1331,
1344-45 (10th Cir. 2012) (citing Makor Issues & Rights, Ltd. v. Tellabs, Inc., 513 F.3d
702, 709 (7th Cir. 2008)); City of Philadelphia v. Fleming Cos., Inc., 264 F.3d 1245,
1264 (10th Cir. 2001) (citing Schlifke v. Seafirst Corp., 866 F.2d 935, 946 (7th Cir.
In its prior Order, the Court recognized two inferences that reasonable investors
could have drawn from Defendants’ July 7, 2010 explanation concerning the termination
of negotiations. Of those inferences, one was inconsistent with what Plaintiffs allege to
be the true explanation. Consistent with the Court’s obligation to construe the factual
allegations in Plaintiffs’ favor, the Court concluded that Defendants’ alleged statement
In its prior Order, the Court did not decide whether the AC met the scienter requirement.
See Nakkhumpun, 2013 WL 5446081, at *17 n.7.
was plausibly misleading. Plaintiffs alleged “more than a sheer possibility” that the July
7, 2010 statement was misleading. Nakkhumpun, 2013 WL 5446081, at *17 (citing
Iqbal, 556 U.S. at 678).
But a bare, plausible inference that a defendant acted with the requisite state of
mind falls short of the required strong inference. See Tellabs, Inc. v. Makor Issues &
Rights, Ltd., 551 U.S. 308, 314 (2007). In evaluating allegations of scienter, the Court
compares the plaintiff’s proposed inference that the defendant acted with the culpable
state of mind with “nonculpable explanations for the defendant’s conduct.” Id. at 32324. A complaint raises a strong inference of scienter only if “a reasonable person would
deem the inference of scienter cogent and at least as compelling as any opposing
inference one could draw from the facts alleged.” Id. at 324.
In this case, Plaintiffs allege that Defendants misstated the reason that the Opon
negotiations broke down in order to “signal to potential strategic partners—and,
consequently, to mislead shareholders—that the announced $400 million price
accurately reflected the value of those assets.” (Doc. # 51-2 at 101.) Plaintiffs also
allege that Defendants were motivated to present potential buyers with an “appealing
investment.” (Id. at 97.) These allegations all but concede that misleading
shareholders was only a side-effect of Defendants’ efforts to obtain the best outcome
for those shareholders. Announcing publicly that Opon had offered a lower price almost
certainly would have prompted other potential buyers to lower their bids, likely
devastating any remaining chance for Delta to sell the assets for a price in the
neighborhood of $400 million. In order to fulfill their fiduciary duties to maximize
shareholder value, Defendants were obligated to carefully craft the July 7, 2010
disclosure to avoid that outcome. Cf. Paramount Commc’ns Inc. v. QVC Network Inc.,
637 A.2d 34, 43 (Del. 1993) (When pursuing a sale or change of control transaction,
directors must act “reasonably to seek the transaction offering the best value
reasonably available to the stockholders.”) Considering this probable reason for
Defendants’ July 7, 2010 statement, along with the fact that even a close reading of the
July 7, 2010 statement only plausibly suggests that the statement was misleading, the
strongest available inference is that Defendants may have been negligent concerning
the possibility that their statement would mislead shareholders. Cf. In re Level 3, 667
F.3d at 1345 (reasoning that the court’s difficulty finding the statement misleading
suggested negligence at most).
In addition to this circumstantial evidence of scienter, “motive can be a relevant
consideration” and “personal financial gain may weigh heavily in favor of a scienter
inference.” Tellabs, 551 U.S. at 325. “But general motives for management to further
the interests of the corporation fail to raise an inference of scienter.” In re Level 3, 667
F.3d at 1346. Plaintiffs allege that Defendants issued the misleading statement to
present an “appealing investment” opportunity to potential buyers so that they could
keep the company afloat and thus continue receiving their then-existing generous
compensation. (Doc. # 51-2 at 97.) This alleged motive falls far short of raising
an inference of scienter. See In re Level 3, 667 F.3d at 1346 (holding that even
compensation tied to stock performance “does not ordinarily indicate scienter”).
Therefore, the Court concludes that the PAC fails to raise a strong inference that
Defendants made the July 7, 2010 statement with knowledge of or reckless indifference
to the possibility it could mislead shareholders.
FALSITY OF STATEMENTS CONCERNING LIQUIDITY AND FINANCIAL
The Court now turns to Plaintiffs’ attempts to revive their claims based on
allegations that Defendants made fraudulent statements concerning Delta’s liquidity and
financial condition in March 2010 and March 2011. In the AC, Plaintiffs alleged that two
statements made by Defendant Wallace on March 11, 2010, and one statement by
Defendant Lakey on March 16, 2011, were materially false or misleading. In its Order,
the Court held that the AC failed to allege that these three statements were false or
misleading. Plaintiffs argue that their PAC overcomes the inadequate allegations of
Defendant Wallace’s March 11, 2010 Statements
First, in a March 11, 2010 press release describing Delta’s results from the
previous year and quarter, Defendant Wallace stated that Delta’s “liquidity situation
ha[d] also improved materially.” (Doc. # 35 at 33.) In its Order, the Court reasoned that
Defendant Wallace’s statement essentially summarized “the several ways Delta’s
liquidity had improved.” (Doc. # 48 at 15.) Because Plaintiffs failed to allege that any of
the specific improvements summarized were false, the Court concluded that Plaintiffs
had failed to plead the statement was false. (Id.)
