IRENE C. BERGER, District Judge.
Lead Plaintiff, Commonwealth of Massachusetts Pension Reserves Investment Trust ("Massachusetts PRIT") and Plaintiff David Wagner, on behalf of the putative class, allege that the price of Massey Energy Company ("Massey") stock was artificially inflated, between February 1, 2008, and July 27, 2010, because Massey and several of its senior executives and directors misled the market about its safety and compliance record and its disregard for safety regulatory compliance. The Defendants move for dismissal of Plaintiffs' Consolidated Amended Class Action Complaint for Violations of the Federal Securities Laws ("CAC"). (Don L. Blankenship, Baxter F. Phillips, Jr., Eric B. Tolbert and Christopher Adkins' Motion to Dismiss Plaintiffs' Consolidated Amended Class Action Complaint ("Officer Defs.'s Mot. to Dismiss") (Document 94); Joint Motion of Massey Energy Company and the Outside Director Defendants to Dismiss the Consolidated Amended Class Action Complaint ("Joint Mot. to Dismiss") (Document 96)). The Joint Motion to Dismiss is supported by the Declaration of Julie A. North and various exhibits regarding "screenshots" of webpages from the United States Mine Safety and Health Administration's ("MSHA") website. Plaintiffs move to strike these exhibits. (Plaintiffs' Motion to Strike Exhibits B-H to the Declaration of Julie A. North in Support of Defendants' Motions to Dismiss ("Mot. to Strike") (Document 100)).
After careful review of the motions and appropriate submissions relative thereto and for the reasons that follow, the Court grants the Plaintiffs' motion to strike and denies the Defendants' motions to dismiss.
This civil action, filed on April 29, 2010, arises out of the alleged securities fraud committed by Massey and several of its officers and directors. Massey, a Delaware Corporation with its headquarters in Richmond, Virginia, is the fourth largest coal producer in the United States and the largest coal producer in the regions of West Virginia, Kentucky and Virginia.
On January 19, 2006, a fire claimed the lives of two miners at Alma No. 1 mine in West Virginia. At the time, Alma No. 1 mine was operated by Massey subsidiary Aracoma Coal Company. As a result, investigations were conducted by MSHA and the FBI.
Following the 2006 miner deaths and the litigation that followed, Defendant Blankenship and Massey sought to restore the Company's reputation and image by announcing that it had a strong company commitment to the safety of its miners and that it had begun "safety improvement initiatives." Massey began to focus on building investor confidence and goodwill with regulators by stating its commitment to safety and affirming that its organization put the safety of its miners before its production, in its SEC quarterly and annual filings, press releases, and investor presentations. For instance, in its 2007 Annual Report, Massey declared that "a safe mine is a productive mine" and explained its "formula for success [as] S-1 + P-2 + M-3 = shareholder value." The Annual Report detailed the meaning of the equation as "safety first, production second and measurement third." (See CAC, ¶ 82) (highlighting the 2007 Annual Report description of "S-1" as "Safety is Job One"). Additionally, on September 6, 2007, at the Lehman Brothers CEO Energy Conference, Defendant Blankenship stated that:
(CAC, ¶ 85) (emphasis added). In a 2008 press release, Massey emphasized that "safety first" was "not just a slogan" in its organization and, in its 2009 Corporate Social Responsibility Report, stated that "no coal company can succeed over the long term without a total commitment to safety." Throughout the class period, Massey affirmed and restated its commitment to safety and reported to investors that a key safety measurement rate, the NFDL rate, was decreasing year after year for the company.
However, on April 5, 2010, twenty-nine (29) miners died in an explosion and fire at Massey's Upper Big Branch Mine ("UBBM") at Montcoal in Raleigh County, West Virginia. The explosion, one of the deadliest United States coal mining accidents in forty years, led to various news reports regarding Massey's safety violations and investigations. Plaintiffs aver that according to MSHA, the cause of the explosion largely involved basic mine safety practices that were not adhered to; namely, inadequate water sprays, dull cutting bits, and extraordinary levels of float coal dust due to inadequate rock dusting. (CAC, ¶ 191). Plaintiffs further aver that the investigations into the explosion and Massey revealed that despite Massey's public statements that it was an "industry leader in safety" and that production was secondary to safety, Massey and Defendant Blankenship, with the acquiescence of the Board of Directors, had continued to make production a priority over safety.
MSHA began to release data that showed the number and severity of violations at the UBBM increased drastically in 2009 and 2010 as production increased.
