Gaynor v. Miller, : 3:15–CV–545–TAV–CCS

• Decision Date: 11 August 2017
• Docket Number: No.: 3:16–CV–232–TAV–CCS,No.: 3:15–CV–545–TAV–CCS, No.: 3:15–CV–546–TAV–CCS,: 3:15–CV–545–TAV–CCS
• Citation: 273 F.Supp.3d 848
• Parties: Kenneth GAYNOR, et al., Individually and on Behalf of All Others Similarly Situated, Plaintiffs, v. Deloy MILLER, et al., Defendants. Marcia Goldberg, et al., Individually and on Behalf of All Others Similarly Situated, Plaintiffs, v. Deloy Miller, et al., Defendants. Gabriel R. Hull, et al., Plaintiffs, v. Deloy Miller, et al., Defendants.
• Court: U.S. District Court — Eastern District of Tennessee

273 F.Supp.3d 848

Kenneth GAYNOR, et al., Individually and on Behalf of All Others Similarly Situated, Plaintiffs,

v.Deloy MILLER, et al., Defendants.

Marcia Goldberg, et al., Individually and on Behalf of All Others Similarly Situated, Plaintiffs,

v.Deloy Miller, et al., Defendants.

Gabriel R. Hull, et al., Plaintiffs,

v.Deloy Miller, et al., Defendants.

No.: 3:15–CV–545–TAV–CCS

No.: 3:15–CV–546–TAV–CCS

No.: 3:16–CV–232–TAV–CCS

United States District Court, E.D. Tennessee.

Filed August 11, 2017

Christopher Martin Wood, Pro Hac Vice, Robbins Geller Rudman & Dowd LLP, Jerry E. Martin, Pro Hac Vice, Douglas S. Johnston, Jr., Timothy L. Miles, Barrett, Johnston, Martin & Garrison, LLC, Nashville, TN, Jack Reise, Stephen R. Astley, Pro Hac Vice, Robbins Geller Rudman & Dowd LLP, Boca Raton, FL, Mary K. Blasy, Pro Hac Vice, Samuel H. Rudman, Robbins, Geller, Rudman & Dowd, LLP, Melville, NY, Curtis V. Trinko, Pro Hac Vice, New York, NY, for Plaintiffs.

Perrie M. Weiner, Robert David Weber, Pro Hac Vice, DLA Piper LLP, Los Angeles, CA, Stephen A. Marcum, Marcum & Petroff, P.C., Huntsville, TN, Brandon James Tindell, Jennifer Knapp Hemmelgarn, Lawrence P. Leibowitz, Leibowitz Law Firm, PLLC, Knoxville, TN, Amanda MacDonald, Margaret A. Keeley, Steven M. Farina, Pro Hac Vice, Williams & Connolly LLP, Washington, DC, Jeffery P. Yarbro, W. Brantley Phillips, Jr., Bass, Berry & Sims, PLC, Nashville, TN, Shayne R. Clinton, Bass, Berry & Sims, PLC, Knoxville, TN, for Defendants.

Scott M. Boruff, Knoxville, TN, pro se.

MEMORANDUM OPINION AND ORDER

Thomas A. Varlan, CHIEF UNITED STATES DISTRICT JUDGE

This civil matter is before the Court on defendant Gerald Hannahs's Motion to Dismiss [Doc. 95],¹ Underwriter Defendants' Motion to Dismiss [Doc. 96],² and individual defendants McPeak, Turkleson, Schlumberger, Gower, Leary, Stivers, Hall, Richardson, and Rector's Motion to Dismiss [Doc. 99]. Plaintiffs filed a response in opposition to defendants' motions to dismiss [Doc. 102], and underwriter defendants and individual defendants replied [Docs. 104, 105]. For the reasons stated herein, the Court will grant in part and deny in part defendants' motions to dismiss.

