Source: https://docs.justia.com/cases/federal/district-courts/arizona/azdce/2:2013cv01800/803880/61
Timestamp: 2017-01-22 16:50:47
Document Index: 546574280

Matched Legal Cases: ['§ 78', '§ 240', '§ 78', '§ 78', '§ 78', '§ 78', '§ 240', '§ 240', '§ 78']

ORDER AND OPINION, Defendants' motion to dismiss 49 is granted; Plaintiffs' complaint is dismissed without prejudice; Plaintiffs may file a properly supported motion to amend provided it is filed no more than 21 days from the date of this order; if a timely motion to amend is not filed, this case will be closed; failure to file a timely motion to amend shall not preclude Plaintiffs from filing a new action based on a sufficient complaint more than 21 days from the date of this order for Stevens v. Nuverra Environmental Solutions Incorporated et al :: Justia Dockets & Filings Log In
Stevens v. Nuverra Environmental Solutions Incorporated et al
ORDER AND OPINION, Defendants' motion to dismiss 49 is granted; Plaintiffs' complaint is dismissed without prejudice; Plaintiffs may file a properly supported motion to amend provided it is filed no more than 21 days from the date of this order; if a timely motion to amend is not filed, this case will be closed; failure to file a timely motion to amend shall not preclude Plaintiffs from filing a new action based on a sufficient complaint more than 21 days from the date of this order. Signed by Judge John W Sedwick on 11/17/14. (REW)
In re Nuverra Environmental
Solutions Securities Litigation
Lead Case No. 2:13-cv-01800-JWS
[Re: Motion at Docket 49]
At docket 49, defendants Nuverra Environmental Solutions, Inc., Richard J.
Heckmann, Mark D. Johnsrud, Jay Parkinson, W. Christopher Chisholm, and Charles
R. Gordon move pursuant to Federal Rule of Civil Procedure 12(b)(6) for an order
dismissing plaintiffs’ complaint. Plaintiffs respond at docket 54. Defendants filed a
reply at docket 56. Oral argument was requested but would not assist the court.
At docket 43 plaintiffs filed an 83-page, two-count Consolidated Class Action
Complaint alleging federal securities law violations. According to the complaint,
Nuverra “is an environmental solutions company focused on serving the needs of
exploration and production (‘E&P’) companies in their pursuit of shale oil and gas
hydraulic fracturing drilling (also known as ‘fracking’).”1 Fracking is a drilling procedure
whereby oil and natural gas is harvested from shale rock formations up to thousands of
feet underground by pumping large quantities of fluids at high pressure into the targeted
rock.2 Nuverra “handles the logistics of delivering—and then removing and disposing
of—the millions of gallons of water needed to operate each fracking well.”3
Plaintiffs’ complaint centers around two alleged events. First, plaintiffs allege
that Nuverra’s truck drivers engaged in an illicit bill padding scheme that artificially
boosted Nuverra’s earnings.4 Second, plaintiffs allege that Nuverra entered into an
unprofitable business deal in early 2012 under which it provided its services at a below-
market rate to E&P driller EOG Resources, Inc. at the Eagle Ford basin in Texas.5
Nuverra hoped that this deal would allow it to “build a book of south Texas E&P
customers”6 but, instead, Nuverra’s “profitability immediately tanked.”7 As discussed in
more detail below, plaintiffs allege that defendants misled the investing public by
making positive statements about the company without disclosing that Nuverra’s profits
were being unsustainably propped up by the bill padding scheme and because the
EOG Resources deal was actually causing it to lose substantial sums of money at the
Eagle Ford site. Plaintiffs allege that these false statements and misleading omissions
artificially inflated the price of Nuverra’s publicly traded securities in violation of federal
Doc. 43 at 2 ¶ 2.
Id. at 14 ¶ 46.
Id. at 2 ¶ 3.
Id. at 19 ¶ 63.
Id. at 20 ¶ 67.
Id. at 20 ¶ 65.