After the tragic UBBM explosion on April 5, 2010, investors began to learn the truth about "Massey's duplicitous and deceptive schemes." (CAC, ¶ 32.) Several current and former Massey miners began to offer insight regarding the Company's commitment to production over safety. (See CAC, ¶ 103-105) (miners interviewed on the National Public Radio ("NPR") and testifying before the House Labor Committee revealing ventilation problems at UBBM that were reported, but not fixed.) For example, a miner on site at the UBBM explosion testified before the House Labor Committee on July 13, 2010, regarding directives he and others received that made them work in conditions that were unsafe, and also testified about another miner who was told to falsify a report to cover up inadequate mine ventilation. (CAC, ¶ 16) (miners told to "cut coal going into our air supply ... [w]e mined this way for 2,000 feet"; "we were made to load coal before all the shields and ventilation were in place so someone could call Mr. Blankenship to say we were `in the coal;'" and another miner was told "by upper management to fix the books to proper air readings when the section had virtually no air.")
Additionally, miners testified before the House Labor Committee on May 24, 2010, about an early notification system at UBBM where Massey guards would send signals to mine management that an MSHA inspector was on the property. (CAC, ¶ 166.) (Former Massey employee testified that "[W]hen an inspector came by the guard shack they would ... call the sections and tell them we have an inspector on the property and make sure everything was right and if it wasn't to fix it.") In their CAC, Plaintiffs allege that various confidential witnesses "have come forward" to corroborate this miner's testimony. Confidential witness No. 4, a "Belt Buster" at UBBM until 2006, stated that when an MSHA inspector arrived at the "guardhouse" a call would be placed to the mine office so that any items that could be a safety violation could be fixed. (CAC, ¶ 167); see also id. ¶¶ 169-70 (confidential
A criminal investigation at UBBM revealed that Hughie Elbert Stover, Chief of Security at UBBM, who "was very close to Blankenship and served as his personal driver during the class period, employed a secondary radio channel, called the `Montcoal channel,' to give early notification to miners of the arrival of MSHA inspectors so that they could cover up safety violations prior to inspection, and ordered the disposal of thousands of pages of documents stored in the Barracks at [UBBM]" when he knew that the FBI and MSHA officials were conducting an investigation into the criminal conduct involving the UBBM explosion. (CAC, ¶ 160.)
Miners also testified before the Senate HELP Committee on April 27, 2010, regarding a "light duty policy" at Massey that was used to prevent injured miners from completing the regulatory-required NFDL paperwork. According to a former Massey Keppler miner, "If you got hurt [at Massey], you were told not to fill out the lost time accident paperwork. The company would just pay guys to sit in the bathhouse or stay home if they got hurt — anything but fill out the paperwork." (CAC, ¶ 31.) The miner stated that if you requested the paperwork, you would be singled out and fired. (See CAC, ¶ 31) (another miner, who survived the UBBM explosion, offered similar testimony to the House Labor Committee on July 13, 2010); id. ¶ 144 (another miner offering similar testimony before the Senate HELP Committee on April 27, 2010). On May 20, 2010, at the Senate Appropriations Committee, Cecil Roberts, President of the United Mine Workers of America, testified that his organization had witnesses and Massey employees who had informed them that when a person was injured at Massey, a human resources employee would meet the worker at the hospital and advise the employee that he or she did not have to take time off from work. (CAC, ¶ 145.) The human resources employee would offer the employee an opportunity to come back to work for light duty assignments so that the injury would not have to be reported. (Id.) Mr. Roberts further testified that Defendant Blankenship's compensation included a bonus for reducing lost time accidents. (Id.)
Plaintiffs aver that Defendant Blankenship testified after Mr. Roberts at the May 20, 2010 hearing and did not dispute the testimony. Defendant Blankenship acknowledged that injured miners were given the opportunity to perform light duty assignments, if they were available, rather than receive only 60% of their pay while at home. (CAC, ¶ 146.) However, Defendant Blankenship did not reference the completion, or non-completion, of the requisite NFDL incident paperwork. Plaintiffs further aver that both Defendants Blankenship and Adkins received compensation packages that were calculated, in part, on the company's NFDL rate. In response to the varied investigations that followed the explosion, eighteen (18) of Massey's Directors and Senior executives, including Defendants Blankenship and Adkins, invoked their Fifth Amendment rights. Based on the foregoing, Plaintiffs allege the Defendants knew or should have known about the nature of the safety compliance record at Massey, but failed to disclose any of these relevant statistics and policies to investors or the market.
In their CAC, Plaintiffs assert claims for securities fraud based on the "fraud on the
On September 30, 2010, Massey admitted, in a letter to shareholders, that the sole safety metric, which it had reported to investors during the class period regarding NFDL incident rates, was materially understated for 2007, 2008, 2009 due to lapses in reporting procedures determined by an independent consultant. (CAC, ¶ 30) ("Massey's 2007 NFDL rate was increased from 2.05 to 2.63, or 28%; its 2008 NFDL rate was increased from 1.93 to 2.52, or 30%; and its 2009 NFDL rate was increased from 1.67 to 2.33, or 40%.") Finally, on December 3, 2010, after running the company for twenty years, Defendant Blankenship resigned after public outcry for Massey's disregard for mine safety. On January 29, 2011, Alpha National Resources, Inc., agreed to purchase Massey.
