Diehl ex rel. Situated v. Omega Protein Corp.

• Decision Date: 07 September 2018
• Docket Number: 17-cv-2448 (PKC)
• Citation: 339 F.Supp.3d 153
• Parties: Daniel DIEHL, Individually and on Behalf of All Others Similarly Situated, et al., Plaintiffs, v. OMEGA PROTEIN CORPORATION, Bret D. Scholtes, and Andrew C. Johannesen, Defendants.
• Court: U.S. District Court — Southern District of New York

339 F.Supp.3d 153

Daniel DIEHL, Individually and on Behalf of All Others Similarly Situated, et al., Plaintiffs,

v.OMEGA PROTEIN CORPORATION, Bret D. Scholtes, and Andrew C. Johannesen, Defendants.

17-cv-2448 (PKC)

United States District Court, S.D. New York.

Signed September 7, 2018

Avital Orly Malina, David Avi Rosenfeld, Erin Whitney Boardman, Robbins Geller Rudman & Dowd LLP, Melville, NY, Joseph Alexander Hood, II, Jeremy Alan Lieberman, Pomerantz LLP, New York, NY, for Plaintiffs.

Richard A. Rosen, Jonathan Hillel Hurwitz, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, for Defendants.

OPINION AND ORDER

P. Kevin Castel, United States District JudgeLead plaintiff IBEW Local 98 Pension Fund ("IBEW") has filed this federal securities fraud suit against defendants Omega Protein Corp. ("Omega"), Bret D. Scholtes, and Andrew C. Johannesen on behalf of itself and all others who purchased Omega stock from August 6, 2013 to March 1, 2017. After the Court consolidated multiple separate suits with IBEW's suit, defendants moved to dismiss the Consolidated Second Amended Complaint. Because IBEW has not alleged an actionable misrepresentation or omission, the motion will be granted.

BACKGROUND

Omega was a publically traded nutritional products company that operated in two primary industry segments, human nutrition and animal nutrition.¹ (Consolidated Second Amended Complaint ("CSAC") ¶¶ 2, 13, 25). It conducted the majority of its operations in the animal nutrition segment through a wholly-owned subsidiary, Omega Protein, Inc. ("Omega's Subsidiary"), which was responsible for sixty-one to ninety-one percent of Omega's revenue from 2012 to 2016. (CSAC ¶¶ 25–26). To produce certain animal nutrition products, Omega's Subsidiary harvested menhaden, a species of fish found in the coastal waters of the Atlantic Ocean and the Gulf of Mexico. (CSAC ¶ 26). The harvesting and production process generated "fish waste" and bilge water (which is water that collects in the lowest part of a ship) containing oil that required disposal. (CSAC ¶¶ 36–43).

The Clean Water Act establishes requirements for monitoring and disposing of fish waste and oily bilge water, and in 2011, United States Attorney's Office for the Eastern District of Virginia filed a criminal information charging Omega's Subsidiary with violating these requirements at its Reedville, Virginia facility. (CSAC ¶¶ 39, 43, 45). Two years later, Omega's Subsidiary entered into a plea agreement (the "Virginia Plea Agreement"), which required it to plead guilty to "knowingly discharging pollutants from a point source into waters of the United States without a permit" and "knowingly discharging oil into waters of the United States in a quantity that may be harmful on numerous and discrete occasions." (CSAC ¶ 46). Omega's Subsidiary agreed to pay a $5.5 million fine and $2 million for community service and to serve three years on probation. (CSAC ¶ 47).

The Virginia Plea Agreement also required Omega's Subsidiary to develop and implement at all of its facilities an environmental compliance program. (CSAC ¶¶ 4, 50–51). Omega's Subsidiary established rules and guidelines pertaining to, among other things, "the maintenance of oil record books, safety inspections and equipment, bilge management, bilge off-loading and bail water management." (CSAC ¶ 51). In addition, it created a reporting system that ostensibly allowed employees to report anonymously any non-compliance or suspected non-compliance with any applicable law or regulation, and Omega's Subsidiary stated that "[n]o employee may be terminated or otherwise retaliated against for reporting deficiencies except where an employee abuses the system or intentionally submits false reports." (CSAC ¶ 51).

On August 6, 2013, which is the start of the class period, Omega filed a press release with the Securities and Exchange Commission ("SEC") on Form 8-K, reporting Omega's financial results for the second quarter of 2013. (CSAC ¶ 76). Scholtes, who was Omega's CEO and President during the class period, commented on the financial results, stating that "[w]e are pleased with [Omega's] increased earnings in the second quarter as we continued to benefit from better animal nutrition sales prices which helped drive higher revenue per ton and consolidated gross margin expansion versus the comparable period last year." (CSAC ¶¶ 17, 76). Omega also filed on the same day its Form 10–Q, in which Omega explained that it "has made, and anticipates that it will make in the future, expenditures in the ordinary course of its business in connection with environmental and regulatory matters" and that "[i]t is possible that newly enacted or existing environmental laws and regulations could require material expenditures or otherwise adversely affect the Company's operations." (CSAC ¶ 78).

