Ash v. Powersecure International, Inc. et al

Filing 52

ORDER - the court GRANTS defendants' motion for judicial notice and corporation by reference [D.E. 38] and motion to dismiss [D.E. 35]. The court hereby DISMISSES without prejudice plaintiffs' complaint. If plaintiffs elect to amend their complaint, they shall file the amended complaint by October 16, 2015. Defendants shall have until November 23, 2015, to file any renewed motion to dismiss. Signed by Chief Judge James C. Dever III on 9/15/2015. (Jenkins, C.)

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
EASTERN DIVISION
No. 4:14-CV-92-D

LEONARD C. ASH, Individually and on
Behalf of All Others Similarly Situated,
Plaintiffs,

v.

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)
)
)
)

)

POWERSECURE INTERNATIONAL,
INC., SIDNEY HINTON, and
CHRISTOPHER T. HUTTER,
Defendants.

ORDER

)
)
)
)
)
)

On May 22, 2014, plaintiff Leonard C. Ash filed a securities class action suit against
PowerSecure International, Inc. ("PowerSecure"), Sidney Hinton, and Christopher T. Hutter
(collectively, "defendants") [D.E. 1].

On October 10, 2014, the court granted a motion to

consolidate this case with two other cases and named Maguire Financial, LP, as lead plaintiff. [D.E.
22]. On December 29, 2014, plaintiffs filed a consolidated securities class action suit against
defendants [D .E. 30]. On February 26, 2015, defendants moved to dismiss the complaint for failure
to state a claim upon which relief can be granted [D.E. 35] and filed a supporting memorandum
[D.E. 36]. Defendants also submitted various materials and asked the court to take judicial notice
of or incorporate by reference these materials in considering the motion to dismiss [D.E. 38]. On
April30, 2015, plaintiffs responded in opposition to the motion to dismiss [D.E. 47] and the motion
for judicial notice [D.E. 48]. On June 4, 2015, defendants replied [D.E. 49-50]. As explained
below, the court grants defendant's motion for judicial notice and motion to dismiss the complaint.

I.
PowerSecure provides "utility and energy technologies to electric utilities and their industrial,
institutional, and commercial customers." Compl. [D.E. 30] ~ 3. Defendant Hinton is and was the
president and chief executive officer ("CEO") ofPowerSecure during the proposed class period of
August 8, 2013, to May 7, 2014. ld. ~~ 1, 21. Defendant Hutter was PowerSecure's chieffmancial
officer ("CFO") during the proposed class period. ld. ~~ 1, 22. PowerSecure has three operating
segments:

interactive distributed generation ("DG"), energy efficiency ("EE"), and utility

infrastructure ("UI"). ld.

~

3. PowerSecure's DG systems "provide a highly dependable backup

power supply during power outages, and provide a more efficient and environmentally friendly
source of power during high cost periods of peak power demand." ld. PowerSecure's UI "products
and services include transmission and distribution system construction and maintenance, installation
of advanced metering and efficient lighting, and emergency storm restoration." ld. The DG and UI
segments each contribute approximately 41% of PowerSecure' s revenues, with the EE segment
contributing most of the remainder. Id.

~

4.

Plaintiffs allege that, over the class period, defendants made numerous material
misrepresentations and omissions that artificially inflated PowerSecure' s publicly-traded share price,
thus facilitating two ofPowerSecure's acquisitions during the class period and personally enriching
Hinton. See, id.

~~

8-15. Plaintiffs state that these misrepresentations and omissions hid from

investors that PowerSecure was "encountering significant operational issues and inefficiencies"
caused, in part, by a significant geographic change in an existing customer's service area, a longer
sales cycle in its DG segment as PowerSecure forwent smaller projects in favor of larger projects,
and the unreliability of workflow from a new customer. ld. ~ 10. Specifically, plaintiffs allege that
defendants made materially false or misleading statements or omissions on August 7, 2013,

2

November 6, 2013, March 10,2014, and April30, 2014, as well as failing to disclose known trends
in violation of SEC regulations.

See,~.

id.

~~

29,40-41, 50-51, 59, 61.

A.
On August 7, 2013, PowerSecure filed a Form 10-Q for the second quarter of 2013 and
issued a press release that stated, in part, "Our second quarter results and all time high backlog
illustrate the continued momentum we are seeing across our business as we deliver differentiated,
best-in-class solutions to our customers." Id.

~

29. The press release quoted Hinton as saying,

"PowerSecure has never been in a stronger position for long term success." Id. On a conference call
that same day, Hinton made several comments about PowerSecure's business, including "our
prospects for this business for continued growth look very, very good," and ''we have got our foot
on the gas to ensure our continued success in the second half of this year and in 2014 and in 2015
and beyond." Id.

~~

30-31. In discussing PowerSecure's UI segment, Hinton added, among other

comments, that the 133% year-over-year growth" just tells you how strong the business is for us and
our prospects for this business, for continued growth look very, very good," that PowerSecure had
"secure[d) a $49 million three-year contract renewal," and that "the same drivers for this business
that we have seen over the past few quarters remain strong." Id.

~

33; see also id.

~

35.

Plaintiffs allege that these statements were materially false or misleading because defendants
failed to adequately disclose that PowerSecure was "experiencing significant and financially draining
operational inefficiencies and other problems that inevitably would have a negative impact on
revenues and profits."

See,~.

id.

~~

29, 32, 34, 36.

On August 8, 2013, the price of PowerSecure shares rose more than 10% and closed at
$17.71 per share. Id. ~ 37. On August 16,2013, PowerSecure sold 2.3 million shares of its common
stock in a public offering at a price of $16 per share. Id.
3

~

38. On August 16, 2013, Hinton sold

200,000 shares of PowerSecure common stock in a public offering at a price of $16 per share. Id.
On August 21, 2013, the PowerSecure offering and the Hinton offering each closed. Id.

B.
On November 6, 2013, PowerSecure announced its third-quarter results for 2013 and issued
a press release that stated, "[W]e realized inefficiencies in our utility infrastructure unit related to
the advanced deployment of crews in anticipation of being selected for a significant long-term
revenue opportunity with a major new utility partner." See Id. ~ 40. 1 After explaining that
PowerSecure expected these inefficiencies to affect results for the next two quarters, the press release
noted that "[o]perating margin as a percentage of revenue increased 6.2 percentage points to 7.3
percent in 3Q 2013 .... " Id. PowerSecure also issued another press release that stated, ''Now that
the utility has formally selected PowerSecure for this role, specific volumes of work will be
determined in the coming quarters. The [C]ompany estimates that in 2014 and 2015 it could be
asked to double its work volumes and could realize $25-$35 million of revenue annually ...." Id.
~

42 (alteration in original).
On a conference call that same day, Hinton commented that "[o]ur third quarter results

continued our tremendous momentum in 2013," "our new order flow has been strong," and "[t]he
continued progression of our backlog positions us very strongly for continued growth." Id.