Plaintiffs allege that Massey and its Directors provided false and misleading information to its investors by reporting only one safety metric, the NFDL rate, which was later disclosed as false and manipulated by Massey's policy of requiring injured workers to perform light duty assignments in lieu of NFDL reporting, frequently told investors that it had a commitment to safety, but failed to disclose its policy of an early notification system which announced the presence of MSHA inspectors and failed to reveal its true safety record by the measurement of its compliance with regulations. Plaintiffs further allege that Massey and its Directors were positioned to receive reports and other information about its compliance record and MSHA violations, but either ignored the reports or recklessly disregarded the reports in their pursuit to increase coal production. In light of the foregoing, Plaintiffs allege that Massey's stock price was artificially inflated by Massey's fraud and they suffered economic loss as a result.
Defendants' separate motions to dismiss the CAC are fully briefed and ripe for this Court's consideration.
A motion to dismiss filed pursuant to Federal Rule of Civil Procedure 12(b)(6) tests the legal sufficiency of a complaint or pleading. Francis v. Giacomelli, 588 F.3d 186, 192 (4th Cir.2009); Giarratano v. Johnson, 521 F.3d 298, 302 (4th Cir.2008). "[T]he legal sufficiency of a complaint is measured by whether it meets the standard stated in Rule 8 [of the Federal Rules of Civil Procedure] (providing general rules of pleading) ... and Rule 12(b)(6) (requiring that a complaint state a claim upon which relief can be granted.)" Id. Federal Rule of Civil Procedure 8(a)(2) requires that a pleading must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). This pleading standard requires that a complaint contain "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, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). In Ashcroft v. Iqbal, the United States Supreme Court stated that to survive a 12(b)(6) motion to dismiss, "a complaint must contain sufficient factual matter, accepted as true, `to state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting
Prior to the Private Securities Litigation Reform Act (PSLRA) of 1995, courts considered the sufficiency of a securities fraud complaint under the standard set forth by Rule 9 of the Federal Rules of Civil Procedure. Rule 9 requires a party to "state with particularity the circumstances constituting fraud or mistake[,]". However, the party was permitted to allege generally any "[m]alice, intent, knowledge, and other conditions of a person's mind." Fed. R.Civ.P. 9(b). The PSLRA superseded Rule 9(b) to the extent that it imposed a heightened pleading requirement in actions brought pursuant to Section 10(b) and Rule 10B-5. (Katyle v. Penn Nat'l Gaming, Inc., 637 F.3d 462, 471 n. 5 (4th Cir.2011); 15 U.S.C. § 78u-4(b)(1), (2)). "Under the PSLRA's heightened pleading instructions, any private securities complaint alleging that the defendant made a false or misleading statement must: (1) `specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading,'; and (2) `state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.'"
Thus, when considering a defendant's Rule 12(b)(6) motion, the Court will (1) accept all factual allegations in the complaint as true and (2) consider the entire complaint and other sources courts ordinarily examine for such motions, particularly documents incorporated into the complaint by reference, and matters which are the proper subject of judicial notice. (Katyle, 637 F.3d at 466) (citing Tellabs, 551 U.S. at 322, 127 S.Ct. 2499).
Before the Court turns its attention to the pending motions to dismiss, the Court will consider Plaintiffs' motion to strike as it concerns the scope of the Court's review. In support of their motion to dismiss, Massey and Certain Director Defendants rely on the Declaration of Julie A. North and a plethora of "screenshots" of web-pages from MSHA's website. Defendants contend these exhibits illustrate the manner in which data may be retrieved from MSHA's website using the MSHA Data Retrieval System ("DRS") and provide examples of reports generated from the DRS. In Footnote 4, of the Joint Motion to Dismiss, Defendants assert that the Court "may consider MSHA's website and the data available through it, without converting the motion to one for summary judgment, because Plaintiffs' extensively relied upon MSHA's website, and the data available through it, in their Complaint." (Joint Motion to Dismiss at 8, n. 4). Plaintiffs' move pursuant to Rules 12(d) and
Plaintiffs assert two causes of action: (1) a claim under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission, against the Defendants collectively, (CAC, ¶ 381-87) and (2) a claim under Section 20(a) of the Act, against Officer Defendants Blankenship, Phillips, Tolbert and Adkins (CAC, ¶ 388-392.) Defendants argue that Plaintiffs have filed a consolidated amended class action complaint that is void of any substantive facts to support a claim under Section 10(b) and Rule 10b-5, and because the cause of action in count one is deficient, Plaintiffs' second claim is also fatally flawed.
Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful for any person, directly or indirectly "[t]o use or employ, in connection with the purchase or sale of any security ..., [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors." The implementing regulation, SEC Rule 10b-5, declares it unlawful:
17 C.F.R. § 240.10b-5. The Supreme Court of the United States has "implied a private cause of action from the text and purpose of [Section] 10(b)" for purchasers or sellers of securities injured by its violation. Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. ___, ___, 131 S.Ct. 1309, 1317, 179 L.Ed.2d 398 (2011) (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 318, 127 S.Ct. 2499, 168
Collectively, Defendants argue that Plaintiffs have filed a 165-page pleading that is void of any substantive facts to support a claim under Section 10(b) and Rule 10b-5 and assert that Plaintiffs' CAC fails as a matter of law for the following reasons: (1) The alleged misleading statements made by the Company about its safety compliance record, even if presumed to be true, lacked the requisite specificity to perpetrate a fraud on the market, given that accurate information about the Company's safety compliance record was available to the market throughout the class period on the MSHA website; (2) Plaintiffs have failed to plead scienter adequately; (3) Plaintiffs are not entitled to the presumption of reliance; and (4) Plaintiffs have failed to state a coherent theory of loss causation. The Court will consider each of these challenges.
Defendants invite the Court to find that Plaintiffs' allegations — regarding the nature and extent of Massey's safety and compliance record or failure to disclose its regulatory violations — are insufficient to give rise to a claim for securities fraud, where such information was publically available to the market.
"To prevail on a [Section] 10(b) claim, a plaintiff must show that the defendant made a statement that was `misleading as to a material fact.'" Matrixx, 131 S.Ct. at 1318 (quoting Basic Inc. v. Levinson, 485 U.S. 224, 238, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988)). Pursuant to the PSLRA, when a plaintiff's claim is based on alleged misrepresentations or omissions of a material fact, the complaint must "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." (15 U.S.C. § 78u-4(b)(1) (emphasis added)); see also Matrixx, 131 S.Ct. at 1318, n. 4; Teachers' Retirement System of Louisiana v. Hunter, 477 F.3d 162, 172 (4th Cir.2007). However, "it is not enough ... [that a plaintiff] point to a false statement — the misrepresentation must concern a material fact." Sec. Exch. Comm'n v. Pirate Investor LLC, 580 F.3d 233, 240 (4th Cir.2009) (citing Basic Inc. v. Levinson, 485 U.S. 224, 238, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988) ("It is not enough that a statement is false or incomplete, if the misrepresented fact is otherwise insignificant.")) "Materiality is an objective concept, `involving the significance of an omitted or misrepresented fact to a reasonable investor.'" Longman v. Food Lion, Inc., 197 F.3d 675, 682-83 (4th Cir.1999) (citation omitted). Therefore, the Fourth Circuit has adopted the following standard for a court's consideration of the materiality of any alleged misrepresentation:
Longman, 197 F.3d at 683 (citation omitted); Phillips v. LCI Int'l, Inc., 190 F.3d 609, 613 (4th Cir.1999) ("If a reasonable investor, exercising due care, would gather a false impression from a statement, which would influence an investment decision, then the statement satisfies the initial element of a [Section] 10(b) claim.") Moreover, "fraudulent corporate statements must be examined in context and in light of the `total mix' of information made available to investors." Phillips v. LCI Int'l, Inc., 190 F.3d 609, 613 (4th Cir.1999) (citing Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988)).
Plaintiffs, in forty-seven (47) pages of their CAC, allege statements made by Massey and Defendant Directors which they contend are "materially false and misleading statements and omissions regarding Massey's regulatory compliance, the safety of its operations, its costs of production, and the ability to maintain or increase the rate of metallurgical coal production at the Company." (CAC, ¶¶ 200.) To summarize Plaintiffs' allegations, Plaintiffs generally assert an exception to three categories of statements made by Defendants. First, Plaintiffs allege that Defendants consistently made false and misleading statements regarding Massey's nonfatal days lost (NFDL rate) beginning on February 1, 2008, the first day of the class period, through March 24, 2010. Second, Plaintiffs allege that during the class period, Defendants made various false and misleading statements professing Massey's commitment to and focus on safety. For example: statements that safety is Massey's "job one every day" (CAC, ¶ 203); Massey "endeavor[s] to conduct ... mining operations in compliance with applicable federal, state, and local laws and regulations" (CAC, ¶ 207); Massey's assertion that it is a "recognized industry leader in safety" (CAC, ¶ 230); and the statement that Massey "has a strong tradition of safety excellence because we make it a priority every day" (CAC, ¶ 247). Third, Plaintiffs allege, notwithstanding Defendants' identification of "risk factors" in its Annual SEC 10-K reporting, its statement that "violations during mining operations occur from time to time" and that Massey's costs and liabilities were impacted by "increasingly strict federal, state, and local environment, health and safety and endangered species laws, regulations and enforcement policies" were misleading given the frequency with which Defendants violated mining regulations. (CAC, ¶¶ 208, 239, 244, 257). Plaintiffs allege that these categories of statements occurred throughout the entire class period and had an immediate impact on stock pricing. Plaintiffs assert that these statements and omissions "created or maintained inflation in Massey's stock price during the Class Period, ... by preventing price declines that would have resulted from complete, accurate, and truthful disclosure of information about the safety and regulatory compliance of Massey mines and other concealed conditions of the Company's operations." (CAC, ¶¶ 201.)
