MELINDA HARMON, UNITED STATES DISTRICT JUDGE.
The above referenced securities-fraud, putative class action alleges material misrepresentations and omissions by Defendants regarding Key Energy Services, Inc.'s ("Key's") financial condition and the future of its business, leading to inflated stock prices in violation of §§ 10(b), control person liability under 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a), as amended by the Private Securities Litigation Reform Act of 1995 (the "PSLRA"), 15 U.S.C. § 78u-4(b)(2), et seq., Securities and Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5, and by the Foreign Corrupt Practices Act of 1977 (the "FCPA"), 15 U.S.C. § 78dd-1, et al., by overstatement of lucrative business opportunities in foreign countries despite significant, highly publicized risks, particularly in Mexico and Russia, and by failure to disclose serious deficiencies in Key's internal control systems to protect Key from the threat of FCPA violations and to attract and maintain investor interest in Key's business operations in areas known for corruption.
Pending before the Court are two motions to dismiss the Consolidated Amended Complaint (instrument #37) of Lead Plaintiff Inter-Local Pension Fund of the Graphic Communications of the International Brotherhood of Teamsters, pursuant to the PSLRA and Federal Rules of Civil Procedure 9(b) and 12(b)(6), filed by (1) Defendants Key Energy Services, Inc. ("Key"),
This action is brought on behalf of a putative class composed of all persons and entities, excluding Defendants and their affiliates, who or which purchased or acquired Key's common stock from September 4, 2012 to July 17, 2014 (the "Class Period").
When a district court reviews a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), it must construe the complaint in favor of the plaintiff and take all well-pleaded facts as true. Randall D. Wolcott, MD, PA v. Sebelius, 635 F.3d 757, 763 (5th Cir.2011), citing Gonzalez v. Kay, 577 F.3d 600, 603 (5th Cir.2009). The plaintiff's legal conclusions are not entitled to the same assumption. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009)("The tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions."), citing Bell Atlantic Corp. v. Twombly, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009); Hinojosa v. U.S. Bureau of Prisons, 506 Fed.Appx. 280, 283 (5th Cir.2012).
"While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, ... a plaintiff's obligation to provide the `grounds' of his `entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do...." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1964-65, 167 L.Ed.2d 929 (2007)(citations omitted). "Factual allegations must be enough to raise a right to relief above the speculative level." Id. at 1965, citing 5 C. Wright & A. Miller, Federal Practice and Procedure § 1216, pp. 235-236 (3d ed. 2004)("[T]he pleading must contain something more ... than ... a statement of facts that merely creates a suspicion [of] a legally cognizable right of action"). "Twombly jettisoned the minimum notice pleading requirement of Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)["a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief"], and instead required that a complaint allege enough facts to state a claim that is plausible on its face." St. Germain v. Howard, 556 F.3d 261, 263 n. 2 (5th Cir.2009), citing In re Katrina Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir.2007)("To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must plead `enough facts to state a claim to relief that is plausible on its face.'"), citing Twombly, 127 S.Ct. at 1974). "`A claim has facial plausibility when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.'" Montoya v. FedEx Ground Package System, Inc., 614 F.3d 145, 148 (5th Cir.2010), quoting Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). The plausibility standard is not akin to a "probability requirement," but asks for more than a "possibility that a defendant has acted unlawfully." Twombly, 550 U.S. at 556, 127 S.Ct. 1955. Dismissal is appropriate when the plaintiff fails to allege "`enough facts to state a claim to relief that is plausible on its face'" and therefore fails to "`raise a right to relief above the speculative level.'" Montoya, 614 F.3d at 148, quoting Twombly, 550 U.S. at 555, 570, 127 S.Ct. 1955.
In Ashcroft v. Iqbal, 556 U.S. at 679, 129 S.Ct. 1937, the Supreme Court stated that "only a complaint that states a plausible claim for relief survives a motion to dismiss," a determination involving "a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." "[T]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements do not suffice" under Rule 12(b). Iqbal, 129 S.Ct. at 1949. The plaintiff must plead specific facts, not merely conclusory allegations, to avoid dismissal. Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498 (5th Cir.2000). "Dismissal is proper if
Dismissal under Rule 12(b)(6) is proper not only where the plaintiff fails to plead sufficient facts to support a cognizable legal theory, but also where the plaintiff fails to allege a cognizable legal theory. Kjellvander v. Citicorp, 156 F.R.D. 138, 140 (S.D.Tex.1994), citing Garrett v. Commonwealth Mortgage Corp., 938 F.2d 591, 594 (5th Cir.1991); ASARCO LLC v. Americas Min. Corp., 382 B.R. 49, 57 (S.D.Tex.2007). "A complaint lacks an `arguable basis in law' if it is based on an indisputedly meritless legal theory' or a violation of a legal interest that does not exist." Ross v. State of Texas, Civ.A. No. H-10-2008, 2011 WL 5978029, at *8 (S.D.Tex. Nov. 29, 2011).
When a plaintiff's complaint fails to state a claim, the court should generally give the plaintiff at least one chance to amend the complaint under Rule 15(a) before dismissing the action with prejudice. Great Plains Trust Co v. Morgan Stanley Dean Witter & Co., 313 F.3d 305, 329 (5th Cir.2002)("District courts often afford plaintiffs at least one opportunity to cure pleading deficiencies before dismissing a case, unless it is clear that the defects are incurable or the plaintiffs advise the court that they are unwilling or unable to amend in a manner that will avoid dismissal."); United States ex rel. Adrian v. Regents of the Univ. of Cal., 363 F.3d 398, 403 (5th Cir.2004)("Leave to amend should be freely given, and outright refusal to grant leave to amend without a justification ... is considered an abuse of discretion. [citations omitted]"). The court should deny leave to amend if it determines that "the proposed change clearly is frivolous or advances a claim or defense that is legally insufficient on its face...." 6 Charles A. Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Proc. § 1487 (2d ed. 1990).
"Rule 12(b) is not a procedure for resolving contests about the facts or the merits of a case." Gallentine v. Housing Authority of City of Port Arthur, Tex., 919 F.Supp.2d 787, 794 (E.D.Tex.2012), citing 5A Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure: Civil 2d § 1356, at 294 (1990).
As noted, on a Rule 12(b)(6) review, although generally the court may not look beyond the pleadings, the Court may examine the complaint, documents attached to the complaint, and documents attached to the motion to dismiss to which the complaint refers and which are central to the plaintiff's claim(s), as well as matters of public record. Lone Star Fund V (U.S.), L.P. v. Barclays Bank PLC, 594 F.3d 383, 387 (5th Cir.2010), citing Collins, 224 F.3d at 498-99; Cinel v. Connick, 15 F.3d 1338, 1341, 1343 n. 6 (5th Cir.1994). See also United States ex rel. Willard v. Humana Health Plan of Tex., Inc., 336 F.3d 375, 379 (5th Cir.2003)("the court may consider... matters of which judicial notice may be taken"). Taking judicial notice of public records directly relevant to the issue in dispute is proper on a Rule 12(b)(6) review and does not transform the motion into one for summary judgment. Funk v. Stryker Corp., 631 F.3d 777, 780 (5th Cir. 2011). "A judicially noticed fact must be one not subject to reasonable dispute in that it is either (1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." Fed. R. Evid. 201(b).
Federal Rule of Civil Procedure 9(b) provides,
"In every case based upon fraud, Rule 9(b) requires the plaintiff to allege as to each individual defendant `the nature of the fraud, some details, a brief sketch of how the fraudulent scheme operated, when and where it occurred, and the participants." Hernandez v. Ciba-Geigy Corp. USA, 200 F.R.D. 285, 291 (S.D.Tex.2001).
Unlike the alleged fraud, Rule 9(b) allows a plaintiff to plead intent to deceive or defraud generally. Nevertheless a mere conclusory statement that the defendant had the required intent is insufficient; the plaintiff must set forth specific facts that raise an inference of fraudulent intent, for example, facts that show the defendant's motive. Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1068 (5th Cir.1994)("Although scienter may be averred generally, case law amply demonstrates that pleading scienter requires more than a simple allegation that a defendant had fraudulent intent. To plead scienter adequately, a plaintiff must set forth specific facts that support an inference of fraud."); Melder v. Morris, 27 F.3d 1097, 1102 (5th Cir.1994).
The particularity requirement of Rule 9(b) also governs a conspiracy to commit fraud. Southwest Louisiana Healthcare System v. MBIA Ins. Corp., No. 05-1299, 2006 WL 1228903, *5 & n. 47 (W.D.La. May 6, 2006); Hernandez v. Ciba-Geigy Corp. USA, No. Civ. A. B-00-82, 2000 WL 33187524, *4 (S.D.Tex. Oct. 17, 2000)("The weight of Fifth Circuit precedent holds that a civil conspiracy to commit a tort that sounds in fraud must be pleaded with particularity."); In re Ford Motor Co. Vehicle Paint Litigation, No. MDL 1063, 1994 WL 426548, *34 (E.D.La. July 30, 1996); and Castillo v. First City Bancorporation of Texas, Inc., 43 F.3d 953, 961 (5th Cir.1994).
The Fifth Circuit, although construing Rule 9(b) strictly, has recognized an exception and permits the requirements to be "relaxed" where facts relating to the fraud are "peculiarly within the perpetrator's knowledge"; then the alleged fraud "may be pled on information and belief, provided the plaintiff sets forth the factual basis for his belief." United States ex rel. Russell v. Epic Healthcare Management Group, 193 F.3d 304, 308 (5th Cir.1999), citing United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 903 (5th Cir.1997)(warning that the exception "must not be mistaken for license to base claims of fraud on speculation and conclusory allegations."). The relaxed standard is not applicable where the information is available from another source or where the plaintiff fails to allege a factual basis for his beliefs. Sealed Appellant I v. Sealed Appellee I, 156 Fed.Appx. 630, 634 (5th Cir.2005)(plaintiff must allege sufficient factual basis for his belief defendant committed fraud, e.g., particular documents containing false statements, identified by number, date or otherwise, or explain how he tried, but failed to obtain the information, whom he contacted, etc.).
A dismissal for failure to plead with particularity in accordance with Rule 9(b) is treated as a Rule 12(b)(6) dismissal for failure to state a claim. Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1017 (5th Cir.1996). If it appears that given an opportunity to amend the pleading, the plaintiff would be able to state a claim upon which relief could be granted, the court should grant leave to amend. People's Choice Home Loan, Inc. v. Mora, No. 3:06-CV-1709-G, 2007 WL 708872, *4 (N.D.Tex. Mar. 7, 2007), citing Kennard v. Indianapolis Life Ins. Co., 420 F.Supp.2d 601, 608-09 (N.D.Tex.2006).
