Opinion ID: 2791707
Heading Depth: 3
Heading Rank: 1

Heading: The Inference of Scienter

Text: In denying leave to amend, the district court concluded that Mr. Nakkhumpun’s way of proving scienter would actually disprove scienter. We disagree.
Mr. Nakkhumpun’s scienter inference is that the defendants “misstated the reason that the Opon negotiations [had] broke[n] down in order to ‘signal[] to potential strategic partners—and, consequently, to mislead shareholders—that the announced $400 million price accurately reflected the value of those assets.’” Appellant’s App., vol. 7, at 1851. The district court concluded that this inference cut against scienter: If the false statement was designed to attract a buyer and maximize shareholder value, the district court thought the intention would have been to help shareholders rather than to deceive them. Id. In our view, this rationale is flawed. Scienter is not limited to situations in which a defendant acted with the primary purpose of misleading shareholders; scienter also exists when a defendant acted 12 with a reckless disregard of a substantial likelihood of misleading investors. In re Level 3 Commc’ns, Inc. Sec. Litig., 667 F.3d 1331, 1343 n.12 (10th Cir. 2012); see Anixter v. Home-Stake Prod. Co., 77 F.3d 1215, 1233 (10th Cir. 1996) (“This circuit still maintains that recklessness . . . is sufficient scienter for finding civil § 10(b) primary violations.”). If Mr. Taylor mischaracterized the impasse in order to entice prospective buyers, he should have realized the obvious risk that existing and potential shareholders would also be misled and that they might rely on the mischaracterization to their detriment. Therefore, Mr. Nakkhumpun has pleaded facts indicating that Mr. Taylor was at least reckless in disregarding the risk that his statement would mislead existing and potential shareholders.
Mr. Nakkhumpun’s inference of scienter is supported by the facts alleged in the complaint.
Mr. Nakkhumpun adequately pleaded four facts: 1. Opon retracted the $400 million offer because Opon executives decided that the assets were not worth $400 million. 2. Mr. Taylor knew that the transaction had fallen apart because Opon valued the assets at less than $400 million. 13 3. Mr. Taylor conditioned the market to believe that Opon had agreed that the assets were worth $400 million. 4. Mr. Taylor knew that his July 2010 statement had implied that Opon continued to value the assets at $400 million. Together, these alleged facts create a plausible inference that Mr. Taylor recklessly disregarded the likelihood that his statements would mislead existing and prospective shareholders. First, Mr. Nakkhumpun adequately pleaded that the deal had fallen apart because Opon retracted its $400 million offer. These allegations are largely based on statements by Confidential Informant 3, the President and Chief Executive Officer of Opon. He said that after conducting due diligence, Opon determined that a 37.5% interest in the Vega Area assets was not worth $400 million. As a result, Opon retracted the $400 million price and “the deal to purchase the assets for $400 million ‘fell apart in the spring.’” Appellant’s App., vol. 6, at 1647 (quoting Confidential Informant 3). 5 Opon offered Delta’s Board a lower price for the assets in the spring of 2010. We do not know what the lower price was or precisely when it was made. But, Opon’s CEO recalled that the new 5 Opon’s withdrawal of the $400 million offer is also recounted by Mr. Nakkhumpun’s Confidential Informant 5, who was a Controller at Delta from 2002 to 2012. See Appellant’s App., vol. 7, at 1649-50. 14 offer “‘was a much tougher deal than what [Opon had] proposed originally.’” Id. (quoting Confidential Informant 3). Second, Mr. Nakkhumpun alleged that Mr. Taylor had known that the deal fell apart because Opon retracted its $400 million offer. These allegations are based on statements attributed to Opon’s CEO and Delta’s former Vice President of Corporate Development and Investor Relations. Opon’s CEO stated he had dealt directly with Mr. Taylor when Opon retracted the $400 million offer, adding that Delta’s Board further rejected Opon’s new offer and told Opon “to ‘take a hike.’” Id. at 1648 (quoting Confidential Informant 3). In addition, Confidential Informant 1, Delta’s former Vice President of Corporate Development and Investor Relations, stated that the new offer had offended Mr. Taylor. Id. at 1643. Third, Mr. Nakkhumpun alleged that Delta executives had conditioned the market to believe that Opon remained committed to the $400 million price. Delta, Mr. Taylor, and the other defendants had allegedly conditioned the market by repeatedly announcing that a $400 million price was a part of the proposed transaction:  On March 18, 2010, Delta issued a press release, announcing that it had entered a non-binding letter of intent with Opon. The letter announced Delta’s proposed sale to Opon of a 37.5% non-operating working interest 15 in the Vega Area assets for $400 million. The deal was expected to close around June 1, 2010. 6  On May 10, 2010, Delta released an earnings press release, quoting Defendant John Wallace, Delta’s thenPresent and Chief Operating Officer: “We continue to work with our potential partner, Opon International, in moving toward the signing of definitive agreements and closing of the transaction.” The press release added that “[t]he consummation of the transaction [was] contingent upon Opon’s ability to arrange financing and [was] subject to customary due diligence, negotiation and execution of definitive binding agreements.” According to the press release, the parties were continuing with the transaction and Delta understood that Opon’s financing efforts were ongoing. 