Plaisance et al v. Schiller et al
Filing
123
MEMORANDUM OPINION AND ORDER granting 101 MOTION to Dismiss 97 Amended Complaint, granting 102 MOTION to Dismiss 97 Amended Complaint, granting 103 MOTION to Dismiss the Amended Complaint, granting 104 MOTION to Dismiss 97 Amended Complaint, granting 105 MOTION to Dismiss 97 Amended Complaint, denying Request for Leave to Amend Complaint. (Signed by Judge Sim Lake) Parties notified. (aboyd, 4)
United States District Court
Southern District of Texas
ENTERED
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
KRISTEN PLAISANCE, ROBBIE
PLAISANCE, RICHIE CORLEY,
CHARLES F. LEEKLEY, BRETT
MORRIS, HENRY NEGRETTE, JIM
NESBITT, CINDY SPARACINO,
RICHARD SPARACINO, CHRISTIAN
SCHICK, JACK GOSTL, SANTIAGO
CORDOVEZ, FLOYD BONE, TOM
HOWLAND, MICHAEL MERNAH,
BEN A. SEALE, JOE SHUPAK,
MARSHALL WHITMER, BILL WALTERS,
ROBERT ROIG, JOSEPH C. ROSSO,
and ARTHUR D. SECOR,
Plaintiffs,
v.
JOHN D. SCHILLER, JR., D. WEST
GRIFFIN, HILL A FEINBERG,
NORMAN M.K. LOUIE, WILLIAM
COLVIN, DAVID M. DUNWOODY,
CORNELIUS DUPRE II, KEVIN
FLANNERY, SCOTT A. GRIFFITHS,
JAMES LaCHANCE, and UHY LLP,
March 14, 2019
David J. Bradley, Clerk
§
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CIVIL ACTION NO. H-17-3741
§
§
Defendants.
MEMORANDUM OPINION AND ORDER
This
action
is
brought
by plaintiffs,
Kristen
Plaisance,
Robbie Plaisance, Rickie Corley, Charles F. Leekley, Brett Morris,
Henry Negrette, Jim Nesbitt,
Cindy Sparacino, Richard Sparacino,
Christian Schick, Jock Gostl,
Howland,
Michael
Mernah,
Ben
Santiago Cordovez,
A.
Seale,
Joe
Floyd Bone, Tom
Shupak,
Marshall
Whitmer, Bill Walters, Robert Roig, Joseph C. Rosso, and Arthur D.
Secor
(collectively,
"Plaintiffs"),
against defendants,
UHY LLP
("UHY"), and ten individual defendants (collectively, "Individual
Defendants"):
("Griffin"),
("Louie") ,
John
D.
Hill
Schiller
A
Feinberg
William
("Dunwoody") ,
("Feinberg"),
Colvin
Cornelius
("Schiller"),
Norman
("Dupre") ,
II
West
David
("Colvin"),
Dupre
D.
Griffin
M. K.
Louie
Dunwoody
M.
Kevin
Flannery
("Flannery"), Scott A. Griffiths ("Griffiths"), and James LaChance
("LaChance") ,
for
common
law
fraud
and
alleged
violations
of
10(b) and 20(a) of the Securities Exchange Act of 1934 (Exchange
§§
Act),
15
U.S.C.
78j (b),
§§
thereunder, 17 C.F.R.
§
78t(a)
and Rule
10b-5
promulgated
240.10b-5, during the period beginning on
September 28, 2007, and ending on December 30, 2016, arising from
statements and representations regarding Energy XXI Ltd. ( "EXXI" or
the "Company" ) .
§
Plaintiffs also assert claims for violations of
20(a) of the Exchange Act, 15 U.S.C.
§
78t(a), and for breach of
fiduciary duty against the Individual Defendants all of whom served
as members of EXXI's Board of Directors.
are
UHY
LLP' s
Motion
to
Dismiss
Pending before the court
( "UHY' s
MD")
(Docket
Entry
No. 101), Defendant D. West Griffin's Motion to Dismiss the Amended
Complaint ("Griffin's MD") (Docket Entry No. 102) , Defendant Norman
M.K. Louie's Motion to Dismiss the Amended Complaint ("Louie's MD")
(Docket Entry No. 103), Defendant John D. Schiller, Jr.'s Motion to
Dismiss
No.
the
104) ,
Amended
Amended
and The
Complaint
Complaint
("Schiller's
Director Defendants'
("Director
Motion
Defendants'
-2-
MD")
MD")
(Docket
to
Entry
Dismiss
(Docket
the
Entry
No. 105).
For the reasons stated below, the defendants' motions to
dismiss will be granted.
I.
Procedural History and Alleged Facts
Plaintiffs initiated this action on September 6,
filing
in
the
Southern District
of
New
York
by
Complaint
for
Common Law Fraud,
Violation of the Federal Securities Law,
a
2017,
and
Breach of Fiduciary Duty (Docket Entry No. 1), asserting claims for
fraud and violation of
promulgated
§
10(b) of the Exchange Act and Rule 10b-5
thereunder. against
violation of
§
all
defendants,
and
claims
for
20(a) of the Exchange Act and breach of fiduciary
duty against the Individual Defendants.
On December 1, 2017, the
Southern District of New York entered an Order pursuant to 28
U.S.C.
§
1404(a)
Entry
No.
52).
transferring the action to this court
On
February
12,
2018,
defendants
dismissal (Docket Entry Nos. 85, 86, 89, 93, and 94).
(Docket
moved
for
On March 29,
2018, Plaintiffs filed an Amended Complaint for Violation of the
Federal Securities Law, Common Law Fraud, and Breach of Fiduciary
Duty ("Plaintiffs' Amended Complaint")
which they reassert
complaint.
(Docket Entry No.
the same claims asserted in their initial
On May 18, 2018, defendants filed the pending motions
to dismiss Plaintiffs' Amended Complaint
105).
(Docket Entry Nos. 101-
On July 16, 2018, plaintiffs filed responses to each of the
pending motions to dismiss
August
97) , in
29,
2018,
defendants
(Docket Entry Nos.
filed replies
in support of
motions to dismiss (Docket Entry Nos. 118-122).
-3-
111-115),
and on
their
Plaintiffs' Amended Complaint alleges that EXXI was founded by
Schiller and Griffin in 2005 to acquire,
explore,
develop,
and
operate oil and natural gas properties onshore in Louisiana and
Texas and offshore in the Gulf of Mexico Shelf, funded by a $300
million initial public offering of
common stock traded on the
London
Investment
Stock
Exchange
Alternative
("AIM") . 1
Market
Plaintiffs allege that Schiller served as EXXI's President, Chief
Executive Officer
("Board")
from
("CEO"),
the
and member of the Board of Directors
company's
inception
through
and
including
February 2, 2017, when EXXI announced the termination of Schiller's
employment as President, CEO, and member of the Board in a Current
Report filed with the SEC on Form 8-K. 2
From EXXI's founding in
2005 through and including October 15, 2015, Schiller also served
as Chairman of the Board.
He was stripped of that title by the
Board on October 9, 2015, following an internal investigation that
found
he
borrowed
affiliates,
some
funds
of
from
whom
personal
provided
acquaintances
services
to
or
EXXI
their
or
its
subsidiaries, and that in 2014 he personally borrowed $3 million
from
defendant
Louie
effective December 15,
before
2014. 3
Louie
was
appointed
to
the
Board
Plaintiffs allege that as EXXI's
1
Plaintiffs' Amended Complaint, Docket Entry No. 97, p. 15
~~ 64-65.
All page numbers for docket entries in the record refer
to the pagination inserted at the top of the page by the court's
electronic filing system, CM/ECF.
2
Id. at 6
~
20.
-4-
Board
Chairman
and
CEO,
Schiller
signed
the
Company's
annual
reports filed with the SEC on Forms 10-K and 10-K/A. 4
Plaintiffs allege that defendant Griffin served as EXXI' s
Chief Financial Officer ( "CFO") and Board member from the Company's
inception
through
and
including
October
20,
2014,
when
EXXI
announced Griffin's resignation in a press release and a Current
Report
filed with the SEC on Form 8-K/A on December 1,
2014,
following BDO USA, LLP's ("BDO") acquisition of the Texas practice
of UHY, which provided independent public accounting services to
EXXI. 5
Plaintiffs
allege
that
as
CFO,
Griffin
signed EXXI' s
quarterly and annual reports filed with the SEC on Forms 10-Q,
10-K, and 10-K/A, and that Griffin is responsible for the content
of the reports that he signed. 6
Plaintiffs
allege
that
UHY
was
engaged
to
audit
EXXI's
financial statements and to express an opinion on whether those
financial statements fairly presented the financial condition of
the
Company. 7
Specifically,
UHY
was
engaged
to
audit
EXXI's
financial statements for the years ended June 30, 2011, 2012, 2013,
and 2014. 8
UHY's
Plaintiffs allege that each audit opinion contained
opinion that
4
Id. ~~ 20-21.
5
Id. at 9 ~ 39.
6
Id. ~~ 37-38.
7
Id. at 19 ~ 85.
8
it audited EXXI's
Id.
-5-
financial
statements
"in
accordance with the standards of the Public Company Accounting
Oversight Board (United States)" (the "PCAOB"),
and perform [ed]
9
that it "plan [ned]
the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was
maintained in all material respects," 10 and that each audit stated:
"'In our opinion Energy XXI
maintained,
(Bermuda)
in all material respects,
Limited and subsidiaries
effective internal control
over financial reporting' for the year in question." 11
Plaintiffs allege that in addition to serving on EXXI's Board,
defendant Colvin was Chairman of the Audit Committee and a member
of the Nomination and Governance Committee; 12 defendant Flannery was
a member of the Audit Committee and the Nomination and Governance
Committee; 13 defendant Dunwoody was Chairman of the Remuneration
Committee and a member of the Audit Committee; 14 defendant Griffiths
served on the Audit Commit tee and the Compensation Commit tee; 15
defendant Feinberg was Lead Independent Director, Chairman of the
Nomination and Governance Committee, a member of the Compensation
9
Id. at 20 ~ 92.
10Id. ~ 93.
11
Id. at 20-21 ~ 94.
12
Id. at 11 ~ 48.
13
Id. ~ 49.
14
Id. at 11-12 ~ 50.
15Id. at 12 ~ 51.
-6-
Committee, and an ex officio member of the Audit Committee; 16 and
defendant Dupre was Chairman of the Compensation Committee and a
member of the Nomination and Governance Committee. 17
Plaintiffs allege that between 2006 and 2010, EXXI completed
five
major
acquisitions
for
aggregate
cash
("Marlin")
in
February
2006
for
of
(1) Marlin Energy,
approximately $2.5 billion of borrowed funds:
L.L.C.
consideration
approximately
$448.4
million; (2) certain Louisiana Gulf Coast producing properties from
affiliates of Castex Energy,
Inc.
( "Castex Properties")
2006 for approximately $312.5 million;
(3)
in June
certain Gulf of Mexico
shelf properties from Pogo Producing Company ("Pogo Properties") in
June 2007 for approximately $415.1 million;
certain Gulf of
(4)
Mexico shelf oil and natural gas interests from MitEnergy Upstream
LLC, a subsidiary of Mitsui & Co., Ltd.
November 2009 for $276.2 million; and
("MitEnergy
(5)
Interests") in
certain shallow water
Gulf of Mexico shelf oil and natural gas interests from affiliates
of Exxon Mobil Corporation ("ExxonMobil Acquisition") in December
2010 for $1.01 billion. 18
Plaintiffs allege that on July 31,
2007,
following EXXI' s
acquisition of the Pogo Properties in June of 2007, EXXI announced
that in addition to trading on the AIM in London, its common stock
~ 52.
16
Id.
17
Id. at 12
~ 53.
18
Id. at 16
~~ 69-71.
-7-
was
approved
for
trading
national exchange. 19
in
the
United
States
on
the
Plaintiffs allege that on August 12,
NASDAQ
2011,
EXXI's common stock was listed for trading on the NASDAQ Global
Select Market under the symbol "EXXI. " 20
Plaintiffs allege that
because many institutional investors are prohibited from investing
in companies that do not meet certain minimum requirements such as
the requirements needed to be listed on the NASDAQ Global Select
Market
exchange,
listing
thereon
gave
capital and increased market liquidity. 21
EXXI
greater
access
to
Plaintiffs assert their
belief that after a reasonable opportunity for discovery, evidence
will show that but for EXXI's use of cash flow hedge accounting,
EXXI would not have met the minimum requirements for listing on the
NASDAQ Global Select Market. 22
Plaintiffs allege that from 2010 to 2013 EXXI made optimistic
and positive statements about its ultimately unsuccessful ultradeep exploration program,
particularly the Davy Jones No.
1
and
No. 2 wells, that were false and misleading when made. 23
Plaintiffs allege that in early 2014 defendants caused EXXI to
acquire EPL,
an independent oil and natural gas exploration and
production company, and assert their belief that after a reasonable
19
Id. at 16-17 ~ 72.
2oid. at 17 ~ 73.
21
Id. ~ 74.
22Id. ~ 76.
23Id. at 25-32 ~~ 108-43.
-8-
opportunity for discovery evidence will show that Schiller pursued
the acquisition without customary and reasonable due diligence, and
consequently
that
EXXI
overpaid
for
EPL, 24
that
following
the
acquisition one of EPL's Board of Directors, defendant Griffiths,
joined EXXI's Board and changed EPL's method of accounting from
successful
efforts
accounting
method, 25
reported
in EXXI' s
March 31,
2014,
to
full
EXXI' s
cost
accounting
reported
financial
goodwill
statements
from
shortly before the acquisition,
to
match
rose
the
EXXI's
from
zero
period ended
to $329 million
reported by EXXI in its June 30, 2014, financial statements filed
immediately after the acquisition. 26
Plaintiffs allege that following EXXI's acquisition of EPL,
EXXI issued financial statements that were false and misleading
because EXXI failed to perform a quantitative goodwill impairment
test and therefore failed to recognize goodwill impairments for EPL
or for its other oil and gas properties 27 and failed to disclose the
existence of a personal loan from defendant Louie to defendant
Schiller. 28
Plaintiffs allege that on or about December 14,
2014,
EXXI
common stock was cancelled for trading on the AIM in London by
24Id. at 33-34 ~~ 147-155.
25Id. at 35-36 ~~ 159-68.
26Id. at 37 ~ 173.
27Id. at 38-49 ~~ 176-230.
2Bid. at 56 ~~ 269-70.
-9-
action of the Board taken pursuant to a shareholder vote at the
annual meeting held on November 4, 2014. 29
Plaintiffs
allege
that
in September of
2015,
following
a
change in independent auditors, EXXI was required to restate more
than four years of financial statements to eliminate the use of
accounting. 30
hedge
Plaintiffs
allege
that
EXXI's
financial
statements for the years ended June 30, 2011, 2012, 2013, 2014, and
filed with the
2015,
SEC on August
26,
2011,
August
9,
2012,
August 21, 2013, August 28 and December 23, 2014, and September 29,
2015, were materially false and misleading because they stated that
EXXI did not use hedging for speculative or trading purposes. 31
Plaintiffs allege that "[u]ntil EXXI's financial statements were
corrected on September 29,
2015,
the
Company's publicly filed
financial statements for at least the years ended June 30, 2011,
2012,
2013,
and
2014,
and
for
all
the
intervening
quarters
materially misstated and did not fairly and accurately present the
Company's financial
condition and its results of operations. " 32
Plaintiffs also allege that
EXXI's disclosure that it was required to restate its
financial statements to eliminate cash flow hedge
accounting was materially false and misleading because it
made it appear that the reason for the restatement was a
29Id. at 18 ~ 78.
3oid. at 17-18 ~ 77.
31
Id. at 52 ~ 249.
32Id. at 54 ~ 257.
-10-
mere technical deficiency in documentation, when the true
reason for the restatement was that the Company was
hedging for improper purposes, including speculating on
future oil and natural gas prices or manipulating
reported revenue and earnings . 33
Plaintiffs
allege
that
on
April
16,
2016,
EXXI
sought
protection from its creditors by filing a voluntary Chapter 11
bankruptcy petition in the Southern District of Texas. 34
Plaintiffs allege that on April 20, 2016, EXXI was informed by
the Listing Qualifications Department of NASDAQ that
its stock
would be delisted from the NASDAQ for failure to meet the minimum
listing qualifications. 35
Plaintiffs allege that on December 13, 2016,
the Bankruptcy
Court for the Southern District of Texas approved EXXI's amended
plan of reorganization. 36
II.
Standards of Review
Defendants argue that Plaintiffs' Amended Complaint should be
dismissed pursuant to Federal Rule of Civil Procedure 12(b) (6) for
failure
to state a
claim for which relief may be granted.
A
Rule 12(b) (6) motion tests the formal sufficiency of the pleadings
and is "appropriate when a defendant attacks the complaint because
it
fails
to
state
a
legally
cognizable
33Id. at 54-55 ~ 259.
34
Id. at 68-69 ~ 328.
3sid. at 18 ~ 79.
36Id. ~ 81.
-11-
claim."
Ramming
v.
United States, 281 F.3d 158, 161 (5th Cir. 2001), cert. denied sub
nom.
Cloud v. United States,
122 S.
Ct.
2665
(2002).
The court
must accept the factual allegations of the complaint as true, view
them in a light most favorable to the Plaintiffs,
reasonable inferences in the Plaintiffs' favor.
and draw all
Id.
To defeat a
motion to dismiss pursuant to Rule 12(b) (6) a plaintiff must plead
"enough facts to state a claim to relief that is plausible on its
face."
Bell Atlantic Corp.
(2007).
"A claim has facial plausibility when the plaintiff pleads
factual
content
that
v.
allows
Twombly,
the
court
127 S.
to
Ct.
draw
1955,
the
1974
reasonable
inference that the defendant is liable for the misconduct alleged."
Ashcroft v. Igbal, 129 S. Ct. 1937, 1949 (2009)
127 S. Ct. at 1965).
'probability
(citing Twombly,
"The plausibility standard is not akin to a
requirement,'
but
it
asks
for
more
than a
possibility that a defendant has acted unlawfully."
Id.
sheer
(quoting
Twombly, 127 S. Ct. at 1965) .
"Where a complaint pleads facts that
are
a defendant's liability,
'merely consistent with'
short
of
the
line
between
entitlement to relief.'"
Id.
possibility
and
it
'stops
plausibility
(quoting Twombly,
127 S.
Ct.
of
at
1966).
When considering a motion to dismiss courts generally are
limited to the complaint and its proper attachments.
Portfolio
Equities,
Inc.,
540
F. 3d 333,
338
(5th
Dorsey v.
Cir.
2008).
Courts may also rely on "'documents incorporated into the complaint
by reference,
and matters
of
which a
-12-
court may
take
judicial
notice."'
Bank PLC,
motion
to
complaint,
Id.
See also Lone Star Fund V (U.s.) , L. P. v. Barclays
594 F.3d 383,
dismiss,
any
387
"[t]he
documents
(5th Cir.
court's
attached
2010)
review
to
the
(When considering a
is
limited
complaint,
to
the
and
any
documents attached to the motion to dismiss that are central to the
claim and referenced by the complaint.")
Stanley Dean Witter,
224 F. 3d 496,
(citing Collins v. Morgan
498-99
(5th Cir.
2000)).
In
securities cases courts may take judicial notice of the contents of
public disclosure documents that are required by law to be filed
and are filed with the SEC with the caveat that these documents may
be considered only for the purpose of determining what statements
they
contain;
not
for
proving
the
truth
of
their
contents.
Lovelace v. Software Spectrum Inc., 78 F.3d 1015, 1018 & n.1 (5th
Cir. 1996)
(citing and adopting rule of Kramer v. Time Warner Inc.,
937 F.2d 767, 774 (2d Cir. 1991), and explaining that rule does not
apply to other forms
of disclosure
such as press
releases and
announcements at shareholder meetings) .
III.
Analysis
Defendants argue that all of the claims asserted against them
should be dismissed because Plaintiffs have failed to state a claim
for which relief may be granted.
A.
Federal Securities Law Claims
Defendants argue that the securities claims asserted against
them should be dismissed because Plaintiffs have failed to satisfy
-13-
the pleading requirements for stating either a primary claim under
§ lO(b)
or Rule lOb-S,
or a
claim for control person liability
under§ 20(a), and because the factual allegations do not satisfy
the pleading requirements of Federal Rule of Civil Procedure 9(b)
or the Private Securities Litigation Reform Act ( "PSLRA") set forth
at lS U.S.C. § 78u-4(b).
1.
Applicable Law
(a)
Federal Securities Law
Section lO(b) of the Exchange Act makes it unlawful for any
person:
To use or employ, in connection with the purchase or sale
of any security
any manipulative or deceptive
device or contrivance in contravention of such rules and
regulations as the [SEC] may prescribe as necessary or
appropriate in the public interest or for the protection
of investors.
lS U.S.C. § 78j (b).
Rule lOb-S makes it unlawful for any person,
directly or indirectly:
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make
the statements made, in the light of the circumstances
under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit upon
any person, in connection with the purchase or sale of
any security.
17
C.F.R.
§
240.10b-S.
To
recover damages
§ lO(b) and Rule lOb-S, plaintiffs must prove
-14-
for
violations
of
"(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."
Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398,
(2014).
2015)
See also Owens v. Jastrow,
(same) .
789 F.3d 529,
535
2407
(5th Cir.
To satisfy the materiality requirement, "there must
be a substantial likelihood that the disclosure of the omitted fact
would
have
been
significantly
available."
altered
[449]
[231]
(1988)).
judged
(1976)
the
the
reasonable
mix'
'total
Inc.
v.
investor
of
as
having
information
Northway,
Inc.,
96 S.
made
Ct.
