Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_16-cv-00512/USCOURTS-casd-3_16-cv-00512-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:0078m(a) Securities Exchange Act

---

led

11JUN 20 PH 2:12

jails'

1 I"1**" |

I

2

3

4

5

6

7

8 UNITED STATES DISTRICT COURT

9 SOUTHERN DISTRICT OF CALIFORNIA

10

CRAIG M. PLUMLEY, individually and

on behalf of all others similarly situated,

et al.,

11 Case No.: 3:16-cv-00512-BEN-AGS

12 ORDER:

13 Plaintiffs,

(1) DENYING PLAINTIFFS’

MOTION TO FILE A SUR-REPLY; 14

v.

15 SEMPRA ENERGY, et al., (2) DENYING DEFENDANT

SOUTHERN CALIFORNIA GAS

COMPANY’S MOTION TO DISMISS

FOR LACK OF STANDING; and

16 Defendants.

17

18

(3) GRANTING DEFENDANTS’

MOTION TO DISMISS FIRST

AMENDED COMPLAINT

WITHOUT PREJUDICE FOR

FAILURE TO STATE A CLAIM

19

20

21

22

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

(“FAC”) filed by Defendants Sempra Energy, Debra L. Reed, and Joseph A.

Householder, which wasjoined by Defendant Southern California Gas Company.

(Docket Nos. 29, 35.) Plaintiffs have also filed a Motion for Leave to File a Sur-Reply in

Further Opposition to Southern California Gas Company’s Joinder in Defendants’

23

24

25

26

27

28

l

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 1 of 25
Motion to Dismiss. (Docket No. 49.) The Motions are fully briefed, and the Court held a

hearing for oral arguments. For the reasons set forth below, Plaintiffs’ Motion to File

Sur-Reply is DENIED, Southern California Gas’s Motion to Dismiss for Lack of

Standing is DENIED, and Defendants’ Motion to Dismiss for Failure to State a Claim is

GRANTED without prejudice.

1

2

3

4

5

i 6 BACKGROUND

Defendant Sempra Energy (“Sempra”) is a publicly traded energy-services holding

company whose operating units invest in, develop, and operate energy infrastructure, and

provide gas and electricity services to customers in North and South America. During all

time periods relevant to this lawsuit, Defendant Debra L. Reed (“Reed”) served as

Sempra’s Chairwoman and ChiefExecutive Officer (“CEO”), and Defendant Joseph A.

Householder (“Householder”) served as Sempra’s ChiefFinancial Officer (“CFO”) and

Executive Vice-President.

Defendant Southern California Gas Company (“SCG”) is one of Sempra’s

operating units. SCG is a natural gas distribution utility and operates over 20,000 square

miles throughout Central and Southern California. SCG’s operations includes the storage

ofnatural gas. It owns four natural gas storage facilities, the largest located at the Aliso

Canyon facility (“Aliso Canyon”). Aliso Canyon contains approximately 115

underground wells. This putative securities class action arises out of a natural gas leak at

Aliso Canyon, from a well identified as “SS-25.”

SCG’S December 2010 and November 2014 Rate Increase Applications

SCG is regulated by the California Public Utilities Commission (“CPUC”). SCG

must apply for and obtain the CPUC’s approval prior to increasing its rates to consumers.

In December 2010, SCG submitted a rate increase application based on the need for

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21 A.

22

23

24

25

26

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

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

i

28

2

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 2 of 25
capital improvements, including replacement ofsafety valves on wells at Aliso Canyon.

In support ofthis application, SCG Storage Engineering Manager James D. Mansdorfer

testified that “[m]any valves (block, well site, safety, etc.) in the Storage Field are leaking

and new ones cost less than or equal to the cost ofrepair.” (FAC 136.) Mr. Mansdorfer

further testified that “[t]his project will replace approximately 5% ofthe larger field

valves every year (e.g. replace valves approximately every 20 years).” (Id.) The CPUC

approved SCG’s December 2010 application, but neither Sempra nor SCG replaced SS25’s valves.

1

2

3

4

5

6

7

8

In November 2014, SCG submitted a rate increase application based on the

purported need to inspect and repair old wells at Aliso Canyon on a more systemic basis.

In support ofthis application, SCG Director of Storage Phillip Baker testified that:

Historically, safety and risk considerations for wells and their

associated valves and piping components have not been

addressed in past rate cases to the same extent that distribution

and transmission facilities have been under the Distribution and

Transmission integrity management programs.

9

10

11

12

13

14

15

(FAC Tfl[ 39,40.) Mr. Baker also testified that:

Without a robust program to inspect underground storage wells

to identify potential safety and/or integrity issues, problems

may remain undetected within the high pressure above-ground

wellhead, pipe laterals (up to 3,600 psig), and below-ground

facilities (up to 4,400 psig) among the 229 storage field wells.

This situation is evidenced by an increase in recent years in the

type ofwork related to safety conditions observed as part of

routine operations. This concern is further amplified by the

age, length, and location ofthe wells. Some [SCG] wells are

more than 80 years old with an average age of 52 years. In

addition, some wells are located within close proximity to

residential dwellings or high consequence areas.

16

17

18

19

20

21

22

23

24

25

(Id. ^[ 40.) He also stated that “a negative well integrity trend seems to have developed

since 2008.” (Id. 141.)

26

27

28

3

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 3 of 25
In addition, SCG presented information that surveys conducted in its storage wells

from 2008 to 2013 “identified casing corrosion, or mechanical damage in 15 wells....

[SCG] has storage wells in service that are more than 70 years old. Half ofthe 229

storage wells are more than 57 years old as for July 2014.” (Id. Tf 42.) Mr. Baker

concluded that, without implementation ofthe proposed Storage Integrity Management

Program (“SIMP”), SCG would “continue to operate in a reactive mode (with potential

for even higher costs to ratepayers) to address sudden failures of old equipment.” (Id. ^

43.)

