Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_15-cv-01478/USCOURTS-casd-3_15-cv-01478-1/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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8 UNITED STATES DISTRICT COURT

9 SOUTHERN DISTRICT OF CALIFORNIA

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11 HAROLD ENG, individually and on

behalfof all others similarly situated, et

Case No.: 3:15-cv-01478-BEN-KSC

12 al., ORDER GRANTING MOTION TO

DISMISS SECOND AMENDED

COMPLAINT WITHOUT

PREJUDICE

13 Plaintiffs,

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v.

15 EDISON INTERNATIONAL,

THEODORE F. CRAVER, JR.,

WILLIAMS JAMES SCILACCI and

RON LITZINGER,

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18 Defendants.

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Before the Court is the Motion to Dismiss Plaintiffs’ Second Amended Complaint

(“SAC”) filed by Defendants Edison International, Southern California Edison’s

(“SCE”)1 parent company, Theodore F. Craver, Jr., William James Scilacci, and Ron

Litzinger. (Docket No. 40.) For the following reasons, the Court GRANTS Defendants’

motion to dismiss, but gives Plaintiffs leave to file an amended pleading.

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l The Court refers to Defendant as “SCE” throughout. 28 l

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1 BACKGROUND2

I. SONGS Settlement3

SCE is a partial owner ofthe San Onofre Nuclear Generating Station (“SONGS”).

In January 2012, following installation oftwo replacement steam generators, one ofthe

new steam generator tubes leaked. SONGS was shut down. The California Public Utility

Commission (“CPUC”) initiated an investigation, the Order Instituting Investigation

(Oil), in October 2012. Part ofthe investigation focused on how to allocate the costs of

the outage and eventual shut down as between SCE, San Diego Gas & Electric

(“SDG&E”), and consumers.

A settlement was reached between SCE, SDG&E, The Utility Reform Network

(“TURN”), and the Office ofRatepayer Advocates (“ORA”) in March 2014.4 Over the

course ofthe next few months, SCE made numerous public statements about the

settlement. On March 20, 2014, SCE filed a Form 8-K with the SEC announcing the

settlement. On March 27, 2014, SCE made a number ofstatements regarding the

settlement. SCE issued a press release formally announcing that a settlement had been

reached and indicated that “[i]fimplemented, the Settlement Agreement will constitute a

complete and final resolution ofthe [Oil] and related proceedings regarding” SONGS.

(SAC f 80.) The same day, SCE held a conference call in which Craver, Edison’s Chief

Executive Officer, stated that the settlement “resolves all matters related to the [Oil]

involving” SONGS. (SAC ^ 81.) On the same call, Litzinger, President of SCE at the

time, in responding to an inquiry from an analyst about CPUC’s involvement in the

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24 2 The Court is not making any findings offact, but rather, summarizing the relevant

allegations ofthe SAC for purposes of evaluating Defendants’ Motion to Dismiss.

3 Plaintiffs SAC contains largely the same allegations as the Amended Complaint.

Therefore, the Court’s summary ofthe allegations is similar to its prior Order, and new

allegations will be discussed where relevant to the Court’s analysis.

4 ORA and TURN are consumer advocacy groups.

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settlement, stated that the CPUC commissioners “were not involved [in the settlement

process] other than encouraging settlement publically.” (SAC 1 82.) Similarly, at a May

28,2014 conference, Craver indicated that the settlement was primarily negotiated with

consumer groups. (SAC 197.)

The CPUC Administrative Law Judge (“ALJ”) overseeing the investigation held

an evidentiary hearing on May 14, 2014 on the settlement that included the parties to the

settlement, objectors, CPUC President Michael Peevey, and other commissioners. In

response to a question from an objector about his communications with commissioners,

Litzinger stated that “[t]he only ex parte communication [he] had with Commissioners

was following the Phase I Proposed Decision. And it was noticed.” (SAC 195.) Similar

to its public statements at the time the settlement was reached, SCE’s Form 10-Qs, filed

on April 29, 2014, July 31,2014, and October 28, 2014, state that implementing the

settlement “will constitute a complete and final resolution ofthe CPUC’s Oil and related

proceedings regarding” SONGS shut down and settlement. (SAC H 90, 99, 107.) On

October 28,2014, during a conference call, Craver, when asked about ex parte

communications with reference to recent issues at PG&E, stated that SCE was making

sure personnel were aware of expected proper conduct, they had a compliance program

and training, and were redoubling efforts on awareness. (SAC 1 108.)

