Plaisance et al v. Schiller et al, No. 4:2017cv03741 - Document 123 (S.D. Tex. 2019)

Court Description: MEMORANDUM OPINION AND ORDER granting 101 MOTION to Dismiss 97 Amended Complaint, granting 102 MOTION to Dismiss 97 Amended Complaint, granting 103 MOTION to Dismiss the Amended Complaint, granting 104 MOTION to Dismiss 97 Amended Complaint, granting 105 MOTION to Dismiss 97 Amended Complaint, denying Request for Leave to Amend Complaint. (Signed by Judge Sim Lake) Parties notified. (aboyd, 4)

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Plaisance et al v. Schiller et al Doc. 123 United States District Court Southern District of Texas ENTERED IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION KRISTEN PLAISANCE, ROBBIE PLAISANCE, RICHIE CORLEY, CHARLES F. LEEKLEY, BRETT MORRIS, HENRY NEGRETTE, JIM NESBITT, CINDY SPARACINO, RICHARD SPARACINO, CHRISTIAN SCHICK, JACK GOSTL, SANTIAGO CORDOVEZ, FLOYD BONE, TOM HOWLAND, MICHAEL MERNAH, BEN A. SEALE, JOE SHUPAK, MARSHALL WHITMER, BILL WALTERS, ROBERT ROIG, JOSEPH C. ROSSO, and ARTHUR D. SECOR, Plaintiffs, v. JOHN D. SCHILLER, JR., D. WEST GRIFFIN, HILL A FEINBERG, NORMAN M.K. LOUIE, WILLIAM COLVIN, DAVID M. DUNWOODY, CORNELIUS DUPRE II, KEVIN FLANNERY, SCOTT A. GRIFFITHS, JAMES LaCHANCE, and UHY LLP, March 14, 2019 David J. Bradley, Clerk § § § § § § § § § § § § § § § § § § § § § § § § § CIVIL ACTION NO. H-17-3741 § § Defendants. MEMORANDUM OPINION AND ORDER This action is brought by plaintiffs, Kristen Plaisance, Robbie Plaisance, Rickie Corley, Charles F. Leekley, Brett Morris, Henry Negrette, Jim Nesbitt, Cindy Sparacino, Richard Sparacino, Christian Schick, Jock Gostl, Howland, Michael Mernah, Ben Santiago Cordovez, A. Seale, Joe Floyd Bone, Tom Shupak, Marshall Whitmer, Bill Walters, Robert Roig, Joseph C. Rosso, and Arthur D. Dockets.Justia.com Secor (collectively, "Plaintiffs"), against defendants, UHY LLP ("UHY"), and ten individual defendants (collectively, "Individual Defendants"): ("Griffin"), ("Louie") , John D. Hill Schiller A Feinberg William ("Dunwoody") , ("Feinberg"), Colvin Cornelius ("Schiller"), Norman ("Dupre") , II West David ("Colvin"), Dupre D. Griffin M. K. Louie Dunwoody M. Kevin Flannery ("Flannery"), Scott A. Griffiths ("Griffiths"), and James LaChance ("LaChance") , for common law fraud and alleged violations of 10(b) and 20(a) of the Securities Exchange Act of 1934 (Exchange §§ Act), 15 U.S.C. 78j (b), §§ thereunder, 17 C.F.R. § 78t(a) and Rule 10b-5 promulgated 240.10b-5, during the period beginning on September 28, 2007, and ending on December 30, 2016, arising from statements and representations regarding Energy XXI Ltd. ( "EXXI" or the "Company" ) . § Plaintiffs also assert claims for violations of 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), and for breach of fiduciary duty against the Individual Defendants all of whom served as members of EXXI's Board of Directors. are UHY LLP' s Motion to Dismiss Pending before the court ( "UHY' s MD") (Docket Entry No. 101), Defendant D. West Griffin's Motion to Dismiss the Amended Complaint ("Griffin's MD") (Docket Entry No. 102) , Defendant Norman M.K. Louie's Motion to Dismiss the Amended Complaint ("Louie's MD") (Docket Entry No. 103), Defendant John D. Schiller, Jr.'s Motion to Dismiss No. the 104) , Amended Amended and The Complaint Complaint ("Schiller's Director Defendants' ("Director Motion Defendants' -2- MD") MD") (Docket to Entry Dismiss (Docket the Entry No. 105). For the reasons stated below, the defendants' motions to dismiss will be granted. I. Procedural History and Alleged Facts Plaintiffs initiated this action on September 6, filing in the Southern District of New York Violation of the Federal Securities Law, a 2017, by Complaint for Common Law Fraud, and Breach of Fiduciary Duty (Docket Entry No. 1), asserting claims for fraud and violation of promulgated § 10(b) of the Exchange Act and Rule 10b-5 thereunder. against violation of § all defendants, and claims for 20(a) of the Exchange Act and breach of fiduciary duty against the Individual Defendants. On December 1, 2017, the Southern District of New York entered an Order pursuant to 28 U.S.C. § 1404(a) Entry No. 52). transferring the action to this court On February 12, 2018, defendants dismissal (Docket Entry Nos. 85, 86, 89, 93, and 94). (Docket moved for On March 29, 2018, Plaintiffs filed an Amended Complaint for Violation of the Federal Securities Law, Common Law Fraud, and Breach of Fiduciary Duty ("Plaintiffs' Amended Complaint") which they reassert complaint. (Docket Entry No. the same claims asserted in their initial On May 18, 2018, defendants filed the pending motions to dismiss Plaintiffs' Amended Complaint 105). (Docket Entry Nos. 101- On July 16, 2018, plaintiffs filed responses to each of the pending motions to dismiss August 97) , in 29, 2018, defendants (Docket Entry Nos. filed replies in support of motions to dismiss (Docket Entry Nos. 118-122). -3- 111-115), and on their Plaintiffs' Amended Complaint alleges that EXXI was founded by Schiller and Griffin in 2005 to acquire, explore, develop, and operate oil and natural gas properties onshore in Louisiana and Texas and offshore in the Gulf of Mexico Shelf, funded by a $300 million initial public offering of common stock traded on the London Investment Stock Exchange Alternative ("AIM") . 1 Market Plaintiffs allege that Schiller served as EXXI's President, Chief Executive Officer ("Board") from ("CEO"), the and member of the Board of Directors company's inception through and including February 2, 2017, when EXXI announced the termination of Schiller's employment as President, CEO, and member of the Board in a Current Report filed with the SEC on Form 8-K. 2 From EXXI's founding in 2005 through and including October 15, 2015, Schiller also served as Chairman of the Board. He was stripped of that title by the Board on October 9, 2015, following an internal investigation that found he borrowed affiliates, some funds of from whom personal provided acquaintances services to or EXXI their or its subsidiaries, and that in 2014 he personally borrowed $3 million from defendant Louie effective December 15, before 2014. 3 Louie was appointed to the Board Plaintiffs allege that as EXXI's 1 Plaintiffs' Amended Complaint, Docket Entry No. 97, p. 15 ~~ 64-65. All page numbers for docket entries in the record refer to the pagination inserted at the top of the page by the court's electronic filing system, CM/ECF. 2 Id. at 6 ~ 20. -4- Board Chairman and CEO, Schiller signed the Company's annual reports filed with the SEC on Forms 10-K and 10-K/A. 4 Plaintiffs allege that defendant Griffin served as EXXI' s Chief Financial Officer ( "CFO") and Board member from the Company's inception through and including October 20, 2014, when EXXI announced Griffin's resignation in a press release and a Current Report filed with the SEC on Form 8-K/A on December 1, 2014, following BDO USA, LLP's ("BDO") acquisition of the Texas practice of UHY, which provided independent public accounting services to EXXI. 5 Plaintiffs allege that as CFO, Griffin signed EXXI' s quarterly and annual reports filed with the SEC on Forms 10-Q, 10-K, and 10-K/A, and that Griffin is responsible for the content of the reports that he signed. 6 Plaintiffs allege that UHY was engaged to audit EXXI's financial statements and to express an opinion on whether those financial statements fairly presented the financial condition of the Company. 7 Specifically, UHY was engaged to audit EXXI's financial statements for the years ended June 30, 2011, 2012, 2013, and 2014. 8 UHY's Plaintiffs allege that each audit opinion contained opinion that 4 Id. ~~ 20-21. 5 Id. at 9 ~ 39. 6 Id. ~~ 37-38. 7 Id. at 19 ~ 85. 8 Id. it audited EXXI's -5- financial statements "in accordance with the standards of the Public Company Accounting Oversight Board (United States)" (the "PCAOB"), and perform [ed] 9 that it "plan [ned] the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects," 10 and that each audit stated: "'In our opinion Energy XXI maintained, (Bermuda) in all material respects, Limited and subsidiaries effective internal control over financial reporting' for the year in question." 11 Plaintiffs allege that in addition to serving on EXXI's Board, defendant Colvin was Chairman of the Audit Committee and a member of the Nomination and Governance Committee; 12 defendant Flannery was a member of the Audit Committee and the Nomination and Governance Committee; 13 defendant Dunwoody was Chairman of the Remuneration Committee and a member of the Audit Committee; 14 defendant Griffiths served on the Audit Commit tee and the Compensation Commit tee; 15 defendant Feinberg was Lead Independent Director, Chairman of the Nomination and Governance Committee, a member of the Compensation 9 Id. at 20 ~ 92. 10Id. ~ 93. 11 Id. at 20-21 ~ 94. 12 Id. at 11 ~ 48. 13 Id. ~ 49. 14 Id. at 11-12 ~ 50. 15Id. at 12 ~ 51. -6- Committee, and an ex officio member of the Audit Committee; 16 and defendant Dupre was Chairman of the Compensation Committee and a member of the Nomination and Governance Committee. 17 Plaintiffs allege that between 2006 and 2010, EXXI completed five major acquisitions for aggregate cash ("Marlin") in February 2006 for of (1) Marlin Energy, approximately $2.5 billion of borrowed funds: L.L.C. consideration approximately $448.4 million; (2) certain Louisiana Gulf Coast producing properties from affiliates of Castex Energy, Inc. ( "Castex Properties") 2006 for approximately $312.5 million; (3) in June certain Gulf of Mexico shelf properties from Pogo Producing Company ("Pogo Properties") in June 2007 for approximately $415.1 million; certain Gulf of (4) Mexico shelf oil and natural gas interests from MitEnergy Upstream LLC, a subsidiary of Mitsui & Co., Ltd. November 2009 for $276.2 million; and ("MitEnergy (5) Interests") in certain shallow water Gulf of Mexico shelf oil and natural gas interests from affiliates of Exxon Mobil Corporation ("ExxonMobil Acquisition") in December 2010 for $1.01 billion. 18 Plaintiffs allege that on July 31, 2007, following EXXI' s acquisition of the Pogo Properties in June of 2007, EXXI announced that in addition to trading on the AIM in London, its common stock ~ 52. 16 Id. 17 Id. at 12 ~ 53. 18 Id. at 16 ~~ 69-71. -7- was approved for trading national exchange. 19 in the United States on the Plaintiffs allege that on August 12, NASDAQ 2011, EXXI's common stock was listed for trading on the NASDAQ Global Select Market under the symbol "EXXI. " 20 Plaintiffs allege that because many institutional investors are prohibited from investing in companies that do not meet certain minimum requirements such as the requirements needed to be listed on the NASDAQ Global Select Market exchange, listing thereon gave capital and increased market liquidity. 21 EXXI greater access to Plaintiffs assert their belief that after a reasonable opportunity for discovery, evidence will show that but for EXXI's use of cash flow hedge accounting, EXXI would not have met the minimum requirements for listing on the NASDAQ Global Select Market. 22 Plaintiffs allege that from 2010 to 2013 EXXI made optimistic and positive statements about its ultimately unsuccessful ultradeep exploration program, particularly the Davy Jones No. 1 and No. 2 wells, that were false and misleading when made. 23 Plaintiffs allege that in early 2014 defendants caused EXXI to acquire EPL, an independent oil and natural gas exploration and production company, and assert their belief that after a reasonable 19 Id. at 16-17 ~ 72. 2oid. at 17 ~ 73. 21 Id. ~ 74. 22Id. ~ 76. 23Id. at 25-32 ~~ 108-43. -8- opportunity for discovery evidence will show that Schiller pursued the acquisition without customary and reasonable due diligence, and consequently that EXXI overpaid for EPL, 24 that following the acquisition one of EPL's Board of Directors, defendant Griffiths, joined EXXI's Board and changed EPL's method of accounting from successful efforts accounting method, 25 reported in EXXI' s March 31, 2014, to full EXXI' s cost accounting reported financial goodwill statements from shortly before the acquisition, to match rose the EXXI's from zero period ended to $329 million reported by EXXI in its June 30, 2014, financial statements filed immediately after the acquisition. 26 Plaintiffs allege that following EXXI's acquisition of EPL, EXXI issued financial statements that were false and misleading because EXXI failed to perform a quantitative goodwill impairment test and therefore failed to recognize goodwill impairments for EPL or for its other oil and gas properties 27 and failed to disclose the existence of a personal loan from defendant Louie to defendant Schiller. 28 Plaintiffs allege that on or about December 14, 2014, EXXI common stock was cancelled for trading on the AIM in London by 24Id. at 33-34 ~~ 147-155. 25Id. at 35-36 ~~ 159-68. 26Id. at 37 ~ 173. 27Id. at 38-49 ~~ 176-230. 2Bid. at 56 ~~ 269-70. -9- action of the Board taken pursuant to a shareholder vote at the annual meeting held on November 4, 2014. 29 Plaintiffs allege that in September of 2015, following a change in independent auditors, EXXI was required to restate more than four years of financial statements to eliminate the use of accounting. 30 hedge Plaintiffs allege that EXXI's financial statements for the years ended June 30, 2011, 2012, 2013, 2014, and filed with the 2015, SEC on August 26, 2011, August 9, 2012, August 21, 2013, August 28 and December 23, 2014, and September 29, 2015, were materially false and misleading because they stated that EXXI did not use hedging for speculative or trading purposes. 31 Plaintiffs allege that "[u]ntil EXXI's financial statements were corrected on September 29, 2015, the Company's publicly filed financial statements for at least the years ended June 30, 2011, 2012, 2013, and 2014, and for all the intervening quarters materially misstated and did not fairly and accurately present the Company's financial condition and its results of operations. " 32 Plaintiffs also allege that EXXI's disclosure that it was required to restate its financial statements to eliminate cash flow hedge accounting was materially false and misleading because it made it appear that the reason for the restatement was a 29Id. at 18 ~ 78. 3oid. at 17-18 ~ 77. 31 Id. at 52 ~ 249. 32Id. at 54 ~ 257. -10- mere technical deficiency in documentation, when the true reason for the restatement was that the Company was hedging for improper purposes, including speculating on future oil and natural gas prices or manipulating reported revenue and earnings . 33 Plaintiffs allege that on April 16, 2016, EXXI sought protection from its creditors by filing a voluntary Chapter 11 bankruptcy petition in the Southern District of Texas. 34 Plaintiffs allege that on April 20, 2016, EXXI was informed by the Listing Qualifications Department of NASDAQ that its stock would be delisted from the NASDAQ for failure to meet the minimum listing qualifications. 35 Plaintiffs allege that on December 13, 2016, the Bankruptcy Court for the Southern District of Texas approved EXXI's amended plan of reorganization. 36 II. Standards of Review Defendants argue that Plaintiffs' Amended Complaint should be dismissed pursuant to Federal Rule of Civil Procedure 12(b) (6) for failure to state a claim for which relief may be granted. A Rule 12(b) (6) motion tests the formal sufficiency of the pleadings and is "appropriate when a defendant attacks the complaint because it fails to state a legally cognizable 33Id. at 54-55 ~ 259. 34 Id. at 68-69 ~ 328. 3sid. at 18 ~ 79. 36Id. ~ 81. -11- claim." Ramming v. United States, 281 F.3d 158, 161 (5th Cir. 2001), cert. denied sub nom. Cloud v. United States, 122 S. Ct. 2665 (2002). The court must accept the factual allegations of the complaint as true, view them in a light most favorable to the Plaintiffs, reasonable inferences in the Plaintiffs' favor. and draw all Id. To defeat a motion to dismiss pursuant to Rule 12(b) (6) a plaintiff must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. (2007). "A claim has facial plausibility when the plaintiff pleads factual content that v. allows Twombly, the court 127 S. to Ct. draw 1955, the 1974 reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Igbal, 129 S. Ct. 1937, 1949 (2009) 127 S. Ct. at 1965). 'probability (citing Twombly, "The plausibility standard is not akin to a requirement,' but it asks for more than a possibility that a defendant has acted unlawfully." Id. sheer (quoting Twombly, 127 S. Ct. at 1965) . "Where a complaint pleads facts that are a defendant's liability, 'merely consistent with' short of the line between entitlement to relief.'" Id. possibility and it 'stops plausibility (quoting Twombly, 127 S. Ct. of at 1966). When considering a motion to dismiss courts generally are limited to the complaint and its proper attachments. Portfolio Equities, Inc., 540 F. 3d 333, 338 (5th Dorsey v. Cir. 2008). Courts may also rely on "'documents incorporated into the complaint by reference, and matters of which a -12- court may take judicial notice."' Bank PLC, motion to complaint, Id. See also Lone Star Fund V (U.s.) , L. P. v. Barclays 594 F.3d 383, dismiss, any 387 "[t]he documents (5th Cir. court's attached 2010) review to the (When considering a is limited complaint, to the and any documents attached to the motion to dismiss that are central to the claim and referenced by the complaint.") Stanley Dean Witter, 224 F. 3d 496, (citing Collins v. Morgan 498-99 (5th Cir. 2000)). In securities cases courts may take judicial notice of the contents of public disclosure documents that are required by law to be filed and are filed with the SEC with the caveat that these documents may be considered only for the purpose of determining what statements they contain; not for proving the truth of their contents. Lovelace v. Software Spectrum Inc., 78 F.3d 1015, 1018 & n.1 (5th Cir. 1996) (citing and adopting rule of Kramer v. Time Warner Inc., 937 F.2d 767, 774 (2d Cir. 1991), and explaining that rule does not apply to other forms of disclosure such as press releases and announcements at shareholder meetings) . III. Analysis Defendants argue that all of the claims asserted against them should be dismissed because Plaintiffs have failed to state a claim for which relief may be granted. A. Federal Securities Law Claims Defendants argue that the securities claims asserted against them should be dismissed because Plaintiffs have failed to satisfy -13- the pleading requirements for stating either a primary claim under § lO(b) or Rule lOb-S, or a claim for control person liability under§ 20(a), and because the factual allegations do not satisfy the pleading requirements of Federal Rule of Civil Procedure 9(b) or the Private Securities Litigation Reform Act ( "PSLRA") set forth at lS U.S.C. § 78u-4(b). 1. Applicable Law (a) Federal Securities Law Section lO(b) of the Exchange Act makes it unlawful for any person: To use or employ, in connection with the purchase or sale of any security any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors. lS U.S.C. § 78j (b). Rule lOb-S makes it unlawful for any person, directly or indirectly: (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-S. To recover damages § lO(b) and Rule lOb-S, plaintiffs must prove -14- for violations of "(1) a material misrepresentation or omission by the defendant; ( 2) scienter; ( 3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398, (2014). 2015) See also Owens v. Jastrow, (same) . 789 F.3d 529, 535 2407 (5th Cir. To satisfy the materiality requirement, "there must be a substantial likelihood that the disclosure of the omitted fact would have been significantly available." [449] [231] (1988)). judged altered (1976) the the reasonable mix' 'total Inc. v. investor of as having information Northway, Inc., 96 S. made Ct. (citing Basic Inc. v. Levinson, 108 S. Ct. 978, The Fifth Circuit has stated that "[m]ateriality is in the circumstances." (5th Cir. by TSC Industries, 2126, not viewed abstract, but in light of the surrounding Krim v. BancTexas Group, Inc., 989 F.2d 1435, 1448 1993). Inclusion of cautionary language along with disclosure of any firm-specific adverse facts or assumptions is relevant to the materiality inquiry, but "cautionary language as such is not per se dispositive of this inquiry." Rubinstein v. Collins, 20 F.3d 160, 168 (5th Cir. 1994). Scienter is "a mental manipulate, or defraud." Ltd., 127 S. Ct. 2499, state embracing intent to deceive, Tellabs, Inc. v. Makor Issues & Rights, 2507 (2007} (quoting Ernst Hochfelder, 96 S. Ct. 1375, 1381, n.12 (1976)}. require a specific intent to deceive; instead, -15- & Ernst v. Scienter does not the scienter element of a federal securities fraud claim may be satisfied by proof that the defendant acted with severe recklessness, which is "limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it." Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir. 1994) (quoting Shushany v. Allwaste, Inc., 992 F.2d 517, 521 (5th Cir. 1993)). strong Plaintiffs "must allege facts sufficient to raise a inference of scienter with respect to each individual defendant." R2 Investments LDC v. Phillips, 401 F.3d 638, 643 (5th Cir. (citing Southland Securities 2005) Solutions, Inc., 365 F.3d 353, 365 Corp. v. (5th Cir. 2004) INSpire Ins. (holding that plaintiffs claiming securities fraud against multiple defendants must "distinguish among those they sue and enlighten each defendant as to his or her particular part in the alleged fraud")). Group allegations that "the defendants" or "the company" knew something do not meet factual that standard. allegations Southland, contained in the 365 entire F.3d at 366. complaint must The be considered in determining whether plaintiffs' allegations raise a strong inference of scienter. To withstand a motion to dismiss, the facts alleged must permit an inference of intentional deception that is at least equally as compelling as any alternative inference. Cir. 2009) Lormand v. US Unwired, Inc., 565 F.3d 228, 254 (5th (quoting Tellabs, 127 S. Ct. at 2499, 2510). -16- ;; Plaintiffs must show a causal connection between the company's revealing of the truth regarding an earlier misrepresentation and a See Alaska subsequent decline in the company's stock price. Electrical Pension Fund v. Flowserve Corp., 572 F.3d 221, 229 (5th Cir. This corrective disclosure must be "related to" or 2009). "relevant to" the alleged fraud, meaning the disclosed information must make the existence of the alleged fraud "more probable than it would be without that alleged fact." Public Employees' Retirement System of Mississippi, Puerto Rico Teachers' Retirement System v. Amedisys, 135 S. Inc., Ct. 769 F.3d 313, 321 2892 (2015). The (5th Cir. corrective 2014), cert. denied, disclosure "can be gradually perceived in the marketplace through a series of partial disclosures." Id. at 322. Partial disclosures are viewed collec- tively and considered as a whole to determine when cumulative facts support a corrective disclosure pleading standard. that meets the loss causation Id. at 325. The parties agree that the applicable statute of limitations and repose is 28 U.S.C. § 1658(b) . 37 Under 28 U.S.C. § 1658(b) an action for securities fraud must be brought no later than two years after the discovery of the facts constituting the violation or five years after the occurrence of the violation, whichever is earlier. 37 See, e.g., Director Defendants' MD, Docket Entry No. 105, pp. 29-30, and Plaintiffs' Memorandum of Law in Opposition to the Director Defendants' Motion to Dismiss Amended Complaint ("Plaintiffs' Opposition to Director Defendants' MD"), Docket Entry No. 115, p. 26. -17- The period of repose misrepresentation or begins to omission securities law violation. run that from forms the the date of the basis of the Hall v. Variable Annuity Life Insurance Co., Civil Action No. H-11-3639, 2012 WL 12877431, at *4 (S.D. Tex. May 31, 2012), aff'd, 727 F.3d 372 (5th Cir. 2013) (citing In re Exxon Mobil Corp. Securities Litigation, 500 F.3d 189, 199-200 (3d Cir. 2007) ("[W]e hold that the repose period applicable to§ 10(b) claims as set out in§§ 9(e) and 1658(b) (2) begins to run on the date of the alleged misrepresentation."). this action on September September 6, 2012. 2017, 38 6, Because Plaintiffs filed the date of repose is Plaintiffs state that they "do not assert any claims for any false, misleading, prior to that date." 39 Nevertheless, citing Rubinstein, 20 F.3d at 170 n.41, statements Plaintiffs were argue made prior or incomplete statements made that to "to the September Defendants had a duty to correct - 6, extent 2012, such as EXXI' s that untrue about which 2 011 annual report, which improperly utilized hedge accounting - the omission of a corrective disclosure in subsequent statements made after that date are actionable." 40 In Rubinstein, acknowledged that 20 F.3d defendants at 170 have a n.41, the duty under Fifth Rule Circuit lOb-S to 38 See Complaint for Violation of the Federal Securities Law, Common Law Fraud, and Breach of Fiduciary Duty, Docket Entry No. 1. 39 Plaintiffs' Opposition to Director Defendants' Entry No. 115, p. 26. 4oid. -18- MD, Docket correct statements if those statements have become materially misleading in light of subsequent events, but the Rubinstein court neither held nor stated that material omissions made before the date of repose remain actionable because defendants have an ongoing duty to correct such omissions. omissions made before the Plaintiffs' argument that material date of repose are nevertheless actionable because defendants had an ongoing duty to correct those omissions would negate the five-year statute of repose by allowing plaintiffs to revive time-barred claims simply by asserting that defendants had an ongoing duty to correct their material omissions. Any claims based on misrepresentations or omissions allegedly made before September 6, 2012, are therefore barred by the statute of repose. See Hall, 2012 WL 12877431, at *4 (citing Malhotra v. The Equitable F. Supp. Life Assurance 2d 299, 305-06 Society (E.D.N. Y. of the 2005) United States, 364 (granting defendants' 12(b) (6) motion on the ground that the statute of repose began to run on the day of the initial omission) . (b) Rule 9(b) Federal Rule of Civil Procedure 9(b) provides that "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." 9 (b) . Fed. R. Ci v. P. Plaintiffs must plead the elements of their Rule 10b-5 claims with particularity. See Goldstein v. MCI WorldCom, 340 F.3d -19- 238, 245 (5th Cir. 2003) (citing Williams v. WMX Technologies, Inc., 112 F.3d 175, 177 (5th Cir.), cert. denied, 118 S. Ct. 412 (1997)). Particularity is required so that the complaint provides defendants with fair notice of the plaintiffs' claims, protects defendants from harm to their reputation and goodwill, reduces the number of strike suits, and prevents plaintiffs from filing baseless claims and then attempting to discover unknown wrongs. See Tuchman, 14 F.3d at 1067. Pleading fraud with particularity in this circuit requires "the particulars of 'time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what [that person] obtained thereby.'" at 1068 (quoting Tel-Phonic Services, Inc. v. TBS International, Inc., 975 F.2d 1134, 1139 (5th Cir. 1992)). Fort James Corp., 470 F.3d 1171, 1174 Id. See also Carroll v. (5th Cir. 2006) (quoting United States ex rel. Riley v. St. Luke's Episcopal Hospital, 355 F.3d 370, 381 (5th Cir. misrepresentation and 2004) ("In cases concerning fraudulent omission of facts, Rule 9(b) typically requires the claimant to plead the type of facts omitted, the place in which the omissions should have appeared, and the way in which the omitted facts made the representations misleading.")) . "A dismissal for failure to plead fraud with particularity as required by rule 9(b) is a dismissal on the pleadings for failure to state a claim." Southland, 365 F.3d at 361 (citing Shushany, 992 F.2d at 520-520). -20- (c) Private Securities Litigation Reform Act In 1995 Congress amended the Exchange Act through the passage of the PSLRA, 15 U.S.C. § 78u-4(b) (1). In relevant part the PSLRA provides: (1) Misleading statements and omissions In any private action arising under this chapter in which the plaintiff alleges that the defendant-(A) made an untrue statement of a material fact; or (B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading; the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed. (2) Required state of mind (A) In general Except as provided in subparagraph (B), in any private action arising under this chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. (3) Motion to dismiss; stay of discovery (A) Dismissal requirements for failure to meet pleading In any private action arising under this chapter, the court shall, on the motion of any defendant, -21- dismiss the complaint if the requirements paragraphs (1) and (2) are not met. 15 U.S.C. § of 78u-4 (b). In ABC Arbitrage Plaintiffs Group v. Tchuruk, 291 F.3d 336, 350 (5th Cir. 2002), the court coalesced the pleading requirements in the PSLRA and Rule 9(b) into a succinct directive for litigants: [A] plaintiff pleading a false or misleading statement or omission as the basis for a section 10(b) and Rule 10b-5 securities fraud claim must, to avoid dismissal pursuant to Rule 9(b) and 15 U.S.C. §§ 78u-4(b) (1) & 78u-4(b) (3) (A): (1) specify each statement alleged to have misleading, i.e., contended to be fraudulent; been (2) identify the speaker; (3) state when and where the statement was made; (4) plead with particularity the contents of the false representations; (5) plead with particularity what the person making the misrepresentation obtained thereby; and (6) explain the reason or reasons why the statement is misleading, i.e., why the statement is fraudulent. This is the "who, what, when, where, and how" required under Rule 9 (b) in our securities fraud jurisprudence and under the PSLRA. Additionally, under 15 U.S.C. § 78u4(b) (1), for allegations made on information and belief, the plaintiff must: ( 7) state with particularity all facts on which that belief is formed, i.e., set forth a factual basis for such belief. In Indiana Electric Workers' Pension Fund IBEW v. Shaw Group, Inc., 537 F.3d 527, 533 (5th Cir. 2008), the Court reiterated that the PSLRA heightened the pleading standards for private claims of securities fraud by requiring -22- plaintiffs to allege with particularity why each one of defendants' omissions was misleading under 15 u.s. c. § representations 78u-4 (b) (1), or and by requiring plaintiffs to plead with particularity those facts giving rise to a strong inference that the required state of mind under 15 U.S.C. defendant § acted with the 78u-4(b) (2). In Tellabs, 127 S. Ct. at 2510, the Supreme Court held that a complaint will survive a motion to dismiss "only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged." However, in Lormand, 565 F.3d at 267, the Fifth Circuit held that the PSLRA did not heighten pleading standards for all six elements of securities fraud. text of 15 U.S.C. § The Fifth Circuit explained that the plain 78u-4(b) (4) provides only that "the plaintiff shall have the burden of proving that the act or omission of the defendant . . caused the loss for which the plaintiff seeks to recover damages." Id. at 255 n.18. Nothing in this language expressly or impliedly heightens the standard of pleading to loss causation. Thus, when considering a motion to dismiss, courts are "not authorized or required to determine whether the plaintiff's plausible inference of 4(b) (4)] is inferences, equally as [they] under the PSLRA." The or and causation more [under 15 U.S.C. plausible than other § 78u- competing must in assessing allegations of scienter Id. at 267. PSLRA contains individuals loss a safe harbor provision that protects corporations from -23- liability for certain forward-looking statements that later prove false. this protection the statement at issue must be To qualify for "accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement" or be "immaterial." 5 (c) (1) (A) (i, ii). "To avoid the safe harbor, 15 u.s.c. 78u- § plaintiffs must plead facts demonstrating that the statement was made with actual knowledge of its falsity." U.S.C. § 78u-5 (c) (1) (B) i Southland, 365 F.3d at 371 (citing 15 Nathenson v. Zonagen Inc., 267 F.3d 400, 409 (5th Cir. 2001)). 2. Application of the Law to the Alleged Facts (a) Defendant UHY UHY argues that the federal securities law claims asserted against Complaint it should fails to be dismissed allege facts because Plaintiffs' capable of Amended establishing an actionable misstatement or omission of fact arising from its audit opinions or a strong inference of scienter. 41 UHY also joins in the arguments presented in the Director Defendants' MD with respect to the securities fraud claims regarding group pleading, loss causation, and the statute of repose. 42 41 UHY's MD, Docket Entry No. 101, p. 12. See also UHY LLP's Reply in Support of the Motion to Dismiss the Amended Complaint (UHY's Reply"), Docket Entry No. 119, pp. 6-15. 42 UHY' s MD, Docket Entry No. 101, p. 7 n. 2. -24- (1) Alleged Misstatements and Omissions Omnicare, Citing Inc. v. Construction Industry Pension Fund, Laborers 135 S. District Ct. 1318 Council (2015), UHY asserts that its audit reports are statements of opinion, not fact, and argues that the securities law claims asserted against it should be dismissed because plaintiffs fail to allege an actionable misstatement or omission of fact arising from its audit reports. 43 At least one court in this district has held that audit reports are statements of opinion, otherwise. See Johnson v. CBD Energy Ltd., Civil Action H-15-1668, 2016 WL 3654657, 'statement opinion'"). at *10 regarding not fact, (S.D. Tex. and plaintiffs July 6, compliance 2016) do not argue ("an auditor's inherently [is] one of Nevertheless, without addressing the applicability of the Supreme Court's Omnicare opinion, plaintiffs respond that UHY' s argument ignores the fact that Plaintiffs have alleged materially false and misleading statement [s] in UHY' s own audit reports. As alleged in the Amended Complaint, each of the Company's annual financial statements included an affirmative statement prepared by UHY that it audited the financial statements "in accordance with the standards of the [PCAOB] (United States) . " ~ 92. Plaintiffs also allege UHY represented that it planned and performed the audits to obtain reasonable assurance about whether the Company maintained effective internal control over its financial reporting. ~ 93. And UHY also affirmatively represented in each audit report that EXXI maintained effective internal control over its financial reporting. ~ 94. 43 Id. at 20. -25- As alleged in the Amended Complaint, and as explained above, those statement [s] were materially false and misleading, and UHY had no basis for making them. 44 Asserting that UHY audited EXXI' s annual financial statements included in EXXI's 2011, 2012, 2013, and 2014 annual reports filed with the SEC on Form 10-K, plaintiffs allege that "[t] hose financial statements were erroneous," 45 because [a] s EXXI announced in a press release and a Current Report on Form 8-K filed with the SEC on September 8, 2015, the Company's previously issued consolidated financial statements for the years ended June 30, 2011, 2013 and 2014, along with its consolidated 2012, financial statements for the quarters ended September 3 o, 2013 and 2014, December 31, 2013 and 2014, March 31, 2014 and 2015, and June 30, 2014, should no longer be relied upon and would be reinstated. ~ 83. 46 In Omnicare the Court clarified how trial courts should evaluate whether a plaintiff has alleged an actionably misleading statement of opinion. Omnicare provides "two potential avenues for plaintiffs to establish the falsity of an opinion." p.l.c. "every Securities Litigation, 2016 WL 3090779, . statement [of opinion] *9. BP First, explicitly affirms one fact: that the speaker holds the stated belief." 1327. at In re Omnicare, 135 S. Ct. at A speaker can be liable for an opinion statement if the speaker did not in fact hold that opinion. Second, "depending on the circumstances," a reasonable investor could 44 Plaintiffs' Memorandum of Law in Opposition to Defendant UHY LLP's Motion to Dismiss Amended Complaint ("Plaintiffs' Opposition to UHY's MD"), Docket Entry No. 111, p. 17. 45 Id. at 5. 46 Id. at 5-6. -26- understand an opinion statement to convey facts about the speaker's basis for holding that view. Specifically, [a speaker's] statement of opinion may fairly imply facts about the inquiry the issuer conducted or the knowledge it had. And if the real facts are otherwise, but not provided, the opinion statement will mislead by omission. Id. at 1322. Thus, even if a speaker's opinion is sincerely held, the statement may nonetheless be actionable under 10b-5' s omissions provision if: (i) the speaker "omits material facts about the issuer's inquiry into or knowledge concerning a statement of opinion," and (ii) "those facts conflict with what a reasonable investor would take from the statement itself." In re BP p.l.c. Securities Litigation, MDL No. 4:10-MD-2185, 2016 WL 3090779, at *9 (S.D. Tex. May 31, 2016) s. Ct . at 13 2 9 ) . (quoting Omnicare, 135 The Omnicare Court emphasized that the latter avenue to liability does not allow a plaintiff to circumvent the particularity and materiality requirements of a fraud claim by alleging in general terms that the defendant improperly failed to reveal the basis for his opinion, or failed to disclose "some fact cutting the other way." 135 S. Ct. at 1329 (explaining that "[r]easonable investors understand that opinions sometimes rest on a weighing of competing facts; indeed, the presence of such facts is one reason why [a speaker] may frame a statement as an opinion, thus conveying uncertainty") . But the Supreme Court also recognized that reasonable investors expect a speaker's statement of opinion to fairly align with the possession at the time. information in his or her Id. In their Amended Complaint Plaintiffs allege that UHY' s unqualified audit reports were materially false and misleading because, among other things: (a) the audits -27- were not conducted in accordance with PCAOB standards; and (b) EXXI's financial statements did not fairly present the Company's true financial position and results of operations and did not comply with GAAP [Generally Accepted Accounting Principles] . 47 In support of their allegations that UHY' s audit reports were materially false and misleading, Plaintiffs allege 102. The Company's with GAAP as they dollars in loans vendors and from a an affiliate of shareholders. financial statements did not comport failed to disclose the millions of to Defendant Schiller from EXXI' s confederate on the Board who was also one of the Company's largest 103. Contrary to the Audit Report, the audit was not conducted in accordance with PCAOB standards. In particular, PCAOB Standard AU § 316 sets forth certain fraud risks or red flags, including: (a) unsupported balances or transactions; (b) inconsistent, vague or implausible responses from management arising from inquiries or analytical procedures; (c) lack of timely and appropriate documents; (d) missing documents; and (e) evasive or unreasonable responses of management to audit reports. 104. In conducting its audits of the financial statements in EXXI's annual reports, Defendant UHY ignored the most obvious of red flags, the missing documentation necessary to permit the Company to use cash flow hedge accounting. 48 Missing from the Plaintiffs' Amended Complaint are allegations of fact capable of proving that UHY did not subjectively believe its audit opinions when they were issued. Therefore, to state a claim against UHY for its audit reports, Plaintiffs must allege, with particularity, 47 ~ facts capable of establishing that UHY knew, Plaintiffs' Amended Complaint, Docket Entry No. 100. 48 Id. at 24 §§ 102-04. -28- 97, p. 22 but omitted to include in its audit reports, material facts that contradict its opinion statements. Pipeline, L.P. (S.D. Tex. See In re Plains All American Securities Litigation, 2 017) . 49 245 F. Supp. 3d 870, 905 The facts that Plaintiffs allege contradict UHY' s audit opinions concern loans that defendant Schiller received from defendant Louie and EXXI vendors and lack of documentation needed to support EXXI's use of hedge accounting. 50 But missing from Plaintiffs' Amended Complaint are allegations of facts capable of establishing that when UHY issued its audit reports, UHY knew or should have Plaintiffs' known about Schiller's loans. Moreover, since Amended Complaint expressly alleges that Schiller's loans were undisclosed until October of 2015, long after UHY issued the audit opinions about which Plaintiffs complain, 51 the facts 49 In Plains All American Judge Rosenthal explained that [s]howing that a statement was false or misleading using this Omnicare prong blurs the lines between the falsity and scienter elements of an Exchange Act claim. Determining whether a statement is false or misleading turns on what the speaker knew, making it similar to the scienter inquiry. But even though this Omnicare inquiry overlaps with the scienter inquiry, the two are not identical. Here, the issue is whether the plaintiffs have adequately pleaded that the defendants were aware of material facts that: ( 1) contradicted or undermined their compliance opinion statements; and ( 2) that an investor would reasonably believe were not true based on that statement. The scienter issue is the individual's state of mind in stating the opinion. 245 F. Supp. 3d at 905. 50 Plaintiffs' Opposition to UHY' s MD, Docket Entry No. 111, p. 17. 51 Plaintiffs' Amended Complaint, Docket Entry No. 97, p. 3 , 22, p. 4 , 24, p. 10 ~ 44. -29- alleged in Plaintiffs' contention that UHY' s Amended audit Complaint reports were contradict false their and misleading because they omitted information about Schiller's loans. 52 Also missing from Plaintiffs' Amended Complaint are any allegations of fact capable of establishing that when UHY issued its audit reports, UHY knew or should have known that EXXI lacked documentation accounting. needed to support Asserting that its use of cash flow hedge "EXXI lacked the specific required documentation to utilize cash flow hedge accounting, " 53 Plaintiffs argue that [i] n any adequate audit, UHY would have requested or looked for the required documentation as part of its audit procedures. Had UHY done so, it immediately would have learned that EXXI lacked the required documentation for hedge accounting. Had UHY performed any adequate audit, the lack of specific required documentation would have been obvious to it. 54 A careful review of Plaintiffs' Amended Complaint, however, only reveals allegations that UHY's audit reports were false when made because EXXI later restated some of its financial statements. 