(citing Basic Inc. v. Levinson, 108 S. Ct. 978,
The Fifth Circuit has stated that "[m]ateriality is
in
the
circumstances."
(5th Cir.
by
TSC Industries,
2126,
not
viewed
abstract,
but
in
light
of
the
surrounding
Krim v. BancTexas Group, Inc., 989 F.2d 1435, 1448
1993).
Inclusion of
cautionary language along with
disclosure of any firm-specific adverse facts or assumptions is
relevant to the materiality inquiry, but "cautionary language as
such is not per se dispositive of this inquiry."
Rubinstein v.
Collins, 20 F.3d 160, 168 (5th Cir. 1994).
Scienter
is
"a mental
manipulate, or defraud."
Ltd.,
127 S.
Ct.
2499,
state
embracing
intent
to deceive,
Tellabs, Inc. v. Makor Issues & Rights,
2507
(2007}
(quoting Ernst
Hochfelder, 96 S. Ct. 1375, 1381, n.12 (1976)}.
require a specific intent to deceive; instead,
-15-
&
Ernst v.
Scienter does not
the scienter element of a federal securities fraud claim
may be satisfied by proof that the defendant acted with
severe recklessness, which is "limited to those highly
unreasonable omissions or misrepresentations that involve
not merely simple or even inexcusable negligence, but an
extreme departure from the standards of ordinary care,
and that present a danger of misleading buyers or sellers
which is either known to the defendant or is so obvious
that the defendant must have been aware of it."
Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir.
1994)
(quoting Shushany v. Allwaste, Inc., 992 F.2d 517, 521 (5th
Cir. 1993)).
strong
Plaintiffs "must allege facts sufficient to raise a
inference
of
scienter
with
respect
to
each
individual
defendant."
R2 Investments LDC v. Phillips, 401 F.3d 638, 643 (5th
Cir.
(citing Southland Securities
2005)
Solutions,
Inc., 365 F.3d 353, 365
Corp.
v.
(5th Cir. 2004)
INSpire
Ins.
(holding that
plaintiffs claiming securities fraud against multiple defendants
must "distinguish among those they sue and enlighten each defendant
as to his or her particular part in the alleged fraud")).
Group
allegations that "the defendants" or "the company" knew something
do not meet
factual
that
standard.
allegations
Southland,
contained in
the
365
entire
F.3d at
366.
complaint
must
The
be
considered in determining whether plaintiffs' allegations raise a
strong inference of
scienter.
To withstand a
motion to
dismiss, the facts alleged must permit an inference of intentional
deception that is at least equally as compelling as any alternative
inference.
Cir. 2009)
Lormand v. US Unwired,
Inc.,
565 F.3d 228,
254
(5th
(quoting Tellabs, 127 S. Ct. at 2499, 2510).
-16-
;;
Plaintiffs must show a causal connection between the company's
revealing of the truth regarding an earlier misrepresentation and
a
See Alaska
subsequent decline in the company's stock price.
Electrical Pension Fund v. Flowserve Corp., 572 F.3d 221, 229 (5th
Cir.
This corrective disclosure must be "related to" or
2009).
"relevant to" the alleged fraud, meaning the disclosed information
must make the existence of the alleged fraud "more probable than it
would be without that alleged fact."
Public Employees' Retirement
System of Mississippi, Puerto Rico Teachers' Retirement System v.
Amedisys,
135
S.
Inc.,
Ct.
769 F.3d 313, 321
2892
(2015).
The
(5th Cir.
corrective
2014),
cert. denied,
disclosure
"can
be
gradually perceived in the marketplace through a series of partial
disclosures."
Id. at 322.
Partial disclosures are viewed collec-
tively and considered as a whole to determine when cumulative facts
support
a
corrective disclosure
pleading standard.
that
meets
the
loss
causation
Id. at 325.
The parties agree that the applicable statute of limitations
and repose is 28 U.S.C.
§
1658(b) . 37
Under 28 U.S.C.
§
1658(b) an
action for securities fraud must be brought no later than two years
after the discovery of the facts constituting the violation or five
years after the occurrence of the violation, whichever is earlier.
37
See, e.g., Director Defendants' MD, Docket Entry No. 105,
pp. 29-30, and Plaintiffs' Memorandum of Law in Opposition to the
Director
Defendants'
Motion
to
Dismiss
Amended
Complaint
("Plaintiffs' Opposition to Director Defendants' MD"), Docket Entry
No. 115, p. 26.
-17-
The
period
of
repose
misrepresentation
or
begins
to
omission
securities law violation.
run
that
from
forms
the
the
date
of
the
basis
of
the
Hall v. Variable Annuity Life Insurance
Co., Civil Action No. H-11-3639, 2012 WL 12877431, at *4 (S.D. Tex.
May 31, 2012), aff'd, 727 F.3d 372
(5th Cir. 2013)
(citing In re
Exxon Mobil Corp. Securities Litigation, 500 F.3d 189, 199-200 (3d
Cir. 2007)
("[W]e hold that the repose period applicable to§ 10(b)
claims as set out in§§ 9(e) and 1658(b) (2) begins to run on the
date of the alleged misrepresentation.").
this
action
on
September
September 6, 2012.
2017, 38
6,
Because Plaintiffs filed
the
date
of
repose
is
Plaintiffs state that they "do not assert any
claims for any false,
misleading,
prior to that date." 39
Nevertheless, citing Rubinstein, 20 F.3d at
170
n.41,
statements
Plaintiffs
were
argue
made
prior
or incomplete statements made
that
to
"to
the
September
Defendants had a duty to correct -
6,
extent
2012,
such as EXXI' s
that
untrue
about
which
2 011 annual
report, which improperly utilized hedge accounting - the omission
of a corrective disclosure in subsequent statements made after that
date are actionable." 40
In
Rubinstein,
acknowledged
that
20
F.3d
defendants
at
170
have
a
n.41,
the
duty under
Fifth
Rule
Circuit
lOb-S
to
38
See Complaint for Violation of the Federal Securities Law,
Common Law Fraud, and Breach of Fiduciary Duty, Docket Entry No. 1.
39
Plaintiffs' Opposition to Director Defendants'
Entry No. 115, p. 26.
4oid.
-18-
MD,
Docket
correct
statements
if
those
statements
have
become materially
misleading in light of subsequent events, but the Rubinstein court
neither held nor stated that material omissions made before the
date of repose remain actionable because defendants have an ongoing
duty to correct such omissions.
omissions
made
before
the
Plaintiffs' argument that material
date
of
repose
are
nevertheless
actionable because defendants had an ongoing duty to correct those
omissions would negate the five-year statute of repose by allowing
plaintiffs to revive time-barred claims simply by asserting that
defendants had an ongoing duty to correct their material omissions.
Any claims based on misrepresentations or omissions allegedly made
before September 6, 2012, are therefore barred by the statute of
repose.
See Hall, 2012 WL 12877431, at *4 (citing Malhotra v. The
Equitable
F.
Supp.
Life
Assurance
2d 299,
305-06
Society
(E.D.N. Y.
of
the
2005)
United
States,
364
(granting defendants'
12(b) (6) motion on the ground that the statute of repose began to
run on the day of the initial omission) .
(b)
Rule 9(b)
Federal Rule of Civil Procedure 9(b)
provides that "[i]n alleging fraud or mistake,
a
party must state with particularity the circumstances constituting
fraud or mistake.
Malice, intent, knowledge, and other conditions
of a person's mind may be alleged generally."
9 (b) .
Fed.
R.
Ci v.
P.
Plaintiffs must plead the elements of their Rule 10b-5
claims with particularity.
See Goldstein v. MCI WorldCom, 340 F.3d
-19-
238,
245
(5th Cir.
2003)
(citing Williams v.
WMX Technologies,
Inc., 112 F.3d 175, 177 (5th Cir.), cert. denied, 118 S. Ct. 412
(1997)).
Particularity is required so that the complaint provides
defendants with fair notice of the plaintiffs'
claims,
protects
defendants from harm to their reputation and goodwill, reduces the
number
of
strike
suits,
and
prevents
plaintiffs
from
filing
baseless claims and then attempting to discover unknown wrongs.
See Tuchman, 14 F.3d at 1067.
Pleading fraud with particularity in this circuit requires
"the
particulars
of
'time,
place,
and
contents
of
the
false
representations, as well as the identity of the person making the
misrepresentation and what [that person] obtained thereby.'"
at 1068
(quoting Tel-Phonic Services,
Inc. v. TBS International,
Inc., 975 F.2d 1134, 1139 (5th Cir. 1992)).
Fort James Corp.,
470 F.3d 1171,
1174
Id.
See also Carroll v.
(5th Cir.
2006)
(quoting
United States ex rel. Riley v. St. Luke's Episcopal Hospital, 355
F.3d 370,
381
(5th Cir.
misrepresentation
and
2004)
("In cases concerning fraudulent
omission
of
facts,
Rule
9(b)
typically
requires the claimant to plead the type of facts omitted, the place
in which the omissions should have appeared, and the way in which
the omitted facts made the representations misleading.")) .
"A
dismissal for failure to plead fraud with particularity as required
by rule 9(b) is a dismissal on the pleadings for failure to state
a claim."
Southland, 365 F.3d at 361 (citing Shushany, 992 F.2d at
520-520).
-20-
(c)
Private Securities Litigation Reform Act
In 1995 Congress amended the Exchange Act through the passage
of the PSLRA, 15 U.S.C.
§
78u-4(b) (1).
In relevant part the PSLRA
provides:
(1)
Misleading statements and omissions
In any private action arising under this chapter in which
the plaintiff alleges that the defendant-(A)
made an untrue statement of a material fact;
or
(B) omitted to state a material fact necessary in
order to make the statements made, in the light of
the circumstances in which they were made, not
misleading;
the complaint shall specify each statement alleged to
have been misleading, the reason or reasons why the
statement is misleading, and, if an allegation regarding
the statement or omission is made on information and
belief, the complaint shall state with particularity all
facts on which that belief is formed.
(2)
Required state of mind
(A) In general
Except as provided in subparagraph (B), in any
private action arising under this chapter in which
the plaintiff may recover money damages only on
proof that the defendant acted with a particular
state of mind, the complaint shall, with respect to
each act or omission alleged to violate this
chapter, state with particularity facts giving rise
to a strong inference that the defendant acted with
the required state of mind.
(3)
Motion to dismiss; stay of discovery
(A)
Dismissal
requirements
for
failure
to
meet
pleading
In any private action arising under this chapter,
the court shall, on the motion of any defendant,
-21-
dismiss the complaint if the requirements
paragraphs (1) and (2) are not met.
15 U.S.C.
§
of
78u-4 (b).
In ABC Arbitrage Plaintiffs Group v. Tchuruk,
291 F.3d 336,
350 (5th Cir. 2002), the court coalesced the pleading requirements
in the PSLRA and Rule 9(b) into a succinct directive for litigants:
[A] plaintiff pleading a false or misleading statement or
omission as the basis for a section 10(b) and Rule 10b-5
securities fraud claim must, to avoid dismissal pursuant
to
Rule
9(b)
and
15
U.S.C.
§§
78u-4(b) (1)
&
78u-4(b) (3) (A):
(1)
specify each statement alleged to have
misleading, i.e., contended to be fraudulent;
been
(2) identify the speaker;
(3) state when and where the statement was made;
(4) plead with particularity the contents of the false
representations;
(5) plead with particularity what the person making the
misrepresentation obtained thereby; and
(6) explain the reason or reasons why the statement is
misleading, i.e., why the statement is fraudulent.
This is the "who, what, when, where, and how" required
under Rule 9 (b) in our securities fraud jurisprudence and
under the PSLRA.
Additionally, under 15 U.S.C. § 78u4(b) (1), for allegations made on information and belief,
the plaintiff must:
( 7)
state with particularity all facts on which that
belief is formed, i.e., set forth a factual basis for
such belief.
In Indiana Electric Workers' Pension Fund IBEW v. Shaw Group,
Inc., 537 F.3d 527, 533 (5th Cir. 2008), the Court reiterated that
the PSLRA heightened the pleading standards for private claims of
securities
fraud
by
requiring
-22-
plaintiffs
to
allege
with
particularity
why
each
one
of
defendants'
omissions was misleading under 15
u.s. c.
§
representations
78u-4 (b) (1),
or
and by
requiring plaintiffs to plead with particularity those facts giving
rise
to a
strong
inference
that
the
required state of mind under 15 U.S.C.
defendant
§
acted with the
78u-4(b) (2).
In Tellabs,
127 S. Ct. at 2510, the Supreme Court held that a complaint will
survive a motion to dismiss "only if a reasonable person would deem
the inference of scienter cogent and at least as compelling as any
opposing
inference
one
could
draw
from
the
facts
alleged."
However, in Lormand, 565 F.3d at 267, the Fifth Circuit held that
the PSLRA did not heighten pleading standards for all six elements
of securities fraud.
text of 15 U.S.C.
§
The Fifth Circuit explained that the plain
78u-4(b) (4) provides only that "the plaintiff
shall have the burden of proving that the act or omission of the
defendant .
. caused the loss for which the plaintiff seeks to
recover damages."
Id.
at 255 n.18.
Nothing in this language
expressly or impliedly heightens the standard of pleading to loss
causation.
Thus, when considering a motion to dismiss, courts are
"not authorized or required to determine whether the plaintiff's
plausible inference of
4(b) (4)]
is
inferences,
equally
as
[they]
under the PSLRA."
The
or
and
causation
more
[under 15 U.S.C.
plausible
than
other
§
78u-
competing
must in assessing allegations of scienter
Id. at 267.
PSLRA contains
individuals
loss
a
safe harbor provision that protects
corporations
from
-23-
liability
for
certain
forward-looking statements that later prove false.
this protection the statement at issue must be
To qualify for
"accompanied by
meaningful cautionary statements identifying important factors that
could cause actual results to differ materially from those in the
forward-looking statement" or be "immaterial."
5 (c) (1) (A) (i,
ii).
"To avoid the safe harbor,
15
u.s.c.
78u-
§
plaintiffs must
plead facts demonstrating that the statement was made with actual
knowledge of its falsity."
U.S.C.
§
78u-5 (c) (1) (B)
i
Southland, 365 F.3d at 371 (citing 15
Nathenson v. Zonagen Inc., 267 F.3d 400,
409 (5th Cir. 2001)).
2.
Application of the Law to the Alleged Facts
(a)
Defendant UHY
UHY argues that the federal securities law claims asserted
against
Complaint
it
should
fails
to
be
dismissed
allege
facts
because
Plaintiffs'
capable
of
Amended
establishing
an
actionable misstatement or omission of fact arising from its audit
opinions or a strong inference of scienter. 41
UHY also joins in the
arguments presented in the Director Defendants' MD with respect to
the
securities
fraud
claims
regarding
group
pleading,
loss
causation, and the statute of repose. 42
41
UHY's MD, Docket Entry No. 101, p. 12.
See also UHY LLP's
Reply in Support of the Motion to Dismiss the Amended Complaint
(UHY's Reply"), Docket Entry No. 119, pp. 6-15.
42
UHY' s MD, Docket Entry No. 101, p. 7 n. 2.
-24-
(1)
Alleged Misstatements and Omissions
Omnicare,
Citing
Inc.
v.
Construction Industry Pension Fund,
Laborers
135 S.
District
Ct.
1318
Council
(2015),
UHY
asserts that its audit reports are statements of opinion, not fact,
and argues
that
the
securities
law claims
asserted against
it
should be dismissed because plaintiffs fail to allege an actionable
misstatement or omission of fact arising from its audit reports. 43
At least one court in this district has held that audit reports are
statements
of
opinion,
otherwise.
See Johnson v. CBD Energy Ltd., Civil Action H-15-1668,
2016 WL 3654657,
'statement
opinion'").
at *10
regarding
not
fact,
(S.D.
Tex.
and
plaintiffs
July 6,
compliance
2016)
do
not
argue
("an auditor's
inherently
[is]
one
of
Nevertheless, without addressing the applicability of
the Supreme Court's Omnicare opinion, plaintiffs respond that UHY' s
argument ignores the fact that Plaintiffs have alleged
materially false and misleading statement [s] in UHY' s own
audit reports. As alleged in the Amended Complaint, each
of the Company's annual financial statements included an
affirmative statement prepared by UHY that it audited the
financial statements "in accordance with the standards of
the [PCAOB] (United States) . "
~ 92.
Plaintiffs also
allege UHY represented that it planned and performed the
audits to obtain reasonable assurance about whether the
Company maintained effective internal control over its
financial reporting.
~ 93.
And UHY also affirmatively
represented in each audit report that EXXI maintained
effective internal control over its financial reporting.
~ 94.
43
Id. at 20.
-25-
As alleged in the Amended Complaint,
and as
explained above, those statement [s] were materially false
and misleading, and UHY had no basis for making them. 44
Asserting
that
UHY audited EXXI' s
annual
financial
statements
included in EXXI's 2011, 2012, 2013, and 2014 annual reports filed
with
the
SEC
on
Form
10-K,
plaintiffs
allege
that
"[t] hose
financial statements were erroneous," 45 because
[a] s EXXI announced in a press release and a Current
Report on Form 8-K filed with the SEC on September 8,
2015,
the Company's previously issued consolidated
financial statements for the years ended June 30, 2011,
2013 and 2014,
along with its consolidated
2012,
financial statements for the quarters ended September 3 o,
2013 and 2014, December 31, 2013 and 2014, March 31, 2014
and 2015, and June 30, 2014, should no longer be relied
upon and would be reinstated.
~ 83. 46
In
Omnicare
the
Court
clarified
how
trial
courts
should
evaluate whether a plaintiff has alleged an actionably misleading
statement of opinion.
Omnicare provides "two potential avenues for
plaintiffs to establish the falsity of an opinion."
p.l.c.
"every
Securities Litigation,
2016 WL 3090779,
. statement [of opinion]
*9.
BP
First,
explicitly affirms one fact:
that the speaker holds the stated belief."
1327.
at
In re
Omnicare, 135 S. Ct. at
A speaker can be liable for an opinion statement if the
speaker did not in fact hold that opinion.
Second, "depending on
the circumstances," a reasonable investor could
44
Plaintiffs' Memorandum of Law in Opposition to Defendant UHY
LLP's Motion to Dismiss Amended Complaint ("Plaintiffs' Opposition
to UHY's MD"), Docket Entry No. 111, p. 17.
45
Id. at 5.
46
Id. at 5-6.
-26-
understand an opinion statement to convey facts about the
speaker's basis for holding that view. Specifically, [a
speaker's] statement of opinion may fairly imply facts
about the inquiry the issuer conducted or the knowledge
it had.
And if the real facts are otherwise, but not
provided, the opinion statement will mislead by omission.
Id. at 1322.
Thus, even if a speaker's opinion is sincerely held,
the statement may nonetheless be actionable under 10b-5' s
omissions provision if:
(i) the speaker "omits material
facts about the issuer's inquiry into or knowledge
concerning a statement of opinion," and (ii) "those facts
conflict with what a reasonable investor would take from
the statement itself."
In re BP p.l.c. Securities Litigation, MDL No. 4:10-MD-2185, 2016
WL 3090779, at *9 (S.D. Tex. May 31, 2016)
s.
Ct . at 13 2 9 ) .
(quoting Omnicare, 135
The Omnicare Court emphasized that the latter
avenue to liability does not allow a plaintiff to circumvent the
particularity and materiality requirements of a
fraud claim by
alleging in general terms that the defendant improperly failed to
reveal the basis for his opinion, or failed to disclose "some fact
cutting the
other way."
135
S.
Ct.
at
1329
(explaining that
"[r]easonable investors understand that opinions sometimes rest on
a weighing of competing facts; indeed, the presence of such facts
is one reason why [a speaker] may frame a statement as an opinion,
thus conveying uncertainty") .
But the Supreme Court also
recognized that reasonable investors expect a speaker's statement
of opinion to fairly align with the
possession at the time.
information in his or her
Id.
In their Amended Complaint Plaintiffs allege that
UHY' s unqualified audit reports were materially false and
misleading because, among other things:
(a) the audits
-27-
were not conducted in accordance with PCAOB standards;
and (b) EXXI's financial statements did not fairly
present the Company's true financial position and results
of operations and did not comply with GAAP [Generally
Accepted Accounting Principles] . 47
In support of
their allegations
that UHY' s
audit reports were
materially false and misleading, Plaintiffs allege
102. The Company's
with GAAP as they
dollars in loans
vendors and from a
an
affiliate
of
shareholders.
financial statements did not comport
failed to disclose the millions of
to Defendant Schiller from EXXI' s
confederate on the Board who was also
one
of
the
Company's
largest
103. Contrary to the Audit Report, the audit was not
conducted in accordance with PCAOB standards.
In
particular, PCAOB Standard AU § 316 sets forth certain
fraud risks or red flags, including: (a) unsupported
balances or transactions; (b) inconsistent, vague or
implausible responses from management arising from
inquiries or analytical procedures; (c) lack of timely
and appropriate documents; (d) missing documents; and
(e) evasive or unreasonable responses of management to
audit reports.
104. In conducting its audits of the financial statements
in EXXI's annual reports, Defendant UHY ignored the most
obvious of red flags, the missing documentation necessary
to permit
the
Company
to use
cash
flow hedge
accounting. 48
Missing from the Plaintiffs' Amended Complaint are allegations
of fact capable of proving that UHY did not subjectively believe
its audit opinions when they were issued.
