Fries v. Northern Oil and Gas, Inc. et al

Filing 48

OPINION AND ORDER re: 38 MOTION to Dismiss the Consolidated Amended Complaint filed by Michael L. Reger, 36 MOTION to Dismiss the Consolidated Amended Complaint. filed by Thomas W. Stoelk, Northern Oil and Gas, Inc. For the aforementioned reasons, the Defendants' motion to dismiss is GRANTED without prejudice. If Plaintiff chooses to amend the CAC, he must do so by Thursday, January 25, 2018. The Clerk of the Court is respectfully directed to terminate the motion, Docs. 36, 38, 46. (As further set forth in this Order.) ( Amended Pleadings due by 1/25/2018.) (Signed by Judge Edgardo Ramos on 1/10/2018) (cf)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
JEFFREY FRIES, Individually and On Behalf of
All Others Similarly Situated,
Plaintiff,
OPINION AND ORDER
- against 16 Civ. 6543 (ER)
NORTHERN OIL AND GAS, INC., MICHAEL L.
REGER, and THOMAS W. STOELK,
Defendants.

Ramos, D.J.:
This class action arises out of alleged violations of the Securities Exchange Act of 1934
by Northern Oil and Gas, Inc. (“Northern Oil”), Michael L. Reger (“Reger”), and Thomas W.
Stoelk (“Stoelk,” collectively, the “Defendants”). Lead plaintiff Matthew Atkinson (“Plaintiff”
or “Atkinson”) asserts causes of action individually and on behalf of others similarly situated
against Defendants for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and Rule 10b–5 promulgated thereunder. Plaintiff generally alleges that Defendants made
false and misleading statements in their public filings and comments. Before this Court is
Defendants’ motion to dismiss the Consolidated Amended Complaint (“CAC”) in its entirety
pursuant to the Federal Rule of Civil Procedure 12(b)(6).
For the reasons set forth below, Defendants’ motion is GRANTED without prejudice.

I.

Background
A.

Factual Background 1
1. Parties

Plaintiff brings this action individually and on behalf of all persons, other than
Defendants, who purchased or otherwise acquired Northern Oil securities from March 1, 2013 to
August 15, 2016 (the “Class Period”). CAC ¶ 1.
Northern Oil is an independent energy company engaged in the acquisition, exploration,
development, and production of oil and natural gas properties in the United States, primarily
holding interests in the Williston Basin of North Dakota and Montana. Id. ¶¶ 2, 31. It was cofounded by Reger and Ryan Gilbertson (“Gilbertson”), a non-party, in 2006. Id. ¶¶ 4-5, 32. In
2007, Northern Oil became a public company through a reverse merger whereby it merged into a
company that had publicly-traded stock. Id. ¶ 33. It is incorporated in Minnesota and is
headquartered in Wayzata, Minnesota. Id. ¶¶ 3, 25.
The two individual Defendants occupied executive positions at Northern Oil during the
Class Period. Reger served as Northern Oil’s Chief Executive Officer (“CEO”) from 2007 until
his termination on August 16, 2016. Id. ¶ 26. Reger sold over 550,000 shares of Northern Oil
common stock during the Class Period for tax purposes. Id.; Doc. 41 (“Hammel Decl.”) Ex. 2036. Stoelk served as Northern Oil’s Chief Financial Officer (“CFO”) at all relevant times, and
became the interim CEO upon Reger’s termination. CAC ¶ 28. Stoelk sold over 78,000 shares
of Northern Oil common stock during the Class Period for tax purposes. Id.; Hammel Decl. Ex.
4-19.

1

The following facts are drawn from allegations contained in the CAC, Doc. 25, which the Court accepts as true for
purposes of the instant motion, and matters subject to judicial notice. See New York Pet Welfare Ass’n, Inc. v. City of
New York, 850 F.3d 79, 86 (2d Cir. 2017) (citation omitted).

2

2.

Reger’s Conduct at Dakota Plains

In 2008, Reger and Gilbertson co-founded another company named Dakota Plains
Transport Inc., which became a public company named Dakota Plains Holdings, Inc. (“Dakota
Plains”) on March 22, 2012. CAC ¶ 34. Dakota Plains, a non-party, is a “transloading” facility
that loads crude oil into railway cars in New Town, North Dakota, and is wholly unrelated to
Northern Oil. Id. ¶¶ 5, 29. It is a Nevada corporation with its principal executive offices in
Wayzata, Minnesota. Id. ¶ 29.
Plaintiff alleges that Reger and Gilbertson improperly exercised control over Dakota
Plains. Id. ¶¶ 5, 35-51. Specifically, when Dakota Plains became a public company, Reger
controlled 21.4% of its stock and 33.3% of its promissory notes, and Gilbertson controlled 11%
of its stock and 38.9% of its promissory notes. Id. ¶¶ 26-27. However, in order to conceal the
full extent of their involvement, they did not hold any formal positions at Dakota Plains. Id. ¶
36. Instead, they named Reger’s father as CEO and Gilbertson’s father as President, and later
installed one of their friends as CEO. Id. ¶¶ 36, 40. Reger also held his Dakota Plains stock in
ten different accounts over which he had beneficial ownership, with each account holding no
more than 5% of the stock. Id. ¶¶ 48-51. Without disclosing their control or ownership, Reger
and Gilbertson used their influence to improperly obtain financial benefits for themselves,
including through a stock manipulation scheme. 2

2

Reger and Gilbertson caused Dakota Plains to issue promissory notes, which they purchased in large part. Id.
¶¶ 39, 41. Some of the promissory notes’ proceeds were used to pay shareholder dividends for Reger and
Gilbertson’s benefit. Id. ¶ 39. Furthermore, Gilbertson, with Reger’s knowledge and consent, directed Dakota
Plains to include an “additional payment” provision in the notes that allowed noteholders to receive bonus payments
based on the average price of Dakota Plains’ stock in the first twenty days of public trading. Id. ¶ 42. On May 15,
2012, Dakota Plains disclosed that noteholders were entitled to receive notes or stock worth $32,851,800 pursuant to
the additional payment provision. Id. ¶ 45. However, Dakota Plains failed to disclose that Reger and Gilbertson
were the main beneficiaries. Id.