55 Plaintiffs allege that in December of 2014, following UHY's acquisition by BDO, EXXI engaged BDO as its successor auditor, and 52 See Plaintiffs' Opposition to UHY' s MD, Docket Entry No. 111, p. 16 n.7 (apparently contradicting the allegations in ~ 102 of Plaintiffs' Amended Complaint by stating: "Plaintiffs do not allege that UHY' s audits were deficient because they failed to uncover the loans."). 53 55 Id. at 15. See pp. 50-51 Plaintiffs ~~ 239-243. I Amended Complaint, -30- Docket Entry No. 97 I that in September of 2015 EXXI filed a Current Report on Form 8-K with the SEC announcing consolidated financial 2011, 2012, 2013, that the Company's previously issued statements for the years ended June 30, and 2014, and for the quarters ended September 30, 2013 and 2014, December 31, 2013 and 2014, March 31, 2014 and 2015, and June 30, 2014, should no longer be relied upon and would be restated. 56 Plaintiffs allege that 252. During the preparation of its annual report on Form 10-K for the year ended June 30, 2015, EXXI and its new auditor, BDO, determined that certain of the Company's oil and gas hedges did not qualify for cash flow hedge accounting treatment. EXXI and BDO determined that the Company's hedge documentation did not specify the hedged items and, therefore, the designations failed to meet the documentation requirements for cash flow hedge accounting treatment. 253. As a result of that determination, EXXI was required to restate its previously issued consolidated financial statements to reflect the unrealized recognition of gains 57 and losses on derivative financial instruments . But missing from Plaintiffs' Amended Complaint are allegations of fact capable reports, of UHY establishing knew or that should when have UHY known issued that its EXXI documentation required to use cash flow hedge accounting. audit lacked Instead, asserting that "[t]he lack of documentation regarding the hedged items could not be a result of a difference of opinion between the Company's auditors BDO and UHY as the Company disclosed that it had 56 Id. at 51 ~~ 244-245. 57 Id. at 53 ~~ 252-53. -31- no documentation regarding what was being hedged, " 58 Plaintiffs allege that UHY's audit reports were false and misleading because absent the missing documentation the audit reports could not have been conducted in accordance with PCAOB Auditing Standards or Generally Accepted Auditing Standards ( "GAAS") . 59 Despite Plaintiffs' Report on Form announcing the 8-K assertion to the contrary, filed with restatement the did not SEC in state the Current September that documentation regarding what was being hedged. EXXI Instead, of 2015 had no EXXI's September 2015 Form 8-K states: [I] n connection with preparing its annual report on Form 10-K for the year ended June 30, 2015 (the "2015 Form 10-K") management of Energy XXI Ltd. (the "Company") and the Audit Committee of its Board of Directors (the "Audit Committee") determined that the contemporaneous formal documentation it had historically prepared to support its initial designations of derivative financial instruments as cash flow hedges in connection with the Company's crude oil and natural gas hedging program did not meet the technical requirements to qualify for cash flow hedge accounting treatment in accordance with ASC Topic 815, Derivatives and Hedging. The primary reason for this determination was that the formal hedge documentation lacked specificity of the hedged items and, therefore, the designations failed to meet hedge documentation requirements for cash flow hedge accounting treatment. 60 EXXI's disclosures in the September 2015 Form 8-K show that EXXI's management reached ~ 58 Id. at 50 59 Id. at 50-51 a judgment different from that previously 235 (emphasis in original) . ~~ 237-43. 60 September 2, 2015, Form 8-K, Exhibit A to UHY's MD, Docket Entry No. 101-1, p. 2. -32- reached regarding the level of specificity required for the documentation of hedged transactions; the disclosures do not show that EXXI had no documentation regarding what was being hedged. Nor do EXXI's disclosures mention UHY or its auditing services as a reason for the restatements. Because Plaintiffs fail allege to facts capable of establishing either that UHY did not sincerely believe the opinions stated in its audit reports, or that when UHY issued its audit reports UHY knew or should have known - but failed to disclose material facts about its inquiry into or knowledge concerning the opinions stated in its audit reports, and that those facts conflict with what a themselves, reasonable i.e., investor would take from the reports information about Schiller's loans and about deficiencies in documentation required to support EXXI's use of cash flow hedge accounting, Plaintiffs have failed to allege facts capable of establishing an actionable misstatement or omission of fact arising from the opinions expressed in UHY's audit reports. See Omnicare, 135 S. Ct. at 1329. below, the Plaintiffs' court concludes Amended Moreover, for the reasons stated that Complaint even were if the capable of facts alleged in establishing an actionable misstatement or omission of fact in UHY's audit reports, Plaintiffs have failed to allege facts capable of raising a strong inference that the misstatements scienter. -33- or omissions were made with (2) Scienter UHY argues that the Exchange Act claims asserted against it should be dismissed because Plaintiffs fail to allege facts capable of establishing a strong inference of scienter. EXXI restated its financial statements for Asserting that fiscal years 2011 through 2014, Plaintiffs argue that the restatements are compelling evidence of UHY' s scienter because "UHY knew, or was severely reckless in not knowing, that EXXI's consolidated annual financial statements were not prepared in accordance with GAAP and did not fairly and accurately present the Company's financial results. " 61 Plaintiffs argue that "UHY has provided no alternative or opposing explanation utilized for cash certifying flow hedge financial statements accounting without in the which EXXI requisite documentation of specific hedged risks. " 62 adequately To plead circumstances supporting a scienter Plaintiffs must allege strong inference that UHY had actual knowledge, or recklessly disregarded, that its audit reports were false or misleading when made or were made without a reasonable basis. See Lovelace, 78 F.3d at 1018-19. have found that the requirement of Circuit courts of appeal "recklessness" in securities fraud cases is especially stringent when a claim is made against an outside auditor like UHY. 61 Plaintiffs' See PR Diamonds, Inc. v. Chandler, 364 Opposition to UHY' s MD, p. 8. 62Id. -34- Docket Entry No. 111, F.3d 671, 693 (6th Cir. 2004) (collecting cases). "Recklessness on the auditor mental part of an independent culpable that it 'approximate[s] entails a state so an actual intent to aid in the fraud being perpetrated by the audited company.'" Id. (quoting Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 121 (2d Cir. 1982)). Thus, Plaintiffs must allege facts capable of establishing not merely that there was a deviation from accounting principles, but that the accounting practices were so deficient that the audit amounted to no audit at all, or an egregious refusal to see the obvious, or to investigate the doubtful, or that the accounting judgments which were made were such that no reasonable accountant would have made the same decisions if confronted with the same facts. Id. at 693-94 Litigation, (quoting 35 F.3d 1407, In 1426 re Worlds of Wonder (9th Cir. 1994)). Securities See also In re Franklin Bank Corp. Securities Litigation, 782 F. Supp. 2d 364, 402 (S.D. Tex. 2011); In re Dell Inc., Securities Litigation, 591 F. Supp. 2d 877, 899 (W.D. Tex. 2008). A careful review of the Plaintiffs' allegations of scienter reveal little more than assertions that UHY's audit reports were false because EXXI later restated certain financial information. Courts in this circuit inferring scienter based in part on improper accounting do inference. so only when other of Litigation, strongly support the See In re ArthroCare Corp. Securities Litigation, 726 F. Supp. 2d 696 (W.D. Tex. 2010) denia 1 s factors media 447 F. reports) ; Supp. 2d (improper accounting practices and -=I~n,__.....:r=-e=----==S~e:::.:l=-·t===-e=l...L.,---'I"-'n=c..:....--=S:<...:e=-c=-u=r..=ic..::t:..:i:..:::e::.=s 693 -35- (S.D. Tex. 2006) (improper accounting practices and overstated revenues, memoranda and meeting minutes revealing that improper accounting potential problems, the defendants methods, explicitly discussed the affirmatively chose to ignore and dismissed an auditor who confronted them about the improper practices) . Plaintiffs' Amended Complaint does not allege media reports or internal company documents that would permit an inference that UHY knew of or recklessly disregarded evidence that EXXI's accounting misrepresented EXXI's financial condition. infer UHY' s scienter, Instead, as reasons to Plaintiffs point to the magnitude of the restatements, and to the reason for the restatements- i.e., lack of specificity in the documentation used to support EXXI's use of cash flow hedge accounting. 63 financials cannot support a But the magnitude of misstated strong inference of scienter absent allegations of facts capable of establishing either that UHY knew or was severely reckless in not knowing of the improper accounting, or that UHY ignored warning signs or red flags indicating that such an inference is merited. See ArthroCare, 726 F. Supp. 2d at 724; Seitel, 447 F. Supp. 2d at 693. Asserting that "the lack of supporting documentation of EXXI' s hedging activities [needed] to permit the Company to utilize hedge accounting was a glaring red flag, giving UHY every reason to know that the financial statements contained material misstatements or 63 Id. at 11-14. -36- omissions, " 64 Plaintiffs argue that "[h] ad UHY performed any adequate audit, the lack of specific required documentation would have been obvious to i.t." 65 But Plaintiffs do not plead any specific facts capable of showing what UHY's audits entailed, how or why they were deficient, or why there is any reason to believe that the alleged deficiencies were opposed to negligent mistakes. purposeful or reckless as Arthrocare, 726 F. Supp. 2d at 735 (citing Dell, 591 F. Supp. 2d at 903). Instead, Plaintiffs rely on the circular reasoning that UHY must have acted with scienter simply because it did not catch the lack of specific documentation for cash flow hedge accounting later identified as the reason for EXXI's restatements. negligent These allegations may support an inference of mismanagement, but they are not sufficient to make intentional or reckless fraud at least as compelling as plausible nonculpable explanations. See Lormand, 565 F.3d at 254 (quoting Tellabs, 127 S. Ct. at 2510). Plaintiffs' pleading on this issue consists of long explanations of the GAAP and GAAS accounting principles allegedly violated, followed by the conclusory statement that UHY clearly violated that principle restatement was issued. 66 64 Id. at 14-15. 65 Id. at 15. based solely the fact that the But the GAAS standards acknowledge that 66 ~~ on Plaintiffs' Amended Complaint, Docket Entry No. 97, pp. 20-24 92-104, pp. 49-51 ~~ 231-43. -37- "even a properly planned misstatement," AU not catch a . audit may not detect a material 23 0. 12; thus, the mere fact that the audits did § later-revised accounting error in the financial statements is not conclusive. Arthrocare, 726 F. Supp. 2d at 735 (citing Supp. In re Dell, 591 F. 2d specifying fraudulent intent or UHY' s at 903) Absent state of mind, facts accounting errors "merely suggest that either management or the accountant missed something, and may have failed to prepare or review the financial statements in accordance with an accepted standard of reasonable care." F. Supp. 2d 630, In re Baker Hughes Securities Litigation, 136 649 (S.D. Tex. 2001) The parties dispute the simplicity and obviousness of the misapplied accounting rules. 67 But reading the Plaintiffs' Amended Complaint and the record in the Plaintiffs' favor, the Amended Complaint does not sufficiently allege that EXXI violated rules that were so clear and obvious as to make its outside auditor either knowingly deceptive or severely reckless in certifying EXXI's figures on the SEC filings. Plaintiffs' factual allegations make it more plausible, or at least as plausible, that UHY to infer that UHY acted negligently than to infer knowingly or recklessly disregarded the presence glaring accounting irregularities or other red flags of in EXXI' s financial statements. Because Plaintiffs have failed to allege facts capable of establishing that when UHY issued its audit reports, UHY knew - or 67 See Plaintiff's Opposition to UHY' s MD, Docket Entry No. 111, pp. 9-11. -38- was severely reckless in not knowing - that its audit opinions contained statements that were false or misleading or that the audit opinions were so deficient that they amounted to "no audit at all," Plaintiffs' raising a allegations against UHY strong inference of scienter. are not capable of See In re Dell Inc., Securities Litigation, 591 F. Supp. 2d at 900. That UHY failed to discover in 2011 and 2014 accounting deficiencies that were not found until 2015 might arguably and at most support an allegation of negligence, 68 but not of fraud. Accordingly, UHY's motion to dismiss the federal securities law claims asserted against it will be granted and those claims will be dismissed with prejudice. (b) Defendant Griffin Griffin argues that the Exchange Act claims asserted against him should be dismissed because he did not make many of the alleged misstatements, because he left EXXI on October 20, 2014 - more than two years before the last alleged misstatement, and because Plaintiffs fail to plead facts capable of raising a strong inference of scienter with respect to statements that he did make. 69 Griffin also joins in all of the arguments presented in the Director Defendants' MD and in the arguments presented in Louie's 68 For the reasons stated in § III.A.2 (e) (3), below, the court concludes that Plaintiffs have failed to plead facts capable of establishing loss causation. 69 Griffin's MD, Docket Entry No. 102, p. 5. -39- MD with respect to alleged "related party transactions." 70 Plaintiffs respond that Griffin's MD should be denied because he is liable for EXXI' s false, misleading, and incomplete financial statements, and because they have adequately alleged scienter with respect to him. 71 (1) Alleged Misstatements and Omissions Plaintiffs allege that Griffin served as EXXI's CFO and Board member from the Company's inception in 2005 through and including October 20, 2014, when EXXI announced Griffin's resignation in a Press Release and a Current Report filed with the SEC on Form 8-K/A on December 1, 2014, following BOO's acquisition of UHY's Texas practice, which had provided independent public accounting services to EXXI. 72 Plaintiffs allege that as CFO, Griffin signed EXXI's quarterly and annual reports filed with the SEC on Forms 10-Q, 10-K, and 10-K/A, and that Griffin is responsible for the content of the reports that he signed and the contained in the Company's press releases. 73 financial information Plaintiffs allege that Griffin was responsible for preparing nearly all of the financial 70 Id. at 5 & n.1. 71 Plaintiffs' Memorandum of Law in Opposition to Defendant D. West Griffin's Motion to Dismiss Amended Complaint ("Plaintiffs' Opposition to Griffin's MD"), Docket Entry No. 112, pp. 7-16. 72 Plaintiffs' Amended Complaint, Docket Entry No. 97, p. 9 73 Id. at 9 ~~ 37-38. -40- ~ 39. statements that were restated after BDO became EXXI's auditor and determined that EXXI's financial statements for 2011 through 2014 should no longer be relied upon. 74 Asserting that [t] he financial statements issued during Griffin's tenure as CEO that had to be restated after his resignation were the annual financial statements for the four years ended June 30, 2011, 2012, 2013, and 2014, and the quarterly financial statements for the quarters ended September 3 0, and December 31, 2013, March 31, 2014, and June 30, 20141 ?S Plaintiffs argue that these financial statements were false and misleading because they were not prepared according to generally accepted accounting principles ( "GAAP") , including ASC Topic 815, which requires the reporting entity to document exactly what was being hedged, specifying the exact items (i.e., the particular monthly well production) to utilize hedge accounting. While Griffin was responsible for EXXI's financial reporting, the Company lacked the necessary documentation for its hedging program to utilize cash flow hedge [accounting] but did so anyhow. 76 Griffin does not plausibly argue that the financial statements he signed that were ultimately restated did not contain statements that were false and misleading. 77 The court concludes, therefore, 74 Plaintiffs' Opposition to Griffin's MD, Docket Entry No. 112, p. 8 (citing Plaintiffs' Amended Complaint, Docket Entry No. 97, p. 51 ~ 245). 75 76 Id. at 8. Id. (citing Plaintiffs' No. 97, pp. 17-18 ~ 77). Amended 77 Complaint, Docket Entry Griffin's MD, Docket Entry No. 102, p. 10 (arguing that "[f]or the reasons explained in the Director Defendants' Motion to Dismiss and Defendant Norman M.K. Louie's Motion to Dismiss the (continued ... ) -41- that Plaintiffs have pled specific facts sufficient to hold Griffin liable for the financial statements that he signed. See Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296, 2302 (2011) ("For purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. 11 The court concludes, however, press releases, Plaintiffs are ). that as to statements made in relying on the group pleading doctrine - a doctrine abolished by the Fifth Circuit in Southland, 365 F.3d at 365. In Southland the Fifth Circuit held that the PSLRA requires plaintiffs to "enlighten each defendant as to his or her particular part in the alleged fraud, so that 11 "corporate officers may not be held responsible for unattributed corporate statements solely on the basis of their titles. Id. 11 Specific facts tying a corporate officer to a statement would include a signature on the document or particular factual allegations explaining the individual 1 s involvement in the formulation of the entire document or specific portion of the document containing the statement. Id. capable showing of Plaintiffs have not pled with particularity facts that statements made in any of the press releases about which they complain are attributable to Griffin. Instead, 77 Plaintiffs attempt to hold Griffin responsible for continued) Amended Complaint, Plaintiffs have not alleged that any statement in those financial statements was false or misleading when made. 11 ) . ( ••• -42- unattributed corporate statements solely on his title as CF0. 78 in the press releases based Accordingly, the court concludes that Plaintiffs have not sufficiently pled specific factual allegations linking Griffin to allegedly false and misleading statements in EXXI's press releases. Scienter (2) Griffin argues that "[a]s explained in the Director Defendants' Motion to Dismiss, Plaintiffs' impermissible attempt to plead scienter based solely on Defendants' positions within EXXI and alleged Complaint." 79 GAAP violations mandates dismissal of their Griffin argues that the only allegations as to his scienter are that (1) his "net worth was dependent upon his investment in EXXI stock and options," Am. Compl. ~ 42; se also id. ~~ 40-41; (2) he had an incentive to "protect his job," id. ~ 42; and (3) he had access to unspecified "material non-public information," e.g., id. ~~57, 59. 80 Griffin argues that Plaintiffs fail to allege that he sold any stock during allegations the are Class Period, internally and that inconsistent 78 Plaintiffs' factual about alleged his Id. at 9 (citing Plaintiffs' Amended Complaint, Docket Entry No. 97, p. 29 ~ 128, p. 34 ~ 157, and p. 36 ~ 166). See also id. at 10 n.2 (asserting that "[s]ince Griffin was the Company's CFO, it is far more likely that he provided the 'numbers' to [the employee who prepared the press releases] so that they could be incorporated in the Company's press releases"). 79 Id. at 10. 