1

2

3

4

5

6

7

8

9 The October 23,2015 Gas Leak in Aliso Canyon

Sempra/SCG2 discovered the Aliso Canyon gas leak at the SS-25 well on or about

October 23,2015, when residents in the nearby Porter Ranch neighborhood reported what

they believed to be a home with a major gas leak. Sempra/SCG did not immediately

report the gas leak to the appropriate government agencies as required by law. Instead,

SCG “went door-to-door reassuring residents that all was under control and that no

danger existed.” (Id. 50.) Three days later, on October 26,2015, Sempra/SCG reported

the gas leak to the appropriate authorities.

The gas leak released “significant quantities ofnatural gas containing methane,

tert-butyl mercaptan, and tetrahydrothiophene,” as well as several “federally-listed

hazardous air pollutants.” (Id. f 49.) Some Porter Ranch residents reported physiological

symptoms such as nausea, vomiting, dizziness, nosebleeds, and headaches. Thousands of

families were relocated to escape the odor and adverse health effects, and the

community’s schools were transferred to alternative facilities.

B.

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24 2 The FAC is at times inconsistent as it appears to equate Sempra’s actions with SCG’s

actions, and vice versa. (See e.g. “[SCG] did not report the Gas Leak to authorities until

October 26, 2015. Sempra’s three-day delay in reporting the Gas leak was in direct

contravention ofthe law, which required Sempra to report it immediately.” FAC T[ 50-

51.) When the allegations appear inconsistent as to which entity Plaintiffs are attributing

conduct/statements, the Court refers to the entity as “Sempra/SCG.”

25

26

27

28

4

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 4 of 25
The gas leak persisted for months. On December 4, 2015, Sempra/SCG began

constructing a reliefwell. On January 6, 2016, Governor Brown declared a state of

emergency (the “Proclamation”) regarding the gas leak. The Proclamation directed

additional immediate actions to respond to the leak, and ordered a comprehensive

independent review ofthe safety ofthe storage wells and the air quality ofthe

surrounding community. The Proclamation also charged SCG with payment ofthe costs

related to the gas leak, as well as the funding of a program to mitigate the emissions.

Sempra/SCG sealed the gas leak on February 18, 2016.

Sempra and SCG have been jointly or separately named as defendants in at least

138 lawsuits related to the gas leak. A number ofstate and federal agencies, including

the CPUC, the U.S. Environmental Protection Agency, and the California Attorney

General’s office have investigated, or are continuing to investigate, Sempra’s and/or

SCG’s conduct before and during the gas leak. The CPUC and the California

Department ofConservation’s Division ofOil, Gas, and Geothermal Resources

commissioned Blade Energy Partners, a third-party investigator, to conduct a root cause

analysis ofthe gas leak. To date, the report has not been completed. (Tr. ofMot. to

Dismiss Hearing on January 11, 2017 at 39:10-18.)

LEGAL STANDARD

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

and Securities and Exchange Commission (“SEC”) Rule 10b-5.3 To state a securities

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23 3 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

24

25

26

27

28

5

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 5 of 25
fraud 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, 747 F.3d 557, 567 (9th Cir.

2014), overruled on other grounds by City of Dearborn Heights Act 345 Police & Fire

Ret. Sys. v. Align Tech, Inc., No. 14-16814, 2017 WL 1753276, at *10 (9th Cir. May 5,

2017).

1

2

3

4

5

6

7

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).4

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

8

9

10

11

12

13

14

15

16

17 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). 18

19 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 ofthis

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

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).

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

or referred to in the FAC, and other publicly available financial documents, including

Sempra’s, Reed’s and Householder’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).

20

21

22

23

24

25

26

27

28

6

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 6 of 25
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. “In passing [the PSLRA], Congress ‘significantly altered

pleading requirements in securities fraud cases by ... requiring that a complaint plead

with particularity both falsity and scienter.’” In re NVIDIA Corp. Sec. Litig., 768 F.3d

1046, 1052 (9th Cir. 2014) (quoting Zucco Partners, 552 F.3d at 990-91). “A plaintiff

must ‘state with particularity both the facts constituting the alleged violation, and the

facts evidencing scienter, i.e., the defendant’s intention to deceive, manipulate, or

defraud.’” Tellabs, 551 U.S. at 313 (describing these pleading requirements as “among

the control measures Congress included in the PSLRA.”). “Rule 9(b) applies to all

elements of a securities fraud action, including loss causation.” Oregon Pub. Emps. Ret.

Fund v. Apollo Grp. Inc., 11A F.3d 598, 605 (9th Cir. 2014).

DISCUSSION

Defendants Sempra, Reed, and Householder filed a motion to dismiss for failure to

state a claim. (Docket No. 29.) Defendant SCG filed a joinder in Defendants’ motion to

dismiss, and moved for dismissal on a separate ground that Plaintiffs lacked standing to

bring claims against it. (Docket No. 35.) After filing oppositions to both dismissal

motions, Plaintiffs subsequently moved to file a sur-reply to SCG’sjoinder in

Defendants’ motion. (Docket No. 49.) The Court addresses each motion in turn.

Plaintiffs’ Motion to File Sur-Reply

Plaintiffs move to file additional briefing to further support their opposition to

SCG’sjoinder in the motion to dismiss as untimely. (Docket No. 49.) SCG maintains

that it timely filed its notice ofjoinder. A review ofthe action’s procedural history

indicates SCG’s joinder was timely.

On February 29, 2016, PlaintiffCraig M. Plumley filed the initial Complaint.

(Docket No. 1.) On June 6, 2016, the Court appointed Plaintiffs Steven Graham and

Richard Berkowitz as Co-Lead Plaintiffs. (Docket No. 17.) Plaintiffs filed their

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20 I.