Therefore, to state a
claim against UHY for its audit reports, Plaintiffs must allege,
with particularity,
47
~
facts capable of establishing that UHY knew,
Plaintiffs' Amended Complaint, Docket Entry No.
100.
48
Id. at 24
§§
102-04.
-28-
97, p.
22
but omitted to include in its audit reports, material facts that
contradict its opinion statements.
Pipeline,
L.P.
(S.D. Tex.
See In re Plains All American
Securities Litigation,
2 017) . 49
245 F.
Supp.
3d 870,
905
The facts that Plaintiffs allege contradict
UHY' s audit opinions concern loans that defendant Schiller received
from defendant Louie and EXXI vendors and lack of documentation
needed to support EXXI's use of hedge accounting. 50
But missing
from Plaintiffs' Amended Complaint are allegations of facts capable
of establishing that when UHY issued its audit reports, UHY knew or
should
have
Plaintiffs'
known
about
Schiller's
loans.
Moreover,
since
Amended Complaint expressly alleges that Schiller's
loans were undisclosed until October of 2015, long after UHY issued
the audit opinions about which Plaintiffs complain, 51 the facts
49
In Plains All American Judge Rosenthal explained that
[s]howing that a statement was false or misleading using
this Omnicare prong blurs the lines between the falsity
and scienter elements of an Exchange Act claim.
Determining whether a statement is false or misleading
turns on what the speaker knew, making it similar to the
scienter inquiry. But even though this Omnicare inquiry
overlaps with the scienter inquiry, the two are not
identical.
Here, the issue is whether the plaintiffs
have adequately pleaded that the defendants were aware of
material facts that:
( 1) contradicted or undermined
their compliance opinion statements; and ( 2) that an
investor would reasonably believe were not true based on
that statement. The scienter issue is the individual's
state of mind in stating the opinion.
245 F. Supp. 3d at 905.
50
Plaintiffs'
Opposition to UHY' s MD,
Docket Entry No.
111,
p. 17.
51
Plaintiffs' Amended Complaint, Docket Entry No. 97, p. 3 , 22,
p. 4 , 24, p. 10 ~ 44.
-29-
alleged
in
Plaintiffs'
contention that
UHY' s
Amended
audit
Complaint
reports
were
contradict
false
their
and misleading
because they omitted information about Schiller's loans. 52
Also
missing
from
Plaintiffs'
Amended
Complaint
are
any
allegations of fact capable of establishing that when UHY issued
its audit reports, UHY knew or should have known that EXXI lacked
documentation
accounting.
needed
to
support
Asserting that
its
use
of
cash
flow
hedge
"EXXI lacked the specific required
documentation to utilize cash flow hedge accounting, " 53 Plaintiffs
argue that
[i] n any adequate audit, UHY would have requested or
looked for the required documentation as part of its
audit procedures. Had UHY done so, it immediately would
have learned that EXXI lacked the required documentation
for hedge accounting.
Had UHY performed any adequate
audit, the lack of specific required documentation would
have been obvious to it. 54
A careful review of Plaintiffs' Amended Complaint, however, only
reveals allegations that UHY's audit reports were false when made
because EXXI later restated some of its financial statements. 55
Plaintiffs allege that in December of 2014,
following UHY's
acquisition by BDO, EXXI engaged BDO as its successor auditor, and
52
See Plaintiffs' Opposition to UHY' s MD, Docket Entry No. 111,
p. 16 n.7 (apparently contradicting the allegations in ~ 102 of
Plaintiffs' Amended Complaint by stating:
"Plaintiffs do not
allege that UHY' s audits were deficient because they failed to
uncover the loans.").
53
55
Id. at 15.
See
pp. 50-51
Plaintiffs
~~ 239-243.
I
Amended Complaint,
-30-
Docket
Entry No.
97
I
that in September of 2015 EXXI filed a Current Report on Form 8-K
with
the
SEC
announcing
consolidated financial
2011,
2012,
2013,
that
the
Company's
previously
issued
statements for the years ended June 30,
and
2014,
and
for
the
quarters
ended
September 30, 2013 and 2014, December 31, 2013 and 2014, March 31,
2014 and 2015, and June 30, 2014, should no longer be relied upon
and would be restated. 56
Plaintiffs allege that
252. During the preparation of its annual report on
Form 10-K for the year ended June 30, 2015, EXXI and its
new auditor,
BDO,
determined that certain of the
Company's oil and gas hedges did not qualify for cash
flow hedge accounting treatment. EXXI and BDO determined
that the Company's hedge documentation did not specify
the hedged items and, therefore, the designations failed
to meet the documentation requirements for cash flow
hedge accounting treatment.
253. As a result of that determination, EXXI was required
to restate its previously issued consolidated financial
statements to reflect the unrealized recognition of gains
57
and losses on derivative financial instruments .
But missing from Plaintiffs' Amended Complaint are allegations of
fact
capable
reports,
of
UHY
establishing
knew
or
that
should
when
have
UHY
known
issued
that
its
EXXI
documentation required to use cash flow hedge accounting.
audit
lacked
Instead,
asserting that "[t]he lack of documentation regarding the hedged
items could not be a result of a difference of opinion between the
Company's auditors BDO and UHY as the Company disclosed that it had
56
Id. at 51
~~
244-245.
57
Id. at 53
~~
252-53.
-31-
no documentation regarding what was being hedged, " 58 Plaintiffs
allege that UHY's audit reports were false and misleading because
absent the missing documentation the audit reports could not have
been conducted in accordance with PCAOB Auditing Standards or
Generally Accepted Auditing Standards ( "GAAS") . 59
Despite Plaintiffs'
Report
on
Form
announcing
the
8-K
assertion to the contrary,
filed
with
restatement
the
did
not
SEC
in
state
the Current
September
that
documentation regarding what was being hedged.
EXXI
Instead,
of
2015
had
no
EXXI's
September 2015 Form 8-K states:
[I] n connection with preparing its annual report on
Form 10-K for the year ended June 30, 2015 (the "2015
Form 10-K") management of Energy XXI Ltd. (the "Company")
and the Audit Committee of its Board of Directors (the
"Audit Committee") determined that the contemporaneous
formal documentation it had historically prepared to
support its initial designations of derivative financial
instruments as cash flow hedges in connection with the
Company's crude oil and natural gas hedging program did
not meet the technical requirements to qualify for cash
flow hedge accounting treatment in accordance with ASC
Topic 815, Derivatives and Hedging. The primary reason
for this determination was that the formal hedge
documentation lacked specificity of the hedged items and,
therefore,
the designations failed to meet hedge
documentation requirements for cash flow hedge accounting
treatment. 60
EXXI's disclosures in the September 2015 Form 8-K show that EXXI's
management
reached
~
58
Id. at 50
59
Id. at 50-51
a
judgment
different
from
that
previously
235 (emphasis in original) .
~~
237-43.
60
September 2, 2015, Form 8-K, Exhibit A to UHY's MD, Docket
Entry No. 101-1, p. 2.
-32-
reached
regarding
the
level
of
specificity
required
for
the
documentation of hedged transactions; the disclosures do not show
that EXXI had no documentation regarding what was being hedged.
Nor do EXXI's disclosures mention UHY or its auditing services as
a reason for the restatements.
Because
Plaintiffs
fail
allege
to
facts
capable
of
establishing either that UHY did not sincerely believe the opinions
stated in its audit reports,
or that when UHY issued its audit
reports UHY knew or should have known - but failed to disclose material facts about its inquiry into or knowledge concerning the
opinions stated in its audit reports, and that those facts conflict
with
what
a
themselves,
reasonable
i.e.,
investor
would
take
from
the
reports
information about Schiller's loans and about
deficiencies in documentation required to support EXXI's use of
cash flow hedge accounting, Plaintiffs have failed to allege facts
capable of establishing an actionable misstatement or omission of
fact arising from the opinions expressed in UHY's audit reports.
See Omnicare, 135 S. Ct. at 1329.
below,
the
Plaintiffs'
court
concludes
Amended
Moreover, for the reasons stated
that
Complaint
even
were
if
the
capable
of
facts
alleged
in
establishing an
actionable misstatement or omission of fact in UHY's audit reports,
Plaintiffs have failed to allege facts capable of raising a strong
inference
that
the
misstatements
scienter.
-33-
or
omissions
were
made
with
(2)
Scienter
UHY argues that the Exchange Act claims asserted against it
should be dismissed because Plaintiffs fail to allege facts capable
of establishing a strong inference of scienter.
EXXI
restated
its
financial
statements
for
Asserting that
fiscal
years
2011
through 2014, Plaintiffs argue that the restatements are compelling
evidence of
UHY' s
scienter because
"UHY knew,
or was
severely
reckless in not knowing, that EXXI's consolidated annual financial
statements were not prepared in accordance with GAAP and did not
fairly and accurately present the Company's financial results. " 61
Plaintiffs argue that "UHY has provided no alternative or opposing
explanation
utilized
for
cash
certifying
flow
hedge
financial
statements
accounting
without
in
the
which
EXXI
requisite
documentation of specific hedged risks. " 62
adequately
To
plead
circumstances supporting a
scienter
Plaintiffs
must
allege
strong inference that UHY had actual
knowledge, or recklessly disregarded, that its audit reports were
false or misleading when made or were made without a reasonable
basis.
See Lovelace, 78 F.3d at 1018-19.
have found that the requirement of
Circuit courts of appeal
"recklessness"
in securities
fraud cases is especially stringent when a claim is made against an
outside auditor like UHY.
61
Plaintiffs'
See PR Diamonds, Inc. v. Chandler, 364
Opposition to UHY' s MD,
p. 8.
62Id.
-34-
Docket Entry No.
111,
F.3d 671, 693 (6th Cir. 2004)
(collecting cases).
"Recklessness on
the
auditor
mental
part
of
an
independent
culpable that it
'approximate[s]
entails
a
state
so
an actual intent to aid in the
fraud being perpetrated by the audited company.'"
Id.
(quoting
Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 121 (2d Cir. 1982)).
Thus,
Plaintiffs must allege
facts
capable of establishing not
merely that there was a deviation from accounting principles, but
that the accounting practices were so deficient that the
audit amounted to no audit at all, or an egregious
refusal to see the obvious, or to investigate the
doubtful, or that the accounting judgments which were
made were such that no reasonable accountant would have
made the same decisions if confronted with the same
facts.
Id.
at
693-94
Litigation,
(quoting
35 F.3d 1407,
In
1426
re
Worlds
of
Wonder
(9th Cir. 1994)).
Securities
See also In re
Franklin Bank Corp. Securities Litigation, 782 F. Supp. 2d 364, 402
(S.D.
Tex.
2011);
In re
Dell
Inc.,
Securities
Litigation,
591
F. Supp. 2d 877, 899 (W.D. Tex. 2008).
A careful review of the Plaintiffs'
allegations of scienter
reveal little more than assertions that UHY's audit reports were
false because EXXI later restated certain financial information.
Courts in this circuit inferring scienter based in part on improper
accounting do
inference.
so only when other
of
Litigation,
strongly support
the
See In re ArthroCare Corp. Securities Litigation, 726
F. Supp. 2d 696 (W.D. Tex. 2010)
denia 1 s
factors
media
447
F.
reports) ;
Supp.
2d
(improper accounting practices and
-=I~n,__.....:r=-e=----==S~e:::.:l=-·t===-e=l...L.,---'I"-'n=c..:....--=S:<...:e=-c=-u=r..=ic..::t:..:i:..:::e::.=s
693
-35-
(S.D.
Tex.
2006)
(improper
accounting practices and overstated revenues, memoranda and meeting
minutes
revealing that
improper
accounting
potential problems,
the
defendants
methods,
explicitly discussed the
affirmatively
chose
to
ignore
and dismissed an auditor who confronted them
about the improper practices) .
Plaintiffs' Amended Complaint does not allege media reports or
internal company documents that would permit an inference that UHY
knew of or recklessly disregarded evidence that EXXI's accounting
misrepresented EXXI's financial condition.
infer UHY' s
scienter,
Instead, as reasons to
Plaintiffs point to the magnitude of the
restatements, and to the reason for the restatements- i.e., lack
of specificity in the documentation used to support EXXI's use of
cash
flow
hedge
accounting. 63
financials cannot support a
But
the
magnitude
of
misstated
strong inference of scienter absent
allegations of facts capable of establishing either that UHY knew
or was severely reckless in not knowing of the improper accounting,
or that UHY ignored warning signs or red flags indicating that such
an inference is merited.
See ArthroCare, 726 F. Supp. 2d at 724;
Seitel, 447 F. Supp. 2d at 693.
Asserting that "the lack of supporting documentation of EXXI' s
hedging activities [needed] to permit the Company to utilize hedge
accounting was a glaring red flag, giving UHY every reason to know
that the financial statements contained material misstatements or
63
Id. at 11-14.
-36-
omissions, " 64
Plaintiffs
argue
that
"[h] ad
UHY
performed
any
adequate audit, the lack of specific required documentation would
have
been obvious
to
i.t." 65
But
Plaintiffs
do
not
plead any
specific facts capable of showing what UHY's audits entailed, how
or why they were deficient, or why there is any reason to believe
that
the
alleged
deficiencies
were
opposed to negligent mistakes.
purposeful
or
reckless
as
Arthrocare, 726 F. Supp. 2d at 735
(citing Dell, 591 F. Supp. 2d at 903).
Instead, Plaintiffs rely on
the circular reasoning that UHY must have acted with scienter
simply because it did not catch the lack of specific documentation
for cash flow hedge accounting later identified as the reason for
EXXI's restatements.
negligent
These allegations may support an inference of
mismanagement,
but
they
are
not
sufficient
to
make
intentional or reckless fraud at least as compelling as plausible
nonculpable explanations.
See Lormand,
565 F.3d at 254
(quoting
Tellabs, 127 S. Ct. at 2510).
Plaintiffs'
pleading
on
this
issue
consists
of
long
explanations of the GAAP and GAAS accounting principles allegedly
violated,
followed by the conclusory statement that UHY clearly
violated
that
principle
restatement was issued. 66
64
solely
the
fact
that
the
But the GAAS standards acknowledge that
Id. at 15.
66
~~
on
Id. at 14-15.
65
based
Plaintiffs' Amended Complaint, Docket Entry No. 97, pp. 20-24
92-104, pp. 49-51 ~~ 231-43.
-37-
"even a properly planned
misstatement," AU
not
catch
a
.
audit may not detect a material
23 0. 12; thus, the mere fact that the audits did
§
later-revised
accounting
error
in
the
financial
statements is not conclusive.
Arthrocare, 726 F. Supp. 2d at 735
(citing
Supp.
In
re
Dell,
591
F.
2d
specifying fraudulent intent or UHY' s
at
903)
Absent
state of mind,
facts
accounting
errors "merely suggest that either management or the accountant
missed something,
and may have failed to prepare or review the
financial statements in accordance with an accepted standard of
reasonable care."
F.
Supp.
2d 630,
In re Baker Hughes Securities Litigation, 136
649
(S.D.
Tex.
2001)
The parties dispute the
simplicity and obviousness of the misapplied accounting rules. 67
But reading the Plaintiffs' Amended Complaint and the record in the
Plaintiffs'
favor,
the Amended Complaint does
not
sufficiently
allege that EXXI violated rules that were so clear and obvious as
to make its outside auditor either knowingly deceptive or severely
reckless
in
certifying
EXXI's
figures
on
the
SEC
filings.
Plaintiffs' factual allegations make it more plausible, or at least
as plausible,
that
UHY
to infer that UHY acted negligently than to infer
knowingly
or
recklessly
disregarded
the
presence
glaring accounting irregularities or other red flags
of
in EXXI' s
financial statements.
Because Plaintiffs have
failed to allege
facts
capable of
establishing that when UHY issued its audit reports, UHY knew - or
67
See Plaintiff's Opposition to UHY' s MD, Docket Entry No. 111,
pp. 9-11.
-38-
was severely reckless in not knowing -
that its audit opinions
contained statements that were false or misleading or that the
audit opinions were so deficient that they amounted to "no audit at
all,"
Plaintiffs'
raising a
allegations
against
UHY
strong inference of scienter.
are
not
capable
of
See In re Dell Inc.,
Securities Litigation, 591 F. Supp. 2d at 900.
That UHY failed to
discover in 2011 and 2014 accounting deficiencies that were not
found until 2015 might arguably and at most support an allegation
of negligence,
68
but not of fraud.
Accordingly,
UHY's motion to
dismiss the federal securities law claims asserted against it will
be granted and those claims will be dismissed with prejudice.
(b)
Defendant Griffin
Griffin argues that the Exchange Act claims asserted against
him should be dismissed because he did not make many of the alleged
misstatements,
because he left EXXI on October 20,
2014 -
more
than two years before the last alleged misstatement, and because
Plaintiffs
fail
to
plead
facts
capable
of
raising
a
strong
inference of scienter with respect to statements that he did make. 69
Griffin
also
joins
in
all
of
the
arguments
presented
in
the
Director Defendants' MD and in the arguments presented in Louie's
68
For the reasons stated in § III.A.2 (e) (3), below, the court
concludes that Plaintiffs have failed to plead facts capable of
establishing loss causation.
69
Griffin's MD, Docket Entry No. 102, p. 5.
-39-
MD
with
respect
to
alleged
"related
party
transactions." 70
Plaintiffs respond that Griffin's MD should be denied because he is
liable
for
EXXI' s
false,
misleading,
and
incomplete
financial
statements, and because they have adequately alleged scienter with
respect to him. 71
(1)
Alleged Misstatements and Omissions
Plaintiffs allege that Griffin served as EXXI's CFO and Board
member from the Company's inception in 2005 through and including
October 20,
2014, when EXXI announced Griffin's resignation in a
Press Release and a Current Report filed with the SEC on Form 8-K/A
on December 1,
2014,
following BOO's acquisition of UHY's Texas
practice, which had provided independent public accounting services
to EXXI. 72
Plaintiffs allege that as CFO,
Griffin signed EXXI's
quarterly and annual reports filed with the SEC on Forms 10-Q,
10-K, and 10-K/A, and that Griffin is responsible for the content
of
the
reports
that
he
signed
and
the
contained in the Company's press releases. 73
financial
information
Plaintiffs allege that
Griffin was responsible for preparing nearly all of the financial
70
Id. at 5
&
n.1.
71
Plaintiffs' Memorandum of Law in Opposition to Defendant
D. West Griffin's Motion to Dismiss Amended Complaint ("Plaintiffs'
Opposition to Griffin's MD"), Docket Entry No. 112, pp. 7-16.
72
Plaintiffs' Amended Complaint, Docket Entry No. 97, p. 9
73
Id. at 9 ~~ 37-38.
-40-
~
39.
statements that were restated after BDO became EXXI's auditor and
determined that EXXI's financial statements for 2011 through 2014
should no longer be relied upon. 74
Asserting that
[t] he financial statements issued during Griffin's tenure
as CEO that had to be restated after his resignation were
the annual financial statements for the four years ended
June 30, 2011, 2012, 2013, and 2014, and the quarterly
financial statements for the quarters ended September 3 0,
and December 31, 2013, March 31, 2014, and June 30,
20141 ?S
Plaintiffs argue that these financial statements were false and
misleading because they
were not prepared according to generally accepted
accounting principles ( "GAAP") , including ASC Topic 815,
which requires the reporting entity to document exactly
what was being hedged, specifying the exact items (i.e.,
the particular monthly well production) to utilize hedge
accounting.
While Griffin was responsible for
EXXI's financial reporting, the Company lacked the
necessary documentation for its hedging program to
utilize cash flow hedge [accounting] but did so anyhow. 76
Griffin does not plausibly argue that the financial statements he
signed that were ultimately restated did not contain statements
that were false and misleading. 77
The court concludes, therefore,
74
Plaintiffs' Opposition to Griffin's MD, Docket Entry No. 112,
p. 8 (citing Plaintiffs' Amended Complaint, Docket Entry No. 97,
p. 51 ~ 245).
75
76
Id. at 8.
Id. (citing Plaintiffs'
No. 97, pp. 17-18 ~ 77).
Amended
77
Complaint,
Docket
Entry
Griffin's MD, Docket Entry No. 102, p. 10 (arguing that
"[f]or the reasons explained in the Director Defendants' Motion to
Dismiss and Defendant Norman M.K. Louie's Motion to Dismiss the
(continued ... )
-41-
that Plaintiffs have pled specific facts sufficient to hold Griffin
liable for the financial statements that he signed.
See Janus
Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296,
2302 (2011)
("For purposes of Rule 10b-5, the maker of a statement
is the person or entity with ultimate authority over the statement,
including its content and whether and how to communicate it. 11
The court concludes, however,
press
releases,
Plaintiffs
are
).
that as to statements made in
relying
on
the
group
pleading
doctrine - a doctrine abolished by the Fifth Circuit in Southland,
365 F.3d at 365.
In Southland the Fifth Circuit held that the
PSLRA requires plaintiffs to "enlighten each defendant as to his or
her particular part in the alleged fraud,
so that
11
"corporate
officers may not be held responsible for unattributed corporate
statements solely on the basis of their titles.
Id.
11
Specific
facts tying a corporate officer to a statement would include a
signature
on
the
document
or
particular
factual
allegations
explaining the individual 1 s involvement in the formulation of the
entire document or specific portion of the document containing the
statement.
Id.
capable
showing
of
Plaintiffs have not pled with particularity facts
that
statements
made
in
any
of
the
press
releases about which they complain are attributable to Griffin.
Instead,
77
Plaintiffs
attempt
to
hold
Griffin
responsible
for
continued)
Amended Complaint, Plaintiffs have not alleged that any statement
in those financial statements was false or misleading when made. 11 ) .