80 Id. at 11. -43- motivations because they allege not only that his incentive was to protect his job, but also that he "'resigned over a disagreement regarding the Company's financial related to its ultra-deep [water] its acquisition of EPL. '" 81 disclosures, including those investments and accounting for Asserting that Plaintiffs' theory of his scienter "rests on nothing more than baseless speculation, and is not 'at least as compelling as any opposing inference one could draw from the facts alleged,' " 82 Griffin argues that "[t] he far more compelling inference is that, to wrongdoing occurring within EXXI, the [his] extent there was any resignation is evidence that he was not a participant. " 83 Asserting that EXXI restated its financial statements for four years, Plaintiffs argue that the restatements are compelling evidence of Griffin's scienter because as EXXI's [CFO]- the senior officer directly responsible for assuring the accuracy of EXXI's financial reporting Griffin undoubtedly knew the Company lacked the necessary documentation - i.e., it had no specific documents regarding the hedged items - to utilize hedge accounting under ASC Topic 815. At the very least, Griffin was severely reckless in not knowing so. 84 Plaintiffs also argue that the following allegations support a strong inference of Griffin's scienter: 81 Id. at 12 (quoting Plaintiffs' Entry No. 97, p. 10 ~ 43). (1) the amount of EXXI's Amended Complaint, Docket 82Id. 84 Plaintiffs' Opposition to Griffin's MD, Docket Entry No. 112, p. 11 (emphasis in original). -44- restatements was significant; (2) EXXI's hedging activities were unusually high; (3) Griffin knew or recklessly disregarded the fact that EXXI delayed recognizing impairment of assets that it acquired from EPL despite steadily declining oil and gas prices that caused EPL to write down those same assets ahead of EXXI; and (4) EXXI lost its entire investment in EPL in a year. 85 A complaint for violation of federal securities laws "will survive would [a motion to dismiss] deem the inference of . only if a reasonable person scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged." Tellabs, 127 S. Ct. at 2510. A defendant's signature on an SEC filing with false or misleading statements or omissions cannot by itself support a Central Laborers' Inc., strong inference of Pension Fund v. 497 F. 3d 546, 555 (5th Cir. scienter. See Integrated Electrical Services 2007) ("If we were to accept [this] proffered interpretation of Sarbanes-Oxley, scienter would be established in every case where there was an accounting error or auditing mistake made by a publicly traded company, thereby eviscerating the pleading requirements for scienter set forth in the PSLRA.") 1266 (quoting Garfield v. NDC Health Corp., 466 F. 3d 1255, (11th Cir. adopted the 2006)). Eleventh In Central Laborers' Circuit's test for the Fifth Circuit when Sarbanes-Oxley certifications, i.e., signatures on SEC filings, could support an 85 Id. at 14-15 (citing Plaintiffs' Amended Complaint, Docket Entry No. 97, p. 17 ~~ 75-76, pp. 42-43 ~~ 197-201, p. 46 ~ 220. -45- inference of scienter. 86 [must have] The "person signing the certification had reason to know, or should have suspected, due to the presence of glaring accounting irregularities or other the that flags, ' financial misstatements or omissions." statements contained 'red material Id. In ArthroCare, 726 F. Supp. 2d at 716, an individual defendant confronted with media reports providing "blatant evidence" of the specific accounting fraud at issue nonetheless "continued to defend [the accounting] stridently and deny the allegations." Although the plaintiffs in ArthroCare alleged accounting errors in eight quarterly SEC filings, court held that only and the defendant signed each filing, the two quarterly filings the immediately following the detailed media reports could support an inference of scienter. Id. at 724. In Seitel, 447 F. Supp. 2d at 693, the court held that the defendant's signature on SEC filings supported a strong inference of scienter because the plaintiffs alleged not only improper 86 accounting practices In Central Laborers' , explained that, but also: 4 97 F. 3d at 554, ( 1) overstated the Fifth Circuit [t] he Sarbanes-Oxley Act states that signing officers must certify that they are "responsible for establishing and maintaining internal controls [and] have designed such internal controls to insure that material information relating to the [company] and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which the period reports are being prepared." 15 u.s.c. § 7241(a)4). -46- revenues of 15 percent for the year 2000 and 30 percent for the first 9 months of 2001; (2) memoranda and meeting minutes revealing that the defendants explicitly discussed the improper accounting methods and affirmatively chose to ignore potential problems; and (3) the dismissal of an auditor who confronted the defendants over the improper practices. Plaintiffs contained allege false Id. that Griffin and misleading condition because EXXI signed statements misapplied the SEC of inaccurate accounting EXXI' s accounting documenting use of cash flow hedge accounting. publication of filings figures, that financial standard But or a follow GAAP, without more, does not establish scienter. for "the mere failure to The party must know that it is publishing materially false information, or the party must information." accounting be reckless Lovelace, 78 F.3d at 1020. errors, pervasiveness, severely courts typically in publishing such To infer scienter from examine and repetition of the errors; the magnitude, the simplicity and obviousness of the misapplied rules; and the defendant's apparent See, e.g., ArthroCare, 726 motives for misapplying these rules. F. Supp. frequency, 2d at 721 and ("' [W]hen the number, context of the size, misapplication timing, [of nature, accounting principles] or restatement are taken into account, the balance of the inferences to be drawn from such significantly in favor of scienter."). -47- allegations may shift Plaintiffs argue that the facts they have alleged raise a strong inference of scienter as to Griffin because EXXI misapplied two accounting standards, i.e., the standards for documenting the use of hedge accounting and for reporting asset impairment, the resulting restatements covered four years, and the magnitude of the restatements was significant. Plaintiffs also allege that Griffin was motivated to inflate EXXI's profitability to help EXXI qualify for listing on the NASDAQ Global While Markets. the parties dispute the simplicity and obviousness of the misapplied accounting standards, Plaintiffs' Amended Complaint does not allege facts capable of establishing either that the standards being violated were so clear and obvious as to make Griffin either knowingly deceptive or severely reckless in certifying EXXI's SEC filings, or severely improper. reckless by Plaintiffs' not knowing allegations that EXXI' s regarding accounting the magnitude was of EXXI's misstated financials do not support a strong inference of scienter because "the magnitude of the error does not show that the existence of the error was clear when it was made," Nobilis Health Corp., 211 F. Supp. 3d 936, 955 Schott v. (S.D. Tex. 2016), and because EXXI's improper accounting did not uniformly benefit EXXI or consistently line up with a motive to skew the accounting results to favor EXXI's financial position. 87 87 See UHY's MD, Docket Entry No. 101, objection from Plaintiffs: "For fiscal restated net income was higher than the income."). See also UHY's Reply, Docket -48- See ArthroCare, 726 p. 16 (asserting without years 2012 and 2013 the originally reported net Entry No. 119, pp. 9-12. F. Supp. 2d at 724; Seitel, 447 F. Supp. Moreover, 2d at 693. missing from Plaintiffs' Amended Complaint are any allegations of specific facts connecting Griffin to the accounting violations that led to the restatement of EXXI's financial statements. Nor are there any allegations that Griffin engaged in insider trading or stood to benefit personally from any of the alleged accounting errors. Plaintiffs offer no facts in support of their contention that Griffin signed the financial statements at issue with scienter other than the fact that, like the senior financial managers of every company, he had control over EXXI's accounting policies and procedures. F. Supp. See Izadj oo v. Helix Energy Solutions Group, Inc. , 23 7 3d 492, 516 {S.D. Tex. 2017) (find no scienter for officers where there were no "glaring irregularities or red flags" to put them on notice of material misstatements and omissions in Sarbanes-Oxley certifications or earnings calls) . Plaintiffs cannot demonstrate scienter by relying either on Griffin's position on the Board, Abrams, 292 F.3d at 432, or on the fact that certain financial statements were restated. Laborers', itself, 497 does F.3d at not 546 create (restatement of a strong See Central financial inference of data, by scienter) . Plaintiffs' factual allegations make it more plausible or at least as plausible to infer that when signing the SEC filings at issue Griffin negligently relied on EXXI's accountants and auditors than to infer that he knowingly or recklessly disregarded the presence of glaring accounting irregularities or other red flags in EXXI's -49- financial statements. Laborers', See Tellabs, 127 S. Ct. at 497 F.3d at 555. See also Abrams, 2510; Central 292 F.3d at 433 (recognizing that accounting problems that lead to a restatement of a company's financials can "easily arise from negligence, oversight or simple necessary mismanagement, to support a none of securities therefore concludes that Plaintiffs' which rise fraud to action") the standard The court factual allegations are not sufficient to raise a strong inference of scienter as to Griffin. Accordingly, Griffin's motion to dismiss the Exchange Act claims asserted against him will be granted and those claims will be dismissed with prejudice. (c) Defendant Louie Asserting that he joined EXXI's Board on December 15, 2014, and that his term expired on December 1, 2015, 88 Louie argues that the Exchange Act claims asserted against him should be dismissed because he did not make many of the alleged misstatements, because Plaintiffs allege no facts requiring disclosure of his personal loan to Schiller, and because Plaintiffs rely on group pleading and fail to plead facts capable scienter or loss causation. 89 of raising a strong inference of Plaintiffs respond that Louie's MD should be denied because he knew - but failed to disclose - that he 88 Louie's MD, Docket Entry No. 103, p. 6. See also Plaintiffs' Amended Complaint, Docket Entry No. 97, p. 10 ~~ 44-45. 89 Louie' s MD, Docket Entry No. 103, p. 9. -50- had loaned $3 million to Schiller, because he signed EXXI's 2014 amended Annual Report which had to be restated, and because scienter and loss causation are adequately pled. 90 (1) Alleged Misstatements and Omissions Regarding Louie plaintiffs allege: 22. From EXXI's founding in 2005 through and including October 15, 2015, Defendant Schiller served as Chairman of the Board. He was stripped of that title by the Board on October 9, 2015, following an internal investigation that found he borrowed funds in 2007, 2009, and 2014 from personal acquaintances or their affiliates, certain of whom provided the Company and certain of its subsidiaries with services, and in 2014 he personally borrowed $3 million from Defendant Norman Louie ("Louie") , before Louie was appointed to the Board effective December 15, 2014. At the time of the loan from Louie, Louie was a managing director at Mount Kellet Capital Management, LP, one of the Company's largest shareholders. The internal investigation was prompted by an SEC inquiry. 44. Defendant Louie was appointed to the Board, effective December 15, 2014, by Defendant Schiller and the rest of the Board without election by shareholders, to stand for election by shareholders at the 2015 annual meeting. When Defendant Schiller's secret loan from Defendant Louie was discovered, the Board determined not to nominate Defendant Louie for election as a director at the 2015 annual meeting. 45. During his short tenure on the Board, Defendant Louie signed the Company's Amended 2014 annual report filed on Form 10-K/A with the SEC on December 23, 2014. As a signatory of the annual report issued in the name of the Company and not attributed to an individual author, 90 Plaintiffs' Memorandum of Law in Opposition to Defendant Norman M.K. Louie's Motion to Dismiss ("Plaintiffs' Opposition to Louie's MD"), Docket Entry No. 113, pp. 7-12. -51- Louie is responsible for the content of the annual report he signed. 269. In the Current Report on Form 8-K, filed with the SEC on December 15, 2014, announcing Defendant Louie's appointment to the Board, Defendants caused EXXI to state that there were no related party transactions between Louie and the Company or any of its subsidiaries that would require disclosure pursuant to Item 404 (a) of Regulation S-K, 17 C.F.R. ~ 229.404(a). 270. That statement in the Current Report on Form 8-K was materially incomplete and misleading because it failed to disclose that (a) Louie had loaned Defendant Schiller $3 million and the loan was outstanding at the time the Form 8-K was filed, (b) Louie was at least indirectly interested in the hedge fund MK' s ownership of EXXI common stock, (c) Louie was at least indirectly interested in the M21K partnership between the Company and MK, and (d) Louie was at least indirectly interested in M21K's $123 million asset purchase from EXXI in 2014. All of those transactions were related party transactions requiring disclosure pursuant to Item 404(a) of 91 Regulation S-K. Louie does not argue the Form 10-K/A he signed that was ultimately restated did not contain statements that were false and misleading. 92 The court concludes, therefore, that the plaintiffs have plead specific facts sufficient to hold Louie liable for the financial statement that he signed. ("For purposes of Rule lOb- 5, person or entity with See Janus, 131 S. Ct. at 2302 the maker of a ultimate authority statement is the over the statement, including its content and whether and how to communicate it."). 91 Plaintiffs' Amended Complaint, Docket p. 6 ~ 22, p. 10 ~~ 44-45, and p. 56 ~~ 269-70. 92 Id. at 10 ~ 45. -52- Entry No. 97, Louie argues, however, that Plaintiffs' allegations fail to state an Exchange Act claim against him for statements made in the December 15, 2014, Form 8-K because he did not sign that form and cannot be held liable for the statements contained therein, and because the the statements transactions at in the Form 8 -K are all true as issue were not related-party transactions Regulation S-K, 17 C.F.R. ~ that 229.404(a) require to be disclosed. 93 Plaintiffs do not dispute that Louie did not sign the Form 8-K filed on December 15, 2014, and therefore cannot be held liable as a maker of the statements contained therein. See Kerr v. Exobox Technologies Corp., Civil Action No. H-10-4221, 2012 WL 201872, at *11 (S.D. Tex. 2012) (defendant not liable under Rule lOb-S for allegedly false statements in company's SEC filings, supplied the statements at filings) . See also Janus, issue, even if he because he did not 131 S. Ct. at 2302 sign the ("For purposes of Rule lOb-S, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it."). Nor do Plaintiffs dispute that the transactions at issue are not "related party" transactions that Regulation S-K, 17 C.F.R. ~ 229.404(a) require to be disclosed. 94 93 Louie' s MD, Docket Entry No. 103, pp. 7-8. 94 Id. at 7-9 (arguing that the transactions at issue were either not "related party" transactions, or that Louie did not have a material interest in them) . -53- Citing In re Bristol Myers Sguibb Co. Securities Litigation, 586 F. Supp. 2d 148, 160 (S.D.N.Y. 2008), and City of Monroe Employees Retirement System v. Bridgestone Corp., 399 F.3d 651, 670 (6th Cir. 2005), plaintiffs argue, however, that their Exchange Act claims against Louie should not be dismissed because the Form 8-K "statements regarding no related party transactions, which may have been literally true under the narrow definition of 'related party,' were, if not literally false, highly misleading," 95 and because the Form 10-K/A that Louie signed was one of EXXI's annual reports that had to be restated. 96 Plaintiffs argue that Louie's loan to Schiller and involvement with entities that owned EXXI stock should have been disclosed to investors because they adversely impacted Schiller's and Louie's ability to manage the Company prudently and to ensure that the Company's public disclosures were truthful. Schiller's dire financial circumstances were a strong motive for him to mislead investors - precisely as he did. Likewise, Louie was highly motivated to inflate the value of EXXI stock, which secured his secret loan to Schiller, if only to reduce his risk of loss if Schiller defaulted on the loan. 97 It is undisputed that "[w]hen an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak." Chiarella (discussing v. United disclosure States, 100 requirements S. in Ct. 1108, the context 1118 (1980) of insider 95 Plaintiffs' Opposition to Louie's MD, Docket Entry No. 113, 96 Id. at 9-10. p. 7. -54- trading and finding that silence is only fraudulent if there exists a duty to disclose) . The Bristol Myers and Bridgestone cases on which Plaintiffs rely stand for the well established principle that once a party makes a disclosure, even if it is literally true, the party is under a duty to speak the full truth. 586 F. Supp. 2d at 160 See Bristol Myers, ("even an entirely truthful statement may provide a basis for liability if material omissions related to the content of the statement make it materially company misleading"); 'chooses to or other statements made Bridgestone, volunteer such 399 F. 3d at information,' 670 ("If though, a 'its disclosure must be full and fair, and courts may conclude that the company was obliged to disclose additional material facts the extent that the volunteered disclosure was misleading'"). . to See also Rubinstein, 20 F.3d at 170 ("'a duty to speak the full truth arises when a defendant undertakes a duty to say anything'"). But the statements Plaintiffs allege were misleading due to Louie's failure to disclose his loan to Schiller and his relationship to entities that owned EXXI stock are statements made by EXXI on the Form 8-K signed by Griffin; not statements made by Louie. Plaintiffs fail either to cite any authority or to allege any facts capable of establishing that Louie had a duty to disclose information needed to correct the allegedly misleading statements made by EXXI and Griffin. See In re Franklin Bank Corp. Securities Litigation, 782 F. Supp. 2d 364, 398 (S.D. Tex. 2011), aff'd, 464 F. App' x 334 (5th Cir. 2012) (plaintiffs failed to allege facts capable of establishing that defendant was under a duty to correct -55- a misleading statement made by a third-party analyst) . Plaintiffs also fail to allege facts capable of establishing that Louie was the source of the information for the related-party statements in the Form 8-K about which Plaintiffs complain, that Louie knew those statements had been made in the Form 8-K, that those statements were material to the Plaintiffs' decision to purchase or to hold (i.e., not to sell) EXXI stock, or that those statements imposed upon Louie a duty to disclose the existence of his loan to Schiller or his relationship to entities that owned EXXI stock. Securities Litigation BMC Software, 871 & n.21 (S.D. Tex. 2001) Inc., 183 F. Supp. See In re 2d 860, (recognizing that a party generally has no liability for misleading claims made about it by a third party and no obligation to correct such statements, but that a party may be liable for allegedly misleading statements made by a third-party if sufficiently involved in preparation of those statements) . Absent such allegations Plaintiffs may not maintain an Exchange Act claim against Louie arising from either the related-party statements contained in EXXI's December 15, 2014, Form 8-K, or from Louie's failure to disclose his loan to Schiller or his position with respect to entities that owned EXXI stock. Levinson, 108 S. Ct. 978, 987 n.17 (1988) See Basic Inc. v. ("Silence, absent a duty to disclose, is not misleading under Rule 10b-5."). (2) Plaintiffs' Scienter failure to allege facts capable of establishing that Louie had a duty to disclose his loan to Schiller or his -56- position with respect to entities that owned EXXI stock precludes Plaintiffs from raising a strong inference of scienter with respect to allegedly misleading statements and/or omissions arising from the Form 8 -K that EXXI filed on December 15, 2014. See In re Centerline Holdings Co. Securities Litigation, 678 F. Supp. 2d 150, 161-62 (S.D.N.Y. 2009) (defendants did not act with scienter regarding omissions "when there was no duty to disclose in the first place") . raising a Nor strong have Plaintiffs inference of alleged scienter facts with capable respect to of the Form 10-K/A that Louie signed in December of 2014 shortly after being named to the Board because missing from Plaintiffs' Amended Complaint are any allegations of specific facts connecting Louie to the accounting violations that led to the restatement of EXXI's financials. Plaintiffs offer no facts in support of their contention that Louie signed the Form 10-K/A at issue with scienter other than the fact that he was allegedly motivated to inflate the market value of EXXI because his personal loan to Schiller was purportedly secured by Schiller's EXXI shares. However, the law in this circuit has long been well established that scienter in a particular case may not be based solely on motives universal to all corporate executives such as the desire to maintain a high stock price. See Indiana Electrical, 53 7 F. 3d at 544. Plaintiffs' factual allegations make it more plausible or at least as plausible to infer that when signing the Form 10-K/A at issue Louie negligently relied on EXXI's accountants and auditors than to infer -57- that he knowingly or recklessly disregarded the presence of glaring accounting irregularities or other red flags in EXXI's financial statements. See Tellabs, 127 497 F.3d at 555. s. Ct. at See also Abrams, 2510; Central Laborers', 292 F.3d at 433 (recognizing that accounting problems that lead to a restatement of a company's financials can "easily arise from negligence, oversight or simple mismanagement, none of which rise to the standard necessary to support a securities fraud action") . The court concludes therefore that Plaintiffs' factual allegations are not sufficient to raise a strong inference of scienter as to Louie. (3) Loss Causation Louie argues that even if Plaintiffs had alleged facts capable of establishing all the elements of their Exchange Act claims, they "have not alleged, nor can they, that there was any loss associated with this loan or its disclosure. " 98 Louie argues that under Dura Pharmaceuticals, Inc. v. Broudo, 125 S. Ct. 1627, 1633-34 (2005), Plaintiffs must allege "that the market reacted negatively to a corrective disclosure, which revealed the falsity of [the Company's] previous representations . . . . " . . . The personal loan from Mr. Louie to Mr. Schiller was disclosed on September 29, 2015. See Ex. C Energy XXI Ltd, Annual Report (Form 10-K) (Sept. 29, 2015) at 43. Immediately thereafter, EXXI's price increased. See Ex. D Energy XXI Stock Prices (showing seven consecutive trading days of increases, reaching a high of $2.28 on October 8, 2015). Even assuming there was a prior misstatement regarding the personal loan - which there was not - without any alleged loss caused by the disclosure of Mr. Louie's personal 98 Louie' s MD, Docket Entry No. 103, p. 9. -58- loan, all of Plaintiffs' claims relating to the personal loan must fail. 99 Plaintiffs respond only that they "have sufficiently alleged loss causation to withstand his motion to dismiss. " 100 Under the PSLRA Plaintiffs must prove that a defendant's act or omission alleged to have violated federal securities laws "caused the loss for which the plaintiff seeks to recover damages." 