The PSLRA heightened the particularity requirements to plead securities fraud in two ways: (1) the plaintiff must "specify each statement alleged to have been misleading and the reason or reasons why the statement is misleading ...," 15 U.S.C. § 78u-4(B)(1)(B); and (2) for "each act or omission alleged" to be false or misleading, the plaintiff must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind," 15 U.S.C. § 78u-4(b)(2). Indiana Elec. Workers' Pension Trust Fund IBEW v. Shaw Group, Inc., 537 F.3d 527, 533 (5th Cir.2007). Rule 9(b) requires the plaintiff in a securities fraud suit to "`specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent.'" Southland Securities Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 362 (5th Cir.2004), quoting Williams v. WMX Technologies, Inc., 112 F.3d 175, 177-78 (5th Cir.1997), cert. denied, 522 U.S. 966, 118 S.Ct. 412, 139 L.Ed.2d 315 (1997). See 15 U.S.C. § 78u-4. In other words, "`[p]leading fraud with particularity in this circuit requires `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.'" Williams, 112 F.3d at 177 (5th Cir.1997), quoting Tuchman, 14 F.3d at 1068. "`In cases concerning fraudulent misrepresentation and 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.'" Carroll v. Fort James Corp., 470 F.3d 1171, 1174 (5th Cir.2006), quoting United States ex rel. Riley v. St. Luke's Hosp., 355 F.3d 370, 381 (5th Cir.2004). These facts "must be laid out before access to the discovery process is granted." Williams, 112 F.3d at 178.
The Fifth Circuit does not permit group pleading in securities fraud suits. Owens v. Jastrow, 789 F.3d 529, 537 (5th Cir.2015), citing Southland, 365 F.3d at 365 ("[T]he PSLRA requires the plaintiffs to distinguish among those they sue and enlighten each defendant as to his or her particular part in the alleged fraud.... [W]e do not construe allegations contained in the [second amended complaint] against `defendants' as a group as properly imputable to any particular defendant unless the connection between the individual defendant and the allegedly fraudulent statement is specifically pleaded.").
"[T]o state a claim under section 10(b) of the 1934 [Exchange] Act and Rule 10b-5, a plaintiff must allege, in connection
See, e.g., ABC Arbitrage Plaintiffs Group v. Tchuruk, 291 F.3d 336, 349-50 (5th Cir. 2002).
An untrue statement is "material" under section 10(b) of the Exchange Act and Rule 10b-5
For the "made with scienter" requirement, the PSLRA, 15 U.S.C. § 78u-4(b)(2), states, "In any private action under this chapter in which the plaintiff may recover money damages 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." Nathenson, 267 F.3d at 407. In Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), without determining if scienter included recklessness, the Supreme Court defined scienter in the context of securities fraud as "`a mental state embracing intent to deceive, manipulate or defraud.'" Id. at 408. The Fifth Circuit has since held that "severe recklessness" satisfies the scienter requirement. Nathenson, 267 F.3d at 407, citing Broad v. Rockwell Intern. Corp., 642 F.2d 929, 961-62 (5th Cir.1981)("`Severe recklessness 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.'"), quoting Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1039-40 (7th Cir.), cert. denied, 434 U.S. 875, 98 S.Ct. 225, 54 L.Ed.2d 155 (1977). Plaintiffs may satisfy the scienter requirement by allegations of intentional misconduct or of severe recklessness, which "resembles a slightly lesser species of intentional misconduct." Nathenson, 267 F.3d at 408-09. Circumstantial evidence of such conscious behavior or severe recklessness is sufficient to support a strong inference of scienter. Id. at 410, citing Greebel v. FTP Software, Inc., 194 F.3d 185, 195 (1st Cir.1999)("Congress plainly contemplated that scienter could be proven by inference, thus acknowledging the role of indirect and circumstantial evidence."). Usually "`the mere publication of inaccurate accounting figures, or failure to follow GAAP, without more, does not establish scienter.'" Shaw Group, 537 F.3d at 534, quoting Barrie v. Intervoice-Brite, Inc., 397 F.3d 249, 264 (5th Cir.2005). "To plead scienter adequately, plaintiffs must state with particularity facts giving rise to a strong inference that the party knew that it was publishing materially false information, or that the party was severely reckless in publishing such information." Id. Plaintiffs may not rely on a general assertion that Defendants knew about a particular bribe or a specific accounting violation or internal control problem because of their positions in the company, because they are officers, or because of their day-to-day involvement in the company; instead
In rejecting the Second Circuit's "motive and opportunity" pleading standard, the Fifth Circuit has concluded, "What must be alleged is not motive and opportunity as such, but particularized facts giving rise to a strong inference of scienter. Appropriate allegations of motive and opportunity may meaningfully enhance the strength of the inference of scienter, but it would seem to be a rare set of circumstances indeed where those allegations alone are both sufficiently persuasive to give rise to a scienter inference of the necessary strength and yet at the same time there is no basis for further allegations also supportive of that inference." Id. at 412. In evaluating whether pleaded facts give rise to a strong (i.e., "a powerful or cogent") inference of scienter, the court must "assess all the allegations holistically," following a three-step procedure "geared to the PSLRA's twin goals: to curb frivolous, lawyer-driven litigation, while preserving investors' ability to recover on meritorious claims." Tellabs, Inc. v. Makor Issues & Rights, 551 U.S. 308, 326, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). As the first step, the court accepts factual allegations in the pleadings as true; second, the court must review the entire complaint, including documents incorporated by reference and matters of which the court should take judicial notice; and third, the court must consider all plausible inferences, both supporting and opposing a strong inference of scienter. Id. at 322-23, 127 S.Ct. 2499 ("The inquiry is inherently comparative: How likely is it that one conclusion, as compared to others, follows from the underlying facts."). To be a "strong" inference of scienter an inference must be more that merely plausible or reasonable under the Iqbal standard; it will survive a motion to dismiss "only if a reasonable person would find it cogent and at least as compelling an any opposing inference that could be drawn from the facts alleged," taken collectively. Id. at 324, 127 S.Ct. 2499 "The inference that the defendant acted with scienter need not be irrefutable ... or even the `most plausible of competing inferences.' ... Yet the inference must be more than merely `reasonable' or permissible' — it must be cogent, thus strong in light of other explanations." Id. at 324, 127 S.Ct. 2499 (citations omitted)(holding that "[a] complaint will survive.. 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."). Circumstantial evidence can support a strong inference of scienter. Nathenson, 267 F.3d at 410.
The Fifth Circuit has held that "`pleading[s] of scienter may not rest on the inference that defendants must have been aware of the misstatement based on their positions with the company.'" Shaw Group, 537 F.3d at 535, quoting Abrams v. Baker Hughes, Inc., 292 F.3d 424, 432 (5th Cir.2001).
If the plaintiff fails to satisfy this scienter requirement, the district court "`shall," on defendant's motion, `dismiss the complaint.'" Id. at 407, citing § 78u-4(b)(3).
Finally, regarding the reliance element in section 10(b) of the Exchange Act and Rule 10b-5, the Fifth Circuit opined in Abell v. Potomac Ins. Co., 858 F.2d 1104, 1117-18 (5th Cir.1988), vacated on other grounds sub nom. Fryar v. Abell, 492 U.S. 914, 109 S.Ct. 3236, 106 L.Ed.2d 584 (1989),
Nathenson, 267 F.3d at 414, quoting Abell, 858 F.2d at 1117-18. "Reliance, in other words, generally requires that the plaintiff have known of the particular misrepresentation complained of, have believed it to be true and because of that knowledge and belief purchased or sold the security in question." Id. Proof of reliance is necessary to establish a "`proper connection between a defendant's misrepresentation and a plaintiff's injury.'" Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds, ___ U.S. ___, 133 S.Ct. 1184, 1192, 185 L.Ed.2d 308 (2013), citing Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804, 131 S.Ct. 2179, 2184, 180 L.Ed.2d 24 (2011).
Because the Supreme Court determined that requiring direct proof of individualized reliance "would place an unnecessarily unrealistic evidentiary burden on [a] plaintiff who has traded in an impersonal market," and "effectively would" prevent plaintiffs "from proceeding with a class action" under Rule 23(b)(3), in Basic, Inc., 485 U.S. at 241-42, 245, 108 S.Ct. 978, the Supreme Court approved of a rebuttable presumption of classwide reliance by recognizing the "fraud-on-the-market theory" in an efficient market. As an alternative and practical way to balance "the substantive requirement of proof of reliance in securities cases against the procedural requisites of Federal Rule of Civil Procedure 23 and to meet the reliance requirement, the theory presumes that potentially significant, publicly distributed information is reflected in the price of a stock". The high court described it succinctly as follows:
Id. at 989. See also Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds, ___ U.S. ___, 133 S.Ct. 1184, 1192, 185 L.Ed.2d 308 (2013)("In Basic, we held that if a market is shown to be efficient, courts may presume that investors who traded securities in that market relied on public, material misrepresentations regarding those securities."). "[A] plaintiff must make the following showings to demonstrate that the presumption of reliance applies in a given case: (1) that the alleged misrepresentations were publicly known, (2) that they were material, (3) that the stock traded in an efficient market, and (4) that the plaintiff traded the stock between the time the misrepresentation was made and when the truth was revealed." Halliburton Co. v. Erica P. John Fund, Inc., ___ U.S. ___, 134 S.Ct. 2398, 2408, 189 L.Ed.2d 339 (2014). The presumption can be rebutted by "any showing that severs the link between the alleged misrepresentation and either the price received (or
Under the PSLRA plaintiffs bear the burden of showing that the defendants' act or omission caused the economic loss for which plaintiffs seek to recover damages. 15 U.S.C. § 78u-4(b)(4). Under Rule 10b-5 Plaintiffs must allege proximate causation as well as economic loss. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 338, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005).