( •••
-42-
unattributed
corporate
statements
solely on his title as CF0. 78
in
the
press
releases
based
Accordingly, the court concludes that
Plaintiffs have not sufficiently pled specific factual allegations
linking Griffin to allegedly false and misleading statements in
EXXI's press releases.
Scienter
(2)
Griffin
argues
that
"[a]s
explained
in
the
Director
Defendants' Motion to Dismiss, Plaintiffs' impermissible attempt to
plead scienter based solely on Defendants' positions within EXXI
and
alleged
Complaint." 79
GAAP
violations
mandates
dismissal
of
their
Griffin argues that the only allegations as to his
scienter are that
(1) his "net worth was dependent upon his investment in
EXXI stock and options," Am. Compl. ~ 42; se also id.
~~ 40-41; (2) he had an incentive to "protect his job,"
id. ~ 42; and (3) he had access to unspecified "material
non-public information," e.g., id. ~~57, 59. 80
Griffin argues that Plaintiffs fail to allege that he sold any
stock
during
allegations
the
are
Class
Period,
internally
and
that
inconsistent
78
Plaintiffs'
factual
about
alleged
his
Id. at 9 (citing Plaintiffs' Amended Complaint, Docket Entry
No. 97, p. 29 ~ 128, p. 34 ~ 157, and p. 36 ~ 166). See also id.
at 10 n.2 (asserting that "[s]ince Griffin was the Company's CFO,
it is far more likely that he provided the 'numbers' to [the
employee who prepared the press releases] so that they could be
incorporated in the Company's press releases").
79
Id. at 10.
80
Id. at 11.
-43-
motivations because they allege not only that his incentive was to
protect his job, but also that he "'resigned over a disagreement
regarding
the
Company's
financial
related to its ultra-deep [water]
its acquisition of EPL. '" 81
disclosures,
including
those
investments and accounting for
Asserting that Plaintiffs' theory of
his scienter "rests on nothing more than baseless speculation, and
is not 'at least as compelling as any opposing inference one could
draw from the facts alleged,' " 82 Griffin argues that "[t] he far more
compelling
inference
is
that,
to
wrongdoing occurring within EXXI,
the
[his]
extent
there
was
any
resignation is evidence
that he was not a participant. " 83
Asserting that EXXI restated its financial statements for four
years,
Plaintiffs
argue
that
the
restatements
are
compelling
evidence of Griffin's scienter because
as EXXI's [CFO]- the senior officer directly responsible
for assuring the accuracy of EXXI's financial reporting
Griffin undoubtedly knew the Company lacked the
necessary documentation - i.e., it had no specific
documents regarding the hedged items - to utilize hedge
accounting under ASC Topic 815.
At the very least,
Griffin was severely reckless in not knowing so. 84
Plaintiffs also argue that the following allegations support a
strong inference of Griffin's scienter:
81
Id. at 12 (quoting Plaintiffs'
Entry No. 97, p. 10 ~ 43).
(1) the amount of EXXI's
Amended Complaint,
Docket
82Id.
84
Plaintiffs' Opposition to Griffin's MD, Docket Entry No. 112,
p. 11 (emphasis in original).
-44-
restatements was significant;
(2)
EXXI's hedging activities were
unusually high; (3) Griffin knew or recklessly disregarded the fact
that EXXI delayed recognizing impairment of assets that it acquired
from EPL despite steadily declining oil and gas prices that caused
EPL to write down those same assets ahead of EXXI; and
(4)
EXXI
lost its entire investment in EPL in a year. 85
A complaint for violation of federal securities laws "will
survive
would
[a motion to dismiss]
deem
the
inference
of
. only if a reasonable person
scienter
cogent
and
at
least
as
compelling as any opposing inference one could draw from the facts
alleged."
Tellabs, 127 S. Ct. at 2510.
A defendant's signature on
an SEC filing with false or misleading statements or omissions
cannot by itself support a
Central Laborers'
Inc.,
strong inference of
Pension Fund v.
497 F. 3d 546,
555
(5th Cir.
scienter.
See
Integrated Electrical Services
2007)
("If we were to accept
[this] proffered interpretation of Sarbanes-Oxley, scienter would
be established in every case where there was an accounting error or
auditing
mistake
made
by
a
publicly
traded
company,
thereby
eviscerating the pleading requirements for scienter set forth in
the PSLRA.")
1266
(quoting Garfield v. NDC Health Corp., 466 F. 3d 1255,
(11th Cir.
adopted
the
2006)).
Eleventh
In Central Laborers'
Circuit's
test
for
the Fifth Circuit
when
Sarbanes-Oxley
certifications, i.e., signatures on SEC filings, could support an
85
Id. at 14-15 (citing Plaintiffs' Amended Complaint, Docket
Entry No. 97, p. 17 ~~ 75-76, pp. 42-43 ~~ 197-201, p. 46 ~ 220.
-45-
inference of scienter. 86
[must have]
The
"person signing the certification
had reason to know, or should have suspected, due to
the presence of glaring accounting irregularities or other
the
that
flags, '
financial
misstatements or omissions."
statements
contained
'red
material
Id.
In ArthroCare, 726 F. Supp. 2d at 716, an individual defendant
confronted with media reports providing "blatant evidence" of the
specific accounting fraud at issue nonetheless "continued to defend
[the accounting]
stridently and deny the allegations."
Although
the plaintiffs in ArthroCare alleged accounting errors in eight
quarterly SEC filings,
court
held
that
only
and the defendant signed each filing,
the
two
quarterly
filings
the
immediately
following the detailed media reports could support an inference of
scienter.
Id.
at 724.
In Seitel,
447 F.
Supp.
2d at 693,
the
court held that the defendant's signature on SEC filings supported
a strong inference of scienter because the plaintiffs alleged not
only
improper
86
accounting
practices
In Central Laborers' ,
explained that,
but
also:
4 97 F. 3d at 554,
( 1)
overstated
the Fifth Circuit
[t] he Sarbanes-Oxley Act states that signing officers
must certify that they are "responsible for establishing
and maintaining internal controls [and] have designed
such
internal
controls
to
insure
that
material
information
relating
to
the
[company]
and
its
consolidated subsidiaries is made known to such officers
by others within those entities, particularly during the
period in which the period reports are being prepared."
15 u.s.c. § 7241(a)4).
-46-
revenues of 15 percent for the year 2000 and 30 percent for the
first 9 months of 2001; (2) memoranda and meeting minutes revealing
that the defendants explicitly discussed the improper accounting
methods and affirmatively chose to ignore potential problems; and
(3) the dismissal of an auditor who confronted the defendants over
the improper practices.
Plaintiffs
contained
allege
false
Id.
that
Griffin
and misleading
condition because
EXXI
signed
statements
misapplied
the
SEC
of
inaccurate accounting
EXXI' s
accounting
documenting use of cash flow hedge accounting.
publication of
filings
figures,
that
financial
standard
But
or a
follow GAAP, without more, does not establish scienter.
for
"the mere
failure
to
The party
must know that it is publishing materially false information, or
the
party
must
information."
accounting
be
reckless
Lovelace, 78 F.3d at 1020.
errors,
pervasiveness,
severely
courts
typically
in
publishing
such
To infer scienter from
examine
and repetition of the errors;
the
magnitude,
the simplicity and
obviousness of the misapplied rules; and the defendant's apparent
See, e.g., ArthroCare, 726
motives for misapplying these rules.
F.
Supp.
frequency,
2d at 721
and
("' [W]hen the number,
context
of
the
size,
misapplication
timing,
[of
nature,
accounting
principles] or restatement are taken into account, the balance of
the
inferences
to
be
drawn
from
such
significantly in favor of scienter.").
-47-
allegations
may
shift
Plaintiffs argue that the facts
they have alleged raise a
strong inference of scienter as to Griffin because EXXI misapplied
two accounting standards, i.e., the standards for documenting the
use of hedge accounting and for reporting asset impairment,
the
resulting restatements covered four years, and the magnitude of the
restatements was significant.
Plaintiffs also allege that Griffin
was motivated to inflate EXXI's profitability to help EXXI qualify
for
listing on
the NASDAQ Global
While
Markets.
the
parties
dispute the simplicity and obviousness of the misapplied accounting
standards,
Plaintiffs'
Amended Complaint does not allege facts
capable of establishing either that the standards being violated
were so clear and obvious as
to make Griffin either knowingly
deceptive or severely reckless in certifying EXXI's SEC filings, or
severely
improper.
reckless
by
Plaintiffs'
not
knowing
allegations
that
EXXI' s
regarding
accounting
the
magnitude
was
of
EXXI's misstated financials do not support a strong inference of
scienter because "the magnitude of the error does not show that the
existence of the error was clear when it was made,"
Nobilis Health Corp., 211 F. Supp. 3d 936,
955
Schott v.
(S.D. Tex. 2016),
and because EXXI's improper accounting did not uniformly benefit
EXXI or consistently line up with a motive to skew the accounting
results to favor EXXI's financial position. 87
87
See UHY's MD, Docket Entry No. 101,
objection from Plaintiffs:
"For fiscal
restated net income was higher than the
income."). See also UHY's Reply, Docket
-48-
See ArthroCare, 726
p. 16 (asserting without
years 2012 and 2013 the
originally reported net
Entry No. 119, pp. 9-12.
F.
Supp.
2d at 724; Seitel,
447 F.
Supp.
Moreover,
2d at 693.
missing from Plaintiffs' Amended Complaint are any allegations of
specific facts connecting Griffin to the accounting violations that
led to the restatement of EXXI's financial statements.
Nor are
there any allegations that Griffin engaged in insider trading or
stood to benefit personally from any of the alleged accounting
errors.
Plaintiffs offer no facts in support of their contention
that Griffin signed the financial statements at issue with scienter
other than the fact that,
like the senior financial managers of
every company, he had control over EXXI's accounting policies and
procedures.
F.
Supp.
See Izadj oo v. Helix Energy Solutions Group, Inc. , 23 7
3d 492,
516
{S.D.
Tex.
2017)
(find no
scienter
for
officers where there were no "glaring irregularities or red flags"
to put them on notice of material misstatements and omissions in
Sarbanes-Oxley certifications or earnings calls) .
Plaintiffs cannot demonstrate scienter by relying either on
Griffin's position on the Board, Abrams, 292 F.3d at 432, or on the
fact that certain financial statements were restated.
Laborers',
itself,
497
does
F.3d at
not
546
create
(restatement of
a
strong
See Central
financial
inference
of
data,
by
scienter) .
Plaintiffs' factual allegations make it more plausible or at least
as plausible to infer that when signing the SEC filings at issue
Griffin negligently relied on EXXI's accountants and auditors than
to infer that he knowingly or recklessly disregarded the presence
of glaring accounting irregularities or other red flags in EXXI's
-49-
financial statements.
Laborers',
See Tellabs, 127 S. Ct. at
497 F.3d at 555.
See also Abrams,
2510; Central
292 F.3d at 433
(recognizing that accounting problems that lead to a restatement of
a company's financials can "easily arise from negligence, oversight
or
simple
necessary
mismanagement,
to
support
a
none
of
securities
therefore concludes that Plaintiffs'
which
rise
fraud
to
action")
the
standard
The
court
factual allegations are not
sufficient to raise a strong inference of scienter as to Griffin.
Accordingly, Griffin's motion to dismiss the Exchange Act claims
asserted against him will be granted and those claims will be
dismissed with prejudice.
(c)
Defendant Louie
Asserting that he joined EXXI's Board on December 15, 2014,
and that his term expired on December 1, 2015,
88
Louie argues that
the Exchange Act claims asserted against him should be dismissed
because he did not make many of the alleged misstatements, because
Plaintiffs allege no facts requiring disclosure of his personal
loan to Schiller, and because Plaintiffs rely on group pleading and
fail
to plead facts
capable
scienter or loss causation. 89
of
raising
a
strong
inference of
Plaintiffs respond that Louie's MD
should be denied because he knew - but failed to disclose - that he
88
Louie's MD, Docket Entry No. 103, p. 6. See also Plaintiffs'
Amended Complaint, Docket Entry No. 97, p. 10 ~~ 44-45.
89
Louie' s MD, Docket Entry No. 103, p. 9.
-50-
had loaned $3 million to Schiller, because he signed EXXI's 2014
amended
Annual
Report
which
had
to
be
restated,
and
because
scienter and loss causation are adequately pled. 90
(1)
Alleged Misstatements and Omissions
Regarding Louie plaintiffs allege:
22.
From EXXI's founding in 2005 through and including
October 15, 2015, Defendant Schiller
served as
Chairman of the Board. He was stripped of that title by
the Board on October 9, 2015, following an internal
investigation that found he borrowed funds in 2007, 2009,
and 2014 from personal acquaintances or their affiliates,
certain of whom provided the Company and certain of its
subsidiaries with services, and in 2014 he personally
borrowed
$3
million
from Defendant Norman Louie
("Louie") , before Louie was appointed to the Board
effective December 15, 2014.
At the time of the loan
from Louie, Louie was a managing director at Mount Kellet
Capital Management, LP, one of the Company's largest
shareholders. The internal investigation was prompted by
an SEC inquiry.
44.
Defendant Louie was appointed to the Board,
effective December 15, 2014, by Defendant Schiller and
the rest of the Board without election by shareholders,
to stand for election by shareholders at the 2015 annual
meeting.
When Defendant Schiller's secret loan from
Defendant Louie was discovered, the Board determined not
to nominate Defendant Louie for election as a director at
the 2015 annual meeting.
45.
During his short tenure on the Board, Defendant
Louie signed the Company's Amended 2014 annual report
filed on Form 10-K/A with the SEC on December 23, 2014.
As a signatory of the annual report issued in the name of
the Company and not attributed to an individual author,
90
Plaintiffs' Memorandum of Law in Opposition to Defendant
Norman M.K. Louie's Motion to Dismiss ("Plaintiffs' Opposition to
Louie's MD"), Docket Entry No. 113, pp. 7-12.
-51-
Louie is responsible for the content of the annual report
he signed.
269.
In the Current Report on Form 8-K, filed with the
SEC on December 15, 2014, announcing Defendant Louie's
appointment to the Board, Defendants caused EXXI to state
that there were no related party transactions between
Louie and the Company or any of its subsidiaries that
would require disclosure pursuant to Item 404 (a) of
Regulation S-K, 17 C.F.R. ~ 229.404(a).
270.
That statement in the Current Report on Form 8-K
was materially incomplete and misleading because it
failed to disclose that (a) Louie had loaned Defendant
Schiller $3 million and the loan was outstanding at the
time the Form 8-K was filed, (b) Louie was at least
indirectly interested in the hedge fund MK' s ownership of
EXXI common stock, (c) Louie was at least indirectly
interested in the M21K partnership between the Company
and MK, and (d) Louie was at least indirectly interested
in M21K's $123 million asset purchase from EXXI in 2014.
All of those transactions were related party transactions
requiring disclosure pursuant
to
Item 404(a)
of
91
Regulation S-K.
Louie does
not
argue
the
Form 10-K/A he
signed that was
ultimately restated did not contain statements that were false and
misleading. 92
The court concludes, therefore, that the plaintiffs
have plead specific facts sufficient to hold Louie liable for the
financial statement that he signed.
("For purposes of Rule lOb- 5,
person
or
entity
with
See Janus, 131 S. Ct. at 2302
the maker of a
ultimate
authority
statement is the
over
the
statement,
including its content and whether and how to communicate it.").
91
Plaintiffs'
Amended Complaint,
Docket
p. 6 ~ 22, p. 10 ~~ 44-45, and p. 56 ~~ 269-70.
92
Id. at 10
~
45.
-52-
Entry
No.
97,
Louie argues, however,
that Plaintiffs' allegations fail to
state an Exchange Act claim against him for statements made in the
December 15, 2014, Form 8-K because he did not sign that form and
cannot be held liable for the statements contained therein,
and
because
the
the
statements
transactions at
in
the
Form
8 -K
are
all
true
as
issue were not related-party transactions
Regulation S-K, 17 C.F.R.
~
that
229.404(a) require to be disclosed. 93
Plaintiffs do not dispute that Louie did not sign the Form 8-K
filed on December 15, 2014, and therefore cannot be held liable as
a maker of the statements contained therein.
See Kerr v. Exobox
Technologies Corp., Civil Action No. H-10-4221, 2012 WL 201872, at
*11
(S.D.
Tex.
2012)
(defendant not liable under Rule lOb-S for
allegedly false statements in company's SEC filings,
supplied the statements at
filings) .
See also Janus,
issue,
even if he
because he did not
131 S. Ct. at 2302
sign the
("For purposes of
Rule lOb-S, the maker of a statement is the person or entity with
ultimate authority over the statement,
including its content and
whether and how to communicate it.").
Nor do Plaintiffs dispute
that the transactions at issue are not "related party" transactions
that
Regulation
S-K,
17
C.F.R.
~
229.404(a)
require
to
be
disclosed. 94
93
Louie' s MD, Docket Entry No. 103, pp. 7-8.
94
Id. at 7-9 (arguing that the transactions at issue were
either not "related party" transactions, or that Louie did not have
a material interest in them) .
-53-
Citing In re Bristol Myers Sguibb Co. Securities Litigation,
586
F.
Supp.
2d 148,
160
(S.D.N.Y.
2008),
and City of Monroe
Employees Retirement System v. Bridgestone Corp., 399 F.3d 651, 670
(6th Cir. 2005), plaintiffs argue, however, that their Exchange Act
claims against Louie should not be dismissed because the Form 8-K
"statements regarding no related party transactions, which may have
been literally true under the narrow definition of 'related party,'
were, if not literally false, highly misleading," 95 and because the
Form 10-K/A that Louie signed was one of EXXI's annual reports that
had
to
be
restated. 96
Plaintiffs
argue
that
Louie's
loan
to
Schiller and involvement with entities that owned EXXI stock
should have been disclosed to investors because they
adversely impacted Schiller's and Louie's ability to
manage the Company prudently and to ensure that the
Company's public disclosures were truthful.
Schiller's
dire financial circumstances were a strong motive for him
to mislead investors - precisely as he did.
Likewise,
Louie was highly motivated to inflate the value of EXXI
stock, which secured his secret loan to Schiller, if only
to reduce his risk of loss if Schiller defaulted on the
loan. 97
It is undisputed that "[w]hen an allegation of fraud is based
upon nondisclosure, there can be no fraud absent a duty to speak."
Chiarella
(discussing
v.
United
disclosure
States,
100
requirements
S.
in
Ct.
1108,
the
context
1118
(1980)
of
insider
95
Plaintiffs' Opposition to Louie's MD, Docket Entry No. 113,
96
Id. at 9-10.
p. 7.
-54-
trading and finding that silence is only fraudulent if there exists
a duty to disclose) .
The Bristol Myers and Bridgestone cases on
which Plaintiffs rely stand for the well established principle that
once a party makes a disclosure, even if it is literally true, the
party is under a duty to speak the full truth.
586 F. Supp. 2d at 160
See Bristol Myers,
("even an entirely truthful statement may
provide a basis for liability if material omissions related to the
content of the statement make it materially
company
misleading");
'chooses
to
or other statements made
Bridgestone,
volunteer
such
399
F. 3d
at
information,'
670
("If
though,
a
'its
disclosure must be full and fair, and courts may conclude that the
company was obliged to disclose additional material facts
the extent that the volunteered disclosure was misleading'").
. to
See
also Rubinstein, 20 F.3d at 170 ("'a duty to speak the full truth
arises when a defendant undertakes a duty to say anything'").
But
the statements Plaintiffs allege were misleading due to Louie's
failure to disclose his loan to Schiller and his relationship to
entities that owned EXXI stock are statements made by EXXI on the
Form 8-K signed by Griffin; not statements made by Louie.
Plaintiffs fail either to cite any authority or to allege any
facts capable of establishing that Louie had a duty to disclose
information needed to correct the allegedly misleading statements
made by EXXI and Griffin.
See In re Franklin Bank Corp. Securities
Litigation, 782 F. Supp. 2d 364, 398 (S.D. Tex. 2011), aff'd, 464
F. App' x 334
(5th Cir.
2012)
(plaintiffs failed to allege facts
capable of establishing that defendant was under a duty to correct
-55-
a misleading statement made by a third-party analyst) .
Plaintiffs
also fail to allege facts capable of establishing that Louie was
the source of the information for the related-party statements in
the Form 8-K about which Plaintiffs complain, that Louie knew those
statements had been made in the Form 8-K,
that those statements
were material to the Plaintiffs' decision to purchase or to hold
(i.e., not to sell) EXXI stock, or that those statements imposed
upon Louie a duty to disclose the existence of his loan to Schiller
or his relationship to entities that owned EXXI stock.
Securities Litigation BMC Software,
871 & n.21 (S.D. Tex. 2001)
Inc.,
183 F.
Supp.
See In re
2d 860,
(recognizing that a party generally has
no liability for misleading claims made about it by a third party
and no obligation to correct such statements, but that a party may
be liable for allegedly misleading statements made by a third-party
if
sufficiently
involved
in preparation
of
those
statements) .
Absent such allegations Plaintiffs may not maintain an Exchange Act
claim
against
Louie
arising
from
either
the
related-party
statements contained in EXXI's December 15, 2014, Form 8-K, or from
Louie's failure to disclose his loan to Schiller or his position
with respect to entities that owned EXXI stock.
Levinson, 108 S. Ct. 978, 987 n.17 (1988)
See Basic Inc. v.
("Silence, absent a duty
to disclose, is not misleading under Rule 10b-5.").