Following the parties’ approval of a modification recommended by the CPUC, the

amended settlement was approved by the CPUC on November 20, 2014. SCE issued a

press release the same day describing the settlement as “resolving all issues regarding the

public utility commission investigation.” (SAC 1112.)

CPUC Investigation and Unreported Ex Parte Communications

Peevey’s home was searched on January 27, 2015. Notes about the settlement

were found in a desk drawer, although the contents were not disclosed to the CPUC and

the public until April 2015. On February 2, 2015, SCE adopted a broader reporting

policy regarding ex parte communications with CPUC decisionmakers. On February 9,

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2015, SCE filed a notice of ex parte communication for a communication that took place

on March 26, 2013 at an industry conference in Warsaw, Poland at a meeting that

included SCE Vice President ofExternal Relations Stephen Pickett, Peevey, and Edward

Randolph, CPUC Director ofEnergy. Pickett claimed at the time it was a one-sided

communication in which he only listened to Peevey, took notes that Peevey kept, and did

not engage. SCE claimed in the Notice that, based on new information from Pickett,

Pickett may have crossed into a substantive communication in reacting to at least one of

Peevey’s comments.

SCE’s February 24,2015 Form 10-K reiterated the prior statements about the

settlement resolving issues regarding SONGS. It also disclosed the late-filed notice of ex

parte communication as to the Warsaw meeting, noted the involved executive and CPUC

president were retired, and acknowledged the Alliance for Nuclear Responsibility’s

(“A4NR”) request for CPUC to open an investigation ofthe ex parte communications.

The same day, Craver characterized the CPUC rules on ex parte communications as being

geared to disclosure to provide equal access to decision makers, not prohibiting

communications entirely, and stated “fundamentally, when we have proceedings before

the Commission, we follow the rules.” (SAC 1122.)

On April 15, 2015, the CPUC ordered SCE to turn over all documents related to

the settlement between March 2013 and November 2014. On April 17, 2015, ORA

sought return of $648 million to customers and TURN indicated it would urge the CPUC

to assess the maximum sanction against SCE and apply it to reducing customer rates.

Documents were produced on April 29, 2015 and included an April 1, 2013 memo

detailing “Elements of a SONGS Deal” from Pickett to Defendants Craver, Litzinger, and

Scilacci. (SAC 132.) Plaintiff also alleges that other emails from 2013 and 2014

reflect a general knowledge at SCE of employee contacts with the CPUC that were not

reported as ex parte communications.

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On June 24, 2015, TURN called for the 2014 Settlement to be overturned or

reopened. On August 5, 2015, the ALJ issued a lengthy Order to Show Cause why not to

impose sanctions for SCE’s unreported reportable ex parte communications with the

CPUC. The Order discussed SCE’s conduct and identified ten violations ofthe CPUC’s

rules on ex parte communications. This was followed by issuance of a proposed ruling

and a final decision by the CPUC on December 3, 2015 to sanction SCE $16.7 million for

failing to report eight reportable ex parte communications.

On May 9,2016, the CPUC “reopened the record to review the 2014 Settlement

Agreement against [the CPUC’s] standards for approving settlements ... in light ofthe

[CPUC’s] December 2015 Decision fining [SCE] for failing to disclose ex parte

communications relevant to this proceeding.” (Order Reopening Record (Docket No. 33,

Ex. A).)

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13 LEGAL STANDARD

The SAC claims violations of Section 10(b) and 20(a) ofthe Exchange Act of 1934

and Securities and Exchange Commission (SEC) Rule 10b-5.5 To state a securities fraud

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5 Section 10(b) ofthe Exchange Act makes it unlawful to:

use or employ, in connection with the purchase or sale of any security

registered on a national securities exchange or any security not so registered .

. . any manipulative or deceptive device or contrivance in contravention of

such rules and regulations as the [SEC] may prescribe as necessary or

appropriate in the public interest or for the protection ofinvestors.

15 U.S.C. § 78j(b). Pursuant to that section, the SEC promulgated Rule 10b-5, which

makes it unlawful 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 light ofthe circumstance

under which they were made, not misleading.” 17 C.F.R. § 240.10b-5(b).