15 U.S.C. § 78u-4 (b) (4). In Dura Pharmaceuticals, 125 S. Ct. at 1633-34, the Supreme Court held that loss causation incorporates traditional elements of proximate causation and economic loss. Amgen 133 S. Inc. v. Ct. continues Connecticut 1184, to be 1192 Retirement (2013) Plans (confirming an element of a and that claim under § Trust loss See Funds, causation 10 (b)) . Loss causation refers to a direct link between the misstatement and a plaintiff's loss, and generally requires a corrective disclosure relating to the challenged representations, followed by a decline in the stock's price. F. App'x 311, 314 See Catogas (5th Cir. 2008) v. Inc., 292 ("Plaintiffs must allege . that the market reacted negatively to a which revealed the falsity of Cyberonics, corrective disclosure, [defendant's] previous representa- tions regarding the accounting for its stock options."). Because Plaintiffs fail to allege in their Amended Complaint or to argue in 99Id. 100 Plaintiffs' Opposition to Louie's MD, Docket Entry No. 113, p. 12. -59- their brief in opposition to Louie's motion to dismiss that a corrective disclosure about Louie's loan to Schiller caused EXXI's stock price to fall, Plaintiffs have failed to plead loss causation. Because Plaintiffs have failed to allege facts capable of establishing omission, that with Louie made scienter, that Plaintiffs complain, an actionable caused the loss Louie's motion to dismiss Exchange Act claims will be granted, misstatement of which or the the Plaintiffs' and those claims will be dismissed with prejudice. (d) Defendant Schiller Schiller argues that the Exchange Act claims asserted against him should be dismissed because Plaintiffs' Amended Complaint fails to allege facts capable of establishing that the statements attributed to him were false or misleading, or that he acted with scienter. Schiller also joins the arguments made by Louie and by the Director Defendants that Plaintiffs' Amended Complaint fails to allege facts capable of establishing loss causation, or that his loans from Louie were "related party transactions." 101 (1) Alleged Misstatements and Omissions Plaintiffs argue that [a] s Chairman and CEO, Schiller signed all of EXXI' s Annual Reports including its 2011, 2012, 2013, and 2014 Annual Reports. ~ 21. On September 8, 2015, the Company 101 Schiller's MD, Docket Entry No. 104, p. 6. -60- announced that all four annual reports should not be relied upon and had to be restated to eliminate hedge accounting from them. ~~ 83 & 89. The Company's Annual Reports for 2012, 2013, and 2014 also included materially false or misleading information about the Company's ultra-deep drilling activities (~~ 124-26, 132, & 242), and the 2014 Annual Report included materially false or misleading information about EXXI's acquisition of EPL (~~ 172 & 174). And third, Schiller is tied directly to the Company's misstatements regarding its oil and gas reserves in EXXI's annual and quarterly financial statements. As Plaintiffs allege, Schiller repeatedly pressured Company employees to include unsubstantiated estimates of natural gas reserves purportedly discovered as a result of EXXI's ultra-deep drilling program in the reserves reported in the quarterly and annual financial statements. ~ 14:1. That pressure undermined the integrity of the Company's financial statements. ~ 142. 102 Plaintiffs argue that Schiller made false and misleading statements on three matters: EXXI's ultra-deep oil drilling activities, EXXI's accounting for the EPL acquisition, and EXXI's financial condition resulting from its use of cash flow hedge accounting . 103 Schiller argues that the statements Plaintiffs attribute to him are not actionable because Plaintiffs have failed capable of proving that the statements were, misleading. 104 to allege in fact, facts false or Schiller also argues that the statements for which Plaintiffs seek to hold him liable are not actionable because they 102 Id. at 24-25 (citing Plaintiffs' Amended Complaint, Docket Entry No. 97, pp. 6 ~ 21, pp. 18-20 ~~ 83 & 89, pp. 27-29 ~~ 12426 & 132, pp. 31-32 ~~ 141-42, p. 37 ~~ 172 & 174, and p. 51 ~ 242). 103 Plaintiffs' Memorandum of Law in Opposition to Defendant John D. Schiller's Motion to Dismiss Amended Complaint ("Plaintiffs' Opposition to Schiller's MD"), Docket Entry No. 114, pp. 9-16. 104 Director Defendants' MD, Docket Entry No. 105, p. 11. -61- were generally forward looking statements of opinion or belief, and because Plaintiffs have failed to plead facts capable of establishing that he did not genuinely hold the stated opinion or belief, that the opinion or belief contained embedded misstatements of fact, or that he omitted material facts about his inquiry into or knowledge of information that would conflict with what reasonable investor would have understood from his comments . 105 a See Omnicare, 135 S. Ct. at 1327-29. (i) Plaintiffs argue Statements About EXXI's Ultra-Deep Drilling Activities Are Not Actionable that they have plausibly alleged that Schiller either made or caused EXXI to make false and misleading statements regarding EXXI's ultra-deep drilling activities on five separate occasions: (1) a November 7, regarding the Davy Jones well production; 2012, (2) Press Release EXXI's 2013 Annual Report filed with the SEC on August 21, 2013; (3) comments made at an Oil & Gas conference on October 17, 2013; (4) EXXI's quarterly report for the second quarter of fiscal year 2014 filed with the SEC on Form 10-Q on February 7, 2014; and (5) EXXI's quarterly report for the third quarter of fiscal year 2014 filed with the SEC on Form 10-Q on May 1, 2014. 106 105 Plaintiffs argue that Id. at 12-13. 106 Plaintiffs' Opposition to Schiller's MD, Docket Entry No. 114, pp. 10-11, 18-19 (citing Plaintiffs' Amended Complaint, Docket Entry No. 97, p. 6 ~ 21, pp • 2 8 - 3 1 ~ ~ 12 7 - 2 9 13 2 - 3 4 136-37). 1 -62- 1 as Schiller knew, the Company's ultra-deep drilling activities were largely unsuccessful - only one of 15 target wells identified by the joint venture ever produced any oil (~ 139) - and he lacked any basis for the upbeat statements he repeatedly made. Plaintiffs substantiate their allegations that Defendants knowingly grossly overstated the status of the ultra-deep drilling activities with information provided by a former EXXI employee who was directly responsible for managing EXXI' s reserves and the Company's reserve accounting at the time of the Davy Jones discovery. ~ 140. In that capacity, the former employee was well positioned to know whether the Company possessed information to substantiate the stated reserves. That former employee said that when the Davy Jones 2 well was tested, it only produced water, not 107 natural gas. (A) Regarding the November November 7, 2012, Press Release 7, 2012, Press Release Plaintiffs allege: On November 7, 2012, EXXI issued a press release in which Defendants caused the Company to state as follows: Within the shallow-water ultra-deep exploration program with McMoRan, the Davy Jones discovery well is proceeding toward first production and the company is participating in the Blackbeard West #2, Lomand North and Lineham Creek wells. The Davy Jones discovery well, the first shallow-water, ultra-deep sub-salt completion on the Gulf of Mexico shelf, is being completed. The wellbore was cleaned out to enable testing of all 165 feet of perforated sands in the Wilcox and the final steps of installing the wellhead are underway. Once these steps are complete, flow testing is expected to commence. Completion and testing of the Davy Jones offset appraisal well (Davy Jones #2) is 107 Id. at 19 (citing Plaintiffs' Entry No. 97, p. 31 ~~ 138-40). -63- Amended Complaint, Docket expected to commence following review of results from the Davy Jones discovery well. 108 Missing from Plaintiffs' Amended Complaint are allegations of facts capable of establishing that any of the statements in the November 7, 2012, Press Release were false or misleading when made, or that they were attributed to, formulated, signed, or adopted by Schiller. Instead, Plaintiffs merely allege that "[o]nly one of 15 target wells identified by the joint venture ever produced oil." 109 But the fact that EXXI' s ultra-deep drilling activities ultimately not successful is not probative of falsity. v. Cannon, 184 F. Supp . 3d 428, 469 (S.D. Tex. this as insufficient something turned out because it is badly must based mean on [the] earlier that it would turn out badly.'") . See Carlton 2016) plaintiffs have at most alleged fraud by hindsight. were ("[T]he Courts treat 'the fact that defendant [s] knew Plaintiffs fail to allege contemporaneous facts capable of showing that Schiller knew earlier material information that he chose not to disclose until later. Id. (citing Abrams, held 292 F.3d at 433 should not be responsible events") . Because Plaintiffs for fail ("company officials failure to allege to foresee facts future capable of establishing either that statements contained in the November 7, 2012, Press Release were false or that any false statements are 108 29, ~ Plaintiffs' Amended Complaint, Docket Entry No. 97, pp. 28127. 109 Id. at 31 ~ 139. -64- attributable to Schiller, and because Plaintiffs neither allege nor argue that statements contained in the November 7, Release misled the market, the statements made 2012, Press that press in release are not actionable under the Exchange Act. See In re Azurix Corp. Securities Litigation, 198 F. Supp. 2d 862, 882 (S.D. Tex. 2002) (holding that statements were "not actionable because plaintiffs have statements were not pleaded untrue") , any aff' d facts sub nom. indicating that Rosenzweig v. the Azurix Corp., 332 F.3d 854 (5th Cir. 2003); Southland Securities Corp. v. INSpire Insurance Solutions, 365 F.3d 353, 2004) (holding that facts Inc., tying an officer or 365 (5th Cir. director to a statement "would include a signature on the document or particular factual allegations explaining the individual's involvement in the formulation of either the entire document, or that specific portion of the document" containing the false or misleading statement) . (B) EXXI's 2013 Annual Report Regarding EXXI's 2013 Annual Report, Plaintiffs allege: In its 2013 Annual Report filed with the SEC on August 21, 2013, Defendants caused the company to state that "work is ongoing to establish commercial production" from Davy Jones No. 1. However, when the statement was made, Defendants knew that Davy Jones No. 1 was not commercially viable. 110 Plaintiffs also allege that [a]s Chairman of the Board and Chief Executive Officer of EXXI, Defendant Schiller signed the Company's annual reports filed with the SEC on Form 10-K and 10-K/A. As 110 Id. at 29-30 ~ 132. -65- a signatory of the annual reports issued in the name of the Company and not attributed to an individual author, Schiller is responsible for the content of the annual reports he signed. 111 Missing from Plaintiffs' Amended Complaint are allegations of facts capable of establishing that on August 21, 2013, when EXXI's 2013 Annual Report was filed, work was not ongoing to establish commercial production from Davy Jones No. 1, that Schiller knew or did not genuinely believe that work was ongoing to establish commercial production from Davy Jones No. 1, or that Schiller had contradictory information, i.e., information that Davy Jones No. 1 was not commercially viable. Absent allegations of such facts, the statements about ultra-deep drilling activities in EXXI' s Annual Report are not actionable against Schiller. 2013 See In re Azurix Corp. Securities Litigation, 198 F. Supp. 2d at 882. (C) Statements at Oil & Gas Conference Regarding Schiller's October 17, 2013, statements at an Oil & Gas Conference, Plaintiffs allege that [a] t an Oil & Gas conference on October 17, 2013, Schiller said that Davy Jones No. 1 was "too deep and too narrow to flow gas" but Schiller falsely stated that Davy Jones No. 2 had a "high probability" of producing and that completion of Davy Jones 2 was expected to start in December, 2013. 112 Plaintiffs allege that Defendant Schiller's "high probability" statement was false and misleading when it was made. As Schiller knew 111 Id. at 6 112 Id. at 30 ~ 21. ~ 133. -66- on October 17, 2013, there was no objective or empirical evidence, such as test results or preliminary production data, to support Schiller's "high probability" statement at that time (or ever). Thus, on that date, Schiller lacked any reasonable basis for his "high probability" statement. 113 Plaintiffs also allege that [a] ccording to a former EXXI employee directly responsible for managing EXXI's reserves and the Company's reserve accounting at the time of the Davy Jones discovery, when the Davy Jones No. 2 well was tested, it only produced water, not natural gas. This material adverse fact, though known by EXXI and the Individual Defendants, was not timely disclosed to investors, including Plaintiffs in particular. 114 Missing from Plaintiffs' Amended Complaint are allegations of fact capable of establishing that Schiller's statements that Davy Jones No. 2 had a "high probability" of producing or that completion of Davy Jones No. 2 was expected to start in December of 2013, were false, or that when Schiller made these statements he either knew that they were false or did not genuinely believe them. Plaintiffs' assertion that Schiller lacked any reasonable basis for his "high probability" statement because he had no objective or empirical evidence to support that statement is unavailing because Plaintiffs fail to allege particularized facts capable of establishing that objective or empirical evidence existed that contradicted that statement. In Rosenzweig, 332 F.3d at 870, the Fifth Circuit reaffirmed its prior recognition in Rubinstein, 20 F. 3d at 169, that "(s] imply alleging that the predictive statements ~ 113 Id. 114 Id. at 31 134. ~ 140. -67- . did not have a reasonable basis negligently made Rule 10b-5. that is, that they were would hardly suffice to state a claim under 11 Plaintiffs, reference to an unidentified former EXXI employee in support of their allegations that when Davy Jones No. tested, it produced water, not gas, is unavailing 2 was because Plaintiffs have not alleged either when the test occurred or that it occurred before Schiller made the statements alleged to be false and misleading at the Oil & Gas Conference on October 17, 2013. Nor have plaintiffs alleged any facts capable of establishing that Schiller knew about the test, knew the test demonstrated that Davy Jones No. 2 was incapable of producing gas, or knew that the test necessarily meant that completion of Davy Jones No. expected to start in December of 2013. 2 was not Because Plaintiffs do not allege facts capable of establishing that Schiller,s statements at the Oil & Gas Conference on October 17, 2013, were false, or that Schiller either knew those statements were false or did not genuinely believe them, and because Plaintiffs neither allege nor argue that any of those statements misled the market, Schiller,s statements at the Oil & Gas Conference on October 17, 2013, are not actionable under the Exchange Act. See In re Azurix Corp. Securities Litigation, 198 F. Supp. 2d at 882. (D) Regarding Form 10-Qs Filed in Early 2014 statements on EXXI, s Form 10 -Q filings for the second and third quarters of fiscal year 2014, Plaintiffs allege: -68- 13 6. In EXXI' s quarterly report for the period ended December 31, 2013, filed on Form 10-Q with the SEC on February 7, 2014, Defendants caused the Company to state that "work is ongoing to establish commercial production" from Davy Jones 1 and that " (o] perations to commence completion of the Davy Jones No. 2 well are expected during calendar year 2014." 13 7. In EXXI' s quarterly report for the period ended March 31, 2014, filed on Form 10-Q with the SEC on May 1, 2014, Defendants failed to mention Davy Jones No. 1, but maintained that Davy Jones No. 2 was "in the process of being completed. ,ns Plaintiffs argue that the statement in the Form 10-Q filed on February 7, 2014, that "work is ongoing to establish commercial production" from Davy Jones No. 1 was false because Schiller had stated at an October 17, 2013, Oil & Gas Conference that Davy Jones No. "too deep and too narrow to flow gas . " 116 was 1 replies that Plaintiffs Schiller have not alleged any facts capable of establishing that statements in the Form 10-Q filed on February 7, 2014, were false or misleading. 117 selectively February 7, cited 2014, only a Asserting that Plaintiffs have portion Schiller of argues the that Form when 10-Q read filed in on context together with the surrounding statements, the statement that work was "ongoing to establish commercial production from Davy Jones 1," which plaintiffs 115 116 Id. at 30-31 allege ~~ is false and misleading because it 136-37. Plaintiffs' Opposition No. 114, pp. 10-11. to 117 Schiller's MD, Docket Entry Defendant John D. Schiller, Jr.'s Reply in Support of His Motion to Dismiss the Amended Complaint ("Schiller's Reply") , Docket Entry No. 122, pp. 12-13. -69- conflicts with the statement he made on October 17, 2013, that Davy Jones No. 1 is too deep and too narrow to flow gas is, consistent with his October 17, 2013, statement. in fact, Schiller explains that Plaintiffs omit an important sentence in the February 7, 2014 Form 10Q filing in which the company truthfully disclosed that "work is ongoing to establish commercial production" from Davy Jones 1. Immediately following that sentence, the company stated in the 10Q: "The operator [Freeport McMoRan) is developing a fit for purpose fracture stimulation process" for Davy Jones 1." 118 In pertinent part the Form 10-Q filed on February 7, 2014, states: Davy Jones. As previously reported, our operating partner, Freeport McMoRan, has drilled two wells in the Davy Jones field. The Davy Jones No. 1 well is located on South Marsh Island Block 230 in 19 feet of water and work is ongoing to establish commercial production from the well. The operator currently is developing a fit for purpose fracture stimulation process. The Davy Jones No. 2 offset appraisal well, located two and a half miles southwest of Davy Jones No. 1, confirmed 120 net feet of potential pay in multiple Wilcox sands, indicating continuity across the major structural features of the Davy Jones prospect, and also encountered 192 net feet of potential hydrocarbons in the Tuscaloosa and Lower Cretaceous carbonat.e sections. Operations to commence completion of the Davy Jones No. 2 well are expected during calendar year 2014. 119 118 Id. at 13 (citing· Energy XXI (Bermuda) Limited, Form 10-Q for the quarterly period ended December 31, 2013, Exhibit 2 to Declaration of David M. Sheeren, Docket Entry No. 122-3). 