Fries v. Northern Oil and Gas, Inc. et al
Filing
63
OPINION AND ORDER re: 54 MOTION to Dismiss Second Amended Complaint filed by Michael L. Reger, 56 MOTION to Dismiss the Second Amended Complaint filed by Thomas W. Stoelk, Northern Oil and Gas, Inc. For the aforementione d reasons, Defendants' motion to dismiss are GRANTED with prejudice. The Clerk of the Court is respectfully directed to terminate the motion, Docs. 54 and 56, and close the case. It is SO ORDERED. (Signed by Judge Edgardo Ramos on 12/10/2018) (ne) Transmission to Orders and Judgments Clerk for processing.
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 case is a putative class action on behalf of everyone who purchased or acquired
securities in Northern Oil and Gas, Inc. between March 1, 2013 and August 15, 2016, claiming
that defendants Northern Oil, Michael L. Reger, and Thomas Stoelk (collectively, “Defendants”)
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5
promulgated thereunder, by making false and misleading statements in their public filings and
disclosures. The lead plaintiff in this case is Matthew Atkinson, an individual who bought shares
in Northern Oil during the class period. Doc. 20 at 7. Before the Court are Defendants’ motions
to dismiss Atkinson’s Second Amended Complaint (“SAC”) for failure to state a claim. For the
reasons that follow, the motions are GRANTED.
I.
BACKGROUND
The Court assumes the reader’s familiarity with the key factual allegations supporting
Plaintiff’s claims; these allegations are set out in detail in Fries v. N. Oil & Gas, Inc., 285 F.
Supp. 3d 706 (S.D.N.Y. 2018). In that opinion, the Court dismissed Plaintiff’s case in its
entirety for failure to state a claim with leave to amend. Id. at 723. The Court found that
Plaintiff failed to adequately allege that Defendants made a misleading statement or omission, or
that they did so with scienter. See id. at 719–20, 721–22.
Plaintiff filed the SAC on January 26, 2018. Doc. 51. The SAC contains some new
facts. First, in its first and second quarterly reports of 2016, Northern Oil disclosed that it had
spent half a million dollars on legal costs related to the SEC’s investigation of Dakota Plains, but
stated that it was not an SEC target itself. SAC ¶¶ 134–39. Second, Defendants knowingly used
Northern’s staff, space, and resources to help Reger and Dakota Plains, including by facilitating
some of Reger and Dakota Plains’s misconduct. SAC ¶¶ 65–84.
On March 23, 2018, Defendants moved to dismiss the SAC. Docs. 54, 56. Reger moved
separately from Northern Oil and Thomas Stoelk.
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
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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 F. App’x. 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
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).
B.
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.
3
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
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.
ARGUMENT
A.
Section 10(b) and Rule 10b-5
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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
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).
As in their prior motion to dismiss, Defendants argue that Plaintiff has failed to
adequately allege in the SAC that Defendants made actionable misrepresentations or omissions,
or acted with scienter. Plaintiff argues that the SAC makes new factual allegations that state a
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plausible claim. The Court addresses in turn the new allegations’ effect on the plausibility of
Plaintiff’s claim.
1.
Misrepresentations or omissions
Defendants argue that Plaintiff still fails in the SAC to allege that they made a material
misrepresentation or omission. The Court agrees.
Plaintiff argues that Northern Oil’s Code of Business Conduct and Ethics (the “Code”)
was misrepresentative because it failed to detect or prevent Reger’s misconduct. SAC ¶ 133.
Breaches of a corporate code of ethics do not render that code misleading unless the company
assures investors that individuals do in fact comply with the code. See Villella v. Chem. &
Mining Co. of Chile Inc., 2017 WL 1169629, at *11 (S.D.N.Y. Mar. 28, 2017). In its prior
opinion, the Court rejected Plaintiff’s argument on the ground that the Code was clearly
aspirational. See Fries, 285 F. Supp. 3d at 717–18. Plaintiff adds no additional allegations in the
SAC relating to the Code. Accordingly, Plaintiff continues to fail to plead an actionable
misstatement or omission with respect to the Code of Business Conduct and Ethics.
Plaintiff also argues that Defendants misled investors by omitting to disclose certain
facts, thus rendering other public statements misleading. First, Plaintiff argues that Defendants
had to disclose Reger’s misconduct because they emphasized his positive qualities and value to
Northern Oil. Second, Plaintiff argues that Defendants had to disclose that Northern Oil had,
among other things, improperly comingled its resources with Dakota Plains because they
publicly stated that Northern Oil was not an SEC subject. Defendants argue that they were under
no such legal obligations.
