Woodley v. Gulfport Energy Corporation et al

Filing 72

OPINION & ORDER: re: 66 MOTION to Dismiss Plaintiff's Second Amended Complaint filed by Quentin R. Hicks, David M. Wood, Keri Crowell. For the foregoing reasons, Defendants' motion to dismiss is GRANTED. Plaintiffs may file a third amended complaint, if at all, by February 11, 2022. The Clerk of Court is respectfully directed to terminate the motion, Doc. 66. IT IS SO ORDERED., ( Amended Pleadings due by 2/11/2022.) (Signed by Judge Edgardo Ramos on 1/11/2022) (ama)

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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
ROBERT F. WOODLEY, individually and
on behalf of all others similarly situated,
Plaintiff,
– against –

OPINION & ORDER
20 Civ. 2357 (ER)

DAVID M. WOOD, KERI CROWELL,
and QUENTIN R. HICKS,
Defendants.

RAMOS, D.J.:
On March 17, 2020, this putative class action was brought under federal securities laws
against Gulfport Energy Corporation and its top officers. Doc. 1. A first amended complaint
was filed on April 1, 2021 pursuant to a stipulation between the parties.1 Doc. 47. Plaintiffs
filed a second amended complaint as a matter of course on July 8, 2021 in response to a motion
to dismiss, Doc. 54, filed on June 16, 2021. Doc. 61. The complaint alleges that Defendants
violated federal securities laws by making materially false and misleading statements concerning
the manner in which they accounted for their oil and gas properties. Defendants now move to
dismiss the second amended complaint under Fed. R. Civ. P. 12(b)(6) for failure to state a claim.
Doc. 66.
For the reasons set forth below, the motion to dismiss is GRANTED.

1

The amended complaint did not name Gulfport as a defendant due to the fact that the matter was stayed as to
Gulfport because of its Chapter 11 bankruptcy proceedings. Doc. 47 ¶ 10.

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I.

BACKGROUND
A. Gulfport’s Accounting Method

Gulfport is a Delaware oil and gas corporation with its principal executive office in
Oklahoma City, Oklahoma. Doc. 61 ¶ 45.
This case involves Gulfport’s accounting for its oil and gas properties in Eastern Ohio
and Central Oklahoma. The oil and gas industry faces unique accounting problems due to the
non-regenerative nature of the resource, large capital requirements, and abnormally high risks.
Doc. 67 at 10. To respond to these challenges, the SEC allows two accounting methodologies:
the “successful efforts” approach and the “full cost” approach, which differ in terms of how costs
associated with properties are accounted for. Id. The SEC specifies how to apply each
approach, id. (citing Sec. & Exch. Comm’n Release Notice, Release No. 113, 2009 WL 375970
(S.E.C. Release No. SAB-113 Oct. 29, 2009), and requires accounting to conform with generally
accepted accounting principles (“GAAP”). Doc. 61 ¶¶ 59–61.
Gulfport uses the full-cost accounting approach, as set forth in SEC Rule 4-10(c) of
Regulation S-X. Ex. 1, 2018 10-K, F-9; see 17 C.F.R.§ 210.4-10(c). This approach distinguishes
between “proved properties” – oil and gas assets with proved reserves that can be estimated with
reasonable certainty – and “unproved properties” – oil and gas assets with no proved reserves.
See Doc. 67 at 10 (citing 17 C.F.R. §§ 210.4-10(a)(22), (23), (32)). The full-cost approach then
capitalizes all costs associated with both proved and unproved properties, but later amortizes and
depletes, or recognizes as an expense, the costs associated with proved properties, abandoned
properties, and properties that have undergone “complete evaluation” (collectively, the
“Amortization Base”). Id. at 11 (citing 17 C.F.R. § 210.4-10(c)(3)(ii)).