119 Energy XXI (Bermuda) Limited, Form 10-Q for the quarterly period ended December 31, 2013, p. 35, Exhibit 2 to Declaration of David M. Sheeren, Docket: Entry No. 122-3, p. 42. The court may properly consider the full section of this Form 10-Q at this stage of the case because in securities cases courts may take judicial notice of the contents of public disclosure documents that are (continued ... ) -70- Missing from Plaintiffs' Amended Complaint are allegations of facts capable of establishing that when the Form 10-Q was filed on February 7, 2014, the work to complete Davy Jones No. 1 was not still ongoing, that the operator was not attempting to develop a "fit for purpose fracture stimulation process" to that well, or that objective or empirical evidence existed that contradicted the statement that Plaintiffs allege was false. Because Plaintiffs do not allege facts capable of establishing that the statement that "work is ongoing to establish commercial production" from Davy Jones No. 1 made in the Form 10-Q filed on February 7, 2014, was false, because Plaintiffs neither allege nor argue that Schiller did not genuinely believe that statement or had information that contradicted it, and because Plaintiffs neither allege nor argue that the statement about the Davy Jones No. 1 well misled the market, that statement will not support a claim against Schiller under the Exchange Act. See In re Azurix Corp. Securities Litigation, 198 F. Supp. 2d at 882. Plaintiffs argue that the statements that "[o]perations to commence completion of the Davy Jones No. 2 well are expected during Form calendar year 2014" made 119 in the 10-Q filed on ( • • • continued) required by law to be filed and are actually filed with the SEC with the caveat that these documents may be considered only for the purpose of determining what statements they contain. See Lovelace, 78 F.3d at 1018 & n.1. See also Lone Star Fund V (U.S.), 594 F.3d at 387 (holding that when considering a motion to dismiss courts may consider documents that are "central to the claim and referenced by the complaint"). -71- February 7, 2014, and that Davy Jones No. 2 was "in the process of being completed" made in the Form 10-Q filed on May 1, 2014, were false because by 2014 specialized production equipment used for ultra-deep well production had been removed from Davy Jones No. 2 and relocated to a different site, and because an unidentified former EXXI employee has allegedly provided information that when Davy Jones No. 2 was tested, it produced water, not gas . 120 These allegations are not sufficient to state a claim for violation of the Exchange Act against Schiller because Plaintiffs have failed to allege facts capable of establishing when the specialized equipment was removed from the Davy Jones No. 2 site or even that it was removed from the site before EXXI filed the Form 10-Qs at issue on February 7, 2014, and May 1, 2014. Nor have Plaintiffs alleged facts capable of establishing the type of specialized equipment that was removed, that removal of the equipment necessarily meant the Davy Jones No. 2 well could not be completed, or that when the statements were made Schiller did not genuinely believe them or had information that contradicted them. Plaintiffs have similarly failed to allege facts capable of establishing when the test that allegedly produced water instead of gas occurred or even that it occurred before EXXI filed the Form 10-Qs at issue on February 7, 2014, and May 1, 2014. Nor have Plaintiffs alleged any facts 120 Plaintiffs' Opposition to Schiller's MD, Docket Entry No. 114, p. 11 (citing Plaintiffs' Amended Complaint, Docket Entry No. 97, p. 31 ~~ 139-40). -72- capable of establishing that Schiller knew about the test, knew the test demonstrated that Davy Jones No. 2 was incapable of producing gas, or knew that the test would necessarily lead to the cessation of ongoing efforts to complete Davy Jones No. 2. allegations capable Form at 10-Qs of issue establishing on February that 7, Absent factual when 2014, EXXI and May filed 1, the 2014, operations to commence completion of the Davy Jones No. 2 well were not expected during calendar year 2014, and that when EXXI filed the Form 10-Q filed on May 1, 2014, Davy Jones No. 2 was not "in the process of being completed," or that Schiller knew either that work was not ongoing on that well or that the well was not capable of producing gas, Schiller cannot be held liable under the Exchange Act for the allegedly false statements regarding Davy Jones No. 2 contained in EXXI's Form 10-Qs filed on February 7, 2014, or May 1, See 2014. In re Azurix Corp. Securities Litigation, 198 F. Supp. 2d at 882. ( ii) Statements About EXXI' s Accounting For The EPL Acquisition Are Not Actionable Asserting that Schiller caused EXXI to buy EPL in 2014 to turn around the Company's stagnant growth and sagging stock price, 121 Plaintiffs argue that [a] year earlier, the Company decided that EPL was overpriced. ~~ 149 & 160. However, Schiller was so desperate to deliver any purportedly good news to the 121 Id. at 19-20 (citing Plaintiffs' Amended Complaint, Docket Entry No. 97, p. 33 ~ 147). See also id. at 11-15. -73- market that he rushed the Company to complete the $2 billion purchase its largest by far without conducting any due diligence. ~ 153. The haste in which Schiller forced EXXI to buy EPL was matched by the haste in which the purchase soured: less than a year after buying EPL, the assets EXXI acquired had become worthless. ~~ 220-21. After EXXI acquired EPL, the Company and its subsidiary reported financial results side-by-side. Quarter after quarter, EPL wrote down assets as impaired, only to have EXXI delay doing so by one quarter. Each time, EXXI wrote down the exact same impairment charge one quarter after EPL did so. EXXI has never explained the reason for its delayed recognition of the impairment charge . 122 Plaintiffs' allegations that Schiller rushed the EPL acquisition, caused EXXI to overpay for EPL, and was so desperate to bring good news to the market that he failed to do any due diligence, are not supported by allegations of particularized facts capable of establishing that any statements about the EPL acquisition attributable to Schiller were false or misleading, or that Schiller failed to disclose information needed to make his EPL statements not misleading. Even assuming that such facts were pled with specificity, the "failure to engage in due diligence before closing an acquisition does not automatically support an inference of fraud." WL 318441, Pohlad, 933 Schiller v. *11 F. (N.D. Supp. Physicians Resource Group, Tex. 793, February 26, 799 (D. 2002) Minn. Inc., 2002 (citing Brogen v. 1995) (failing "to adequately investigate the merits of a potential acquisition and 122 Id. See also Plaintiffs' Amended Complaint, Docket Entry No. 97, pp. 32-49 ~~ 144-230. -74- subsequent steps to remedy that omission may give rise to a claim for negligence; but it cannot support a claim for securities fraud") ) . Plaintiffs' allegations that Schiller can be held liable under the Exchange Act for false or misleading statements because EXXI recognized impairment charges for EPL one quarter after EPL did so without explaining the reason for its delayed recognition, are not supported by allegations of particularized fact. Missing from Plaintiffs' Amended Complaint are allegations of facts capable of establishing the relevant accounting standards, how those standards were violated, or that Schiller knew or ignored glaring red flags that statements about misleading when made. Schiller's MD is EPL attributable to him were false or Also missing from Plaintiffs' Opposition to any argument or authority for Plaintiffs' contention that a corporate parent has a duty to explain why its accounting for impairment of a subsidiary's assets differs from the subsidiary's own accounting for the same assets. Fire Control and Rescue District Plymouth County Retirement No. 15 Civ. 2016) 6034 (RJS), See North Collier Firefighter Pension Plan and Association v. 2016 WL 5794774, MDC *3, Partners, 9-11, 24 Inc. , (S.D.N.Y. (dismissing§ 10(b) claim that rested on allegations of how management goodwill of parent related to company should subsidiary) . have See tested also and Harris v. impaired Amtrust Financial Services, Inc., 135 F. Supp. 3d 155, 171 (S.D.N.Y. 2015) ("The fact that Lead Plaintiff cannot tick and tie the loss and -75- loss adjustment financial expense statement to the reported in AmTrust's consolidated losses its individual subsidiaries reported to insurance regulators, without more, does not plausibly allege a misstatement."). Because Plaintiffs do not allege facts capable of establishing that any of EXXI's statements about EPL were false, or that EXXI had a duty to explain the differences between its accounting for EPL's goodwill impairment and EPL's own accounting for impairment of its assets; because Plaintiffs fail to allege facts capable of establishing that Schiller either knew that any statements about EPL attributable to him were false, or did not genuinely believe any such statements; and because Plaintiffs' neither allege nor argue that any statements about EPL misled the market, the EPL statements about which Plaintiffs complain are not actionable against Schiller under the Exchange Act. See In re Azurix Corp. Securities Litigation, 198 F. Supp. 2d at 882. (iii) EXXI's Financial Actionable Statements Are Asserting that "EXXI lacked the necessary documentation for its hedging activities to utilize hedge accounting," 123 Plaintiffs argue that [a]s a result, in September 2015, shortly after EXXI's auditor was acquired, the new auditor required the Company to restate more than four years of financial statements and to make an adjustment to its accumulated deficit to eliminate the effects of cash flow hedge 123 Id. at 15-16 (citing Plaintiffs' Amended Complaint, Docket Entry No. 97, pp. 49-50 ~~ 234-35). -76- accounting. ~~ 244-45. On September 8, 2015, EXXI announced that its previously issued consolidated financial statements for the four years ended June 30, 2011, 2012, 2013, and 2014, and for the seven quarters ended September 30, 2013 and 2014, December 31, 2013 and 2014, March 31, 2014 and 2015, and June 30, 2014- eleven financial statements in all - should no longer be relied upon, and would be restated. ~ 245. The announcement stunned Plaintiffs and other EXXI investors. ~ 247 . 124 Plaintiffs argue that [a] s Chairman and CEO, Schiller signed all of EXXI' s Annual Reports including its 2011, 2012, 2013, and 2014 Annual Reports. ~ 21. On September 8, 2015, the Company announced that all four annual reports should not be relied upon and had to be restated to eliminate hedge accounting from them. ~~ 83 & 89. The Company's Annual Reports for 2012, 2013, and 2014 also included materially false or misleading information about the Company's ultra-deep drilling activities (~~ 124-26, 132, & 242), and the 2014 Annual Report included materially false or misleading information about EXXI's acquisition of EPL (~~ 172 & 174). And third, Schiller is tied directly to the Company's misstatements regarding its oil and gas reserves in EXXI's annual and quarterly financial statements. As Plaintiffs allege, Schiller repeatedly pressured Company employees to include unsubstantiated estimates of natural gas reserves purportedly discovered as a result of EXXI's ultra-deep drilling program in the reserves reported in the quarterly and annual financial statements. ~ 141. That pressure undermined the integrity of the Company's financial statements. ~ 142.125 Regarding Schiller's alleged misstatements on EXXI's oil and gas reserves Plaintiffs allege: 124 Id. at (citing Plaintiffs' Entry No. 97, pp. 244-45, and 247). 16 125 Id. Amended Complaint, Docket at 24-25 (citing Plaintiffs' Amended Complaint, Docket Entry No. 97, p. 6 ~ 21, pp. 18-20 ~~ 83 & 89, pp. 27-30 ~~ 124-26 & 132, pp. 31-32 ~~ 141-42, p. 37 ~~ 172 & 174, and p. 51 ~ 242). -77- 141. According to the former EXXI employee, Defendant Schiller pressured Company employees to include unsubstantiated estimates of natural gas reserves purportedly discovered as a result of EXXI's ultra-deep drilling program in the amount of reserves reported in the Company's quarterly and annual financial statements. This led to internal confrontations over accounting policies and practices. 142. Although the unsubstantiated estimates of natural gas reserves purportedly discovered as a result of EXXI's ultra-deep drilling program were not included in any of the Company's financial statements, the pressure from Defendant Schiller and the confrontations it led to created mistrust between the Company's internal 126 accountants and senior management. Because Plaintiffs estimates of expressly natural gas allege that "the unsubstantiated reserves purportedly discovered as a result of EXXI's ultra-deep drilling program were not included in any of the Company's financial statements," 127 they are not statements for which Schiller can be held liable under the Exchange Act. Schiller does not plausibly argue, however, that the financial statements he signed that were ultimately restated due to EXXI's lack of specific documentation needed to support its use of cash flow hedge accounting did not contain statements that were false and misleading. The court therefore concludes that the Plaintiffs have pled specific facts sufficient to hold Schiller liable for the financial statements that he signed and that were restated because accounting. 126 EXXI improperly cash flow hedge See Janus, 131 S. Ct. at 2302. Plaintiffs' Amended Complaint, Docket Entry No. 97, pp. 31- 32 ~~ 141-42. 127 utilized Id. ~ 142. -78- (iv) Conclusions For the reasons stated above, the court concludes that the purportedly false and misleading statements that Plaintiffs allege Schiller made about EXXI's ultra-deep oil drilling activities, and EXXI' s accounting for the unsuccessful EPL acquisition will not support Exchange Act claims against Schiller either because Plaintiffs have failed to allege facts capable of establishing that the statements were false when made, or that to the extent they were statements of opinion or belief, Schiller did not genuinely hold the opinions expressed, the statements of fact, opinions contained embedded untrue or Schiller omitted material facts about his inquiry or knowledge that would conflict with what a reasonable investor would have understood from his statements. 135 s. Ct. at 1327-29. The court concludes, See Omnicare, however, that the Plaintiffs have pled particularized facts capable of establishing Schiller's liability for false and misleading statements contained in EXXI's financial statements that Schiller signed, that were filed with the SEC, and that were restated utilized cash flow hedge accounting. (2) Schiller because EXXI improperly See Janus, 131 S. Ct. at 2302. Scienter argues that "the Amended Complaint should be dismissed for failure to allege any inference of scienter, much less a strong one." 128 128 He argues that Plaintiffs' references to his Schiller's MD, Docket Entry No. 104, p. 13. -79- desire to maintain a lavish lifestyle, his executive position within EXXI, his signature on SEC filings that were restated, and his loans from Louie and EXXI individually or collectively - vendors are to raise a all inadequate strong inference of scienter. 129 Citing Nathenson v. Zonagen Inc., 267 F.3d 400 (5th Cir. 2001), Plaintiffs respond that they have alleged several "special circumstances" that strongly support an inference of Schiller's scienter. Those circumstances include: (i) Schiller's prominence as EXXI's founder, Chairman, and CEO; (ii) the importance of the Company's ultra-deep drilling activities, its oil and gas reserves, and the EPL acquisition to EXXI's net worth and future prospects; (iii) the fact that Schiller himself made several statements regarding the Company's ultra-deep drilling, its reserves, and the EPL acquisition; (iv) Schiller's attempt to influence the Company's reserve estimates; and (v) Schiller's dependence on the market price for EXXI stock to meet his need for cash to fund his lavish lifestyle. Those circumstances particularly Schillers' need to control the Company's disclosures to satisfy his urgent need for cash - make his scienter "at the very least, equally as compelling as any alternative inference, and a tie favors the plaintiff." Lormand, 565 F. 3d at 254 (emphasis added) . 130 Plaintiffs also point to the loans that Schiller took from Louie and from EXXI's vendors but failed to disclose to the Board or to the market as strong inferences of scienter. 131 129 Id. at 13-22. No. 122, pp. 16-21. See also Schiller's Reply, 130 Plaintiffs' Opposition to Schiller's No. 114, p. 27 (emphasis in original). 131 Id. at 27-31. -80- MD, Docket Entry Docket Entry In Nathenson the Fifth Circuit held that the individual defendants' positions within the defendant pharmaceutical company enhanced the scienter allegations. Recognizing "that normally an officer's position with a company does not suffice to create an inference of scienter," id. at 424, the court found a number of special circumstances that taken together, different result in that case: sufficed to support a (1) the company was small and had only three-dozen full-time employees; (2) it was essentially a oneproduct company; and (3) the alleged misrepresentations were about the patent protection for that single product, the company's most crucial issue. The however, See Id. at 425. Fifth and other courts have been reluctant, to apply the limited exception recognized in Nathenson. Rosenzweig, argument Circuit that 332 "the water-privatization F. 3d at failure (rejecting 867-68 of projects core Azurix's supports the the plaintiffs' business inference that defendants knew, or recklessly disregarded, Azurix's prospects for success" and holding that the plaintiffs must identify exactly who supplied the information or when they knew the information"); Abrams, 292 F. 3d at 432 ("A pleading of scienter may not rest on the inference that defendants must have been aware of the misstatement based on their positions within the company."). Circuit has stated that only in the Instead, the Fifth "rare case" will a strong inference of scienter be drawn from an officer's position in a company, and only when this factor combines with other, -81- "special circumstances." Local 731 I.B of T. Excavators and Pavers Pension Trust Fund v. Diodes, Inc., 810 F.3d 951, 959 (5th Cir. 2016). Fifth Circuit reiterated that such circumstances may include: The (1) a small company in which corporate executives are more likely to be familiar with day-to-day operations; the company's continued vitality"; (2) transactions "critical to (3) omitted information readily apparent to the speaker; and (4) statements by the corporate officer that are internally inconsistent. Id. Plaintiffs neither allege nor argue that facts capable of establishing Nathenson or any of the special circumstances Diodes are present in this recognized case. in Plaintiffs' allegations that between 2006 and 2010 EXXI completed five major acquisitions for aggregate cash consideration of approximately $2.5 billion demonstrates that EXXI differed substantially from the small, single product companies at issue in Nathenson and Diodes. 132 Instead, as special circumstances capable of allowing a strong inference of scienter to be drawn from Schiller's position with the Company, Plaintiffs point to Schiller's 132 prominence as EXXI' s Plaintiffs' Amended Complaint, Docket Entry No. 97, p. 16 69-71. Moreover, Schiller argues without objection that EXXI had approximately 257 employees at the time of its bankruptcy, more than the companies falling under the Nathenson exception. See Schiller's Reply, Docket Entry No. 122, p. 19 & n.9 ("In connection with its bankruptcy petition, the company sought emergency relief to pay these employees during the course of the bankruptcy. See Ex. 3 to the Declaration of David M. Sheeren at p. 5 (disclosing 257 employees) . The Court can properly take judicial notice of that adjudicative fact. Funk v. Stryker Corp., 631 F.3d 777, 783 (5th Cir. 2011) ." See also Carlton, 184 F. Supp. 3d at 479 (183 employees voids the Nathenson exception) . ~~ -82- founder, Chairman, importance of acquisition, and CEO known for his lavish lifestyle, EXXI's ultra-deep drilling activities, and oil and gas reserves to EXXI' s the the EPL net worth and future prospects, and the allegedly false and misleading statements that Schiller made about these subjects, i.e., EXXI's ultra-deep drilling activities, EPL acquisition, and gas reserves. 133 Since, however, for the reasons stated in§ III.A.2(d) (1) (i)-(iii), above, the court has already concluded that Plaintiffs have failed to plead facts capable of establishing that Schiller's statements about EXXI's ultra-deep drilling activities, EPL acquisition, or reserves were false or nlisleading, Plaintiffs' attempt to infer a strong inference statements misses of the misleading statements scienter for and/or mark. The only that from making allegedly the court has those false and found are actionable against Schiller are the financial statements included in the EXXI SEC filings that he signed and were later restated. A defendant's signature on an misleading statements or omissions strong inference of scienter. 