I. Background³

This case is a combined, securities class action, whereby plaintiffs allege claims pursuant to Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. § 77a [Doc. 92 ¶ 1]. Plaintiffs represent a class of individuals who purchased Miller Energy Series C and Series D preferred shares that were offered between February 13, 2013, and August 21, 2014, allegedly traceable to the Securities and Exchange Commission ("SEC") Form S–3 filed on September 6, 2012 (the "registration statement") [Id. ]. Specifically, plaintiff Kenneth Gaynor purchased Series D shares on April 28, 2015, plaintiff Marcia Goldberg purchased Series D shares on August 20, 2014, plaintiff Gabriel Hull purchased Series D shares between August 20, 2014, and May 6, 2015, and Hull also purchased Series C shares on dates between November 25, 2014, and May 6, 2015, and plaintiff Christopher Vorrath purchased Series C shares between July 29, 2013, and February 4, 2015 [Doc. 88–2]. Plaintiffs claim that they purchased these shares "pursuant and/or traceable to" the offerings [Doc. 92 ¶¶ 12–15]. Series C shares were offered on February 13, 2013, May 8, 2013, and June 28, 2013, and Series D shares were offered on September 26, 2013, October 17, 2013, and August 21, 2014 [Id. ¶ 1].

A. Defendants

Defendants are numerous current and former executive officers and directors of Miller Energy ("individual defendants"), as well as the investment banking firms that underwrote the relevant offerings ("underwriter defendants") [Id. ¶ 2].

Defendant Deloy Miller ("Miller") founded Miller Energy, served as the Chief Executive Officer ("CEO") from 1967, through August 2008, served as the Chief Operating Officer ("COO") for some time, and served as the Chairman of the Board of Directors ("Board") from December 1996, until September 14, 2014 [Id. ¶ 19]. Defendant Scott Boruff served on the Board from August 6, 2008, through March 29, 2016, acted as CEO from August 6, 2008, to September 14, 2014, and served as the President of Miller Energy from June 26, 2010, until June 14, 2011 [Id. ¶ 20]. Defendant David Voyticky served as the President of Miller Energy from June 9, 2011, until August 12, 2014, as its Acting Chief Financial Officer ("CFO") from September 2011, until February 2014, and as a director from April 2010, to April 2014 [Id. ¶ 21]. Defendant Catherine Rector served as the Vice President and Chief Accounting Officer of Miller Energy between July 2012, and October 2013 [Id. ¶ 22]. Defendant David Hall served as the COO from July 18, 2013, until August 6, 2015, and he served on the Board from December 10, 2009, until April 16, 2015 [Id. ¶ 23]. Defendants Merrill McPeak, Gerald Hannahs, Charles Stivers, and Don Turkleson served as directors of Miller Energy beginning September 6, 2012, and they signed the registration statement used to conduct the Offerings [Id. ¶ 24]. Defendants Bob Gower, Joseph Leary, William Richardson, and Marceau Schlumberger served as directors of Miller Energy at the time of certain offerings [Id. ¶ 25]. Defendant Paul Boyd served as the CFO and Treasurer of Miller Energy from 2008 to 2011, and as Director of Risk Management from 2011 until 2014 [Id. ¶ 26].

Defendant MLV acted as an underwriter of Miller Energy's preferred stocks with regard to all relevant offerings [Id. ¶ 54]. Defendant Williams Financial Group ("WFG") underwrote the February Series C offering [Id. ]. Maxim Group LLC ("Maxim"), Aegis Capital Corp. ("ACC"), and National Securities Corporation ("NSC") served as underwriters on all relevant offerings other than the October 2013, Series D offering [Id. ]. Defendant Northland Capital Markets ("NCM") underwrote the June 2013, Series C offering, the September 2013, Series D offering, and the August 2014, Series D offering [Id. ]. Defendant Dominick & Dominick, LLC ("D & D") acted as underwriter on the September 2013, Series D offering [Id. ].

