Podraza v. Whiting

• Decision Date: 22 June 2015
• Docket Number: No. 14–1947.,14–1947.
• Citation: 790 F.3d 828
• Parties: Thomas PODRAZA; Dennis Doucet; Jan Arnett; Douglas Keehn, Plaintiffs–Appellants Patriot Coal Investor Group; Ernesto Espinoza, on behalf of himself and all others similarly situated; John Ziants; James Schmitt ; Karel Rybacek; Douglas Combs; Furman Jerry Rogers, III, individually and on behalf of all others similarly situated, Plaintiffs Kevin Lowery, individually and on behalf of all others similarly situated, Plaintiff–Appellant v. Richard M. WHITING; Mark N. Schroeder, Defendants–Appellees James Karas; Denis Dehne; Cambridge Retirement System ; Richard Sitko, Movants.
• Court: U.S. Court of Appeals — Eighth Circuit

790 F.3d 828

Thomas PODRAZA; Dennis Doucet; Jan Arnett; Douglas Keehn, Plaintiffs–AppellantsPatriot Coal Investor Group; Ernesto Espinoza, on behalf of himself and all others similarly situated; John Ziants; James Schmitt ; Karel Rybacek; Douglas Combs; Furman Jerry Rogers, III, individually and on behalf of all others similarly situated, PlaintiffsKevin Lowery, individually and on behalf of all others similarly situated, Plaintiff–Appellant

v. Richard M. WHITING; Mark N. Schroeder, Defendants–AppelleesJames Karas; Denis Dehne; Cambridge Retirement System ; Richard Sitko, Movants.

No. 14–1947.

United States Court of Appeals, Eighth Circuit.

Submitted: Jan. 15, 2015.

Filed: June 22, 2015.

David A.P. Brower, Brower Piven, P.C., New York, N.Y., argued (Richard H. Weiss, Brower Piven, P.C., New York, N.Y., Eric D. Holland, R. Seth Crompton, Holland, Groves, Schneller & Stolze, LLC, St. Louis, MO, on the brief), for appellant.

Kristen R. Seeger, Sidley Austin LLP, Chicago, IL, argued (Hille R. Sheppard, Lawrence P. Fogel, Sidley Austin LLP, Chicago, IL, Glenn E. Davis, HeplerBroom LLC, St. Louis, MO, on the brief), for appellees.

Before WOLLMAN, SMITH, and SHEPHERD, Circuit Judges.

Opinion

SHEPHERD, Circuit Judge.

This appeal concerns a securities fraud class action brought on behalf of all persons who purchased or acquired Patriot Coal Corporation securities between October 21, 2010, and July 9, 2012 (“Plaintiffs”). The defendants are Richard Whiting and Mark Schroeder, Patriot's former Chief Executive Officer and former Chief Financial Officer, respectively (“Defendants”).

In September 2010, a federal district judge in West Virginia ordered Patriot to install environmental remediation facilities at two of its mines. Beginning in October 2010 and continuing until May 2012, for accounting purposes, Patriot recorded the facilities' installation costs as capital expenditures. After corresponding with the Securities and Exchange Commission (“SEC”) over a period of months about this accounting treatment, however, Patriot restated its financial documents in May 2012 to recognize the installation costs as expenses. The restatement caused Patriot's asset retirement obligation expense and net loss to increase by $49.7 million for 2010 and $23.6 million for 2011. Patriot's share priced dropped after the restatement. The company filed for bankruptcy in July 2012.

Plaintiffs subsequently brought this action, alleging Defendants violated sections 10(b), 20(a), and 20(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78a et seq., as well as SEC Rule 10b–5, 17 C.F.R. § 240.10b–5. Plaintiffs argued Defendants fraudulently capitalized the environmental remediation facilities' installation costs to avoid the impact expensing the costs would have on Patriot's bottom line. Defendants moved to dismiss Plaintiffs' complaint under Federal Rule of Civil Procedure 12(b)(6) and the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u–4. The district court¹ granted the motion to dismiss, finding Plaintiffs failed to meet the PSLRA's heightened requirement for pleading scienter. Plaintiffs now appeal the dismissal of their complaint, arguing the district court's scienter ruling was in error. Because we find the more compelling inference is that Defendants did not act with fraudulent intent, we agree with the district court that the facts alleged do not give rise to the required strong inference of scienter. We affirm.

I.

“Because this appeal arises from the district court's grant of a motion to dismiss, we draw the relevant facts from the class complaint.” Elam v. Neidorff, 544 F.3d 921, 925 (8th Cir.2008). We also consider “other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). Plaintiffs do not dispute that we may consider Patriot's SEC filings and its SEC correspondence to establish what Patriot wrote in those documents.