The failure to disclose material information does not amount to an actionable
misrepresentation, absent a duty to disclose. In re Marsh & Mclennan Companies, Inc. Sec.
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Litig., 501 F. Supp. 2d 452, 469 (S.D.N.Y. 2006); see also Chiarella v. United States, 445 U.S.
222, 235 (1980) (“When an allegation of fraud is based upon nondisclosure, there can be no
fraud absent a duty to speak.”). One duty to disclose arises when a corporation makes a
disclosure, whether voluntary or required, and additional information is necessary to make the
disclosure complete and accurate. Glazer v. Formica Corp., 964 F.2d 149, 157 (2d Cir. 1992).
“Thus, with respect to allegations of corporate mismanagement, disclosure is required where ‘a
failure to disclose facts that amount to mismanagement may render other statements
misleading.’” In re Marsh & Mclennan, 501 F. Supp. 2d at 469. Courts have found disclosure
to be required under this principle in 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.”
Menaldi v. Och-Ziff Capital Mgmt. Grp. LLC, 164 F. Supp. 3d 568, 581 (S.D.N.Y. 2016),
reconsideration denied, 2016 WL 2642223 (S.D.N.Y. May 6, 2016) (internal quotations marks
omitted).
Defendants were under no obligation to disclose Reger’s misconduct at Dakota Plains.
Plaintiff made the same argument in his First Amended Complaint (“FAC”). 1 He argued that
Defendants’ representations that Reger had a wealth of knowledge and expertise in Northern
Oil’s industry and that Reger was instrumental to Northern Oil’s success created a misleading
impression of Reger that Defendants had to correct by disclosing “facts which made Reger an
unfit CEO.” See Fries, 285 F. Supp. 3d at 718. The Court disagreed, as the omitted fact of
1
On May 8, 2017, the Court appointed Matthew Atkinson as lead plaintiff. Doc. 20. Consequently, the Court
ordered Atkinson to file an amended complaint. Doc. 24. Atkinson did so on July 6, 2017. Doc. 25. To distinguish
the July 6, 2017 complaint from the SAC, the Court refers to the former as the “First Amended Complaint.” The
parties, on the other hand, refer to the FAC as the “Consolidated Amended Complaint.” See, e.g., Docs. 36, 38.
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Reger’s alleged misconduct did not render Defendants’ representations as to his role in Northern
Oil untrue. See id. at 718–19. The Court continues to reject Plaintiff’s argument for the same
reason.
The SAC, however, contains new allegations in support of Plaintiff’s theory that
Defendants misled by omission. Plaintiff argues that in its 2016 Q1 and Q2 quarterly reports to
the SEC, Northern Oil misled investors by minimizing its and Reger’s role in Dakota Plains.
SAC ¶¶ 134, 137. Specifically, Northern Oil made the following disclosure in its 2016 Q1 Form
10-Q:
General and administrative expense was $4.3 million in the first quarter of 2016
compared to $4.4 million in the first quarter of 2015. Lower compensation expense in
2016 ($0.4 million) was offset by higher legal and professional expense ($0.5 million).
The reduction in compensation expense resulted from 2015 third quarter staff reductions
and lower incentive plan amounts. The increase in legal and professional expense was
primarily due to the Company engaging outside legal counsel to assist it in complying
with requests from the SEC relating to an ongoing investigation of 2012 trading patterns
in the securities of Dakota Plains Holdings, Inc. (“Dakota Plains”). Michael Reger, our
chief executive officer, was an initial investor in Dakota Plains in 2008. The
Company has never owned any interest in Dakota Plains. Based on the information
available to it, the Company does not believe that it, or any conduct by the
Company, is the focus of any investigation by a governmental agency regarding this
matter.
SAC ¶ 134 (emphasis in original). Northern Oil made the same disclosure in substance in its Q2
Form 10-Q. SAC ¶ 137. Plaintiff contends that, having “broached the subject of the SEC’s
investigation into Reger’s activities at Dakota Plains,” Northern Oil had a duty to disclose that
(1) Northern Oil’s operations, personnel, and resources were heavily comingled with Dakota
Plains; (2) Reger was not just an investor but a control person at Dakota Plains; (3) the
government was investigating Reger’s illegal conduct, partly facilitated by Northern Oil
resources, at Dakota Plains; and (4) as a result, many of Northern Oil’s public statements were
false or misleading. SAC ¶¶ 136, 139. Because it failed to do so, Plaintiff argues, Defendants’
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statements (1) amounted to a false denial that Reger had participated in illegal conduct and (2)
misled investors about the SEC investigation into Dakota Plains, results which are actionable
under § 10(b) and Rule 10b-5. The Court addresses both these theories in turn.