~

43.

In speaking of the UI segment, Hinton also highlighted "a major new utility infrastructure win that

has the potential-this is significant. I want to be very clear, this win has the potential to be the
largest contract that PowerSecure has ever won." Id. ~ 45. Hinton further stated that ''we currently
estimate that in 2014 and 2015 we could be asked to double our work volumes with them and as a

1

The complaint states that PowerSecure released its third-quarter 2014 results on this day,
but this appears to be an error. [D.E. 37-8, 37-21].
4

result realize $25 million to $3 5 million of revenue annually from this expanded relationship." Id.
Plaintiffs allege that these statements were materially false or misleading because defendants
"were only guessing as to the amount of work that might be assigned if the [UI] contract was
awarded to PowerSecure," they failed to disclose the extent of their operational inefficiencies, and
they were experiencing a longer sales cycle as a result of a decision to "actively seek out larger
business opportunities while neglecting [PowerSecure's] smaller projects." Id.

~~

41-43, 46-48.

On November 7, 2013, PowerSecure shares closed at a price of$17.63 per share. Id. ~ 49.

c.
On March 10, 2014, PowerSecure released its fourth-quarter and full-year financial results
for 2013 and held a conference call to discuss the results. Id. ~50. On that conference call, Hinton
again discussed the utility company referenced in the November 6, 2013 conference call, stating,
"We continue to expect that relationship will yield $25 million to $35 million of revenue annually.
However, until we have greater visibility with the customer, we will keep the majority of this work
out of our backlog, other than near term revenues that we expect to realize." Id. Hinton added that
''we have visibility into what we believe will be another very good year in 20 14 for our utility
infrastructure business." Id.
Plaintiffs allege that these statements were materially false or misleading because defendants
had "no reasonable basis that the described relationship with the new customer would yield $25
million to $35 million of revenue annually" and they failed to disclose that PowerSecure's work
backlog was unsustainable. Id.

~~51-53.

On March 11, 2014, the price ofPowerSecure shares reached a class-period high of$27.44
per share in intraday trading and closed at $25.28 per share, a one-day increase of more than 9.4%.
Id.

~54.

5

D.
"On or about April 30, 2014, PowerSecure disseminated to its shareholders its 2013 Annual
Report, which contained a signed letter from Defendant Hinton to PowerSecure shareholders, dated
April 2014." Id.

~59.

The signed letter stated that "Our growth continues to be driven by new

business awards from new utility partners and by expanding our business with existing partners ..
. . [W]e have visibility into what we believe will be another very good year in 2014 for our utility
infrastructure business." Id.
Plaintiffs allege that these statements were materially false or misleading because defendants
failed to disclose PowerSecure's operational inefficiencies and the increased length of the sales
cycle. Id.

~

60.
E.

On May 7, 2014, after the close of trading, PowerSecure issued a press release announcing
first-quarter results for 2014. Id.

~

76. PowerSecure announced a net loss of almost $4.3 million,

as gross margins decreased from 30.6% to 20.9%, cost of sales increased 34%, operating expenses
increased 39%, and revenue from the DG segment decreased 17%. Id. In a conference call that same
day in which defendants Hinton and Hutter explained the fmancial results, Hinton stated in part that
"we had a customer, a key that- I think we said it specifically, that $7.5 million of work in the fourth
quarter that we then got $1 million of work in the first one .... We adjust, we try to guess the
rhythm of how work is released and it's a relatively new account and we just guessed wrong." Id.
~80--

81.
On May 8, 2014, the price ofPowerSecure common stock dropped from $18.60 to $7.00, a

decrease of more than 62%, on "extraordinary trading volume of over 10 million shares." See id.
~

84.
6

On May 22, 2014, the named plaintiff filed suit against defendants. [D.E. 1]. On October
10, 2014, the court granted a motion to consolidate this case with two other cases and named
Maguire Financial, LP, as the lead plaintiff. [D.E. 22]. On December 29, 2014, plaintiffs filed an
amended complaint. [D.E. 30].

II.
The court first addresses defendants' motion for judicial notice and incorporation by
reference [D.E. 39].

In ruling on a motion to dismiss, a court must consider "documents

incorporated into the complaint by reference, and matters of which a court may take judicial notice."
Tellabs. Inc. v. Makor Issues & Rights. Ltd., 551 U.S. 308,322 (2007); see Inre PEC Sols .. Inc. Sec.
Litig., 418 F.3d 379, 388 n.7 (4th Cir. 2005) ("[W]e are not strictly limited to the four comers of the
complaint when examining this complaint: since it relies upon a public document a court may as
well without converting the motion to dismiss into a motion for summary judgment."); Greenhouse
v. MCG Capital Corp., 392 F.3d 650, 656 (4th Cir. 2004) ("[A] court ruling on a 12(b)(6) motion
may look to documents or articles cited in the complaint .... " (quotation omitted)). Courts may take
judicial notice of SEC filings, historical stock prices, and analyst reports (for the purpose of
determining disclosure or market knowledge, but not for the truth of the matters asserted in the
reports). See Kramer v. Time Warner Inc., 937 F.2d 767, 774 (2d Cir. 1991); see also Cozzarelli
v. Inspire Pharm.. Inc., 549 F.3d 618, 625 (4th Cir. 2008) (examining documents outside the
complaint to determine a disclosure issue); PEC Sols., 418 F .3d at 390 & n.1 0 (taking judicial notice
of the defendants' SEC filings related to sale of stock); Greenhouse, 392 F.3d at 656-57 ("A court
ruling on a 12(b)(6) motion may look to ... SEC filings, press releases, stock price tables, and other
material on which the plaintiffs allegations necessarily rely." (quotation omitted)); cf. Von Saher
v. Norton Simon Museum of Art at Pasadena, 592 F.3d 400,406 (9th Cir. 2009) ("Courts may take