Defendant Ladenburg Thalmann & Co. ("LTC") served as underwriter on the September 2013, and the August 2014, Series D offerings [Id. ]. Finally, I–Bankers Securities, Inc. ("IBS") underwrote the August 2014, Series D offering [Id. ].

B. Substantive Allegations⁴

Plaintiffs claim that Miller Energy made "false and misleading financial accounting and reporting" statements related to its valuation of oil and gas assets in Alaska purchased in 2009 ("Alaska Assets") [Id. ¶¶ 3, 45]. Miller Energy reported that the Alaska Assets valued approximately $480 million, which plaintiffs contend overstated the value of the assets by "hundreds of millions of dollars" [Id. ¶¶ 47–48, 56].

Plaintiffs allege that Miller Energy set forth these false and misleading valuations in its Form S–3 registration statement, filed September 6, 2012, utilizing a "shelf" registration or continuous offering process [Id. ¶ 52]. The registration statement became effective of September 18, 2012, and it was utilized for all relevant offerings [Id. ¶¶ 52–53]. Plaintiffs contend that Miller Energy repeated this false valuation in various financial reports with the SEC between 2010 and 2015, including prospectuses and Forms 10–K, 10–Q, and 8–K [Id. ¶ 48, 55].

Plaintiffs state in their Complaint that Miller Energy publically defended the accuracy of its Alaska Assets valuations on multiple occasions, in spite of events that cast doubt on the company's calculations [Id. ¶ 50]. For instance, a report published by The Street Sweeper in 2011, asserted that the Alaska Assets were actually worth between $25 million and $30 million, offset by $40 million in liabilities [Id. (citing Melissa Davis & Janice Shell, Miller Energy: This Hot ‘Alaska’ Stock May Be About To Melt , Seeking Alpha: The Street Sweeper (July 28, 2011) ]. Miller Energy responded to this report by claiming it took a "conservative approach" to valuation of the Alaska Assets [Id. ].

Acquisition of the Alaska Assets resulted in a 5,000% increase in Miller Energy's assets, along with a 982% increase in stock value [Id. ¶ 51]. On December 10, 2009, Miller Energy stock closed at $0.61 per share, and on March 31, 2010, following acquisition of the Alaska Assets, Miller Energy stock closed at $6.60 per share [Id. ]. Miller Energy shares reached an all-time high in December 2013, at a price of $8.83 per share [Id. ].

Plaintiffs list multiple disclosures that they contend, "revealed that the Registration Statement was false and misleading in that it overstated the value of the Alaska Assets" [Id. ¶ 105]. These disclosures include, in chronological order: (1) quarterly reports in 2014 and 2015, which disclose that Miller Energy was taking impairment charges on the Alaska Assets [Id. ¶¶ 106–07], (2) a Wells Notice in April 2015, which indicated that the SEC had made an initial determination to recommend civil action against Miller Energy with regard to its acquisition of the Alaska Assets [Id. ¶ 108], (3) a decision by Miller Energy, in May 2015, to defer dividend payments on Series C and Series D preferred shares [Id. ¶ 109], (4) a report by Miller Energy that the NYSE had notified the company its shares were subject to delisting [Id. ¶ 110], (5) a notification of late filing, in July 2015 [Id. ¶ 111], (6) a notice of suspension of Series C stocks [Id. ¶ 112], and (7) a August 6, 2015, disclosure by Miller Energy that the SEC initiated civil proceedings against the company, alleging that Miller Energy overvalued the Alaska Assets [Id. ¶ 113]. Plaintiffs then set forth information with regard to the SEC enforcement action, including the SEC's specific allegations [Id. ¶¶ 114–18], the settlement terms agreed upon by Miller Energy and the SEC's Enforcement Division on August 20, 2015 [Id. ¶ 121], and the SEC's official findings [Id. ¶ 124].

In September 2015, Miller Energy's Series C and Series D preferred shares were delisted, after...