3

On February 20, 2015, Dakota Plains reported Reger and Gilbertson’s potential violations
of securities laws at that company to the United States Securities and Exchange Commission
(“SEC”). Id. ¶ 52. Thereafter, the SEC sent Reger a Wells Notice 3 in connection with the
Dakota Plains investigation. Id. ¶¶ 15, 109. On August 16, 2016, after Reger informed Northern
Oil of the Wells Notice, Northern Oil terminated Reger. Id. On that day, Northern Oil stock fell
by 6.28%. Id. ¶ 110. On October 31, 2016, the SEC issued a cease and desist order against
Reger concerning his role at Dakota Plains, in which he agreed to cease and desist from violating
Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, and Sections 13(d) and 16(a) of the
Securities Exchange Act of 1934; and to make disgorgement and penalty payments. Id. ¶ 111;
see Hammel Decl. Ex. 3.
3.

Reger’s Conduct at Northern Oil

Plaintiff claims that, during the Class Period, Reger neglected his responsibilities as the
CEO of Northern Oil, and instead, appropriated Northern Oil resources to further his control of
Dakota Plains. CAC ¶ 55. Plaintiff relies on three confidential witnesses (“CWs”). CW 1, a
former executive assistant at Northern Oil headquarters from January 2009 through September
2015 who reported directly to Reger, asserts Reger went to the Northern Oil headquarters in
Wayzata, Minnesota three or four days a week for brief periods of time, and that Stoelk
effectively ran Northern Oil during Reger’s last few years at the company. Id. ¶ 58. At Northern
Oil headquarters, Reger worked on Dakota Plains matters, including holding meetings with
Dakota Plains directors and investors. Id. ¶¶ 60-61. CW 1 “regularly ferried Dakota Plainsrelated personnel . . . to and from Northern Oil headquarters.” Id. ¶ 61. Reger also used

3

A Wells Notice is a notice that the SEC sends to an individual or entity at the conclusion of an investigation
informing the recipient that the SEC’s enforcement division intends to recommend an enforcement action against
them. Id. ¶ 15 n. 2.

4

Northern Oil sponsored tours of Northern Oil facilities in North Dakota to pitch hedge funds and
other investment entities on Dakota Plains. Id. ¶ 62.
CW 2, a former vice president of engineering at Northern Oil headquarters from
November 2011 through November 2015 who reported directly to Reger and Stoelk, states that
Reger had little to no involvement in the day-to-day operations at Northern Oil, and instead,
spent most of his time pursuing acquisitions or working on matters related to Dakota Plains. Id.
¶ 64. He further attests that Reger’s role at Dakota Plains was an open secret at Northern Oil, of
which Stoelk was aware. Id. ¶¶ 65-66.
CW 3, a former vice president of operations for Dakota Plains in Wayzata, Minnesota
from April 2012 to February 2013, recalls spending more time in Northern Oil’s offices than
Dakota Plains’ own offices, which was located half a block away from Northern Oil’s
headquarters. Id. ¶¶ 53, 71. He states that “Dakota Plains functioned under the direction of
Northern Oil.” Id. ¶ 71.
4.

Defendants’ Alleged False or Misleading Representations

Plaintiff alleges that, in light of Reger’s misconduct, Defendants made fraudulent
representations and omissions in their public filings and other public comments. Specifically,
Northern Oil stated in each of its Form 10-Ks for the years ended December 31, 2012, December
31, 2013, December 31, 2014 and December 31, 2015 that it “adopted a Code of Business
Conduct and Ethics that applies to [Northern Oil’s] chief executive officer, chief financial officer
and persons performing similar functions [and that a] copy is available on [Northern Oil’s]
website at www.northernoil.com.” Id. ¶¶ 74, 89, 98, 103. Reger and Stoelk signed certifications
as to the accuracy of each of these public filings. See Northern Oil and Gas, Inc., Annual Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Form 10-K) (March 1,

5

2013); Northern Oil and Gas, Inc., Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (Form 10-K) (March 3, 2014); Northern Oil and Gas, Inc.,
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Form 10K) (February 27, 2015); Northern Oil and Gas, Inc., Annual Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 (Form 10-K) (March 3, 2016). Northern Oil’s
Code of Business Conduct and Ethics states in relevant part the following:
•

“It is the policy of [Northern Oil] that all employees and directors comply
strictly with all laws governing its operations and to conduct its affairs in
keeping with the highest moral, legal and ethical standards. In particular, senior
executives hold an important and elevated role in maintaining a commitment to
(i) honest and ethical conduct; (ii) full, fair, accurate, timely and understandable
disclosure in [Northern Oil]’s public communications, and (iii) compliance with
applicable government rules and regulations.” Id. ¶ 75 (emphasis omitted).