7

judicial notice of publications introduced to indicate what was in the public realm at the time, not
whether the contents of those articles were in fact true.") (quotation omitted).
Defendants submitted 21 exhibits. See [D.E. 37-3-37-23]. Plaintiffs challenge six ofthese
exhibits as unincorporated documents and, as for the incorporated documents, they challenge the
"improper use of any of these Exhibits ... as evidence of the truth of their contents." [D.E. 48] 3-4
(challenging exhibits 10, 11, 16, 17, 20, and 21 as unincorporated). 2 As for the incorporated
documents, the court may ''treat such a document as part of the complaint, and thus may assume that
its contents are true for purposes of a motion to dismiss under Rule 12(b)(6)." United States v.
Ritchie, 342 F.3d 903, 908 (9th Cir. 2003). The court grants defendants' motion for incorporation
by reference with respect to these documents.
As for the unincorporated documents, defendants submitted four SEC filings, including
Form 4s that Hinton filed concerning his transactions in PowerSecure stock. The SEC filings
contained in exhibits 16, 17, 20, and 21, and-in light of the allegations contained in the
complaint-the Roth Capital Partners analyst reports in exhibits 10 and 11 are the proper subject of
judicial notice. Cf. Phillips v. LCI lnt'l. Inc., 190 F.3d 609,616 (4th Cir. 1999) (reviewing a proxy
statement); Kramer, 937 F.3d at 774. Moreover, the court rejects plaintiffs' reliance on Zak v.
Chelsea Therapeutics International, Ltd., 780 F.3d 597 (4th Cir. 2015), to exclude Hinton's Form
4s. In Zak, the district court had relied on the defendants' submission of SEC filings regarding their
stock transactions in finding that the plaintiffs failed to adequately plead scienter. 780 F.3d at
607-08. The Fourth Circuit reversed, noting that "[a]lthough plaintiffs asserting securities fraud
claims frequently bolster allegations regarding scienter by asserting unusual sales of stock by

2

Plaintiffs do not object to Exhibit 5, a chart ofPowerSecure historical prices. [D.E. 48] 4;
see Greenhouse, 392 F.3d at 655 n.4.
8

individuals accused of committing securities fraud, the plaintiffs in the present case did not include
this type of allegation in their complaint." Id. at 607. Thus, "because the SEC documents were not
... an integral part of ... the plaintiffs' complaint, the district court should not have considered
those documents in reviewing the sufficiency of the plaintiffs' allegations." Id. Here, in contrast,
plaintiffs specifically alleged that Hinton and PowerSecure sold stock during the class period and
that these sales, which were "unusual and suspicious in timing and amount" for Hinton, are evidence
of scienter. See Compl. [D.E. 30] ~~ 98-101. Thus, the court may take judicial notice of the Form
4s and the other unincorporated documents and grants defendants' motion for judicial notice and
incorporation by reference [D.E. 38-39].

III.
A motion to dismiss under Rule 12(b)( 6) tests the legal and factual sufficiency of a
complaint. See Fed. R. Civ. P. 12(b)(6); Ashcroftv. Iqbal, 556 U.S. 662,678 (2009); Bell Atl. Corp.
v. Twombly, 550 U.S. 544, 555-56 (2007); Vitol. S.A. v. Primerose Shipping Co., 708 F.3d 527,
543 (4th Cir. 2013); Giarratano v. Johnson, 521 F.3d 298, 302 (4th Cir. 2008). The court need not
accept a complaint's conclusions oflaw. See Iqbal, 556 U.S. at 678-79; Twombly, 550 U.S. at 555;
Nemet Chevrolet, Ltd. v. Consumeraffairs.com. Inc., 591 F.3d 250, 255 (4th Cir. 2009). As for a
complaint's factual sufficiency, a party must plead "enough facts to state a claim to relief that is
plausible on its face." Twombly, 550 U.S. at 570. "[N]aked assertions of wrongdoing" cannot
"cross the line between possibility and plausibility of entitlement to relief." Francis v. Giacomelli,
588 F.3d 186, 193 (4th Cir. 2009) (quotation omitted); see Vitol. S.A., 708 F.3d at 543. "The
plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer
possibility that a defendant has acted unlawfully." Iqbal, 556 U.S. at 678. A plaintiff armed with
nothing more than "labels and conclusions" or a "formulaic recitation of the elements of a cause of
9

action" cannot proceed. Twombly, 550 U.S. at 555 & n.3; Vitol. S.A., 708 F.3d at 543; Francis, 588
F.3d at 193. "Determining whether a complaint states a plausible claim for relief will ... be a
context-specific task that requires the reviewing court to draw on its judicial experience and
common sense." Iqbal, 556 U.S. at 679.
To survive a Rule 12(b)(6) motion to dismiss a fraud claim, a plaintiff generally must "state
with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b). The
pleading standard is even higher for alleged violations of section 1O(b) of the Securities Exchange
Actof1934 ("Exchange Act"), codified at 15 U.S.C. § 78j(b), or Rule lOb-5, see 17 C.P.R. 240.10b5, which the Securities Exchange Commission ("SEC") promulgated under the authority of section
10(b). See 15 U.S.C. § 78u-4(b); Tellabs, 551 U.S. at 313-14; Matrix Capital Mgmt. Fund. LP v.
BearingPoint. Inc., 576 F.3d 172, 181-82 (4th Cir. 2009); Teachers' Ret. Sys. ofLa. v. Hunter, 477
F.3d 162, 172 (4th Cir. 2007).
To establish liability under section 1O(b) and Rule 1Ob-5, a plaintiff must prove six elements:
"(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection
between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon
the misrepresentation or omission; (5) economic loss; and (6) loss causation." Matrixx Initiatives.
Inc. v. Siracusano, 131 S. Ct. 1309, 1317 (2011) (quotation omitted); Stoneridge Inv. Partners. LLC
v. Scientific-Atlanta. Inc., 552 U.S. 148, 157 (2008); Matrix Capital, 576 F.3d at 181; see also Dura
Pharm .. Inc. v. Broudo, 544 U.S. 336, 341-42 (2005).
The Private Securities Litigation Reform Act ("PSLRA") also added a safe harbor for certain
forward-looking statements. Private Securities Litigation Reform Act of 1995, Pub. L. 104-67, 109
Stat. 737,749-50 (codified at 15 U.S.C. § 78u-5). This safe harbor precludes liability for allegedly
material misrepresentations under certain circumstances, including if (1) the forward-looking
10

statement is "identified as a forward-looking statement, and is accompanied by meaningful
cautionary statements identifying important factors that could cause actual results to differ materially
from those in the forward-looking statement;" (2) the forward-looking statement is immaterial; or
(3) the plaintiff fails to prove that the forward-looking statement "if made by a natural person, was
made with actual knowledge by that person that the statement was false or misleading." 15 U.S.C.
§ 78u-5(c)(1). A forward-looking statement includes "a statement containing a projection of
revenues, income ... , earnings ... per share, ... or other financial items," "a statement of the plans
and objectives of management for future operations, including plans or objectives relating to the
products or services of the issuer," and "a statement of future economic performance." 15 U.S.C.
§ 78u-5(i)(1).

