Yoshikawa v. Exxon Mobil Corp.

• Docket Number: Civil Action 3:21-CV-00194-N
• Decision Date: 24 August 2023
• Parties: MENDI YOSHIKAWA, et al., Plaintiffs, v. EXXON MOBIL CORP., et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

1

MENDI YOSHIKAWA, et al., Plaintiffs,
v.
EXXON MOBIL CORP., et al., Defendants.

Civil Action No. 3:21-CV-00194-N

United States District Court, N.D. Texas, Dallas Division

August 24, 2023

MEMORANDUM OPINION AND ORDER

David C. Godbey Chief United States District Judge

This Order addresses Defendants Exxon Mobil Corp. (“ExxonMobil”), Darren W. Woods, Liam M. Mallon, and Melissa Bond's motion to dismiss [99] Plaintiffs'^[1] Second Amended Complaint (“SAC”) [92]. For the reasons stated below, the Court grants the motion in part and denies in part.

I. Origins of the Dispute

As discussed in the Court's prior order granting Defendants' first motion to dismiss [88], this is a federal securities putative class action on behalf of all persons and entities who purchased or otherwise acquired ExxonMobil common stock (“XOM”) between March 7, 2018 and January 15, 2021 (the “Class Period”). Order 1, Sept. 29, 2022 (“First MTD Order”). Plaintiffs allege that ExxonMobil portrayed its oil and gas assets in the

2

Permian Basin^[2] as more valuable than they were, and when ExxonMobil finally disclosed that its production goals could not be realized, the value of XOM shares declined. Id. at 1-2. Plaintiffs initially sued ExxonMobil and several of its personnel under Sections 10(b) and 20(a) of the Securities and Exchange Act (the “Exchange Act”) and the related Rule 10b-5(b), alleging both affirmative misrepresentations of ExxonMobil's drilling potential in the Permian Basin and omissions of material information about the project's obstacles. Id. at 2. The Court initially dismissed Plaintiffs' claims for failure to adequately plead that any Defendant acted with the requisite state of mind, but granted leave to amend. Id. at 20, 37-38.

The SAC omits several of the original defendants, but maintains the Section 10(b) misrepresentation and omission claims against ExxonMobil and its officers Woods and Mallon, as well as the Section 20(a) control person claim against Woods. See SAC ¶¶ 43740, 448. Plaintiffs also now assert a scheme liability claim against Melissa Bond, the former Senior Manager of Delaware Basin Development, alongside Mallon and ExxonMobil, and additionally name Mallon as a control person. Id. ¶¶ 441, 448. The SAC adds allegations that Bond and Mallon conspired to manipulate the valuation of ExxonMobil's Permian assets, of which Woods either would or should have learned from a meeting with Bond. Id. ¶¶ 123-32, 11-63. Further, the SAC recounts that ExxonMobil was found liable for unlawfully terminating two whistleblowers who raised concerns about

3

ExxonMobil's valuation of the Permian assets in response to negative press. Id. ¶¶ 132- 34, 137, 141-43, 146, 151-53, 155-57. Defendants have again moved to dismiss.

II. Legal Standards

A. Motion to Dismiss

When addressing a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), a court must determine whether the plaintiff has asserted a legally sufficient claim for relief. Blackburn v. City of Marshall, 42 F.3d 925, 931 (5th Cir. 1995). “When reviewing a motion to dismiss, a district court must consider the complaint in its entirety, as well as documents incorporated into the complaint by reference, and matters of which a court may take judicial notice.” Funk v. Stryker Corp., 631 F.3d 777, 783 (5th Cir. 2011) (internal quotation marks omitted).

Section 10(b) claims are subject to Rule 9(b), which requires that plaintiffs alleging fraud or mistake state their claims with particularity. Owens v. Jastrow, 789 F.3d 529, 534-35 (5th Cir. 2015). Specifically, plaintiffs must set forth “the ‘who, what, when, where, and how' of the events constituting fraud or mistake.” Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 339 (5th Cir. 2008) (quoting ABC Arbitrage Pls. Grp. v. Tchuruk, 291 F.3d 336, 350 (5th Cir. 2002) (internal quotations omitted)). Plaintiffs also must “distinguish among those they sue and enlighten each defendant as to his or her particular part in the alleged fraud.” Southland Sec. Corp. v. INSpire Ins. Sols., Inc., 365 F.3d 353, 365 (5th Cir. 2004). Allegations against defendants as a group, without more specific connections between an individual Defendant and an allegedly fraudulent act, should be disregarded. Owens, 789 F.3d at 537-38. Other inference-based allegations, such as

4

pleading based on a defendant's position, corporate culture, or common knowledge alone, are similarly too vague. See First MTD Order 6-8 (citing Abrams v. Baker Hughes Inc., 292 F.3d 424, 433 (5th Cir. 2002); Callinan v. Lexicon Pharma., Inc., 479 F.3d 379, 432 (S.D. Tex. 2020) (quoting In re Citigroup Inc. Sec. Litig., 753 F.Supp.2d 206, 245 (S.D.N.Y. 2010)); Ind. Elec. Workers' Pension Trust Fund IBEW v. Shaw Grp., Inc., 537 F.3d 527, 537 (5th Cir. 2008)).