The Fifth Circuit has opined that under Dura Pharmaceuticals and Twombly, the plausibility standard in Rule 8(a) would apply to pleading causation and economic loss. Public Employees Retirement System of Mississippi, Puerto Rico Teachers Retirement System v. Amedisys, Inc., 769 F.3d 313, 320 (5th Cir.2014), cert. denied,
Id. at 320-21, quoting FindWhat Investor Group v. FindWhat.com, 658 F.3d 1282, 1311-12 (11th Cir.2011). The corrective disclosure may be comprised of "a series of partial disclosures." Lormand v. US Unwired, Inc., 565 F.3d 228, 261 (5th Cir. 2009). See also Greenberg v. Crossroads Sys., Inc., 364 F.3d 657, 665 (5th Cir. 2004)(In demonstrating reliance and loss causation, "plaintiffs cannot trigger the presumption or reliance by simply offering evidence of any decrease in price following the release of negative information. Such evidence does not raise an inference that the stock's price was actually affected by an earlier release of positive information. To raise an inference through a decline in stock price that an earlier false, positive statement affected a stock's price, the plaintiffs must show that the false statement causing the increase was related to the statement causing the decrease."). In the Fifth Circuit, "the testimony of an expert — along with some kind of analytical research or event study — is required to show loss causation." Fener v. Operating Engineers Const. & Misc. Pension Fund (Local 66), 579 F.3d 401, 409 (5th Cir. 2009). Nevertheless, opined the Fifth Circuit, "[N]either Fener not Halliburton even considers whether internal non-public disclosures from Defendants can provide the basis for establishing loss causation. As such, these cases do not disturb the established principle that proof of loss causation in the context of a fraud-on-the-market regiment is drawn from public data and public filings." In re TETRA Technologies, Inc. Sec. Litig., Civ.A. No. 4:08cv0965, 2010 WL 1335431, at *3 (Bnkrty.S.D.Tex. Apr. 5, 2010)(finding the Fifth Circuit's "bar for demonstrating loss causation" to be "a high one" and allowing additional merits discovery as a matter of law prior to submission of Plaintiff's expert report and seeking class certification). Plaintiffs in a private securities fraud suit do not have to prove loss causation (i.e., that the defendant's deceptive conduct caused the investors' claimed economic loss) before they can obtain class certification. Erica P. John Fund, Inc., ___ U.S. ___, 134 S.Ct. 2398, 189 L.Ed.2d 339, abrogating Oscar Private Equity Investments v. Allegiance Telecom, Inc., 487 F.3d 261 (5th Cir.2007)(holding that plaintiffs must prove defendants' alleged misrepresentations were the proximate cause of their economic loss to qualify for class certification).
As to the requirement that an allegation of a statement or omission "made on information and belief" requires that the complaint "state with particularity all facts on which that belief is formed," the Fifth Circuit adopts the Second Circuit's interpretation in Novak v. Kasaks, 216 F.3d 300, 313 (2d Cir.), cert. denied, 531 U.S. 1012, 121 S.Ct. 567, 148 L.Ed.2d 486 (2000), which held that "`plaintiffs who
ABC Arbitrage, 291 F.3d at 351-52, quoting Novak, 216 F.3d at 313-14. The Fifth Circuit, id. at 352, further quoted Novak, 216 F.3d at 314 n. 1:
The "other facts" can be documentary evidence (for which the plaintiff specifies the internal report(s), the person(s) who prepared them, when, which company officer reviewed them) that "provide[s] an adequate basis for believing that the defendants' statement or omissions were false or misleading" or "descriptions of personal sources" with sufficient particularity "to support the probability that a person in the position occupied by the source would possess the information pleaded to support the allegations of false or misleading statements made on information and belief." Id. at 353. Therefore only "if the other facts, i.e., do not provide an adequate basis for believing that the defendants' statements were false and the descriptions of the personal sources are not sufficiently particular to support the probability that a person in the position occupied by the source would possess the information pleaded to support the allegations of false or misleading statements made on information and belief," must the complaint name personal sources.
Nevertheless in the wake of Tellabs, 551 U.S. at 757, 127 S.Ct. 2499, which requires comparative weighing of allegations and consideration of plausible nonculpable explanations for a defendant's conduct to determine if there is a cogent and compelling inference of scienter, the Fifth Circuit opined in Shaw Group., id. at 535, that
See also Local 731 I.B. of T. Excavators and Pavers Pension Trust Fund v. Diodes, Inc., 67 F.Supp.3d 782, 788 (E.D.Tex.2014)("The Fifth Circuit cautions against reliance on confidential witnesses, even at the pleading stage. See [Shaw Group], 537 F.3d at 535. In order to establish the reliability of confidential witness statements, Plaintiff's allegations must include `particular job descriptions, individual responsibilities, and specific employment dates for the witnesses. See Cent. Laborers' Pension Fund v. Integrated Elec. Servs., Inc., 497 F.3d 546, 552 (5th Cir. 2007). But even if described `with sufficient particularity to support the probability that a person in the position occupied by the source ... would possess the information pleaded,' the Court discounts allegations based on confidential witnesses. ABC Arbitrage, 291 F.3d at 353.")(Schneider, J.)
Where a plaintiff relies on documentary evidence with company-generated statistics instead of personal sources, the Fifth Circuit followed the Second Circuit's standard in In re Scholastic Corp. Securities Litigation, 252 F.3d 63, 72-73 (2d Cir.), cert. denied sub nom. Scholastic Corp. v. Truncellito, 534 U.S. 1071, 122 S.Ct. 678, 151 L.Ed.2d 590 (2001). ABC Arbitrage, 291 F.3d at 356. While declining to require as a threshold requirement in every case that plaintiffs provide details about purported "negative internal reports, such as report titles, when they were prepared, who prepared them, to whom they were
Allegations of a conversation between one party's unnamed high ranking official/top executive and a named executive of another is sufficient to meet the Novak standard for a source if the unnamed person in such a position would possess the information pleaded and that this executive was the source for the information. Id. at 357.
A "forward-looking statement" is defined in 15 U.S.C. § 77z-2(i)(1) in relevant part as:
The PSLRA creates a safe harbor for forward looking statements, whether written or oral, under § 78u-5(c)(1) if "(A) the forward-looking statement is — (i) identified as a forward-looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement; or (ii) immaterial; or (B) the plaintiff fails to prove that the forward-looking statement (i) if made by a natural person was made with actual knowledge by that person that the statement was false or misleading; or (ii) if made by a business entity: was — (i) made by or with the approval of an executive officer
Nor do statements of material fact include puffery, i.e., generalized, positive statements about the company's competitive strengths, experienced management, and future prospects that are too vague, optimistic, and lacking in concrete factual or material misrepresentations to support a securities fraud claim. Southland, 365 F.3d at 372, citing inter alia Rosenzweig v. Azurix Corp., 332 F.3d 854, 869 (5th Cir.2003). No reasonable investor would rely on such obviously false or misleading statements. Rosenzweig, id.
In order to prevent costly discovery until the court can determine whether a filed securities fraud suit has merit, with two rare exceptions the PSLRA instituted an automatic, mandatory stay of discovery in 15 U.S.C. § 78u-4(b)(3)(B), which provides,
See, e.g., Davis v. Duncan Energy Partners, L.P., 801 F.Supp.2d 589 (S.D.Tex. 2011)(Lake J.).
Rule 10b-5's implied private right of action does not apply to suits against aiders and abettors. Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135, 131 S.Ct. 2296, 2302-03, 180 L.Ed.2d 166 (2011), citing Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994), and Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 152-53, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008). Section 20(a) of the Exchange Act, 15 U.S.C. § 78t, imposes a derivative liability on persons who control those primarily liable under the Exchange Act and those who aid and abet them:
For a violation of § 20(a), a plaintiff must show (1) an underlying, primary violation of § 10(b) of the Exchange Act and Rule 10b-5 and (2) direct or indirect control of the violator by the defendant. Southland, 365 F.3d at 383-84. The plaintiff bears the burden of establishing control, while the defendant bears the burden of proving a good faith affirmative defense; therefore, for a prima facie case of control person liability, the plaintiff is not required to plead facts showing that the defendant acted in bad faith. In re Enron Corp. Sec., Derivative & ERISA Litig., 258 F.Supp.2d 576, 598 (S.D.Tex.2003), citing G.A. Thompson & Co. v. Partridge, 636 F.2d 945, 958 & nn. 22 and 23 (5th Cir.1981). Pleading standards for claims for control person liability are relaxed: the heightened pleading standards of Rule 9(b) do not apply, as neither fraud nor scienter is an element of such a claim. On Longhorn
Control person liability is derivative: if a plaintiff fails to state a claim for a primary violation of section 10(b) or Rule 10b-5, any claim for control person liability fails. ABC Arbitrage, 291 F.3d at 348 n.57; Thomas Lee Hazan, The Law of Securities Regulation § 13.15 (1990).
The FCPA is both a civil and a criminal statute. Penalties for knowingly violating the FCPA can be civil and criminal and include monetary penalties and imprisonment. 15 U.S.C. § 78ff. The U.S. Sentencing Guidelines are used to determine the criminal penalty range.
The FCPA, an amendment to the Exchange Act,
The FCPA controls bribery by (1) prohibiting any U.S. citizen (individual or corporate) from bribing a foreign official, 15 U.S.C. § 78dd-1; and (2) establishing record-keeping rules for issuers of securities of publicly held corporations registered under the Exchange Act, 15 U.S.C. § 78m(b)(2). The latter (2) is composed of two categories: (1) the issuers are required to "make and keep books, records and accounts which, in reasonable detail,
More specifically, the anti-bribery provisions of the FCPA, 15 U.S.C. § 78dd-1(a),
From 1977 to 1979 the SEC mainly focused on anti-bribery provisions of § 78dd-1(a)(1), but subsequently it has focused its enforcement proceedings on the books and records provision, section 13(b)(2)(A), as amended, 15 U.S.C. § 78m(b)(2)(A) violations, and on the internal controls provisions, § 78m(b)(2)(B) that breach the statute's two requirements: "(1) a company must keep accurate books and records reflecting the transactions and dispositions of the assets of the issuer, and (2) a company must maintain a reliable and adequate system of internal accounting controls." S.E.C. v. World-Wide Coin Investments, Ltd., 567 F.Supp. 724, 748 (N.D.Ga.1983). The "books and records" provision, section 13(b)(2)(A) of the FCPA, provided the SEC with complete authority over the financial management and reporting requirements of publicly held United States corporations. World-Wide Coin, 567 F.Supp. at 746. The FCPA also imposes accounting controls for companies subject to either the registration or the reporting provisions of the Exchange Act. Midwestern Teamsters, 2009 WL 6799492, at *1. Observing that "investors are entitled to rely on the implicit representations that corporations will account for their funds properly and will not channel funds out of the corporation or omit to include such funds in the accounting system so there are no checks possible on how much the corporation's funds are being expended in the manner management later claims," the Honorable Robert L. Vining quoted Section 13(b)(2) of the FCPA to demonstrate the internal accounting controls on every issuer having a class of securities registered pursuant to section 12 of the Exchange Act, id.:
An "issuer's" books and records for purposes of accounting control requirements include those of the subsidiaries and affiliates under its controls, including foreign subsidiaries and joint ventures. DOJ/SEC Resource Guide at p. 43.