As a threshold matter, the Court finds that Plaintiffs, in their CAC, adequately identify statements alleged to have been misleading or false. After each such statement, Plaintiffs assert the reason or reasons why the statement is misleading, and then allege a basis to support the materiality of the alleged fact. The Court will consider each category of misstatements and omissions.
As to the first category, Plaintiffs allege Defendants represented to the market that NFDL rates "are the benchmark the coal industry uses to measure safety" (CAC, ¶ 305) and reported "NFDL rates of 2.05 for the year 2007, 1.94 for the year
Plaintiffs also allege that the use of the NFDL was misleading to investors in that the rate did not disclose Massey's record of compliance with federal and state regulations. To that end, Plaintiffs have also pled statements indicating that Massey's S & S citation rate was worse than the national industry average during the class period. (CAC, ¶¶ 123-125.)
The next category asserted by Plaintiffs relates to statements made by Defendants concerning their commitment to safety. The Court has previously provided several examples of the nature of these statements. Plaintiffs allege that "statements professing that safety was the `first priority every day' [at Massey] are "false and misleading when made because production, not safety, was the first priority at Massey during the Class Period." (CAC, ¶ 204). Plaintiffs allege that the falsity of the statement "is demonstrated by unsafe working conditions at Massey mines, particularly the Company's Large underground and surface mines, which had the worst fatality rate in the nation, and had a worse than national industry average performance as measured by MSHA-issued S & S citations and Elevated Enforcement Actions." (Id.) In support of its allegations, Plaintiffs argue that contrary to Defendants assertions that safety at its mines were improving, there were red flags, i.e., above average fatality rate, S & S citation rate, and Elevated Enforcement Actions rates, that were ignored by the Defendants. Plaintiffs allege that Defendants' statements of being an industry leader in safety are capable of being proven false given the number of safety violations found at Upper Big Branch mine alone. Plaintiffs allege in the first three months of 2010 alone, Upper Big Branch mine was the subject of "124 citations and 53 assessed penalties totaling $188,769." (CAC, ¶ 176.) These allegations are sufficiently plead in that they exhibit the false nature of the Defendants' statements with respect to being an "industry leader" in safety. Defendants argue that Plaintiffs' allegations that Massey asserted false or
The third category of statements identified by Plaintiffs as material misrepresentations or omissions concern the statements made by Defendants in their SEC filings with respect to the risk factor created by the mine industry and the regulation of federal and state agencies. Defendants argue that Plaintiffs' allegations of misleading warnings, that Massey mines could be temporarily or permanently closed, or that its operations could be stopped based on Massey's failure to comply with safety laws, are insufficient. Plaintiffs allege these warnings were misleading inasmuch as Massey had already failed to comply with the regulations. Defendants' argument of insufficiency is based on the fact that Massey's previous failure to comply with federal safety regulations was fully disclosed through MSHA's website and through Massey's corporate filings. Defendants acknowledge that their annual corporate filings included the following statement, "even with our substantial efforts to comply with extensive and comprehensive regulatory requirements, violations during mining operations occur from time to time." (Defendant Massey and the Outside Director Defendants' Mem. at 9 (citing CAC, ¶ 207.)) Plaintiffs have asserted that this statement is misleading because Massey violated federal law and regulations deliberately and frequently, and not "from time to time." Defendant argues that the frequency with which they incurred mining violations was available to the market and Plaintiffs. Therefore, Defendants argue that the facts Plaintiffs claim were misrepresented in Massey's risk warnings were publicly available, and are, therefore, not actionable. Finally, Massey argues that it warned investors of the very risk that Plaintiffs now claim was not disclosed; namely, interruptions of production and regulatory risks.
The Court has previously considered the Defendants' "truth-on-the-market" defense and found that consideration of it and review of the MSHA website would require a factual determination that is not permissible at the 12(b)(6) stage of litigation. Therefore, Defendants' contention that the extent and nature of its compliance record could be found on the MSHA website will not preclude the Court from finding that Plaintiffs' allegations are sufficient to assert a Section 10(b) claim. Plaintiffs, in their allegations, are challenging the truthfulness of the statement Massey made about the frequency of its violations and the potential effect on production such violations could have. Defendants have stated that the violations occurred
In conclusion, the Court finds that Plaintiffs have sufficiently pled allegations to satisfy the heightened pleading standards of Rule 9(b) and the PSLRA in their identification of false and misleading statements.