Defendants contend that plaintiffs have failed to sufficiently plead the first two elements:
a material misrepresentation or omission, and scienter. Defs.' Mem. Supp. Mot. Dismiss [D.E. 36]
9-10. The court addresses each in turn.
A.

As for the first element, a plaintiff must "specify each statement alleged to have been
misleading [and] the reason or reasons why the statement is misleading." 15 U.S.C. § 78u-4(b)(1);
see Matrixx Initiatives, 131 S. Ct. at 1318 n.4. The statement must be "misleading as to a material
fact." Matrixx Initiatives, 131 S. Ct. at 1318 (emphasis omitted); Basic Inc. v. Levinson, 485 U.S.
224, 238 (1988). A statement is material if"there is a substantial likelihood that [its] disclosure .
. . would have been viewed by the reasonable investor as having significantly altered the 'total mix'
of information made available." Matrixx Initiatives, 131 S. Ct. at 1318 (quotation omitted). Section
10(b) and Rule 10b-5 "decidedly do not prohibit any misrepresentation-no matter how willful,
objectionable, or flatly false--of immaterial facts, even if it induces reactions from investors that,

11

in hindsight or otherwise, might make the misrepresentation appear material." Greenhouse, 392 F .3d
at 656. Immaterial statements include "soft" or "puffing" statements because "the market price of
a share is not inflated by vague statements predicting growth." Raab v. Gen. Physics Corp., 4 F.3d
286, 289 (4th Cir. 1993); see City ofMonroe Emps.' Ret. Sys. v. Bridgestone Corp., 399 F.3d 651,
671 (6th Cir. 2005) (collecting cases and finding "loosely optimistic statements insufficiently
specific" and "too squishy, too untethered to anything measurable, to communicate anything that a
reasonable person would deem important to a securities investment decision"); Howard v. Haddad,
962 F.2d 328, 331 (4th Cir. 1992) (finding the alleged misstatements immaterial because "[a]t most
they amounted to 'puffery"'). "[P]rojections of future performance not worded as guarantees are
generally not actionable under the federal securities laws." Raab, 4 F .3d at 290 (quotation omitted).
Furthermore, "[s]ilence, absent a duty to disclose, is not misleading under Rule 10b-5."
Basic, 485 U.S. at 239 n.17. "Rule 10b-5 imposes such a duty to disclose only when silence would
make other statements misleading or false." Taylor v. First Union Corp. of S.C., 857 F.2d 240,
243-44 (4th Cir. 1988); see Matrixx Initiatives, 131 S. Ct. at 1321 ("Disclosure is required under
these provisions only when necessary to make statements made, in the light of the circumstances
under which they were made, not misleading." (quotation and alteration omitted)).
Essentially, plaintiffs' complaint alleges that defendants failed to disclose certain
information, including the terms of a new contract with a significant customer, PowerSecure' s shift
in strategy toward fewer, larger, and more profitable opportunities, and operational inefficiencies
driven by a contract with a new UI customer, and that, absent such disclosure, 26 statements that
defendants made on August 7, 2013, November 6, 2013, March 10,2014, andApril30, 2014, were
materially false or misleading. The court addresses the statements in chronological order.

12

1.

On August 7, 20 13, defendants made nine statements that plaintiffs claim are materially false
or misleading. 3 Eight of these statements, however, are immaterial because they are precisely the
kind of"mere expressions of optimism from company spokesmen" that are not actionable under the
federal securities laws. Raab, 4 F.3d at 290. For example, a reasonable investor would not rely on
Hinton's statements that PowerSecure was seeing "continued momentum ... across our business,"
that "PowerSecure has never been in a stronger position for long term success," or that ''we have got
our foot on the gas to ensure our continued success in the second half of this year and in 2014 and
in 2015 and beyond" as guarantees of future performance. Compl. [D.E. 30]

~~

29-31; cf. App.

[D.E. 37-2] 1-2 (statements 1-5, 7-9).
With respect to the ninth alleged misrepresentation, plaintiffs claim that Hinton made a
material misstatement when he stated that "we were blessed to announce securing a $49 million
three-year contract renewal, both the renewal and expansion, with one of the largest investor on
utilities in the country." Compl. [D.E. 30] ~ 33; cf. App. [D.E. 37-2] 1 (statement 6). Plaintiffs
argue that this was misleading because the contract was not a renewal but "a new contract in a new,
distant location from an existing customer" and that "[a]s a result of this relocation, PowerSecure
was forced to hire and train new workers at great expense and essentially start over." Compl. [D.E.
30]

~

34. Although defendants argue that there is little real difference between a renewal with the

same customer and a new contract with the same customer, see Defs.' Mem. Supp. Mot. Dismiss
[D.E. 36] 18, given the relatively small number of contracts that PowerSecure worked on, see
Compl. [D.E. 30]

~

5, a reasonable investor might find the distinction between the two as having

3

The court has compared the consolidated complaint with defendants' appendix reciting the
highlighted statements and refers (for ease ofreference) to the alleged misrepresentations as outlined
in the appendix. See App. [D.E. 37-2].
13

significantly altered the total mix of information because the new contract would require a significant
investment in hiring and training new personnel and lead to underutilization of existing personnel.
See id. ~ 34. Moreover, the statement is not forward-looking, and therefore does not qualify for the
statutory safe harbor, because it is represents a present or historical fact. See 15 U.S.C. § 78u-5(i)(1)
(definition of a forward-looking statement). Thus, plaintiffs sufficiently allege that this statement
was materially misleading.

2.
On November 6, 2013, defendants made 12 statements that plaintiffs claim are materially
false or misleading. SeeApp. [D.E. 37-2] 2-4. Five of these statements are immaterial because they
are optimistic expressions, not guarantees of future performance, and a reasonable investor would
not view them as significantly altering the total mix of information available. See Compl. [D.E. 30]
~~

43, 45; cf. App. [D.E. 37-2] 3-4 (statements 13, 15, 18, 20, and 21).
Two more statements fall into the statutory safe harbor and thus cannot serve the basis of a

private securities claim. PowerSecure stated in a press release, filed with a Form 8-K that Hutter
signed, that PowerSecure "estimates that in 2014 and 2015 it could be asked to double its work
volumes and could realize $25-$35 million of revenue annually from this expanded relationship."
Compl. [D.E. 30] 42; [D.E. 37-21] 14; cf. App. [37-2] 2 (statement 12). This statement falls into
the heartland of a forward-looking statement.

See,~.