•

“[Northern Oil] proactively promotes ethical behavior. Employees should
report violations of applicable laws, rules and regulations, this Code or any
other code, policy or procedure of [Northern Oil] to appropriate personnel.
Officers of [Northern Oil] should report any such violation directly to the chief
executive officer and/or the chief financial officer. Employees and directors
are expected to cooperate in internal investigations of misconduct.” Id.

•

“All employees and directors should protect [Northern Oil]’s assets and ensure
their efficient use. All [Northern Oil] assets should be used for legitimate
business purposes only. The use of assets of [Northern Oil] for any unlawful
or improper purpose is strictly prohibited. Theft, carelessness, and waste have
a direct impact on [Northern Oil]’s profitability.” Id.

•

“A conflict of interest exists where one or both parties in a relationship receive
or give unfair advantage of preferential treatment because of the relationship
and the term ‘conflict of interest’ describes any circumstance that could cast
doubt on a person’s ability to act with total objectivity with regard to [Northern
Oil]’s interest. Conflicts of interest are prohibited as a matter of [Northern Oil]
policy. . . . All employees must conduct business in a manner that avoids even
the appearance of conflict between personal interests and those of [Northern
Oil]. . . . Also, employees are prohibited from directly or indirectly competing,
or performing services for any person or entity in competition with, [Northern
Oil].” Id.
6

Plaintiff asserts that these statements are materially false and/or misleading because (1) Northern
Oil’s policies and Code of Business Conduct and Ethics were inadequate to either detect or
prevent misconduct by Northern Oil officers, (2) Reger’s misconduct violated Northern Oil’s
assurance to investors that its executives would maintain honest conduct and adhere to applicable
laws and regulations, (3) Reger’s blatant misuse of Northern Oil’s assets violated Northern Oil’s
commitment to investors to safeguard those assets for legitimate purposes, and (4) Reger’s
involvement in Dakota Plains violated Northern Oil’s prohibition of conflicts of interest. Id.
¶¶ 78, 93, 102, 106.
Defendants also made certain representations concerning Reger’s personal experience in
the oil industry. Specifically, Northern Oil made the following alleged misrepresentations in its
2012, 2013, 2014 and 2015 10-Ks:
•

“To continue to develop our business, we rely on our management team’s
knowledge and expertise in the industry and will use our management team’s
relationships with industry participants, specifically those of Mr. Reger our
Chief Executive Officer, to enter into strategic relationships, which may take
the form of joint ventures with other private parties and contractual
arrangements with other oil and natural gas companies.” Id. ¶¶ 76, 91, 100, 105
(emphasis omitted).

•

“Michael L. Reger is a founder of our predecessor, Northern Oil and Gas, Inc.,
and has served as Chairman of the Board and Chief Executive Officer of our
company since March 2007. Mr. Reger has been involved in the acquisition of
oil and gas mineral rights for his entire career. Mr. Reger began working the
oil and gas leasing business for his family’s company, Reger Oil, in 1992 and
worked as an oil and gas landman for Reger Oil from 1992 until co-founding
Northern [Oil] in 2006. Mr. Reger holds a B.A. in Finance and an M.B.A. in
finance/management from the University of St. Thomas in St. Paul, Minnesota.
The Reger family has a history of acreage acquisition in the Williston Basin
dating to 1952.” Id. ¶¶ 77, 92, 101, 106 (emphasis omitted).

Reger also represented on August 14, 2013, October 2, 2013, October 17, 2013, November 12,
2013, August 20, 2014 and November 12, 2014 that he is “a fourth generation landman,” which
7

gave Northern Oil certain early advantages such as knowledge of the landscape and longstanding relationships with operators. Id. ¶¶ 79, 81, 83, 85, 94, 96. A Northern Oil executive
further represented on December 12, 2013 that Reger has “a four generation advantage on the
ground in [the Williston] [B]asin.” Id. ¶ 87.
Plaintiff argues that these statements concerning Reger were rendered either false and/or
misleading because Defendants improperly failed to disclose Reger’s ownership in and control
over Dakota Plains, his violation of SEC regulations, and participation in a stock manipulation
scheme. Id. ¶¶ 114-115. Northern Oil’s outsized reliance on Reger allowed him to run Dakota
Plains and engage in illegal stock manipulation, and this dependence on Reger also caused
Northern Oil to overlook flagrant ethical violations. Id. ¶¶ 78, 80, 82, 84, 86, 88, 93, 95, 97, 102,
106. Defendants’ misrepresentations and omissions induced Plaintiff into paying artificially
inflated prices for Northern Oil stock. Id. ¶ 115.
B.

Procedural History

On August 18, 2016, plaintiff Jeffrey Fries filed the Complaint individually and on behalf
of all others similarly situated. Doc. 1. On October 17, 2016, plaintiffs Atkinson and Richard
Miller (“Miller”) filed a motion for joint appointment as lead plaintiffs. Doc. 6. On May 8,
2017, the Court declined to grant joint appointment and appointed Atkinson to serve individually
as lead plaintiff, finding that he was the most adequate plaintiff due to his timely application to
be appointed as lead plaintiff, his large financial stake, typicality of his claims, and adequacy of
his representation. Doc. 20. On July 6, 2017, Atkinson filed the CAC. Doc. 25. On August 21,
2017, Defendants filed the instant motion to dismiss the CAC pursuant to Rule 12(b)(6). Docs.
36, 38.

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II.

Legal Standard
A.