(2)
Plaintiffs'
Scienter
failure to allege facts capable of establishing
that Louie had a duty to disclose his loan to Schiller or his
-56-
position with respect to entities that owned EXXI stock precludes
Plaintiffs from raising a strong inference of scienter with respect
to allegedly misleading statements and/or omissions arising from
the Form 8 -K that EXXI filed on December 15,
2014.
See In re
Centerline Holdings Co. Securities Litigation, 678 F. Supp. 2d 150,
161-62
(S.D.N.Y.
2009)
(defendants
did
not
act
with
scienter
regarding omissions "when there was no duty to disclose in the
first
place") .
raising
a
Nor
strong
have
Plaintiffs
inference
of
alleged
scienter
facts
with
capable
respect
to
of
the
Form 10-K/A that Louie signed in December of 2014 shortly after
being named to the Board because missing from Plaintiffs' Amended
Complaint are any allegations of specific facts connecting Louie to
the accounting violations that led to the restatement of EXXI's
financials.
Plaintiffs
offer
no
facts
in
support
of
their
contention that Louie signed the Form 10-K/A at issue with scienter
other than the fact that he was allegedly motivated to inflate the
market value of EXXI because his personal loan to Schiller was
purportedly secured by Schiller's EXXI shares.
However, the law in
this circuit has long been well established that scienter in a
particular case may not be based solely on motives universal to all
corporate executives such as the desire to maintain a high stock
price.
See Indiana Electrical,
53 7 F. 3d at 544.
Plaintiffs'
factual allegations make it more plausible or at least as plausible
to
infer
that
when
signing
the
Form
10-K/A
at
issue
Louie
negligently relied on EXXI's accountants and auditors than to infer
-57-
that he knowingly or recklessly disregarded the presence of glaring
accounting irregularities or other red flags in EXXI's financial
statements.
See Tellabs, 127
497 F.3d at 555.
s.
Ct. at
See also Abrams,
2510; Central Laborers',
292 F.3d at 433
(recognizing
that accounting problems that lead to a restatement of a company's
financials can "easily arise from negligence, oversight or simple
mismanagement,
none of which rise to the standard necessary to
support a securities fraud action") .
The court concludes therefore
that Plaintiffs' factual allegations are not sufficient to raise a
strong inference of scienter as to Louie.
(3)
Loss Causation
Louie argues that even if Plaintiffs had alleged facts capable
of establishing all the elements of their Exchange Act claims, they
"have not alleged, nor can they, that there was any loss associated
with this loan or its disclosure. " 98
Louie argues that under Dura
Pharmaceuticals, Inc. v. Broudo, 125 S. Ct. 1627, 1633-34 (2005),
Plaintiffs must allege "that the market reacted negatively
to a corrective disclosure, which revealed the falsity of
[the Company's] previous representations . . . . " . . . The
personal loan from Mr. Louie to Mr. Schiller was disclosed
on September 29, 2015.
See Ex. C Energy XXI Ltd, Annual
Report (Form 10-K) (Sept. 29, 2015) at 43.
Immediately
thereafter, EXXI's price increased. See Ex. D Energy XXI
Stock Prices (showing seven consecutive trading days of
increases, reaching a high of $2.28 on October 8, 2015).
Even assuming there was a prior misstatement regarding the
personal loan - which there was not - without any alleged
loss caused by the disclosure of Mr. Louie's personal
98
Louie' s MD, Docket Entry No. 103, p. 9.
-58-
loan, all of Plaintiffs' claims relating to the personal
loan must fail. 99
Plaintiffs respond only that they "have sufficiently alleged loss
causation to withstand his motion to dismiss. " 100
Under the PSLRA Plaintiffs must prove that a defendant's act
or
omission alleged
to
have
violated
federal
securities
laws
"caused the loss for which the plaintiff seeks to recover damages."
15 U.S.C.
§
78u-4 (b) (4).
In Dura Pharmaceuticals, 125 S. Ct. at
1633-34, the Supreme Court held that loss causation incorporates
traditional elements of proximate causation and economic loss.
Amgen
133
S.
Inc.
v.
Ct.
continues
Connecticut
1184,
to be
1192
Retirement
(2013)
Plans
(confirming
an element of
a
and
that
claim under
§
Trust
loss
See
Funds,
causation
10 (b)) .
Loss
causation refers to a direct link between the misstatement and a
plaintiff's loss, and generally requires a corrective disclosure
relating to the challenged representations, followed by a decline
in
the
stock's
price.
F. App'x 311, 314
See
Catogas
(5th Cir. 2008)
v.
Inc.,
292
("Plaintiffs must allege .
that the market reacted negatively to a
which revealed the falsity of
Cyberonics,
corrective disclosure,
[defendant's] previous representa-
tions regarding the accounting for its stock options.").
Because
Plaintiffs fail to allege in their Amended Complaint or to argue in
99Id.
100
Plaintiffs' Opposition to Louie's MD, Docket Entry No. 113,
p. 12.
-59-
their brief in opposition to Louie's motion to dismiss that a
corrective disclosure about Louie's loan to Schiller caused EXXI's
stock
price
to
fall,
Plaintiffs
have
failed
to
plead
loss
causation.
Because Plaintiffs have failed to allege facts capable of
establishing
omission,
that
made
scienter,
with
Louie
that
Plaintiffs complain,
an
actionable
caused
the
loss
Louie's motion to dismiss
Exchange Act claims will be granted,
misstatement
of
which
or
the
the Plaintiffs'
and those claims will be
dismissed with prejudice.
(d)
Defendant Schiller
Schiller argues that the Exchange Act claims asserted against
him should be dismissed because Plaintiffs' Amended Complaint fails
to
allege
facts
capable
of
establishing
that
the
statements
attributed to him were false or misleading, or that he acted with
scienter.
Schiller also joins the arguments made by Louie and by
the Director Defendants that Plaintiffs' Amended Complaint fails to
allege facts capable of establishing loss causation, or that his
loans from Louie were "related party transactions." 101
(1)
Alleged Misstatements and Omissions
Plaintiffs argue that
[a] s Chairman and CEO, Schiller signed all of EXXI' s
Annual Reports including its 2011, 2012, 2013, and 2014
Annual Reports. ~ 21. On September 8, 2015, the Company
101
Schiller's MD, Docket Entry No. 104, p. 6.
-60-
announced that all four annual reports should not be
relied upon and had to be restated to eliminate hedge
accounting from them. ~~ 83 & 89. The Company's Annual
Reports for 2012, 2013, and 2014 also included materially
false or misleading information about the Company's
ultra-deep drilling activities (~~ 124-26, 132, & 242),
and the 2014 Annual Report included materially false or
misleading information about EXXI's acquisition of EPL
(~~ 172 & 174).
And third,
Schiller is tied directly to the
Company's misstatements regarding its oil and gas
reserves in EXXI's annual and quarterly financial
statements.
As Plaintiffs allege, Schiller repeatedly
pressured Company employees to include unsubstantiated
estimates of natural gas reserves purportedly discovered
as a result of EXXI's ultra-deep drilling program in the
reserves reported in the quarterly and annual financial
statements.
~
14:1.
That pressure undermined the
integrity
of
the
Company's
financial
statements.
~ 142. 102
Plaintiffs argue that Schiller made false and misleading statements
on three matters:
EXXI's
ultra-deep oil
drilling activities,
EXXI's accounting for the EPL acquisition,
and EXXI's financial
condition resulting from its use of cash flow hedge accounting . 103
Schiller argues that the statements Plaintiffs attribute to him are
not
actionable because
Plaintiffs
have
failed
capable of proving that the statements were,
misleading. 104
to allege
in fact,
facts
false or
Schiller also argues that the statements for which
Plaintiffs seek to hold him liable are not actionable because they
102
Id. at 24-25 (citing Plaintiffs' Amended Complaint, Docket
Entry No. 97, pp. 6 ~ 21, pp. 18-20 ~~ 83 & 89, pp. 27-29 ~~ 12426 & 132, pp. 31-32 ~~ 141-42, p. 37 ~~ 172 & 174, and p. 51 ~ 242).
103
Plaintiffs' Memorandum of Law in Opposition to Defendant
John D. Schiller's Motion to Dismiss Amended Complaint ("Plaintiffs'
Opposition to Schiller's MD"), Docket Entry No. 114, pp. 9-16.
104
Director Defendants' MD, Docket Entry No. 105, p. 11.
-61-
were generally forward looking statements of opinion or belief, and
because
Plaintiffs
have
failed
to
plead
facts
capable
of
establishing that he did not genuinely hold the stated opinion or
belief, that the opinion or belief contained embedded misstatements
of fact, or that he omitted material facts about his inquiry into
or
knowledge
of
information
that
would
conflict
with
what
reasonable investor would have understood from his comments . 105
a
See
Omnicare, 135 S. Ct. at 1327-29.
(i)
Plaintiffs
argue
Statements
About
EXXI's
Ultra-Deep
Drilling Activities Are Not Actionable
that
they
have
plausibly
alleged
that
Schiller either made or caused EXXI to make false and misleading
statements regarding EXXI's ultra-deep drilling activities on five
separate
occasions:
(1)
a
November
7,
regarding the Davy Jones well production;
2012,
(2)
Press
Release
EXXI's 2013 Annual
Report filed with the SEC on August 21, 2013;
(3) comments made at
an Oil & Gas conference on October 17, 2013;
(4) EXXI's quarterly
report for the second quarter of fiscal year 2014 filed with the
SEC on Form 10-Q on February 7,
2014;
and
(5)
EXXI's quarterly
report for the third quarter of fiscal year 2014 filed with the SEC
on Form 10-Q on May 1, 2014. 106
105
Plaintiffs argue that
Id. at 12-13.
106
Plaintiffs' Opposition to Schiller's MD, Docket Entry
No. 114, pp. 10-11, 18-19 (citing Plaintiffs' Amended Complaint,
Docket Entry No. 97, p. 6 ~ 21, pp • 2 8 - 3 1 ~ ~ 12 7 - 2 9
13 2 - 3 4
136-37).
1
-62-
1
as Schiller knew, the Company's ultra-deep drilling
activities were largely unsuccessful - only one of 15
target wells identified by the joint venture ever
produced any oil (~ 139) - and he lacked any basis for
the upbeat statements he repeatedly made.
Plaintiffs
substantiate their allegations that Defendants knowingly
grossly overstated the status of the ultra-deep drilling
activities with information provided by a former EXXI
employee who was directly responsible for managing EXXI' s
reserves and the Company's reserve accounting at the time
of the Davy Jones discovery.
~ 140.
In that capacity,
the former employee was well positioned to know whether
the Company possessed information to substantiate the
stated reserves. That former employee said that when the
Davy Jones 2 well was tested, it only produced water, not
107
natural gas.
(A)
Regarding
the
November
November 7, 2012, Press Release
7,
2012,
Press
Release
Plaintiffs
allege:
On November 7, 2012, EXXI issued a press release in which
Defendants caused the Company to state as follows:
Within the shallow-water ultra-deep exploration
program with McMoRan, the Davy Jones discovery
well is proceeding toward first production and
the company is participating in the Blackbeard
West #2, Lomand North and Lineham Creek wells.
The Davy Jones discovery well, the first
shallow-water, ultra-deep sub-salt completion
on the Gulf of Mexico shelf,
is being
completed.
The wellbore was cleaned out to
enable testing of all 165 feet of perforated
sands in the Wilcox and the final steps of
installing the wellhead are underway.
Once
these steps are complete, flow testing is
expected to commence.
Completion and testing of the Davy Jones
offset appraisal well (Davy Jones #2) is
107
Id. at 19 (citing Plaintiffs'
Entry No. 97, p. 31 ~~ 138-40).
-63-
Amended Complaint,
Docket
expected to commence following review of
results from the Davy Jones discovery well. 108
Missing from Plaintiffs' Amended Complaint are allegations of
facts capable of establishing that any of the statements in the
November 7, 2012, Press Release were false or misleading when made,
or that they were attributed to, formulated, signed, or adopted by
Schiller.
Instead, Plaintiffs merely allege that "[o]nly one of 15
target wells identified by the joint venture ever produced oil." 109
But
the
fact
that
EXXI' s
ultra-deep
drilling
activities
ultimately not successful is not probative of falsity.
v.
Cannon,
184
F.
Supp .
3d 428,
469
(S.D.
Tex.
this
as
insufficient
something
turned
out
because
it
is
badly must
based
mean
on
("[T]he
Courts treat
fact
that
defendant [s]
[the]
earlier that it would turn out badly.'") .
See Carlton
2016)
plaintiffs have at most alleged fraud by hindsight.
were
'the
knew
Plaintiffs fail
to
allege contemporaneous facts capable of showing that Schiller knew
earlier material information that he chose not to disclose until
later.
Id.
(citing Abrams,
held
292 F.3d at 433
should not
be
responsible
events") .
Because Plaintiffs
for
fail
("company officials
failure
to allege
to
foresee
facts
future
capable of
establishing either that statements contained in the November 7,
2012,
Press Release were false or that any false statements are
108
29,
~
Plaintiffs' Amended Complaint, Docket Entry No. 97, pp. 28127.
109
Id. at 31
~
139.
-64-
attributable to Schiller, and because Plaintiffs neither allege nor
argue that statements contained in the November 7,
Release
misled
the
market,
the
statements
made
2012,
Press
that
press
in
release are not actionable under the Exchange Act.
See In re
Azurix Corp. Securities Litigation, 198 F. Supp. 2d 862, 882 (S.D.
Tex. 2002)
(holding that statements were "not actionable because
plaintiffs
have
statements
were
not
pleaded
untrue") ,
any
aff' d
facts
sub nom.
indicating
that
Rosenzweig v.
the
Azurix
Corp., 332 F.3d 854 (5th Cir. 2003);
Southland Securities Corp. v.
INSpire Insurance Solutions,
365 F.3d 353,
2004)
(holding
that
facts
Inc.,
tying
an
officer
or
365
(5th Cir.
director
to
a
statement "would include a signature on the document or particular
factual allegations explaining the individual's involvement in the
formulation of either the entire document, or that specific portion
of the document" containing the false or misleading statement) .
(B) EXXI's 2013 Annual Report
Regarding EXXI's 2013 Annual Report, Plaintiffs allege:
In its 2013 Annual Report filed with the SEC on
August 21, 2013, Defendants caused the company to state
that "work is ongoing to establish commercial production"
from Davy Jones No. 1. However, when the statement was
made, Defendants knew that Davy Jones No. 1 was not
commercially viable. 110
Plaintiffs also allege that
[a]s Chairman of the Board and Chief Executive Officer of
EXXI, Defendant Schiller signed the Company's annual
reports filed with the SEC on Form 10-K and 10-K/A. As
110
Id. at 29-30
~
132.
-65-
a signatory of the annual reports issued in the name of
the Company and not attributed to an individual author,
Schiller is responsible for the content of the annual
reports he signed. 111
Missing from Plaintiffs' Amended Complaint are allegations of
facts capable of establishing that on August 21, 2013, when EXXI's
2013 Annual Report was filed,
work was not ongoing to establish
commercial production from Davy Jones No. 1, that Schiller knew or
did not
genuinely believe
that
work
was
ongoing
to
establish
commercial production from Davy Jones No. 1, or that Schiller had
contradictory information, i.e., information that Davy Jones No. 1
was not commercially viable.
Absent allegations of such facts, the
statements about ultra-deep drilling activities
in EXXI' s
Annual Report are not actionable against Schiller.
2013
See In re
Azurix Corp. Securities Litigation, 198 F. Supp. 2d at 882.
(C) Statements at Oil & Gas Conference
Regarding Schiller's October 17, 2013, statements at an Oil &
Gas Conference, Plaintiffs allege that
[a] t an Oil & Gas conference on October 17, 2013,
Schiller said that Davy Jones No. 1 was "too deep and too
narrow to flow gas" but Schiller falsely stated that Davy
Jones No. 2 had a "high probability" of producing and
that completion of Davy Jones 2 was expected to start in
December, 2013. 112
Plaintiffs allege that
Defendant Schiller's "high probability" statement was
false and misleading when it was made. As Schiller knew
111
Id. at 6
112
Id. at 30
~
21.
~
133.
-66-
on October 17, 2013, there was no objective or empirical
evidence, such as test results or preliminary production
data, to support Schiller's "high probability" statement
at that time (or ever).
Thus, on that date, Schiller
lacked any reasonable basis for his "high probability"
statement. 113
Plaintiffs also allege that
[a] ccording
to
a
former
EXXI
employee
directly
responsible for managing EXXI's reserves and the
Company's reserve accounting at the time of the Davy
Jones discovery, when the Davy Jones No. 2 well was
tested, it only produced water, not natural gas.
This
material adverse fact, though known by EXXI and the
Individual Defendants, was not timely disclosed to
investors, including Plaintiffs in particular. 114
Missing from Plaintiffs' Amended Complaint are allegations of
fact capable of establishing that Schiller's statements that Davy
Jones
No.
2
had
a
"high
probability"
of
producing
or
that
completion of Davy Jones No. 2 was expected to start in December of
2013, were false,
or that when Schiller made these statements he
either knew that they were false or did not genuinely believe them.
Plaintiffs' assertion that Schiller lacked any reasonable basis for
his "high probability" statement because he had no objective or
empirical evidence to support that statement is unavailing because
Plaintiffs
fail
to
allege
particularized
facts
capable
of
establishing that objective or empirical evidence existed that
contradicted that statement.
In Rosenzweig, 332 F.3d at 870, the
Fifth Circuit reaffirmed its prior recognition in Rubinstein, 20
F. 3d at 169, that "(s] imply alleging that the predictive statements
~
113
Id.
114
Id. at 31
134.
~
140.
-67-
. did not have a reasonable basis negligently made
Rule 10b-5.
that is,
that they were
would hardly suffice to state a claim under
11
Plaintiffs, reference to an unidentified former EXXI employee
in support of their allegations that when Davy Jones No.
tested,
it
produced
water,
not
gas,
is
unavailing
2 was
because
Plaintiffs have not alleged either when the test occurred or that
it occurred before Schiller made the statements alleged to be false
and misleading at the Oil & Gas Conference on October 17,
2013.
Nor have plaintiffs alleged any facts capable of establishing that
Schiller knew about the test, knew the test demonstrated that Davy
Jones No. 2 was incapable of producing gas, or knew that the test
necessarily meant that completion of Davy Jones No.
expected to start in December of 2013.
2 was not
Because Plaintiffs do not
allege facts capable of establishing that Schiller,s statements at
the Oil & Gas Conference on October 17, 2013, were false, or that
Schiller
either
knew
those
statements
were
false
or
did
not
genuinely believe them, and because Plaintiffs neither allege nor
argue that any of those statements misled the market, Schiller,s
statements at the Oil & Gas Conference on October 17, 2013, are not
actionable
under
the
Exchange
Act.
See
In
re
Azurix
Corp.
Securities Litigation, 198 F. Supp. 2d at 882.
(D)
Regarding
Form 10-Qs Filed in Early 2014
statements on EXXI, s
Form 10 -Q
filings
for
the
second and third quarters of fiscal year 2014, Plaintiffs allege:
-68-
13 6. In EXXI' s quarterly report for the period ended
December 31, 2013, filed on Form 10-Q with the SEC on
February 7, 2014, Defendants caused the Company to state
that "work is ongoing to establish commercial production"
from Davy Jones 1 and that " (o] perations to commence
completion of the Davy Jones No. 2 well are expected
during calendar year 2014."
13 7. In EXXI' s quarterly report for the period ended
March 31, 2014, filed on Form 10-Q with the SEC on May 1,
2014, Defendants failed to mention Davy Jones No. 1, but
maintained that Davy Jones No. 2 was "in the process of
being completed. ,ns
Plaintiffs argue that the statement in the Form 10-Q filed on
February 7,
2014,
that "work is ongoing to establish commercial
production" from Davy Jones No. 1 was false because Schiller had
stated at an October 17, 2013, Oil & Gas Conference that Davy Jones
No.
"too deep and too narrow to flow gas . " 116
was
1
replies
that
Plaintiffs
Schiller
have not alleged any facts
capable of
establishing that statements in the Form 10-Q filed on February 7,
2014, were false or misleading. 117
selectively
February
7,
cited
2014,
only
a
Asserting that Plaintiffs have
portion
Schiller
of
argues
the
that
Form
when
10-Q
read
filed
in
on
context
together with the surrounding statements, the statement that work
was "ongoing to establish commercial production from Davy Jones 1,"
which
plaintiffs
115
116
Id. at 30-31
allege
~~
is
false
and
misleading
because
it
136-37.
Plaintiffs' Opposition
No. 114, pp. 10-11.
to
117
Schiller's
MD,
Docket
Entry
Defendant John D. Schiller, Jr.'s Reply in Support of His
Motion to Dismiss the Amended Complaint ("Schiller's Reply") ,
Docket Entry No. 122, pp. 12-13.
-69-
conflicts with the statement he made on October 17, 2013, that Davy
Jones No. 1 is too deep and too narrow to flow gas is,
consistent with his October 17, 2013, statement.
in fact,
Schiller explains
that Plaintiffs
omit an important sentence in the February 7, 2014 Form
10Q filing in which the company truthfully disclosed that
"work is ongoing to establish commercial production" from
Davy Jones 1. Immediately following that sentence, the
company stated in the 10Q:
"The operator [Freeport
McMoRan)
is developing a fit for purpose fracture
stimulation process" for Davy Jones 1." 118
In pertinent part the Form 10-Q filed on February 7,
2014,
states:
Davy Jones.
As previously reported, our operating
partner, Freeport McMoRan, has drilled two wells in the
Davy Jones field.
The Davy Jones No. 1 well is located
on South Marsh Island Block 230 in 19 feet of water and
work is ongoing to establish commercial production from
the well. The operator currently is developing a fit for
purpose fracture stimulation process.