Omega addressed the Virginia Plea Agreement in its Form 10–Q filing as well. It stated as follows:

In April 2010, the Company received a request for information from the EPA concerning its bail wastewater practices used in its fishing operations at its Reedville facility. In February 2011, the U.S. Coast Guard conducted inspections at the Company's Reedville facility regarding the Reedville vessels' bilge water discharge practices. Based on these inquiries, both agencies commenced investigations of the Company's bail waste water and bilge water practices at its Reedville facility.

In June 2013, the Company's subsidiary, Omega Protein, Inc., resolved both the U.S. Coast Guard and EPA investigations by entering into a plea agreement with the United States Attorney's Office for the Eastern District of Virginia. Pursuant to terms of the plea agreement, the Company's subsidiary pled guilty to two Clean Water Act violations. The plea agreement required the subsidiary to pay a $5.5 million fine, be placed on a three year term of probation, and implement an environmental compliance program. In addition to the $5.5 million fine, the subsidiary was required to make a $2 million contribution to the National Fish and Wildlife Foundation to fund projects in Virginia related to the protection of the environmental health of the Chesapeake Bay. The plea agreement was approved by the U.S. District Court for the Eastern District of Virginia in June 2013 and the subsidiary paid both the $5.5 million fine and the $2.0 million contribution in July 2013.

(CSAC ¶ 80). Omega made similar disclosures on several other Forms 10–Q during the class period, each of which Johannesen (Omega's CFO) signed. (CSAC ¶¶ 68, 86, 93, 102, 134). Omega varied this language only slightly and added on some Forms 10–Q that Omega's Subsidiary "will be on probation until June 2016, unless the probation period is terminated earlier by the court." (CSAC ¶¶ 68, 86, 93, 102; see CSAC ¶ 134). Scholtes commented on Omega's financial results on Omega's Form 8-K several more times during the class period, sometimes stating the results were "fueled" by, "benefit[ed] from," or "reflect[ed]" some benign aspect of Omega's business. (CSAC ¶¶ 82, 98, 136, 142, 150, 152).

On all but the last Form 10–K filed during the class period, each of which Scholtes and Johannesen signed, Omega addressed the risk of Omega's Subsidiary failing to comply with the terms of its probation. (CSAC ¶¶ 68, 95, 122, 148). Omega explained that "[i]f [Omega's Subsidiary] fails to comply with the terms of its probation under a plea agreement entered into in June 2013, we could be subject to criminal prosecution." (CSAC ¶¶ 95, 122, 148). Omega also reiterated that "[t]he plea agreement and the terms of the court's sentencing order require [Omega's Subsidiary] to develop and implement an environmental compliance program at all of its facilities" and stated that "[t]he Company has implemented a comprehensive compliance program which covers the areas addressed by the plea agreement." (CSAC ¶¶ 95, 122, 148, 169).

On August 3, 2016, Omega disclosed on its Form 10–Q that it had "received a petition on probation ... and as a result of that petition ha[d] become aware of a criminal investigation ... into the waste water discharge practices" of Omega's Subsidiary at its Abbeville, Louisiana facility. (CSAC ¶ 154). Omega noted that "[t]he petition on probation seeks to revoke the subsidiary's probation based on alleged Clean Act Water [sic] [v]iolations" but that Omega was "unable to determine [the petition's] potential outcome or its effects on the Company's probation status." (CSAC ¶ 154). Additionally, Omega stated that if Omega's Subsidiary were found to be out of compliance with its probation terms, Omega's Subsidiary "could be subject to additional criminal penalties or prosecution," including new criminal charges in the Western District of Louisiana. (CSAC ¶ 154).

Omega asserted in its next Form 10–Q, filed on November 2, 2016, that it "ha[d] initiated its own investigation and ha[d] been cooperating with [federal prosecutors]." (CSAC ¶ 158). Based on the information it had obtained, it "believe[d] that it [was] probable that a liability ha[d] been incurred and some financial fine or penalty in connection with the Abbeville facility's wastewater discharges practices may be imposed," although it could not determine whether Omega's Subsidiary's actions would affect Omega's Subsidiary's probation status. (CSAC ¶ 158).

On December 16, 2016 Omega filed a press release with the SEC on Form 8-K, disclosing that Omega's Subsidiary had "entered into a plea agreement" (the "Louisiana Plea Agreement") "with the United States Attorney's Office for the Western District of Louisiana to resolve the previously disclosed government investigation related to [Omega's] Subsidiary's Abbeville, Louisiana operations." (Doc. 42-8 at 3, 4). It attached the Louisiana Plea Agreement to the Form 8-K. (Doc. 42-8 at 3, 5–10). Omega stated that "[u]nder the [Louisiana] Plea Agreement, [Omega's] Subsidiary agreed to plead guilty to two felony counts under the Clean Water Act" and that the...