Motion to Dismiss

Under Rule 12(b)(6), a complaint may be dismissed for “failure to state a claim upon
which relief can be granted.” Fed. R. Civ. P. 12(b)(6). When ruling on a motion to dismiss
pursuant to Rule 12(b)(6), the Court must accept all factual allegations in the complaint as true
and draw all reasonable inferences in the plaintiff’s favor. Koch v. Christie’s Int’l PLC, 699 F.3d
141, 145 (2d Cir. 2012). However, the Court is not required to credit “mere conclusory
statements” or “[t]hreadbare recitals of the elements of a cause of action.” Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). “To survive
a motion to dismiss, a complaint must contain sufficient factual matter . . . to ‘state a claim to
relief that is plausible on its face.’” Id. at 678 (quoting Twombly, 550 U.S. at 570). A claim is
facially plausible “when the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.” Id. (citing
Twombly, 550 U.S. at 556). If the plaintiff has not “nudged [his] claims across the line from
conceivable to plausible, [the] complaint must be dismissed.” Twombly, 550 U.S. at 570.
In determining the motion to dismiss, the Court may “consider documents that are
referenced in the complaint, documents that the plaintiffs relied on in bringing suit and that are
either in the plaintiffs’ possession or that the plaintiffs knew of when bringing suit, or matters of
which judicial notice may be taken.” Silsby v. Icahn, 17 F. Supp. 3d 348, 354 (S.D.N.Y. 2014),
aff’d sub nom. Lucas v. Icahn, 616 Fed. Appx. 448 (2d Cir. 2015) (summary order) (citing
Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002)); see also DiFolco v. MSNBC
Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010). The Court may “take judicial notice of public
disclosure documents that must be filed with the [SEC] and documents that both ‘bear on the

9

adequacy’ of SEC disclosures and are ‘public disclosure documents required by law.’” Silsby,
17 F. Supp. 3d at 354 (citing Kramer v. Time Warner, Inc., 937 F.2d 767, 773–74 (2d Cir.
1991)); see also In re Bank of Am. AIG Disclosure Sec. Litig., 980 F. Supp. 2d 564, 570
(S.D.N.Y. 2013), aff’d, 566 Fed. Appx. 93 (2d Cir. 2014) (summary order).
A. Heightened Pleading Standard under Rule 9(b)
A complaint alleging securities fraud must satisfy the heightened pleading requirements
of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act
(“PSLRA”) by stating the circumstances constituting fraud with particularity. See, e.g., ECA &
Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d
Cir. 2009) (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 320-21 (2007)).
These requirements apply whenever a plaintiff alleges fraudulent conduct, regardless of whether
fraudulent intent is an element of a claim. Rombach v. Chang, 355 F.3d 164, 170-71 (2d Cir.
2004) (quoting Fed. R. Civ. P. 9(b)) (“By its terms, Rule 9(b) applies to ‘all averments of
fraud.’”)
Specifically, Rule 9(b) requires that a securities fraud claim based on misstatements must
identify: (1) the allegedly fraudulent statements, (2) the speaker, (3) where and when the
statements were made, and (4) why the statements were fraudulent. See, e.g., Anschutz Corp. v.
Merrill Lynch & Co., Inc., 690 F.3d 98, 108 (2d Cir. 2012) (citing Rombach, 355 F.3d at 170).
Conditions of a person’s mind—such as malice, intent or knowledge—may be alleged generally,
however. Kalnit v. Eichler, 264 F.3d 131, 138 (2d Cir. 2001) (citing Fed. R. Civ. P. 9(b)). Like
Rule 9(b), the PSLRA requires that securities fraud complaints “‘specify’ each misleading
statement,” set forth the reasons or factual basis for the plaintiff's belief that the statement is
misleading, and “state with particularity facts giving rise to a strong inference that the defendant

10

acted with the required state of mind.” Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 345 (2005)
(quoting 15 U.S.C. §§ 78u–4(b)(1), (2)); see also, e.g., Slayton v. Am. Express, Co., 604 F.3d
758, 766 (2d Cir. 2010).
These heightened pleading standards, when viewed together with the more general
standards applicable to Rule 12(b)(6) motions to dismiss under Twombly and Iqbal, make clear
that “plaintiffs must provide sufficient particularity in their allegations to support a plausible
inference that it is more likely than not that a securities law violation has been committed.” In re
Lululemon Sec. Litig., 14 F. Supp. 3d 553, 570 (S.D.N.Y. 2014), aff’d, 604 F. App’x 62 (2d Cir.
2015) (citing ECA & Local 134 IBEW, 553 F.3d at 196).
III.

Discussion
A. Section 10(b) and Rule 10b-5
Section 10(b) of the Securities Exchange Act of 1934 prohibits using or employing, “in

connection with the purchase or sale of any security . . . any manipulative or deceptive device or
contrivance,” 15 U.S.C. § 78j(b) (1934), while SEC Rule 10b-5, promulgated thereunder, creates
liability for a person who makes “any untrue statement of a material fact or . . . omit[s] to state a
material fact . . . in connection with the purchase or sale of any security.” In re OSG Sec. Litig.,
971 F. Supp. 2d 387, 397 (S.D.N.Y. 2013) (quoting 17 C.F.R. § 240.10b–5 (1951)). Rule 10b–5,
promulgated by the SEC to implement Section 10(b), “more specifically delineates what
constitutes a manipulative or deceptive device or contrivance.” Press v. Chemical Inv. Servs.
Corp., 166 F.3d 529, 534 (2d Cir. 1999). Under Rule 10b–5, it is unlawful for any person,
directly or indirectly, by the use of any means specified in Section 10(b):
(a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue
statement of a material fact or to omit to state a material fact necessary in order to
make the statements made, in the light of the circumstances under which they were
made, not misleading, or (c) To engage in any act, practice, or course of business
11