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Section 20(a) ofthe Exchange Act, 15 U.S.C. § 78t(a), states that a person who:

directly or indirectly, controls any person liable under any provision of this

chapter or of any rule or regulation thereunder shall also be liable jointly and

severally with and to the same extent as such controlled person to any person

to whom such a controlled person is liable . . . unless the controlling person

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claim, a plaintiffmust plead: (1) a material misrepresentation or omission by the

defendant; (2) scienter; (3) a connection between the misrepresentation or omission and

the purchase and sale of a security; (4) reliance upon the misrepresentation or omission;

(5) economic loss; and (6) loss causation. Reese v. Malone, 1A1 F.3d 557, 567 (9th Cir.

2014).

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All factual allegations are accepted as true and “courts must consider the complaint

in its entirety, as well as 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 ofwhich a court may take judicial notice.” Tellabs, Inc. v. Makor

Issues & Rights, Ltd., 551 U.S. 308, 322 (2007).6

Securities fraud claims are subject to the heightened pleading requirements of

Federal Rule ofCivil Procedure 9(b) and the Private Securities Litigation Reform Act of

1995 (PSLRA). In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 701 (9th Cir.

2012). Under Rule 9(b), plaintiffs must “state with particularity the circumstances

constituting fraud.” Id. “Rule 9(b) applies to all elements of a securities fraud action,

including loss causation.”7 Oregon Pub. Employees Ret. Fund v. Apollo Grp. Inc., 11A

F.3d 598, 605 (9th Cir. 2014).

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acted in good faith and did not directly or indirectly induce the act or acts

constituting the violation or cause of action.

Section 20(a) claims may be dismissed summarily if, as here, the plaintifffails to

adequately plead a primary violation of Section 10(b). Zucco Partners, LLC v. Digimarc

Corp., 552 F.3d 981, 990 (9th Cir. 2009).

6 The Court grants Defendants’ Request for Judicial Notice as to all documents relied on

or referred to in the SAC, SCE’s reported stock price history, and other publicly available

financial documents, including SCE’s SEC filings. See Dreiling v. Am. Exp. Co., 458

F.3d 942, 946 n. 2 (9th Cir.2006) (SEC filings subject to judicial notice).

7 Plaintiffs asserted in their Opposition that “loss causation issues need only comply with

Fed. R. Civ. P. 8(a), not Rule 9(b).” (Pis.’ Opp’n at 24.) However, at oral argument,

Plaintiffs conceded that the Rule 9(b) pleading requirements also applies to loss

causation.

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1 DISCUSSION

The Court previously dismissed Plaintiffs’ Amended Complaint for failing to

sufficiently allege the elements ofscienter and loss causation. (See Docket No. 35.)

Defendants’ Motion to Dismiss argues Plaintiffs’ have failed to cure the deficiencies in

the Amended Complaint. The Court agrees.

Loss Causation

To sufficiently plead loss causation, a plaintiffmust “allege that the decline in the

defendant's stock price was proximately caused by a revelation offraudulent activity

rather than by changing market conditions, changing investor expectations, or other

unrelated factors.” Loos v. Immersion Corp., 762 F.3d 880, 887 (9th Cir. 2014) (citing

Metzlerlnv. GMBHv. Corinthian Colls., Inc., 540 F.3d 1049, 1062 (9th Cir. 2008)). “In

other words, the plaintiffmustplausibly allege that the defendant's fraud was ‘revealed to

the market and caused the resulting losses.’” Id. (quoting Metzler at 1063) (emphasis

added and in original); see also In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1057 (9th

Cir. 2008) (“So long as the complaint alleges facts that, iftaken as truq, plausibly

establish loss causation, a Rule 12(b)(6) dismissal is inappropriate”) (emphasis added).

As Plaintiffs noted, the decline in stock price must be “statistically significant.”8

In re REMECInc. Sec. Litig., 702 F. Supp. 2d 1202, 1266 (S.D. Cal. 2010) (citing

Metzler at 1063); see also Lloyd v. CVB Fin. Corp., 811 F.3d 1200, 1210 (9th Cir. 2016)

(finding amended complaint adequately pleaded loss causation where it alleged the

corrective disclosure “caused [the] stock price to drop precipitously'’) (emphasis added).

“[W]hether a drop in a stock's price is statistically significant will vary depending on the

average trading range for that particular stock.” Greenberg v. Crossroads Sys., Inc., 364

F.3d 657, 665 n. 9 (5th Cir. 2004). For example, “[a] drop of 10% for a volatile stock

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8 See Docket No. 49 at 2, Pl.’s Reply to Defs.’ Response to Pis.’ Notice ofRecent

Developments.