Defendants now move for dismissal of the complaint in its entirety. Plaintiffs
maintain that the complaint is sufficient, but request leave to amend if the court holds
otherwise.8
Rule 12(b)(6), tests the legal sufficiency of a plaintiff’s claims. In reviewing such
construed in the light most favorable to the nonmoving party.”9 To be assumed true,
the allegations “may not simply recite the elements of a cause of action, but must
opposing party to defend itself effectively.”10 Dismissal for failure to state a claim can
be based on either “the lack of a cognizable legal theory or the absence of sufficient
facts alleged under a cognizable legal theory.”11 “Conclusory allegations of law . . . are
insufficient to defeat a motion to dismiss.”12
To avoid dismissal, a plaintiff must plead facts sufficient to “state a claim to relief
that is plausible on its face.”13 “A claim has facial plausibility when the plaintiff pleads
defendant is liable for the misconduct alleged.”14 “The plausibility standard is not akin
Doc. 54 at 22.
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly,
550 U.S. 544, 570 (2007)).
defendant has acted unlawfully.”15 “Where a complaint pleads facts that are ‘merely
plausibility of entitlement to relief.’”16 “In sum, for a complaint to survive a motion to
content, must be plausibly suggestive of a claim entitling the plaintiff to relief.”17
The Alleged Section 10(b) and Rule 10b-5 Violation
Count I of plaintiffs’ complaint alleges a violation of Section 10(b) of the
Securities Exchange Act of 1934. Section 10(b) “forbids (1) the ‘use or employ[ment]
. . . of any . . . deceptive device,’ (2) ‘in connection with the purchase or sale of any
security,’ and (3) ‘in contravention of’ Securities and Exchange Commission ‘rules and
regulations.’”18 SEC Rule 10b-5, promulgated under the authority of Section 10(b),
specifically forbids, among other things, making untrue statements of material facts or
omitting material facts “necessary in order to make the statements made . . . not
misleading.”19 In order to state a claim under Section 10(b) and Rule 10b-5, a plaintif f
must allege the following five elements: (1) a material misrepresentation (or omission);
(2) scienter; (3) “a connection with the purchase or sale of a security;” (4) transaction
Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341 (2005) (quoting 15 U.S.C. § 78j(b)).
17 C.F.R. § 240.10b–5(b) (2014).
and loss causation; and (5) economic loss.20 Defendants’ motion to dismiss challenges
the first two elements, which must be pled with particularity.21
Federal Rule of Civil Procedure 9(b) states that all allegations of fraud or mistake
must “state with particularity the circumstances constituting fraud or mistake.” Further,
the Private Securities Litigation Reform Act of 1995 (“PSLRA”), which Congress
enacted “[a]s a check against abusive litigation by private parties,”22 contains pleading
requirements that are more exacting than Rule 9’s.23 They require plaintiffs to state with
particularity not only the allegedly misleading statements and omissions, but also
scienter.24 With regard to misleading statements, the PSLRA requires the plaintiff’s
complaint to “specify each statement alleged to have been misleading, [and] the reason
or reasons why the statement is misleading.”25 With regard to scienter, the PSLRA
requires the plaintiff to state “facts giving rise to a strong inference that the defendant
acted with the required state of mind.”26 The Ninth Circuit has combined the PSLRA’s
dual pleading requirements into a single inquiry whereby courts determine whether the
particular facts in the complaint, taken as a whole, raise a strong inference that the
defendants intentionally or with deliberate recklessness made false or misleading
statements to investors.27
Broudo, 544 U.S. at 341–42 (citations omitted); In re Daou Sys., Inc., 411 F.3d 1006,
1014 (9th Cir. 2005).
In re Daou Sys., Inc., 411 at 1014.
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007).
Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009).
15 U.S.C. § 78u–4(b)(1), (2). See also Tellabs, 551 U.S. at 313.
15 U.S.C. § 78u–4(b)(1)(B).
Id. § 78u–4(b)(2)(A).
Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir. 2001).
Turning to the allegations in plaintiffs’ complaint, defendants argue that the
complaint fails to state a claim for three reasons: (1) the alleged misrepresentations are
not pled with sufficient particularity because plaintiffs do not connect each purported
misstatement to a specific reason why the statement was misleading; (2) none of the
alleged statements is actionable; and (3) plaintiffs’ allegations fail to give rise to a
compelling inference of scienter.28 Pursuant to the Ninth Circuit’s guidance, the court
will analyze defendants’ first and third arguments together.