555. a filing with cannot by itself false or support a See Central Laborers', 497 F.3d at "[T]he mere publication of inaccurate accounting figures, or failure scienter. false SEC to follow without more, does not establish The party must know that it is publishing materially information, 133 GAAP, Plaintiffs' 27. or the party must Opposition to No. 114, p. -83- be severely reckless Schiller's MD, Docket in Entry publishing such information." Lovelace, 78 F.3d at 1020. See also ArthroCare, 726 F. Supp. 2d at 716; Seitel, 447 F. Supp. 2d at 693. To infer scienter from accounting errors, courts typically examine the magnitude, simplicity pervasiveness, and obviousness and repetition of the errors; of the misapplied rules; and defendant's apparent motives for misapplying these rules. ArthroCare, 726 F. timing, nature, Supp. 2d at frequency, 721 (" [W]hen the number, the the See size, and context of the misapplication [of accounting principles] or restatement are taken into account, the balance of the inferences to be drawn from such allegations may shift significantly in favor of scienter."). Although Plaintiffs have argued that the number, size, timing, nature, frequency, and context of the misapplication [of accounting principles] and the restatement raise a strong inference of scienter as to Griffin, EXXI's CFO, Plaintiffs have made no such argument as to Schiller. Instead, Plaintiffs merely point to the loans that Schiller borrowed from fellow board member Louie and from EXXI vendors but did not disclose. But for the reasons stated in§ III.A.2(c) (1), above, the court has already concluded that Plaintiffs have failed to allege any facts capable of establishing that Louie Schiller- had a duty to disclose those loans. or now Absent a duty to disclose, failure to disclose is not capable of raising a strong inference of scienter. See Chiarella v. United States, 100 S. Ct. at 1118 ("When an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak."). -84- Moreover, missing from Plaintiffs' Amended Complaint are any allegations of specific facts connecting Schiller to the accounting violations statements. that led to the restatement of EXXI's financial Nor are there any allegations that Schiller engaged in insider trading or stood to benefit personally from any of the alleged accounting errors. Plaintiffs offer no facts in support of their contention that Schiller signed the financial statements at issue with scienter other than the fact that, like the senior managers of every company, he had control over the Company. Izadj oo, 23 7 F. Supp. 3d at 516 See (find no scienter for officers where there were no "glaring irregularities or red flags" to put them on notice of material misstatements and omissions in SarbanesOxley certifications or earnings calls) Plaintiffs cannot demonstrate scienter by relying either on Schiller's position on the board, Abrams, 292 F.3d at 432, financial statements were restated. or on the fact that certain See Central Laborers, 497 F.3d at 546 (restatement of financial data, by itself, does not create a strong inference of scienter). Plaintiffs' factual allegations make it more plausible or at least as plausible to infer that when signing the SEC filings at issue Schiller negligently relied on EXXI's accountants and auditors than to infer that he knowingly or recklessly disregarded the presence of glaring accounting irregularities or other red flags in EXXI's financial statements. See Tellabs, 555. 127 s. Ct. at 2510; Central Laborers, 497 F.3d at See also Abrams, 292 F.3d at 433 (recognizing that accounting -85- problems that lead to a restatement of a company's financials can "easily arise from negligence, oversight or simple mismanagement, none of which rise to the securities fraud action") . Plaintiffs' factual standard necessary to support a The court concludes therefore that allegations are not sufficient to raise a strong inference of scienter as to Schiller. (3) Loss Causation Schiller joins in and incorporates by reference arguments made by the Director Defendants and by Louie that Plaintiffs failed to show that any of the alleged misstatements were followed by corrective disclosures Plaintiffs that caused the price of the stock to drop. fail to plead loss causation because they do not allege any causal connection between the supposed fraudulent conduct and their purported losses. 134 Although they have not responded directly to Schiller's loss causation argument, Plaintiffs argue that they "have sufficiently alleged loss dismiss." 135 causation to withstand [Schiller's] motion to Citing Lormand, 565 F.3d at 256-58, and asserting that "[l]oss causation 'is subject to the pleading standard of Federal Rule of pleading [Civil] Procedure requirement of 8 (a) (2), Rule rather 9(b) ," 136 than the Plaintiffs heightened argue that 134 Schiller's Reply, Docket Entry No. 122, p. 21. See also Schiller's MD, Docket Entry No. 104, p. 6 ("Mr. Schiller joins in all of the arguments in The Director Defendants' Motion to Dismiss and incorporates those arguments herein by reference."). 135 Plaintiffs' Opposition to Director Defendants' MD, Docket Entry No. 115, p. 24. 136Id. -86- "[u] nder that relaxed pleading standard, facially omissions "plausible"' and their connection loss." 137 [they] need only allege 'a between the Citing North misstatements Port or Firefighters' Pension- Local Option Plan v. Temple-Inland, Inc., 936 F. Supp. 2d 722, 761 (N.D. Tex. 2013), Plaintiffs argue that they "need not plead a fact-for-fact disclosure to establish loss causation, " 138 and if the court disagrees, opportunity to amend Plaintiffs "respectfully request the their complaint to add such factual allegations in further support of loss causation." 139 For the reasons stated in§ III.A.2(c) (3), above, with respect to Louie, and in § III.A.2 (e) (3), below, with respect to the Director Defendants, Plaintiffs have failed to plead loss causation with respect to Schiller. (4) Conclusions as to Schiller Because Plaintiffs have failed to allege facts establishing omission, that with Schiller made scienter, that an actionable caused the capable of misstatement loss of which or the Plaintiffs' complain, Schiller's motion to dismiss the Plaintiffs' Exchange Act claims will be granted, dismissed with prejudice. 137Id. usrd. 139 Id. at 25. -87- and those claims will be (e) Director Defendants The Director Defendants argue that the federal securities law and fraud claims asserted against them should be dismissed because Plaintiffs' misstatement Amended or Complaint omission, fails scienter, to or plead loss an actionable causation. The Director Defendants also argue that Plaintiffs' Amended Complaint fails to the extent it asserts (1) claims against the Director Defendants based on statements attributed to unspecified "Defendants" or the Company when those Director Defendants were not on the EXXI board and (2) claims barred by the five-year statute of repose or the prohibition on holder claims. 140 (1) Alleged Misstatements and Omissions Asserting that the Director Defendants are Feinberg, Colvin, Dunwoody, Dupre, Flannery, Griffiths, and LaChance, Plaintiffs argue that [a] t relevant times, each of the Director Defendants served as a director of EXXI. In addition to serving on the Board, Defendant Colvin was Chairman of the Audit Committee and a member of the Nomination and Governance Committee. ~ 48. Defendant Flannery was a member of the Audit Committee and the Nomination and Governance Committee of the Board. ~ 49. Defendant Dunwoody was Chairman of the Remuneration Committee and a member of the Audit Committee. ~ 50. Defendant Griffiths served on the Audit Committee and the Compensation Committee. ~ 51. Defendant Feinberg was Lead Independent Director, Chairman of the Nomination and Governance Committee, a member of the Compensation Committee, and an ex officio member of the Audit Committee. ~ 52. Defendant Dupre was Chairman of the Compensation Committee and a member of the Nomination and Governance Committee. ~ 53. 140 Director Defendants' MD, Docket Entry No. 105, p. 11. See also Reply Brief in Support of the Director Defendants' Motion to Dismiss the Amended Complaint ("Director Defendants' Reply") , Docket Entry No. 121, pp. 6-12. -88- By virtue of their Board positions and responsibilities, the Director Defendants were privy to and participated in the creation, development, and reporting of the Company's financial condition; they had significant personal contact and familiarity with the Company and its senior officers and their fellow directors; and they were advised of and had access to internal reports and other non-public data and information about the Company's finances, operations, and sales. ~ 290. The Director Defendants were aware of the Company's dissemination of information to the investing public which they knew or recklessly disregarded was materially false, misleading, and incomplete. Id. . . . [T] he Amended Complaint more than sufficiently pleads claims under the [PSLRA] , for common law fraud, and for breach of fiduciary duty against the Director Defendants. Their motion to dismiss the Amended Complaint should be denied in its entirety. 141 Plaintiffs argue that they have plausibly alleged that the Director Defendants caused EXXI to make a series of materially misleading statements about three different matters: deep oil drilling activities, unsuccessful EPL acquisition, and Schiller's secret Unlike specific attributed to statements Schiller, accounting for the EXXI's improper use of cash hedge accounting, the EXXI' s EXXI's ultra- loan from defendant Louie. 142 on Plaintiffs these argue issues that the made by or statements regarding EXXI's ultra-deep drilling activities for which they seek to hold the Director Defendants liable were not attributed to any person. 143 Citing Southland, 365 F.3d at 365, Plaintiffs argue that 141 Plaintiffs' Opposition to Director Defendants' MD, Docket Entry No. 115, pp. 8-10 (citing Plaintiffs' Amended Complaint, Docket Entry No. 97, pp. 11-13 ~~ 48-53 and p. 62 ~ 290). 142 Id. at 12-22. 143 Id. at 12-13, & n. 5. -89- "directors may be held liable for false, misleading, or incomplete statements in corporate documents that have no stated author or are not attributed to any individual if they are sufficiently linked to the document or statement in question. " 144 (i) Statements About EXXI's Ultra-Deep Drilling Activities Are Not Actionable Plaintiffs argue that they have plausibly alleged that the Director Defendants caused EXXI to make false and misleading statements regarding EXXI's ultra-deep oil drilling activities in a November 7, 2012, Press Release regarding the McMoRan and Davy Jones well production, and in EXXI's Form 10-Q filed on February 7, 2014, for the allegations quoted in period regarding § ended December the November III.A.2 (d) (1) (i) (A), 31, 7, 2013. 145 2012, above, and Press their Plaintiffs' Release are allegations regarding the Form 10-Q filed on February 7, 2014, are quoted in § I I I . A . 2 (d) ( 1) ( i) (D) , above . For the reasons stated in those previous sections of this Memorandum Opinion and Order, the court has already concluded that Plaintiffs' Amended Complaint fails to allege facts capable of establishing that any of the statements in either the November 7, 2014, 2012, Press Release, Form 10-Q about which Plaintiffs 144 or the February 7, complain were false or Id. at 12. 145 Id. 12-13 (citing Plaintiffs' Entry No. 97, pp. 28-29 ~ 127, and 30 -90- ~ Amended 136. Complaint, Docket misleading when made. fails Plaintiffs' to allege facts Amended Complaint similarly capable of establishing that any of the statements about EXXI' s ultra-deep drilling activities contained in either of these documents was attributed to, formulated, signed, adopted, or used by any of the Director Defendants as conduits to the market. Absent such allegations, the Director Defendants cannot be held liable :for statements in either the November 7, 2012, Press Release, or the February 7, 2014, Form 10-Q. See Azurix, 198 F. Supp. 2d at 882 (holding that statements were "not actionable because plaintiffs have not pleaded any facts indicating that the statements were untrue"); Southland, 365 F. 3d at 365 (holding that facts tying an officer or director to a statement "would include a signature on the document or particular factual allegations explaining the individual's involvement in the formulation of either the entire document, or that specific portion of the document") . Also missing from Plaintiffs' Amended Complaint are allegations of fact capable of establishing that any of the statements contained in either the November 7, 2012, Press Release, or the February Accordingly, the 7, court 2014, Form concludes 10-Q that mislead the the market. Director Defendants cannot be held liable under the Exchange Act for allegedly false and misleading statements about EXXI's activities made in either the November 7, the February 7, 2014, Form 10-Q. -91- ultra-deep drilling 2012, Press Release or ( ii) Statements About EXXI' s Accounting For The EPL Acquisition Are Not Actionable Asserting that after EXXI acquired EPL, EPL wrote down assets as impaired, only to have EXXI delay doing so by one quarter, 146 that in Plaintiffs' Amended Complaint they "allege in detail the sequence of accounting for the impairment charges, 11147 and that "EXXI restated financial statements that were prepared after the Company acquired EPL in June [of 2014, 11148 Plaintiffs argue that [t]he side-by-side comparison of EXXI's recognition of impairments in the Company's consolidated annual and quarterly financial statements with EPL's more timely recognition of them in its stand-along financial statements amply explains how and why EXXI's accounting for the assets acquired from EPL in the Company's consolidated financial statements was false, misleading, and incomplete. The adequately inform the Director Defendants of the particular misrepresentations. 149 Citing Southland, 365 F.3d at 365, Plaintiffs argue that the Director Defendants are liable for the false, misleading, or incomplete statements in EXXI's financial statements because they are linked to them by virtue of their ability to control EXXI' s financial disclosures. . In particular, the Director Defendants who were members of the Audit Committee - Colvin (Chair), Flannery, Dunwoody, Griffiths, and Feinberg (ex officio) are closely linked to the Company's financial statements. As members of the Audit Committee, those five Director Defendants recommended the annual appointment of the Company's auditor, reviewed the scope of the audits, reviewed the Company's accounting principles, and reviewed the Company's financial 146 Id. at 13. 147Id. 148 Id. at 14. 149Id. -92- statements included in the annual and quarterly reports filed with the SEC. ~ 54. They are undoubtedly liable for the false and misleading financial statements. 150 Plaintiffs' argument that the Director Defendants can be held liable under the Exchange Act for false or misleading statements in EXXI' s financial statements because EXXI recognized impairment charges for EPL one quarter after EPL did without explaining the reason for its delayed recognition is not supported by allegations of particularized fact. are allegations of Missing from Plaintiffs' Amended Complaint facts capable of establishing the relevant accounting standards, how those standards were violated, or that any of the Director Defendants knew - or ignored glaring red flags - that EXXI' s financial statements were false and misleading due to improper accounting for impairment of EPL's assets. from Plaintiffs' Also missing Amended Complaint is an allegation that any of EXXI's financial statements were restated to correct misstatements arising from a failure to properly account for the impairment of EPL' s assets. Defendants' MD Missing from Plaintiffs' is any argument or Opposition to Director authority supporting their contention that a corporate parent has a duty to explain why its accounting for impairment of a subsidiary's assets differs from the subsidiary's own accounting for impairment of the same assets. See MDC Partners, 2016 WL 5794774, at *3, 9-11, 24 (dismissing§ 10(b) claim that company 150 rested should on allegations have tested and Id. at 14-15. -93- of how management impaired goodwill of parent related to subsidiary). that Lead See also Harris, 135 F. Supp. 3d at 171 ("The fact Plaintiff cannot tick and tie adjustment expense reported in AmTrust' s the loss and loss consolidated financial statement to the losses its individual subsidiaries reported to insurance regulators, misstatement."). without more, does not plausibly allege a Because Plaintiffs do not allege facts capable of establishing that the Director Defendants made or caused EXXI to make any false or misleading statements about EPL and/or the impairment of its assets, or that EXXI had a duty to explain the differences between its accounting for impairment of EPL's assets and EPL' s own accounting· for impairment of its assets, and because Plaintiffs neither allege nor argue that any statements about EPL misled the market, the court concludes that the Director Defendants cannot be held liable under the Exchange Act for allegedly false and misleading statements about EPL and/or EXXI's accounting for impairment of EPL' s assets. See In re Azurix Corp. Securities Litigation, 198 F. Supp. 2d at 882. (iii) EXXI's Financial Actionable Statements Are Plaintiffs allege that because EXXI used hedge accounting without required documentation, "EXXI was required to restate its financial statements for the fiscal years ended June 30, 2012, 2013, September 30, and 2014, and for the 2013 through March 31, 151 Id. at 16 (citing Plaintiffs' Entry No. 97, pp. 19-20 ~ 89). -94- intermediate 2015." 151 2011, quarters from Plaintiffs argue Amended Complaint, Docket that "[t] he Director Defendants cannot dispute that those erroneous financial statements were materially false issued. " 152 and misleading when Because Plaintiffs' Amended Complaint alleges that each of the Director Defendants signed the Company's annual reports filed with the SEC on Forms 10-K and 10-K/A, 153 each of them can be held liable for annual reports. false and misleading statements made in those The Director Defendants do not dispute that they signed EXXI's annual reports filed with the SEC on Forms 10-K and 10-K/A and that the annual reports for fiscal years ending June 30, 2011, 2012, 2013, and 2014 that they signed and that were ultimately restated did not contain statements that were false and misleading. 154 The court concludes, therefore, that the Plaintiffs have pled specific facts sufficient to hold the Director Defendants liable for the financial statements that they signed containing false and misleading statements resulting from EXXI's use of hedge accounting. lOb-S, See Janus, 131 S. Ct. at 2302 ("For purposes of Rule the maker of a statement is ultimate authority over the statement, the person or entity with including its content and whether and how to communicate it."). 1s2Id. 153 Plaintiffs' Amended Complaint, Docket Entry No. 97, pp. 1113 ~ 46 (LaChance), ~ 48 (Colvin), ~ 49 (Flannery), ~ 50 (Dunwoody), ~ 51 (Griffiths), ~ 52 (Feinberg), and ~ 53 (Dupre) . 154 Id. a t 11 ff11 46 • -95- (iv) Statements About Schiller's Loans Are Not Actionable Plaintiffs allege that EXXI's Form 8-K filed with the SEC on December 15, 2014, was false and misleading because it "state[d] that there were no related party transactions between Louie and the Company or any of its subsidiaries that would require disclosure pursuant to Item 404(a) of Regulation S-K," but failed to disclose that Schiller had taken a personal loan from Louie. 155 reasons stated in§ III.A.2(c) (1), concluded that the statement above, in the But for the the court has already Form 8-K about which the Plaintiffs complain was neither false nor misleading and therefore not actionable under the Exchange Act. (v) Conclusions For the reasons stated above, the court concludes that the purportedly false and misleading statements that Plaintiffs allege the Director Defendants caused EXXI to make about ultra-deep drilling activities, accounting for the impairment of EPL's assets, and Schiller's secret loan from defendant Louie will not support Exchange Act claims, but that Plaintiffs have alleged an actionable claim against statements signed, the Direct contained that were in Defendants EXXI' s filed with for financial the SEC, false and misleading statements and that were that restated because EXXI improperly utilized cash flow hedge accounting. Janus, 131 S. Ct. at 2302. 155 Id. at 56 ~~ 269-70. -96- they See (2) Scienter Asserting that "[t]he facts of the restatements give rise to a strong inference of scienter[, as] do the facts of the related party transaction between Louie and Schiller," 156 Plaintiffs argue that the Director Defendants, particularly the four directors on the Nomination and Governance Committee, were severely reckless in not discovering Louie's loan to Schiller before he joined the Board. And so, too, do the facts relating to the accounting for the EPL acquisition and EXXI's ultra-deep drilling activities. The differences in accounting for impairment in EXXI' s consolidated financial statements [for] EXXI when compared to the stand-alone financial statements of its subsidiary, EPL, cannot be attributed to any "overhaul" in accounting systems. Taken together, the sum of all these misstatements and omissions of material fact easily gives rise to the requisite strong inference of scienter . 157 Plaintiffs allege that the Director Defendants signed SEC filings that contained false and misleading statements of EXXI's financial condition because EXXI misapplied the accounting standard for documenting use of cash flow hedge accounting. publication of inaccurate accounting figures, But "the mere or a follow GAAP, without more, does not establish scienter. failure to The party must know that it is publishing materially false information, or the party information." must be severely Lovelace:_, 78 reckless F. 3d at 1020. in publishing See also such Central Laborers, 497 F.3d at 555 (recognizing that a defendant's signature 156 Plaintiffs' Opposition to Director Defendants' MD, Docket Entry No. 115, p. 23. 