Gruber v. Gilbertson
| Decision Date | 20 March 2018 |
| Docket Number | 16cv9727 |
| Parties | JON D. GRUBER, individually and on behalf of all others similarly situated, Plaintiff, v. RYAN R. GILBERTSON, et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Defendants Ryan R. Gilbertson, et al., move to dismiss Lead Plaintiff Jon D. Gruber's Second Amended Complaint ("Complaint") for failure to state a claim. For the reasons that follow, Defendants' motion to dismiss is granted in part and denied in part.
The allegations of the Complaint are presumed true for purposes of this motion. This securities fraud action arises from a multi-faceted scheme to manipulate the stock of Dakota Plains Holdings, Inc. ("Dakota Plains" or the "Company"), an oil transloading company located in Minnesota. The principal architects of the fraud—Ryan Gilbertson and Michael Reger—concealed their identities from investors as they secretly amassed a substantial equity stake in the Company. Surrounding themselves with friends, family, and former business associates, Gilbertson and Reger had sweeping authority to execute their scheme in three stages. First, they embedded a unique provision in the Company's promissory notes that triggered an "additional payment" to noteholders if the Company's average stock price exceeded a nominal figure during the first twenty days in which its stock was publicly traded.
The perverse incentives arising from the "additional payment" clause played directly into the second act of the fraud—inflating the value of Dakota Plains' publicly traded stock. To execute this part of the scheme, Gilbertson, with Reger's assent, engineered several actions. He convinced the Company's management to approve a reverse merger between Dakota Plains and a defunct shell company, whose unrestricted stock could easily be transferred from place to place. Gilbertson enlisted his friends to purchase and sell tens of thousands of Dakota Plains stock from a third party brokerage account. Reger persuaded friends and family to purchase more stock, multiplying their efforts to inflate the stock price. As a consequence, the stock price jumped from pennies on the dollar to a peak price of nearly $12 per share within the first twenty days of trading.
Once the Company's share price hit that apex, Gilbertson and Reger activated the "additional payment" provision, receiving millions more Dakota Plains shares. But their rapid accumulation of shares overwhelmed the Company with a liability it could not pay. As shareholders questioned the purpose of the "additional payment" provision, Gilbertson unloaded his stock—still at inflated prices—even as most shareholders remained oblivious to the stock's imminent decline.
Throughout the entirety of the scheme, Gilbertson and Reger operated under a cloak of anonymity despite possessing substantial equity in the Company and exercising outsize control over its operations. Of course, Gilbertson and Reger could not have executed their scheme but for the complicity of the Company's management and board. At each stage, the Complaint depicts a narrative in which friends and family were installed as officers and directors of the Company, lured by personal relationships with Gilbertson and Reger or lucrative consulting fees they received from a cadre of third party companies Gilbertson and Regercontrolled. Despite telltale signs that fraud was afoot, much of the misconduct only came to light after an internal investigation connected Gilbertson to suspicious transactions in the first twenty days of the public trading period. But instead of disclosing the misconduct, the officers and directors approved attractive compensation packages for each other, and continued to publicly vouch for the Company's financial condition.
Against this backdrop, Jon Gruber, an investor who made 68 separate purchases of Dakota Plains stock between February 2013 and December 2014, asserts Section 10(b) and Rule 10b-5, Section 20(a), and Section 20A claims against Defendants on behalf of himself and the putative class members who purchased Dakota Plains stock between March 23, 2012 and August 16, 2016 (the "Class Period").
In 2008, Gilbertson and Reger founded Dakota Plains Transport Inc., the predecessor to Dakota Plains. (Compl. ¶ 63.) Since the very beginning, Gilbertson and Reger operated the Company from the shadows. Every decision they made on behalf of the Company was designed to benefit themselves. The Company issued millions of founder shares to Gilbertson and Reger, and millions more to their friends and family. (Compl. ¶ 63.) Gilbertson and Reger also installed their fathers, Weldon Gilbertson and James Reger, as the Company's officers and directors of the two-man board. (Compl. ¶ 63.) For his service, Weldon Gilbertson received 1.2 million shares of Dakota Plains stock for little to no consideration, the vast majority of which he unwittingly transferred to his son. Gilbertson then transferred some of those shares to his wife, Jessica Gilbertson, though a substantial number of her shares were restricted and could not be sold without Gilbertson's consent. (Compl. ¶¶ 64, 66.) In essence, millions ofDakota Plains shares were distributed to Gilbertson's hand-selected nominees, with every transfer of stock subject to his exclusive control. (Compl. ¶ 64.)