The Davy Jones
No. 2 offset appraisal well, located two and a half miles
southwest of Davy Jones No. 1, confirmed 120 net feet of
potential pay in multiple Wilcox sands, indicating
continuity across the major structural features of the
Davy Jones prospect, and also encountered 192 net feet of
potential hydrocarbons in the Tuscaloosa and Lower
Cretaceous carbonat.e sections.
Operations to commence
completion of the Davy Jones No. 2 well are expected
during calendar year 2014. 119
118
Id. at 13 (citing· Energy XXI (Bermuda) Limited, Form 10-Q
for the quarterly period ended December 31, 2013, Exhibit 2 to
Declaration of David M. Sheeren, Docket Entry No. 122-3).
119
Energy XXI (Bermuda) Limited, Form 10-Q for the quarterly
period ended December 31, 2013, p. 35, Exhibit 2 to Declaration of
David M. Sheeren, Docket: Entry No. 122-3, p. 42.
The court may
properly consider the full section of this Form 10-Q at this stage
of the case because in securities cases courts may take judicial
notice of the contents of public disclosure documents that are
(continued ... )
-70-
Missing from Plaintiffs' Amended Complaint are allegations of
facts capable of establishing that when the Form 10-Q was filed on
February 7,
2014,
the work to complete Davy Jones No.
1 was not
still ongoing, that the operator was not attempting to develop a
"fit for purpose fracture stimulation process" to that well,
or
that objective or empirical evidence existed that contradicted the
statement that Plaintiffs allege was false.
Because Plaintiffs do
not allege facts capable of establishing that the statement that
"work is ongoing to establish commercial production"
from Davy
Jones No. 1 made in the Form 10-Q filed on February 7, 2014, was
false,
because Plaintiffs neither allege nor argue that Schiller
did not genuinely believe that statement or had information that
contradicted it, and because Plaintiffs neither allege nor argue
that the statement about the Davy Jones No.
1 well misled the
market, that statement will not support a claim against Schiller
under
the
Exchange
Act.
See
In
re
Azurix
Corp.
Securities
Litigation, 198 F. Supp. 2d at 882.
Plaintiffs argue that the statements that "[o]perations to
commence completion of the Davy Jones No.
2 well are expected
during
Form
calendar
year
2014"
made
119
in
the
10-Q
filed
on
( • • • continued)
required by law to be filed and are actually filed with the SEC
with the caveat that these documents may be considered only for the
purpose of determining what statements they contain. See Lovelace,
78 F.3d at 1018 & n.1. See also Lone Star Fund V (U.S.), 594 F.3d
at 387 (holding that when considering a motion to dismiss courts
may consider documents that are "central to the claim and
referenced by the complaint").
-71-
February 7, 2014, and that Davy Jones No. 2 was "in the process of
being completed" made in the Form 10-Q filed on May 1, 2014, were
false because by 2014 specialized production equipment used for
ultra-deep well production had been removed from Davy Jones No. 2
and relocated to a different site,
and because an unidentified
former EXXI employee has allegedly provided information that when
Davy Jones No. 2 was tested, it produced water, not gas . 120
These
allegations are not sufficient to state a claim for violation of
the Exchange Act against Schiller because Plaintiffs have failed to
allege facts capable of establishing when the specialized equipment
was removed from the Davy Jones No.
2 site or even that it was
removed from the site before EXXI filed the Form 10-Qs at issue on
February 7,
2014,
and May 1,
2014.
Nor have Plaintiffs alleged
facts capable of establishing the type of specialized equipment
that was removed, that removal of the equipment necessarily meant
the Davy Jones No. 2 well could not be completed, or that when the
statements were made Schiller did not genuinely believe them or had
information that contradicted them.
Plaintiffs have similarly
failed to allege facts capable of establishing when the test that
allegedly produced water instead of gas occurred or even that it
occurred before EXXI filed the Form 10-Qs at issue on February 7,
2014,
and May 1,
2014.
Nor have Plaintiffs alleged any facts
120
Plaintiffs' Opposition to Schiller's MD, Docket Entry
No. 114, p. 11 (citing Plaintiffs' Amended Complaint, Docket Entry
No. 97, p. 31 ~~ 139-40).
-72-
capable of establishing that Schiller knew about the test, knew the
test demonstrated that Davy Jones No. 2 was incapable of producing
gas, or knew that the test would necessarily lead to the cessation
of ongoing efforts to complete Davy Jones No. 2.
allegations
capable
Form
at
10-Qs
of
issue
establishing
on
February
that
7,
Absent factual
when
2014,
EXXI
and
May
filed
1,
the
2014,
operations to commence completion of the Davy Jones No. 2 well were
not expected during calendar year 2014, and that when EXXI filed
the Form 10-Q filed on May 1, 2014, Davy Jones No. 2 was not "in
the process of being completed," or that Schiller knew either that
work was not ongoing on that well or that the well was not capable
of producing gas, Schiller cannot be held liable under the Exchange
Act for the allegedly false statements regarding Davy Jones No. 2
contained in EXXI's Form 10-Qs filed on February 7, 2014, or May 1,
See
2014.
In
re
Azurix
Corp.
Securities
Litigation,
198
F. Supp. 2d at 882.
( ii) Statements About EXXI' s Accounting For
The EPL Acquisition Are Not Actionable
Asserting that Schiller caused EXXI to buy EPL in 2014 to turn
around the Company's stagnant growth and sagging stock price, 121
Plaintiffs argue that
[a] year earlier, the Company decided that EPL was
overpriced.
~~ 149 & 160.
However, Schiller was so
desperate to deliver any purportedly good news to the
121
Id. at 19-20 (citing Plaintiffs' Amended Complaint, Docket
Entry No. 97, p. 33 ~ 147). See also id. at 11-15.
-73-
market that he rushed the Company to complete the $2
billion purchase
its largest by far
without
conducting any due diligence. ~ 153. The haste in which
Schiller forced EXXI to buy EPL was matched by the haste
in which the purchase soured: less than a year after
buying EPL,
the assets EXXI acquired had become
worthless. ~~ 220-21.
After EXXI acquired EPL, the Company and its
subsidiary reported financial results side-by-side.
Quarter after quarter, EPL wrote down assets as impaired,
only to have EXXI delay doing so by one quarter.
Each
time, EXXI wrote down the exact same impairment charge
one quarter after EPL did so.
EXXI has never explained
the reason for its delayed recognition of the impairment
charge . 122
Plaintiffs'
allegations
that
Schiller
rushed
the
EPL
acquisition, caused EXXI to overpay for EPL, and was so desperate
to bring good news to the market that he failed to do any due
diligence, are not supported by allegations of particularized facts
capable
of
establishing
that
any
statements
about
the
EPL
acquisition attributable to Schiller were false or misleading, or
that Schiller failed to disclose information needed to make his EPL
statements not misleading.
Even assuming that such facts were pled
with specificity, the "failure to engage in due diligence before
closing an acquisition does not automatically support an inference
of fraud."
WL 318441,
Pohlad,
933
Schiller v.
*11
F.
(N.D.
Supp.
Physicians Resource Group,
Tex.
793,
February 26,
799
(D.
2002)
Minn.
Inc.,
2002
(citing Brogen v.
1995)
(failing
"to
adequately investigate the merits of a potential acquisition and
122
Id.
See also Plaintiffs' Amended Complaint, Docket Entry
No. 97, pp. 32-49 ~~ 144-230.
-74-
subsequent steps to remedy that omission may give rise to a claim
for
negligence;
but
it
cannot
support
a
claim
for
securities
fraud") ) .
Plaintiffs' allegations that Schiller can be held liable under
the Exchange Act for false or misleading statements because EXXI
recognized impairment charges for EPL one quarter after EPL did so
without explaining the reason for its delayed recognition, are not
supported by allegations of particularized fact.
Missing from
Plaintiffs' Amended Complaint are allegations of facts capable of
establishing the relevant accounting standards, how those standards
were violated, or that Schiller knew or ignored glaring red flags
that
statements
about
misleading when made.
Schiller's
MD
is
EPL
attributable
to
him
were
false
or
Also missing from Plaintiffs' Opposition to
any
argument
or
authority
for
Plaintiffs'
contention that a corporate parent has a duty to explain why its
accounting for impairment of a subsidiary's assets differs from the
subsidiary's own accounting for the same assets.
Fire
Control
and Rescue District
Plymouth County Retirement
No.
15 Civ.
2016)
6034
(RJS),
See North Collier
Firefighter Pension Plan and
Association v.
2016 WL 5794774,
MDC
*3,
Partners,
9-11,
24
Inc. ,
(S.D.N.Y.
(dismissing§ 10(b) claim that rested on allegations of how
management
goodwill
of
parent
related
to
company
should
subsidiary) .
have
See
tested
also
and
Harris
v.
impaired
Amtrust
Financial Services, Inc., 135 F. Supp. 3d 155, 171 (S.D.N.Y. 2015)
("The fact that Lead Plaintiff cannot tick and tie the loss and
-75-
loss
adjustment
financial
expense
statement
to
reported
the
in
AmTrust's
consolidated
losses
its
individual
subsidiaries
reported to insurance regulators, without more, does not plausibly
allege a misstatement.").
Because Plaintiffs do not allege facts
capable of establishing that any of EXXI's statements about EPL
were false,
or that EXXI had a duty to explain the differences
between its accounting for EPL's goodwill impairment and EPL's own
accounting for impairment of its assets; because Plaintiffs fail to
allege facts capable of establishing that Schiller either knew that
any statements about EPL attributable to him were false, or did not
genuinely believe any such statements;
and because Plaintiffs'
neither allege nor argue that any statements about EPL misled the
market, the EPL statements about which Plaintiffs complain are not
actionable against Schiller under the Exchange Act.
See In re
Azurix Corp. Securities Litigation, 198 F. Supp. 2d at 882.
(iii)
EXXI's
Financial
Actionable
Statements
Are
Asserting that "EXXI lacked the necessary documentation for
its hedging activities to utilize hedge accounting," 123 Plaintiffs
argue that
[a]s a result, in September 2015, shortly after EXXI's
auditor was acquired, the new auditor required the
Company to restate more than four years of financial
statements and to make an adjustment to its accumulated
deficit to eliminate the effects of cash flow hedge
123
Id. at 15-16 (citing Plaintiffs' Amended Complaint, Docket
Entry No. 97, pp. 49-50 ~~ 234-35).
-76-
accounting.
~~ 244-45.
On September 8, 2015, EXXI
announced that its previously issued consolidated
financial statements for the four years ended June 30,
2011, 2012, 2013, and 2014, and for the seven quarters
ended September 30, 2013 and 2014, December 31, 2013 and
2014, March 31, 2014 and 2015, and June 30, 2014- eleven
financial statements in all - should no longer be relied
upon, and would be restated.
~ 245.
The announcement
stunned Plaintiffs and other EXXI investors.
~ 247 . 124
Plaintiffs argue that
[a] s Chairman and CEO, Schiller signed all of EXXI' s
Annual Reports including its 2011, 2012, 2013, and 2014
Annual Reports. ~ 21. On September 8, 2015, the Company
announced that all four annual reports should not be
relied upon and had to be restated to eliminate hedge
accounting from them. ~~ 83 & 89. The Company's Annual
Reports for 2012, 2013, and 2014 also included materially
false or misleading information about the Company's
ultra-deep drilling activities (~~ 124-26, 132, & 242),
and the 2014 Annual Report included materially false or
misleading information about EXXI's acquisition of EPL
(~~
172 & 174).
And third,
Schiller is tied directly to the
Company's misstatements regarding its oil and gas
reserves in EXXI's annual and quarterly financial
statements.
As Plaintiffs allege, Schiller repeatedly
pressured Company employees to include unsubstantiated
estimates of natural gas reserves purportedly discovered
as a result of EXXI's ultra-deep drilling program in the
reserves reported in the quarterly and annual financial
statements.
~
141.
That pressure undermined the
integrity of
the
Company's
financial
statements.
~
142.125
Regarding Schiller's alleged misstatements on EXXI's oil and
gas reserves Plaintiffs allege:
124 Id.
at
(citing Plaintiffs'
Entry No. 97, pp. 244-45, and 247).
16
125 Id.
Amended Complaint,
Docket
at 24-25 (citing Plaintiffs' Amended Complaint, Docket
Entry No. 97, p. 6 ~ 21, pp. 18-20 ~~ 83 & 89, pp. 27-30 ~~ 124-26 &
132, pp. 31-32 ~~ 141-42, p. 37 ~~ 172 & 174, and p. 51 ~ 242).
-77-
141. According to the former EXXI employee, Defendant
Schiller
pressured
Company
employees
to
include
unsubstantiated estimates of natural gas reserves
purportedly discovered as a result of EXXI's ultra-deep
drilling program in the amount of reserves reported in
the Company's quarterly and annual financial statements.
This led to internal confrontations over accounting
policies and practices.
142. Although the unsubstantiated estimates of natural
gas reserves purportedly discovered as a result of EXXI's
ultra-deep drilling program were not included in any of
the Company's financial statements, the pressure from
Defendant Schiller and the confrontations it led to
created
mistrust
between
the
Company's
internal
126
accountants and senior management.
Because
Plaintiffs
estimates of
expressly
natural
gas
allege
that
"the
unsubstantiated
reserves purportedly discovered as
a
result of EXXI's ultra-deep drilling program were not included in
any
of
the
Company's
financial
statements," 127
they
are
not
statements for which Schiller can be held liable under the Exchange
Act.
Schiller
does
not
plausibly
argue,
however,
that
the
financial statements he signed that were ultimately restated due to
EXXI's lack of specific documentation needed to support its use of
cash flow hedge accounting did not contain statements that were
false
and misleading.
The court
therefore concludes that the
Plaintiffs have pled specific facts sufficient to hold Schiller
liable for the financial statements that he signed and that were
restated
because
accounting.
126
EXXI
improperly
cash
flow
hedge
See Janus, 131 S. Ct. at 2302.
Plaintiffs' Amended Complaint, Docket Entry No. 97, pp. 31-
32 ~~ 141-42.
127
utilized
Id.
~
142.
-78-
(iv)
Conclusions
For the reasons stated above,
the court concludes that the
purportedly false and misleading statements that Plaintiffs allege
Schiller made about EXXI's ultra-deep oil drilling activities, and
EXXI' s accounting for the unsuccessful EPL acquisition will not
support
Exchange
Act
claims
against
Schiller
either
because
Plaintiffs have failed to allege facts capable of establishing that
the statements were false when made, or that to the extent they were
statements of opinion or belief, Schiller did not genuinely hold the
opinions
expressed,
the
statements of fact,
opinions
contained
embedded
untrue
or Schiller omitted material facts about his
inquiry or knowledge that would conflict with what a reasonable
investor would have understood from his statements.
135
s. Ct. at 1327-29.
The court concludes,
See Omnicare,
however,
that the
Plaintiffs have pled particularized facts capable of establishing
Schiller's liability for false and misleading statements contained
in EXXI's financial statements that Schiller signed, that were filed
with
the
SEC,
and
that
were
restated
utilized cash flow hedge accounting.
(2)
Schiller
because
EXXI
improperly
See Janus, 131 S. Ct. at 2302.
Scienter
argues
that
"the
Amended
Complaint
should
be
dismissed for failure to allege any inference of scienter, much
less a strong one." 128
128
He argues that Plaintiffs' references to his
Schiller's MD, Docket Entry No. 104, p. 13.
-79-
desire
to maintain a
lavish lifestyle,
his
executive position
within EXXI, his signature on SEC filings that were restated, and
his
loans
from
Louie
and
EXXI
individually or collectively -
vendors
are
to raise a
all
inadequate
strong inference of
scienter. 129
Citing Nathenson v.
Zonagen Inc.,
267
F.3d 400
(5th Cir.
2001), Plaintiffs respond that they have alleged
several "special circumstances" that strongly support an
inference of Schiller's scienter.
Those circumstances
include:
(i) Schiller's prominence as EXXI's founder,
Chairman, and CEO; (ii) the importance of the Company's
ultra-deep drilling activities, its oil and gas reserves,
and the EPL acquisition to EXXI's net worth and future
prospects; (iii) the fact that Schiller himself made
several statements regarding the Company's ultra-deep
drilling,
its reserves,
and the EPL acquisition;
(iv) Schiller's attempt to influence the Company's
reserve estimates; and (v) Schiller's dependence on the
market price for EXXI stock to meet his need for cash to
fund his lavish lifestyle.
Those circumstances
particularly Schillers' need to control the Company's
disclosures to satisfy his urgent need for cash - make
his scienter "at the very least, equally as compelling as
any alternative inference,
and a tie favors the
plaintiff." Lormand, 565 F. 3d at 254 (emphasis added) . 130
Plaintiffs also point to the loans that Schiller took from Louie
and from EXXI's vendors but failed to disclose to the Board or to
the market as strong inferences of scienter. 131
129
Id. at 13-22.
No. 122, pp. 16-21.
See also Schiller's Reply,
130
Plaintiffs' Opposition to Schiller's
No. 114, p. 27 (emphasis in original).
131
Id. at 27-31.
-80-
MD,
Docket Entry
Docket
Entry
In
Nathenson
the
Fifth
Circuit
held
that
the
individual
defendants' positions within the defendant pharmaceutical company
enhanced the scienter allegations.
Recognizing "that normally an
officer's position with a company does not suffice to create an
inference of scienter," id. at 424,
the court found a number of
special circumstances that taken together,
different result in that case:
sufficed to support a
(1) the company was small and had
only three-dozen full-time employees; (2) it was essentially a oneproduct company; and (3) the alleged misrepresentations were about
the patent protection for that single product, the company's most
crucial issue.
The
however,
See
Id. at 425.
Fifth
and
other
courts
have
been
reluctant,
to apply the limited exception recognized in Nathenson.
Rosenzweig,
argument
Circuit
that
332
"the
water-privatization
F. 3d at
failure
(rejecting
867-68
of
projects
core
Azurix's
supports
the
the
plaintiffs'
business
inference
that
defendants knew, or recklessly disregarded, Azurix's prospects for
success" and holding that the plaintiffs must identify exactly who
supplied
the
information
or
when
they
knew
the
information");
Abrams, 292 F. 3d at 432 ("A pleading of scienter may not rest on the
inference that defendants must have been aware of the misstatement
based on their positions within the company.").
Circuit has
stated that only in the
Instead, the Fifth
"rare case"
will a
strong
inference of scienter be drawn from an officer's position in a
company, and only when this factor combines with other,
-81-
"special
circumstances."
Local 731 I.B of T. Excavators and Pavers Pension
Trust Fund v. Diodes, Inc., 810 F.3d 951, 959 (5th Cir. 2016).
Fifth Circuit reiterated that such circumstances may include:
The
(1) a
small company in which corporate executives are more likely to be
familiar with day-to-day operations;
the company's continued vitality";
(2) transactions "critical to
(3) omitted information readily
apparent to the speaker; and (4) statements by the corporate officer
that are internally inconsistent.
Id.
Plaintiffs neither allege nor argue that facts capable of
establishing
Nathenson
or
any
of
the
special
circumstances
Diodes
are
present
in
this
recognized
case.
in
Plaintiffs'
allegations that between 2006 and 2010 EXXI completed five major
acquisitions for aggregate cash consideration of approximately $2.5
billion demonstrates
that EXXI differed substantially from the
small, single product companies at issue in Nathenson and Diodes. 132
Instead,
as special circumstances capable of allowing a
strong
inference of scienter to be drawn from Schiller's position with the
Company,
Plaintiffs
point
to
Schiller's
132
prominence
as
EXXI' s
Plaintiffs' Amended Complaint, Docket Entry No. 97, p. 16
69-71.
Moreover, Schiller argues without objection that EXXI
had approximately 257 employees at the time of its bankruptcy, more
than the companies falling under the Nathenson exception. See
Schiller's Reply, Docket Entry No. 122, p. 19 & n.9 ("In connection
with its bankruptcy petition, the company sought emergency relief
to pay these employees during the course of the bankruptcy.
See
Ex. 3 to the Declaration of David M. Sheeren at p. 5 (disclosing
257 employees) .
The Court can properly take judicial notice of
that adjudicative fact.
Funk v. Stryker Corp., 631 F.3d 777, 783
(5th Cir. 2011) ." See also Carlton, 184 F. Supp. 3d at 479 (183
employees voids the Nathenson exception) .
~~
-82-
founder,
Chairman,
importance
of
acquisition,
and CEO known for his lavish lifestyle,
EXXI's
ultra-deep
drilling
activities,
and oil and gas reserves to EXXI' s
the
the
EPL
net worth and
future prospects, and the allegedly false and misleading statements
that Schiller made about these subjects, i.e., EXXI's ultra-deep
drilling activities, EPL acquisition, and gas reserves. 133
Since,
however, for the reasons stated in§ III.A.2(d) (1) (i)-(iii), above,
the court has already concluded that Plaintiffs have failed to
plead facts capable of establishing that Schiller's statements
about EXXI's ultra-deep drilling activities, EPL acquisition, or
reserves were false or nlisleading, Plaintiffs' attempt to infer a
strong
inference
statements
misses
of
the
misleading statements
scienter
for
and/or
mark.
The
only
that
from
making
allegedly
the court has
those
false
and
found are actionable
against Schiller are the financial statements included in the EXXI
SEC filings that he signed and were later restated.
A defendant's
signature
on
an
misleading statements or omissions
strong inference of scienter.
