Opinion ID: 2791707
Heading Depth: 2
Heading Rank: 4

Heading: Separate Treatment of the Defendants

Text: On the Opon-related claim, the parties have not differentiated between the various defendants. But, we must do so. 29 In his opening brief, Mr. Nakkhumpun seems to confine his appellate argument to Mr. Taylor. See Appellant’s Opening Br. at 25 (arguing that “Defendants (and specifically Defendant Taylor) misleadingly represented to investors” that Opon had terminated discussions after it was unable to obtain financing). For Mr. Taylor, we conclude that in the proposed amended complaint, Mr. Nakkhumpun adequately alleged falsity, scienter, and loss causation for Mr. Taylor’s July 2010 statement. Therefore, we reverse the dismissal and denial of leave to amend on the claim against Mr. Taylor for his July 2010 statement concerning the Opon transaction. But, Mr. Nakkhumpun has not adequately pleaded culpability on the part of other defendants regarding the Opon transaction. Thus, we affirm the dismissal and denial of leave to amend on the Opon-related claims against all defendants other than Mr. Taylor. IV. Financial Condition (Cash Flow and Liquidity) Mr. Nakkhumpun also claims that the defendants made false or misleading statements about Delta’s financial condition through six statements between March 2010 and August 2011. On appeal and in the district court, the defendants challenged these claims based on failure to allege falsity or scienter. The district court granted the defendants’ motion to dismiss as to these statements on the ground 30 that they were not false. But, we may affirm the judgment on any ground supported by the record, so long as Mr. Nakkhumpun had a fair opportunity to address that ground. See Merrifield v. Bd. of Cnty. Comm’rs, 654 F.3d 1073, 1077 (10th Cir. 2011). We affirm the dismissal and denial of leave to amend, concluding that the claims involving the six statements are missing necessary allegations of either falsity or scienter. A. Mr. Wallace’s Two Statements on March 11, 2010 Defendant John Wallace was Delta’s President and Acting Senior Executive Officer from May 2009 to July 2010. According to Mr. Nakkhumpun, Mr. Wallace misled the market on March 11, 2010, in two statements about Delta’s liquidity. Both statements address Delta’s earnings for the fourth quarter and full year of 2009. Mr. Wallace’s first statement was made through a press release on behalf of Delta: Clearly, 2009 proved to be a very challenging year for Delta beginning with the drop in natural gas prices during the first half of the year, and further compounded by liquidity and bank covenant concerns for much of the year. Yet, I am very pleased with how far we have come and, from an operational and liquidity perspective, how much we improved during the latter half of the year. Cash flow provided by operating activities totaled $61.0 million for the fourth quarter, which is up meaningfully over the third quarter. The fourth quarter of 2009 was the third consecutive quarter of substantial growth in EBITDAX (a non-GAAP measure), up 134% from third quarter levels. We have also been able to reduce our lease 31 operating expenses to $1.26 per Mcfe for the fourth quarter, down 14% from the third quarter 2009. More importantly, the EBITDAX for the fourth quarter is sufficient to be in compliance with the leverage ratio covenant of our senior credit facility. While we obtained waivers for the first quarter of 2010, under the current commodity price forward curve, our current financial projections suggest that we will be in compliance with our financial covenants for the remainder of 2010. Our liquidity situation has also improved materially, aided in no small part by the offshore litigation settlement proceeds received from the federal government at the end of the year, which netted approximately $48.7 million to Delta. . . . Appellant’s App., vol. 7, at 1666 (emphasis added). Mr. Nakkhumpun’s claim is based on the italicized portions of the statement. Mr. Wallace’s second statement was made during a conference call discussing the announced results with market participants. There, Mr. Wallace commented: As we all know, 2009 was a challenging year for our industry and for Delta in particular. Looking back I’m very pleased with how Delta weathered the storm, and I’m proud to present to our investors a company that is in a far better liquidity and financial situation than we were in at this time last year. Id. at 1667 (emphasis added). Again, Mr. Nakkhumpun bases his claim on the italicized portion of the statement. Mr. Nakkhumpun claims these statements were inaccurate because Delta’s financial situation was deteriorating over this time- 32 period. The district court rejected Mr. Nakkhumpun’s arguments. But, even if these statements were false, Mr. Nakkhumpun has not alleged scienter. 