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The full-cost approach also requires a quarterly ceiling test to limit total capitalized costs
so that they do not exceed an amount, known as the “cost center ceiling,” equal to the sum of (1)
projected future revenues, less expenses, from proved reserves, with a discount factor of 10%;
(2) the cost of properties not included in the Amortization Base; (3) the lower of cost or
estimated fair value of unproved properties included in the Amortization Base; and (4) certain
income tax effects associated with certain classes of properties. Id. (citing 17 C.F.R. § 210.410(c)(4)(i)). If the cost center ceiling is exceeded in a given quarter, the excess is “charged to
expense” and “shall not be reinstated for any subsequent increase in the cost center ceiling.” Id.
(citing 17 C.F.R § 210.4-10(c)(4)(ii)).
B. Gulfport’s Accounting Error and Restatement
Gulfport issued a press release with their Q3 2019 financial statements on October 31,
2019, reporting a net loss of $48.8 million for the three months ending September 30, 2019 and
net income of $248.4 million for the nine months ending September 30, 2019. Doc. 61 ¶ 131.
This financial statement also noted a $35.6 million impairment of Gulfport’s oil and gas
properties; depreciation, depletion, and amortization of $145.5 million in the three months
ending September 30, 2019; depreciation, depletion, and amortization of $388.9 million in the
nine months ending September 30, 2019; and a carrying value for its oil and gas properties and
equipment of approximately $5.584 billion. Id.
Gulfport issued a press release with their Q4 2019 and FY 2019 financial results on
February 27, 2020. Id. ¶ 26. The press release also included a restatement of the Q3 2019
financial results after management discovered “an error related to the transfer of certain
unevaluated leasehold costs to the amortization base.” Doc. 68-2 at 5. The same day, Gulfport
issued a second press release further explaining the accounting error, stating that

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[m]anagement determined it did not effectively design and maintain controls over the
completeness and accuracy of the accounting of transfers of unevaluated capitalized costs
into the amortization base for the three and nine month periods ended September 30,
2019 and the twelve month period ended December 31, 2019 . . . [and Gulfport] did not
have an adequate process for monitoring that its accounting policies for transferring
unevaluated oil and gas properties were consistently being performed timely and
reconciled with the general ledger.
Doc. 68-3 at 3. This “material weakness in internal controls” thus resulted in an improperly
conducted ceiling test and the release of a financial statement that did not correctly report a
material impairment, both in violation of GAAP. Doc. 61 ¶¶ 76–77. Gulfport therefore revised
its Q3 2019 financial statements to reflect a $571.4 million third-quarter impairment of its oil and
gas properties, as opposed to the $35.6 million it originally reported, a $484.8 million third
quarter net loss, as opposed to $48.8 million, and a $163.2 million third quarter depreciation,
deduction, and amortization expense, as opposed to $145.5 million. Id. ¶ 85. Gulfport also
revised language concerning their internal controls, procedures, and risk factors, and issued new
SOX Certifications (required to comply with the Sarbanes-Oxley Act) to identify the issues that
caused the accounting error. Id. ¶¶ 91–94.
C. Lawsuit Commenced
On March 17, 2020, Robert Woodley filed suit against Defendants Gulfport, David Wood
(former CEO), Keri Crowell (CFO until August 2019), and Quentin Hicks (CFO from August
2019 to May 2021) alleging violations of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and Rule 10b-5. Doc. 1. The lawsuit was filed as a putative class action on behalf
of all persons who purchased or otherwise acquired Gulfport securities between May 3, 2019 and
February 27, 2020. Id. On February 8, 2021, the Court appointed Joseph Rotunno as lead
plaintiff in this matter and stayed the matter as to Gulfport due to Chapter 11 bankruptcy
proceedings. Doc. 42. On February 17, 2021, the parties stipulated to the filing of the first

