Court Opinion

ID: 9910181
Source: CourtListenerOpinion
Date Created: 2023-12-15 01:00:34.555184+00
Date Added: 2024-06-11T12:51:23.055198
License: Public Domain

Case: 21-20312         Document: 00517001842               Page: 1      Date Filed: 12/14/2023

             United States Court of Appeals
                  for the Fifth Circuit                                              United States Court of Appeals
                                                                                              Fifth Circuit
                                      ____________                                          FILED
                                                                                     December 14, 2023
                                        No. 21-20312
                                      ____________                                     Lyle W. Cayce
                                                                                            Clerk
   Utah Retirement Systems,

                                                                       Plaintiff—Appellant,

                                              versus

   Mark McCollum; Christoph Bausch; Karl Blanchard;
   Krishna Shivram; Stuart Fraser; Douglas M. Mills;
   Weatherford International, P.L.C.; Bernard Duroc-
   Danner,

                                               Defendants—Appellees.
                      ______________________________

                      Appeal from the United States District Court
                          for the Southern District of Texas
                                   No. 4:19-CV-3363
                      ______________________________

   Before Dennis, Southwick, and Wilson, Circuit Judges.
   Per Curiam:*
         This appeal stems from a district court’s dismissal of a securities
   fraud class action lawsuit. Because we find Plaintiff inadequately pleaded
   the element of scienter, we AFFIRM.

         _____________________
         *
             This opinion is not designated for publication. See 5th Cir. R. 47.5.
Case: 21-20312       Document: 00517001842            Page: 2     Date Filed: 12/14/2023

                                       No. 21-20312

                           I. Factual Background
          The alleged facts are complex and span several years.1 We therefore
   do not repeat the allegations in their entirety, though we have carefully
   considered them.
          Weatherford International, P.L.C. (“Weatherford”) is a publicly
   traded oilfield service company that was founded in 1998. By October 2016,
   Weatherford had over $7.1 billion in debt and endured seven consecutive
   quarterly revenue declines. The market began to speculate that
   Weatherford might be on the brink of bankruptcy. Around that time,
   Weatherford publicly ushered in a series of cost-cutting measures, including
   layoffs and closures of several manufacturing plants, which were intended
   to make Weatherford profitable again.
          Despite those efforts, Weatherford’s debt still continued to grow.
   So, on July 28, 2017, then-CEO Mark McCollum introduced a formal
   “Transformation Plan,” encompassing over 1,500 cost-cutting measures
   even more drastic than those previously announced. The initiatives
   included ramping up workforce reductions, consolidating facilities,
   centralizing support functions, and regrouping eight product lines into four
   business units. The Transformation Plan also called for Weatherford to
   divest business units that were “not critical to [its] strategy going forward.”
          Defendants then started a campaign to sell the Transformation Plan
   to investors. Over the course of approximately three years, Weatherford
   attempted to implement the Transformation Plan. Relevant to this appeal,
   former Weatherford employees (“FEs”) allege that, from October 26,
   2016, through May 10, 2019 (the “Class Period”), “Defendants knew all
          _____________________
          1
            To the extent we recite the facts, they are as alleged in the complaint. See
   Neiman v. Bulmahn, 854 F.3d 741, 746 (5th Cir. 2017).

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                                   No. 21-20312