Ind. State Dist. Council of Laborers & Hod

Carriers Pension & Welfare Fund v. Omnicare. Inc., 583 F.3d 935, 943 (6th Cir. 2009) (holding a
statement about "growth outlook" immaterial because it "call[ed] attention to its [own] predictive
character"); GSC Partners CDO Fund v. Washington, 368 F.3d 228, 242 (3d Cir. 2004) ("Any
reasonable reading of this statement, would make one skeptical about the recovery of the full [dollar
amount estimated by management]."). The statement was identified as forward looking and
14

accompanied by sufficiently meaningful cautionary language that warned investors of the very risk
that was later realized. See [D.E. 37-21] 4, 11 (noting that the statements are "not guarantees" and
referring the reader to PowerSecure's Form 10-K); Institutional Inv'rs Grp. v. Avaya. Inc., 564 F.3d
242, 257-58 (3d Cir. 2009); Harris v. Ivax Com., 182 F.3d 799, 807 (11th Cir. 1999) ("[W]hen an
investor has been warned of risks of a significance similar to that actually realized, she is sufficiently
on notice of the danger of the investment to make an intelligent decision about it according to her
own preferences for risk and reward."). On that day's conference call, Hinton repeated that ''we
currently estimate that in 2014 and 2015 we could be asked to double our work volumes with them
and as a result realize $25 million to $35 million of revenue annually from this expanded
relationship." Compl. [D.E. 30] ~ 45; [D.E. 37-17] 5; cf. App. [D.E. 37-2] 3 (statement 17). Again,
this statement is a forward-looking statement that was identified as such and accompanied by
meaningful cautionary language. See [D.E. 37-17] 2; [D.E. 37-9] 10; [D.E. 37-21] 11.
The remaining five statements are not materially misleading for lack of adequate disclosure,
as plaintiffs claim. In two of them, PowerSecure disclosed the negative effect of operational
inefficiencies "related to the advanced deployment of crews in anticipation of being selected for a
significant long-term revenue opportunity with a major new utility partner," predicted "some
continued inefficiencies," and discussed changes in operating margins. Compl. [D.E. 30] ~ 40; [D.E.
37-21] 8; cf. App. [D.E. 37-2] 2 (statements 10-11). Thus, defendants disclosed and discussed the
very issue that later contributed to the negative financial results of which plaintiffs now complain.
Plaintiffs allege that three more November 6, 2013 statements are misleading because
defendants had no reasonable basis for estimating that PowerSecure could realize $25 to $35 million
in annual revenues fromanewUI customer.

See,~,

Compl. [D.E. 30] ~~ 44, 46; [D.E. 37-15] 13;

cf. App. [D.E. 37-2] (statements 14, 16, 19). For this argument, which plaintiffs repeat throughout
15

the complaint, see, ~. Compl. [D.E. 30] ~~ 42, 48, 51, 53, plaintiffs rely on a May 7, 2014
statement in which Hinton said, speaking of that new Ul customer, "They're a great account. No
issue with them at all. We adjust, we try to guess the rhythm of how work is released and it's a
relatively new account and we just guessed wrong." [D.E. 37-15] 13 (emphasis added). Plaintiffs'
argument-that any guess of future revenue streams has no reasonable basis and is therefore
misleading-has no basis in law. See Teachers' Ret. Sys., 477 F.3d at 181 ("A failed venture,
standing alone, does not permit a reasonable inference of fraud."); Raab, 4 F.3d at 290 (finding

"[p]redictions of future growth" immaterial because such predictions "will almost always prove to
be wrong in hindsight" and are "simply the company's best guess as to how the future will play
out"). Moreover, plaintiffs' allegations ignore the context of the complete November 6, 2013
conference call, in which Hinton stated, "I want to be clear though, we do not currently have the $25
million to $35 million of annual opportunity in our revenue backlog. The $240 million does not
include that. We will add that to the backlog as we see specific volumes start to firm up." Compl.
[D.E. 30]

~

45; [D.E. 37-17] 5 (emphasis added). In context, Hinton's statements were forward-

looking statements, accurately couched as estimates that had yet to "firm up." Thus, they were not
materially misleading.
3.
On March 10, 2014, defendants made four statements that plaintiffs allege are materially

~isleading. 4 The first statement, in which Hinton discussed the new UI contract and reiterated his
earlier prediction of $25 to $35 million in annual revenues, is not materially misleading. Compl.
[D.E. 30]

~

50; [D.E. 37-6] 4-5; cf. App. [D.E. 37-2] 4 (statement 22). Plaintiffs' claim that this

4

Defendants are not liable for statements made by investment analysts. See Janus Capital
Grp. v. First Derivative Traders, 131 S. Ct. 2296, 2302-03 (20 11 ); In re aaiPharma Inc. Sec. Litig.,
521 F. Supp. 2d 507, 510 (E.D.N.C. 2007).
16

statement had no reasonable basis because it was a "guess" is incorrect as a matter oflaw. See Raab,
4 F.3d at 290; see also Teachers' Ret. Sys., 477 F.3d at 181. Similarly, Hutter's statements
comparing the current revenue backlog to the past revenue backlog and noting that "our backlog
implies continued growth" call attention to their own predictive character and are not materially
misleading. See Compl. [D.E. 30]

~53;

[D.E. 37-6] 8; Omnicare, 583 F.3d at 943; cf. App. [D.E.

37-2] 5 (statements 24-25). Finally, Hutter's statement that defendants "expect[ed] 2014 gross
margins to continue to be in the mid to high 20 percent" is immaterial as a matter of law and, as a
forecast of future economic performance, falls within the statutory safe harbor. See Raab, 4 F.3d at
289-90; Compl. [D.E. 30] ~53; [D.E. 37-6] 2 (identifying forward-looking statements); [D.E. 37-8]
11 (meaningful cautionary language); cf. App. [D.E. 37-2] 5 (statement 23).
4.
On April 30, 2014, Hinton signed a letter in which he stated, in part, that "With our
expanding utility relationships, strong backlog, and the high quality of our sales pipeline, we have
visibility into what we believe will be another very good year in 2014 for our utility infrastructure
business." Compl. [D.E. 30]

~

59-60; cf. App. [D.E. 37-2] 5 (statement 26). This statement

amounts to puffery and is immaterial as a matter oflaw. See Raab, 4 F.3d at 289-90.
5.

Plaintiffs also allege that defendants violated section 1O(b) and Rule 1Ob-5 when they "failed
to disclose known trends" in violation ofltem 303 of SEC Regulation S-K. Compl. [D.E. 30] ~ 61.
Item 303 requires companies to describe, in certain SEC filings, "any known trends or uncertainties
that have had or that the registrant reasonably expects will have a material favorable or unfavorable
impact on net sales or revenues or income from continuing operations."

17 C.F.R. §

229.303(a)(3)(ii). Plaintiffs allege that defendants had an "affirmative duty to disclose known trends
17

or uncertainties" and that they failed to do so thereby violating the federal securities laws. Compl.
[D.E. 30]

~~

63-67.