Section 13(b)(2) of the FCPA and the rules promulgated under it "are rules of general application which were enacted to (1) assure that an issuer's books and records
In re Nature's Sunshine Products Securities Litigation, 486 F.Supp.2d 1301 (D.Utah 2007), a court recognized for the first time control person liability in the context of an FCPA enforcement action.
Here the FCPA allegations, which cite ever increasing enforcement actions by the SEC and the DOJ in recent years, in Lead Plaintiff's view serve to show the heightened risk of Key's investment and of doing business in Mexico and Russia, as well as misrepresentations by Defendants, given Key's repeated statements that Key fully complied with FCPA provisions, yet its internal controls were so inadequate as to "underscore[], at minimum, the gross recklessness with which Defendants misled investors." #37 at ¶¶ 5-6. Lead Plaintiff asserts that ultimately Key revealed that the SEC was investigating Key for potential FCPA violations in its Russian operations, with the result that Key's share price and the company suffered significant economic loss. Id. at ¶¶ 9-13. The complaint states that because of this SEC's investigation of its Russian operations, "Key discovered potential FCPA violations in Mexico that required self-disclosure to both the DOJ and SEC, and that Key recorded a massive impairment to goodwill and other assets at its Russia reporting unit." #37 ¶ 73.
There is no implied private right of action under the FCPA. Lamb v. Phillip Morris, Inc., 915 F.2d 1024 (6th Cir.1990)(relying on Cort v. Ash, 422 U.S. 66, 78, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975)), cert. denied, 498 U.S. 1086 (1991); J.S. Service Center Corp. v. Gen. Elec. Technical Services Co., Inc., 937 F.Supp. 216 (S.D.N.Y.1996); Lewis on Behalf of Nat. Semiconductor Corp. v. Sporck, 612 F.Supp. 1316 (N.D.Cal.1985); Scientific Drilling International, Inc. v. Gyrodata Corp., 215 F.3d 1351 (table of Decisions without Reported Opinion), Nos. 99-1077, 99-1084, 1999 WL 674511, at *3-4 (Fed. Cir. Aug. 30. 1999)(concluding that "the Fifth Circuit would likely follow the Sixth Circuit's decision in Lamb").
With the continuing downturn in its domestic oil and gas operations, by 15.4% just in 2013, in 2011 Key had begun a couple of years earlier aggressively expanding its international business and subsequently during the Class Period as part of its business and growth strategies, Defendants urged investors to take advantage of international growth opportunities
In its 2009 Form 10-K, filed with the SEC on February 26, 2010, Key reported that in the United States in 2009, it had "1.8 million rig hours and 1.7 million trucking hours, which was a decrease of 35.2% and 28.2%, respectively, from 2008 activity levels and 28.1% and 24.8%, respectively from 2007 activity levels." #37, ¶ 14. At the same time, it reported this decline as offset by "our expansion into Mexico and Russia during 2009, and the full year effect of acquisitions completed during 2008." Id. It further stated that it expected Petroleos Mexicanos ("PEMEX"), Mexico's state-owned oil company and Key's biggest international client, "will maintain their level of workover activity and that the rigs we have currently operating in Mexico will be utilized for all of 2010." Id.
In its 2010 Form 10-K, filed with the SEC on February 28, 2012, Key emphasized the significance of its international expansion, pointing out that the revenues for its Well Servicing segment increased 14% over 2009, attributable to "international expansion, improved pricing and additional revenues from 2010 acquisitions, offset by lower revenues attributable to our operations in Mexico due to a decrease in work for [PEMEX]." #37 at ¶ 36. It also stated that in 2009, while revenues in that same segment fell significantly because of commodity prices and the financial crisis, "the expansion of our operations in Mexico and incremental rig hours from our Russian joint venture in 2009" partially compensated for this downward trend". Id.
Although there was a slowdown in its Mexican operations that year, purportedly caused by budget issues at PEMEX, Key still predicted continued growth in Mexico in 2011. #37 at ¶ 37. In its 2010 Form 10-K, Key represented that PEMEX had commenced operations under its 2011 capital budget, and Key's activity started to increase from its depressed 2010 levels. Key therefore stated that it "anticipate[d] strong demand through most of 2011 for our rigs currently deployed in Mexico, primarily in the Chicontepec region." Id.
At the Pritchard Capital Energize Conference in San Francisco, California on January 4, 2012, Whichard reported, "Internationally our presence continues to grow.... As we exit Q4, we'll have 24 rigs operating in Mexico with PEMEX demanding more equipment." #37 at ¶ 38.
In a press release on February 16, 2012, in announcing its financial results for the fourth quarter and full year of 2011 Key represented that "[t]he strong improvement in international results in 2011 was driven by higher rig activity in Mexico..." #37, ¶ 39. The next day in a conference call for analysts and investors, Alario bragged of Key's success in Mexico: "When we first entered the Mexico market back in 2007 with three rigs, we believed then that it could become a 40-to 50 rig market for Key. I am pleased to report that our activity in Mexico should more than double in 2012, with at least 40 rigs for the year compared to an average of 18 rigs in 2011." Id.
In its Form 10-K for the year 2011, filed with the SEC on February 29, 2012, Key indicated, "We generate significant revenue from our contracts with" PEMEX, and "in Mexico we were awarded two $90 million contracts for work in the Aceite Terciario del Golfo ("ATG") field. The contracts led us to increase our rig count in the country during 2011 with additional rigs planned for the country in 2012, doubling our rig count in the country." Id. at ¶ 41. In the same document, buttressing its emphasis on the importance of Key's expansion
Whichard again bragged about Key's Mexican business at the Raymond James Institutional Investors Conference in Orlando, Florida on March 6, 2012, representing that "[o]ur international revenue doubled year-over-year, if you pull Argentina out of the mix.
Key issued a press release on June 26, 2012 announcing second quarter 2012 financial results: "The
In sum, Key represented that its growth was largely based on positive trends in its Mexico operations and that Mexico was driving, and was expected to continue driving, its financial successes. Despite these optimistic statements, however, the complaint asserts that Key's internal controls were not strong, Defendants' representations were thus not made in good faith, and Defendants were grossly reckless in misleading investors. #37 at ¶ 45. Indeed, "had Key's compliance machinery been as developed and stringent as Defendants represented, it would have been impossible for Defendants
The substantial increase in recent years in United States' regulation and enforcement of the FCPA should have given Key ample warning of the need for great vigilance in doing business abroad and for essential internal compliance controls. For instance, on November 16, 2010, Assistant Attorney General Lanny A. Brewer admonished at the 24th National Conference on the FCPA, "FCPA enforcement is stronger than it's ever been — and getting stronger. We are in an era of FCPA enforcement; and we are here to stay." #37 at ¶ 57. The severity of penalties for violations also "skyrocketed," and companies worldwide "are now well aware of the increasingly severe criminal and civil penalties imposed by the DOJ and SEC in FCPA cases." Id. at ¶ 58. The risks were highly publicized when Key was expanding further into international markets. In 2009 in an article in the International Trade Law
Key's Board of Directors adopted a Code of Business Conduct ("Code") with an introductory letter by Alario stating that all Key employees "must commit to always acting lawfully, ethically and with integrity,: and summarizes, "Do the right thing without exception." #37, ¶¶ 94-95. The Code "applies to the Company and its subsidiaries and affiliates[,] ... including all business units in all of our offices and locations around the world[, but] [a]ll employees and officers in the business units are expected to be familiar with the Code and apply it in the daily performance of their work-related responsibilities." Id. ¶ 95. An Ethics Committee (composed of representatives from the Company's Internal Audit, Legal, Human Resources, and Operations departments) and the Board of Directors' Audit Committee monitor and oversee compliance with "applicable laws and regulations." Id. ¶ 96. The Code especially highlights the Audit Committee's oversight role:
Id. The Code instructs Key employees about limitations on gifts given to governmental officials ("In the U.S., an employee may not give gifts of more than nominal value ($100.00) to an actual or prospective customer, supplier, or contractor of the Company, or any governmental official, in an attempt to establish dealings with the Company providing such gifts, without written approval of the employee's supervisor."), and admonishes they must "[n]ot offer bribes or accept kickbacks from our suppliers, contractors, or customers for any reason." #37 ¶ 97. It also informs employees that the FCPA "prohibits payments to foreign officials for the purpose of obtaining or keeping business" and that under the FCPA "a `foreign official' is any officer or employee of an instrumentality of a foreign government, including state-owned or controlled energy companies, such as Petroleos Mexicanos, SA (`PEMEX'), as well as political officers and candidates for political office. Further description and examples, as well as instructions for proper transaction of business inside the U.S. are found on-line in the Company's FCPA Compliance Manual." #39 ¶ 98.
Key's Foreign Corrupt Practices Act Compliance Manual ("FCPA Compliance Manual"), effective June 6, 2008, also contains an introductory letter signed by Alario:
#37 ¶ 99. The Manual is divided into two parts: "FCPA Policy" and "FCPA Procedures." #37 ¶ 100.
The policy of Key and its subsidiaries and affiliates is that "the Company and each person or entity acting as a representative or advisor to the Company shall fully comply with all applicable provisions of the [FCPA]" and prohibits "use of Company funds or assets for any unlawful, improper or unethical purpose," noting that any "[i]mproper gifts, payments or offerings of anything of value to foreign officials could jeopardize the growth and reputation of the Company, and will not be tolerated." #37 ¶ 101. The FCPA Compliance Manual governs "all financial recordkeeping activities to which Key is subject by virtue of the federal and state securities laws, including the U.S. Securities and [sic] Exchange Act of 1934." #37 ¶ 102.
The FCPA describes the responsibilities of different parties as follows:
#37 ¶ 103. Key's FCPA Policy emphasized, "If the situation warrants a token gift of other than nominal value, the employee must consult with the FCPA Compliance Officer prior to offering such a gift. The approval of the FCPA Compliance Officer is required to ensure that the gift is consistent with the FCPA, and that the gift is lawful, customary, and necessary to the conduct of business in the country where it is made.... Employment of a foreign agent, commencement of significant business operations outside the United States, gifts, or entertainment of a foreign official must all be approved in advance by the FCPA Compliance officer." #37 ¶ 104.