Plaintiffs’ allegations do not satisfy Rule 9(b)’s or the PSLRA’s
heightened pleading requirements.
Count I of the complaint contains boilerplate conclusions that def endants made
unspecified misleading statements and/or omitted material facts “as specified herein.”29
Section V of the complaint is captioned “Defendants’ False and Misleading Statements”
and contains 29 pages of allegations sorted into seven subsections that correspond
with the seven consecutive financial calendar quarters to which the statements pertain,
starting with the Third Quarter (“Q3”) of 2011. Each subsection concludes with a
paragraph that purports to list all of the reasons why the statements referenced in the
subsection were false and misleading when made. These reasons can be boiled down
to two: (1) defendants failed to disclose that Eagle Ford’s explosive growth in revenue
and profitability was unsustainable because it was largely the result of the illicit bill
padding scheme;30 and (2) Nuverra’s “sweetheart deal” with EOG caused Nuverra to
operate at a loss. 31
Doc. 49 at 9–21.
Doc. 43 at 78 ¶ 217.
Doc. 43 at 31 ¶ 96(a); 35 ¶ 109(a) (verbatim same).
Doc. 43 at 35 ¶ 109(b); 40 ¶ 118(a) (verbatim same); 45 ¶ 133(a) (same); 48 ¶ 144(a)
(same); 52 ¶ 153(a) (same); 55 ¶ 161(a) (same).
Plaintiffs fail to adequately plead a claim regarding
defendants’ failure to disclose the alleged bill padding
Plaintiffs highlight the complaint’s allegations regarding Q3 2011 as an example
of how the complaint satisfies the PSLRA’s particularity requirements. They explain
that paragraphs 84-88 and 92-95 of the complaint “group together Defendants’ similar
false and misleading statements” related to Q3 2011, each of which involve Nuverra
“bragging about Nuverra’s significant growth in its core water solutions.” Plaintiffs then
explain that paragraph 96 of the complaint identifies the reason why each of these
statements is false and misleading: Nuverra failed to disclose that its growth was
unsustainable because it was based on the “illicit and widespread bill padding
scheme”32 involving employees at E&P companies who colluded with Nuverra drivers to
sign the drivers’ falsified time sheets.33 Further, plaintiffs argue that they adequately
pleaded the required scienter at various other locations in the complaint.34
Paragraphs 84-88 and 92-95 of the complaint allege:
Statements made by an unidentified author of a Nuverra press release
regarding Nuverra’s “strong organic growth,” its efforts to expand its
geographic reach and market share by acquiring permits and wells in
additional shale areas, and its addition of cost-saving natural-gas-
Defendant Heckmann’s statements during the 3Q 2011 conference call
that Nuverra had added 50 trucks to its fleet, increased its frac tank
inventory by 200 units, and added a disposal well at the Eagle Ford site.
Heckmann also stated that Nuverra planned to add two additional
Doc. 54 at 6–7.
Doc. 43 at 20 ¶ 63.
Doc. 54 at 16–20.
disposal wells at the Eagle Ford site by year-end and that Nuverra’s “core
asset” is its disposal wells.
Statements made by an unidentified author of Nuverra’s 3Q 2011 Form
10-Q that Nuverra’s strategy was to continue to build its business “through
organic growth and acquisitions,” that Nuverra had 450 trucks, 1,100 frac
tanks, and 23 disposal wells in the Haynesville and Eagle Ford shale
areas, and that Nuverra was in the process of acquiring additional
disposal wells.
Heckmann’s Sarbanes-Oxley certification that he had reviewed Nuverra’s
3Q 2011 Form 10-Q and it did not contain any untrue statements or
omissions of material facts and it fairly presented the financial condition
and operating results of the company.
Heckmann’s statements at a November 16, 2011 investment conference
that Nuverra had expanded into the Eagle Ford basin and had “70 trucks
or so down there.” Heckmann also stated that Nuverra expected to add a
pipeline at Eagle Ford in the future.