Between March 2009 and December 2011, Dakota Plains conducted four private placements of stock and raised $7.35 million from 70 investors. The offering materials omitted any reference to Gilbertson and Reger, leaving investors with the impression that Weldon Gilbertson and James Reger were principally in control of the Company. (Compl. ¶ 65.) Although Gilbertson and Reger's significant stock holdings amounted to material ownership in and control over the Company, omitting their names from corporate disclosures was a calculated decision in view of the "negative press [they] had received . . . relat[ing] [to] party transactions at other oil and gas ventures they founded together, including Voyager Oil & Gas, Inc."—which went bankrupt—and another company called Northern Oil & Gas, Inc. (See Compl. ¶¶ 26, 36, 121.)
In January 2011, Gilbertson had his father declare a dividend on Dakota Plains stock, resulting in a cash payment of approximately $1.9 million and a common stock distribution of 1.4 million shares. As a result, Gilbertson and his wife received $450,000. An additional $439,000 was paid to a limited liability company controlled by Reger. (Compl. ¶ 67.) Paying this dividend substantially impaired Dakota Plains' liquidity.
In February 2011, to replenish the Company's coffers, Gilbertson directed Dakota Plains to issue notes aggregately valued at $3.5 million with 12% annual interest ("Senior Notes"). (Compl. ¶ 68.) Gilbertson and Reger each purchased $1 million in Senior Notes, and a foundation they jointly controlled—the Total Depth Foundation—purchased another $100,000. Gilbertson and Reger jointly held 60% of the Senior Notes. (Compl. ¶ 68.) As SeniorNoteholders, they also received a substantial number of warrants, giving them the option to purchase additional shares at a fixed price once the Company went public. (Compl. ¶ 68.) Although neither Gilbertson nor Reger were named officers or directors, they oversaw the issuance of the Senior Notes, selected the investors to whom the notes were offered, and established the terms of the notes. (Compl. ¶ 69.)
In the same month, Gilbertson and Reger hired their friend, Gabriel Claypool, to replace Reger's father as CEO. Dakota Plains issued 500,000 shares of restricted common stock to Claypool. (Compl. ¶ 71.) Claypool also received other undisclosed benefits, such as stock in another company controlled by Gilbertson and Reger, as well as a loan from yet another entity that belonged to them. (Compl. ¶ 71.) After Claypool became CEO, he and Reger signed a consulting agreement obligating Dakota Plains to pay $200,000 in sham consulting fees (and an additional $100,000 later in the year) to the same limited liability company that made the undisclosed loan to Claypool. (Compl. ¶ 72.)
In April 2011, Gilbertson and Reger directed Claypool to authorize the issuance of Junior Notes valued at $5.5 million at 12% annual interest. (Compl. ¶ 73.) A limited liability company controlled by Reger purchased $2 million in Junior Notes, Gilbertson purchased $2 million, and the Total Depth Foundation purchased another $250,000. (Compl. ¶ 73.) In total, Gilbertson and Reger held $4.25 million of the $5.5 million in Junior Notes. Unlike the Senior Notes, the Junior Notes contained a unique "additional payment" feature that provided Junior Noteholders with bonus payments tied to the price of Dakota Plains stock at the time of its initial public offering. (Compl. ¶ 74.)
In September 2011, Dakota Plains hired Timothy Brady as Chief Financial Officer, and appointed Terry Rust, Paul Cownie, and David Fellon as board members. (Compl. ¶ 75.) In November 2011, after Gilbertson presented his plan to restructure Dakota Plains' debt and raise additional capital, the Company's board of directors voted to consolidate the Senior Notes and Junior Notes, thereby extending the "additional payment" feature in the Junior Notes to all Consolidated Notes, including the Senior Notes. (Compl. ¶ 76.) The Company also re-wrote the conditions triggering the "additional payment," providing for its activation if the Company went public by reverse merger instead of an initial public offering. (Compl. ¶ 76.) Under the modified terms, Consolidated Noteholders were entitled to receive a bonus payment in stock or cash if the average price of Dakota Plains stock exceeded $2.50 per share during the first twenty days of public trading. (Compl. ¶ 77.)
According to the Complaint,...
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