which operates or would operate as a fraud or deceit upon any person, in connection
with the purchase or sale of any security.
17 C.F.R. § 240.10b–5.
To state a private civil claim under Section 10(b) and Rule 10b-5, a plaintiff must plead
that: (1) the defendant made a material misrepresentation or omission, (2) with scienter, i.e., a
wrongful state of mind, (3) in connection with the purchase or sale of a security, and (4) that the
plaintiff relied on the misrepresentation or omission, thereby (5) causing economic loss. Dura,
544 U.S. at 341-42; see also Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 153 (2d Cir.
2007). Defendants argue that Plaintiff failed to adequately allege that Defendants made
actionable misrepresentations or omissions, or acted with scienter.
1. Plaintiff Fails to Allege Misstatements or Omissions of Material Fact
Plaintiff alleges that Defendants made material misstatements or omissions regarding
Northern Oil’s Code of Business Conduct and Ethics, and Reger’s importance at Northern Oil.
The Court addresses each claim in turn.
First, Plaintiff argues that Northern Oil’s statement concerning the Code of Business
Conduct and Ethics and the provisions therein were misleading because Defendants failed to
disclose Reger’s misconduct. This argument is unavailing. The mere adoption of a code of
ethics is not rendered misleading by an undisclosed breach thereof. Villella v. Chem. & Mining
Co. of Chile Inc., No. 15 Civ. 2106 (ER), 2017 WL 1169629, at *11 (S.D.N.Y. Mar. 28, 2017)
(“a defendant’s mere adoption of a code of ethics, without statements assuring investors that its
employees are in fact in compliance with the code, is not misleading.”) (citing Lopez v.
Ctpartners Exec. Search Inc., 173 F. Supp. 3d 12, 29 (S.D.N.Y. 2016)); see also Barrett v. PJT
Partners Inc., No. 16 Civ. 2841 (VEC), 2017 WL 3995606, at *6 (S.D.N.Y. Sept. 8, 2017)
(rejecting plaintiff’s argument that statements regarding the existence of a company’s internal
12

controls are false because an employee failed to comply). Furthermore, an undisclosed breach of
a corporate code of conduct is not actionable if defendants made no guarantees that the code
would be followed or representations of historical compliance. In re Banco Bradesco S.A. Sec.
Litig., No. 16 Civ. 4155 (GHW), 2017 WL 4381407, at *41 (S.D.N.Y. Sept. 29, 2017); see also
In re Braskem S.A. Sec. Litig., 246 F. Supp. 3d 731, 756 (S.D.N.Y. 2017) (“An undisclosed
breach of [a corporate] standard of conduct is . . . without more, not actionable under the
securities laws.”); Lopez, 173 F. Supp. 3d at 29 (“[A] code of ethics . . . is inherently
aspirational; it simply cannot be that every time a violation of that code occurs, a company is
liable under federal law for having chosen to adopt the code at all, particularly when the adoption
of such a code is effectively mandatory.”) (citation omitted). There are no allegations in the
CAC showing that Defendants made such guarantees or representations of historical compliance
in the Code of Business Conduct and Ethics or otherwise. The code merely lays out Northern
Oil’s policies, including prohibited employee conduct, and notes what Northern Oil “promotes”
and what Northern Oil employees “should” do. 4 CAC ¶ 75.
Plaintiff argues in its opposition papers that Defendants are nonetheless liable because
they misled Northern Oil shareholders by “repeatedly tout[ing]” and “parad[ing]” its “muchballyhooed” code. Opp. at 2, 6, 13-14. At least one court in this district found that repeated
assurance of a company’s general integrity and ethical soundness despite knowledge of
employee non-compliance may be actionable. In re Petrobras Sec. Litig., 116 F. Supp. 3d 368,
381 (S.D.N.Y. 2015). However, the Court finds no allegations in the CAC showing that

4

Plaintiff claims in its opposition papers that Northern Oil “specifically highlighted the compliance of their senior
executives with government regulations.” Doc. 43 (“Opp.”) at 13. However, the CAC contains no such facts. The
CAC merely states that the code provides that Northern Oil executives have “an important and elevated role in
maintaining a commitment to . . . honest and ethical conduct.” CAC ¶ 75. This statement is not a guarantee of the
executives’ future compliance, nor a representation of their prior compliance.