21

22

23

24

25

26

27

28

7

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 7 of 25
consolidated First Amended Complaint (“FAC”) on July 26, 2016. (Docket No. 22.) At

that time, all defendants except SCG had executed waivers ofservice. (Docket Nos. 9-

11.) On August 10, 2016, following multiple joint requests for extensions oftime, the

Plaintiffs and Defendants Sempra, Reed, and Flouseholder filed anotherjoint motion to

modify the Court’s scheduling order. (Docket No. 24.) The motion was granted in part

on August 16, 2016, and the moving defendants were ordered to respond to the FAC by

September 12, 2016. (Docket No. 26.) Defendants Sempra, Reed, and Householder

timely filed the pending motion to dismiss on September 12,2016. (Docket No. 29.)

Plaintiffs’ sent SCG a request for waiver ofservice on August 2, 2016. (Docket

No. 25.) SCG executed the waiver on August 10,2016, and the waiver was filed with the

Court on August 12,2016. Thus, barring any other stipulation, SCG had sixty days from

the date the waiver ofservice was sent (i.e., October 1, 2016) to respond to the FAC.

Fed. R. Civ. P. 4(d)(3). On September 15, 2016, three days after Defendants’ filed their

motion to dismiss, SCG filed a one-page notice ofjoinder in the motion to dismiss.

(Docket No. 35.) In two paragraphs, SCG moved to join in the pending motion to

dismiss and assert an additional argument that Plaintiffs lacked standing to assert a claim

against SCG. {Id.) Subsequently, Plaintiffs filed two separate oppositions, one directed

against the motion to dismiss, and one directed against SCG’s notice ofjoinder. (Docket

Nos. 38, 41.) The opposition to SCG’sjoinder motion raised both procedural and

substantive arguments. (Docket No. 41.) SCG filed its reply to Plaintiffs’ opposition, to

which Plaintiffs filed the instant motion to file a sur-reply. (Docket No. 46.)

Plaintiffs’ sur-reply argues that the Court’s August 16, 2016 Order required SCG

to respond by September 12,2016. However, Plaintiffs ignore the fact that SCG was not

identified as a moving party in the August 10, 2016 motion for modification ofthe

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

8

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 8 of 25
scheduling order.5 (Docket No. 24.) As noted above, SCG was not required to respond

to the FAC until October 1, 2016 pursuant to Rule 4(d)(3) ofthe Federal Rules ofCivil

Procedure. Further, even if SCG’sjoinder motion was untimely, the Court may consider

it “to secure the just, speedy, and inexpensive determination” ofthe action. Fed. R. Civ.

P. 1. The Court finds consideration of SCG’sjoinder would promote the just, speedy,

and inexpensive determination ofthis action. Moreover, the Court finds Plaintiffs do not

appear to have suffered any prejudice considering they provided a robust opposition to

the single paragraph of argument. Accordingly, Plaintiffs Motion to File Sur-Reply is

DENIED.

1

2

3

4

5

6

7

8

9

10 SCG’s Motion to Dismiss for Lack of Standing

SCG contends it should be dismissed from the case because Plaintiffs do not have

standing to bring claims against it. The Court disagrees.

It is well established that “[ojnly a purchaser or seller ofsecurities has standing to

bring an action under section 10(b) and Rule 10b-5.” Binder v. Gillespie, 184 F.3d 1059,

1066 (9th Cir. 1999) (citing Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 749

(1975)). SCG asks the Court to stretch Binder's holding and find Plaintiffs lack standing

to pursue section 10(b) and Rule 10b-5 claims against SCG because they did not allege

that they purchased SCG stock. But Binder does not support such a requirement.

In Binder, the Ninth Circuit upheld summary judgment because the plaintiff did

not have standing to bring claims against individual defendants. Id. Specifically, the

court concluded that the plaintifflacked standing because he did not purchase or sell any

stock in connection with the defendants’ alleged omissions or misrepresentations. Id.

(“We agree with the district court that summary judgment was appropriate for Wilson,

II.

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

5 Although the Court’s docket reflects that the motion was filed by Sempra and SCG, the

actual document filed reflects that only Plaintiffs, Sempra, Reed, and Householderjointly

moved for modification ofthe scheduling order. (Docket No. 24.) Indeed, the motion

expressly defines “Defendants” as Sempra, Reed, and Householder. {Id. at 2.)

26

27

28

9

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 9 of 25
Stevens, and Fitchey. None ofthese defendants had any role in AVBC prior to Binder's

purchase ofstock... A cause of action under section 10(b) applies only to

misrepresentations or omissions made ‘in connection with the purchase or sale of any

security.’ 15 U.S.C. § 78j(b).”). The Binder court did not suggest that a plaintiff

asserting a claim under section 10(b) or Rule 10b-5 only has standing to sue the company

it purchased shares from. Rather, the court reiterated the principle that “[shareholders

‘who did no more than retain their shares[] are ... barred by the purchaser-seller rule

from maintaining an action under Rule 10b-5.”’ Binder, 184 F.3d at 1066.

Additionally, as Plaintiffs pointed out in their opposition, at least two courts have

allowed a plaintiffto pursue section 10(b) or Rule 10b-5 claims against a subsidiary who

is the alleged source ofmisleading information. See In re Alstom SA Sec. Litig., 406 F.

Supp. 2d 433, 466-67 (S.D.N.Y. 2005); In re Kidder Peabody Sec. Litig., 10 F. Supp. 2d

398, 408 (S.D.N.Y. 1998). Where, as here, a plaintiff alleges it relied upon a thirdparty’s (i.e. SCG’s) materially false statements or omissions in connection with the

purchase or sale ofsecurities (i.e. Sempra stock), he or she has sufficiently pled facts to

demonstrate standing. 15 U.S.C. § 78j(b). Accordingly, SCG’s motion to dismiss for

lack ofstanding is DENIED.

III. Defendants’6 Motion to Dismiss for Failure to State a Claim

Defendants argue that the FAC fails to sufficiently allege any materially false or

misleading statements or scienter. The Court agrees.

A. Materially False or Misleading Statements

“The complaint must plead specific facts indicating why any alleged

misrepresentation was false or any omission rendered a representation misleading.”

