Carlton v. Cannon
| Decision Date | 04 May 2016 |
| Docket Number | CIVIL ACTION NO. H-15-012 |
| Citation | 184 F.Supp.3d 428 |
| Parties | Dave Carlton, et al., Plaintiffs, v. Fred Cannon, et al., Defendants. |
| Court | U.S. District Court — Southern District of Texas |
Nicholas Porritt, Adam Marc Apton, Levi & Korsinsky, LLP, Washington, DC, R. Dean Gresham, Gresham PC, Dallas, TX, Laurence M. Rosen, Phillip Kim, The Rosen Law Firm, P.A., New York, NY, James L. Gascoyne, Gascoyne Bullion PC, Sugar Land, TX, for Plaintiffs.
David D. Sterling, Baker Botts LLP, Cristina Espinoza Rodriguez, Hogan Lovells US LLP, Noelle M. Reed, Wallis Mizell Hampton, Skadden Arps et al., Houston, TX, Gregory D. Chisholm, Peter A. Spaeth, Alexandra Boudreau, Peter J. Kolovos, Wilmer Cutler Pickering Hale and Dorr LLP, Boston, MA, Michael G. Bongiorno, Wilmer Cutler Pickering Hale Dorr LLP, New York, NY, Jan Nielsen Little, Julia Sun Choe, Steven P. Ragland, Justina Kahn Sessions, Keker Van Nest LLP, San Francisco, CA, for Defendants.
KiOR, Inc., is a once-promising "clean-tech" start-up company that hoped to commercialize technology to turn woodchips into oil. KiOR attracted prominent investors, media attention, and state and federal funding. The manufacturing of its product, and the company, failed. In this putative class action, investors allege that KiOR violated the federal securities laws in the process. The lead plaintiffs, Dave Carlton and Sharon Kegerreis, sued KiOR; its CEO, Fred Cannon; its CFO, John Karnes; and its cofounder and majority shareholder, Vinod Khosla, under the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a –78pp, seeking to represent purchasers of KiOR's stock between June 24, 2011 and March 17, 2014.
KiOR filed for bankruptcy protection after this suit was filed. The court stayed the claims against KiOR and severed the claims against the individual defendants. See 11 U.S.C. § 362(a)(1) ; (Docket Entry No. 84). The plaintiffs filed a third amended complaint against Cannon, Karnes, and Khosla, alleging that Cannon and Karnes violated § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5 ; and that all three individual defendants violated § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). The plaintiffs alleged that the individual defendants knowingly made false and misleading statements to investors in KiOR's registration prospectus, quarterly and annual SEC filings, earnings calls, press releases, and investor presentations. The statements concerned the yields and costs at KiOR's demonstration unit in Houston, Texas; the hurdles facing KiOR's production capabilities at its commercial-scale plant in Columbus, Mississippi; and the projected future yields at the Columbus plant.
The individual defendants moved to dismiss. (Docket Entry Nos. 92, 93, 94). Cannon and Karnes argued that the safe-harbor provision in the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub. L. No. 104–67, 109 Stat. 737, applies; that the third amended complaint failed to allege the falsity of their statements with particularity; and that the complaint failed to allege facts giving rise to a strong inference of scienter. Khosla argued that he lacked the ability to control either the company's day-to-day operations or the specific misstatements alleged. The plaintiffs filed an omnibus response, (Docket Entry No. 97), and the defendants replied, (Docket Entry Nos. 99, 100, 101). The court heard oral argument. (Docket Entry Nos. 102, 107).
Based on the pleadings, the motions and responses, the applicable law, and counsel's arguments, the court grants Khosla's and Karnes's motions to dismiss. The claims against them are dismissed with prejudice because additional amendment would be futile.
The court denies Cannon's motion to dismiss. His statements from November 2012 to January 2014 about how the Columbus plant operated are actionable. See Part IV.A. Some of Cannon's statements cannot be the basis for liability, however. These statements include:
The reasons for these rulings are explained below. A status and scheduling conference is set for May 25, 2016 at 10:00 a.m. to set a scheduling order for discovery, subsequent motions, and trial.
Table of Contents
KiOR, a renewable-fuels company incorporated in 2007, sought to commercialize technology to convert nonfood biomass like woodchips into "green" gasoline for cars and other vehicles. (Docket Entry No. 86 at ¶ 76). The technology called for a process to reduce woodchips to a dry, flour-like dust and funnel the dust into a catalytic reactor that "cracks" the woodchips' molecular structure to vaporize and rearrange it. (Id. at ¶ 3). This process would produce crude oil and other byproducts, including light gases, water, and coke. The mixture would enter a separator to remove the catalyst from the oil and related byproducts and transfer them to a product-recovery unit for refining and a hydrotreating unit for processing into gasoline or diesel. The catalyst would be sent to a regenerator for cleaning and recycling. (Id. at ¶ 77).