Last of all, the FCPA Policy "recognizes and emphasizes the importance of anti-corruption training as an essential component of an FCPA compliance program. To that end, Key will provide FCPA Anti-corruption training, both in person and through web-based programs, periodically at times to be determined by the Company's General Counsel." #37 ¶ 105. Any employee who violates the FCPA or the Company's FCPA Policy "will be disciplined and may be terminated. Intentional violations of the FCPA will result in termination." Id.
In the second half of the FCPA Compliance Manual regarding procedures, the broad definitions of "foreign official" and "anything of value," including with respect to third parties, as well as the need for due diligence and investigation of the "reputation, beneficial ownership, professional capability and experience, financial standing and credibility" and history of compliance of any prospective Representative and any acquisitions and joint ventures, are set out #37 ¶¶ 106-110. The procedures require Key's Accounting Department to be responsible for maintaining and enforcing Key's accounting and record keeping policies and Key's Internal Audit Department with auditing Key's compliance with policies state in the Compliance Manual and related policies and procedures constituting its internal control system. #37 ¶ 111. The procedures require Key to "maintain a system of internal account controls sufficient to provide reasonable assurances" that
#37 ¶ 112. The procedures require "[m]onitoring and auditing systems" in place to detect policy violations and review personnel records of those who deal with governmental officials or who submit financial data that affect Key's financial statements or reports. #37 at ¶ 113. Similarly Key's Audit Department must conduct FCPA audits based on an annual FCPA audit plant and must "interview persons responsible for administering, implementing and monitoring Key's compliance program." Id.
The complaint asserts that given these accounting and controls were supposedly in place at Key through its Code of Business Conduct and its FCPA Compliance manual, any illegal payments made regarding
In addition the government has provided companies with clear guidelines on designing and implementing an effective FCPA program, including the DOJ/SEC Resource Guide and the Federal Sentencing Guidelines.
The Consolidated Amended Complaint charges that although Key had compliance programs that looked strong on paper, in actuality Key did not have an effective compliance or training program in effect and therefore "created an atmosphere in which violations of laws and regulations and the Company's own internal policies were ignored" and there were "rampant FCPA violations." #37 ¶ 133. Key did not properly staff its compliance department nor establish effective internal controls and internal audit departments. Id. Either Defendants knew or should have known that Key's internal controls were nonexistent or they recklessly disregarded the controls in place. Id.
The Consolidated Amended Complaint alleges that six, unidentified confidential witnesses ("CWs") have come forward to testify against Key with regard to its illusory compliance program and its actual FCPA violations. #37 at pp. 1-2. CW2, a Senior Internal Auditor at Key from May 2012 through July 2012, who had worked at several other large public companies and had substantial experience conducting audits both domestically and abroad, even in countries known for having corrupt business cultures,
CW6, a Corporate Auditor at Key from May 2011 through May 2013,
CW6 revealed that internal auditors were sent to Mexico several times in 2012 and 2013 to learn what kinds of control processes needed to be implemented in such local operations as payroll, purchasing, etc., but that the auditors did not perform any audits of potential FCPA violations because they were not asked to do so. #37 ¶ 137. CW6 also complained that "a lack of response" from senior executives in Mexico obstructed the auditing team's ability to finish its job and compromised the audit's independence. Id. CW2 thought that if Key had focused its internal audits on such critical financial processes, instead of on safety, it would have uncovered improper activity that was overlooked, such as Key's Board of Directors' request in 2012 for an internal audit of the use of company credit cards. Id. An audit conducted in 2012 uncovered widespread misuse of these for personal expenses which CW6 substantiated. Id. The complaint further asserts that the "confidential witnesses substantiated that Key's operations in Mexico were hampered by accounting irregularities," but does not identify any particular accounting irregularities. #37 at ¶ 167.
In addition, CW2 informed Plaintiffs that CW3, after observing unusual numbers in the accounting records of Key's Mexican operations, informed CW2 that millions of dollars of accruals were listed on these accounting records without being cleared for much longer than the 30-day limits, indeed for over 90 or 180 days, when nothing was booked as an actual sale or payment CW3 was told not to speak to Lead Plaintiff through his attorney. #37 at ¶ 138.
CW4
When the SEC began its investigation of Key's possible FCPA violations in Mexico and Russia, the Board of Directors asked CW5 to speak with the SEC and the law firm that Key hired to conduct an internal investigation. Contrary to Key's representations that in pursuing a joint venture by acquiring a drilling company named Geostream in Russia, Key was moving cautiously and following the FCPA and its own policies and procedures, while aligning them with Geostream's, Key suddenly purchased an initial 50% interest in Geostream in two investments in 2008 and 2009, and then the remaining 50% on April 9, 2013, without performing sufficient due diligences to satisfy the SEC. #37 ¶ 141. CW2 commented, "Due diligence was done, but it wasn't as thorough as it should have been" and did not provide a clear picture of Geostream's operations. #37 ¶ 143. He further noted that there was concern about liability because before Key purchased the remaining 50%, since Key had almost no access to Geostream's
CW1,
After the acquisition was completed, Key allegedly learned that Geostream's structure and finances were far more complicated than Key had expected. Geostream held offshore shell companies, among which it made transfers of ownership from one business to the next. #37 ¶ 144. CW2 asserted that Geostream had "16 companies under the Russian umbrella," and that "[o]bviously the FCPA was really foreign to them.... They have a different kind of mentality there." Id. Given Russia's reputation for corruption, the complaint asserts that Key was reckless at best and that the lack of oversight obscured whether Geostream's employees were violating the FCPA. Id.
Key had already acquired 100% of Geostream, which it characterized as its primary growth strategy in Russia. On February 15, 2013, Alario stated in a conference call with investors and analysts, "Russia is the second-largest oil well inventory market in the world. So there's great reason for Key to be in that market. And we're being very, very patient, as we learn about it and as we get better at convincing a small, select group of customers that this highly reliable equipment that we have over there is a better way to go." #37 ¶ 146. In an October 31, 2013 conference call, Alario stated, "We believe that we can more effectively grow in ... Russia operating the business [] ourselves." #37 ¶ 145.
On May 16, 2014, when Key filed its Form 10-Q for the quarterly period ending March 31, 2014, revealing that the SEC was investigating Key's operations in Russia, the market first learned of possible FCPA violations by Key. #37 ¶ 145-46. Nor was the Russian revelation of Key's corrupt culture unique according to the complaint. Key gradually began to reveal problems in its Mexican operations when on January 6, 2014 it disclosed in a press release that PEMEX was auditing $372 million worth of Key's billings, resulting in Key's having to take a charge of $2-3 million in 4Q 2013. #137 ¶ 147.
On June 4, 2014, Key filed another 8-K, which disclosed, "In April 2014, the Company became aware of an allegation involving Key's Mexico operations that, if true, could potentially constitute a violation of certain Company policies, including our Code of Business Conduct, the U.S. Foreign Corrupt Practices Act (FCPA) and other applicable laws." #37 at ¶ 149. It further stated that it had "conducted an initial investigation of this matter and the Board of Directors of the Company has formed a special committee of independent directors to oversee the investigation" of these and "any other resulting matters." Id. It also indicated that on May 30, 2013 Key had voluntarily made known the allegation and information from its initial investigation to the SEC and the DOJ and that fines, criminal penalties and/or sanctions relating to the alleged FCPA violations could be imposed on Key. Id.
Even though Key had not disclosed to the public any of the reports on the FCPA investigation, the news of possible violations impacted its financial status. #37 ¶ 150. On July 17, 2014 in a press release, Key divulged that (1) it expected "to record a $30-35 million pre-tax charge for goodwill
In sum, Defendants' representations throughout the Class Period that Key strictly complied with the highest ethical standards and complied with all applicable laws and regulations, including the FCPA, were materially incomplete and/or false in light of their failure to disclose inter alia "(a) the full magnitude and consequences of the Company's FCPA violations; (b) that the Company's compliance function and internal controls were woefully inadequate or not strictly adhered to; and (c) that violations of Key's internal controls and corporate policy were ignored." #37 at ¶ 154. Key's Compliance Manual and its Code of Business Conduct contained false and misleading statements from the beginning of the class period.
The Consolidated Amended Complaint then details a number of other material and purportedly misleading disclosures made during the Class Period. For example, on September 4, 2012 at the Barclays Capital CEO Power Energy Conference in New York, Alario represented that "the core of our story is our business with PEMEX.... I don't think there's a better example of value delivered by a service company to a customer than Key's value to PEMEX." #37 ¶ 160. He also emphasized that PEMEX entrusted Key to perform some of PEMEX's riskiest work and "I think [that] proves that PEMEX has got confidence in Key," while he was leading investors to believe that this confidence would provide future opportunities to do business with PEMEX. Id. The complaint asserts that the statements in ¶¶ 159-161 were materially false and misleading because "Defendants failed to disclose that revenues from PEMEX were overstated due to overbilling and that the Company's production was in decline." #37 at ¶ 162.
Regarding Key's operations in Russia and its at-that-time 50% interest in Geostream, Alario represented that its investment in Russia was small but "potentially a good solid market," explaining,
#37 at ¶ 161. The complaint asserts that these statements about Russia and Mexico are materially false and misleading because Alario did not disclose that Key's growth strategy in both countries was substantially due to or directly attributable to conduct that violated the FCPA. See also
On October 2, 2012 at the Johnson Rice Energy Conference in New Orleans, Louisiana, Whichard bragged that Key's "business has doubled in Mexico year-over-year," "we're adding other assets into that market, such as coil, wireline, premium rental equipment, and PEMEX is calling on us to add more and more equipment to their market." He claimed that he expected Key's success to continue, that Key was seeking business opportunities not only with PEMEX but with other multinational companies, "so we're broadening our customer base" in Mexico and looking at opportunities in regions in Mexico beyond Chicontepec area, known as the ATG field. The complaint maintains that Whichard's statements were materially false and misleading because he did not disclose that Key's rapid growth and future prospects in Mexico were largely due or directly related to its violations of the FCPA, that Key's internal controls were knowingly or recklessly inadequate, as discussed previously.
