Albert Fadem Trust v. American Elec. Power Co.

Citation334 F.Supp.2d 985
Decision Date10 September 2004
Docket NumberNo. C2-02-1104.,No. C2-02-1261.,No. C2-02-1211.,No. C2-02-1060.,No. C2-02-1076.,No. C2-02-1113.,No. C2-02-1141.,No. C2-02-1087.,No. C2-03-67.,No. C2-02-1045.,No. C2-02-1132.,No. C2-02-1094.,C2-02-1045.,C2-02-1087.,C2-02-1113.,C2-02-1060.,C2-02-1094.,C2-02-1132.,C2-02-1076.,C2-02-1104.,C2-02-1141.,C2-02-1261.,C2-03-67.,C2-02-1211.
PartiesThe ALBERT FADEM TRUST, et al., Plaintiffs, v. AMERICAN ELECTRIC POWER COMPANY, INC., et al., Defendants. This Document Relates To: All Actions
CourtU.S. District Court — Southern District of Ohio
334 F.Supp.2d 985
The ALBERT FADEM TRUST, et al., Plaintiffs,
This Document Relates To: All Actions
No. C2-02-1045.
No. C2-02-1087.
No. C2-02-1113.
No. C2-02-1060.
No. C2-02-1094.
No. C2-02-1132.
No. C2-02-1076.
No. C2-02-1104.
No. C2-02-1141.
No. C2-02-1261.
No. C2-03-67.
No. C2-02-1211.
United States District Court, S.D. Ohio, Eastern Division.
September 10, 2004.

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Stanley Morris Chesley, Waite Schneider Bayless & Chesley Co LPA, Cincinnati, OH, for Plaintiffs.

Alvin James McKenna, Bryan R. Faller, Porter Wright Morris & Arthur, Columbus, OH, for Defendant.


ALGENON L. MARBLEY, District Judge.


This case is before the Court on the Motion to Dismiss the Consolidated

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Amended Complaint ("CAC") filed by Defendants, American Electric Power Company, Inc. ("AEP"), E. Linn Draper, Jr., Thomas Shockley, III, Susan Tomasky, J.M. Buonaiuto, E.R. Brooks, Donald M. Carlton, John P. DesBarres, Robert W. Fri, William R. Howell, Lester A. Hudson, Jr., Leonard Kujawa, Richard Sandor, Donald W. Smith, Linda Gillespie Stuntz, and Kathryn D. Sullivan (the "Individual Defendants," and collectively with AEP, the "Defendants").1 For the following reasons, the Motion to Dismiss is GRANTED and the Motion for Leave to file a Second Consolidated Amended Complaint ("SCAC") is DENIED.

Plaintiffs failed to plead Defendants' scienter with the particularity required by the Federal Rules of Civil Procedure Rule 9(b) and the Private Securities Litigation Reform Act ("PSLRA"). Thus, dismissal of their claims under Section 10(b) and Rule 10b-5 is warranted. Because Plaintiffs fail to allege any actionable omissions or affirmatively misleading material statements, their Section 10(b) and Rule 10b-5 warrant further dismissal. This failure also provides the basis for dismissing Plaintiffs' claim under Section 11. Finally, without any primary liability, Plaintiffs cannot state a claim under Sections 15 or 20(a) for control person liability.


This is a federal securities class action brought under Sections 11 and 15 of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. §§ 77k and 77o; Sections

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10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a); and the rules and regulations promulgated thereunder by the Securities Exchange Commission ("SEC"), including Rule 10b-5, 17 C.F.R. § 240.10b-5. The claims under the Exchange Act are brought on behalf of all persons and entities who purchased or otherwise acquired AEP common stock between February 10, 2000 and October 9, 2002, inclusive (the "Class Period").3 The claims under the Securities Act are brought on behalf of all persons and entities who acquired shares of AEP common stock or AEP 9.25% equity units ("Equity Units") in a secondary offering on or about June 5, 2002 (the "Secondary Offering").4 Essentially, Plaintiffs contend that AEP and the Individual Defendants knew about or recklessly disregarded practices that the company engaged in during the Class Period and concealed the practices to cause the price of the Company's stock to become artificially inflated.

Defendant AEP is a public utility holding company that directly or indirectly owns various public utility companies operating in Arkansas, Indiana, Kentucky, Louisiana, Michigan, Ohio, Oklahoma, Tennessee, Texas, Virginia and West Virginia. Before 1997, AEP's business consisted of AEP and its wholly-owned subsidiaries, and the company derived operating revenue by selling power from the subsidiaries' generation facilities into the spot market, other competitive power markets, or on a contractual basis. AEP's many subsidiaries are involved in power engineering and construction services; energy management; the operation of natural gas pipelines, natural gas storage and coal mines; and wholesale energy trading and marketing. In addition, AEP owns a service company subsidiary, American Electric Power Service Corporation ("AEPSC"), which provides accounting, administrative, information systems, engineering, financial, legal, maintenance and other services at cost to the other AEP companies.