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amended complaint, Doc. 45, which was filed on April 1, 2021. Doc. 47. Defendants then filed
a motion to dismiss on June 16, 2021. Doc. 54. In response, Plaintiffs filed a second amended
complaint as a matter of course on July 8, 2021, mooting Defendants’ first motion to dismiss.
Doc. 61. The second amended complaint alleges that Defendants issued false and misleading
statements and material omissions related to the 2019 filings. Id. ¶ 188. Defendants now move
to dismiss the second amended complaint. Doc. 66.
D. Complaint Allegations
As relevant to the instant motion, the complaint alleges that:
[d]efendants were motivated to protect themselves from the significant pressure from
[shareholders] Firefly and Shah Capital who threatened that if they and Gulfport
management failed to deliver immediate improvements to Gulfport’s financial results,
they could face a proxy contest for control of the Company and lose their positions. . . .
The threat to each of the Defendants was personal and concrete and their careers at
Gulfport were on the line. Indeed, there was significant external pressure and threats
from Firefly and Shah Capital directed specifically at Gulfport’s board of directors and its
management, which included Defendants.
Doc. 61 ¶¶ 100–01. Specifically, the complaint cites two press releases issued by shareholder
Firefly: (1) a January 17, 2019 press release in which Firefly stated that they were “discouraged
by the Board’s lack of urgency in addressing the Company’s prolonged stock price
underperformance and its unwillingness to commit to actions that we believe would maximize
value for stockholders,” id. ¶ 102, and (2) a March 6, 2019 press release in which they restated
their concerns, demanded that the board take three steps of executing a $400 million share
buyback plan, changing executive compensation incentives, and abstaining from equity
issuances, and threatened that “[i]f the [c]ompany does not accomplish the three goals . . . , we
believe the Board’s composition will need to change,” id. ¶ 103.
The complaint alleges that Defendants Woods and Hicks acquired a number of Gulfport
shares on August 30, 2019 in response to criticism that their interests were not aligned with those
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of the shareholders. Id. ¶ 104. The complaint then alleges that on September 6, 2019,
shareholder Shah Capital issued a press release expressing “disappointment” because
“management and board have not yet utilized some of the tools available to stop this massive
equity underperformance . . . .” Id. ¶ 106. The complaint notes that Gulfport then took several
steps to address the concerns, including that two directors resigned from the board, the chairman
decided not to seek reelection, the Senior Vice President (“SVP”) of Geosciences retired, and the
company instituted a 13% reduction in the number of employees. Id. ¶¶ 107–08. Despite these
changes, Firefly issued another press release on November 21, 2019 expressing continued
disappointment and distrust in the incumbent board, especially since the board refused to adopt
their action plan, and included a plan to nominate director candidates for election to the board if
their concerns were further ignored. Id. ¶ 109. Plaintiffs thus allege that this pressure motivated
Defendants to conceal the material weakness to protect their “careers and the survival of the
[c]ompany.” Id. ¶ 110–12.
Plaintiffs also allege that Defendants knew or recklessly disregarded that the
representations they made were false and misleading. Id. ¶ 113. Specifically, they allege:
Because of [Defendants’] positions with Gulfport, and their access to material
information available to them but not to the public, Defendants knew that the adverse
facts specified herein had not been disclosed to and were being concealed from the
public, and that the positive representations being made were then materially false and
misleading. As the most senior executives of the Company, Defendants had access to
Gulfport’s general ledger, which recorded the carrying value of Gulfport’s oil and gas
properties, and each of them had access to the data inputs used in Defendants’ ceiling
tests during the Class Period and participated in quarterly ceiling tests. The information
concerning the carrying value of Gulfport’s oil and gas properties in Gulfport’s general
ledger to which Defendants had access contradicted both the inputs used in the ceiling
test and representations made to investors.
Id. ¶ 44.

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Plaintiffs also allege that Defendants were on notice of a decline in the natural gas market
in 2019 that created a high risk of substantial impairment of their properties. Id. ¶ 159. They
thus allege that
[t]he reconciliation of supporting records to the general ledger is a process that is taught
to students in introductory accounting courses. It is not a sophisticated, complex concept
or process. Having failed to perform this most basic accounting process in a declining
commodity market in connection with their quarterly ceiling tests, Defendants[’] conduct,
or failure to act, was an extreme departure from the ordinary standard of care.
Id. ¶ 162. Plaintiffs also allege further circumstantial evidence of fraudulent intent throughout
the complaint.
II.

LEGAL STANDARD

When ruling on a motion to dismiss pursuant to Rule 12(b)(6), the Court must accept all

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)); see also id. at 681 (citing Twombly, 550 U.S. at 551). “To survive a

that is plausible on its face.’” Id. at 678 (quoting Twombly, 550 U.S. at 570). A claim is facially

inference that the defendant is liable for the misconduct alleged.” Id. (citing Twombly, 550 U.S.

possibility that a defendant has acted unlawfully.” Id.
claims across the line from conceivable to plausible, [the] complaint must be dismissed.”
Twombly, 550 U.S. at 570.

must meet to survive a motion to dismiss.” ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d
87, 99 (2d Cir. 2007); see also Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 321–23
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(2007). 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 Chi. v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir.
2009) (citing Tellabs, 551 U.S. at 320–
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

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

statement,” set forth the reasons or factual basis for

’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 Pharm., Inc. v. Broudo, 544 U.S. 336, 345 (2005)
(quoting 15 U.S.C. §§ 78u–4(b)(1), (2)); see also Slayton v. Am. Express, Co., 604 F.3d 758, 766
(2d Cir. 2010).
the statements . . . were false and misleading; they must demonstrate wit
how that is so.” Rombach, 355 F.3d at 174.

standards applicable to Rule 12(b)(6) motions to dismiss under Twombly and Iqbal, make clear

inference that it is more likely than not that a securities law violation has been committed.” In re

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Lululemon Sec. Litig., 14 F. Supp. 3d 553, 570 (S.D.N.Y. 2014), a ’d, 604 F. App’x 62 (2d Cir.
2015) (citing ECA, 553 F.3d at 196).
III.