A statement made by an unidentified speaker at an unidentified date at an
unidentified location that Nuverra was investing in a water treatment plant
in Eagle Ford and that Nuverra hoped to pipe treated water out to
producers to use for fracking purposes.
Heckmann’s statements at a November 30, 2011 energy conference
regarding Nuverra’s expansion in the Eagle Ford site, including adding
wells and a potential pipeline and water treatment facility in the future.
In sum, plaintiffs allege that because defendants did not disclose the unsustainable
nature of Nuverra’s profits, any discussion of Nuverra’s operations at the Eagle Ford
site or its plans for future growth necessarily misled investors.
These allegations fail to state a claim with sufficient particularity because
plaintiffs do not link each allegedly misleading statement with a specific reason or
reasons why it is misleading. Instead, plaintiffs list numerous statements, list the
omitted information (the bill padding scheme), and then provide the blanket conclusion
that the omission rendered all of the statements false or misleading without explaining
why. This is insufficient.35 For each allegedly misleading statement, plaintiffs must
plead with particularity the circumstances that made disclosure of the omitted fact
necessary in order to make the statement not misleading.36 Here, plaintiffs do not
explicitly state how the omitted information even relates to each alleged statement, let
alone why it renders each statement misleading.
Plaintiffs also fail to plead scienter with particularity. Although plaintiffs argue
that they have “provided particularized allegations regarding what Defendants knew and
when,”37 they do not allege that any particular defendant knew about the alleged bill
padding scheme, or had access to any specific information about it. Alternatively,
plaintiffs appear to argue that the individual defendants must have been aware of the
bill padding scheme because the Eagle Ford site was so important to the company and
the defendants attended regular meetings where that site was discussed. While it is
true that in some circumstances knowledge of a material fact may be inferred where the
gravity of the fact renders it so obvious that the defendant “must have been aware of
it,”38 plaintiffs have failed to state such circumstances.
Plaintiffs fail to identify who participated in the alleged bill padding scheme, who
knew about it, when it began, how long it lasted, to what extent any particular bill was
15 U.S.C. § 78u-4(b)(1)(B); 17 C.F.R. § 240.10b–5(b). See also May v. Borick, No.
CV 95-8407 LGB, 1997 WL 314166, at *8 (C.D. Cal. Mar. 3, 1997) (“Plaintiff . . . fails to specify,
for any individual statement, how and why it was fraudulent or misleading at the time it was
made, leaving Defendants and the Court to piece together Plaintiff’s claims with regard to
particular statements.”).
17 C.F.R. § 240.10b–5(b).
Doc. 54 at 21.
Zucco Partners, 552 F.3d at 991; Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d
702, 704 (7th Cir. 2008) (“[K]nowledge is inferable from gravity.”).
falsified, or to what extent Nuverra’s revenues as a whole were enhanced by this
practice. The mere allegation that the individual defendants attended meetings where
the status of Eagle Ford was discussed, standing alone, does not create a compelling
inference that the bill padding scheme was discussed at those meetings or would have
been obvious to those in attendance. Similarly, the mere fact that the Eagle Ford
project was critically important to the company does not, standing alone, create a
compelling inference that a bill padding scheme of unknown magnitude would have
been readily apparent to management. Further, when viewed as a whole, the alleged
facts do not combine to create a strong inference that defendants knew about the bill
padding scheme. Without stating that defendants knew about the scheme or providing
any plausible reasons why defendants must have known about it, the only plausible
inference is that defendants were unaware of the scheme when the statements were
made.39 Count I of plaintiffs’ complaint is dismissed to the extent it relies on
defendants’ failure to disclose the alleged bill padding scheme.
Plaintiffs fail to adequately plead a claim regarding Nuverra’s
“sweetheart deal” with EOG that caused Nuverra to operate at
Plaintiffs also allege that a combined 50 paragraphs of defendants’ statements,40
which related to six financial quarters (Q4 2011 through Q1 2013), were rendered false
and misleading because “EOG’s sweetheart deal, which accounted for more than half
of Nuverra’s business at the Eagle Ford site,” caused Eagle Ford to operate at a loss
each month.41 As with plaintiffs’ allegations regarding the bill padding scheme, these
claims fail because they do not link each allegedly misleading statement with a specific
reason or reasons why it is false or misleading. Instead, the complaint rattles off one
allegedly false-and-misleading statement after another (including, apparently, “We have
Zucco Partners, 552 F.3d at 991.