Alario and Whichard allegedly filed a 3Q 2012 Form with certifications that were false and misleading under the Sarbanes-Oxley Act of 2002 ("SOX Certifications," which the complaint quotes in full without specifying which statements Lead Plaintiff considers false or misleading and why)
In the Form 10K report filed on February 25, 2012, #37 ¶¶ 177-181, Key purportedly made numerous false and misleading statements. Key reported, "Revenues for our international segment increase $134.2 million, or 67.4%, to $333.3 million in the year ended December 31, 2012," an increase "primarily attributable to increased activity in Mexico." #37 ¶ 178. In its yearly goodwill impairment analysis in the 10-K, Key reported that the goodwill for its Russian unit at the end of 2012 was approximately $24.6 million and the fair value of these assets exceeded the carrying value by 17.8%, while Key did not record any asset impairments in that year. Id. ¶ 179. These statements were false, according to the complaint, because Key's violations of the FCPA significantly impacted its revenue growth in these markets, while the statements falsely implied that Key's success was based on legitimate business activities. These statements also falsely implied that Key had adequate internal controls, compliance policies and procedures, in place. Id. ¶ 180-181. The Form 10-K had Sarbanes-Oxley certifications signed by Alario and Whichard stating that the information was accurate and all material changes to Key's internal controls over financial reporting were disclosed. Id. ¶ 181.
In a press release on April 25, 2013, filed the next day with the SEC on Form 8-K, Key announced its financial results for IQ 2013 and revealed that PEMEX had significantly reduced activities in Mexico, resulting in an adverse impact on Key's share price, which dropped nearly 17% from a closing price of $7.09 on April 25, 2013 to a closing price of $5.90 on April 26, 2013. #37 ¶¶ 184-186. In the same release Key stated that it intended to expand operations in Russia, again not revealing that its growth strategy was largely based on conduct that violated the FCPA and the erroneous impression it had created that it had adequate internal controls in place. Id. ¶ 187.
Also, on May 3, 2013 Key filed its 1Q 2013 on Form 10-Q, stating that its revenue from its international business had declined because of PEMEX's slowdown, but that its overall revenue for that period increased by $20.6 million, or 33.3%, compared to $82.4 million in 1Q 2012, "primarily
In 2014 there were growing losses in the price of Key's common stock as negative news about Key's international business operations gradually overwhelmed the positive. In a January 6, 2014 press release, filed the next day on Form 8-K, Key disclosed that PEMEX was auditing $372 million of Key's billings under its contracts with PEMEX and that Key would take a charge of between $2-3 million in 4Q 2013. #37 ¶¶ 204, 206. Even though Defendants did not disclose its violations of the FCPA or its lack of effective internal controls, Key's share price dropped over 3% from its closing price of $7.83 on January 6, 014 to $7.55 the next day.
On February 13, 2014 Key issued a press release announcing its 4Q and full year 2013 financial results, which included quarterly International segment revenues of $38.1 million, down 14.5% sequentially. #37 at ¶ 207. Despite the loss, in a conference call the next day Alario remained upbeat about Key's future success in Mexico and Russia. #37 ¶¶ 208, 210. Key's share price increased more than 2%, rising from a closing price of $7.81 on February 13, 2014 to $8.00 on February 14, 2014. Id. ¶ 209.
Key's 2013 Form 10-K, filed on February 25, 2014, warned that Key's "failure to comply with the [FCPA] and similar laws may have a negative impact on our ongoing operations," and "We could be subject to sanctions and civil and criminal prosecution as well as fines and penalties in the event of a find of violation of the FCPA or similar laws by us or any of our employees," but also reported the value of its goodwill in its Russian reporting unit was around $23 million, with the fair value of these assets exceeding the carrying value by 86%, statements that the complaint asserts were false and misleading for the reasons discussed previously. #37 ¶¶ 212-213. The document included Sarbanes-Oxley certifications signed by Alario and Dodson. Id. ¶ 214.
On April 30, 2014 Key issued a press release, filed with the SEC the next day on Form 8-K, announcing that in the first quarter of year 2014 its International revenues were down 15.7% sequentially, to $32.1 million. #37 ¶ 215. In a conference call on May 1, 2014, Alario stated about Key's business in Mexico, "We've reached the point where we're willing to say that our International business has essentially reached bottom. Mexico has clearly been a drag on this segment." #37 ¶ 216. Yet he also expressed confidence that Key would turn the situation around: "In Mexico we've also recently seen a number of opportunities from integrated service companies under these incentive contracts, and some of those are under negotiation now. And hopefully, those will, as you indicate, will [sic] get started sooner rather than later." Id. Alario did not discuss the violations of the FCPA nor Key's lack of adequate internal controls, but nevertheless, the share price of Key's common stock dropped from a closing price of $10.04 on April 30, 2014 to a closing price of $9.14 on May 1, 2014. Id. ¶¶ 217-218.
Finally on May 6, 2014 in its Quarterly Report of 1Q 2014 on Form 10-Q, with certifications signed by Alario and Dodson stating that the information was accurate, Key disclosed for the first time that it was being investigated by the SEC for possible FCPA violations in its Russian operations.
On July 21, 2014, investment bank Imperial Capital downgraded Key to In-Line from Outperform and lowered its price target for shares to $7.50 from $10.50. Two days later brokerage firm Wunderlich Securities repeated a "Hold" rating on Key and stated, "Overall it's clear that Key is struggling even as the domestic services market is showing overall improvement and while it has been able to reduce debt nicely, we remain Hold rated given the company-specific headwinds facing KEG." #37 ¶ 225.
To demonstrate scienter, the complaint, asserting that at the end of the Class Period Key's revelations first of FCPA violations in its Mexican operations, then less than a month later of possible violations involving its Russian operations, and on November 3, 2014 of investigations of its Colombia operations,
The complaint asserts that by virtue of their positions at Key, Individual Defendant had access to undisclosed adverse information about Key, its business, operations, finances, and present and future business prospects. They had access to such information through internal corporate documents, conversations, connections with other corporate officers, traders, marketing experts, attendance at management and Board of Directors' meetings, etc. Thus, the complaint claims, "it is appropriate to treat Individual Defendants as a group for pleading purposes and to presume that the materially false, misleading and incomplete information conveyed in the Company's public filings, press releases, and public statements ... was the result of the collective actions of the Individual Officers identified above." #37 ¶ 252.
Moreover, "[a]s officers and controlling persons of a publicly held company whose common stock was, and is, registered with the SEC pursuant to the Exchange Act, traded on the NYSE, and governed by the
Lead Plaintiff alleges that plaintiffs are entitled to a presumption of reliance based on the fraud on the market doctrine.
Because the Court does not yet address the issue of class certification, it does not otherwise summarize allegations relating to it.
The Court will address the arguments in the two motions together, noting that Whichard has joined in that of the other Defendants.
Defendants observe that Plaintiffs have identified four broad categories of allegedly false and misleading statements during the Class Period that it claims violated Section 10(b) and Rule 10b-5: (1) statements in the Company's Code of Business Conduct and FCPA Compliance Manual; (2) statements about Key's business in Mexico and Russia that purportedly omitted disclosing that Key's growth and growth strategy largely resulted because of FCPA violations; (3) statements allegedly falsely portraying Key's business in Mexico; and (4) statements in certifications accompanying Key's SEC filings that purportedly omitted internal control deficiencies and FCPA violations at Key. #49 at p. 10. Furthermore Defendants assert that because the allegations in the controlling complaint were not made based on Plaintiff's personal knowledge, they are based on information and belief, triggering the PSLRA requirements that Plaintiff must plead sufficient facts with particularity to support its claims that the statements were false when made. ABC Arbitrage, 291 F.3d at 351.
Defendants first contend that Plaintiffs' Amended Complaint fails to allege falsity with the requisite particularity under the PSLRA. Defendants never represented that there would never be an FCPA problem, but instead warned investors of the risks of a FCPA violation and that the Company's statutory FCPA compliance depended on its compliance program and the efforts of its employees, agents, affiliates and business partners to follow it.
While Plaintiffs claim that statements in Key's Code of Business Conduct and FCPA Compliance Manual
The complaint contains allegations from six purported "confidential witnesses" ("CWs"), but the sum of their allegations is that Key's FCPA controls were adequate, not even close to constituting particularized allegations showing that the Code or Manual or something Individual Defendants said was false at the time. See, e.g., In re Intelligroup Sec. Litig., 527 F.Supp.2d 262, 359-61 (D.N.J.2007)(holding that "personal opinions void of specific details regarding the basis [for the CW's] personal knowledge" add nothing to falsity or scienter); Zucco Partners, LLC v. Digimarc Corp., 445 F.Supp.2d 1201, 1208 (D.Or.2006)("[A] shared opinion among confidential witnesses does not necessarily indicate either falsity or a strong inference of scienter if the allegations themselves are not specific enough."), (quoting In re Metawave Communications Corp. Sec. Litig., 298 F.Supp.2d 1056, 1070 (W.D.Wash.2003)), aff'd, 552 F.3d 981 (9th Cir.2009), as amended (Feb. 10, 2009). Specifically none of the CWs (1) "alleges that an FCPA violation actually occurred," (2) "alleges that he ever reported his concerns about FCPA controls to Key's FCPA Compliance Officer, as required by Key's [FCPA] Manual" (Ex. 22),
Furthermore, Defendants insist that Plaintiffs failed to raise a strong inference of scienter. There are no allegations suggesting that Defendants had any motive to commit securities fraud or that Defendants sold stock during the Class Period or at unusual times and at unusual prices, or that Key used its stock to purchase other companies. Nor do Plaintiffs provide particularized allegations that anything said by any Individual Defendant was known to be false by the Individual speaking at the time he spoke. Finally Plaintiffs assert that because Key and the SEC were investigating possible FCPA violations, such FCPA violations must have occurred and Individual Defendants must have known about them at the time statements issued. Here, too, such scienter-by-inference arguments have been standardly rejected by the courts. Defendants further note that the complaint's allegations contradict each other: it alleges that Key falsely represented that its internal FCPA controls were strong when the opposite was true, but contemporaneously alleges that Individual Defendants must have known of the FCPA violations because a functional FCPA compliance system would have alerted those up the corporate ladder of such FCPA violations. Instead, argue Defendants, the complaint gives rise to a much stronger inference that to the extent Key had FCPA problems, Individual Defendants were not aware of them.
Last, the complaint fails to allege loss causation, i.e., that the alleged misrepresentations caused inflation of the price of Key's common stock. Defendants insist that the two stock price drops that
Backing up the complaint's allegations with documentary evidence, Defendants maintain that Key was open and transparent about its business operations in Mexico, including about the significance of its relationship with PEMEX. Among its reports to the SEC Key identified its reliance on PEMEX as a "Risk Factor" in its Form 10-K in 2009.