First, Defendants’ statements did not amount to a denial of illegal conduct. A reasonable
investor would not interpret Northern Oil’s description of Reger as an “initial investor” of
Dakota Plains—an accurate description—to preclude Reger from having done criminal acts.
Describing someone as an initial investor of a company does not suggest that that is the
beginning and end of his or her relationship with that company.
Defendants’ statements are distinct from those in prior cases in this district that were
found to function as denials of illegal conduct. In In re Sotheby’s Holdings, Inc. Sec. Litig., 2000
U.S. Dist. LEXIS 12504 (S.D.N.Y. Aug. 30, 2000), for instance, the court held that the
defendant’s statement that it faced competition from its competitor misled investors given that
the defendant in fact had an illegal price-fixing agreement with the competitor, id. at *11–12. A
reasonable investor would interpret a company’s statement that another company is a
competitive threat to preclude a price-fixing agreement; after all, competitors enter into pricefixing agreements specifically to avoid competition. In re Banco Bradesco S.A. Sec. Litig., 277
F. Supp. 3d 600 (S.D.N.Y. 2017) is another distinct case. There, the court held that the company
had misled investors by representing that it had adopted an “effective” anti-bribery policy when
in fact high-level officers were participating in many illegal bribery schemes. See id. at 659–60.
Thus, in both In re Sotheby’s and In re Banco Bradesco, the companies did not just fail to fully
disclose the underlying illegal behavior, but made statements that strongly implied there was no
illegal conduct. Defendants’ statements, unlike those made in In re Sotheby’s and In re
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Bradesco, did no such thing. Defendants’ statements did not amount to a denial of illegal
conduct.
Second, Defendants made no statements in Northern Oil’s Form 10-Q that amounted to
an “opinion that, absent disclosure, misleads investors about material facts underlying that
belief,” Menaldi, 164 F. Supp. 3d at 581. Plaintiff attempts to characterize Northern Oil’s
statement that it was not “the focus of any investigation by a governmental agency regarding”
Dakota Plains as such, but fails. Most obviously, Defendants’ statement is not an opinion, but a
fact. The SEC indeed was not investigating Northern Oil. Plaintiff’s statement is thus unlike
that in DoubleLine Capital LP v. Odebrecht Fin., Ltd., 323 F. Supp. 3d 393 (S.D.N.Y. 2018),
where the Court found the company’s statement that it “believe[s]” it was successful for certain
reasons to be an opinion, id. at 443. But more pointedly, Defendants’ statement did not mislead
investors about any underlying material facts. A reasonable investor would not understand the
fact the SEC is not investigating Northern Oil to mean that Northern Oil did not do anything
wrong. Plaintiff’s argument that the moment Defendants acknowledged the SEC investigation
into Reger and Dakota Plains, they became obliged to disclose all of Northern Oil’s uncharged,
related wrongdoing, runs in the face of the general rule in this district that “[c]orporations do
not . . . have a duty ‘to disclose uncharged, unadjudicated wrongdoing.’” Menaldi, 164 F. Supp.
3d at 580 (citing City of Pontiac Policemen’s & Firemen’s Ret. Sys. v. UBS AG, 752 F.3d 173,
184 (2d Cir. 2014)). Following the Second Circuit in City of Pontiac, 2 the Court in Menaldi
explicitly rejected the contention that, to avoid liability under § 10(b), “in addition to disclosing
2
City of Pontiac concerned allegedly misleading failures to disclose corporate wrongdoing under § 11 of the
Securities Act of 1933. See City of Pontiac Policemen’s & Firemen’s Ret. Sys. v. UBS AG, 752 F.3d 173, 184 (2d
Cir. 2014). Section 11 imposes civil liability on issuers and signatories “of a registration statement that ‘contained
an untrue statement of a material fact or omitted to state a material fact . . . necessary to make the statements therein
not misleading.’” 15 U.S.C. § 77k. Though § 11 applies to a narrower set of circumstances than § 10-b, it “give[s]
rise to liability more readily” because plaintiffs alleging a § 11 violation need not show scienter, reliance, or loss
causation. In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 360 (2d Cir. 2010).
