12 F. Supp. 3d 622
S.D.N.Y.2014Background
- OSG issued debt in a March 2010 Senior Notes Offering; the company later filed for bankruptcy (Nov. 14, 2012) and was not a party to this action.
- Lead plaintiffs allege misstatements related to Section 956 tax liability arising from foreign subsidiaries guaranteeing U.S. parent loans.
- IRS proofs of claim in bankruptcy initially asserted over $35M then amended to over $435M; OSG later settled部分 taxes for $264M, excluding 2012–2013 taxes.
- Former senior executives (Arntzen, Itkin) alleged to have known about or recklessly disregarded the Section 956 issue; resignations occurred in 2012–2013.
- Audit Committee in 2013 found material misstatements over the twelve-year period ended 2013; restatement announced in Aug. 2013; SEC investigation disclosed.
- Proskauer Rose’s internal work revealed a 2011 memorandum suggesting no guarantee by OIN, but later documents contradicted this view; Proskauer refused to issue a formal tax opinion in Oct. 2012.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Arntzen and Itkin pleaded adequate scienter under 10(b). | Scienter shown by extensive circumstantial evidence and connections to tax issue. | Nuanced Section 956 issue too complex; no clear knowledge. | Adequate scienter pleaded; claim survives. |
| Whether the complaint states control person liability under Section 20(a). | Arntzen and Itkin’s scienter imputable to OSG; control present. | No primary 10(b) violation established by Arntzen/Itkin. | Denied; Section 20(a) liability adequately stated. |
| Whether the allegations meet PSLRA heightened pleading standard for scienter. | Totality of circumstantial evidence supports strong inference of intent. | Allegations insufficiently concrete about knowledge. | Sufficient under PSLRA; the inference is cogent and at least as strong as opposing inferences. |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (strong inference standard for scienter)
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (U.S. 1976) (settled standard for scienter)
- Stoneridge Investment Partners v. Scientific-Atlanta, 552 U.S. 148 (U.S. 2008) (control liability limitations)
- ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (circumstantial evidence and pleading guidance)
- Kalnit v. Eichler, 264 F.3d 131 (2d Cir. 2001) (reckless inference standards for scienter)
- South Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98 (2d Cir. 2009) (reckless disregard standard explanation)
- New Orleans Emp. Ret. Sys. v. Celestica, Inc., 455 Fed.Appx. 10 (2d Cir. 2011) (corporate scienter adequate when grounded in executive conduct)
- ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JPMorgan Chase Co., 553 F.3d 187 (2d Cir. 2009) (GAAP violations as contributing to scienter when paired with intent)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (standard for evaluating inference strength)