   along that the Transformation Plan was insufficient to dig Weatherford out
   of its debt.” By November 2018, Weatherford hired a restructuring advisor
   and by December 31, 2018, the Company retained restructuring counsel. On
   February 1, 2019, when an analyst asked if Weatherford was considering
   bankruptcy, McCollum responded, “I don’t waste a lot of time thinking or
   planning how to fail,” and that “the actions that we can take is [sic]
   continuing to execute the [T]ransformation [P]lan and do that quarter in
   and quarter out and continue to improve the profitability, which ultimately
   will drive the cash flow of this organization and improve our credit
   metrics.” Weatherford retained additional restructuring counsel in April
   2019.
           On May 10, 2019, Weatherford issued a press release announcing
   that the company had executed a restructuring support agreement with a
   group of its senior noteholders and was seeking Chapter 11 bankruptcy
   protection since it “still face[d] a high level of debt” and “w[ould] not be
   able to generate sufficient liquidity to service all of its debt.” By all
   accounts, the Transformation Plan had failed. On May 13, 2019, the New
   York Stock Exchange suspended trading in Weatherford’s stock, and on
   May 14, 2019, Weatherford began trading on the Over-the-Counter market.
   That same day, Weatherford’s share price plummeted more than 86%,
   closing at $0.05 per share. Weatherford initiated bankruptcy proceedings on
   July 1, 2019, implemented the restructuring support agreement negotiated
   during the Class Period, and gave all ownership in Weatherford to
   noteholders and certain Weatherford management, including the individual
   defendants—leaving only 1% to existing shareholders.
           This lawsuit was initiated. The lead Plaintiff, Utah Retirement
   Systems, brings claims on behalf of purchasers of the common stock of
   Weatherford during the Class Period. Defendants are Weatherford and a
   handful of its former executives. Plaintiff alleges that Defendants, in

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                                     No. 21-20312

   violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
   and SEC Rule 10-b(5), made materially false and misleading representations
   and omissions about Weatherford’s “Transformation Plan.” The district
   court granted Weatherford’s motion to dismiss Plaintiff’s claims with
   prejudice pursuant to Federal Rule of Civil Procedure 12(b)(6), which is
   now on appeal.
                         II. Standards of Review
          “We review a district court’s dismissal of federal securities law
   claims under Rule 12(b)(6) de novo.” Owens v. Jastrow, 789 F.3d 529, 535
   (5th Cir. 2015). “A ‘complaint will survive a Rule 12(b)(6) motion to
   dismiss if, accepting its factual allegations as true, the complaint plausibly
   states a claim for relief.’” Okla. Firefighters Pension & Ret. Sys. v. Six Flags
   Ent. Co., 58 F.4th 195, 206 (5th Cir. 2023) (quoting Loc. 731 I.B. of T.
   Excavators & Pavers Pension Tr. Fund v. Diodes, Inc., 810 F.3d 951, 956 (5th
   Cir. 2016)). We will accept “all well-pleaded facts as true and view[] those
   facts in the light most favorable to the plaintiff[].” Moffett v. Bryant, 751
   F.3d 323, 325 (5th Cir. 2014) (internal quotation marks and citation
   omitted).
          Under Federal Rule of Civil Procedure 9(b), allegations of fraud
   must be pleaded “with particularity” as to “the circumstances constituting
   fraud.” Fed. R. Civ. P. 9(b). Particularity “necessarily differs with the
   facts of each case,” but it generally requires a plaintiff to allege “the
   particulars of time, place, and contents of the false representations, as well
   as the identity of the person making the misrepresentation and what [they]
   obtained thereby.” Tuchman v. DSC Commc’ns Corp., 14 F.3d 1061, 1067-68
   (5th Cir. 1994) (internal quotation marks and citation omitted). Under Rule
   9(b), however, “[m]alice, intent, knowledge, and other conditions of a
   person’s mind may be alleged generally.” Fed. R. Civ. P. 9(b).

