1 14-2581-cv In re Magnum Hunter Res. Corp. Sec. Litig. UNITED STATES COURT OF APPEALS FOR THE SECO ND CIRCUIT SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AF TER JANUARY 1, 2007, IS PERM ITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PR OCEDURE 32.1 AND THIS CO URT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMEN T FILED WITH THIS CO URT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATA BASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL. At a stated term of the United States Court of Appeals for the Seco nd Circuit, held at the Thurgood Marshall United Stat es Courthouse, 40 Foley Sq uare, in the City of New York, on the 23 rd day of June, two thousand fifteen. PRESENT: RALPH K. WINTER, PIERRE N. LEVAL, REENA RAGGI, Circuit Judges

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---------------------------- ---------------------------- -------------- IN RE MAGNUM HUNTER RESOURCES CORPORATION SECURITIES LITIGATION

---------------------------- ---------------------------- -------------- EDWARD PAIGE, Plaintiff-Appellant , DELAWARE COUNTY EMPLOYEES RETIREMENT FUND, MARY PAPPAS, THE ILNAF TRUST, MIKE GRETSCHEL, MARK HIN NAU, DAVID MACATTE, Individually and on behalf of all others similarly situated, ANTHONY ROSIAN, Individua lly and on behalf of all others similarly situated, SHAUN FOSTER, Individually and on behalf of all others similarly situated, TEDDY ATCHLEY, Individually and on behalf of all others similarly situated, Plaintiffs , v. No. 14-2581-cv2 MAGNUM HUNTER RESOURCES CORPORATION, GARY C. EVANS, RONALD D. ORMAND, FRED J. SMITH, JR., H.C. “KIP” FERGUSON, III, J. RALEIGH BAILES, SR., VICTOR G. CARILLO, BRAD BYNUM, STEPHEN C. HURLEY, JOE L. MCCLAUGHERTY, STEVEN A. PFEIFER, JEFF SWANSON, CREDIT SUISSE SECURITIES (USA) LLC, CITIGROUP GLOBAL MARKETS INC., DAVID S. KRUEGER, JAMES W. DENNY, III, Defendants-Appellees

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---------------------------- ---------------------------- -------------- APPEARING FOR APPELLANT: STEVEN J. TOLL (Daniel S. Sommers, S. Douglas Bunch, Genevieve O. Fontan, Cohen Milstein, Sellers & Toll PLLC; Kimberly Donaldson Smith, Catherine Pratsinakis, Chimicles & Tikellis LLP, Haverford, Pennsylvania; Peter Safirstein, Elizabeth Metcalf, Morgan & Morg an, P.C., New York, New York; Jonathan Gardner, Angelina Nguyen, Labaton Such arow LLP, New York, New York, on the brief ) Cohen Milstein Sellers & Toll PLLC, New York, New York.

APPEARING FOR APPELLEES: GERARD G. PECHT (Peter A. Stokes, Fulbright & Jaworski, Houston, Texas; Adam S. Hakki, Shearman & Sterling LLP, New York, New York, on the brief ), Fulbright & Jaworski LLP, Houston, Texas. Appeal from a judgment of the United States District Court for the Southern District of New York (Katherine B. Forrest, Judge ). UPON DUE CONSIDERATION, IT IS HEREBY ORDERE D, ADJUDGED, AND DECREED that the judgment entere d on June 24, 2014, is AFFIRMED. Lead Plaintiff Edward Paige on behalf of himself and a putative class of investors who acquired Magnum Hunter Resource Corporation (“Ma gnum Hunter”) securities

* The Clerk of Court is directed to ame nd the official caption as shown above.3 between January 17, 2012, and April 22, 2013 (“plaintiffs”), appeal from the dismissal of their amended complaint for failure to state s ecurities fraud claims ag ainst (1) current and former Magnum Hunter executives in viola tion of §§ 10(b) and 20 (a) of the Securities Exchange Act of 1934 (“Exchange Act”), see 15 U.S.C. §§ 78j(b), 78t(a), and Securities and Exchange Commission (“SEC” ) Rule 10b-5, see 17 C.F. R. § 240.10b-5; (2) those same executives as well as Magnum Hunter’s outside board members and underwriters in violation of § 11 of th e Securities Act of 1933 (“Securitie s Act”), see 15 U.S.C. § 77k; and (3) Magnum Hunter’s underwriters in violatio n of § 12 of the Secur ities Act, see 15 U.S.C. § 77 l (a)(2). 1 We review a Rule 12(b)(6) dismis sal de novo, accepting all factual allegations in the complaint as true, and draw ing all reasonable inferences in plaintiffs’ favor. See ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007). We assume the parties’ familiar ity with the facts a nd the record of prior proceedings, which we reference only as necessary to explain our deci sion to affirm. 1. Exchange Act Claims Fail To Allege Fa cts Admitting a Strong In ference of Scienter To survive dismissal, securities fraud co mplaints must satis fy the heightened pleading standard of Fed. R. Civ. P. 9(b), which requires that the circumstances

