Robertson v. Strassner

• Decision Date: 08 October 1998
• Docket Number: No. Civ.A. H-98-364.,Civ.A. H-98-364.
• Parties: John W. ROBERTSON, et al., Plaintiffs, v. David B. STRASSNER, et al., Defendants.
• Court: U.S. District Court — Southern District of Texas

Page 443

32 F.Supp.2d 443

John W. ROBERTSON, et al., Plaintiffs, v. David B. STRASSNER, et al., Defendants.

No. Civ.A. H-98-364.

United States District Court, S.D. Texas, Houston Division.

October 8, 1998.

David E. Sharp, Roger B. Greenberg, Greenberg Peden Siegmyer & Oshman, Houston, TX, Thomas E. Egler, Helen J. Hodges, Katherine L. Blanck, Milberg Weiss Bershad Hynes and Lerach, San Diego, CA, for plaintiffs.

Kenneth R. Wynne, Wynne & Maney, Houston, TX, Timothy R. McCormick, Thompson & Knight, Dallas, TX, for defendants.

Roger B. Greenberg, Greenberg Peden Siegmyer & Oshman, Houston, TX, for Loretta White, Woodmont Investments, Inc., movants.

Charles C. Correll, Jr., Porter & Hedges, Houston, TX, for Ryder Scott Company Petroleum Engineers, movant.

MEMORANDUM OPINION AND ORDER

ATLAS, District Judge.

This securities fraud case is before the Court on Defendants' Motion to Dismiss Plaintiffs' Amended Complaint [Doc. # 18]. The parties agree that Plaintiffs must satisfy the pleading requirements of both Rule 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4. The Court has carefully reviewed the Amended Complaint [Doc. # 17], Defendants' Motion to Dismiss, Plaintiffs' Opposition [Doc. # 21], and Defendants' Replies [Doc. # 23 and # 24]. Based on this review and the application of binding and persuasive legal authority, the Court concludes that Plaintiffs have satisfied their burden under Rule 9(b) and the PSLRA. Defendants' Motion to Dismiss is denied.

I. FACTUAL BACKGROUND

Defendant Offshore Energy Development Corporation ("OEDC") engages primarily in exploration for and production of natural gas in the Gulf of Mexico. Defendant David B. Strassner was OEDC's President in November 1996, and Defendant Douglas H. Kiesewetter was its Chief Operating Officer. Defendants David R. Albin, Strassner, and Kiesewetter were members of OEDC's board of directors. Defendant Natural Gas Partners, L.P. ("NGP") is a limited partnership of which Albin is a member and manager. NGP was a major investor in and creditor of OEDC.

Plaintiffs purchased stock in OEDC during an initial public offering ("IPO") between November 1, 1996 and April 18, 1997. Plaintiffs allege that the IPO price of $12.00 per share was artificially inflated due to allegedly false and misleading statements made by Defendants during the IPO process. Plaintiff's further allege that Defendants made additional false statements during the five months following the IPO. Plaintiffs allege that Defendants engaged in this scheme to defraud primarily to raise over $12 million needed to repay a loan from OEDC to NGP. Plaintiffs also allege that Defendants wanted to sell some of their own shares in OEDC at artificially inflated prices.

On April 18, 1997, Defendants publicly advised that the financial and operational condition of OEDC was precarious and that OEDC had agreed to pay NGP additional funds to assist in locating a buyer for the company. The price of OEDC shares fell by more than 50% to $3.25 per share.

In December 1997, Titan Exploration, Inc. ("Titan") acquired OEDC for approximately $6.46 per share. Titan is a public corporation in which Defendant NGP owns a controlling interest.

Plaintiffs filed their Class Action Complaint on February 6, 1998 alleging violations of Sections 10(b) and 20(a) of the Securities and Exchange Act, 15 U.S.C. §§ 78j(b), 78t(a) and Securities and Exchange Commission Rule 10(b)-5.¹ Plaintiffs filed an Amended Class Action Complaint on May 18, 1998, and Defendants moved to dismiss. The parties have submitted thorough briefs in support of their respective positions, and the motion is ripe for decision.

II. APPLICABLE LEGAL STANDARDS

A. Motion to Dismiss

Rule 12(b)(6) allows for dismissal of a complaint if the plaintiff fails "to state a claim upon which relief may be granted." A motion to dismiss is "viewed with disfavor and is rarely granted." Lowrey v. Texas A & M University System, 117 F.3d 242, 247 (5th Cir.1997). Dismissal is appropriate only when "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Holmes v. Texas A & M Univ., 145 F.3d 681, 683 (5th Cir.1998) (citations omitted).