13

Defendants made such assurances. Rather, the CAC only alleges that they informed investors
that Northern Oil adopted the code and that the code is available on Northern Oil’s website.
CAC ¶ 75. Accordingly, Plaintiff fails to allege an actionable misstatement or omission with
respect to the Code of Business Conduct and Ethics.
Second, Plaintiff argues that Defendants misled Northern Oil investors by emphasizing
Reger’s importance to the company while failing to disclose Reger’s misconduct. Plaintiff
claims that once Defendants spoke of Reger’s value to Northern Oil, they were obligated to
disclose facts which made Reger an unfit CEO. Defendants argue that there is no authority for
Plaintiff’s proposition, and that they have no duty to disclose corporate mismanagement or
uncharged criminal conduct.
Allegations that defendants concealed corporate mismanagement or uncharged criminal
conduct are not actionable unless the non-disclosures render other statements by defendants
misleading. In re Marsh & Mclennan Companies, Inc. Sec. Litig., 501 F. Supp. 2d 452, 469
(S.D.N.Y. 2006) (citations omitted); see also Boca Raton Firefighters & Police Pension Fund v.
Bahash, 506 F. App’x 32, 36 (2d Cir. 2012) (Section 10(b) does not reach mere “instances of
corporate mismanagement.”) (quoting Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 477 (1977));
Freudenberg v. E*Trade Fin. Corp., 712 F. Supp. 2d 171, 192 (S.D.N.Y. 2010) (“[W]here the
conduct involves deception related to the mismanagement—and not mismanagement alone—the
claims are actionable under the federal securities laws.”) (citation omitted). In making that
determination, courts must consider whether the omitted mismanagement or uncharged criminal
conduct is “sufficiently connected to defendants’ existing disclosures.” In re Sanofi Sec. Litig.,
155 F.Supp.3d 386, 403 (S.D.N.Y. 2016) (citations omitted); see also Richman v. Goldman
Sachs Grp., Inc., 868 F. Supp. 2d 261, 274 (S.D.N.Y. 2012) (noting that revealing one fact about

14

a subject does not trigger a duty to reveal all facts on the subject, so long as “what was revealed
would not be so incomplete as to mislead.”) (citation omitted). Specifically, the requisite
connection triggering a duty to disclose arises in the following three circumstances:
(1) when a corporation puts the reasons for its success at issue, but fails to disclose
that a material source of its success is the use of improper or illegal business
practices; (2) when a defendant makes a statement that can be understood, by a
reasonable investor, to deny that the illegal conduct is occurring; and (3) when a
defendant states an opinion that, absent disclosure, misleads investors about
material facts underlying that belief.
In re Virtus Inv. Partners, Inc. Sec. Litig., 195 F. Supp. 3d 528, 536 (S.D.N.Y. 2016) (internal
quotations and citations omitted).
Plaintiff alleges that Defendants made the following representations about Reger:
(1) Northern Oil relies on executives’ knowledge and expertise in the industry, and specifically
relies on Reger’s relationships with industry participants; (2) Reger has been involved in the
acquisition of oil and gas mineral rights for his entire career; (3) Reger is a fourth generation
landman in the Williston Basin; and (4) Reger’s knowledge of the landscape and relationships
gave Northern Oil certain early advantages. Id. ¶¶ 76-77, 79, 81, 83, 85, 87, 91-92, 94, 96, 10001, 105-06. However, Plaintiff does not claim that these statements are inaccurate in and of
themselves. Further, the omitted facts do not show that Northern Oil did not rely on Reger’s
knowledge and expertise in the industry, that Reger did not have the pedigree Northern Oil
represented, or that Reger’s experience and expertise did not give Northern Oil certain early
advantages. See e.g. Richman, 868 F. Supp. 2d at 274 (S.D.N.Y. 2012) (finding that defendants
were not required to disclose the receipt of a Wells Notice as their prior disclosure contained
nothing concerning investigations that could be considered inaccurate or incomplete); cf. Suez
Equity Inv’rs, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 94, 99 (2d Cir. 2001) (finding that
defendants deliberately misrepresented the abilities of an executive because they stated that the
15

executive had no pending civil suits and failed to disclose, inter alia, lawsuits that have been
brought against him). Nor do any of the highlighted statements suggest that Reger was not
engaged in the undisclosed improper activities. See e.g. In re ITT Educ. Servs., Inc. Sec. &
S’holder Derivatives Litig., 859 F. Supp. 2d 572, 579 (S.D.N.Y. 2012) (finding that defendants’
“statements are not misleading because they do not suggest that the undisclosed improper
activity alleged by [p]laintiff was not occurring.”). Accordingly, the Court finds that Plaintiff
also fails to allege an actionable misstatement or omission related to Defendants’ representations
about Reger. 5
2. Plaintiff Fails to Allege Scienter
Defendants argue that even if Plaintiff had sufficiently alleged an actionable
misrepresentation or omission, his claims must further fail for the independent reason that
Plaintiff has inadequately pled scienter. The Court agrees.
Section 10(b) and Rule 10b–5 require plaintiffs to allege a state of mind demonstrating
“an intent to deceive, manipulate or defraud,” also known as scienter. Ganino v. Citizens Utils.
Co., 228 F.3d 154, 168 (2d Cir. 2000) (citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193
(1976)); see also, e.g., In re Philip Servs. Corp. Sec. Litig., 383 F. Supp. 2d 463, 469 (S.D.N.Y.
2004). To satisfy the PSLRA’s pleading requirements for scienter, a plaintiff must allege facts

5

Plaintiff also argues in a footnote that Reger and Stoelk improperly sold securities based on nonpublic information
that they should have disclosed prior to trading. Insider trading liability arises when an insider trades shares based
on material nonpublic information without disclosing that information. Steginsky v. Xcelera Inc., 741 F.3d 365, 370
(2d Cir. 2014) (citations omitted). However, SEC filings show that Reger and Stoelk sold stocks for tax purposes,
and Plaintiff does not allege any facts suggesting otherwise. See Hammel Decl. Exs. 4-19, 20-36; see also Silsby, 17
F. Supp. 3d at 354 (courts may “take judicial notice of public disclosure documents that must be filed with the
[SEC] and documents that both ‘bear on the adequacy’ of SEC disclosures and are ‘public disclosure documents
required by law.’”). Plaintiff has not cited any authority, and the Court is aware of none, that imposes disclosure
obligations on executives when they forfeit stock for tax purposes. Indeed, courts in this district have held that stock
sales for tax reasons are not indicative of fraud. See In re Bristol-Myers Squibb Sec. Litig., 312 F. Supp. 2d 549, 561
(S.D.N.Y. 2004) (citing Ressler v. Liz Claiborne Inc., 75 F.Supp.2d 43, 59-60 (S.D.N.Y. 1999)). Accordingly, the
Court finds that Plaintiff cannot premise his Section 10(b) and Rule 10b-5 claims on Reger and Stoelk’s stock sales
for tax purposes.