1 Specifically, plaintiffs assert Exchange Ac t claims against the following defendants: Gary C. Evans, Magnum Hu nter’s Chairman and Chief Executive Officer; Ronald Ormand, Magnum Hunter’s former Chief Financ ial Officer; David S. Krueger and Fred J. Smith, Jr., Magnum Hunter’s fo rmer and current Chief Accounting Officers, respectively; and H.C. “Kip” Ferguson, Magnum Hunter’s Vice President of Exploration. They assert their § 11 claims against defendants Evans, Ormand, and Krueger; Magnum Hunter’s outside board members J. Ralei gh Bailes, Sr., Victor G. Car illo, Brad Bynum, Stephen C. Hurley, Joe L. McClaugherty, Steven A. Pfeifer, and Jeff Swanson; and underwriters Credit Suisse Securities (USA) LLC, and Citigroup Global Markets Inc. (“Underwriter Defendants”). Section 12 claims are asserted only against the Underwriter Defendants.4 constituting fraud be “state[d] with particular ity,” and the Private Securities Litigation Reform Act (“PSLRA”), see 15 U. S.C. § 78u-4(b), which requir es that scienter, i.e., a defendant’s “intention to deceive, manipulat e, or defraud,” also be pleaded with particularity, Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U. S. 308, 313 (2007) (internal quotation marks omitted). To sa tisfy the PSLRA, a comp laint must, “‘with respect to each act or omission alleged to [constitute securities fraud], state with particularity facts giving rise to a strong in ference that the defendant acted with the required state of mind.’” ATSI Commc’ns, In c. v. Shaar Fund, Lt d., 493 F.3d at 99 (quoting 15 U.S.C. § 78u-4(b)(2)). That strong inference must be “cogent and at least as compelling as any opposing infe rence one could draw from th e facts alleged.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. at 324. In deciding if this burden has been carried, we consider “all of the facts alleged, taken collectively,” not individual allegations in isolation. Id. at 323. Scienter may be sa tisfied by alleging facts “(1) showing that the

defendants had both motive a nd opportunity to co mmit the fraud or (2) constituting strong

circumstantial evidence of conscious misb ehavior or recklessne ss.” ATSI Commc’ns, Inc. v. Shaar Fund, Lt d., 493 F.3d at 99. On appeal, plaintiffs do not argue th at any defendant had the “motive and opportunity” to commit fraud suffi cient to support scienter. 2 Id. Rather, they argue that

2 In their amended complaint, plaintiffs pur ported to allege that defendants Evans and Krueger had the motive and opportunity to co mmit fraud because those defendants sold shares of Magnum Hunter stock during the clas s period. Insofar as these allegations are not abandoned, see United States v. Joyn er, 313 F.3d 40, 44 (2d Cir. 2002) (deeming argument not raised in appellate brief abandoned ), we agree with the dist rict court that such5 the alleged facts give rise to a strong infere nce of defendants’ “conscious misbehavior or recklessness.” Id. Where, as here, “motive is not apparent, it is still possible to plead scienter by identifying circumstances indica ting conscious behavior by the defendant, though the strength of the circ umstantial allegations must be correspondingly greater.” Kalnit v. Eichler, 264 F.3d 131, 142 (2d Cir. 2001). Like the district court, however, we conclude that plaintiffs have failed in this regard. Under plaintiffs’ theory, defendants repres ented in their public statements that Magnum Hunter had evaluated its internal contro ls and procedures and signed off that they were effective, despite knowingl y or recklessly disregarding that the internal controls were ineffective, which caused Magnum Hunter to re state its financials and eventually reveal that there were greater accounting weaknesse s than had previously been reported. Plaintiffs’ allegations, however, fail to support su ch an inference. Rather, as the district court held, they support only that “defenda nts were in a constant game of ‘Catch up’—acknowledging the company’s material weaknesses and disclosing their continued efforts to resolve them, only to learn of yet mo re.” In re Magnum Hunter Res. Corp. Sec. Litig., 26 F. Supp. 3d 278, 297 (S.D.N.Y. 2014). Plaintiffs’ allegations regarding the February and May 2012 publication of inaccurate financial results leading to the November 2012 financ ial restatement do not themselves give rise to a plau sible inference of scienter. See Stevelman v. Alias Research,