Lloyd v. CVBFin. Corp., 811 F.3d 1200,1206 (9th Cir. 2016) (emphasis added).

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26 6 Having found SCG may join in the motion to dismiss filed by Defendants Sempra,

Reed, and Householder, the Court’s reference to “Defendants” in this section also

includes SCG.

27

28

10

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 10 of

 25
Plaintiffs allege two categories ofstatements that were allegedly false or misleading: (1)

pre-Aliso Canyon gas leak statements, and (2) post-Aliso Canyon gas leak statements.

Pre-Aliso Canyon Gas Leak Statements

Plaintiffs identify numerous allegedly false or misleading statements that were

made prior to the Aliso Canyon gas leak, including statements that emphasize

Sempra’s/SCG’s focus on and commitment to safety and the speed of SCG’s response

time in the event of a natural gas leak. Examples include: 1) SCG’s “utilities exhibit

consistent attention to safety and security in everyday operations. One of [SCG’s] stated

core values is, ‘Treat safety as a way oflife.’ At all levels within [SCG]... we pay

significant attention to the development ofstructures, roles and processes to address the

risks associated with our operations and facilities ” (FAC f 68)7; 2) “[I]n the event that an

unintentional release ofnatural gas occurs, the public and emergency responders are

prepared and the consequence ofthe release minimized” (id.); 3) “Whenever a well may

pose a safety risk, we act immediately to address the problem” (id.); and 4) “It is our

practice to respond promptly when we receive calls from customers regarding a natural

gas leak.... We believe that our system is safe.... We meet or exceed all federal and

state requirements for safe pipeline operations and maintenance, including ongoing

technical training and testing for employees.” (Id. 171).

Plaintiffs further allege that SCG’s “Aliso Canyon Safety Plan,” a document

published on SCG’s website since at least May 12, 2015, contains false or misleading

statements such as: 1) “Aliso is committed to comply with applicable international,

federal, state and local health and safety laws and requirements” (id. 172); 2) “Aliso

Canyon is committed to ensuring the safety of our employees and protecting and

conserving the environment, customers, and the communities” (id.); and 3) “VALVE

1

2

3 1.

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27 7 The Court has removed all original emphasis when quoting the FAC in this section for

28 ease ofreading.

li

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 11 of

 25
MAINTENANCE: [SCG] performs maintenance and inspection activities on all valves

that may be necessary for the safe operation ofits natural gas system” {id. f 73).

In essence, Plaintiffs contend that all ofthese types ofstatements were false or

misleading because Sempra/SCG did not contemporaneously disclose that SS-25 lacked a

safety valve.8 Therefore, Plaintiffs conclude, all ofDefendants’ statements regarding the

condition of SCG’s natural gas storage facilities, Sempra’s/SCG’s compliance with

federal, state and local health and safety laws and regulations, and Sempra’s executive’s

statements regarding Sempra’s/SCG’s earnings were also fraudulent or misleading.

Defendants argue that SCG disclosed the conditions ofits facilities and the associated

risks, that the safety-related statements were true or are not specific enough to be

actionable, and that the omission of SS-25’s lack ofsafety valve was immaterial.

Because Plaintiffs rely on the same alleged facts for almost all ofthe alleged

misrepresentations in this category, the Court will only address the substance of

Plaintiffs’ proffered support once.

Both parties cite to In re BPp.l.c. Sec. Litig, 843 F. Supp. 2d 712 (S.D. Tex. 2012)

to support their respective positions. In BP, the district court found “general statements

about BP’s ‘commitment to safety,’ prioritization of‘process safety performance,’... and

desire to become a ‘world leader in process safety’” were “too squishy, too untethered to

anything measureable, to communicate anything that a reasonable person would deem

important to a securities investment decision.” Id. at 756-57. On the other hand, it found

specific and measurable statements sufficient to survive a motion to dismiss. Id. at 757-

58. (“Many ofPlaintiffs’ allegations in this category are statements that refer to progress

in process safety as measured against the metrics set forth in the Baker Report’s

recommendations.... The Baker Panel recommendations did not leave BP with a

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27 8 Indeed, Plaintiffs cite almost identical facts, ifnot replicate the same paragraph, as

evidence offalsity of each statement in this category. 28

12

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 12 of

 25
“squishy” mandate. To the contrary, the Panel’s number one recommendation ...

required BP's corporate management to ‘demonstrate their commitment to process safety

by articulating a clear message on the importance ofprocess safety and matching that

message both with the policies they adopt and the actions they take.’... Plaintiffs’

allegations raise a triable issue as to whether BP followed through on the latter portion of

the Baker Panel’s recommendation, which required BP to match the message with

policies and actions.”)

The Court finds that the FAC’s alleged fraudulent or misleading statements

regarding its commitment to or prioritization ofsafety, and all similarly alleged

statements, are too nonspecific and unmeasurable to state a claim for securities fraud.

Unlike the statements the BP court found actionable, Plaintiffs have not identified any

metrics, reports, recommendations, etc., from which SCG’s actions may be compared to.

The alleged misrepresentations are more akin to corporate puffery, which are not

actionable. Police Ret. Sys. ofSt. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051, 1060

(9th Cir. 2014) (internal citation omitted) (“Statements ofmere corporate puffery, ‘vague

statements of optimism like ‘good,’ ‘well-regarded,’ or other feel good monikers are not

actionable because ‘professional investors and most amateur investors as well, know how

to devalue the optimism of corporate executives.’”). In sum, none ofthese alleged

misstatements or omissions resemble quantifiable statements upon which a reasonable

investor would rely in deciding whether to purchase or sell a security. See BP, 843 F.

Supp. 2d at 756-57.