As for AEP's wholesale energy trading venture, in 1997, AEP established another subsidiary, AEP Energy Services ("AEPES"), for the purpose of trading energy on the newly deregulated wholesale markets.5 Employees of AEPSC, known as "traders," worked on behalf of AEPES to make these trades.6 AEPES quickly grew into one of the biggest traders in the industry, and it is undisputed that AEP touted the success of AEPES and the energy trading business to its investors throughout the Class Period.

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The primary government body overseeing the energy trading markets is the Federal Energy Regulatory Commission ("FERC"). The industry came under heightened scrutiny beginning in 2000-2001 because of the California Energy Crisis.7 In February of 2002, the FERC started investigating whether energy traders, in particular, had manipulated short-term energy prices in California and the Western United States by engaging in so-called "round-trip" or "wash" trades.8 Pursuant to its investigation, the FERC requested data from over 100 companies, including AEP, regarding whether the companies had engaged in such "round-trip trades," "wash" trades, or other manipulative transactions.9 Accordingly, AEP undertook an internal investigation, and on May 13, 2002 and on May 30, 2002, it publicly reported that it did not engage in "round-trip" or "wash" trades, and the CAC does not allege that it did.

On September 25, 2002, however, Dynegy, another major energy company, reported that fifteen of its employees had engaged in another type of manipulative practice — inaccurate reporting to trade publications. Trade industry publishers (the "Trade Press"), such as Platts, compile and publish daily and monthly natural gas price indices, statistics, trading volumes, and other related information10 in trade publications such as Inside FERC (monthly indices) and Gas Daily (daily indices). The price indices in these publications are determined, in large part, from information reported by natural gas market participants, primarily traders employed by the various energy companies.

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Traders provide "reports" to reporters employed by Platts, who conduct interviews, primarily via phone and facsimile, to get information regarding trades: prices, dates, volumes and sometimes the counterparties with whom the trades were made. Once gathered, all this information, including the source, is kept confidential by Platts. Platts takes the data, "sorts prices from low to high, looks for `outliers' ..., cross-checks with counterparties, and calculates descriptive statistics ... The index price is based on this analysis." FERC Report, at III-3. The accuracy of such data seems important because the price indices are used in determining the price of natural gas over time. Plaintiffs do not contend, however, that Platts and its publications actually set the prices. Nevertheless, prior to the Dynegy announcement, the FERC discovered that almost none of the companies within the industry had internal controls to regulate reporting.11

The lack of internal controls was one of the primary findings of the FERC investigation into the specific issue of false reporting. From the FERC Report, it appears that this round of the investigation began on October 22, 2002, when the FERC sent data requests to the largest natural gas marketers inquiring about their "past reporting practices, any internal procedures or controls they may have had in place; any changes they have made to those procedures; and any investigations they [had] in progress." FERC Report, at III-19. AEP allegedly began investigating its internal reporting procedures on October 4, 2002, shortly after the Dynegy announcement. Five days later, on October 9, 2002, AEP announced that five of the AEPES traders had reported inaccurate data to Platts between 1998-2002. It also announced that it had dismissed the traders and instituted new internal procedures to ensure the accuracy of future reporting, including requiring the company's chief risk officer to verify the information, and only then, report the information to trade publications.

Plaintiffs do not dispute that AEP made these public disclosures, took corrective action against the employees and instituted remedial measures after October 2002.12

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Plaintiffs, instead, dispute that AEP did not learn of the practice until October of 2002. In fact, it is the gravamen of Plaintiffs' CAC that AEP and the Individual Defendants knew about or recklessly disregarded the practice of inaccurate reporting during the Class Period and concealed it to cause the price of the Company's stock to become artificially inflated. They state that the artificial inflation is evidenced by the 22% and 17% decline in the price of Common Stock and Equity Units, respectively, at close on October 9, 2002.

Specifically, Plaintiffs allege that, since 1998, AEP engaged in the inaccurate reporting in an attempt to manipulate the market for natural gas. Plaintiffs contend that AEP reported false prices and volumes of natural gas trades, and, in some cases, reported trades that never occurred. In this way, Plaintiffs argue that AEP portrayed itself as having a greater volume of trading activity in particular trading locations, which in turn moved the indices to favor AEP's trading positions. According to Plaintiffs' CAC, "AEP had attempted to manipulate the published price indices to AEP's advantage, and AEP traders stated that the head of AEP's trading desk had specifically instructed them to submit the false information ... AEP had no internal procedures in place to ensure the accuracy of the reported...

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