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          Securities fraud claims brought by private litigants, like the ones
   here, are also subject to the pleading requirements imposed by the Private
   Securities Litigation Reform Act (“PSLRA”). See 15 U.S.C. § 78u-4. The
   PSLRA “was enacted in response to an increase in securities fraud lawsuits
   perceived as frivolous.” Newby v. Enron Corp., 338 F.3d 467, 471 (5th Cir.
   2003). It requires a plaintiff to “identify each allegedly misleading
   statement with particularity and explain why it is misleading.” Owens, 789
   F.3d at 535 (internal quotation marks and citation omitted). Moreover, “if
   an allegation regarding the statement or omission is made on information
   and belief, the complaint shall state with particularity all facts on which that
   belief is formed.” 15 U.S.C. § 78u-4(b)(1)(B). “At a minimum, the PSLRA
   pleading standard incorporates the ‘who, what, when, where, and how’
   requirements of Rule 9(b).” Owens, 789 F.3d at 535 (quoting ABC Arbitrage
   Plaintiffs Grp. v. Tchuruk, 291 F.3d 336, 349–50 (5th Cir. 2002)). Thus,
   pleadings that fail “to specify the alleged fraudulent statements, the
   speaker, when and where the statements were made, and why they are
   fraudulent” must be dismissed. Fin. Acquisition Partners LP v. Blackwell,
   440 F.3d 278, 287 (5th Cir. 2006).
                                III. Discussion
          Plaintiff’s complaint alleges that Defendants violated Section 10(b)
   of the Exchange Act and SEC Rule 10b-5. “To state a Section 10(b) and
   Rule 10b-5 claim, a plaintiff must allege: ‘(1) a material misrepresentation or
   omission; (2) scienter (a wrongful state of mind); (3) a connection with the
   purchase or sale of a security; (4) reliance; (5) economic loss; and (6) a
   causal connection between the material misrepresentation and the loss.’”
   Okla. Firefighters Pension & Ret. Sys., 58 F.4th at 206 (further internal
   quotations omitted) (emphasis added) (quoting Mun. Emps.’ Ret. Sys. of
   Mich. v. Pier 1 Imports, Inc., 935 F.3d 424, 429 (5th Cir. 2019)). We focus our
   analysis on whether Plaintiff sufficiently pleaded scienter because our

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   adverse finding is dispositive of this appeal.
                                   *        *         *
          The PSLRA imposes an exacting standard for pleading intent in the
   securities fraud context. It requires, “in any private action . . . [where] the
   plaintiff may recover money damages only on proof that the defendant
   acted with a particular state of mind,” that a complaint “state with
   particularity facts giving rise to a strong inference that the defendant acted
   with” scienter “with respect to each act or omission alleged.” 15 U.S.C. §
   78u-4(b)(2)(A) (emphasis added). “The required state of mind [for
   scienter] is an intent to deceive, manipulate, or defraud or severe
   recklessness.” Ind. Elec. Workers’ Pension Tr. Fund IBEW v. Shaw Grp., Inc.,
   537 F.3d 527, 533 (5th Cir. 2008) (internal quotations omitted).
          Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007)
   controls our review of Plaintiff’s scienter arguments. In that case, the
   Supreme Court saw its task as one “to prescribe a workable construction of
   the strong inference standard, a reading geared to the PSLRA’s twin goals:
   to curb frivolous, lawyer-driven litigation, while preserving investors’ ability
   to recover on meritorious claims.” Id. at 322 (internal citations omitted).
   The Supreme Court established the following prescriptions:
          First, faced with a Rule 12(b)(6) motion to dismiss a § 10(b)
          action, courts must, as with any motion to dismiss for failure
          to plead a claim on which relief can be granted, accept all
          factual allegations in the complaint as true. . . . Second, . . .
          [t]he inquiry is whether all of the facts alleged, taken
          collectively, give rise to a strong inference of scienter, not
          whether any individual allegation, scrutinized in isolation,
          meets that standard. Third, in determining whether the
          pleaded facts give rise to a “strong” inference of scienter, the
          court must take into account plausible opposing inferences.
   Id. at 322-23 (citations omitted). “Congress required plaintiffs to plead with