DISCUSSION

A. Section 10(b) and Rule 10b-5
1. Legal Standard
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,” 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). A statement may give rise to liability under § 10(b) if it is “(1) a
material misrepresentation; (2) a material omission in contravention of an affirmative legal
disclosure obligation; or (3) a material omission of information that is necessary to prevent
existing disclosures from being misleading.” Police & Fire Ret. Sys. of the City of Detroit v. La
Quinta Holdings Inc., No. 16 Civ. 3068 (AJN), 2017 WL 4082482, at *5 (S.D.N.Y. Aug. 24,
2017), aff’d, 735 F. App’x 11 (2d Cir. 2018)) (internal quotation marks and citation omitted).
Rule 10b–5, promulgated to implement Section 10(b), “more specifically delineates what
constitutes a manipulative or deceptive device or contrivance.” Press v. Chem. 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.

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17 C.F.R. § 240.10b–5. To state a 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. In re Express Scripts Holding Co. Sec. Litig., No. 16 Civ. 3338 (ER), 2017 WL
3278930, at *10 (S.D.N.Y. Aug. 1, 2017) (citations omitted); see also Carpenters Pension Tr.
Fund of St. Louis v. Barclays PLC, 750 F.3d 227, 232 (2d Cir. 2014). Moreover, the plaintiff
must meet the PSLRA requirements. ECA, 553 F.3d at 196. Therefore, while the Court normally
draws reasonable inferences in favor of a non-movant on a motion to dismiss, the PSLRA
ishes a more stringent rule for inferences involving scienter’ because the PSLRA requires
particular allegations giving rise to a strong inference of scienter.” Id. (citing Teamsters Loc.
445 Freight Div. Pension Fund v. Dynex Cap. Inc., 531 F.3d 190, 194 (2d Cir. 2008)).
“Plaintiffs can establish the requisite strong inference of fraudulent intent’ either (a) by
demonstrating that defendants had both motive and opportunity to commit fraud, or (b) by
alleging facts that constitute strong circumstantial evidence of conscious misbehavior or
recklessness.’” In re Bristol-Myers Squibb Sec. Litig., 312 F. Supp. 2d 549, 560 (S.D.N.Y. 2004)
(citing Kalnit, 264 F.3d at 138–39). To show motive and opportunity to commit fraud, “
must assert a

”