With respect to the second element of a Section 10(b) claim, Defendants assert that Plaintiffs have failed to plead facts sufficient to support a strong inference that any of the Defendants acted with the intent to defraud. A plaintiff seeking to establish liability under Section 10(b) and Rule 10b-5 must allege a defendant "acted with scienter, `a mental state embracing intent to deceive, manipulate, or defraud.'" Matrixx, 131 S.Ct. at 1323 (internal quotations and citations omitted). "Under the PSLRA, a plaintiff must `state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.'" Matrixx, 131 S.Ct. at 1324 (citing 15 U.S.C. § 78u-4(b)(2)(A)). The Supreme Court has instructed that "[t]his standard requires courts to take into account `plausible opposing inferences.'" (Id.) (citing Tellabs, 551 U.S. at 323, 127 S.Ct. 2499.) To plead the necessary mental state, "negligence is not enough[,]" rather "[a] plaintiff must show either `intentional misconduct'
The Officer Defendants argue that Plaintiffs have failed to plead with particularity what each individual defendant knew and when each individual defendant knew it. All of the Defendants challenge Plaintiffs' allegations that Massey or the individual directors: knew about or participated in the actions of Hughie Elbert Stover in the operation of an "early warning notification system," disregarded "red flags" that would have revealed such a scheme, knew about the "light duty work policy" and participated in any manner to encourage injured miners not to complete the NFDL paperwork, or that they knew about the "lapses in reporting" of the NFDL injury rate or had reason to suspect the reports were inaccurate prior to September 30, 2010. Additionally, the Officer Defendants challenge whether Plaintiffs have pled adequately the "motive to defraud on behalf of any of the individual defendants." Specifically, Defendants Blankenship and Adkins contest Plaintiffs' allegations that they had a motive to defraud the market given that they received bonuses relating to the NFDL rate.
Considering the entirety of the CAC, as the Court must in its analysis of this element, the theory serving as the basis for Plaintiffs' Section 10(b) claim is that Massey and its Directors intentionally misled the public to believe that Massey put safety before production, was operating its mines in a safe manner, with a new commitment to protecting the lives of its miners, and that its commitment to "safety first" would minimize regulatory risk to the company's costs and production, thereby artificially inflating its stock price. In support of this theory, the Court has already found that Plaintiffs adequately pled with sufficient particularity that Defendants made false and misleading statements to investors regarding the company's safety. The Court finds Defendants' assertions inadequate to persuade the Court that Plaintiffs did not plead particular facts giving rise to the strong inference that Massey and the Director Defendants engaged in conduct with the intent to deceive.
The alleged facts in this case indicate Defendants made frequent statements regarding Massey's commitment to safety and detailed the Company's accomplishments of their safety goals through the use of the NFDL incident rate. The individual directors consistently signed various SEC filings and/or made direct statements to investors during presentations or in press releases applauding the company for its achievement of a lower than national average NFDL rate in 2007-2009 or applauding its use of new safety programs. The
The Court's finding is further bolstered by Plaintiffs' allegations that miners made statements indicating Massey engaged in
Section 10(b) claims require a plaintiff to have relied upon the defendant's deceptive acts. Erica P. John Fund, Inc. v. Halliburton Co., ___ U.S. ___, ___, 131 S.Ct. 2179, 2184-2185, 180 L.Ed.2d 24 (2011) (citing Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 159, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008)). "The traditional (and most direct) way a plaintiff can demonstrate reliance is by showing that he was aware of a company's statement and engaged in a relevant transaction — e.g., purchasing common stock-based on that specific misrepresentation." (Id. at 2185.) However, the Supreme Court recognized that this limited proof of reliance would place "an unrealistic
The pleading practice, in this Circuit, requires that a plaintiff, as a precursor to proof, allege loss causation in the complaint, "with sufficient specificity to enable the court to evaluate whether the necessary causal link exists" between the defendant's alleged fraud and the plaintiff's economic harm. Katyle, 637 F.3d at 465-66 (quoting Teachers' Ret. Sys. v. Hunter, 477 F.3d 162, 186 (4th Cir.2007)). The determination here is largely "fact-dependent." Therefore, "specificity sufficient to plead loss causation will vary depending on the facts and circumstances of each case." (Id. at 471.) "[T]he facts alleged in the complaint ... need not conclusively show that the securities' decline in value is attributed solely to the alleged fraud rather than to other intervening factors[,]". However, a party is required to allege facts to show that the misrepresentation or omission was "one substantial cause of the investment's decline in value." In re Mut. Funds Inv. Litig., 566 F.3d 111, 128 (4th Cir.2009); Katyle, 637 F.3d at 472. Put another way, "the complaint must allege a sufficiently direct relationship between the plaintiff's economic loss and the defendant's fraudulent conduct." Katyle, 637 F.3d at 472 (citing Miller v. Asensio & Co., 364 F.3d 223, 232 (4th Cir.2004)). Moreover, "[l]oss causation... requires a plaintiff to show that a misrepresentation that affected the integrity of the market price also caused a subsequent economic loss." Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. ___, ___, 131 S.Ct. 2179, 2186, 180 L.Ed.2d 24 (2011). To sufficiently plead loss causation under a fraud on the market theory, a party must provide a basis on which to conclude corrective disclosures revealed "new facts" suggesting the company perpetuated a fraud on the market. Katyle, 637 F.3d at 473 (citing Teachers', 477 F.3d at 187). "Corrective disclosures must present facts to the market that are new, that is, publicly revealed for the first time, because, `if investors already know the truth, false statements won't affect the price.'" (Id. at 473) (citing Schleicher v. Wendt, 618 F.3d 679, 681 (7th Cir.2010)). The disclosure must "at least relate back to the misrepresentation and not to some other negative information about the company." (Id.) (citing In re Williams Sec.