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may not be statistically significant whereas the same drop for a stock with little average

movement may be significant.” Id.

Here, Plaintiffs’ SAC relies on the same six purported corrective disclosures they

alleged in their Amended Complaint: (1) A4NR’s February 10, 2015 request for

sanctions against SCE (price dropped 2% on February 11); (2) California Assemblyman’s

March 19, 2015 letter requesting the CPUC order SCE to produce documents (price

dropped .99% on March 20, 2015); (3) CPUC’s April 15, 2015 order directing SCE to

produce documents (price dropped .79%); (4) ORA and TURN’S April 17,2015

announcement they were seeking fines (price dropped .99%); (5) SCE’s April 29, 2015

production of documents (price dropped 1.73% on April 30); and (6) TURN’S June 24,

2015 request that the CPUC reopen the settlement (price dropped 2.71%). (SAC 126-

134.) The SAC does not identify any additional corrective disclosures followed by a

decline in stock price.

The Court finds the reasoning in its prior Order determining Plaintiffs failed to

sufficiently allege loss causation remains sound. Therefore, it adopts the reasoning set

forth in its September 14, 2016 Order regarding loss causation. {See Docket No. 35 at

19-21.) In addition, the Court finds Plaintiffs’ SAC does notplausibly alleged that the

scanty .79% to 2.71% declines in stock price were “statistically significant.” See Lloyd,

supra, 811 F.3d at 1210-1211 (stock price allegedly dropped 22%); Metzler, supra, 540

F.3d at 1064 (characterizing 10% stock price drop as “modest”); In re Gilead Sciences,

supra, 536 F.3d at 1054 (stock price allegedly dropped 12%); Greenberg, supra, 364

F.3d at 665 (stock price allegedly dropped 63%).

Although the Court is required to assume the facts in the SAC are true, “it is not

required to indulge unwarranted inferences in order to save a complaint from dismissal.”

Metzler, supra, 540 F.3d at 1064-65. The SAC’s allegations that the SCE’s stock price

fell by “statistically significant” amounts are not facts; they are inferences or legal

conclusions Plaintiffs believe are warranted from the facts that are alleged. As part of

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their motion, Defendants provided SCE’s stock price history, which indicates that the

declines in stock price in the range of.79% to 2.71% were typical movements for SCE’s

stock in the days prior and subsequent to the alleged corrective disclosures. (Defs.’ Req.

for Judicial Notice, Ex. 21.) In their Opposition, Plaintiffs merely provided a conclusory

assertion that “the allegations are straightforward. When company-specific news about

defendants’ bad acts reached the market, Edison’s stock price dropped a material

amount.”9 (Pis.’ Opp’n at 24). When the Court raised its concerns about the seemingly

insignificant drops in stock price during oral argument, Plaintiffs did not demonstrate that

they had alleged the statistical significance ofthe drops in the SAC.10

Thus, the SAC does not plausibly alleged that the six disclosures were followed by

“statistically significant” stock price drops. As a result, Plaintiffs have failed to

sufficiently plead loss causation.

Scienter

Having found Plaintiffs’ SAC does not plausibly plead loss causation, the Court

need not analyze the scienter allegations. However, the Court expresses its doubts over

whether Plaintiffs’ SAC also sufficiently alleges scienter by their inclusion of “new

facts,” which appear to be more inferences and/or legal conclusions Plaintiffs wish the

Court to draw.

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9 Plaintiffs’ lack offurther explanation may be in part due to their erroneous earlier

assumption that they were not required to plead loss causation under the heightened Rule

9(b) standard. Seefn. 7, supra.

10 Surprisingly, counsel for Plaintiffs argued in essence that the SAC only needed to

allege there were “statistically significant” drops, which the Court must accept as true,

and that “how much the stock price dropped because of a disclosure [is] irrelevant.” (Tr.

ofMot. to Dismiss Hearing on November 30, 2016 at 18:9-20:17.) The Court disagrees

because, as explained above, counsel’s assertion ignores that Plaintiffs are required to

plausibly allege the statistical significance ofthe price drops, which includes evaluation

ofthe amount ofthe stock drop.

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1 CONCLUSION

Defendants’ Motion to Dismiss is GRANTED without prejudice. Plaintiffs shall

have twenty-one (21) days from the date ofthis Order to file a Third Amended

Complaint.

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5 IT IS SO ORDERED.

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'///Ms r 'T. BENITEZ

7 DATED: May , 2017

HON/Ri

United States District Court Judge 8

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