Second, in an investor conference call that also occurred on March 11, 2010,
Defendant Wallace asserted that the Company was in “a far better liquidity and financial
situation” than at the same time the previous year. (Doc. # 35 at 34.) The Court
reasoned that the statement communicated only that Delta’s liquidity and financial
condition were far better on March 11, 2010, the day Defendant Wallace made the
statement, than one year earlier. (Doc. # 48 at 15.) The Court concluded that the
alleged “more acute” problems and debt default that occurred in the intervening year
failed to contradict the proposition that the Company’s liquidity and financial situation
was better in March 2010 than March 2009. (Id. at 15-16.)
To overcome these deficiencies, Plaintiffs first add a factual clarification, alleging
specifically that Delta experienced more acute liquidity problems and defaulted on its
credit facility before Defendant Wallace made the March 11, 2010 statements. (Doc.
# 51 at 13.) The clarification adds to Plaintiffs’ other allegations that Delta faced serious
challenges during the year between March 2009 and March 2010. However, it does not
cast doubt on the specific improvements summarized in the first statement or contradict
the proposition that Delta’s liquidity position was better on March 11, 2010, than a year
earlier. Consequently, the factual clarification does not alter the conclusion the Court
reached in its Order. See Nakkhumpun, 2013 WL 5446081 at *7.
Aside from the factual clarification, Plaintiffs also articulate a new reason that
Defendant Wallace’s statements were false by focusing on the words “materially” and
“far better.” (Doc. # 51 at 14.) Specifically, Plaintiffs argue that Delta’s liquidity position
deteriorated so much between March 2009 and March 2010 that, even if it was accurate
to summarize specific events in 2009 as having improved Delta’s liquidity, it was false to
characterize the improvement as a “material” one. Likewise, even if Delta’s liquidity and
financial condition did improve between March 2009 and March 2010, it was false to say
that Delta’s liquidity and financial position were “far better” in March 2010 than March
2009. (Id. at 14.)
In its previous Order, the Court deemed Defendant Wallace’s statements
material for the specific reason that they used the terms “liquidity” and “cash flow,”
which have “set meanings” and thus can be objectively verified. Nakkhumpun, 2013
WL 5446081 at *6. The objectively verifiable portions of these representations were
that the “liquidity situation ha[d] also improved” and that Delta was in a “better liquidity
and financial situation.” In contrast, the adjectives “materially” and “far” are immaterial
statements of corporate optimism that are incapable of objective verification. See In re
Gold Resource Corp. Sec. Litig., --- F. Supp. 2d ----, ----, 2013 WL 3724918, at *13
(D. Colo. 2013) (“[L]abeling the production rate as ‘record’ or the growth rate as
‘aggressive’ is a good example of ‘corporate optimism’ or ‘mere puffing’ that is ‘not
capable of objective verification.’” (quoting Grossman v. Novell, 120 F.3d 1112, 1119
(10th Cir. 1997)). Therefore, Plaintiffs’ new theory fails not on the falsity element but
on the materiality element. 4
Defendant Lakey’s March 16, 2011 Statement
Finally, the Court turns to Defendant Lakey’s statement on March 16, 2011:
“These new cost control measures substantially improve our EBITDAX and cash flow
which, combined with increased production at the Vega Area, provide value to our
The Court notes that because these adjectives are not subject to objective verification it
would be difficult to determine whether a reasonable investor would find the characterizations
inconsistent with the facts on the ground. See In re Level 3, 667 F.3d at 1342.
shareholders.” (Doc. ## 36 at 57; 51-1 at 66.) In its Order, the Court concluded that,
although asserting a substantial improvement in cash flow was material, Plaintiffs failed
to adequately plead that the statement was false. (Doc. # 48 at 13, 16.) That was
because the facts alleged to be inconsistent with Defendants’ statement consisted
of conclusory allegations and lacked substantiating facts. (Id. at 17.)
To correct the deficiency, Plaintiffs have added three, more specific allegations,
but not one is inconsistent with Defendants’ statement. The statement expressly
attributes the substantial improvement in cash flow to Delta’s implementation of new
cost controls. (Doc. # 36 at 57.) Notably, Defendants did not state only that cash flow
substantially improved, but rather that “new cost control measures” had improved cash
flow. For that statement to be false, Plaintiffs would have to allege facts showing that
the cost control measures did not substantially improve Delta’s cash flow. Plaintiffs
supplemented the AC with allegations (1) that Delta held checks past due; (2) that its
senior lenders assigned their rights in Delta’s debts to Macquarie because they were
“fatigued” with Delta’s inability to pay, and (3) that Delta was “desperately seeking
strategic alternatives and was ‘talking about anything that would stick to the wall.’”
Because none of these indicates anything about cost control measures or their impact
on cash flow, not one is inconsistent with Defendants’ statement. Therefore, the PAC
fails to allege that Defendant Lakey’s March 16, 2011 statement was false.
For the foregoing reasons, it is ORDERED that Plaintiffs’ motion to amend
(Doc. # 51) is DENIED. It is FURTHER ORDERED that Plaintiffs’ motion to vacate
or reconsider the final judgment entered in this case (Doc. # 50) is DENIED as moot.
DATED: January 29 , 2014
BY THE COURT:
CHRISTINE M. ARGUELLO
United States District Judge
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