555.
a
filing
with
cannot by itself
false
or
support a
See Central Laborers', 497 F.3d at
"[T]he mere publication of inaccurate accounting figures, or
failure
scienter.
false
SEC
to
follow
without
more,
does
not
establish
The party must know that it is publishing materially
information,
133
GAAP,
Plaintiffs'
27.
or
the party must
Opposition
to
No. 114, p.
-83-
be
severely reckless
Schiller's
MD,
Docket
in
Entry
publishing such information."
Lovelace, 78 F.3d at 1020.
See also
ArthroCare, 726 F. Supp. 2d at 716; Seitel, 447 F. Supp. 2d at 693.
To infer scienter from accounting errors, courts typically examine
the magnitude,
simplicity
pervasiveness,
and
obviousness
and repetition of the errors;
of
the
misapplied
rules;
and
defendant's apparent motives for misapplying these rules.
ArthroCare,
726 F.
timing, nature,
Supp.
2d at
frequency,
721
(" [W]hen the number,
the
the
See
size,
and context of the misapplication [of
accounting principles] or restatement are taken into account, the
balance of the inferences to be drawn from such allegations may
shift significantly in favor of scienter.").
Although Plaintiffs
have argued that the number, size, timing, nature, frequency, and
context of the misapplication [of accounting principles]
and the
restatement raise a strong inference of scienter as to Griffin,
EXXI's CFO, Plaintiffs have made no such argument as to Schiller.
Instead,
Plaintiffs
merely
point
to
the
loans
that
Schiller
borrowed from fellow board member Louie and from EXXI vendors but
did not disclose.
But for the reasons stated in§ III.A.2(c) (1),
above, the court has already concluded that Plaintiffs have failed
to allege any facts capable of establishing that Louie Schiller- had a duty to disclose those loans.
or now
Absent a duty to
disclose, failure to disclose is not capable of raising a strong
inference of scienter.
See Chiarella v. United States, 100 S. Ct.
at 1118 ("When an allegation of fraud is based upon nondisclosure,
there can be no fraud absent a duty to speak.").
-84-
Moreover, missing from Plaintiffs' Amended Complaint are any
allegations of specific facts connecting Schiller to the accounting
violations
statements.
that
led
to
the
restatement
of
EXXI's
financial
Nor are there any allegations that Schiller engaged in
insider trading or stood to benefit personally from any of the
alleged accounting errors.
Plaintiffs offer no facts in support of
their contention that Schiller signed the financial statements at
issue with scienter other than the
fact
that,
like the senior
managers of every company, he had control over the Company.
Izadj oo,
23 7 F.
Supp.
3d at 516
See
(find no scienter for officers
where there were no "glaring irregularities or red flags" to put
them on notice of material misstatements and omissions in SarbanesOxley
certifications
or
earnings
calls)
Plaintiffs
cannot
demonstrate scienter by relying either on Schiller's position on
the board, Abrams,
292 F.3d at 432,
financial statements were restated.
or on the fact that certain
See Central Laborers, 497 F.3d
at 546 (restatement of financial data, by itself, does not create
a strong inference of scienter).
Plaintiffs' factual allegations
make it more plausible or at least as plausible to infer that when
signing the SEC filings at issue Schiller negligently relied on
EXXI's accountants and auditors than to infer that he knowingly or
recklessly
disregarded
the
presence
of
glaring
accounting
irregularities or other red flags in EXXI's financial statements.
See Tellabs,
555.
127
s. Ct. at
2510; Central Laborers,
497 F.3d at
See also Abrams, 292 F.3d at 433 (recognizing that accounting
-85-
problems that lead to a restatement of a company's financials can
"easily arise from negligence, oversight or simple mismanagement,
none
of
which
rise
to
the
securities fraud action") .
Plaintiffs'
factual
standard
necessary
to
support
a
The court concludes therefore that
allegations
are
not
sufficient
to
raise a
strong inference of scienter as to Schiller.
(3)
Loss Causation
Schiller joins in and incorporates by reference arguments made
by the Director Defendants and by Louie
that Plaintiffs failed to show that any of the alleged
misstatements were followed by corrective disclosures
Plaintiffs
that caused the price of the stock to drop.
fail to plead loss causation because they do not allege
any causal connection between the supposed fraudulent
conduct and their purported losses. 134
Although
they
have
not
responded
directly
to
Schiller's
loss
causation argument, Plaintiffs argue that they "have sufficiently
alleged
loss
dismiss." 135
causation
to
withstand
[Schiller's]
motion
to
Citing Lormand, 565 F.3d at 256-58, and asserting that
"[l]oss causation 'is subject to the pleading standard of Federal
Rule of
pleading
[Civil]
Procedure
requirement
of
8 (a) (2),
Rule
rather
9(b) ," 136
than the
Plaintiffs
heightened
argue
that
134
Schiller's Reply, Docket Entry No. 122, p. 21.
See also
Schiller's MD, Docket Entry No. 104, p. 6 ("Mr. Schiller joins in
all of the arguments in The Director Defendants' Motion to Dismiss
and incorporates those arguments herein by reference.").
135
Plaintiffs' Opposition to Director Defendants' MD, Docket
Entry No. 115, p. 24.
136Id.
-86-
"[u] nder that relaxed pleading standard,
facially
omissions
"plausible"'
and
their
connection
loss." 137
[they] need only allege 'a
between
the
Citing North
misstatements
Port
or
Firefighters'
Pension- Local Option Plan v. Temple-Inland, Inc., 936 F. Supp. 2d
722,
761
(N.D.
Tex.
2013),
Plaintiffs argue that they "need not
plead a fact-for-fact disclosure to establish loss causation, " 138
and if the court disagrees,
opportunity
to
amend
Plaintiffs "respectfully request the
their
complaint
to
add
such
factual
allegations in further support of loss causation." 139
For the reasons stated in§ III.A.2(c) (3), above, with respect
to Louie,
and
in
§
III.A.2 (e) (3),
below,
with respect
to
the
Director Defendants, Plaintiffs have failed to plead loss causation
with respect to Schiller.
(4)
Conclusions as to Schiller
Because Plaintiffs have failed to allege facts
establishing
omission,
that
with
Schiller made
scienter,
that
an actionable
caused
the
capable of
misstatement
loss
of
which
or
the
Plaintiffs' complain, Schiller's motion to dismiss the Plaintiffs'
Exchange Act claims will be granted,
dismissed with prejudice.
137Id.
usrd.
139
Id. at 25.
-87-
and those claims will be
(e)
Director Defendants
The Director Defendants argue that the federal securities law
and fraud claims asserted against them should be dismissed because
Plaintiffs'
misstatement
Amended
or
Complaint
omission,
fails
scienter,
to
or
plead
loss
an
actionable
causation.
The
Director Defendants also argue that Plaintiffs' Amended Complaint
fails to the extent it asserts (1) claims against the
Director Defendants based on statements attributed to
unspecified "Defendants" or the Company when those
Director Defendants were not on the EXXI board and
(2) claims barred by the five-year statute of repose or
the prohibition on holder claims. 140
(1)
Alleged Misstatements and Omissions
Asserting that the Director Defendants are Feinberg, Colvin,
Dunwoody,
Dupre,
Flannery,
Griffiths,
and LaChance,
Plaintiffs
argue that
[a] t relevant times, each of the Director Defendants
served as a director of EXXI. In addition to serving on
the Board, Defendant Colvin was Chairman of the Audit
Committee and a member of the Nomination and Governance
Committee. ~ 48. Defendant Flannery was a member of the
Audit Committee and the Nomination and Governance
Committee of the Board.
~ 49.
Defendant Dunwoody was
Chairman of the Remuneration Committee and a member of
the Audit Committee.
~ 50.
Defendant Griffiths served
on the Audit Committee and the Compensation Committee.
~ 51.
Defendant Feinberg was Lead Independent Director,
Chairman of the Nomination and Governance Committee, a
member of the Compensation Committee, and an ex officio
member of the Audit Committee.
~ 52.
Defendant Dupre
was Chairman of the Compensation Committee and a member
of the Nomination and Governance Committee.
~ 53.
140
Director Defendants' MD, Docket Entry No. 105, p. 11. See
also Reply Brief in Support of the Director Defendants' Motion to
Dismiss the Amended Complaint ("Director Defendants' Reply") ,
Docket Entry No. 121, pp. 6-12.
-88-
By
virtue
of
their
Board
positions
and
responsibilities, the Director Defendants were privy to
and participated in the creation, development, and
reporting of the Company's financial condition; they had
significant personal contact and familiarity with the
Company and its senior officers and their fellow
directors; and they were advised of and had access to
internal
reports
and
other
non-public
data
and
information about the Company's finances, operations, and
sales. ~ 290. The Director Defendants were aware of the
Company's dissemination of information to the investing
public which they knew or recklessly disregarded was
materially false, misleading, and incomplete.
Id.
. . . [T] he Amended Complaint more than sufficiently
pleads claims under the [PSLRA] , for common law fraud,
and for breach of fiduciary duty against the Director
Defendants.
Their motion to dismiss the Amended
Complaint should be denied in its entirety. 141
Plaintiffs argue that they have plausibly alleged that the
Director Defendants caused EXXI to make a
series of materially
misleading statements about three different matters:
deep
oil
drilling
activities,
unsuccessful EPL acquisition,
and Schiller's secret
Unlike
specific
attributed
to
statements
Schiller,
accounting
for
the
EXXI's improper use of cash hedge
accounting,
the
EXXI' s
EXXI's ultra-
loan from defendant Louie. 142
on
Plaintiffs
these
argue
issues
that
the
made
by
or
statements
regarding EXXI's ultra-deep drilling activities for which they seek
to hold the Director Defendants liable were not attributed to any
person. 143
Citing Southland, 365 F.3d at 365, Plaintiffs argue that
141
Plaintiffs' Opposition to Director Defendants' MD, Docket
Entry No. 115, pp. 8-10 (citing Plaintiffs' Amended Complaint,
Docket Entry No. 97, pp. 11-13 ~~ 48-53 and p. 62 ~ 290).
142
Id. at 12-22.
143
Id. at 12-13,
&
n. 5.
-89-
"directors may be held liable for false, misleading, or incomplete
statements in corporate documents that have no stated author or are
not attributed to any individual if they are sufficiently linked to
the document or statement in question. " 144
(i)
Statements
About
EXXI's
Ultra-Deep
Drilling Activities Are Not Actionable
Plaintiffs argue that they have plausibly alleged that the
Director
Defendants
caused
EXXI
to
make
false
and
misleading
statements regarding EXXI's ultra-deep oil drilling activities in
a November 7,
2012, Press Release regarding the McMoRan and Davy
Jones well production, and in EXXI's Form 10-Q filed on February 7,
2014,
for
the
allegations
quoted
in
period
regarding
§
ended December
the
November
III.A.2 (d) (1) (i) (A),
31,
7,
2013. 145
2012,
above,
and
Press
their
Plaintiffs'
Release
are
allegations
regarding the Form 10-Q filed on February 7, 2014, are quoted in
§
I I I . A . 2 (d) ( 1) ( i) (D) ,
above .
For the reasons stated in those
previous sections of this Memorandum Opinion and Order, the court
has already concluded that Plaintiffs' Amended Complaint fails to
allege facts capable of establishing that any of the statements in
either the November 7,
2014,
2012,
Press Release,
Form 10-Q about which Plaintiffs
144
or the February 7,
complain were
false
or
Id. at 12.
145
Id. 12-13 (citing Plaintiffs'
Entry No. 97, pp. 28-29 ~ 127, and 30
-90-
~
Amended
136.
Complaint,
Docket
misleading when made.
fails
Plaintiffs'
to allege facts
Amended Complaint similarly
capable of establishing that any of the
statements about EXXI' s ultra-deep drilling activities contained in
either of these documents was attributed to,
formulated,
signed,
adopted, or used by any of the Director Defendants as conduits to
the market.
Absent
such allegations,
the
Director Defendants
cannot be held liable :for statements in either the November 7,
2012,
Press Release,
or the February 7,
2014,
Form 10-Q.
See
Azurix, 198 F. Supp. 2d at 882 (holding that statements were "not
actionable because plaintiffs have not pleaded any facts indicating
that
the
statements were untrue");
Southland,
365
F. 3d at 365
(holding that facts tying an officer or director to a statement
"would include a signature on the document or particular factual
allegations
explaining
the
individual's
involvement
in
the
formulation of either the entire document, or that specific portion
of the document") .
Also missing from Plaintiffs' Amended Complaint
are allegations of fact capable of establishing that any of the
statements contained in either the November 7, 2012, Press Release,
or
the
February
Accordingly,
the
7,
court
2014,
Form
concludes
10-Q
that
mislead
the
the
market.
Director Defendants
cannot be held liable under the Exchange Act for allegedly false
and
misleading
statements
about
EXXI's
activities made in either the November 7,
the February 7, 2014, Form 10-Q.
-91-
ultra-deep
drilling
2012, Press Release or
( ii) Statements About EXXI' s Accounting For
The EPL Acquisition Are Not Actionable
Asserting that after EXXI acquired EPL, EPL wrote down assets
as impaired,
only to have EXXI delay doing so by one quarter, 146
that in Plaintiffs' Amended Complaint they "allege in detail the
sequence of accounting for the impairment charges,
11147
and that
"EXXI restated financial statements that were prepared after the
Company acquired EPL in June [of 2014,
11148
Plaintiffs argue that
[t]he side-by-side comparison of EXXI's recognition of
impairments in the Company's consolidated annual and
quarterly financial statements with EPL's more timely
recognition of them in its stand-along financial
statements amply explains how and why EXXI's accounting
for the assets acquired from EPL in the Company's
consolidated financial statements was false, misleading,
and incomplete.
The adequately inform the Director
Defendants of the particular misrepresentations. 149
Citing Southland, 365 F.3d at 365, Plaintiffs argue that
the Director Defendants are liable for the false,
misleading, or incomplete statements in EXXI's financial
statements because they are linked to them by virtue of
their
ability
to
control
EXXI' s
financial
disclosures.
. In particular, the Director Defendants
who were members of the Audit Committee - Colvin (Chair),
Flannery, Dunwoody, Griffiths, and Feinberg (ex officio)
are closely linked to the Company's financial
statements.
As members of the Audit Committee, those
five
Director
Defendants
recommended
the
annual
appointment of the Company's auditor, reviewed the scope
of the audits,
reviewed the Company's accounting
principles,
and
reviewed
the
Company's
financial
146
Id. at 13.
147Id.
148
Id. at 14.
149Id.
-92-
statements included in the annual and quarterly reports
filed with the SEC.
~ 54.
They are undoubtedly liable
for the false and misleading financial statements. 150
Plaintiffs' argument that the Director Defendants can be held
liable under the Exchange Act for false or misleading statements in
EXXI' s
financial
statements because
EXXI
recognized
impairment
charges for EPL one quarter after EPL did without explaining the
reason for its delayed recognition is not supported by allegations
of particularized fact.
are
allegations
of
Missing from Plaintiffs' Amended Complaint
facts
capable of
establishing the
relevant
accounting standards, how those standards were violated, or that
any of the Director Defendants knew - or ignored glaring red flags
- that EXXI' s financial statements were false and misleading due to
improper accounting for impairment of EPL's assets.
from Plaintiffs'
Also missing
Amended Complaint is an allegation that any of
EXXI's financial statements were restated to correct misstatements
arising from a failure to properly account for the impairment of
EPL' s
assets.
Defendants'
MD
Missing from Plaintiffs'
is
any
argument
or
Opposition to Director
authority
supporting
their
contention that a corporate parent has a duty to explain why its
accounting for impairment of a subsidiary's assets differs from the
subsidiary's own accounting for impairment of the same assets.
See
MDC Partners, 2016 WL 5794774, at *3, 9-11, 24 (dismissing§ 10(b)
claim
that
company
150
rested
should
on allegations
have
tested
and
Id. at 14-15.
-93-
of
how management
impaired
goodwill
of
parent
related
to
subsidiary).
that
Lead
See also Harris, 135 F. Supp. 3d at 171 ("The fact
Plaintiff
cannot
tick
and
tie
adjustment expense reported in AmTrust' s
the
loss
and
loss
consolidated financial
statement to the losses its individual subsidiaries reported to
insurance regulators,
misstatement.").
without more,
does not plausibly allege a
Because Plaintiffs do not allege facts capable of
establishing that the Director Defendants made or caused EXXI to
make
any
false
or misleading
statements
about
EPL and/or
the
impairment of its assets, or that EXXI had a duty to explain the
differences between its accounting for impairment of EPL's assets
and EPL' s own accounting· for impairment of its assets, and because
Plaintiffs neither allege nor argue that any statements about EPL
misled the market, the court concludes that the Director Defendants
cannot be held liable under the Exchange Act for allegedly false
and misleading statements about EPL and/or EXXI's accounting for
impairment of EPL' s assets.
See In re Azurix Corp.
Securities
Litigation, 198 F. Supp. 2d at 882.
(iii)
EXXI's
Financial
Actionable
Statements
Are
Plaintiffs allege that because EXXI used hedge accounting
without required documentation,
"EXXI was required to restate its
financial statements for the fiscal years ended June 30,
2012,
2013,
September 30,
and
2014,
and
for
the
2013 through March 31,
151
Id. at 16 (citing Plaintiffs'
Entry No. 97, pp. 19-20 ~ 89).
-94-
intermediate
2015." 151
2011,
quarters
from
Plaintiffs argue
Amended Complaint,
Docket
that "[t] he Director Defendants cannot dispute that those erroneous
financial
statements were materially false
issued. " 152
and misleading when
Because Plaintiffs' Amended Complaint alleges that each
of the Director Defendants signed the Company's annual reports
filed with the SEC on Forms 10-K and 10-K/A, 153 each of them can be
held liable
for
annual reports.
false
and misleading statements made
in those
The Director Defendants do not dispute that they
signed EXXI's annual reports filed with the SEC on Forms 10-K and
10-K/A and that the annual reports for fiscal years ending June 30,
2011,
2012,
2013,
and
2014
that
they
signed
and
that
were
ultimately restated did not contain statements that were false and
misleading. 154
The court concludes, therefore, that the Plaintiffs
have pled specific facts sufficient to hold the Director Defendants
liable for the financial statements that they signed containing
false and misleading statements resulting from EXXI's use of hedge
accounting.
lOb-S,
See Janus, 131 S. Ct. at 2302 ("For purposes of Rule
the maker of
a
statement
is
ultimate authority over the statement,
the person or entity with
including its content and
whether and how to communicate it.").
1s2Id.
153
Plaintiffs' Amended Complaint, Docket Entry No. 97, pp. 1113 ~ 46 (LaChance), ~ 48 (Colvin), ~ 49 (Flannery), ~ 50
(Dunwoody), ~ 51 (Griffiths), ~ 52 (Feinberg), and ~ 53 (Dupre) .
154
Id. a t 11
ff
11
46
•
-95-
(iv) Statements About Schiller's Loans Are Not
Actionable
Plaintiffs allege that EXXI's Form 8-K filed with the SEC on
December 15, 2014, was false and misleading because it "state[d]
that there were no related party transactions between Louie and the
Company or any of its subsidiaries that would require disclosure
pursuant to Item 404(a) of Regulation S-K," but failed to disclose
that Schiller had taken a personal loan from Louie. 155
reasons stated in§ III.A.2(c) (1),
concluded that
the
statement
above,
in the
But for the
the court has already
Form
8-K about which the
Plaintiffs complain was neither false nor misleading and therefore
not actionable under the Exchange Act.
(v)
Conclusions
For the reasons stated above,
the court concludes that the
purportedly false and misleading statements that Plaintiffs allege
the
Director Defendants
caused
EXXI
to
make
about
ultra-deep
drilling activities, accounting for the impairment of EPL's assets,
and Schiller's secret loan from defendant Louie will not support
Exchange Act claims, but that Plaintiffs have alleged an actionable
claim
against
statements
signed,
the
Direct
contained
that
were
in
Defendants
EXXI' s
filed with
for
financial
the
SEC,
false
and
misleading
statements
and
that
were
that
restated
because EXXI improperly utilized cash flow hedge accounting.
Janus, 131 S. Ct. at 2302.
155
Id. at 56
~~
269-70.
-96-
they
See
(2)
Scienter
Asserting that "[t]he facts of the restatements give rise to
a strong inference of scienter[,
as]
do the facts of the
related party transaction between Louie and Schiller," 156 Plaintiffs
argue that
the Director Defendants, particularly the four directors
on the Nomination and Governance Committee, were severely
reckless in not discovering Louie's loan to Schiller
before he joined the Board.
And so, too, do the facts
relating to the accounting for the EPL acquisition and
EXXI's ultra-deep drilling activities. The differences
in accounting for impairment in EXXI' s consolidated
financial statements [for] EXXI when compared to the
stand-alone financial statements of its subsidiary, EPL,
cannot be attributed to any "overhaul" in accounting
systems.
Taken together,
the sum of all these
misstatements and omissions of material fact easily gives
rise to the requisite strong inference of scienter . 157
Plaintiffs allege that
the Director Defendants signed SEC
filings that contained false and misleading statements of EXXI's
financial condition because EXXI misapplied the accounting standard
for documenting use of cash flow hedge accounting.
publication of
inaccurate accounting
figures,
But "the mere
or a
follow GAAP, without more, does not establish scienter.
failure
to
The party
must know that it is publishing materially false information, or
the
party
information."
must
be
severely
Lovelace:_,
78
reckless
F. 3d at
1020.
in
publishing
See
also
such
Central
Laborers, 497 F.3d at 555 (recognizing that a defendant's signature
156
Plaintiffs' Opposition to Director Defendants' MD, Docket
Entry No. 115, p. 23.
1s7Id.