A plaintiff can successfully allege the causal connection via one of two approaches. With respect to the first approach, a plaintiff asserting a fraud on the market theory must demonstrate a causal relationship by identifying "corrective disclosures" that "revealed to the market the undisclosed truth" and causes the decline in share price. These corrective disclosures must reveal to the market, in some sense, the fraudulent nature of the practice about which plaintiff complains. The second approach by which a plaintiff can successfully allege causation is by pleading that a previously concealed risk materialized, causing the plaintiff's loss. Defendants assert that Plaintiffs fail to allege a coherent theory of loss causation under either of the two approaches.
Plaintiffs allege that the putative class was harmed when "the artificial inflation in Massey's share price was eliminated as the result of price declines accompanying news of the true state of the Company's operations[.]" (Pls.' Opp'n at 41.) To that end, Plaintiffs allege that five specific sets of "corrective events" removed the artificial inflation of Massey's shares. Generally, Plaintiffs allege these "corrective events" caused Massey's stock price to decline: (1) the UBBM explosion, together with "statements by government regulators, mineworkers and media regarding the longstanding and undisclosed safety violations," on April 6 and April 7, 2010, was an "immediate manifestation of the extent and the magnitude of the risks concealed from investors[]"; (2) inspections and investigations after the explosion, on April 13 through April 16, 2010, at Massey's other operations led to additional revelations that a "willful disregard of safety and regulatory requirements was not confined to UBB"; (3) Massey's April 22, 2010 disclosure of its First Quarter Earning Results contained statements quantifying "for the first time" the "immediate financial impact of its illegal and unsafe mining practices," together with the news that the Circuit Court of Kanawha County issued an order to show cause why Massey should not be held in contempt for violating its settlement agreement in the derivative shareholder action that resulted from the 2006 miner tragedy; (4) revelations on April 30, 2010, and May 17, 2010, that Massey faced criminal investigations by the FBI and Department of Justice as a result of "regulatory and safety problems that had been fraudulently concealed from investors provided a further manifestation of the hidden risks arising from defendants' misconduct[]"; and (5) Massey's Second Quarter Earnings released on July 27, 2010, revealed larger corrections of earning results based on the correction of safety and regulatory violations which had a bigger impact on Massey's production rates and mining expense than previously expected. (See Pls.' Opp'n at 42; CAC, ¶ 333.) In sum, Plaintiffs allege its loss causation is supported by the decline in Massey's stock price which occurred after information regarding its alleged safety and compliance record became known to the public, following the UBBM explosion. Plaintiffs also assert that its loss causation can be supported by the explosion, itself, which revealed a materialization of the risk that Massey "fraudulently concealed
The Court finds that Plaintiffs have appropriately pled allegations sufficient to support loss causation. While the five alleged corrective disclosures provide this Court with a basis to conclude that "new facts" were revealed which would suggest that Defendants perpetrated a fraud on the market by omitting the extent of its safety compliance record, the Court finds that the materialization of the risk of Massey's misleading statements was realized in the UBBM explosion. In this case, the allegations, accepted by the Court as true, indicate that prior to the tragic UBBM explosion, Defendants did not directly disclose any facts to investors about its safety and compliance record with the exclusion of the lone safety metric of the NFDL. After the April 5, 2010 explosion at the UBBM, MSHA and various media outlets began to release data about the nature of violations cited at UBBM and other Massey mines. This data included the number of violations Massey had amassed in recent years, including at UBBM, and the extent of those violations, which included citations for ventilation and air quality of the mines. Plaintiffs have alleged that MSHA, as a result of on-site investigations of the UBBM explosion, revealed that the "cause of the Explosion largely involved basic mine safety practices that were not adhered to: inadequate water sprays, dull cutting bits, and extraordinary levels of float coal dust due to inadequate rock dusting." (CAC, ¶ 192.) Therefore, the explosion and the cause of the explosion revealed to the market the fraudulent nature of which Plaintiffs complain, specifically, that Defendants mislead the market about the safety at its mines and its commitment to put production over safety. Therefore, the Court finds that Plaintiffs have sufficiently alleged particular facts supporting an allegation that its losses were caused by Massey's misleading and false statements about the safety of its mines.