As to the FAC’s allegations that SCG made fraudulent or misleading statements

that it maintained its facilities in accordance with state and federal regulations because

SS-25 lacked a safety valve, Plaintiffs acknowledged at oral argument that an

investigation into SS-25’s natural gas leak was still ongoing. Plaintiffs also

acknowledged that they were unaware of any fines assessed against any Defendants

either for: 1) the lack ofsafety valve on SS-25, or 2) other noncompliance with applicable

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

13

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 13 of

 25
laws and regulations. As a result, Plaintiffs’ allegation that SS-25 was required to have a

safety valve is an assumption or a legal conclusion. Without any additional facts to

support this claim, the Court determines Plaintiffs have not sufficiently plead facts to

demonstrate how Defendants’ statements regarding their compliance with applicable laws

and regulations were false or misleading.

Additionally, Plaintiffs have not established how the nondisclosure of SS-25’s lack

ofsafety valve was material. In considering materiality, the Court must decide “whether

a reasonable investor would have viewed the nondisclosed information, ‘as having

significantly altered the total mix ofinformation made available.’” Matrixx Initiatives,

Inc. v. Siracusano, 563 U.S. 27, 44 (2011) (quoting Basic Inc. v. Levinson, 485 U.S. 224,

232 (1988) (emphasis in original)). The Ninth Circuit has stated that “[t]o be actionable

under the securities laws, an omission must be misleading ... it must affirmatively create

an impression of a state of affairs that differs in a material way from the one that actually

exists.” Police Ret. Sys., supra, 759F.3dat 1061 (quoting Brody v. Transitional Hosps.

Corp., 280 F.3d 997, 1006 (9th Cir. 2002).

Here, Plaintiffs’ FAC indicates SCG disclosed the conditions ofthe Aliso Canyon

wells and their valves prior to SS-25’s leak. First, Plaintiffs allege that, in December

2010, SCG submitted an application for a rate increase with the CPUC. To support the

rate increase application, SCG’s then Storage Engineering Manager James D. Mansdorfer

“testified that many valves, including safety valves, in the Aliso Canyon facility required

a number of capital improvements.” (FAC f 36.) Mr. Mansdorfer further testified that

“Many valves (block, well site, safety, etc.) in the Storage Field are leaking and new ones

cost less than or equal to the cost ofrepair. This project will replace approximately 5%

ofthe largerfield valves every year (e.g. replace valves approximately every 20 years).”

{Id.) (emphasis added). Thus, at the time of SS-25’s October 23, 2015 natural gas leak

occurred, investors presumably were avj/are that, at most, 20% ofthe Aliso Canyon well

valves would have been replaced (i.e. 5% a year beginning in 2011).

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

14

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 14 of

 25
Second, Plaintiffs also allege that, in November 2014, SCG submitted another rate

application increase to the CPUC, wherein SCG presented information that:

Ultrasonic surveys conducted in storage wells as part ofwell

repair work from 2008 to 2013 identified intemal/extemal

casing corrosion, or mechanical damage in 15 wells.... In

addition to the 36 well-related conditions ..., and the corrosion

or mechanically damaged wells that were previously identified,

[SCG] has 52 storage wells in service that are more than 70

years old. Half ofthe 229 storage wells are more than 57 years

old as ofJuly 2014.

1

2

3

4

5

6

7

8

(FAC Tf 42.) To “rectify these conditions,” Director of Storage Phillip Baker indicated

that a rate increase was necessary to implement a Storage Integrity Management Program

(“SIMP”). {Id. ]} 43.) (“Given the increasing trend in well integrity repairs, the corrosion

threats that have been detected in some wells, the increasing age ofthe wells ... the

SIMP ... is certainly justified.”) Mr. Baker testified that, “[wjithout the SIMP, [SCG]

will continue to operate in a reactive mode (with the potential for even higher costs to

ratepayers) to address sudden failures of old equipment.” {Id.) Thus, it appears to the

Court that Plaintiffs’ own allegations contradict their claims that SCG failed to disclose

the risks associated with its natural gas storage facilities, including the condition ofthe

Aliso Canyon wells and their components.

Finally, Plaintiffs’ FAC alleges SS-25 was one of 115 underground wells at Aliso

Canyon, and that Aliso Canyon was one offour gas storage facilities owned by SCG.

(FAC 30,34.) The Court agrees with Defendants that, in light ofthe facts alleged in

the FAC, requiring SCG or a similarly situated company to release specific information

about the accoutrements of each individual well demands disclosures “with a level of

granularity that the securities laws do not require because it would ‘bury the shareholders

in an avalanche’ ofinformation.” See In re Convergent Techs. Sec. Litig., 948 F.2d 507,

516 (9th Cir. 1991) (quoting TSCIndus. Inc. v. Northway, Inc., 426 U.S. 438, 448-449

(1976). The Court notes that the Ninth Circuit has “expressly declined to require a rule

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

15

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 15 of

 25
of completeness for securities disclosures because ‘no matter how detailed and accurate

disclosure statements are, there are likely to be additional details that could have been

disclosed but were not.”’ Police andRet. Sys., 759 F.3d at 1061 (quoting Brody, 280

F.3d at 1006).

In sum, Plaintiffs have not met their burden to show how the pre-Aliso Canyon gas

leak statements were false, misleading, or material.

Post-Aliso Canyon Gas Leak Statements

Plaintiffs allegations regarding Sempra’s/SCG’s post-Aliso Canyon gas leak

statements identify numerous statements which allegedly minimized the scope and risks

the gas leak posed, and “creat[ed] a false sense that [Sempra/SCG] could address the Gas

Leak before a state of emergency was declared.”9 (FAC 1110.) Examples include: 1)

“the leak does not pose an imminent threat to public safety” (id. f 111)10; 2) “Scientists

agree natural gas is not toxic and its odorant is harmless at the minute levels at which it is

added to natural gas” (id.); 3) “We have assembled a world-class team of experts, and we

are working as quickly as safety will allow to stop the leak” (id.); 4) “The leak continues

to pose no threat to public safety as the site is confined to a localized, remote area” (id. |

116); 5) “After considerable testing and analysis, we expect this situation to take another

wear or longer to resolve” (id.); and 6) “We have experts taking air samples at multiple

random locations to reassure the community that the air quality continues to be within

safe levels” (id.). Plaintiffs also identify as false and misleading Sempra’s/SCG’s

quarterly earnings announcements and earnings call from November 3, 2015,

1

2

3

4

5

6

7 2.