Item 303 does not create a private right of action. See Oran v. Stafford, 226 F .3d 27S, 287
(3d Cir. 2000) (Alito, J.). Plaintiffs' argument relies on the implicit claim that a violation ofltem
303 amounts to a per se violation of section lO(b) and Rule lOb-S. The Fourth Circuit has not ruled
on this issue.
In Oran, the Third Circuit considered whether Item 303 imposed on the defendant an
"affirmative obligation to disclose," under section 1O(b) and Rule 1Ob-S, several studies linking the
defendant's drugs to heart-valve defects. See Oran, 226 F .3d at 279, 287. As then-Judge Alito noted
in his opinion for the Third Circuit, Item 303 's "disclosure obligations extend considerably beyond
those required by Rule lOb-S." Id. at 288. The Oran court reasoned that, because the materiality
standards under Rule 1Ob-5 and Item 303 differed significantly, a duty to disclose under Rule 1Ob-S
"must be separately shown." Id. The Oran court concluded that because "plaintiffs have failed to
plead any actionable misrepresentation or omission under ... Rule [lOb-S], SK-303 cannot provide
a basis for liability." Id.; see also In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 10S4-S6 (9th Cir.
2014) ("In sum, we hold that Item 303 does not create a duty to disclose for purposes of Section
lO(b) and Rule lOb-5. Such a duty to disclose must be separately shown .... "); Shah v. GenVec.
Inc., No. 8:12-cv-341-DKC, 2013 WL S348133, at *1S n.16 (D. Md. Sept. 20, 2013) (unpublished);
Iron Workers Local16 Pension Fund v. Hilb Rogal & Hobbs Co., 432 F. Supp. 2d S71, S83 (E.D.
Va. 2006).
In opposition to this analysis, plaintiffs cite Stratte-McClure v. Morgan Stanley, 776 F.3d 94
(2d Cir. 2015), and argue that the NVIDIA court misread Oran. In Stratte-McClure, the Second
Circuit held that "Item 303's affirmative duty to disclose in Form 10-Qs can serve as the basis for
18

a securities fraud claim under Section 10(b)." 776 F.3d at 101. The Stratte-McClure court
concluded that Oran was not contrary because of then-Judge Alito's statement that "a violation of
SK-303' s reporting requirement does not automatically give rise to a material omission under Rule
10b-5." Id. at 103 (quoting Oran, 226 F.3d at 288). Thus, the Stratte-McClure court reasoned, Oran
suggested that an Item 303 violation could give rise to a material Rule 1Ob-5 omission "so long as
the omission is material under Basic, and the other elements ofRule 10b-5 have been established."
Id. at 103-D4.
This court finds Oran's reasoning, and NVIDIA's interpretation ofOran, persuasive. When
then-Judge Alito's statement that "a violation of SK-303's reporting requirements does not
automatically give rise to a material omission under Rule 10b-5" is placed in full context of the
discussion, including the significant differences in materiality standards under the two rules, it is
apparent that Oran required a plaintiff to independently show a duty to disclose under Rule 1Ob-5
standards. See Oran, 226 F.3d at 287-88. Item 303 is not a magic black box in which inadequate
allegations under Rule 10b-5 are transformed, by means ofbroader and different SEC regulations,
into adequate allegations under Rule 1Ob-5. See Exchange Act Release No. 34-26831, 54 Fed. Reg.
22,427, 22,430 n.27 (May 24, 1989) ("[Item 303] mandates disclosure of specified forward-looking
information, and specifies its own standard for disclosure-i.e., reasonably likely to have a material
effect. This specific standard governs the circumstances in which Item 303 requires disclosure. The
probability/magnitude test for materiality approved by the Supreme Court in Basic ... is inapposite
to Item 303 disclosure."). A plaintiff cannot seek to bring an action under Rule 1Ob-5 in the guise
of an Item 303 violation when the same underlying alleged omissions are not sufficient to state a
Rule 10b-5 violation. Compare Compl. [D.E. 30] ~~ 34, 36, 41, with Compl. [D.E. 30] ~ 63. Rather,
as then-Judge Alito properly concluded in Oran, "[s]uch a duty to disclose must be separately
19

shown." Oran, 226 F.3d at 288. Thus, plaintiffs' allegation that defendants violated Item 303 fails
to state a claim.
In sum, plaintiffs sufficiently allege one material misrepresentation: Hinton's August 7,

2013 statement that PowerSecure had secured a $49 million three-year contract renewal when the
contract was in a different geographic area and would require the hiring and training of new workers.
See Compl. [D.E. 30]

~

33. The remaining statements are immaterial, fall within the statutory safe

harbor, or are not false or rendered misleading by inadequate disclosure.

B.
As for the second element, a plaintiff must "state with particularity facts giving rise to a
strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u4(b)(2)(A). The required state of mind is scienter, or "a mental state embracing intent to deceive,
manipulate, or defraud." Tellabs, 551 U.S. at 319 (quotation omitted). A strong inference is one that
is "more than merely plausible or reasonable-it must be cogent and at least as compelling as any
opposing inference ofnonfraudulent intent." Id. at 314. "This standard requires courts to take into
account plausible opposing inferences." Matrixx Initiatives, 131 S. Ct. at 1324 (quotation omitted);
see Tellabs, 551 U.S. at 323-24 ("To determine whether the plaintiff has alleged facts that give rise
to the requisite strong inference of scienter, a court must consider plausible, nonculpable
explanations for the defendant's conduct, as well as inferences favoring the plaintiff." (quotation
omitted). In comparing alternative inferences, the court considers all allegations holistically.
Matrixx Initiatives, 131 S. Ct. at 1324; Tellabs, 551 U.S. at 323.
The Fourth Circuit has held that, in addition to intentional misconduct, "pleading
recklessness is sufficient to satisfy the scienter requirement." Matrix Capital, 576 F.3d at 181; see
Cozzarelli, 549 F.3d at 623; cf. Matrixx Initiatives, 131 S. Ct. at 1323-24 (assuming without
20

deciding that recklessness may establish scienter). In the context of section 1O(b), a reckless act is
one "so highly unreasonable and such an extreme departure from the standard of ordinary care as to
present a danger of misleading the plaintiff to the extent that the danger was either known to the
defendant or so obvious that the defendant must have been aware of it." Matrix Capital, 576 F.3d
at 181 (quotation omitted); see Zak, 780 F .3d at 613 ("[T]he recklessness necessary to support a
finding of scienter must be 'severe.'"); Pub. Emps.' Ret. Ass'n of Colo. v. Deloitte & Touche LLP,
551 F.3d 305, 313 (4th Cir. 2009); Cozzarelli, 549 F.3d at 623. The scienter requirement is not met
if"the inference that defendants acted innocently, or even negligently, [is] more compelling than the
inference that they acted with the requisite scienter." Pub. Emps. Ret. Ass'n, 551 F.3d at 313; see
Zak, 780 F.3d at 613 (noting that the scienter requirement "prevents section 10(b) from devolving
into a penalty for business decisions that, in hindsight, appear questionable").
Plaintiffs make three broad allegations concerning scienter: (1) as senior executive officers,
Hutter and Hinton had access to and were briefed on information about the day-to-day affairs of the
company and therefore knew about the difficulties facing the UI segment; (2) a confidential witness
(CW 1) alleges that "problems affecting the Company's UI business significantly pre-dated the May
2014 disclosures"; and (3) PowerSecure and Hinton had pecuniary motives to deliberately mislead
the public. See Compl. [D.E. 30]

~~

86-101.