that is more than a generalized motive that any public for-

Kalnit,

264 F.3d at 139–40. To show strong circumstantial evidence of conscious misbehavior or

an extreme departure from the standards of ordinary care to the extent that the danger was either
known to the defendant or so obvious that the defendant must have been aware of it.” ECA, 554
F.3d at 202–03 (quoting Kalnit, 264 F.3d at 142)
negligence and has been described as “a state of mind approximating actual intent.” S. Cherry
St., LLC v. Hennessee Grp. LLC, 573 F.3d 98, 109 (2d Cir. 2009) (internal quotation marks and
citation omitted). In general, there are
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[a]t least four circumstances [that] may give rise to a strong inference of the requisite
scienter: where the complaint
concrete and personal way from the purported fraud; (2) engaged in deliberately illegal
behavior; (3) knew facts or had access to information suggesting that their public
statements were not accurate; or (4) failed to check information they had a duty to
monitor.
ECA, 553 F.3d at 199 (internal quotation marks and citations omitted).
2. Discussion
a. Motive and Opportunity to Defraud
Defendants contest only the second element of the claim, arguing that Plaintiffs have not
shown the required strong inference of scienter, which on its own is enough to warrant dismissal.
Doc. 67 at 15; see, e.g., In re Bristol-Myers Squibb, 312 F. Supp. 2d at 555–57. Defendants first
argue that the complaint does not plead a motive and opportunity to defraud because it does not
plead a concrete and personal benefit. Doc. 67 at 17. Instead, according to Defendants,
Plaintiffs plead only that Defendants felt pressure from shareholders to improve Gulfport’s stock
and therefore had motive to conceal Gulfport’s material weakness. Id. Such a motive has been
routinely rejected by courts in the Second Circuit as sufficient to establish a motive to defraud.
See In re Kandi Techs. Grp., Inc. Sec. Litig., No. 17 Civ. 1944 (ER), 2019 WL 4918649, at *5
(S.D.N.Y. Oct. 4, 2019) (rejecting as a basis for liability the motive to artificially inflate and
maintain the market price of securities); ECA, 553 F.3d at 198 (“[m]otives that are common to
most corporate officers, such as . . . the desire to keep stock prices high . . . do not constitute
“motive”) (internal citations omitted); Tabak v. Canadian Solar Inc., 549 F. App’x 24, 29 (2d
Cir. 2013) (finding that pressure to increase stock price is not sufficient to establish motive)
(summary order).
Plaintiffs, however, argue that they have plead specific and concrete personal threats and
pressure against the Defendants, which the Second Circuit has recognized as demonstrating the
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requisite motive. See Set Cap. LLC v. Credit Suisse Grp. AG, 996 F.3d 64 (2d Cir. 2021).
However, in Credit Suisse, the complaint alleged a more specific pressure – pressure “to shift
[the Defendant’s] investment arm away from volatile assets like XIV Notes” – coupled with the
awarding of a $10.2 million bonus for complying with that pressure. 996 F.3d at 81. Here, the
complaint more broadly alleges that Defendants faced pressure from shareholders to improve
Gulfport’s financial results and thereby protect their positions in the company from the threat of
a proxy contest. Doc. 61 ¶ 110. Most corporate officers face these threats as part of their role,
and the Court is not persuaded that the shareholder press releases excerpted in the complaint
create a unique motive significant enough to satisfy the high PSLRA threshold for scienter. The
complaint thus does not establish motive and opportunity to commit fraud.
b. Circumstantial Evidence of Conscious Misbehavior or Recklessness
Defendants next argue that the complaint does not plead facts that constitute strong
circumstantial evidence of conscious misbehavior or recklessness. Because the complaint fails
to demonstrate motive, to show scienter through circumstantial evidence, “the strength of the
circumstantial allegations must be correspondingly greater.” Kalnit, 264 F.3d at 142 (internal
quotation marks and citation omitted). Defendants argue that the complaint alleges no facts
suggesting knowledge of contradictory information, nor any sources by which Defendants could
have obtained such knowledge. Doc. 67 at 19. The Second Circuit has stated that “[w]here
plaintiffs contend defendants had access to contrary facts, they must specifically identify the
reports or statements containing this information.” Teamsters, 531 F.3d at 196 (rejecting claim
of knowledge based on the fact that executives had access to data that suggested their public
statements were not accurate); see also In re Gildan Activewear, Inc. Sec. Litig., 636 F. Supp. 2d
261, 273 (S.D.N.Y. 2009; In re Iconix Brand Grp., Inc., No. 15 Civ. 4860 (PGG), 2017 WL

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4898228, at *18 (S.D.N.Y. Oct. 25, 2017) (both cases finding no knowledge or recklessness
leading to an inference of scienter due to lack of particularized allegations).
Plaintiffs argue that they have sufficiently plead scienter based on eight allegations of
circumstantial evidence that holistically raise an inference of scienter. Doc. 69 at 23. The Court
will address each allegation in turn.
1. Access to Information Contradicting Financial Statements
First, Plaintiffs point to their allegations in the complaint that Defendants’ participation in
the ceiling tests and access to Gulfport’s general ledger gave them access to information
supporting an inference of scienter. Doc. 69 at 23–24. They cite Sgalambo v. McKenzie, which
says that “[t]o state a claim based on 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 they had a duty to monitor.”
739 F. Supp. 2d 453, 473 (S.D.N.Y. 2010) (internal quotation marks and citation omitted). This
standard was first stated in Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir. 2000), a case in which
the Second Circuit surveyed many securities fraud cases to more concretely determine what
types of allegations are required to meet the recklessness scienter standard. Novak found that
plaintiffs have succeeded in stating a claim based on recklessness when they (1) “specifically
allege[] defendants’ knowledge of facts or access to information contradicting their public
statements” or (2) allege “facts demonstrating that defendants failed to review or check
information that they had a duty to monitor, or ignored obvious signs of fraud.” 216 F.3d at 308.
Although Novak suggests that mere access to information contradicting public statements can be
enough to establish scienter, other cases in this Circuit applying the PSLRA standard have made
clearer that it is not enough that defendants held senior positions and had access to inside