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

9 The FAC also alleges some of Sempra’s/SCG’s post-gas leak statements were

misleading “for failure to tell investors that [Sempra/SCG] had not immediately reported

the Gas Leak to authorities,” which resulted in a criminal complaint by the Los Angeles

District attorney. (FAC If 113.) Because neither party addressed these statements in their

briefings, the Court will not address the merits ofthe statement.

10 The Court has removed all original emphasis when quoting the FAC in this section for

ease ofreading.

24

25

26

27

28

16

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 16 of

 25
Sempra’s/SCG’s November 2015 Form 10-Q, and Defendants Reed and Householder’s

SOX certifications for the November 2015 Form 10-Q.

Effectively, Plaintiffs assert that all ofthese statements were false and misleading

because Sempra/SCG did not disclose that SS-25 did not have a safety valve, the leak

took longer than a week to resolve, and the gas leak posed a threat to human safety.11

Defendants argue that its statements were accurate and truthful, and that Plaintiffs failed

to plead with particularity how the November Form 10-Q and related SOX certifications

were false, misleading, or material.

As to the statements that Sempra/SCG would work quickly to stop the gas leak, the

Court agrees that Plaintiffs have not sufficiently plead facts to indicate that they were

false or misleading. First, Sempra’s/SCG’s statements that they were “working as

quickly as safety will allow to stop the leak” are not actionable because they are vague

statements ofoptimism, i.e. inactionable corporate puffery. See Police Ret. Sys., 759

F.3d at 1060. Plaintiffs’ allegations may be sufficient iftheir complaint included factual

allegations indicating Defendants failed to act at all, or even that their actions were

delayed, in response to the leak. Instead, Plaintiffs merely allege Defendants were

literally unable to work quickly due to SS-25’s lack of a safety valve. This is an

assumption that the Court need not assume is true, nor is it an inference supported by the

factual allegations.

Second, to the extent that the FAC alleges that investors should have been advised

that stopping the leak “would take materially longer and be substantially more difficult in

light ofthe state of disrepair [SS-25] was already in prior to the Gas Leak,” these

allegations are contradicted by the FAC’s earlier allegations. (FAC 1114.) As discussed

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

11 The Court notes that, similar to the pre-Aliso Canyon gas leak statements, Plaintiffs

cite to the same, or nearly the same, alleged facts to support their assertions that the postgas leak claims were fraudulent or misleading. As it determined above, the Court shall

address the substance ofthe proffered support only once.

26

27

28

17

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 17 of

 25
in the pre-Aliso Canyon gas leak statements section above, Sempra/SCG disclosed the

conditions and attendant risks ofthe Aliso Canyon wells prior to the leak.

Third, the Court finds Plaintiffs’ allegation that the inclusion of a safety valve on

SS-25 would have prevented the gas leak or expedited stopping the gas leak is, at best,

premature. As discussed above, the investigation surrounding SS-25’s gas leak is still

ongoing, and neither Sempra nor SCG have been sanctioned for the lack ofsafety valve

on SS-25. Fourth, inasmuch as the FAC alleges investors were misled into believing

Sempra/SCG could stop the leak before a state of emergency was declared, Plaintiffs fail

to allege any facts to indicate Sempra or SCG ever made such a statement.

With respect to the statement that Sempra/SCG would stop the leak within a week,

the Court finds the FAC does not allege that Defendants promised investors or the public

that it would stop the gas leak within a week, or any other specific or measurable

timeframe. Specifically, the FAC alleges that Sempra/SCG stated on October 30, 2015:

“After considerable testing and analysis, we expect this situation to take another week or

longer to resolve.” (FAC 117) (emphasis added). Plaintiffs do not allege additional

facts other than that SS-25 lacked a safety valve, the omission ofwhich they claim

“misled investors into believing that the Gas Leak would be fixed quickly and without

incident.” (FAC ^ 117.) However, Plaintiffs did not allege other facts to support an

inference that the inclusion ofthe safety valve on SS-25 would have allowed

Sempra/SCG to stop the leak more expeditiously such that this statement was false or

misleading.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

Finally, as to the statements regarding the Aliso Canyon gas leak’s threat to public

safety, the Court agrees that the statements, as pled, were not false or misleading. The

FAC alleges Sempra/SCG made several public statements that essentially assured the

public that the Aliso Canyon gas leak did not pose a threat to public safety, while

simultaneously expressing its “regret that the smell ofthe odorant in natural gas is

unpleasant and that some people are sensitive to the odor,” which may “bother some

22

23

24

25

26

27

28

18

3:16-CV-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 18 of

 25
people.” (FAC ^ 111, 116.) To support this claim, Plaintiffs allege “local residents

immediately reported] headaches, nausea, and severe nosebleeds” and “[a]bout 50

children per day saw school nurses for severe nosebleeds” as a result ofthe gas leak. {Id.

f 112.) However, Plaintiffs do not allege contemporaneous facts to indicate when

Sempra/SCG became aware ofthe residents’ complaints.

In addition, Plaintiffs allege various “Air Pollutants”12 were released, but do not

allege a specific amount ofAir Pollutants were released into the air or what amount

would have triggered Sempra’s/SCG’s duty to report. Nor do they specifically allege

when Sempra/SCG became aware ofthe presence ofthe Air Pollutants with respect to

their statements regarding the threat to public safety. Specific factual allegations stating

when Sempra/SCG became aware ofthe negative public health impact are critical in

determining whether these statements were false or misleading. See Lloyd, supra, 811 F.

3d at 1206 (“The complaint must plead specific facts indicating why any alleged

misrepresentation was false or any omission rendered a representation misleading.”).