Doc. 43 at ¶¶ 97-105, 107-08, 110-16, 119-30, 134-40, 143, 145-49, 152, and 154-59.
Id. at ¶¶ 109(a), 118(a), 133(a), 144(a), 153(a), and 161(a).
two permits,”42 “We hired 175 truck drivers,”43 and “The Company now has 5 disposal
wells”44), alleges that Eagle Ford was operating at a loss, and then provides the blanket
conclusion that each statement was false and misleading because of that fact without
providing an individualized explanation of how or why. This is insufficient.45 Plaintiffs
cannot merely conclude that Eagle Ford’s unprofitability rendered every statement false
and misleading. For each statement alleged, plaintiffs must specifically state whether
Eagle Ford’s alleged unprofitability makes that statement false, or whether the omission
of that fact makes the statement misleading, and why. For example, if Heckmann’s
August 6, 2012 statement that “Eagle Ford revenues were up 57% over last quarter”46
was not true, plaintiffs must say so and state what the truth was. Or, if plaintiffs are
alleging that his August 6 statement was misleading by omission, plaintiffs must say so
and state why the omitted fact rendered the statement misleading. But plaintiffs cannot
do as they have done: group voluminous statements together, state a fact, and then
conclude that the fact renders all of the preceding statements false and misleading
without explaining why on an individualized basis. Complaints such as these fail to
satisfy either Rule 9(b) or the PSLRA’s heightened pleading requirements. The
remainder of Count I is dismissed.
Id. at ¶ 100.
Id. at ¶ 111.
Id. at ¶ 134.
Id. at ¶ 120.
The court cannot determine whether the complaint contains any
actionable statements or omissions.
Defendants argue that plaintiffs’ claim should also be dismissed because
plaintiffs fail to allege any actionable statements or omissions. Defendants argue that
plaintiffs only allege unactionable statements of historical data, forward-looking
statements protected by the PSLRA’s safe harbor provision,47 and corporate puffery.
Plaintiffs respond by accusing defendants of “cherry-picking” statements from their
complaint and argue that various other statements alleged in their complaint are
actionable. The complaint’s failure to state with particularity which statements were
false or misleading, and why, makes it impossible to effectively analyze and resolve
these arguments. It may be that some statements are actionable and others are not.
But because the complaint fails to specifically identify which statements among the 29
pages of allegedly false and misleading statements are actionable and which are not,
and why, it is impossible to discern the merits of the parties’ arguments. This result is
one that the PSLRA’s heightened pleading requirements are designed to eliminate.
The Alleged Section 20(a) Violation
Finally, defendants argue that because plaintiffs have not stated a claim under
Section 10(b) or Rule 10b-5, their Section 20(a) claim necessarily fails. Defendants are
correct.48 Claim II is dismissed.
Based on the preceding discussion, defendants’ motion to dismiss at docket 49
is GRANTED. Plaintiffs’ complaint is DISMISSED without prejudice. 49 Plaintiffs may
file a properly supported motion to amend provided it is filed no more than 21 days from
78 U.S.C. § 78u–5(c).
See Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1035 n.15 (9th Cir. 2002).
Doe v. United States, 58 F.3d 494, 497 (9th Cir. 1995) (“In dismissing for failure to
state a claim, ‘a district court should grant leave to amend . . . unless it determines that the
pleading could not possibly be cured by the allegation of other facts.’”) (quoting Cook, Perkiss &
Liehe v. N. Cal. Collection Service, 911 F.2d 242, 247 (9th Cir.1990)).
the date of this order. If a timely motion to amend is not filed, this case will be closed.
However, failure to file a timely motion to amend shall not preclude plaintiffs from filing
a new action based on a sufficient complaint more than 21 days from the date of this
DATED this 17th day of November, 2014.