1s7Id. -97- on an SEC filing with false or misleading statements or omissions cannot by itself support a strong inference of scienter) . scienter from accounting errors, magnitude, pervasiveness, simplicity and and obviousness courts typically repetition of the of misapplied the To infer examine the errors; the rules; and defendant's apparent motives for misapplying these rules. ArthroCare, argued that 726 F. the Supp. number, 2d at 721. size, timing, the See Although Plaintiffs have nature, frequency, and context of the misapplication of accounting principles and the restatement raise a strong inference of scienter as to Griffin, EXXI's CFO, plaintiffs Director Defendants. have made no such argument as to the Instead, Plaintiffs merely point to the loans that Schiller borrowed from fellow Board member Louie that the Director Defendants neither discovered nor disclosed. reasons stated in §§ But for the III .A. 2 (c) (1) and III .A. 2 (d) (1) (iv), above, the court has already concluded that Plaintiffs have failed to allege any facts capable of establishing that Louie or Schiller had a duty to disclose those loans. to disclose scienter. is not capable See Chiarella v. Absent a duty to disclose, failure of raising a United States, strong 100 inference of s. Ct. at 1118 ("When an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak."). Moreover, missing from Plaintiffs' Amended Complaint are any allegations of specific facts connecting the Director Defendants to the accounting violations that led to the restatement of EXXI's -98- financial statements. Nor are there allegations that any of the Director Defendants engaged in insider trading or stood to benefit personally from any of the alleged accounting errors. Plaintiffs offer no facts in support of their contention that the Director Defendants signed the financial statements at issue with scienter other than the fact that, like the directors of every company, they had control over the Company. (find no scienter for See Izadjoo, 237 F. Supp. 3d at 516 officers irregularities or red flags" misstatements and omission earnings calls). where there were no "glaring to put them on notice of material in Sarbanes-Oxley certifications or Plaintiffs cannot demonstrate scienter by relying either on the Director Defendants' position on the Board or on certain board committees, Abrams, 292 F.3d at 432, or on the fact that certain financial Laborers, itself, 497 does F. 3d at not statements were 546 create (restatement a strong See Central restated. of financial inference of data, by scienter) . Plaintiffs' factual allegations make it more plausible or at least as plausible to infer that when signing the SEC filings at issue Schiller negligently relied on EXXI' s accountants and auditors than to infer that he knowingly or recklessly disregarded the presence of glaring accounting irregularities or other red flags in EXXI's financial statements. Laborers, 497 F.3d at See Tellabs, 127 S. Ct. at 555. See also Abrams, 292 2510; Central F.3d at 433 (recognizing that accounting problems that lead to a restatement of a company's financials can "easily arise from negligence, oversight -99- or simple necessary mismanagement, to support a none of securities concludes therefore that Plaintiffs' sufficient to raise a strong which fraud rise to the standard The action") court factual allegations are not inference of scienter as to the Director Defendants. (3) Loss Causation The Director Defendants argue that even if Plaintiffs could satisfy the falsity and scienter elements of their Exchange Act claims that "[a] third, independent basis compelling dismissal is Plaintiffs' failure to plead facts demonstrating loss causation that is, 'a causal connection between misrepresentation and the loss. that the Plaintiffs have not I " 158 the [alleged] material The Director Defendants argue alleged that there was any loss associated with any of the statements or categories of statements that Plaintiffs allege were false and misleading, i.e., statements about EXXI's ultra-deep drilling activities, EPL, Schiller's loans, or EXXI' s improper use of hedge accounting. 159 158 Director Defendants' MD, Docket Entry No. 105, p. 27. Defendants UHY and Schiller join the Director Defendants' argument on loss causation. See UHY's MD, Docket Entry No. 101, p. 7 & n.2 ("The arguments in the motion to dismiss of the Director Defendants are adopted for purposes of this motion to dismiss;" and n. 2, " [w] i th respect to the securities fraud claim, UHY incorporates the arguments regarding group pleading, loss causation, and the statute of repose."); Schiller's MD, Docket Entry No. 104, p. 6 ("Mr. Schiller joins in all of the arguments in The Director Defendants' Motion to Dismiss and incorporates those arguments herein by reference.") 159 Id. at 27-29. -100- Plaintiffs respond that they "have sufficiently alleged loss causation to withstand [the defendants'] motion [s] to dismiss. " 160 Citing inter alia Lormand, 565 F.3d at 256-58, and asserting that "[l]oss causation is subject to the pleading standard of Federal Rule of pleading [Civil] Procedure requirement of 8 (a) (2), rather 9(b) ," 161 Rule "[u]nder that relaxed pleading standard, facially plausible connection omissions and loss. " 162 their between than the Plaintiffs heightened argue that [they] need only allege a the Citing North misstatements Port or Firefighters' Pension- Local Option Plan v. Temple-Inland, Inc., 936 F. Supp. 2d 722, 761 (N.D. Tex. 2013), Plaintiffs argue that they "need not plead a fact-for-fact disclosure to establish loss causation," 163 and if the court disagrees, opportunity to amend Plaintiffs "respectfully request the their complaint to add such factual allegations in further support of loss causation. " 164 Under the PSLRA Plaintiffs must prove that a defendant's act or omission alleged to have violated federal securities laws "caused the loss for which the plaintiff seeks to recover damages." 15 U.S.C. § 78u-4 (b) (4). Loss causation refers to a direct link 160 Plaintiffs' Opposition to Director Defendants' MD, Entry No. 115, p. 24. 161Id. 164 Id. at 25. -101- Docket between the misstatement and a plaintiff's loss, requires a corrective representations, F.3d 676, relating to the challenged followed by a decline in stock price after the truth is revealed. 758 disclosure and generally & See Spitzberg v. Houston American Energy Corp., n.l8 (5th Cir. 2014) (citing In re Williams Securities Litigation, 558 F.3d 1130, 1137 (lOth Cir. 2009)). In Dura Pharmaceuticals, 125 S. Ct. at 1633-34, the Court held that loss causation incorporates causation and economic loss. traditional elements See Amgen, 133 of S. proximate Ct. at 1192 (confirming that loss causation continues to be an element of a claim under Rule 8(a) heightened § and 10 (b)) . The 12(b) (6) pleading, Fifth Circuit plausibility is sufficient has pleading to plead held that standard, loss the not causation. Lormand, 565 F. 3d at 258 (" [W] e conclude that Rule 8 (a) ( 2) requires the plaintiff to allege, in respect to loss causation, a facially 'plausible' causal relationship between the fraudulent statements or omissions and plaintiff's economic loss, including allegations of a material misrepresentation or omission, followed by the leaking out of relevant or related truth about the fraud that caused a significant part of the depreciation of the stock and plaintiff's economic loss or, as Twombly indicates, the complaint must allege enough facts to give rise to a reasonable hope or expectation that discovery will reveal evidence of the foregoing omitted)) . elements of loss causation." (internal citations A court is "not authorized or required to determine -102- whether the plaintiff's plausible inference of loss causation is equally or more plausible than other competing inferences, as [it] must in assessing allegations of scienter under the PSLRA." Id. at 267. In pertinent part Plaintiffs allege: LOSS CAUSATION/ECONOMIC LOSS 278. As alleged herein, Defendants engaged in a scheme to deceive the investing market generally, and Plaintiffs in particular, and a course of conduct that artificially inflated EXXI's stock price and operated as a fraud or deceit on purchasers of EXXI stock by misrepresenting the Company's financial and operating condition and prospects as well as known trends in its industry. 279. Once Defendants' misrepresentations and fraudulent conduct were disclosed to the market, EXXI's stock price reacted negatively as the artificial inflation was removed from it. As a result of their purchases of EXXI stock alleged herein, and their decision to refrain from selling EXXI stock alleged herein, Plaintiffs suffered significant economic losses. 280. Defendants' false and misleading statements had the intended effect and caused EXXI stock to trade at artificially inflated levels at all relevant times and caused Plaintiffs to refrain from selling EXXI stock. 281. As investors and the market became aware of EXXI's prior misstatements and omissions and that EXXI's actual financial condition and business prospects were, in fact, not as represented, EXXI's stock price reacted negatively substantially damaging Plaintiffs . 165 I Missing from Plaintiffs' Amended Complaint are allegations that identify any corrective disclosure followed by a drop in the price of EXXI stock. 165 Plaintiffs ~~ 278-81. 1 Argument as to the existence of any such Amended Complaint, Docket Entry No. -103- 97, p. 59 disclosures is also missing from the briefs that Plaintiffs have filed in opposition to the defendants' motions to dismiss. Plaintiffs allege that in September of 2015 EXXI was required to restate more than four years of financial eliminate the use of hedge accounting. 166 statements to Plaintiffs allege that EXXI's financial statements for the years ending June 30, 2011, 2012, 2013, 2014, and 2015, filed with the SEC on August 26, 2011, August 9, 2012, August 21, 2013, August 28 and December 23, 2014, and September 29, 2015, were materially false and misleading because they stated that EXXI did not use hedging for speculative or trading purposes. 167 financial Plaintiffs allege that " (u] ntil EXXI' s statements were corrected on September 29, Company's publicly filed financial 2015, the statements for at least the years ended[] June 30, 2011, 2012, 2013, and 2014, and for all the intervening quarters materially misstated and did not fairly and accurately present the results of operations." 168 Company's financial condition and its Plaintiffs do not allege that EXXI stock price declined as a result of the disclosure that four years of financial statements would be restated. The Director Defendants argue that Plaintiffs are unable to satisfy the requirement for pleading loss causation ~ 166 Id. at 17-18 167 Id. at 52 ~ 249. 168 Id. at 54 ~ 257. because 77. -104- EXXI's stock price actually increased following disclosure in September of 2015 that certain of EXXI's financial statements would be restated and that Schiller had taken personal loans from Louie and from EXXI vendors. 169 While the Fifth Circuit has recognized that courts can take judicial F. notice of App' x at 316, historical stock prices, see Catogas, 292 the court need not do so here because it is sufficient in considering the motions to dismiss that Plaintiffs have alleged no losses September of 2015. following See Schott, the relevant 211 F. Supp. disclosures 3d at 946. in Since Plaintiffs have not alleged that the restatements caused their losses, the court does not analysis of loss causation. factor the restatements into its Instead, Plaintiffs allege that EXXI's disclosure that it was required to restate its financial statements to eliminate cash flow hedge accounting was materially false and misleading because it made it appear that the reason for the restatement was a mere technical deficiency in documentation, when the true reason for the restatement was that the Company was hedging for improper purposes, including speculating on future oil and natural gas prices or manipulating reported revenue and earnings. 170 But also missing capable of restatements from Plaintiffs' establishing was false, that or Amended Complaint are EXXI's that the facts stated reason for the stated reason for the restatements was ever the subject of a corrective disclosure that 169 Director Defendants' MD, Docket Entry No. 105, pp. 28-29 (citing Exhibit 10, EXXI stock price table, Docket Entry No. 10610) . 170 55 ~ Plaintiffs' Amended Complaint, Docket Entry No. 97, pp. 54259. -105- was followed by a decline in stock price. Accordingly, Plaintiffs have failed to plead loss causation. At the end of their responsive briefing on the issue of loss causation, Plaintiffs request leave to amend "[t]o the extent the Court requires specificity notwithstanding pleading requirements request the factual allegations of Rule opportunity to in 8 (a) (2), amend further their should freely give leave "Although Rule 15[a] [to amend] 314 (5th Cir. respectfully complaint of general to add such causation. " 171 loss states that "[t]he court when justice so requires." 'evinces a bias in favor of granting leave to amend,' it is not automatic." 311, Plaintiffs support Federal Rule of Civil Procedure 15(a) (2) the 1996), Matter of Southmark Corp., 88 F.3d cert denied, 117 S. Ct. 686 (1997) (quoting Dussouy v. Gulf Coast Investment Corp., 660 F.2d 594, 597 (5th Cir. 1981)). "A decision discretion of the trial court. to grant leave Its discretion, is within the however, is not broad enough to permit denial if the court lacks a substantial reason to Mortgage curiam)) . do so. " Co., 50 Id. F.3d Generally, (citing State 1298, a 1302-1303 district court of Louisiana v. (5th Cir. errs in Litton 1995) (per dismissing a complaint for failure to state a claim under Rule 12(b) (6) without giving the plaintiff an opportunity to amend. Bazrowx v. Scott, 136 F. 3d 1053, cert. 171 1054 (5th Cir.) Plaintiffs' Opposition Docket Entry No. 115, p. 25. (per curiam) , to -106- the Director denied, 119 Defendants' MD, S. Ct . 15 6 ( 19 9 8) . If, however, a complaint alleges the plaintiff's best case, there is no need for further amendment. Id. See also Jones v. Greninger, 188 F.3d 322, 327 (5th Cir. 1999) (per curiam) (dismissing plaintiff's pro se action because court could perceive of no viable claim plaintiff could include in an amended The Fifth Circuit has complaint based on the underlying facts) . also held that in exercising its discretion, a court may consider various criteria including, inter alia, the failure to cure deficiencies by amendments previously allowed and futility of the proposed amendment. F.2d 831, 227, 230 836 See Whitaker v. City of Houston, Texas, (5th Cir. 1992) (1962)). (citing Foman v. Davis, Because Plaintiffs have 963 83 S. Ct. already had an opportunity to file an amended complaint and because the court is persuaded that Plaintiffs have pleaded their best case, the Plaintiffs' request for leave to amend will be denied. B. Control Person Liability Claims Plaintiffs liable as allege that the "controlling persons" Exchange Act. Individual of EXXI Defendants under § 20 (a) are all of the Section 20(a) imposes joint and several liability on "[e]very person who, directly or indirectly, controls any person liable under any provision of this chapter or of regulation thereunder" for securities fraud. any rule or 15 U.S.C. § 78t(a). "Control person liability is secondary only and cannot exist in the absence of a primary violation." Southland, 365 F.3d at 383. Because the court has concluded that the Plaintiffs' primary claims -107- under§ 10(b) should be dismissed, the§ 20(a) claims will also be dismissed under Rule 12(b) (6) which relief can be granted. C. for failure to state a claim upon See Izadjoo, 237 F. Supp. 3d at 520. Common Law Fraud Claims Plaintiffs assert claims for common law fraud against all of the defendants . 172 Under Texas law a claimant alleging fraud must prove the following: (1) that a material representation was made; (1) the representation was false; (3) when the representation was made, the speaker knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion; (4) the speaker made the representation with the intent that the other party should act upon it; (5) the party acted in reliance on the representation; and (6) the party thereby suffered injury. Aguaplex, Inc. v. Rancho La Valencia, (Tex. 2009) S. W. 3d (per curiam) 749, 758 (Tex. Inc., 297 S.W.3d 768, 774 (quoting In re FirstMerit Bank, N.A., 52 2001)) . See also Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d 200, 212-13 (5th Cir. 2009) not (same). subject to Although Plaintiffs' common law fraud claim is the heightened pleading scienter under the "strong PSLRA, inference" standard for Plaintiffs are nevertheless required to satisfy Rule 9(b), which requires them to state with particularity facts supporting each 172 element of fraud. See Plaintiffs' Amended Complaint, Docket Entry No. 97, pp. 6667 ~~ 313-320. Although Plaintiffs' Amended Complaint does not specify that this claim is being asserted under Texas law, both defendants and Plaintiffs have cited and relied upon Texas law. See Director Defendants' MD, Docket Entry No. 105, pp. 31-33 and Plaintiffs' Opposition to the Director Defendants' MD, Docket Entry No. 115, p. 27. -108- Benchmark Electronics, Inc. v. J.M. Huber Corp., 343 F.3d 719, 724 (5th Cir. 2003). "'At a minimum, Rule 9 (b) requires allegations of the of particulars time, place, and contents of the false representations, as well as the identity of the person making the Id. misrepresentation and what he obtained thereby. '" Tel-Phonic Services, Inc. v. 1134, 1139 (5th Cir. 1992)). plead the who, what, when, TBS International, In other words, where, Inc., (quoting 975 F.2d the claimant must and how of the fraud. Plaintiffs' common law fraud claims rest on the same alleged misstatements underlying their Exchange Act claims and fail for the same reasons, particularity statements i.e., showing with Plaintiffs that scienter any that have of not the caused alleged defendants injury. facts made with false Accordingly, defendants' motions to dismiss Plaintiffs' common law fraud claims will be granted, and these claims will be dismissed. D. Breach of Fiduciary Duty Claims Plaintiffs assert claims for breach of fiduciary duty against the Individual Defendants. 173 In pertinent part Plaintiffs allege that the Individual Defendants breached their fiduciary duties of care and loyalty to the Company and its shareholders, including the Plaintiffs, the inter alia "by making or causing the Company to make materially false and misleading statements about the Company's 173 Plaintiffs' Amended Complaint, Docket Entry No. 97, pp. 6769 ~~ 321-32. -109- financial and operating condition and prospects alleged herein." 174 Plaintiffs also allege that "[t]he Individual Defendants' breaches of fiduciary duty were intertwined with the materially false and misleading statements they made or caused the Company to make about the Company's financial alleged herein. " 175 and operating Plaintiffs' condition breach of and prospects fiduciary duty claims rest on the same alleged misstatements underlying their Exchange Act claims and fail for the same reasons, i.e., Plaintiffs have not alleged facts with particularity showing that any of the defendants made false statements that caused injury. Accordingly, defendants' motions to dismiss Plaintiffs' breach of fiduciary duty claims will be granted, and these claims will be dismissed. IV. Conclusions and Order For the reasons explained above, the court concludes that Plaintiffs have failed to state claims for violations of and 20(a) U.S.C. §§ C.F.R. § of the Securities Exchange Act of 1934 §§ 10(b) (1934 Act), 15 78j (b), 78t(a), and Rule 10b-5 promulgated thereunder, 17 240.10b-5, fiduciary duty. 176 for common law fraud, or for breach of Accordingly, UHY LLP' s Motion to Dismiss (Docket 174 Id. at 68 ~ 324. 175 Id. at 69 ~ 329. 176 The court has allowed the parties extraordinary leeway in submitting lengthy briefs and other written materials in connection with the pending motions. As the length of this Memorandum Opinion and Order indicates, the court has expended considerable time (continued ... ) -110- Entry No. 101) is GRANTED. Defendant D. West Griffin's Motion to Dismiss the Amended Complaint (Docket Entry No. 102) is GRANTED. Defendant Norman M.K. Louie's Complaint (Docket Entry No. Schiller, Jr.'s Motion to Dismiss the Amended Complaint Entry No. 104) is GRANTED. 103) Motion to Dismiss is GRANTED. the Amended Defendant John D. The Director Defendants' (Docket Motion to Dismiss the Amended Complaint (Docket Entry No. 105) is GRANTED. Plaintiffs' request for leave to amend is DENIED. SIGNED at Houston, Texas, on this the 14th day of March, 2019. LAKE UNITED STATES DISTRICT JUDGE 176 ( • • • continued) reading these papers and performing a significant amount of independent research to be as fully informed as possible when addressing the parties' arguments. While, because of the sheer volume of information presented, it is not impossible that some arguments were overlooked, the parties should assume that failure to expressly address a particular argument in this Memorandum Opinion and Order reflects the court's judgment that the argument lacked sufficient merit to warrant discussion. Accordingly, the court strongly discourages the parties from seeking reconsideration based on arguments they have previously raised or that they could have raised. -111-

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