Opinion ID: 163762
Heading Depth: 3
Heading Rank: 3

Heading: The Blue Moon Transaction

Text: The plaintiffs alleged that Kinder-Morgan engaged in another transaction involving a dummy corporation, this one called Blue Moon Holdings. This transaction occurred sometime in 1998 and involved the improper recognition of at least $2 million in income. The complaint provides no further details about this transaction. - 11 - D. Motives for Overstating Kinder-Morgan’s Financial Results The plaintiffs allege two primary motives for the defendants’ issuance of misleading statements about Kinder-Morgan’s financial performance. The first was their desire to have Kinder-Morgan issue securities to finance the Company’s December 1997 acquisition of MidCon, a natural gas transmission and marketing subsidiary. Kinder-Morgan engaged in four transactions in 1998 involving the issuance of approximately $ 4 billion in securities, and the plaintiffs allege that Kinder-Morgan overstated its financial performance to ensure that these securities would be sold at prices favorable to it. The second alleged motive for the misleading statements was the defendants’ desire to hide operational problems that could have undermined a planned merger with Sempra Energy that was announced in March 1999. The plaintiffs alleged that the individual defendants stood to gain personally from a completed merger with Sempra. Larry Hall allegedly would have received a $1.87 million severance package and a yearly consulting fee of $800,000 if the merger closed. Clyde McKenzie allegedly would have received a severance payment of approximately $500,000. Sempra walked away from the merger, however, when it allegedly discovered during due diligence Kinder-Morgan’s improper accounting and the poor performance of the Company’s operations. - 12 - When the Sempra merger collapsed, so did the price of Kinder-Morgan’s common stock. On the last trading day prior to the announcement that the merger had been called off, Kinder-Morgan shares traded at $21.25 per share. On the day of the announcement, Kinder-Morgan stock fell to $12.81 per share. E. Procedural History of the Litigation The plaintiffs filed their initial complaint and a first amended complaint in 2000. The first amended complaint was dismissed, with prejudice as to some claims and without prejudice as to others, in March 2001. 3 The plaintiffs filed their second amended complaint a month later, in April 2001. At a hearing in March 2002, the district court entertained a motion by the defendants to dismiss the second amended complaint pursuant to Fed. R. Civ. P. 12(b)(6). The court granted the motion and dismissed the second amended 3 At the same time that the district court dismissed the first amended complaint, it dismissed a separate case brought by different plaintiffs who also alleged securities fraud claims against Kinder-Morgan. On appeal, we affirmed the district court’s dismissal of that case. McDonald v. Kinder-Morgan, Inc., 287 F.3d 992, 999 (10th Cir. 2002). That case involved allegations that KinderMorgan failed to disclose certain future risks associated with the Bushton Plant when it reported its results from that operation. Id. at 994. As discussed in more detail below, because the plaintiffs’ theory in McDonald was one of fraud by omission to disclose future risks, they conceded during their litigation that the financial information that Kinder-Morgan reported in the 1997 third quarter 10-Q was accurate. In contrast, the plaintiffs in the instant case claim that statements made by Kinder-Morgan in the 1997 third quarter 10-Q and elsewhere are inaccurate and materially misleading as stated. - 13 - complaint with prejudice, concluding that the plaintiffs had failed, with respect to the Bushton claims and the Blue Moon Holdings claim, to meet the requirement of the Private Securities Litigation Reform Act (PSLRA), 15 U.S.C. § 78u-4(b)(1) and (2), to plead facts supporting their allegations with particularity and to plead allegations supporting a strong inference of scienter. The court found that the plaintiffs had pled facts with sufficient particularity about the CU Cogen contract, but concluded that claim should be dismissed because it did not meet the PSLRA’s requirements that the allegations in the complaint support a strong inference of scienter. 15 U.S.C. § 78u-4(b)(2). Having dismissed the underlying securities fraud claims against both Kinder-Morgan and the individual defendants, the court also dismissed the claims of derivative liability—the § 20 claims of control person liability—against the individual defendants. The district court delivered these rulings from the bench and subsequently entered a written final judgment summarizing them, which the plaintiffs now appeal.