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the existence of an investigation, defendants were required to disclose that [they were], in fact,
engaged” in a criminal scheme, 164 F. Supp. 3d at 581. Defendants thus did not actionably
mislead investors by acknowledging the SEC investigation into Reger and Dakota Plains while
failing to disclose its own alleged involvement.
Nothing in the portion of the Form 10-Q’s that Plaintiff finds so incriminating could be
read by a reasonable investor to deny any illegal conduct. Northern’s disclosures were entirely
true. Plaintiff has failed to show that the Form 10-Q’s were misleading. The Form 10-Q’s
constitute the sole new facts Plaintiff added in his SAC to show that Defendants made a material
misstatement in violation of § 10(b) and Rule 10b-5. Consequently, as it did for the FAC, the
Court finds that Plaintiff fails to allege an actionable misstatement or omission by Defendants.
2.
Scienter
Even if Plaintiff had sufficiently alleged a misstatement or omission in the SAC, his
claims would nonetheless fail because he has not sufficiently alleged scienter.
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
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 (alteration and internal
quotation marks 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
11
(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., 2014 WL 2840152, at *17 (S.D.N.Y. June 23, 2014) (emphasis in original)
(citing Tellabs, 551 U.S. at 322–23).
“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., 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.”). “A strong inference of corporate scienter may also be appropriate ‘where a
corporate statement is so important and 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
12
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).
The Court found that Plaintiff failed to plead scienter sufficiently in the FAC. See Fries,
285 F. Supp. 3d at 722. In the SAC, Plaintiff adds new allegations purporting to show scienter.
Plaintiff purports to proceed under both theories of scienter, alleging both that Defendants “were
personally motivated to make false statements and omit material information necessary to make
the statements not misleading” and that Defendants did so “willfully or with reckless disregard
for the truth.” SAC ¶¶ 169, 170. Plaintiff’s new allegations all come from “CW1,” a
confidential witness who reported directly to Reger while working at Northern. Among these
new allegations, highlighted in Plaintiff’s briefing, are that (1) Dakota Plains used Northern Oil
lawyers to draw up the papers to take Dakota Plains public, (2) Dakota Plains officers held
meetings at Northern Oil offices, (3) Northern’s employees were frequently required to perform
tasks for Dakota Plains, and (4) Northern’s board members knew that its resources were being
allocated to Dakota Plains. SAC ¶¶ 66–68, 70–71, 72, 73. These and other allegations, Plaintiff
argues, show that Defendants knew that Reger’s activities at Dakota Plains implicated Northern
in the SEC investigation into Dakota Plains.
But none of that has to do with whether Defendants made the allegedly misleading
statements intentionally. Plaintiff confuses the question of whether Defendants believed that
their statements were misleading with whether Defendants were aware of the facts that they,
under Plaintiff’s theory, had to disclose to prevent their statements from being misleading. The
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SAC cites no facts showing that Defendants engaged in conscious or reckless behavior in making
the contested Form 10-Q disclosures. Indeed, CW1’s allegations all concern events occurring
years before the allegedly misleading statements were made. The SAC also alleges that
Defendants were personally motivated to commit fraud, SAC ¶ 170, but only in a conclusory
fashion—Plaintiff cites no facts that would make that theory of scienter plausible. Consequently,
as it did for the FAC, the Court finds that Plaintiff fails to establish the requisite scienter under
§ 10(b) and Rule 10b-5.
Because Plaintiff has failed to allege an actionable misstatement or omission and to plead
the requisite scienter for such a misstatement or omission, Plaintiff’s § 10(b) and Rule 10b-5
claim is dismissed.
B.
Section 20(a)
Liability for a § 20(a) violation is derivative of liability for a § 10(b) violation. See, e.g.,
In re eSpeed, Inc. Sec. Litig., 457 F. Supp. 2d 266, 297–98 (S.D.N.Y. 2006). Because Plaintiff
has inadequately pled a § 10(b) violation, Plaintiff cannot make a successful § 20(a) claim.
Consequently, Plaintiff’s § 20(a) claim is dismissed.
C.
Leave to Amend
Rule 15 of the Federal Rules of Civil Procedure states that the court should freely give
leave to plaintiffs to amend their complaint “when justice so requires.” The Second Circuit has
affirmed that Rule 15 of the Federal Rules of Civil Procedures embodies a “strong preference for
resolving disputes on the merits.” Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797
F.3d 160, 190 (2d Cir. 2015) (quoting Williams v. Citigroup Inc., 659 F.3d 208, 212–13 (2d Cir.
2011)). “Leave to amend need not be granted, however, where the proposed amendment would
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