stock sales are insufficient by themselves to demonstrate motive and opportunity to commit fraud. See Acito v. IM CERA Grp., Inc., 47 F.3d 47 , 54 (2d Cir. 1995) (holding that selling stock, by itself, insufficient to pl ead scienter, absent allegations that “stock sales were ‘unusual’”); acco rd Rothman v. Gregor, 220 F.3d 81, 94 (2d Cir. 2000).6 Inc., 174 F.3d 79, 84 (2d Cir.1999) (rejecting argument that company’s subsequent revelation of accounting change and retroactive announcement of lowered earnings was probative of conscious misbehavior or recklessness). Nor do Magnum Hunter’s

statements related to internal controls wea knesses support such an inference, even when compared to earlier statements that the company was implem enting remedial measures. See, e.g., ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 200 (2 d Cir. 2009) (“[A]llegations of GAAP violations or accounting irregularities, standing alone, are insufficient to state a securitie s fraud claim” in absence of “evidence of corresponding fraudulent intent.” (internal quotation ma rks omitted)); Novak v. Kasaks, 216 F.3d 300, 309 (2d Cir. 2000) (stating that failu re to identify problems with

internal controls and accountin g practices does not manifest recklessness sufficient for § 10(b) liability). The amended complaint alleges only that Magnum Hunter repeatedly disclosed ongoing control weaknesses in late-2012 through mid-2013 wh ile continuing to warn of possible additional problems. Plaintiffs argu e that the initial disclo sures did not identify every known control weakness, but that, too, is insufficient to support a plausible inference of scienter. See, e.g., Acito v. IMCERA Grp., Inc., 47 F. 3d 47, 53 (2d Cir. 1995) (“Mere allegations that statements in one report shou ld have been made in earlier reports do not

make out a claim of securities fra ud.”). In any event, plaintiffs’ own allegations belie their contention, as the November 20 12 disclosure showed Magnum Hunter identifying material weaknesses in its quarterly financial reporting, as well as in its sh are-based compensation,7 and disclosing a “[l]ack of sufficient, qua lified personnel to design and manage an effective control environment.” Am. Compl. ¶ 105. Plaintiffs nevertheless argue that when th ese disclosure allegations are combined with the alleged assertions of “confidential witnesses” who used to work at Magnum Hunter, a strong inference of recklessness can be drawn. These witnesses indicate, inter alia, that corporate controller Smith wa s inexperienced and overwhelmed by his responsibilities, and that defenda nt Krueger, the former chief accounting officer, lacked the desire or skills to train accounting staff on appropriate internal c ontrols. Contrary to plaintiffs’ contention, however, these confidentia l witness assertions su ggest, at most, that Magnum Hunter had inadequate internal cont rols; they do not imply that any defendant made specific disclosures with fraudulent scie nter. See ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d at 99. Instead, document s referenced in the co mplaint indicate that defendants disclosed repeated ly, in November 2012 and in to 2013, that Magnum Hunter had material accounting weaknesses in its audit staffing and financial reporting. A confidential witness statement regardin g “changed” production numbers is also insufficient to plead scienter with the required particularity. The witness does not identify any specific numbers that were changed, nor does she tie the ch anged numbers to a particular misstatement. Thus, this allegation is insufficiently particular to attribute the requisite scienter to any defendant. As for statements regarding the Eagle Ford disclosures, plaintiffs have not alleged that these expressions of corporate optimism—that the site had achieved “predictability” and was “c learly exceeding” the company’s previous8 projections—were false, let alone reckless . See Novak v. Kasaks, 216 F.3d at 309 (rejecting “fraud by hindsight”). Accordingly, after examining “all of the facts alleged, taken collectively,” we conclude that no “reasonable pers on” would “deem the inference of scienter cogent and at least as compelling as any opposing inferenc e one could draw from the facts alleged.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. at 314. 3