Viewing the single alleged material misrepresentation regarding whether a UI contract was
new or renewed, plaintiffs' complaint fails to adequately plead scienter and therefore fails to state
a claim under section 10(b) and Rule lOb-5. See Matrix Capital, 576 F.3d at 187 (determining
whether defendants acted with scienter ''with respect to those [misstated or misleading] statements").
Alternatively, viewing all the allegations in the complaint and attached documents holistically,
plaintiffs have failed to state with particularity facts giving rise to a strong inference that defendants
21

acted with scienter. As explained below, the more plausible inference is that defendants, at most,
negligently failed to adequately disclose additional information about the extent of operational
inefficiencies and a change in corporate strategy that failed to result in the predicted growth.
As for defendants' positions in the company, apart from alleging that Hutter was one of
PowerSecure's "most senior executive officers ... responsible for overseeing [PowerSecure's]
business and operations day-to-day," Compl. [D.E. 30]
Hinton's role as CEO. See id.

~~

~

87, most of the allegations center on

87-90. The complaint alleges that Hinton managed a "matrix

organization," had "numerous direct reports including multiple sales leaders, product leaders,
operations leaders and functional leaders," and operated "the day-to-day business in direct contact
with individual sales leaders." Id.

~

88 (quotation omitted). Plaintiffs do not, however, state any

facts showing that defendants actually knew of the alleged problems in the UI segment. Cf. City of
Roseville Emps.' Ret. Sys. v. Sterling Fin. Corp., 963 F. Supp. 2d 1092, 1119 (E.D. Wash. 2013). 5
Rather, they rely on the testimony ofCW1, a former "Senior Vice President of Sales in the UI group,
from late 2011 through January 2014." Compl. [D.E. 30] ~ 92. According to CW1, problems with
the UI group started as early as May 2013, when PowerSecure had to "shut the two or three offices
it had been operating in the area of West Palm Beach, Florida" and start over in Ft. Meyers, Florida,
after gaining a new contract with Florida Power & Light Company ("FP&L"). Id.

~

93. Thus,

plaintiffs' complaint relies on the combination ofCW1 's allegations of problems existing as far back
as May 2013 and Hinton's and Hutter's positions as PowerSecure's senior executive officers to
create the inference that both defendants actually knew about the problems in the UI segment.
5

The complaint lacks the "detailed allegations establishing the defendants' actual exposure"
sufficient to base knowledge on the "core operations" doctrine. See Yates v. Mun. Mortg. & Equity.
LLC, 744 F.3d 874, 890 (4th Cir. 2014); In re Autodesk. Inc. Sec. Litig., 132 F. Supp. 2d 833,
843-44 (N.D. Cal. 2000); cf. Compl. [D.E. 30] ~ 87 (alleging that "the matters at issue here ... were
at the core of the Company's business and were critical to its overall performance and prospects").
22

CW1 's allegations are fatally undermined in at least two ways. First, the complaint does not
allege that CW1 had personal knowledge of the FP&L contract or the Texas-based Oncor project.
See id.

~~

93-94. Rather, the complaint only alleges that CW1 was "in a position at the Company

to have personal knowledge" and lists CW1's job title. Id.~ 92 (emphasis added). This conclusory
allegation does not establish personal knowledge ofCW1 's subsequent statements, particularly when
that knowledge is not corroborated by other evidence. See Zucco Partners. LLC v. Digimarc Corp.,
552 F.3d 981, 995-96 (9th Cir. 2009); In re Trex Co. Sec. Litig., 454 F. Supp. 2d 560, 573 (W.D.
Va. 2006) (plaintiffs bear the burden of proving personal knowledge). Second, the complaint fails
to allege that CW1 had any communications or meetings with Hinton or Hutter, thus precluding
personal knowledge of what those defendants actually knew. Accordingly, the court declines to
credit CW1 's allegations.

See,~.

Zucco Partners. LLC, 552 F.3d at 995-96; Pipefitters Local No.

636 Defined Benefit Plan v. Tekelec, No. 5:11-CV-4-D, 2013 WL 1192004, at *12 (E.D.N.C. Mar.
22, 2013) (unpublished); City of Pontiac Gen. Emps.' Ret. Sys. v. Stryker Corp., 865 F. Supp. 2d.
811, 834 n.9 (W.D. Mich. 2012); In re Trex Co., 454 F. Supp. 2d at 573.
Finally, plaintiffs' allegations of the pecuniary motives ofPowerSecure and Hinton do not
support a strong inference of scienter. As for PowerSecure, the August 16, 2013 public offering of
2.3 million shares-nine days into the proposed class period-adds little inference of fraud. See
Cozzarelli, 549 F.3d at 627 ("[A] strong inference of fraud does not arise merely from seeking
capital to support a risky venture."); Compl. [D.E. 30]

~

98 (alleging that PowerSecure received

$34.4 million in "needed funds"). The October 8, 2013 acquisition of Encari, LLC is somewhat
more probative of pecuniary motive, although the complaint alleges only that there was "potential
additional earn-out consideration" that would be half-financed by PowerSecure common stock,
without detailing the conditions under which PowerSecure would actually pay, whereas the primary
23

payment was a cash payment of $4.8 million. Compl. [D.E. 30]

~

99 (emphasis added).

