285 F. Supp. 3d 706
S.D. Ill.2018Background
- Securities-fraud class action (Class Period: Mar 1, 2013–Aug 15, 2016) against Northern Oil & Gas, CEO Michael Reger, and CFO Thomas Stoelk alleging violations of §10(b), Rule 10b-5, and §20(a).
- Northern Oil is an oil & gas company; Reger co-founded unrelated Dakota Plains (a transloading company) and allegedly concealed his control/benefit from it while using Northern Oil resources and influence to advance Dakota Plains interests.
- SEC investigated Dakota Plains, issued Reger a Wells Notice during the Class Period; Reger was terminated Aug 16, 2016 and later agreed to a cease-and-desist order (post–Class Period) implicating disclosure violations.
- Plaintiff alleges defendants made false/misleading public statements: (a) touting Northern Oil’s Code of Business Conduct and Ethics and (b) describing Reger’s industry pedigree and centrality to Northern Oil — omissions allegedly concealing conflicts, misuse of assets, and misconduct.
- Court considered confidential-witness allegations that Reger spent significant time on Dakota Plains matters at Northern Oil and that other executives (including Stoelk) knew; defendants moved to dismiss under Fed. R. Civ. P. 12(b)(6).
- Court granted dismissal without prejudice for failure to plead a material misstatement/omission and failure to plead scienter; §20(a) claim dismissed as derivative; plaintiff given leave to amend.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Misstatement/omission re: Code of Ethics | Code adoption and related statements were misleading because defendants failed to disclose Reger's misconduct and the code's ineffectiveness | Mere adoption or reference to a code is aspirational; absent guarantees or factual assurances, nondisclosure of breaches is not actionable | Dismissed — adoption/availability of code not an actionable misstatement or omission here |
| Misstatements about Reger's role/experience | Statements touting Reger's pedigree and centrality became misleading when defendants failed to disclose his control of Dakota Plains and misconduct | Statements about Reger's experience/pedigree were accurate on their face; no duty to disclose uncharged misconduct or mismanagement absent additional facts making disclosures misleading | Dismissed — allegations do not render those statements false or misleading |
| Scienter (intent/recklessness) | Knowledge of and allowance of Reger's conduct, CW allegations, and certifications by Stoelk support a strong inference of scienter | Allegations point to mismanagement or negligence; no direct facts showing knowledge of illegality; subsequent termination undermines intent inference | Dismissed — plaintiff failed to plead a strong inference of scienter (recklessness/conscious misbehavior not established) |
| Control-person liability (§20(a)) | Reger and Stoelk are control persons liable for primary violations | §20(a) liability is derivative of §10(b); if primary claim fails, control-person claim fails | Dismissed — derivative claim dismissed because no adequately pled primary violation |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (standards for evaluating competing inferences for scienter)
- Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (elements of private §10(b) claim and loss causation principles)
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading standards — conclusory allegations insufficient)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility standard for Rule 12(b)(6))
- ECA & Local 134 IBEW Joint Pension Trust of Chicago v. JPMorgan Chase Co., 553 F.3d 187 (PSLRA scienter pleading standards)
- Kalnit v. Eichler, 264 F.3d 131 (recklessness vs. conscious misbehavior; pleading scienter without motive)
- Novak v. Kasaks, 216 F.3d 300 (requirements for particularity when alleging access to contrary facts)
- Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190 (corporate scienter and pleading access to contrary information)