16

with particularity that would give rise “to a strong inference that the defendant acted with the
required state of mind.” ECA & Local 134 IBEW, 553 F.3d at 198 (citations omitted). A “strong
inference” that a defendant acted with a certain intent is one that is “more than merely plausible
or reasonable—it must be cogent and at least as compelling as any opposing inference of
nonfraudulent intent.” Tellabs, 551 U.S. at 314 (emphasis added). This inquiry goes beyond the
ordinary Rule 9(b) framework and requires courts to consider “not only inferences urged by the
plaintiff . . . but also competing inferences rationally drawn from the facts alleged.” Id. “The
relevant inquiry for the Court ‘is whether all of the facts alleged, taken collectively, give rise to a
strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets
that standard.’” In re Magnum Hunter Res. Corp. Sec. Litig., No. 13 Civ. 2668 (KBF), 2014 WL
2840152, at *17 (S.D.N.Y. June 23, 2014) (emphasis in original) (citing Tellabs, 551 U.S. at
322–23, 127).
“When the defendant is a corporate entity . . . the pleaded facts must create a strong
inference that someone whose intent could be imputed to the corporation acted with the requisite
scienter.” Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190,
195 (2d Cir. 2008). The “most straightforward way to raise such an inference for a corporate
defendant” in most cases is “to plead it for an individual defendant,” however, there may be
some instances where a plaintiff may allege scienter as to a corporate defendant without also
alleging scienter as to an individual defendant. Id.; Vining v. Oppenheimer Holdings Inc., No. 08
Civ. 4435 (LAP), 2010 WL 3825722, at *12 (S.D.N.Y. Sept. 29, 2010) (“[A] plaintiff can raise
an inference of corporate scienter by establishing scienter on behalf of an employee who acted
within the scope of his employment.”) (internal citation omitted). “A strong inference of
corporate scienter may also be appropriate ‘where a corporate statement is so important and

17

dramatic that it would have been approved by corporate officials sufficiently knowledgeable
about the company to know that the announcement was false.’” In re Gentiva Secs. Litig., 932 F.
Supp. 2d 352, 384 (S.D.N.Y. 2013) (citing Vining, 2010 WL 3825722, at *13).
A plaintiff may establish scienter by alleging facts that show either (1) that the defendant
had the “motive and opportunity” to commit the alleged fraud, or (2) “strong circumstantial
evidence of conscious misbehavior or recklessness.” ECA & Local 134 IBEW, 553 F.3d at 198;
see also, e.g., Ho v. Duoyuan Global Water, Inc., 887 F. Supp. 2d 547, 574 (S.D.N.Y. 2012).
When a plaintiff fails to allege a motive to commit fraud, the plaintiff’s allegations that indicate a
defendant’s conscious misbehavior or recklessness “must be correspondingly greater.” Kalnit,
264 F.3d at 142 (internal citations omitted); accord S. Cherry St., LLC v. Hennessee Grp. LLC,
573 F.3d 98, 109 (2d Cir. 2009).
Here, Plaintiff does not argue that Defendants had the “motive and opportunity” to
commit fraud, and proceeds solely on the theory that Defendants acted with conscious
misbehavior or recklessness. Opp. at 20. Conscious misbehavior “encompasses deliberate
illegal behavior,” and recklessness is “conduct which is highly unreasonable and which
represents an extreme departure from the standards of ordinary care.” Novak v. Kasaks, 216 F.3d
300, 308 (2d Cir. 2000). To state a claim based recklessness, plaintiffs may either specifically
allege defendants’ knowledge of facts or access to information contradicting defendants’ public
statements, or allege that defendants failed to check information that they had a duty to monitor.
In re Longtop Fin. Techs. Ltd. Sec. Litig., 910 F. Supp. 2d 561, 574 (S.D.N.Y. 2012) (citing In re
Gildan Activewear, Inc. Sec. Litig., 636 F. Supp. 2d 261, 272 (S.D.N.Y. 2009)). “[W]here
plaintiffs contend defendants had access to contrary facts, they must specifically identify the
reports or statements containing this information.” Teamsters Local 445 Freight Div. Pension