Finally, Plaintiffs’ allegations that the November 2015 Form 10-Qs and related

SOX certifications are also deficient for failure to plead with specificity. Plaintiffs

generally allege that the November Form 10-Q was false or misleading because it

“understat[ed] operation and maintenance expenses and capital expenditures, by failing to

expend the funds necessary to update, repair, replace, and modernize the infrastructure at

[SS-25] at Aliso Canyon.” Yet Plaintiffs do not allege how much should have been spent

(which may or may not be a material amount). Rather, Plaintiffs assert a conclusory

assumption that “[h]ad [Sempra/SCG] properly updated and maintained its aging and

deficient equipment, its capital expenditures and related expenses would have been

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

12 The FAC collectively refers to “toluene (a reproductive toxin), benzene (a known

carcinogen and reproductive toxin), hydrogen sulfides, sulfur dioxide, ethylbenzene (a

carcinogen), and xylenes” as “Air Pollutants.” (FAC 149.)

26

27

28

19

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 19 of

 25
substantially higher and, by extension, its net income would have been lower.” (FAC

124.) The Court finds these general allegations are insufficient under the heightened

pleading standards required in securities fraud claims.

In sum, none ofthe alleged false or misleading statements pled in the FAC are

sufficient to state a claim for securities fraud. Even ifthey were, Plaintiffs’ FAC must

still be dismissed for failing to meet their burden to allege scienter.

Scienter

Under the PSLRA, a complaint must “state with particularity facts giving rise to a

strong inference that the defendant acted with the required state ofmind.” 15 U.S.C. §

78u-4(b)(2)(A). In this circuit, scienter is a mental state that includes the “intent to

deceive, manipulate, or defraud,” and deliberate recklessness.13 City of Dearborn

Heights, 2017 WL 1753276, at *10 (quoting Schueneman v. Arena Pharm.,Inc., 840

F.3d 698, 705 (9th Cir. 2016) (internal citation and quotation marks omitted)). A strong

inference ofscienter must be “at least as compelling as any opposing inference one could

draw from the facts alleged.” Id. (quoting Tellabs, 551 U.S. at 324)). The Ninth Circuit

has instructed that a court first “determine[s] whether any ofthe allegations, standing

alone, are sufficient to create a strong inference ofscienter.” Id. (quoting N.M. State Inv.

Council v. Ernst & Young LLP, 641 F.3d 1089, 1095 (9th Cir. 2011)). Ifnone ofthe

individual allegations are sufficient, a court then “conducts a ‘holistic’ review ofthe same

allegations to determine whether the insufficient allegations combine to create a strong

inference ofintentional conduct or deliberate recklessness.” Id.

The allegations in the FAC neither individually nor holistically support a strong

inference that Defendants intentionally acted with scienter. All ofthe FAC’s scienter

1

2

3

4

5

6

7 B.

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

13 The Supreme Court has “not decided whether recklessness suffices to fulfill the scienter

requirement.” Matrixx Initiatives, 563 U.S. at 48 (noting the defendant did not challenge

the Court ofAppeals determination that deliberate recklessness may satisfy the scienter

requirement).

26

27

28

20

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 20 of

 25
allegations are based solely upon alleged inferences about the defendants’ financial

motive and opportunity based on their knowledge that SS-25 did not have a safety valve.

Thus, the question before the Court is whether Plaintiffs have pled a compelling and

cogent inference, at least as compelling as possible alternatives, that when Sempra/SCG

submitted their rate increase applications and made statements regarding their

commitment to safety, the scope ofthe Aliso Canyon gas leak and the risks it posed,

Defendants were deliberately reckless in not disclosing that SS-25 lacked a safety valve.

They have not.

“An actor is deliberately reckless ifhe had reasonable grounds to believe material

facts existed that were misstated or omitted, but nonetheless failed to obtain and disclose

such facts although he could have done so without extraordinary effort.” Reese, supra,

747 F.3d at 569 (9th Cir. 2014) (internal citation omitted). Nevertheless, “recklessness

only satisfies scienter under § 10(b) to the extent that it reflects some degree of

intentional or conscious misconduct.” In re NVIDIA Corp. Sec. Litig., 768 F.3d at 1053

(emphasis added).

As discussed above, the Court is not persuaded that the lack ofsafety valve on SS25, as pled, constitutes a material omission by Sempra or SCG. However, even ifit were,

Plaintiffs have not alleged specific facts to demonstrate Sempra’s or SCG’s intentional or

conscious misconduct. The FAC heavily relies on the allegation that SCG executive

Rodger Schwecke “admitted” that SS-25’s safety valve was removed in 1979 “due to

difficulties finding a replacement part.

any specific facts demonstrating any ofthe defendants’ knowledge of an imminent gas

leak, or a resulting risk in the increase in time to stop such a gas leak, due to the lack of

safety valve. At best, the FAC alleges Sempra/SCG knew that SS-25 lacked a safety

valve, and had financial motive and opportunity to omit this information from: 1) the

1

2

3

4

5

6

7

8

i

9

10

11

12

13

14

15

16

17

18

19

20

”14 21 (FAC 54.) However, the FAC fails to allege

22

23

24

25

26

27

14 By the Court’s count, this fact is repeated approximately twenty-one times in the FAC.

21

3:16-cv-00512-BEN-AGS

28

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 21 of

 25
2010 and 2014 CPUC rate increase applications, 2) public statements regarding the scope

and health effects ofthe Aliso Canyon gas leak, and 3) statements regarding

Sempra’s/SCG’s commitment to safety. These allegations, without more, are not

sufficient to support an inference ofscienter. See City ofDearborn Heights, 2017 WL

1753276, at * 10 (factual allegations that merely show “a motive to commit fraud and an

opportunity to do so provide some reasonable inference ofintent, but are not sufficient to

establish a strong inference of deliberate recklessness”).