In deciding whether dismissal is warranted, the Court accepts as true the non-conclusory allegations in the plaintiff's complaint. Khurana v. Innovative Health Care Systems, Inc., 130 F.3d 143, 147 (5th Cir.1997) (petition for cert. filed March 12, 1998); Kaiser Aluminum & Chemical Sales, Inc. v. Avondale Shipyards, Inc., 677 F.2d 1045 1050 (5th Cir.1982), cert. denied, 459 U.S. 1105, 103 S.Ct. 729, 74 L.Ed.2d 953 (1983); Zuckerman v. Foxmeyer Health Corp., 4 F.Supp.2d 618, 621 (N.D.Tex.1998). A motion to dismiss for failure to plead fraud with the particularity required by Rule 9(b) is treated as a motion to dismiss for failure to state a claim under Rule 12(b)(6). United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 901 (5th Cir.1997).

B. Standards for Pleading Securities Fraud

Section 10(b) Elements.—To state a claim based on Section 10(b) of the Securities Exchange Act of 1934 (the "Act"), the plaintiff must allege "1) a misstatement or omission; 2) of material fact; 3) made with the intent to defraud; 4) on which the plaintiff relied; and 5) which proximately caused the plaintiff's injury." Williams v. WMX Technologies, Inc., 112 F.3d 175, 177 (5th Cir.), cert. denied, ___ U.S. ___, 118 S.Ct. 412, 139 L.Ed.2d 315 (1997).

Rule 9(b) Requirements.—Rule 9(b) of the Federal Rules of Civil Procedure provides a heightened pleading requirement for allegations of fraud. To satisfy the burden imposed by Rule 9(b), the plaintiff must "specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent." Zuckerman, 4 F.Supp.2d at 622 (quoting Williams, 112 F.3d at 177), and Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir.1994). See also Oppenheimer v. Prudential Securities Inc., 94 F.3d 189, 195 (5th Cir.1996).

The PSLRA's Requirements.—The PSLRA imposes additional pleading requirements on plaintiffs in securities fraud actions. If plaintiffs' allegations are based on information and belief, "the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1); Zuckerman, 4 F.Supp.2d at 622. Plaintiffs must also distinguish among the defendants, attributing each allegedly fraudulent statement to a particular defendant or defendants. Zuckerman, 4 F.Supp.2d at 622 (citing In re Silicon Graphics, Inc. Securities Litigation, 970 F.Supp. 746, 752 (N.D.Cal.1997)). "This rule, however, is applied in tandem with the presumption that senior executives of a corporate defendant may be held personally liable for misrepresentations contained in a public statement issued for the corporation." Id.

As a final matter, plaintiffs in securities fraud litigation must allege facts which demonstrate scienter. Zuckerman, 4 F.Supp.2d at 622. Scienter is a "mental state embracing intent to deceive, manipulate or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). The Fifth Circuit has held that scienter may be satisfied by

proof that the defendant acted with severe recklessness, which is "limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it".

Tuchman, 14 F.3d at 1067; Cyrak v. Lemon, 919 F.2d 320, 325 (5th Cir.1990). Before the enactment of the PSLRA, plaintiffs could adequately plead scienter by pleading facts which allege a defendant's motive and opportunity to commit securities fraud, or by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness. Zuckerman, 4 F.Supp.2d at 622 (citing Tuchman, 14 F.3d at 1067); Salinger v. Projectavision, Inc., 972 F.Supp 222, 232 (S.D.N.Y.1997). Accord, STI Classic Fund v. Bollinger Industries, Inc., 1996 WL 885802 (N.D.Tex. Oct.25, 1996) (Memorandum and Recommendation of Magistrate Judge Sanderson, adopted by District Judge Buchmeyer, 1996 WL 866699, Nov. 12, 1996).

The PSLRA provides that securities fraud plaintiffs must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). The parties disagree about what this PSLRA standard for pleading scienter means. Defendants, relying on the legislative history of the PSLRA,² argue that Congress rejected the "motive and opportunity" test in favor of a stricter pleading requirement. Defendants contend that "a plaintiff must plead a strong inference of fraudulent intent and allege specific facts `that constitute strong evidence of conscious misbehavior' for each defendant." Defendants' Motion, at 8.³ Plaintiffs contend that they can adequately plead scienter under the PSLRA by satisfying the prior "motive and opportunity" requirement, which had been adopted by the Fifth Circuit. See Williams, 112 F.3d at 177.⁴ The issue has not yet been decided by the United States Court of Appeals for the Fifth or any other circuit.

The Court has reviewed the arguments by all parties, numerous district court authorities and the legislative history of the PSLRA.⁵ The Court concludes, as did the Zuckerman and STI Classic Fund courts in this Circuit, that Plaintiffs may meet the heightened pleading requirements of Rule 9(b) and the PSLRA as applied to Section 10(b), by "alleging either motive and...