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information. See, e.g., Lipow v. Net1 UEPS Techs., Inc., 131 F. Supp. 3d 144, 163 (S.D.N.Y.
2015) (“Plaintiff must do more than allege that the Individual Defendants had or should have had
knowledge of certain facts contrary to their public statements simply by virtue of their high-level
positions.”); In re Nokia Oyj (Nokia Corp.) Sec. Litig., 423 F. Supp. 2d 364, 406 (S.D.N.Y.
2006) (holding that generalized allegations that the individual defendants “knew, or should have
known, that they were misrepresenting material facts, based on their senior positions in the
company” are insufficient to establish scienter); ); In re Atlas Air Worldwide Holdings, Inc. Sec.
Litig., 324 F. Supp. 2d 474, 495 (S.D.N.Y. 2004) (finding inference of scienter where
confidential sources with pertinent knowledge spoke to the allegations).
“Courts in this Circuit have long held that accusations founded on nothing more than a
defendant’s corporate position are entitled to no weight.” City of Brockton Ret. Sys. v. Avon
Prod., Inc., No. 11 Civ. 4665 (PGG) 2014 WL 4832321, at *19 (S.D.N.Y. Sept. 29, 2014); see
also Bd. of Trustees of City of Ft. Lauderdale Gen. Employees’ Ret. Sys. v. Mechel OAO, 811 F.
Supp. 2d 853, 873 (S.D.N.Y. 2011), aff’d sub nom. Frederick v. Mechel OAO, 475 F. App’x 353
(2d Cir. 2012) (summary order). Therefore, these allegations do not raise a strong inference of
scienter.
2. Red Flags
Plaintiffs allege that Defendants knew the natural gas market had crashed, which created
a high risk for substantial impairment that would affect the ceiling test. Doc. 61 ¶ 159. Because
the process of reconciling the ceiling test inputs to the amounts recorded in the general ledger is
allegedly a simple process, they argue, Defendants’ failure to reconcile the general ledger during
such a market crash “was an extreme departure from the ordinary standard of care.” Id. ¶ 162.

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While “scienter may be found where there are specific allegations of various reasonably

statements were false,” In re Refco, Inc. Sec. Litig., 503 F. Supp. 2d 611, 649 (S.D.N.Y. 2007)
(internal quotation marks and citation omitted), Plaintiffs’ allegations do not rise to such a level.
Plaintiffs have not explained their conclusion that the reconciliation process is not a complex
process and have not otherwise shown that the accounting errors were so patently wrong as to be
obvious indicators of fraud. See, e.g., In re Molycorp, Inc. Sec. Litig., No. 13 Civ. 5697 (PAC),
2015 WL 1097355, at *15 (S.D.N.Y. Mar. 12, 2015) (finding no inference of scienter even
where the error involved reconciliation with the general ledger); In re Turquoise Hill Res. Ltd.
Sec. Litig., No. 13 Civ. 8846 (LGS), 2014 WL 7176187, at *6 (S.D.N.Y. Dec. 16, 2014)
(rejecting plaintiff’s unsupported allegation that the relevant accounting principles were simple
and straightforward and thus their misapplication by defendant is evidence of scienter).
Furthermore, “[t]he fact that a defendant had a duty to review the Company’s internal controls is
not a substitute for specific allegations that he was provided with information that demonstrated
the inadequacy of those internal controls.” Schiro v. Cemex, S.A.B. de C.V., 396 F. Supp. 3d
283, 307 (S.D.N.Y. 2019). Therefore, these allegations on their own do not support a strong
inference of scienter.
3. Internal Control Weakness
Plaintiffs argue that the internal control weakness that led to the restatement itself
supports an inference of scienter. Doc. 69 at 27. “Courts in this District have repeatedly held
that weak internal controls will support an inference of scienter.” In re Cannavest Corp. Sec.
Litig., 307 F. Supp. 3d 222, 246 (S.D.N.Y. 2018) (collecting cases). However, it is also true that
bad accounting cannot establish scienter on its own. See, e.g., In re China Organic Sec. Litig.,