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   particularity facts that give rise to a ‘strong’—i.e., a powerful or cogent—
   inference.” Id. at 323. “To determine whether the plaintiff has alleged facts
   that give rise to the requisite ‘strong inference’ of scienter, a court must
   consider plausible, nonculpable explanations for the defendant’s conduct,
   as well as inferences favoring the plaintiff.” Id. at 323-24. All told, “the
   reviewing court must ask: When the allegations are accepted as true and
   taken collectively, would a reasonable person deem the inference of scienter
   at least as strong as any opposing inference?” Id. at 326.
          Applying the Tellabs framework to the present case, it is evident that
   Plaintiff has not alleged facts (as opposed to conclusions not based on
   pleaded facts) from which a reasonable person could draw a “strong
   inference” that Defendants spoke or acted with scienter to mislead
   investors during the Class Period. Chiseled to its core, Plaintiff’s scienter
   theory is that Defendants “knew” throughout the Class Period that
   bankruptcy was “inevitable.” When taken as a whole, however, Plaintiff’s
   proposed inference is not “at least as compelling as any opposing inference
   of nonfraudulent intent”—e.g., that Weatherford was “trying to fix its
   issues but was continually stymied by a weak oil market.” Id. at 314.
   Plaintiff has failed to sufficiently plead facts from which a reasonable person
   could draw a strong inference that Defendants acted with the intent to
   deceive, manipulate, or defraud or with severe recklessness.
          Additionally, we consider Plaintiff’s motive argument because,
   depending on the circumstances arising from the underlying facts pleaded,
   motive and opportunity may be relevant to a showing of scienter “and
   ‘may, on occasion, rise to the level of creating a strong inference of reckless
   or knowing conduct.’” Nathenson v. Zonagen Inc., 267 F.3d 400, 410-11 (5th
   Cir. 2001) (quoting In re Comshare, Inc. Sec. Litig., 183 F.3d 542, 551 (6th
   Cir. 1999)). Motive alone, however, is generally insufficient to plead a
   strong inference of scienter under the PSLRA. Id. at 410-12.

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           Here, the asserted motive argument is meritless. Plaintiff argues that
   Defendants were motivated and incentivized throughout the Class Period to
   misrepresent to investors the true state of Weatherford’s financial situation
   and to delay the “inevitable” filing of bankruptcy because Defendants
   needed time to negotiate a Management Incentive Plan (“MIP”) under
   which management could receive up to 5% ownership in the reorganized
   company. But we have held “incentive compensation ‘can hardly be the
   basis on which an allegation of fraud is predicated’” because “the vast
   majority of corporate executives” receive this type of compensation. Ind.
   Elec. Workers, 537 F.3d at 544 (quoting Tuchman, 14 F.3d at 1068).
   However, in a limited set of circumstances—when the potential bonus is
   extremely high and other allegations support an inference of scienter—
   performance-based compensation can establish motive. See Barrie v.
   Intervoice-Brite, Inc., 397 F.3d 249, 261 (5th Cir. 2005). Here, the MIP
   merely gave the new board the discretion to award equity compensation of
   up to 5% but did not guarantee any concrete benefit to anyone. Further, the
   complaint lacks factual allegations that tie together Plaintiff’s pleaded fraud
   theory with the asserted motive. Plaintiff argues that Defendants needed to
   delay bankruptcy to negotiate the MIP, but Plaintiff does not allege how the
   MIP would have been different—or not existed at all—had the company
   gone under sooner. The district court therefore did not err when it
   dismissed Plaintiff’s claims for failure to allege facts from which a
   reasonable person could draw a strong inference that Defendants spoke and
   acted with scienter to mislead investors during the Class Period.2

           _____________________
           2
             “Control person liability is secondary only and cannot exist in the absence of a
   primary violation.” Southland Sec. Corp. v. INSpire Ins. Sols., 365 F.3d 353, 383 (5th Cir.
   2004) (citing Lovelace v. Software Spectrum Inc., 78 F.3d 1015, 1021 n.8 (5th Cir. 1996)).
   Because Plaintiff insufficiently pleaded a primary violation, its Section 20(a) claims
   against the individual defendants must fail. Accordingly, we affirm the district court’s

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                                    IV. Conclusion
           For these reasons, we AFFIRM the judgment of the district court.

   dismissal of those claims too.

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