The alleged misrepresentations are generic, forward-looking statements concerning Key's overall business in Russia and Mexico or mere puffery about Key's internal controls. None of the statements is a guarantee that the FCPA investigations or violations would never occur in relation to Key's operations in these area, nor that Key's internal controls were foolproof. Furthermore statements about the materialization of risks that the Company has previously disclosed and warned against are not corrective disclosures.
Key contends that Russia was never a central focus of its international growth strategy, but "a small market for Key" according to Alario. Ex. 7, Feb. 15, 2013 Earnings Call Tr. at 9. Basically Key's operations were comprised of an ownership in Geostream, in which it gradually obtained first a 26% interest, then 50% in March 2009, and finally 100% on May 3, 2013. Key reported satisfactory progress in the region until political instability began threatening its operations in 2014. In July of that year Key revealed that it expected "to record a $30 million to $35 million pre-tax charge for goodwill and other asset impairments related to its operations in Russia." Ex. 18, July 17, 2014 Press Release at 1. Key notes that it tested its Russian reporting annually from 2010 to 2013 and found that the fair value of the unit exceeded its carrying value until June 2014, when Key found that an impairment had occurred and calculated the relevant charge. Ex. 3, Feb. 25, 2011 Form 10-K at 45, 80; Ex. 4, Feb. 29, 2012 Form 10-K at 46; Ex. 5, Feb. 25, 2013 Form 10-K at 41; Ex. 1, Feb. 25, 2014 Form 10-K at 41; #49 at 8 n. 2. Key emphasizes that Plaintiff does not allege that Key was required to take an impairment charge earlier than it did.
Key argues that throughout the Class Period it repeatedly disclosed FCPA compliance problems as a primary risk factor in conducting international operations that could negatively impact its business. See, e.g., Ex. 5, Feb. 25, 2013 Form 10-K at 16; Ex. 1, Feb. 25, 2014 Form 10-K at 17. It adopted its Code of Business Conduct and its FCPA Compliance Manual to instruct employees about their obligations under the FCPA and established procedures to be followed, but it never guaranteed that
As for the Sarbanes-Oxley Act certifications signed by Alario and Whichard, attached to Key's SEC filings during the Class Period, which the complaint at ¶¶ 166-167 asserts were materially false and misleading because Alario and Whichard "were at the time aware of and/or recklessly disregarded material weaknesses in Key's internal controls that were not disclosed to the investment public," Defendants maintain that the allegation confuses financial reporting controls in the Sarbanes-Oxley certifications with the anti-corruption policies or controls designed to ensure FCPA compliance. See In re Invision Techs. Inc. Sec. Litig., No. C-04-3181 MJJ, 2006 WL 538752, at *6 & n. 2 (N.D.Cal. Jan 24, 2006)(rejecting allegation that purported lack of FCPA-related controls rendered [Sarbanes-Oxley] certifications false and misleading). Nor are there any particular facts alleged to show that Alario and Whichard knew that what they were certifying was not true. City of Roseville Employees' Retirement System v. Horizon Lines, Inc., 686 F.Supp.2d 404, 420 (D.C.Del.2009)("The Act ... does not mandate officers certify that their company's reports are completely devoid of any misleading statements or omissions. Of course, this is not a license for executives to simply bury their head in the sand, but it does mean that they can only certify the truthfulness of their reports based on the information they know, or of which they should reasonably have been aware, at the time."); Shaw Group, Inc., 537 F.3d at 545 ("There must be, in other words, facts establishing that the officer who signed the certification had a `reason to know, or should have suspected, due to the presence of glaring accounting irregularities or other `red flags,' that the financial statements contained material misstatements or omissions."). Plaintiffs have failed to allege facts demonstrating that at the time Alario and Whichard signed the certifications, Alario and Whichard knew of or recklessly disregarded any weaknesses in Key's internal controls, so Plaintiffs' certification claim must fail. Nor do Plaintiffs plead particularized facts giving rise to a strong inference of scienter, that they knew what they were certifying was untrue. City of Roseville, 686 F.Supp.2d at 420 ("[Sarbanes-Oxley] does not mandate officers certify that their company's reports are completely devoid of any misleading statements or omissions. Officers are not guarantors of their truth. Instead, they must certify that they personally have no knowledge of such misleading statements and omissions. Of course this is not a license for executives to simply bury their heads in the sand, but it does mean they can only certify the truthfulness of their reports based on the information they know, or of which they should reasonably have been aware, at the time.").
Indeed, Defendants highlight the fact that Plaintiffs fail to allege any motive
Finally, contend Defendants, because Plaintiffs have failed to state a primary violation of § 10(b) and Rule 10b-5, their derivative control person claims under section 20(a) must also be dismissed. Shaw, 537 F.3d at 545.
Whichard's separate motion to dismiss (#50) alleges additional grounds for dismissal of claims solely against him. The only allegations about him are the following: (1) Whichard served as Key's CFO from March 2009 until he retired in March 2013; (2) Whichard allegedly made false statements when he discussed Key's international growth at the Johnson Rice energy Conference in Orlando Florida on October 2, 2012, full transcript attached as Ex. A
The complaint alleges that at the Johnson Rice Energy Conference he made two false or misleading statements relating to Mexico, but it misquotes them (#37 ¶ 163). Whichard states them in full, as evidenced by th transcript, Ex. A:
Whichard points out that the complaint does not claim that any of these statements is false, but only that Whichard failed to reveal that "Key's `rapid growth' and `future prospects' in Mexico were largely attributable to or directly related to conduct that violated the FCPA." #37 ¶ 164. Whichard emphasizes that the complaint does not provide any particularized facts showing that (1) there was any conduct in Mexico that violated the FCPA; (2) if there were, that Whichard was aware of it at the time he made these statements; and (3) that the purported FCPA violation would have rendered any of these statements misleading.
As for the certifications, which are identical in all material respects, the complaint asserts that "Alario and Whichard were at the time aware of and/or recklessly disregarded material weaknesses in Key's internal controls that were not disclosed to the investing public." #37 ¶ 167. The complaint does not identify which of the provisions in those certifications were allegedly false or misleading nor provide particularized facts to support the claim. Nor does it provide particularized facts to show that when he signed the certifications, Whichard was aware of any "material weaknesses" in Key's internal controls. "Material weakness" in a company's internal controls is a term of art in accounting that means "a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the registrant's annual or interim financial statements will not be prevented or detected on a timely basis." 17 C.F.R. § 240.12b-2. There are no facts alleged showing that Whichard had actual knowledge of any material weakness in Key's internal controls over financial reporting, nor allegations that any CW told him of any material weaknesses in internal controls. The Sarbanes-Oxley certifications refer to "internal control over financial reporting"; they do not relate to FCPA compliance policies and procedure and do not make any statements about the adequacy of systems designed to insure compliance with the FCPA. Even if they did, the complaint states that Key had policies, procedures, and training (including the Code, the Manual, and anti-corruption training) to address FCPA issues and that when Key became aware of a potential problem in Mexico, it launched an investigation and informed the SEC and DOJ. #37 at ¶¶ 94, 99, 105, 149. While Plaintiffs allege that
The complaint also alleges that "Key's operations in Mexico were hampered by accounting irregularities" (#37 ¶ 167). While the complaint alleges, "CW2 was contacted by CW3 to discuss unusual numbers that CW3 observed in the accounting records of Key's Mexican operations" related to accruals on Mexican books (id. ¶ 138), it fails to identify when these alleged observations occurred or to what they related within the Mexican operations or that the accruals resulted in any misstatement in Key's financial reporting. Moreover the complaint itself reflects that the CW2 did not use the words "accounting irregularities," but instead "was contacted by CW3 to discuss `unusual numbers,'" and does not define "unusual numbers." #37 ¶ 138. The complaint does not allege that the accruals were the result of a lack of internal control over financial reporting nor does it assert that Whichard had any knowledge about the accruals.
The complaint alleges that Key's acquisition of the last half of Geostream was done without due diligence, a claim unsupported by particularized facts, but is Plaintiffs' basis for claiming that Whichard's certification was false and misleading about internal controls over financial reporting. The complaint, however states that the acquisition took place on April 9, 2013 (¶ 55), not only after Whichard had left Key the previous month, but months after the only two certifications the complaint asserts that he signed. Thus as a claim against him, it fails.
On February 25, 2013 Key filed its Annual Report on Form 10-K with the SEC, which included the following in the "Risk Factors" section, ¶ 177:
See City of Brockton, 2014 WL 4832321 at *16 ("[S]tatments from the Ethics Codes and the Corporate Responsibility Reports offer no assurance that Avon's compliance efforts will be successful.... Instead, these statements merely set forth standards in generalized terms that Avon hoped its employees would adhere to. Such statements are not material.").
The complaint also charges that the 2012 Form 10-K, certified by Whichard, was false or misleading regarding statements (1) that Key's revenue growth in its international segments as "primarily due to increased activity in Mexico" because,
Whichard insists that the complaint fails to state a claim under § 10(b) and Rule 10b-5 for securities fraud or for control person liability under § 20(a) against him.
Regarding the former, Whichard contends that Plaintiffs fail to meet pleading requirements for scienter. Lead Plaintiff asserts that its allegations are "grounded in eyewitness accounts of misconduct," but fails to specify that alleged misconduct (who did what, where, when or why) and fails to allege that any eyewitness witnessed any misconduct by, or discussed suspected violations with, Whichard. Nor have Plaintiffs identified any specific communications with or reports to Whichard that directly contradict his statements. Abrams, 292 F.3d at 432; Rosenzweig, 332 F.3d at 868 (dismissing complaint where report "fail[ed] to identify exactly who supplied the information [that contradicted company's public disclosures] or when [management] knew the information").