Patriot is a coal mining company based in St. Louis, Missouri, with chief operations in the central and eastern United States. In 2008, Patriot acquired the Apogee and Hobet surface mines in West Virginia. At the time of the acquisition, the mines were subject to environmental litigation in the Southern District of West Virginia. The plaintiffs in the environmental suits alleged that the mines discharged selenium, a naturally occurring yet potentially toxic element, into water runoff. The selenium discharge levels allegedly exceeded limits set in applicable state mining permits, and the environmental plaintiffs sued to enforce compliance.

Patriot entered consent decrees with the plaintiffs in the environmental suits in March 2009, agreeing to bring the Apogee and Hobet mines into compliance with specific selenium discharge levels by April 2010. As part of its subsequent effort to reduce selenium discharge levels at the mines, Patriot installed water treatment technology it refers to as Zero Valent Iron (“ZVI”). Patriot recorded all the costs associated with the ZVI technology, which amounted to about $20 million, as expenses.

In September 2010, however, because the ZVI technology proved ineffective in sufficiently lowering the selenium discharge levels, the West Virginia district court ordered Patriot to install a Fluidized Bed Reactor (“FBR”) facility at the Apogee mine and to submit and implement a treatment plan for the Hobet mine. After evaluating several alternative technologies, Patriot proposed to install an Advanced Biological Metals (“ABMet”) facility at the Hobet mine. We follow the parties and the district court in referring to Patriot's court-ordered obligations to install the FBR and ABMet facilities as the “Remediation Obligations.”

On October 21, 2010, the first day of the class period, Patriot issued a press release announcing that it had been ordered to install the FBR facility and that it would recognize the facility's installation costs as a $50 million capital expenditure and its operating costs as a $20.7 million expense. After Patriot selected the ABMet facility for the Hobet mine, it disclosed it would recognize that facility's installation costs, which it estimated at $25 million, as capital expenditures as well. In subsequent public filings with the SEC—including in Form 10–Qs filed in November 2010, May 2011, and August 2011, as well as in its 2010 Form 10–K—Patriot reiterated it would recognize the Remediation Obligations' installation costs as capital expenditures and issued financial statements to that effect.

In September 2011, the SEC's Division of Corporate Finance sent Patriot a letter questioning this accounting treatment. The letter opened an eight-month dialogue between Patriot and the SEC. During that time, the SEC sent six letters to Patriot, all addressed to Whiting. Patriot responded with six letters of its own: four signed by Schroeder and two signed by Patriot Vice President Christopher Knibb. In its letters, Patriot provided detailed explanations of its accounting treatment. It stated it believed its accounting complied with “authoritative” accounting guidance, and in particular with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 410–30. According to Patriot, ASC 410–30 allows companies to capitalize expenses for “tangible assets acquired to clean a particular spill ... to the extent that those tangible assets have future uses.” J.A. 178. Patriot maintained it properly capitalized the Remediation Obligations' installation costs because it expected the Remediation Obligations to address “current and future selenium discharge limit exceedances.” J.A. 178.

Patriot also told the SEC that ASC 410–30 supported its decision to capitalize the Remediation Obligations' installation costs but not the ZVI technology's costs. Patriot stated the FBR facility would “fill an area approximately 670 feet in length and approximately 190 feet wide.” J.A. 201. Given its size, the FBR facility would be “located farther down the valley where wider construction areas are available.” J.A. 199. This placement “centrally located [the FBR facility] near active and potential, future operations.” J.A. 199. By contrast, “ZVI water treatment tanks are more commonly located in areas adjoining the affected outfalls because they require a significantly smaller amount of evenly graded land.” J.A. 199. Further, the FBR facility would contain “large steel tanks and other infrastructure that is designed to have a long lifespan.” J.A. 201. “Comparatively, the ZVI tanks are plastic tanks.... The tanks were not constructed to withstand significant water flow over multiple years.” J.A. 201.

In February 2012, while its dialogue with the SEC was ongoing, Patriot filed its 2011 Form 10–K and again disclosed it was capitalizing the Remediation Obligations' installation costs. It also disclosed it had received comments from the SEC regarding this accounting treatment and that the comments were unresolved. Ernst & Young LLP, Patriot's independent auditor, issued an audit opinion accompanying the 2011 Form 10–K. The audit opinion, which included an assessment of “the accounting principles used,” concluded that Patriot's 2011 year-end financial statements “present fairly, in all material respects, [Patriot's] consolidated financial position” “in conformity with U.S. generally accepted accounting principles.” J.A. 308. It also “expressed an unqualified opinion” of Patriot's “internal control over financial reporting.” J.A. 308.

Nevertheless, the SEC continued questioning Patriot's accounting treatment.

And in a letter to the SEC dated May 8, 2012, Patriot agreed to restate its financial documents. Thus on May 8, 2012, Patriot filed a Form 8–K disclosing it would restate its 2010 and 2011 consolidated...