12 To plead scienter, Mr. Nakkhumpun must have alleged that Mr. Wallace acted with the intent to mislead shareholders or in reckless disregard of an obvious risk that shareholders would be misled. Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1105 (10th Cir. 2003). The alleged facts must create an inference of scienter that is at least as strong as any competing inference. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 326 (2007). Mr. Nakkhumpun’s alleged facts are not susceptible to an equally strong inference of scienter. To support his scienter argument, Mr. Nakkhumpun relies on a number of confidential informants. Even when we view the informants’ statements in the light most favorable to Mr. Nakkhumpun, he has not alleged facts indicating that Mr. Wallace would have known that his statements would have misled investors. Mr. Wallace was speaking about indicia 12 In reviewing the motion for leave to amend, the district court focused on three words in the March 2011 statements: “materially” (press release) and “far better” (conference call). Appellant’s App., vol. 7, at 1854-55. The court determined that these three words could not be considered false because they were incapable of objective verification. Because we affirm on the ground of scienter, we need not address the district court’s analysis. 33 of liquidity in the publicly filed earnings data. Though Mr. Nakkhumpun’s confidential informants refer to cash flow problems, these references do not suggest that Mr. Wallace knew or should have known that his discussion of the publicly filed documents would mislead investors. Confidential Informant 1 (who was responsible for budgeting and financial forecasting for Delta) provided general information about Delta’s poor financial condition in 2009 and 2010, recalling that  Delta’s financial position was dire for the years 2009, 2010, and 2011,  “red flags” were raised to Mr. Wallace,  Delta “‘couldn’t pay [its] bills’” and had to sell assets to pay debts,  Delta’s leaders were urged to raise capital through sales of equity in 2009, 2010, and 2011, and  the years 2009, 2010, and 2011 were “‘all about selling assets and paying debts.’” Appellant’s App., vol. 6, at 1642-43. Other informants (in Delta’s accounts payable department) stated that Delta had become increasingly slow in paying bills. For example, Delta’s Restructuring Officer stated that Delta’s liquidity problems had “‘bec[o]me more acute’” in early 2010 because of Delta’s inability to sell assets and recalled that Delta had defaulted 34 on its credit line in early 2010. Id. at 1638 (quoting Declaration of John T. Young, Jr., Chief Restructuring Officer of Delta Petroleum Corporation). Notwithstanding the allegations based on these informants’ statements, an innocent inference is stronger than an inference of scienter because Mr. Wallace was discussing benchmarks of liquidity reflected in the publicly filed documents on earnings, and Mr. Nakkhumpun has not challenged the truthfulness of Mr. Wallace’s reporting on these benchmarks. A fact-finder might view Mr. Wallace’s report as overly rosy in light of Delta’s continued inability to pay its bills. But, none of the allegations suggest an intention to deceive investors or awareness of facts that would have alerted Mr. Wallace to a risk that his assessment would mislead anyone. Therefore, we affirm dismissal of the claims related to Mr. Wallace’s statements on March 11, 2010. B. Mr. Wallace’s Statement in May 2010 (Concerning Improvement in Delta’s Liquidity) Mr. Nakkhumpun also alleged that Mr. Wallace had made a misleading statement in May 2010 regarding Delta’s financial condition. In May 2010, Delta held a conference call to discuss the financial results for the first quarter of 2010. There, Mr. Wallace commented: 35 While the current gas prices and forward curve are more than adequate to provide solid returns on the completion capital we must be mindful of our liquidity position. We believe we are in a far better financial situation than we were a year ago and the preservation of our liquidity is essential to maintain and improve our balance sheet. Appellant’s App., vol. 7, at 1675 (emphasis added). Mr. Nakkhumpun complains about the italicized portion of this statement. The district court characterized this portion of the statement as an opinion, and Mr. Nakkhumpun does not challenge this characterization. An opinion is considered false if the speaker does not actually or reasonably hold that opinion. Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, __ U.S. __, __ S. Ct. __, 2015 WL 1291916, at  (2015); Va. Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1095 (1991). The district court concluded that Mr. Nakkhumpun had failed to allege falsity, reasoning that none of the alleged facts would cast doubt on Mr. Wallace’s belief in the truth of his statement in May 2010. We agree. Mr. Nakkhumpun presents two factual allegations, stating they conflict with Mr. Wallace’s statement:  “[B]eginning in 2009 and continuing through the Class Period[,] Delta ‘had a liquidity issue’ and ‘couldn’t pay [its] bills.’”  “Delta had ‘cash flow problems’ and was experiencing a ‘long slow demise that began in March 2009.’” 36 Appellant’s Opening Br. at 43-44. Mr. Nakkhumpun argues that he alleged discrete facts supporting these more general statements. But, Mr. Nakkhumpun’s factual allegations do not suggest scienter. In expressing his opinion, Mr. Wallace focused broadly on Delta’s “financial situation.” Appellant’s App., vol. 7, at 1675. Mr. Nakkhumpun tries to poke holes in that opinion based on others’ accounts of worsening cash flow problems. But, Mr. Nakkhumpun has not alleged any facts that would cast doubt on the sincerity or reasonableness of Mr. Wallace’s statement of his opinion. See Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, __ U.S. __, __ S. Ct. __, 2015 WL 1291916, at  (2015) (stating that an issuer’s opinions do not become misleading simply because they are undercut by some facts known to the issuer). Thus, we uphold dismissal of this claim based on the failure to adequately allege falsity. C. Mr. Lakey’s Statement in March 2011 (Concerning EBITDAX and Cash Flow) In March 2011, Delta issued a press release announcing its financial results for its fourth quarter and full year ending December 2010. Mr. Nakkhumpun challenges the truthfulness of this press release, but he has not adequately alleged falsity. 37 The press release touted Delta’s new cost-cutting measures and the results. Defendant Carl Lakey (Delta’s President and CEO as of July 2010) spoke about the fourth quarter results: We are very pleased with our results for the fourth quarter. Our EBITDAX [earnings before interest, taxes, depreciation, depletion, amortization, and exploration expenses] is 20% higher than the third quarter driven by lower operating and overhead costs, despite lower production related to asset sales and lower average Henry Hub gas prices in the quarter. We have been committed to reducing our operating and overhead costs, and I’m pleased to state that we have been able to deliver such results. We drove our LOE/Mcfe down by 38% compared to the third quarter. Additionally, our overhead costs are down 25% from the third quarter. We remain focused on sustaining costs at or near these levels for 2011. We’ve also had very positive results from the well completion activity performed in the fourth quarter and to date in the first quarter of this year. The larger frac design, which we call Gen IV, has increased our initial production and our estimated reserves per well. We have completed a total of 16 wells with the Gen IV frac design and all have performed better than we would have expected under prior completion designs. Thus, we expect first quarter production to increase 4% to 7% over the fourth quarter. These new cost control measures substantially improve our EBITDAX. Appellant’s App., vol. 7, at 1693 (emphasis added). Mr. Nakkhumpun bases his claim on the italicized portion of the statement. The district court characterized this statement as an expression of fact rather than opinion. 13 To allege falsity of this factual 13 The defendants contend that this statement involved an opinion rather than a fact. We need not decide whether the defendants are 38 statement, Mr. Nakkhumpun had to explain why Mr. Lakey’s statement was misleading. See Adams v. Kinder-Morgan, 340 F.3d 1083, 1097 (10th Cir. 2003) (stating that falsity is adequately pleaded when a plaintiff alleges a factual statement was misleading). Mr. Nakkhumpun relies on allegations that Delta’s cash flow became a growing problem. Appellant’s App., vol. 1, at 21, 27, 108; Appellant’s App., vol. 6, at 1395-96. But, Mr. Nakkhumpun has not pleaded any facts suggesting that the cost control measures had failed to improve Delta’s cash flow. Thus, the allegations do not suggest that Mr. Lakey was misleading anyone about the impact of Delta’s cost-control measures. D. Mr. Taylor’s and Mr. Lakey’s Statements in August 2011 (Concerning Share Price and Trading Discount) In August 2011, Delta held a conference call with market participants to discuss the financial results for the first quarter of 2011. Defendants Daniel Taylor and Carl Lakey spoke during the call. Mr. Nakkhumpun challenges the truthfulness of their statements, but he has not adequately alleged scienter. Mr. Taylor (who was then Delta’s Chairman of the Board) presented information about new results in the Vega Area assets: correct because the statement would not be actionable even if it involved a fact rather than an opinion. 39 [W]e’re very excited about what we are seeing in this [Vega Area] well, the potential it holds and what it means for Delta. . . . [W]e are pleased to have a flowing well that is in the process of confirming substantial quantities of economic reserves in the deeper shale formations of the Piceance Basin.