“[C]onditions of a person's mind” may be alleged generally, FED. R. CIV. P. 9(b), and the particularity standard may be relaxed where “the facts relating to the alleged fraud are peculiarly within the perpetrator's knowledge.” U.S. ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 903 (5th Cir. 1997). But courts pay careful attention to allegations made on information and belief, as here, to ensure this exception is not misused as a “license to base claims of fraud on speculation and conclusory allegations.” Id. (quoting Tuchman v. DSC Comms. Corp., 14 F.3d 1061, 1068 (5th Cir. 1994)) (internal quotations omitted). “[T]he complaint must set forth a factual basis for such belief.” Thompson, 125 F.3d at 903 (citing Kowal v. MCI Comms. Corp., 16 F.3d 1271, 1279 n.3 (D.C. Cir.1994); Neubronner v. Milken, 6 F.3d 666, 672 (9th Cir. 1993)); see also ABC Arbitrage, 291 F.3d at 351, n.70 (citing Thompson, 125 F.3d at 903; 5 CHARLES ALAN WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE & PROCEDURE § 1224 (2d ed. 1990)) (“[T]he special requirements of Rule 9(b) required even before the enactment of the [Private Securities Litigation Reform Act (‘PSLRA')] that more be pleaded in the context of securities fraud claims.”).

5

B. Pleading Section 10(b) and Rule 10b-5 Claims

Section 10(b) of the Exchange Act, codified at 15 U.S.C. § 78j(b), empowers the SEC to prescribe rules and regulations to protect the public from manipulative and deceptive securities practices. Rule 10b-5, implementing Section 10(b), makes it unlawful:

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading,

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5. Violations require scienter, or a “mental state embracing intent to deceive, manipulate, or defraud.” Mun. Emps.' Ret. Sys. of Michigan v. Pier 1 Imps., Inc., 935 F.3d 424, 429-30 (5th Cir. 2019) (quoting Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308, 319 (2007)). “Both intent and ‘severe recklessness' are sufficient.” Pier 1, 935 F.3d at 430 (quoting Nathenson v. Zonagen, Inc., 267 F.3d 400, 408-09 (5th Cir. 2001)).

There is “considerable overlap among the subsections of the Rule,” Lorenzo v. SEC, 139 S.Ct. 1094, 1102 (2019), but subsection (b) focuses on false statements and omissions, whereas scheme liability under (a) and (c) concerns conduct. See SEC v. Mapp, 240 F.Supp.3d 569, 585 (E.D. Tex. 2017); In re Cognizant Tech. Sols. Corp. Sec. Litig., 2020 WL 3026564, at *18 (D.N.J. 2020). Thus, pleading each type of claim varies only slightly. The elements of a private Rule 10b-5(b) claim are: (1) a material misrepresentation or

6

omission; (2) scienter; (3) a connection with the purchase or sale of a security; (4) reliance on the misrepresentation or omission; (5) economic loss; and (6) a causal connection between the misrepresentation or omission and the loss. Owens, 789 F.3d at 535 (quoting Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 238-39 (5th Cir. 2009)). Similarly, Rule 10b-5(a) and (c) claims “require allegations ‘that the defendant (1) committed a deceptive or manipulative act, (2) with scienter, that (3) the act affected the market for securities or was otherwise in connection with their purchase of sale, and (4) that the defendant's actions caused the plaintiff's injuries.'” Ranieri v. AdvoCare Int'l, L.P., 336 F.Supp.3d 701, 720 (N.D. Tex. 2018) (quoting In re Enron Corp. Sec., 529 F.Supp.2d 644, 678 n.45 (S.D. Tex. 2006)).

The PSLRA further heightens the pleading requirements in two ways. Plaintiffs must “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made 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). Additionally, plaintiffs must, “with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Id. § 78u-4(b)(2)(A). The latter “alters the usual contours of a Rule 12(b)(6) ruling” by requiring courts to “take into account plausible inferences opposing as well as supporting a strong inference of scienter.” Cotter v. Gwyn, 2016 WL 4479510, at *6 (E.D. La. 2016) (quoting Lormand, 565 F.3d at 239). When viewing the allegations holistically, the inference must be “cogent and compelling, not merely reasonable or permissible, in light

7

of other explanations.” Cotter, 2016 WL 4479510, at *6 (internal quotations and citations omitted).

C. Pleading Section 20(a) Claims

Section 20(a) of the Exchange Act “makes those who control others who violate section 10(b)...