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11 Civ. 8623 (JMF), 2013 WL 5434637, at *10 (S.D.N.Y. Sept. 30, 2013); Iowa Pub. Emps.’
Ret. Sys. v. Deloitte & Touche LLP, 919 F. Supp. 2d 321, 331–32 (S.D.N.Y. 2013).
Additionally, weak internal controls are not evidence of scienter where there is no allegation that
the weakness was brought to the defendants’ attention prior to making the purportedly false and
misleading statements. See Turquoise Hill, 2014 WL 7176187, at *8 (“The accounting controls
were an after-the-fact explanation for why the error had occurred, not a red flag before it was
discovered.”). Therefore, the internal control weakness does not support an inference of scienter.
4. False SOX Certifications
Similarly, Plaintiffs argue that the false SOX Certifications, which attest to the accuracy
of Gulfport’s SEC filings in compliance with the Sarbanes-Oxley Act, support an inference of
scienter. Doc. 69 at 27. However, the only case they cite from this Circuit found an inference of
scienter based on the fact that the defendant personally participated in the design and evaluation
of the internal controls and supervised the evaluations, which Plaintiffs do not allege here. See
Dobina v. Weatherford Int’l Ltd., 909 F. Supp. 2d 228, 246 (S.D.N.Y. 2012). A plaintiff “cannot
raise an inference of fraudulent intent based on the signing of a certification without alleging any
facts to show a concomitant awareness of or recklessness to the materially misleading nature of
the statements.” In re Diebold Nixdorf, Inc., Sec. Litig., No. 19 Civ. 6180 (LAP), 2021 WL
1226627, at *14 (S.D.N.Y. Mar. 30, 2021) (internal quotation marks and citation omitted). As
discussed above, the other “red flags” plaintiffs allege also do not support an inference of
scienter, so the certifications similarly do not.
5. GAAP Violations
Plaintiffs argue that the existence of GAAP violations also support an inference of

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scienter. Doc. 69 at 28. They argue that Defendants’ failure to reconcile the accounts is not a
complex process, and therefore Defendants’ failure to accurately do so suggests fraudulent
intent. Id. The only case they cite in support from this Circuit states that while “the existence of
GAAP violations are relevant to scienter, they are generally not persuasive absent more concrete
evidence of knowledge or recklessness.” In re OSG Sec. Litig., 12 F. Supp. 3d 622, 627
(S.D.N.Y. 2014) (internal quotation marks and citations omitted); see also Iconix, 2017 WL
4898228, at *17; Chill v. Gen. Elec. Co., 101 F.3d 263, 270 (2d Cir. 1996). Therefore, these
facts alone do not raise an inference of scienter.
6. Magnitude of the Restatement
Plaintiffs also argue that the magnitude of the errors identified in the Restatement, that
over $500 million dollars were impaired, constitutes evidence of scienter. Doc. 69 at 31. The
magnitude of errors can constitute “some evidence of scienter.” Atlas Air, 324 F. Supp. 2d at
488–89. However, an inference of scienter is only raised when magnitude is coupled with other
circumstantial evidence. See Iconix, 2017 WL 4898228, at *17; see also Rothman v. Gregor,
220 F.3d 81, 92 (2d Cir. 2000) (finding magnitude of write-off errors together with other
allegations raised a strong inference of recklessness). So while the magnitude does constitute
some evidence of scienter, it is not enough on its own to raise a strong inference.
7. SEC Investigation
The complaint includes information about a past instance in which the SEC issued a
cease-and-desist order against Defendant Crowell regarding Gulfport’s failure to disclose certain
transactions concerning Michael Moore, the former CEO, from 2014 to 2018. Doc. 61 ¶¶ 164–
68. Specifically, Crowell, the then-CFO, allowed Moore to charge personal expenses on the
company credit card and did not require him to pay it back in a timely manner. Id. ¶ 167. In the

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complaint, Plaintiffs allege that the events underlying the SEC’s investigation raise a strong
inference that Defendant Crowell “engaged in substantially similar conduct during the Class
Period . . . .” Id. ¶ 164.
The Court finds that the SEC investigation has no bearing on the fraud at issue in the
instant case. A CFO’s failure to properly handle a CEO’s credit card use has little in common
with the allegations raised in the complaint, and no inference of scienter can be drawn here.
8. Resignations
Lastly, the Plaintiffs argue that the suspicious timing of the resignations of Crowell and
other Gulfport executives raise an inference of scienter. Doc. 69 at 32. They allege that
Crowell’s resignation on August 9, 2019 is suspicious, as that was the quarter when Gulfport
materially understated its impairments, and the resignation meant that Crowell did not have to
sign and certify the materially false and misleading financial results published in October 2019.
Doc. 61 ¶ 130. However, Plaintiffs do not allege that the resignations of the other executives are
suspicious, so only Crowell’s resignation could plausibly support an inference of scienter in the
complaint.
A “resignation by itself is insufficient to support an allegation of scienter because there
are any number of reasons that an executive might resign.” Ho v. Duoyuan Glob. Water, Inc.,
887 F. Supp. 2d 547, 575 (S.D.N.Y. 2012) (internal quotation marks and citations omitted)
(finding that a suspiciously timed resignation added to the inference of scienter). However, a
suspiciously timed resignation can add to “the overall pleading of circumstantial evidence of
fraud.” In re Scot. Re Grp. Sec. Litig., 524 F. Supp. 2d 370, 394 n.176 (S.D.N.Y. 2007). Here,
Crowell resigned in August 2019 before the false financial statements were released in October