Plaintiffs, in their second count, assert a claim under Section 20(a) of the Securities and Exchange Act of 1934 against the Officer Defendants by contending that the Officer Defendants by virtue of their positions, stock ownership, and actions were controlling persons of Massey who "had the power to, and did, directly and indirectly, exercise control over Massey, including the content and dissemination of statements that Plaintiffs' allege are false and misleading." (Am. Compl., ¶ 390.) Plaintiffs allege that these Defendants "were provided with and/or had access to reports, filings, press releases and other statements alleged to be misleading prior to and/or shortly after they were issued and had the ability to prevent the issuance or correct the statements[]" (id.) and had an "awareness of the Company's operations and/or intimate knowledge of the false financial statements filed by the Company with the SEC and disseminated to the investing public." (Id. ¶ 392.) Plaintiffs allege these Defendants had the power to influence and control the decision-making of Massey, and did so, including the dissemination of the various statements alleged to be false and misleading. Pursuant to Section 20(a) of the Securities Exchange Act of 1934:
15 U.S.C. § 78t(a). To state a prima facie case under Section 20(a), a plaintiff must allege (1) a predicate violation of Section 10(b), and (2) control by the defendant over the primary violator. (In re Mut. Funds Inv. Litig., 566 F.3d 111, 129-30 (4th Cir.2009) (citing Maher v. Durango Metals, Inc., 144 F.3d 1302, 1305 (10th Cir.1998))). "Once the plaintiff establishes a prima facie case of control, the burden shifts to the defendant to show a lack of culpable participation or knowledge." (Id. at 130.) "[U]ltimately, as a complex factual question, assessing control person liability is not ordinarily subject to resolution on a motion to dismiss, and dismissal should be granted only when a plaintiff does not plead any facts from which it can reasonably be inferred the defendant was a control person." (Id.) (internal citations and quotations omitted).
All of the Defendants argue that because Plaintiffs fail to establish the predicate violation under Section 10(b), their dependent Section 20(a) claim also fails. Plaintiffs, in a footnote to their opposition, assert that they have sufficiently pled claims for primary violations and that the Individual Defendants do not contest they were controlling persons of Massey at all relevant times, requiring this Court to "uphold the associated controlling person claims." (Pls.' Opp'n at 49, n. 65.) Defendants do not contest Plaintiffs' assertion in their replies. Therefore, since Defendants only challenged the sufficiency of the claim with respect to the predicate violation, the Court finds that Plaintiffs' Section 20(a) claims survive the instant motions to dismiss.
In conclusion, for the reasons stated herein, the Court does hereby
The Court
(CAC, ¶ 118.)
Second, respecting the "additional facts [proffered by Plaintiffs] that could, only if necessary, be alleged in a second amended complaint," the Court finds that consideration of these "proffers" are inappropriate given the current stage of the case. Moreover, the Court, on March 9, 2012, notified the parties of its observation of the various "qualified statements" made by Plaintiffs regarding their "request for leave to replead" their CAC and indicated that it did not locate any motion to amend the pleading in the record. (See Order (Document 135)). The Court ordered Plaintiffs to provide the Court with a copy of the motion to amend, to the extent they believed such a motion had been filed, together with the proposed amended pleading by March 12, 2012. Plaintiffs, through counsel, responded with a statement of "clarification" wherein they indicate that "the three Supplemental Proffers were not intended to serve as motions to amend [the CAC] ... [b]ecause Plaintiffs believe their existing Complaint is sufficient they did not file such a motion[.]" (Plaintiffs' Clarification in Response to the Order Dated March 9, 2012 (Document 136)). Plaintiffs asserted that they sought to provide the Court with additional facts that were learned after the filing of the Complaint, to "preview what additional facts or legal claims might be included in a second amended complaint (should one be allowed)." (Id. at 2) (citation omitted). Therefore, in light of these representations, the Court will not consider Plaintiffs' "proffers" in its consideration of the pending motions to dismiss.
Basic, 485 U.S. 224, 241-42, 108 S.Ct. 978 (citing Peil v. Speiser, 806 F.2d 1154, 1160-1161 (3d Cir.1986)).