Moreover the complaint asserts that "Individual Defendants," "personnel at the highest level," and unnamed "senior management" must have known of the alleged violations based on their positions. #37 ¶¶ 227, 238, 242. Not only may Plaintiffs not use group pleading allegations to create an inference of scienter as to individual defendants, but conclusory allegations that they must have known of the alleged fraud due to their positions and/or ability to access information are insufficient to state a claim. Southland, 365 F.3d at 365 ("The `group pleading doctrine conflicts with the scienter requirement of the PSLRA"; "corporate officers may not be held responsible for unattributed corporate statements solely on the basis of their titles, even if their general level of day-to-day involvement in the corporations's affairs is pleaded"); Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d 200, 208 (5th Cir.)("We have rejected the group pleading approach to scienter and instead look to the state of mind of the individual corporate official or officials `who make up or issue the statement (or order or approve it or its making or issuance, or who furnish information or language for inclusion therein, or the like) rather than generally to the collective knowledge of the corporation's officer and employees acquired in the course of their employment."), cert. denied, 558 U.S. 873, 130 S.Ct. 199, 175 L.Ed.2d 125 (2009); 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"); Shaw Group, 537 F.3d at 535 (same). Lead Plaintiff's assertion that all Defendants must have been aware of unidentified FCPA violations because Mexico and Russia are "notoriously corrupt" and because the SEC and the DOJ are investigating Key also fails. Key did disclose the jurisdictions where it has business operations and warned investors of the risks of an FCPA violation in each of its quarterly and annual SEC filings, yet
Nor does the fact that an SEC investigation is ongoing establish scienter without facts showing that a specific person knew of any purported wrongdoing. Plaintiff does not explain how the ongoing investigation of Key shows that Whichard made a false statement, no less that he had the scienter required by the PSLRA.
Nor does Plaintiff's vague assertion that Defendants' Sarbanes-Oxley certifications reveal scienter. Even though the certifications relate to internal controls over financial reportings and disclosures, not FCPA compliance, Lead Plaintiff fails to identify anything in the certifications that is false, and it does not claim that Key misstated any financial information. In re Invision, 2006 WL 538752 at *6. Even if it had, the signing of a Sarbanes-Oxley certification that is required by law, by itself, does not establish a strong inference of fraudulent intent. Instead of quoting the whole certification, as was done here, Plaintiffs must identify the particular statement(s) in the certification that is (are) allegedly false or misleading and plead facts explaining why it is (they are) false or misleading. In re Invision Techs., 2006 WL 538752, at *6. The complaint fails to allege any particularized facts that clearly contradict statements within the certifications. Plaintiffs must also provide facts showing that "the officer who signed the certification had a reason to know, or should have suspected, due to the presence of glaring accounting irregularities or other `red flags.' that the financial statements contained material misstatements or omissions." Shaw Group, 537 F.3d at 545. No such facts are pleaded here.
The complaint does not allege any motive of any defendant, in making false or misleading statements, showing he benefitted from any alleged FCPA violation, such as by selling stock at inflated prices. Nor do Plaintiffs raise an inference of fraudulent intent on Whichard's part that is as cogent and compelling as the opposing inference that he did not have fraudulent intent. Tellabs, 551 U.S. at 324, 127 S.Ct. 2499.
Last of all, because Plaintiffs have failed to state a claim for a primary violation of § 10(b) and Rule 10b-5 by any defendant, any derivative control person claim also fails.
The Court largely agrees with Defendants' analysis of the substantial pleading deficiencies of the complaint and finds Lead Plaintiff's opposition to be filled with the same problems as the complaint. It is comprised of generalized, indefinite, unsupported assertions and arguments, like the allegations in the complaint, which it simply repeats and which fail to meet the pleading requirements which the Court has set forth in detail.
As a threshold matter the Court notes the total inadequacy of Lead Plaintiff's one-paragraph, four-sentence summary of the standard of review (#51 at p. 10), which, given the securities fraud context of the PSLRA and Rule 9(b) (which Lead Plaintiff seemingly ignores), incorrectly asserts, "A plaintiff may survive a 12(b)(6) motion even if `recovery is very remote and untimely.' Twombly, 550 U.S. at 555, 127 S.Ct. 1955." This erroneous standard may be one reason why Lead Plaintiff's complaint is fatally deficient. Moreover, since Lead Plaintiff's allegations are made on information and belief, he must provide
Furthermore, for purposes of the pending motions to dismiss, the Court's review is limited to allegations in the First Consolidated Amended Complaint and the documents referenced in or attached to it and the motions to dismiss and relevant materials subject to judicial notice; it may not look to matters outside these parameters, for example to Plaintiff's new comments about post-Class Period events, including that Key has spent more than $59 million on its ongoing investigation, a fact irrelevant to state a claim of securities fraud anyway, or the generalization that Key "in the wake of this expansive investigation, transitioned completely away from its international business, citing the `secular trend of aging horizontal wellbores' and `options for the allocation of the Company's capital.'" Plaintiffs' Opposition, #51 at p. 9. The Court focuses on the specificity of material factual allegations in the complaint, required by Rule 9(b) and the PSLRA, but clearly lacking here, and the case law interpreting the pleading requirements, which Defendants and the Court have shown undermines many of the Consolidated Complaint's conclusory claims.
The complaint repeatedly claims that numerous statements were false or misleading mainly because Key concealed that its growth and growth strategy were large due to conduct that violated the FCPA and because Key created the erroneous impression that it had internal controls in place to prevent such violations. Lead Plaintiff cannot rely on vague assertions that the SEC and DOJ have increased their vigilance over FCPA violations generally or that Mexico and Russian are rife with corruption to establish that there were violations of the FCPA in Mexico and Russia by Key during the Class Period or vaguely to assert that during the Class Period, Key somehow violated the statute in its operations in these countries. Indeed not a single specific violation of the FCPA (identifying the nature of the violation, when, where, and who was involved) is alleged.
Moreover, the complaint contends that Key's Code of Business Conduct and FCPA Compliance Manual, on which Key's all-too-vaguely described internal controls were based, were filled with false representations and omissions for purposes of § 10(b) and Rule 10b-5. Not only have the Court and Defendants shown that courts has found such sources to be aspirational and immaterial puffery, but Lead Plaintiff has failed to allege particular facts demonstrating any breach by any particular Defendant, with scienter, of any employee responsibility in any particular statement set forth in those documents. In re Franklin Bank Corp. SEC. Litig., 782 F.Supp.2d at 381.
With regard to the Sarbanes-Oxley certifications, Defendants have repeatedly pointed out that they do not relate to FCPA issues, but to the accuracy of financial reports. The complaint does not give a single example of a glaringly erroneous accounting irregularity which was knowingly certified by a Defendant here. Defendants and the Court have pointed out that Lead Plaintiff has failed to plead requisite facts showing that each individual who signed a certification knew how, why, and when an (identified) statement in the certification was false because of identified `red flags' or glaring accounting irregularities.
Nor has Lead Plaintiff adequately alleged loss causation with regard to any disclosure statement targeted in the complaint, but merely alleges statements and subsequent drops or rises in the price of Key's common stock.
As pointed out, Lead Plaintiff impermissibly indulges in group pleading, in inferring knowledge of falsity based on individual
Furthermore, to satisfy the reliance element in a fraud-on-the-market securities fraud action, Lead Plaintiff must allege facts showing not only that each alleged misrepresentation was publicly known and was material, but that Key's stock traded in an efficient market, and plaintiff traded the stock between the time when the misrepresentation was made and when the truth was revealed. Erica P. John Fund, 134 S.Ct. at 2408.
Lead Plaintiff has also erroneously relied too heavily on short, generalized statements of unnamed CWs without "discounting" them and providing corroborating "documentary evidence and/or a sufficient general description of the personal sources of the plaintiffs' beliefs," as the Fifth Circuit recommends (Shaw Group, 537 F.3d at 535; ABC Arbitrage, 291 F.3d at 351-52, quoting Novak, 216 F.3d at 313-14.).
Accordingly, the Court
ORDERS that Defendants' two motions to dismiss (#49 and 50) are GRANTED. Furthermore, the Court
GRANTS LEAVE to Lead Plaintiff to file within 20 days a Second Consolidated Amended Complaint that satisfies the heightened pleading requirements of Rule 9(b) and the PSLRA or to inform the Court that it no longer wishes to proceed with this suit.
It forbids three kinds of fraud when they are "material" (when there is "a substantial likelihood that the [statement or omission] ... would have been viewed by the reasonable investor has having significantly altered the `total mix' of information available", Basic, 485 U.S. at 231-32, 108 S.Ct. 978): misstatements, misleading statements, and omissions (silence) when there is a duty to disclose. 17 C.F.R. § 240.10b-5. Although the Exchange Act does not provide for a private cause of action for § 10(b) violations, the Supreme Court has held that a right of action is implied in the language of the statute and its implementing regulation. Superintendent of Ins. of N.Y. v. Bankers Life & Casualty Co., 404 U.S. 6, 13 & n. 9, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971). Only actual purchasers and sellers of securities have an implied private cause of action under Rule 10b-5. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730-31, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975).
For corporations he explains, id. at 688-89,
When the purchase price of a company or an asset ... exceeds the book value of its assets, the difference is recorded as goodwill, an intangible asset that is not amortized or depreciated.... ([In other words, goodwill is] the "excess of the purchase price over its book value," which is an "intangible asset for accounting purposes").... "Goodwill must `be tested for impairment at least annually using a two-step process that begins with an estimation of the fair value of a reporting unit. The first step is a screen for potential impairment, and the second step measures the amount of impairment, if any." .... Key tested its Russian reporting unit every year from 2010 to 2013 and consistently found that the fair value of the unit exceeded the carrying value.... June 2014 is the first time that Key found that impairment had occurred and calculated a corresponding charge. Notably, Plaintiff does not allege that Key was required to take an impairment charge any sooner than it did.
Defendants object that such statements by them are "generalized, optimistic statements and expressions of opinion that courts consistently have held to be inactionable puffery." #49 at p. 23, citing Southland, 365 F.3d at 372. Even if they were statements of facts, there are no facts alleged that support the claim that the statements were false when made, that Key actually overbilled PEMEX in 2012, no less that Key's top officials, or anyone else at Key, knew about the alleged overbilling at the time. Nor does the complaint allege facts showing that Defendants knew of any concealed decline in Key's production from PEMEX that year.
The Court notes that in Shaw Group, approving and relying on Garfield v. NDC Health Corp., 466 F.3d 1255, 1266 (11th Cir. 2006), the Fifth Circuit concluded that "a Sarbanes-Oxley certification, standing alone, is not indicative of scienter." 537 F.3d at 545. It agreed with the Eleventh Circuit that there must be "`facts establishing that the officer who signed the certification had a `reason to know or should have suspected, due to the present of glaring accounting irregularities or other `red flags,' that the financial statements contained material misstatements or omissions.'" Id. citing id.
Id. at 545 (citations to Garfield omitted). Lead Plaintiff has not provided facts showing "glaring accounting irregularities or other `red flags'" that would imply that the certifier(s) had "reason to know or should have suspected" that "the financial statements contained material misstatements or omissions," also never identified, regarding any of the certifications referenced in the complaint.