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2019. Doc. 61 ¶¶ 130–31. While the timing could in theory support Plaintiffs’ allegations, the
resignation alone does not support a strong inference of scienter.
In conclusion, several of Plaintiffs’ arguments are essentially arguments that the
occurrence of the accounting errors that led to the restatement is itself evidence of fraudulent
intent. Such arguments are weak absent more concrete circumstantial evidence of actual
scienter, as mistakes can be made without fraudulent intent. Plaintiffs’ other arguments are not
alleged with sufficient specificity or do not individually raise a strong inference of scienter.
Even collectively, Plaintiffs’ allegations do not come close to showing the required level of
“highly unreasonable” conduct that is “an extreme departure from the standards of ordinary
care.” ECA, 554 F.3d at 202–03. Defendants’ suggested inference that they discovered,
disclosed, and corrected the accounting errors within a relatively short period of time with no
fraudulent intent is simply more compelling. See Magnum Hunter Res. Corp. Sec. Litig., 26 F.
Supp. 3d 278, 297–98 (S.D.N.Y. 2014), aff’d, 616 F. App’x 442 (2d Cir. 2015) (summary order).
Plaintiffs’ claim of scienter therefore cannot stand. Defendants’ motion to dismiss the claims
under Section 10(b) and Rule 10b-5 is GRANTED.
B. Section 20(a)
Section 20(a) of the Exchange Act imposes liability on individuals who control any
person or entity that violates section 10. See 15 U.S.C. § 78t(a). “To assert a prima facie case

control of the primary violator by the targeted defendant, and show that the controlling person
was in some meaningful sense a culpable participant in the fraud perpetrated by the controlled
person.’” Ft. Lauderdale Gen. Emps.’ Ret. Sys., 811 F. Supp. 2d at 882 (quoting S.E.C. v. First
Jersey Sec, Inc., 101 F.3d 1450, 1472 (2d Cir. 1996).

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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).
Because Plaintiffs have inadequately pled a § 10(b) violation, they cannot make a successful
Section 20(a) claim. Consequently, Defendants’ motion to dismiss Plaintiffs’ Section 20(a)
claim is GRANTED.
C. Leave to Amend
Plaintiff requests leave to amend the complaint in the event the Court grants Defendants’
motion. Doc. 69 at 34 n.35. Federal Rule of Civil Procedure 15 instructs courts to “freely give
leave [to amend a pleading] when justice so requires.” Fed. R. Civ. P. 15(a)(2). The Second
Circuit has instructed courts not to dismiss a complaint “without granting leave to amend at least
once when a liberal reading of the complaint gives any indication that a valid claim might be
stated.” Shabazz v. Bezio, 511 F. App’x 28, 31 (2d Cir. 2013) (quoting Shomo v. City of New
York, 579 F.3d 176, 183 (2d Cir. 2009)). In Loreley Financing (Jersey) No. 3 Ltd. v. Wells
Fargo Securities, LLC, the Second Circuit reaffirmed the “liberal spirit” of Rule 15 and
counseled strongly against the dismissal of claims with prejudice prior to “the benefit of a
ruling” that highlights “the precise defects” of those claims. 797 F.3d 160, at 190–
91 (quoting Williams v. Citigroup Inc., 659 F.3d 208, 214 (2d Cir. 2011) (per curiam)).
Here, although Plaintiffs have already had the opportunity to amend their original
complaint, because this is the Court’s first opportunity to highlight the precise defects of
Plaintiffs’ pleading and it is not yet apparent that another opportunity to amend would be futile,
the Court will permit Plaintiffs to replead their dismissed claims.

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IV.

CONCLUSION

For the foregoing reasons, Defendants’ motion to dismiss is GRANTED. Plaintiffs may
file a third amended complaint, if at all, by February 11, 2022. The Clerk of Court is respectfully
directed to terminate the motion, Doc. 66.
It is SO ORDERED.

Dated:

January 11, 2022
New York, New York
Edgardo Ramos, U.S.D.J.

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