18

Fund v. Dynex Capital Inc., 531 F.3d 190, 196 (2d Cir. 2008) (quoting Novak, 216 F.3d at 309).
Moreover, corporate mismanagement does not constitute recklessness. Gissin v. Endres, 739 F.
Supp. 2d 488, 514 (S.D.N.Y. 2010).
Plaintiff seeks to establish that Northern Oil and Stoelk were reckless based on the
following representations of the CWs: (1) that Reger came to Northern Oil headquarters three or
four days a week; (2) that Reger worked on Dakota Plains matters at Northern Oil facilities;
(3) that Reger had little to no involvement in the day-to-day operations at Northern Oil; and
(4) that individuals at Northern Oil including Stoelk knew that Reger ran Dakota Plains.
However, none of these allegations address whether Northern Oil and Stoelk were aware that
Reger acted illegally at Dakota Plains, whether he violated Northern Oil’s Code of Business
Conduct and Ethics provisions concerning use of Northern Oil assets and conflict of interest, or
whether Reger improperly abdicated his responsibilities as CEO. Indeed, it is unclear from
Plaintiff’s allegations whether Northern Oil’s relationship with Dakota Plains was collaborative
or created a conflict of interest. 6 Furthermore, Plaintiff concedes that Reger worked on pursuing
acquisitions as Northern Oil’s CEO. CAC ¶ 64.
There are also no allegations that Reger acted with recklessness sufficient to show that
Plaintiff sought to deceive Northern Oil shareholders. Dakota Plains is alleged to be wholly
unrelated to Northern Oil, and the SEC settlement concerning Reger’s failure to disclose his
control of Dakota Plains, which occurred after the Class Period, only implicated Reger in
negligent, not fraudulent, conduct. Id. ¶¶ 5, 111. Furthermore, Reger’s alleged violations of the

6

Indeed, Plaintiff states that Dakota Plains is a “wholly unrelated” transloading company while Northern Oil is a
company engaged in the acquisition, exploration, development, and production of oil and natural gas properties,
which suggests that there is no inherent conflict in working with the two. CAC ¶¶ 2, 5, 29, 31, 83. Moreover,
Plaintiff alleges that Defendants represented that part of Northern Oil’s success was due to its relationships with
other companies. Id. ¶¶ 81, 83.

19

Code of Business Conduct and Ethics and abdication of responsibility do not establish fraudulent
intent as opposed to mere mismanagement. N. Collier Fire Control & Rescue Dist. Firefighter
Pension Plan & Plymouth Cty. Ret. Ass’n v. MDC Partners, Inc., No. 15 Civ. 6034 (RJS), 2016
WL 5794774, at *22 (S.D.N.Y. Sept. 30, 2016) (refusing to infer scienter based on an individual
defendant’s reckless abdication of his duties because it only amounts to mismanagement and
poor governance, not securities fraud).
Plaintiff also argues that Reger engaged in conscious misbehavior by making false or
misleading statements, and Stoelk engaged in conscious misbehavior by certifying the Form 10Ks. The mere allegation that Defendants’ disclosures were incomplete or that they omitted
material information “is not enough to plead scienter based on conscious misbehavior or
recklessness.” In re Lions Gate Entm’t Corp. Sec. Litig., 165 F. Supp. 3d 1, 24 (S.D.N.Y. 2016),
appeal withdrawn (June 7, 2016).
Viewing all of Plaintiff’s allegations as a whole, the inference of scienter is not “as
compelling as any opposing inference of nonfraudulent intent.” Tellabs, 551 U.S. at 314.
Defendants may not have disclosed Reger’s uncharged involvement with Dakota Plains because
there was no reason to believe that Reger’s conduct was improper when Defendants made the
disclosures, and because Reger believed during the Class Period that the success of Dakota
Plains would benefit Northern Oil investors. Doc. 44 at at 6; Doc 45 at 10. Indeed, when Reger
received a Wells Notice from the SEC, Northern Oil terminated him, which undermines scienter.
See City of Brockton Ret. Sys. v. Avon Prod., Inc., No. 11 Civ. 4665 (PGG), 2014 WL 4832321,
at *24 (S.D.N.Y. Sept. 29, 2014) (the fact that the defendant commenced an internal
investigation tends to undermine any inference of scienter.)

20

B. Section 20(a)
Section 20(a) of the Exchange Act provides as follows:
Every person who, directly or indirectly, controls any person liable under any
provision of [the Exchange Act] or of any rule or regulation thereunder shall
also be liable jointly and severally with and to the same extent as such
controlled person to any person to whom such controlled person is liable, . . .
unless the controlling person acted in good faith and did not directly or
indirectly induce the act or acts constituting the violation or cause of action.
15 U.S.C. § 78t(a).
Defendants argue that because a claim under Section 20(a) is predicated on a primary
violation of securities law, the Section 20(a) claims must be dismissed. Doc. 37 at 19. It is
axiomatic that liability for a Section 20(a) violation is derivative of liability for a Section 10(b)
violation. See, e.g., In re eSpeed, Inc. Sec. Litig., 457 F. Supp. 2d 266, 297-98 (S.D.N.Y. 2006))
(in the absence of a primary violation, “control person” liability under Section 20(a) cannot
exist). In light of Plaintiff’s failure to adequately plead a primary violation, the Section 20(a)
claims against the Defendants cannot stand. Accordingly, the Court dismisses Plaintiff’s Section
20(a) claim.
C. Leave to Amend
In his Opposition, Plaintiff requested the opportunity to amend in the event the Court
determined the allegations were insufficient to state a claim. Opp. at 24. A court may deny
leave to amend a complaint for “good reason, including futility, bad faith, undue delay, or undue
prejudice to the opposing party.” Holmes v. Grubman, 568 F.3d 329, 334 (2d Cir. 2009)
(quoting McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 200 (2d Cir. 2007)). A court may
deny a motion to amend on the basis of futility “only where no colorable grounds exist to support
the proposed claim.” Allison v. Clos-ette Too, L.L.C., No. 14 Civ. 1618 (LAK) (JCF), 2015 WL
136102, at *2 (S.D.N.Y. Jan. 9, 2015). In Loreley Financing (Jersey) No. 3 Ltd. v. Wells Fargo
21