2. The Securities Act Claims Are Barr ed by the Statute of Limitations

Claims under the Securities Act must be “‘brought within one year after the discovery of the untrue statement or the omissi on, or after such discovery should have been made by the exercise of reasonable diligence.’” Police & Fire Ret. Sys. of City of Detroit v. IndyMac MBS, Inc., 721 F.3d 95, 107 ( 2d Cir. 2013) (quoting 15 U.S.C. § 77m). Plaintiffs argue that their claims are timely w ith the benefit of the “discovery rule,” under which “the limitations period do es not begin to run until the pl aintiff thereafter discovers or a reasonably diligent plaintiff would have disc overed the facts constituting the violation.” Merck & Co. v. Reynolds, 559 U.S. 633, 6 53 (2010) (internal quotation marks omitted) (applying discovery rule to Exchange Act cl aims). We have never considered whether Merck abrogates this circuit’s existing “inquiry notice” rule in favor of the discovery rule in Securities Act claims, an issue that divides the district cour ts in this circuit. See, e.g., Pennsylvania Pub. Sch. Emps.’ Ret. Sys. v. Bank of Am. Corp., 874 F. Supp. 2d 341, 364 (S.D.N.Y. 2012) (surveying “conflicting la w . . . on this point”). We need not

3 Because plaintiffs have failed to state a § 10(b) claim, their § 20(a) cl aim must al so fail. See ATSI Commc’ns, Inc. v. Shaa r Fund, Ltd., 493 F.3d at 108.9 conclusively decide this questi on here because, even if we were to resolve it in plaintiffs’ favor, we nevertheless concl ude that the Securities Act claims are untimely because Magnum Hunter’s public disclosures on Octo ber 22, 2012, and November 14, 2012, would

have led a reasonabl y diligent plaintiff to ha ve discovered the facts underlying his claim. See Freidus v. Barclays Bank PLC, 734 F.3d 132, 139 (2d Cir. 2013). Plaintiffs argue that it was only with the Ap ril 16, 2013 disclosure that they could understand the “pervasive” nature of the intern al control weaknesses. Appellant’s Br. 50. The argument fails because we have never perm itted the statute of limitations to be tolled until a company’s disclosures touc h on every specific allegation that a plaintiff chooses to put in his complaint. That is especially so where, as here, earlier disclosures were sufficient to allow plaintiffs to discover the facts underlyi ng the cause of action. See Freidus v. Barclays Bank PLC, 7 34 F.3d at 139; cf. Staehr v. Ha rtford Fin. Servs. Grp., 547 F.3d 406, 427 (2d Cir. 2008) (s tating that, under inquiry notice doctrine, “investor does not

have to have notice of the entire fraud be ing perpetrated”). Accordingly, because plaintiffs filed the operative co mplaint more than one year af ter Magnum Hunter disclosed

information sufficient for plaintiffs to discover their claims , plaintiffs’ claims are untimely. The “relation back” and “equitable tolli ng” doctrines warrant no different

conclusion. Plaintiffs cannot benefit from the relation back doctrine because those plaintiffs who originally filed suit did not allege stock purchases traceable to any of Magnum Hunter’s offerings and, thus, lacked standing. See DeMaria v. Andersen, 318 F.3d 170, 178 (2d Cir. 2003) (stating that sta nding under § 11 of Secu rities Act is conferred10 only upon “purchasers who can trace their shares to an a llegedly misleading registration statement”); Fed. R. Civ. P. 15(c)(1)(B) (relation back doctrine applies only where amended pleading “asserts a claim or defense that arose out of the conduct, transaction, or occurrence set out—or attempted to be set out—in the original pleading”). Delaware County Employees Retirement Fu nd (“DelCo”), the plaintiff with standing, was not an original plaintiff and, thus, cannot provide re lationship back to the original complaint. See Police & Fire Ret. Sys. of City of Detroi t v. IndyMac MBS, Inc., 721 F.3d at 112–13. Plaintiffs’ equitable tolling ar gument is similarly unavailing, as DelCo has long known about it claims. Indeed, in June 2013, it m oved for appointment as lead counsel, although it never filed its own complaint. Under these circumstances, we conclude that plaintiffs

have not demonstrated either the reasonable d iligence or extraordinar y obstacle to filing necessary for equitable tolling. See Pace v. DiGuglielmo, 544 U.S. 408, 418 (2005).

3. Conclusion We have considered plaintiffs’ remaini ng arguments and conclude that they are

without merit. We therefore AFFIRM the judgment of the district court.

FOR THE COURT: CATHERINE O’HAGAN WOLF E, Clerk of Court