7  On May 10, 2010, Mr. Taylor and Mr. Wallace participated in a conference call with market participants, discussing Delta’s financial results for the first quarter of 2010. In the call, Mr. Taylor said: “As we announced in March we have signed a letter of intent with Opon International to sell a 37.5% [sic] of working interest in our properties in the Vega area of the Piceance Basin along with warrants to purchase Delta Common stock for $400 million in total. We continue to work with Opon in their financing efforts and are working towards signing a definitive purchase and sale agreement.” 8  On June 1, 2010, Delta issued a press release, announcing “an extension to the expected time frame to sign a definitive Purchase and Sale Agreement with [Opon].” The press release reiterated the $400 million price and stated that “Delta [was] continu[ing] to work with Opon in its financing efforts and both parties [were] working 6 Appellant’s App., vol. 7, at 1671. 7 Appellant’s App., vol. 7, at 1673. 8 Appellant’s App., vol. 7, at 1675. 16 towards signing a definitive Purchase and Sale Agreement.” 9 Mr. Taylor’s May 10, 2010, statement showed he knew Delta had conditioned the market to believe that Opon remained willing to pay $400 million for a 37.5% interest in the Vega assets. Fourth, Mr. Nakkhumpun alleged facts that would have made Mr. Taylor’s statements misleading. After Delta had conditioned the market to believe Opon was continuing to offer $400 million, Mr. Taylor said in July 2010 that the deal had fallen apart because Opon was unable to obtain financing on the agreed terms. Here, factfinders could reasonably infer that someone in Mr. Taylor’s situation would have recognized the risk of deceiving investors, who presumably would have attributed the impasse to Opon’s inability to obtain a loan rather than its unwillingness to pay $400 million for a 37.5% interest in the assets. Based on the prior announcements, investors could have believed that Opon continued to value the 37.5% interest at $400 million. With this belief, investors would presumably expect offers from other potential buyers with better credit than Opon. The risk of misleading investors would have been obvious. 9 Appellant’s App., vol. 7, at 1678. 17 Based on these four facts alleged in the complaint, Mr. Nakkhumpun has adequately pleaded that Mr. Taylor acted with scienter when he announced termination of the Opon deal. ii. The Defendants’ Challenges to the Scienter Inference The defendants contend that Mr. Nakkhumpun has not adequately alleged an inference of scienter for three reasons: 1. Mr. Nakkhumpun did not allege that Mr. Taylor was motivated to engage in securities fraud. 2. We should not credit the Opon CEO’s view of why the Opon deal terminated. 3. Mr. Taylor had no duty to disclose Opon’s counteroffer. We reject each argument. First, the defendants argue that Mr. Taylor lacked a motive to engage in securities fraud because his interests and Delta’s were aligned with the interests of shareholders. This argument would fail on the merits, legally and factually. Legally, the argument is invalid because scienter allegations may suffice even without a motive. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 325 (2007). Factually, the argument is invalid because Mr. Taylor’s motives were not aligned with all class members. The class includes investors who purchased Delta stock after the misleading announcement in July 2010. Their interests were not aligned with the 18 interests of Mr. Taylor, the Chief Executive Officer of a company facing the prospect of bankruptcy. Second, the defendants argue that Mr. Nakkhumpun’s “only allegations that supposedly cast doubt on Delta’s explanation derive from the confidential witness statement of the opposing party in the failed negotiations.” Appellees’ Resp. Br. at 22. Thus, the defendants suggest that we should not credit Opon’s version of events. But, a court cannot dismiss a complaint by assessing the credibility of an informant. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). Third, the defendants argue that Mr. Taylor had no duty to disclose the counter-offer. For the sake of argument, we can assume that Mr. Taylor could have chosen to say nothing or announce termination of the Opon deal without saying what had gone wrong. But, rather than stay silent or decline to say what had gone wrong, Mr. Taylor chose to explain to the market why the deal had fallen apart. Once Mr. Taylor made that choice, he could not give an explanation that would mislead investors. See Matrixx Initiatives, Inc. v. Siracusano, __ U.S. __, 131 S. Ct. 1309, 1321-22 (2011) (stating that disclosure is necessary “‘to make . . . statements made, in light of the circumstances under which they were made, not misleading’” (quoting 17 C.F.R. § 240.10b-5(b))). Thus, Mr. Taylor 19 incurred a duty to disclose when he chose to explain why the deal had fallen apart. See United States v. Gordon, 710 F.3d 1124, 1142 (10th Cir. 2013) (stating that when a party without a duty of disclosure elects to disclose material facts, he or she must speak fully to provide information that is complete and is not misleading). Accordingly, we reject the defendants’ three challenges to the inference of scienter.