As to the allegations against Defendants Reed and Householder, Plaintiffs allege

Reed and Householder received shares ofstock on January 4,2016, two days prior to

Governor Jerry Brown’s Proclamation (which declared the Aliso Canyon gas leak a state

of emergency). Reed received 140,852 shares, the largest amount ofshares she had

received since 2011, and Householder received 46,559 shares. On the same day, Reed

sold 72,000 ofthe shares she had received, and Householder sold 22,798 shares ofthe

shares he had received. The FAC alleges these stock sales evidence their scienter

because Sempra’s stock price declined the day after Governor Brown’s Proclamation, and

Reed and Householder would not have received as much money for their stock sales if

they had waited until after the Proclamation was issued. The FAC further alleges “there

is a strong inference that [Defendants Householder and Reed] knew that [Governor Jerry

Brown’s] Proclamation was about to be disclosed” because “Governor Brown’s sister,

Kathleen Brown serves on Sempra’s Board and was compensated $235,000 in 2015.”

(FAC If 160-61.)

The Court finds Plaintiffs have failed to allege facts to support a strong inference

ofthe individual defendants’ scienter. In Ronconi v. Larkin, the Ninth Circuit discussed

that “not every sale ofstock by a corporate insider shows that the share price is about to

decline.” 253 F.3d 423,435 (9th Cir. 2001). For example, “[a] corporate insider may

sell stock to fund major family expenses, diversify his portfolio, or arrange his estate

plan. He may sell stock in a pattern that has nothing to do with any inside information,

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 22

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 22 of

 25
such as selling stock twice a year when the college tuition for his children is due.” Id. A

plaintiffrelying on suspicious stock sales to demonstrate scienter must allege that the

sales were “unusual” or “suspicious.” Id. (internal citation omitted) (“insider trading is

suspicious only when it is ‘dramatically out ofline with prior trading practices at times

calculated to maximize thepersonal benefitfrom undisclosed inside information’”)

(emphasis in original). A district court considers three factors: “(1) the amount and

percentage ofshares sold by insiders; (2) the timing ofthe sales; and (3) whether the sales

were consistent with the insider’s prior trading history.” Id.

In their motion to dismiss, Defendants argued that Reed and Householder’s stock

sales were neither unusual nor suspicious because the stock sales were consistent with

their prior trading history. Defendants explained that Reed and Householder annually

receive shares of Sempra stock as part oftheir compensation, a portion ofwhich each of

them immediate sells to pay for their respective federal income tax withholding liability.

To support this explanation, Defendants provided copies ofReed’s and Householder’s

Form 4s from 2013 to 2016, which were filed with the SEC, and a copy ofthe Form 4

filing instructions. Defs.’ RJN Exs. I-O. The Form 4s indicate that on January 2, 2013,

January 3, 2014, January 1, 2015, and January 4,2016, Reed and Householder received

shares ofstock, which they immediately sold. Defs.’ RJN Exs. I-N. Where the Form 4

asked for a “Transaction Code,” Reed and Housholder elected code “F,” which represents

“Payment of exercise price or tax liability by delivering or withholding securities incident

to the receipt, exercise or vesting of a security issued in accordance with Rule 16b-3.”

(Defs.’RJN Ex. O.)

In their opposition, Plaintiffs argue that Defendants’ consistent history ofstock

“sales to offset tax costs ... is irrelevant” because “Ronconi does not list a sale’s

‘purpose’ as a factor to be considered.” (Pis.’ Opp’n at 22, n. 19.) This statement

misinterprets the Ronconi factors, which requires a court to determine “whether the sales

were consistent with the insider’s prior trading history.” Id., 253 F.3d at 435. Here,

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 23

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 23 of

 25
Defendants have established prima facie evidence ofReed’s and Householder’s

consistent stock trading history.15 Rather than directly rebut this evidence, Plaintiffs

assert that, because Kathleen Brown, Governor Brown’s sister, serves on Sempra’s board,

a reasonable inference may be drawn that Governor Brown told Ms. Brown that he was

going to issue the Proclamation, that Ms. Brown told Reed and Householder that the

Proclamation would be issued, that Reed and Householder sold their stock based on this

information, and that Reed and Householder therefore must have known the omission of

SS-25’s lack ofsafety valve was false or misleading. The Court finds such an inference

is not reasonable, much less compelling, in light ofthe complete absence of any facts,

other than Ms. Brown’s position on Sempra’s board, to support the multiple accusations.

In sum, the Court finds Plaintiffs’ FAC fails to state a claim for securities fraud.

Having found Plaintiffs have not adequately pled a primary violation of Section 10(b),

the Court also dismisses Plaintiffs’ Section 20(a) claims. See Zucco Partners, LLC, 552

F.3d at 990. Accordingly, the FAC is DISMISSSED. However, the Court grants

Plaintiffs leave to file an amended pleading.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16 CONCLUSION

For the reasons set forth above, Plaintiffs’ Motion to File Sur-Reply is DENIED,

Defendant Southern California Gas’s Motion to Dismiss for Lack ofJurisdiction is

DENIED, and Defendants’ Motion to Dismiss for Failure to State a Claim is GRANTED

without prejudice. Plaintiffs’ shall have twenty-one (21) days from the date ofthis

17

18

19

20

21

22

23

15 Inasmuch as Plaintiffs rely on their allegations about the amount ofstock Reed and

Householder sold as a comparison to a percentage oftheir annual compensations, the

Court is not persuaded that these facts alone demonstrate scienter. For instance, it is

reasonable to infer that ifReed “received her largest-ever stock award” she may very

well need to sell “twice the Sempra shares she ever sold before” to pay for her expected

tax liability, as she appears to have done in prior years. (Pis.’ Opp’n at 21-22) (emphasis

in original.)

24

25

26

27

28

24

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 24 of

 25
Order to file a Second Amended Complaint that addresses the deficiencies identified in

this Order.

1

2

3 IT IS SO ORDERED.

4

DATED: June/#, 2017 5

T. BENITfeZ

6 /UnitecfStates District Judge

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 25

3:16-cv-00512-BEN-AGS

Case 3:16-cv-00512-BEN-AGS Document 56 Filed 06/20/17 PageID.<pageID> Page 25 of

 25