As for Hinton, plaintiffs allege that he effectively made three stock sales during the class
period: 200,000 shares on August 16, 2013; 138,770 shares on December 19, 2013, pursuant to a
separation agreement for his pending divorce; and 10,000 shares on February 4, 2014, also pursuant
to his pending divorce. Compl. [D.E. 30]

~

100. The latter two sales do not raise an inference of

scienter because they were made pursuant to a "final division of marital assets in conjunction with
the Reporting Person's pending divorce." [D.E. 37-22] 7, 9; see Teachers' Ret. Sys., 477 F.3dat 184
("[I]nsider trading can imply scienter only if the timing and amount of a defendant's trading were
'unusual or suspicious."'); Ronconi v. Larkin, 253 F.3d 423, 435 (9th Cir. 2001) ("Insider trading
is suspicious only when it is dramatically out of line with prior trading practices at times calculated
to maximize the personal benefit from undisclosed inside information." (quotation and alterations
omitted)); In reIntegrated Elec. Servs., No. 4:04-CV-3342, 2006 U.S. Dist. LEXIS 1425, at *4-6
(S.D. Tex. Jan. 10, 2006)(unpublished). As for the first sale, Hinton offered for sale 200,000 shares
on August 16, 2013, or roughly 32% of his then-current holdings, and the sale closed on August 21,
2013. Compl. [D.E. 30]

~

100; see [D.E. 37-22] 3. Plaintiffs allege that this sale was out ofline

with prior trading practices. Compl. [D.E. 30] ~ 101. This sale, however, does not support a strong
inference of scienter for several reasons: (1) the public offering came nine days into the proposed
class period and after only five of the twenty-six alleged misleading statements, the only material
one of which was that Hinton improperly referred to a contract as a renewal rather than a new
contract; 6 (2) the amount of the offering, which was roughly 32% of his then-current holdings, was
6

Again, the court declines to credit, for lack of personal knowledge, CW1 's allegation that
"problems affecting the Company's UI business significantly pre-dated the May 2014 disclosures,
as far back as the beginning of the Class Period." Compl. [D.E. 30] ~92. Furthermore, even if
credited, CW1 's allegation that "the UI group stopped growing in the third and fourth quarters of
2013" is not probative of Hinton's knowledge of any alleged operational inefficiencies or other
24

offset less than four months later with his December 5, 2013 receipt of 275,000 shares (albeit
restricted shares), followed by an April 7, 2014 receipt of an additional 17,015 restricted shares,
resulting in a net positive change (excluding the shares sold as part of the divorce agreement), [D.E.
37-22] 5, 11; and (3) the failure of Hutter, his alleged coconspirator, to sell any PowerSecure shares.
See,

~.

Cozzarelli, 549 F .3d at 627-28 (declining to fmd a strong inference of scienter where

defendants "sold 13%, 12%, and 3% of their holdings" and "the total holdings of each defendant
increased" while the defendants allegedly failed to adequately disclose information regarding an
ongoing medical study); Metzler Inv. GMBH v. Corinthian Colls .. Inc., 540 F.3d 1049, 1067 (9th
Cir. 2008) (declining to find scienter where a defendant sold 37% of his shares because "[w]e
typically require larger sales amounts[-]and corroborative sales by other defendants-to allow
insider trading to support scienter"); Ronconi, 253 F.3d at 436 ("One insider's well timed sales do
not support the 'strong inference' required by the statute where the rest of the equally knowledgeable
insiders act in a way inconsistent with the inference that the favorable characterizations of the
company's affairs were known to be false when made." (citation omitted)); In re Advanta Corp. Sec.
Litig., 180 F.3d 525, 540 (3d Cir. 1999), abrogation on other grounds recognized bx Institutional
Inv'rs Grp. v. Avaya. Inc., 564 F.3d 242, 276 (3d Cir. 2009); In re Dot Hill Sys. Corp. Sec. Litig.,
594 F. Supp. 2d 1150, 1161 (S.D. Cal. 2008) ("The insider trading allegations are problematic
because the insider sales ... preceded the vast majority of the alleged misrepresentations."). 7

problems as of the August 7, 2013 statement, just over one month into the third quarter. See id.,
94.
7

Plaintiffs attempt to distinguish Metzler by citing the court's reasoning that the defendant
"sold in a manner consistent with their pre-Class Period sales." Pis.' Mem. Opp'n Mot. Dismiss
[D.E. 47] 45 n.42; see Metzler, 540 F.3d at 1067. That reasoning, however, was in addition to the
court's independent rationale that larger sales amounts were required to "allow insider trading to
support scienter." Metzler, 540 F.3d at 1067. Moreover, with respect to Hutter's lack of sales, the
cases that plaintiffs cite stand only for the proposition that the absence of sales by coconspirators is
25

Hinton's sale of stocks supports, at best, a very weak inference of scienter.

In sum, viewing all the allegations holistically, plaintiffs' complaint fails to "state with
particularity facts giving rise to a strong inference" that defendants acted with scienter or severe
recklessness. Excluding CW1 's allegations for lack of personal knowledge, the complaint essentially
states that defendants must have known of or recklessly disregarded the operational inefficiencies,
possible failure of a change in corporate strategy to pursue higher-margin projects, and the possibility
of a new client delaying work, supported by the fact that PowerSecure and Hinton made public
offerings of PowerSecure common stock nine days into the proposed class period. This inference
of scienter is not as compelling as the competing inference that defendants innocently or negligently
failed to fully disclose to the market (and competitors) information about the change in corporate
strategy to pursue higher-margin opportunities, and the extent of existing and potential operational
inefficiencies driven by estimates of future work flow. See Zak, 780 F.3d at 613 (the scienter
requirement "prevents section 1O(b) from devolving into a penalty for business decisions that, in
hindsight, look questionable"). Thus, looking at all allegations, plaintiffs have failed to adequately
plead scienter.
Here, plaintiffs have failed to "state with particularity facts giving rise to a strong inference
that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2)(A). Thus, the
court grants defendants' motion to dismiss count one.

IV.
Plaintiffs also allege violations of sections 20(a) and 20(b) of the Exchange Act by Hinton
and Hutter. Compl. [D.E. 30] ~~ 125-32. In light ofthe disposition of plaintiffs' section 10(b) and

not dispositive, not whether the court can use the lack of allegations in weighing competing
inferences. See Pls. Mem. Opp'n Mot. Dismiss [D.E. 47] 46.
26

Rule 10b-5 claim, the court dismisses these counts and the complaint as a whole. Cozzarelli, 549
F .3d at 628. In so doing, the court gives leave to plaintiffs to amend their complaint. See Pls.' Mem.

Opp'n Mot. Dismiss. [D.E. 47] 16 n.7.

v.
In sum, the court GRANTS defendants' motion for judicial notice and incorporation by

reference [D.E. 38] and motion to dismiss [D.E. 35]. The court hereby DISMISSES without
prejudice plaintiffs' complaint. If plaintiffs elect to amend their complaint, they shall file the
amended complaint by October 16, 2015. Defendants shall have until November 23, 2015, to file
any renewed motion to dismiss.
SO ORDERED. This t.<'day of September 2015.

27