-97-
on an SEC filing with false or misleading statements or omissions
cannot by itself support a strong inference of scienter) .
scienter
from
accounting errors,
magnitude,
pervasiveness,
simplicity
and
and
obviousness
courts
typically
repetition
of
the
of
misapplied
To infer
examine
errors;
the
the
the
rules;
and
defendant's apparent motives for misapplying these rules.
ArthroCare,
argued
that
726
F.
the
Supp.
number,
2d at
721.
size,
timing,
the
See
Although Plaintiffs have
nature,
frequency,
and
context of the misapplication of accounting principles and the
restatement raise a strong inference of scienter as to Griffin,
EXXI's
CFO,
plaintiffs
Director Defendants.
have
made
no
such
argument
as
to
the
Instead, Plaintiffs merely point to the loans
that Schiller borrowed from fellow Board member Louie that the
Director Defendants neither discovered nor disclosed.
reasons stated in
§§
But for the
III .A. 2 (c) (1) and III .A. 2 (d) (1) (iv), above,
the court has already concluded that Plaintiffs have failed to
allege any facts capable of establishing that Louie or Schiller had
a duty to disclose those loans.
to
disclose
scienter.
is
not
capable
See Chiarella v.
Absent a duty to disclose, failure
of
raising
a
United States,
strong
100
inference
of
s. Ct. at 1118
("When an allegation of fraud is based upon nondisclosure, there
can be no fraud absent a duty to speak.").
Moreover, missing from Plaintiffs' Amended Complaint are any
allegations of specific facts connecting the Director Defendants to
the accounting violations that led to the restatement of EXXI's
-98-
financial statements.
Nor are there allegations that any of the
Director Defendants engaged in insider trading or stood to benefit
personally from any of the alleged accounting errors.
Plaintiffs
offer no facts in support of their contention that the Director
Defendants signed the financial statements at issue with scienter
other than the fact that, like the directors of every company, they
had control over the Company.
(find
no
scienter
for
See Izadjoo, 237 F. Supp. 3d at 516
officers
irregularities or red flags"
misstatements
and omission
earnings calls).
where
there
were
no
"glaring
to put them on notice of material
in Sarbanes-Oxley certifications or
Plaintiffs cannot demonstrate scienter by relying
either on the Director Defendants'
position on the Board or on
certain board committees, Abrams, 292 F.3d at 432, or on the fact
that
certain financial
Laborers,
itself,
497
does
F. 3d at
not
statements were
546
create
(restatement
a
strong
See Central
restated.
of
financial
inference
of
data,
by
scienter) .
Plaintiffs' factual allegations make it more plausible or at least
as plausible to infer that when signing the SEC filings at issue
Schiller negligently relied on EXXI' s accountants and auditors than
to infer that he knowingly or recklessly disregarded the presence
of glaring accounting irregularities or other red flags in EXXI's
financial statements.
Laborers,
497
F.3d at
See Tellabs, 127 S. Ct. at
555.
See
also Abrams,
292
2510; Central
F.3d at
433
(recognizing that accounting problems that lead to a restatement of
a company's financials can "easily arise from negligence, oversight
-99-
or
simple
necessary
mismanagement,
to
support
a
none
of
securities
concludes therefore that Plaintiffs'
sufficient
to
raise a
strong
which
fraud
rise
to
the
standard
The
action")
court
factual allegations are not
inference of
scienter as
to
the
Director Defendants.
(3)
Loss Causation
The Director Defendants argue that even if Plaintiffs could
satisfy the falsity and scienter elements of their Exchange Act
claims that "[a] third, independent basis compelling dismissal is
Plaintiffs' failure to plead facts demonstrating loss causation that
is,
'a
causal
connection between
misrepresentation and the loss.
that
the
Plaintiffs
have
not
I
"
158
the
[alleged]
material
The Director Defendants argue
alleged that
there
was
any loss
associated with any of the statements or categories of statements
that Plaintiffs allege were false and misleading, i.e., statements
about EXXI's ultra-deep drilling activities, EPL, Schiller's loans,
or EXXI' s improper use of hedge accounting. 159
158
Director Defendants' MD, Docket Entry No. 105, p. 27.
Defendants UHY and Schiller join the Director Defendants' argument
on loss causation. See UHY's MD, Docket Entry No. 101, p. 7 & n.2
("The arguments in the motion to dismiss of the Director Defendants
are adopted for purposes of this motion to dismiss;" and n. 2,
" [w] i th respect to the securities fraud claim, UHY incorporates the
arguments regarding group pleading, loss causation, and the statute
of repose.");
Schiller's MD,
Docket Entry No.
104,
p.
6
("Mr. Schiller joins in all of the arguments in The Director
Defendants' Motion to Dismiss and incorporates those arguments
herein by reference.")
159
Id. at 27-29.
-100-
Plaintiffs respond that they "have sufficiently alleged loss
causation to withstand [the defendants'] motion [s]
to dismiss. " 160
Citing inter alia Lormand, 565 F.3d at 256-58, and asserting that
"[l]oss causation is subject to the pleading standard of Federal
Rule
of
pleading
[Civil]
Procedure
requirement
of
8 (a) (2),
rather
9(b) ," 161
Rule
"[u]nder that relaxed pleading standard,
facially
plausible
connection
omissions
and
loss. " 162
their
between
than
the
Plaintiffs
heightened
argue
that
[they] need only allege a
the
Citing North
misstatements
Port
or
Firefighters'
Pension- Local Option Plan v. Temple-Inland, Inc., 936 F. Supp. 2d
722,
761
(N.D. Tex.
2013),
Plaintiffs argue that they "need not
plead a fact-for-fact disclosure to establish loss causation," 163
and if the court disagrees,
opportunity
to
amend
Plaintiffs "respectfully request the
their
complaint
to
add
such
factual
allegations in further support of loss causation. " 164
Under the PSLRA Plaintiffs must prove that a defendant's act
or
omission
alleged
to
have
violated
federal
securities
laws
"caused the loss for which the plaintiff seeks to recover damages."
15 U.S.C.
§
78u-4 (b) (4).
Loss causation refers to a direct link
160 Plaintiffs' Opposition to Director Defendants' MD,
Entry No. 115, p. 24.
161Id.
164 Id. at 25.
-101-
Docket
between the misstatement and a plaintiff's loss,
requires
a
corrective
representations,
F.3d
676,
relating
to
the
challenged
followed by a decline in stock price after the
truth is revealed.
758
disclosure
and generally
&
See Spitzberg v. Houston American Energy Corp.,
n.l8
(5th Cir.
2014)
(citing
In
re Williams
Securities Litigation, 558 F.3d 1130, 1137 (lOth Cir. 2009)).
In
Dura Pharmaceuticals, 125 S. Ct. at 1633-34, the Court held that
loss
causation
incorporates
causation and economic
loss.
traditional
elements
See Amgen,
133
of
S.
proximate
Ct.
at
1192
(confirming that loss causation continues to be an element of a
claim under
Rule
8(a)
heightened
§
and
10 (b)) .
The
12(b) (6)
pleading,
Fifth
Circuit
plausibility
is
sufficient
has
pleading
to
plead
held
that
standard,
loss
the
not
causation.
Lormand, 565 F. 3d at 258 (" [W] e conclude that Rule 8 (a) ( 2) requires
the plaintiff to allege, in respect to loss causation, a facially
'plausible' causal relationship between the fraudulent statements
or omissions and plaintiff's economic loss, including allegations
of
a
material
misrepresentation
or
omission,
followed
by
the
leaking out of relevant or related truth about the fraud that
caused a significant part of the depreciation of the stock and
plaintiff's economic loss
or,
as Twombly indicates,
the
complaint must allege enough facts to give rise to a reasonable
hope or expectation that discovery will reveal evidence of the
foregoing
omitted)) .
elements
of
loss
causation."
(internal
citations
A court is "not authorized or required to determine
-102-
whether the plaintiff's plausible inference of loss causation is
equally or more plausible than other competing inferences, as [it]
must in assessing allegations of scienter under the PSLRA."
Id. at
267.
In pertinent part Plaintiffs allege:
LOSS CAUSATION/ECONOMIC LOSS
278.
As alleged herein, Defendants engaged in a
scheme to deceive the investing market generally, and
Plaintiffs in particular, and a course of conduct that
artificially inflated EXXI's stock price and operated as
a fraud or deceit on purchasers of EXXI stock by
misrepresenting the Company's financial and operating
condition and prospects as well as known trends in its
industry.
279.
Once Defendants' misrepresentations and
fraudulent conduct were disclosed to the market, EXXI's
stock price reacted negatively as the artificial
inflation was removed from it.
As a result of their
purchases of EXXI stock alleged herein, and their
decision to refrain from selling EXXI stock alleged
herein, Plaintiffs suffered significant economic losses.
280.
Defendants' false and misleading statements
had the intended effect and caused EXXI stock to trade at
artificially inflated levels at all relevant times and
caused Plaintiffs to refrain from selling EXXI stock.
281.
As investors and the market became aware of
EXXI's prior misstatements and omissions and that EXXI's
actual financial condition and business prospects were,
in fact, not as represented, EXXI's stock price reacted
negatively substantially damaging Plaintiffs . 165
I
Missing from Plaintiffs'
Amended Complaint are allegations
that identify any corrective disclosure followed by a drop in the
price of EXXI stock.
165
Plaintiffs
~~ 278-81.
1
Argument as to the existence of any such
Amended Complaint, Docket Entry No.
-103-
97, p.
59
disclosures is also missing from the briefs that Plaintiffs have
filed in opposition to the defendants' motions to dismiss.
Plaintiffs allege that in September of 2015 EXXI was required
to
restate
more
than
four
years
of
financial
eliminate the use of hedge accounting. 166
statements
to
Plaintiffs allege that
EXXI's financial statements for the years ending June 30,
2011,
2012, 2013, 2014, and 2015, filed with the SEC on August 26, 2011,
August 9, 2012, August 21, 2013, August 28 and December 23, 2014,
and
September
29,
2015,
were
materially
false
and
misleading
because they stated that EXXI did not use hedging for speculative
or trading purposes. 167
financial
Plaintiffs allege that
" (u] ntil EXXI' s
statements were corrected on September 29,
Company's publicly filed financial
2015,
the
statements for at least the
years ended[] June 30, 2011, 2012, 2013, and 2014, and for all the
intervening quarters materially misstated and did not fairly and
accurately
present
the
results of operations." 168
Company's
financial
condition
and
its
Plaintiffs do not allege that EXXI stock
price declined as a result of the disclosure that four years of
financial statements would be restated.
The Director Defendants
argue that Plaintiffs are unable to satisfy the requirement for
pleading
loss
causation
~
166
Id. at 17-18
167
Id. at 52
~
249.
168
Id. at 54
~
because
257.
77.
-104-
EXXI's
stock
price
actually
increased following disclosure in September of 2015 that certain of
EXXI's financial statements would be restated and that Schiller had
taken personal loans from Louie and from EXXI vendors. 169
While the Fifth Circuit has recognized that courts can take
judicial
F.
notice
of
App' x at 316,
historical
stock prices,
see
Catogas,
292
the court need not do so here because it is
sufficient in considering the motions to dismiss that Plaintiffs
have
alleged
no
losses
September of 2015.
following
See Schott,
the
relevant
211 F.
Supp.
disclosures
3d at 946.
in
Since
Plaintiffs have not alleged that the restatements caused their
losses,
the
court
does
not
analysis of loss causation.
factor
the
restatements
into
its
Instead, Plaintiffs allege that
EXXI's disclosure that it was required to restate its
financial statements to eliminate cash flow hedge
accounting was materially false and misleading because it
made it appear that the reason for the restatement was a
mere technical deficiency in documentation, when the true
reason for the restatement was that the Company was
hedging for improper purposes, including speculating on
future oil and natural gas prices or manipulating
reported revenue and earnings. 170
But also missing
capable
of
restatements
from
Plaintiffs'
establishing
was
false,
that
or
Amended Complaint are
EXXI's
that
the
facts
stated
reason
for
the
stated
reason
for
the
restatements was ever the subject of a corrective disclosure that
169
Director Defendants' MD, Docket Entry No. 105, pp. 28-29
(citing Exhibit 10, EXXI stock price table, Docket Entry No. 10610) .
170
55
~
Plaintiffs' Amended Complaint, Docket Entry No. 97, pp. 54259.
-105-
was followed by a decline in stock price.
Accordingly, Plaintiffs
have failed to plead loss causation.
At the end of their responsive briefing on the issue of loss
causation, Plaintiffs request leave to amend "[t]o the extent the
Court
requires
specificity notwithstanding
pleading requirements
request
the
factual
allegations
of
Rule
opportunity to
in
8 (a) (2),
amend
further
their
should freely give leave
"Although Rule 15[a]
[to amend]
314
(5th Cir.
respectfully
complaint
of
general
to
add
such
causation. " 171
loss
states that "[t]he court
when justice so requires."
'evinces a bias in favor of granting leave to
amend,' it is not automatic."
311,
Plaintiffs
support
Federal Rule of Civil Procedure 15(a) (2)
the
1996),
Matter of Southmark Corp., 88 F.3d
cert denied,
117 S.
Ct.
686
(1997)
(quoting Dussouy v. Gulf Coast Investment Corp., 660 F.2d 594, 597
(5th Cir.
1981)).
"A decision
discretion of the trial court.
to
grant
leave
Its discretion,
is
within the
however,
is not
broad enough to permit denial if the court lacks a substantial
reason
to
Mortgage
curiam)) .
do
Co.,
50
Id.
so. "
F.3d
Generally,
(citing State
1298,
a
1302-1303
district
court
of
Louisiana v.
(5th
Cir.
errs
in
Litton
1995)
(per
dismissing
a
complaint for failure to state a claim under Rule 12(b) (6) without
giving the plaintiff an opportunity to amend.
Bazrowx v. Scott,
136 F. 3d 1053,
cert.
171
1054
(5th Cir.)
Plaintiffs' Opposition
Docket Entry No. 115, p. 25.
(per curiam) ,
to
-106-
the
Director
denied,
119
Defendants'
MD,
S.
Ct .
15 6
( 19 9 8) .
If,
however,
a
complaint
alleges
the
plaintiff's best case, there is no need for further amendment.
Id.
See also Jones v. Greninger, 188 F.3d 322, 327 (5th Cir. 1999) (per
curiam)
(dismissing plaintiff's pro se action because court could
perceive of no viable claim plaintiff could include in an amended
The Fifth Circuit has
complaint based on the underlying facts) .
also held that in exercising its discretion, a court may consider
various
criteria
including,
inter
alia,
the
failure
to
cure
deficiencies by amendments previously allowed and futility of the
proposed amendment.
F.2d 831,
227,
230
836
See Whitaker v. City of Houston, Texas,
(5th Cir. 1992)
(1962)).
(citing Foman v. Davis,
Because
Plaintiffs
have
963
83 S. Ct.
already
had
an
opportunity to file an amended complaint and because the court is
persuaded
that
Plaintiffs
have
pleaded
their
best
case,
the
Plaintiffs' request for leave to amend will be denied.
B.
Control Person Liability Claims
Plaintiffs
liable as
allege
that
the
"controlling persons"
Exchange Act.
Individual
of
EXXI
Defendants
under
§
are
20 (a)
all
of
the
Section 20(a) imposes joint and several liability on
"[e]very person who, directly or indirectly, controls any person
liable under any provision of
this
chapter or of
regulation thereunder" for securities fraud.
any rule or
15 U.S.C.
§
78t(a).
"Control person liability is secondary only and cannot exist in the
absence of a primary violation."
Southland,
365 F.3d at 383.
Because the court has concluded that the Plaintiffs' primary claims
-107-
under§ 10(b) should be dismissed, the§ 20(a) claims will also be
dismissed under Rule 12(b) (6)
which relief can be granted.
C.
for failure to state a claim upon
See Izadjoo, 237 F. Supp. 3d at 520.
Common Law Fraud Claims
Plaintiffs assert claims for common law fraud against all of
the defendants . 172
Under Texas law a claimant alleging fraud must
prove the following:
(1) that a material representation was made; (1) the
representation was false; (3) when the representation was
made, the speaker knew it was false or made it recklessly
without any knowledge of the truth and as a positive
assertion; (4) the speaker made the representation with
the intent that the other party should act upon it;
(5) the party acted in reliance on the representation;
and (6) the party thereby suffered injury.
Aguaplex,
Inc. v. Rancho La Valencia,
(Tex. 2009)
S. W. 3d
(per curiam)
749,
758
(Tex.
Inc.,
297 S.W.3d 768,
774
(quoting In re FirstMerit Bank, N.A., 52
2001)) .
See
also
Flaherty
&
Crumrine
Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d 200, 212-13 (5th
Cir. 2009)
not
(same).
subject
to
Although Plaintiffs' common law fraud claim is
the
heightened
pleading scienter under the
"strong
PSLRA,
inference"
standard for
Plaintiffs are nevertheless
required to satisfy Rule 9(b), which requires them to state with
particularity
facts
supporting
each
172
element
of
fraud.
See
Plaintiffs' Amended Complaint, Docket Entry No. 97, pp. 6667 ~~ 313-320.
Although Plaintiffs' Amended Complaint does not
specify that this claim is being asserted under Texas law, both
defendants and Plaintiffs have cited and relied upon Texas law.
See Director Defendants' MD, Docket Entry No. 105, pp. 31-33 and
Plaintiffs' Opposition to the Director Defendants' MD, Docket Entry
No. 115, p. 27.
-108-
Benchmark Electronics, Inc. v. J.M. Huber Corp., 343 F.3d 719, 724
(5th Cir. 2003).
"'At a minimum, Rule 9 (b) requires allegations of
the
of
particulars
time,
place,
and
contents
of
the
false
representations, as well as the identity of the person making the
Id.
misrepresentation and what he obtained thereby. '"
Tel-Phonic Services,
Inc.
v.
1134, 1139
(5th Cir. 1992)).
plead the
who,
what,
when,
TBS International,
In other words,
where,
Inc.,
(quoting
975 F.2d
the claimant must
and how of the fraud.
Plaintiffs' common law fraud claims rest on the same alleged
misstatements underlying their Exchange Act claims and fail for the
same
reasons,
particularity
statements
i.e.,
showing
with
Plaintiffs
that
scienter
any
that
have
of
not
the
caused
alleged
defendants
injury.
facts
made
with
false
Accordingly,
defendants' motions to dismiss Plaintiffs' common law fraud claims
will be granted, and these claims will be dismissed.
D.
Breach of Fiduciary Duty Claims
Plaintiffs assert claims for breach of fiduciary duty against
the Individual Defendants. 173
In pertinent part Plaintiffs allege
that the Individual Defendants breached their fiduciary duties of
care and loyalty to the Company and its shareholders, including the
Plaintiffs,
the
inter alia "by making or causing the Company to make
materially false and misleading statements about the Company's
173
Plaintiffs' Amended Complaint, Docket Entry No. 97, pp. 6769 ~~ 321-32.
-109-
financial and operating condition and prospects alleged herein." 174
Plaintiffs also allege that "[t]he Individual Defendants' breaches
of fiduciary duty were intertwined with the materially false and
misleading statements they made or caused the Company to make about
the
Company's
financial
alleged herein. " 175
and
operating
Plaintiffs'
condition
breach of
and prospects
fiduciary duty claims
rest on the same alleged misstatements underlying their Exchange
Act claims and fail for the same reasons, i.e., Plaintiffs have not
alleged facts with particularity showing that any of the defendants
made false statements that caused injury.
Accordingly, defendants'
motions to dismiss Plaintiffs' breach of fiduciary duty claims will
be granted, and these claims will be dismissed.
IV.
Conclusions and Order
For the reasons explained above,
the court concludes that
Plaintiffs have failed to state claims for violations of
and 20(a)
U.S.C.
§§
C.F.R.
§
of the Securities Exchange Act of 1934
§§
10(b)
(1934 Act),
15
78j (b), 78t(a), and Rule 10b-5 promulgated thereunder, 17
240.10b-5,
fiduciary duty. 176
for
common
law
fraud,
or
for
breach
of
Accordingly, UHY LLP' s Motion to Dismiss (Docket
174
Id. at 68 ~ 324.
175
Id. at 69
~
329.
176
The court has allowed the parties extraordinary leeway in
submitting lengthy briefs and other written materials in connection
with the pending motions. As the length of this Memorandum Opinion
and Order indicates, the court has expended considerable time
(continued ... )
-110-
Entry No. 101) is GRANTED.
Defendant D. West Griffin's Motion to
Dismiss the Amended Complaint (Docket Entry No. 102) is GRANTED.
Defendant
Norman
M.K.
Louie's
Complaint
(Docket Entry No.
Schiller,
Jr.'s Motion to Dismiss the Amended Complaint
Entry No.
104)
is GRANTED.
103)
Motion
to
Dismiss
is GRANTED.
the
Amended
Defendant John D.
The Director Defendants'
(Docket
Motion to
Dismiss the Amended Complaint (Docket Entry No. 105) is GRANTED.
Plaintiffs' request for leave to amend is DENIED.
SIGNED at Houston, Texas, on this the 14th day of March, 2019.
LAKE
UNITED STATES DISTRICT JUDGE
176
( • • • continued)
reading these papers and performing a significant amount of
independent research to be as fully informed as possible when
addressing the parties' arguments.
While, because of the sheer
volume of information presented, it is not impossible that some
arguments were overlooked, the parties should assume that failure
to expressly address a particular argument in this Memorandum
Opinion and Order reflects the court's judgment that the argument
lacked sufficient merit to warrant discussion.
Accordingly, the
court strongly discourages the parties from seeking reconsideration
based on arguments they have previously raised or that they could
have raised.
-111-
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