The reactor, separator, and catalyst regenerator are part of the "biomass fluid-catalytic-cracking process." This is KiOR's core proprietary technology. The "yield"—the fuel this process extracts from the woodchips—is measured in gallons of fuel per one "bone-dry" ton of biomass.
The third amended complaint sets out extensive information from nonparty informants. Only one, Paul O'Connor, is identified by name. Khosla and Paul O'Connor founded KiOR in 2007. Khosla provided the initial financing, owned or controlled more than 70 percent of the voting stock, and appointed his business partner, Samir Kaul, to the board. O'Connor worked with Confidential Witness 6 ("CW 6"), who joined KiOR in 2007 as its senior scientist to develop the technology that KiOR tried to commercialize. O'Connor served on the board from November 2007 until June 2012, and again from March 18, 2014 to August 31, 2014. He was also KiOR's chief technology officer from 2007 to 2009.
KiOR developed a demonstration unit near Houston, Texas to test its technology. Based on the demonstration unit's results, KiOR went public in June 2011. The IPO materials stated that KiOR had achieved conversion yields of 67 gallons of fuel per bone-dry ton and that a commercial-scale plant could consistently achieve this yield at a production cost of less than $1.80 per gallon. The plaintiffs alleged that this representation was false, describing information obtained from CW 6. This information described problems at the demonstration unit and data showing that the unit yields were at most 40 gallons and cost at least $6 per gallon. The plaintiffs alleged that even after CW 6 told Cannon and Karnes about these concerns, they continued to misrepresent the figures in public statements.
KiOR built its first commercial-scale production plant in Columbus, Mississippi, in a building that once housed a paper mill. The plant was mechanically complete by April 2012 and fully commissioned for operations by September of that year. Soon after the plant began operating, KiOR's officers informed investors that there were some "start-up" issues. Relying on statements from confidential witnesses, all former KiOR employees, the plaintiffs alleged that these issues were serious and fundamental design flaws, not temporary "start-up" problems. The flaws included undersized equipment, tar buildup, unexpected production shutdowns, and slow-moving conveyor systems. (Docket Entry No. 86 at ¶ 112). Additional problems included design flaws in the vapor-recovery unit, leaks, a city-wide blackout, instrument failures, and operating variability. (Id . at ¶¶ 40–59). The plaintiffs alleged that confidential witnesses and O'Connor told Cannon and Karnes about the severity of these problems, but that they deliberately or recklessly misrepresented the degree to which the problems resulted from fundamental design and structural defects as opposed to temporary start-up glitches. The plaintiffs alleged that from September 2012, when operations began, throughout 2013, Cannon and Karnes continually reassured investors that the plant...
To continue reading
Request your trial
-
In re Venator Materials PLC Sec. Litig.
...susceptible to different interpretations," it's appropriate to resolve that issue with evidence at a later stage. Carlton v. Cannon , 184 F. Supp. 3d 428, 473 (S.D. Tex.), amended on denial of reconsideration, 2016 WL 3959164 (S.D. Tex.). It's conceivable here that investors could have unde......
-
In re Plains All Am. Pipeline, L.P. Sec. Litig.
...n.5, 2016 WL 5539756, at *8 n.5 (S.D. Tex. Sept. 29, 2016) (company's 440 employees made Nathenson inapplicable); Carlton v. Cannon , 184 F.Supp.3d 428 (S.D. Tex. 2016) (183 employees); Stephens v. Uranium Energy Corp. , 2016 WL 3855860 (S.D. Tex. 2016) (61 employees). That alone takes this......
-
Lomingkit v. Apollo Educ. Grp. Inc.
...Cappelli to attribute some of the problems with the new classroom to a lack of training.Plaintiffs, citing to Carlton v. Cannon , 184 F.Supp.3d 428 (S.D. Tex. 2016), argue that Federal Rule 9(b) does not require such a high degree of particularization to state a claim under Rule 10b–5. (Doc......
-
Izadjoo v. Helix Energy Solutions Grp., Inc.
...or is identified as forward looking and is accompanied by meaningful cautionary language. Id. ; see also Carlton v. Cannon , 184 F.Supp.3d 428, 452–56 (S.D. Tex. 2016) ; In re BP p.l.c. Sec. Litig. , 843 F.Supp.2d 712, 777 (S.D. Tex. 2012) ( BP I ).2. Scienter Section 10(b) and Rule 10b–5 d......