P. Kevin Castel, United States District Judge
BACKGROUND
Omega was a publically traded nutritional products company that operated in two primary industry segments, human nutrition and animal nutrition.
The Clean Water Act establishes requirements for monitoring and disposing of fish waste and oily bilge water, and in 2011, United States Attorney's Office for the Eastern District of Virginia filed a criminal information charging Omega's Subsidiary with violating these requirements at its Reedville, Virginia facility. (CSAC ¶¶ 39, 43, 45). Two years later, Omega's Subsidiary entered into a plea agreement (the "Virginia Plea Agreement"), which required it to plead guilty to "knowingly discharging pollutants from a point source into waters of the United States without a permit" and "knowingly discharging oil into waters of the United States in a quantity that may be harmful on numerous and discrete occasions." (CSAC ¶ 46). Omega's Subsidiary agreed to pay a $5.5 million fine and $2 million for community service and to serve three years on probation. (CSAC ¶ 47).
The Virginia Plea Agreement also required Omega's Subsidiary to develop and implement at all of its facilities an environmental compliance program. (CSAC ¶¶ 4, 50-51). Omega's Subsidiary established rules and guidelines pertaining to, among other things, "the maintenance of oil record books, safety inspections and equipment, bilge management, bilge off-loading and bail water management." (CSAC ¶ 51). In addition, it created a reporting system that ostensibly allowed employees to report anonymously any non-compliance or suspected non-compliance with any applicable law or regulation, and Omega's Subsidiary stated that "[n]o employee may be terminated or otherwise retaliated against for reporting deficiencies except where an employee abuses the system or intentionally submits false reports." (CSAC ¶ 51).
On August 6, 2013, which is the start of the class period, Omega filed a press release with the Securities and Exchange
Omega addressed the Virginia Plea Agreement in its Form 10-Q filing as well. It stated as follows:
In April 2010, the Company received a request for information from the EPA concerning its bail wastewater practices used in its fishing operations at its Reedville facility. In February 2011, the U.S. Coast Guard conducted inspections at the Company's Reedville facility regarding the Reedville vessels' bilge water discharge practices. Based on these inquiries, both agencies commenced investigations of the Company's bail waste water and bilge water practices at its Reedville facility.
In June 2013, the Company's subsidiary, Omega Protein, Inc., resolved both the U.S. Coast Guard and EPA investigations by entering into a plea agreement with the United States Attorney's Office for the Eastern District of Virginia. Pursuant to terms of the plea agreement, the Company's subsidiary pled guilty to two Clean Water Act violations. The plea agreement required the subsidiary to pay a $5.5 million fine, be placed on a three year term of probation, and implement an environmental compliance program. In addition to the $5.5 million fine, the subsidiary was required to make a $2 million contribution to the National Fish and Wildlife Foundation to fund projects in Virginia related to the protection of the environmental health of the Chesapeake Bay. The plea agreement was approved by the U.S. District Court for the Eastern District of Virginia in June 2013 and the subsidiary paid both the $5.5 million fine and the $2.0 million contribution in July 2013.
(CSAC ¶ 80). Omega made similar disclosures on several other Forms 10-Q during the class period, each of which Johannesen (Omega's CFO) signed. (CSAC ¶¶ 68, 86, 93, 102, 134). Omega varied this language only slightly and added on some Forms 10-Q that Omega's Subsidiary "will be on probation until June 2016, unless the probation period is terminated earlier by the court." (CSAC ¶¶ 68, 86, 93, 102; see CSAC ¶ 134). Scholtes commented on Omega's financial results on Omega's Form 8-K several more times during the class period, sometimes stating the results were "fueled" by, "benefit[ed] from," or "reflect[ed]" some benign aspect of Omega's business. (CSAC ¶¶ 82, 98, 136, 142, 150, 152).
On all but the last Form 10-K filed during the class period, each of which Scholtes and Johannesen signed, Omega addressed the risk of Omega's Subsidiary failing to comply with the terms of its probation. (CSAC ¶¶ 68, 95, 122, 148). Omega explained that "[i]f [Omega's Subsidiary] fails to comply with the terms of
On August 3, 2016, Omega disclosed on its Form 10-Q that it had "received a petition on probation ... and as a result of that petition ha[d] become aware of a criminal investigation ... into the waste water discharge practices" of Omega's Subsidiary at its Abbeville, Louisiana facility. (CSAC ¶ 154). Omega noted that "[t]he petition on probation seeks to revoke the subsidiary's probation based on alleged Clean Act Water [sic] [v]iolations" but that Omega was "unable to determine [the petition's] potential outcome or its effects on the Company's probation status." (CSAC ¶ 154). Additionally, Omega stated that if Omega's Subsidiary were found to be out of compliance with its probation terms, Omega's Subsidiary "could be subject to additional criminal penalties or prosecution," including new criminal charges in the Western District of Louisiana. (CSAC ¶ 154).
Omega asserted in its next Form 10-Q, filed on November 2, 2016, that it "ha[d] initiated its own investigation and ha[d] been cooperating with [federal prosecutors]." (CSAC ¶ 158). Based on the information it had obtained, it "believe[d] that it [was] probable that a liability ha[d] been incurred and some financial fine or penalty in connection with the Abbeville facility's wastewater discharges practices may be imposed," although it could not determine whether Omega's Subsidiary's actions would affect Omega's Subsidiary's probation status. (CSAC ¶ 158).
On December 16, 2016 Omega filed a press release with the SEC on Form 8-K, disclosing that Omega's Subsidiary had "entered into a plea agreement" (the "Louisiana Plea Agreement") "with the United States Attorney's Office for the Western District of Louisiana to resolve the previously disclosed government investigation related to [Omega's] Subsidiary's Abbeville, Louisiana operations." (Doc. 42-8 at 3, 4). It attached the Louisiana Plea Agreement to the Form 8-K. (Doc. 42-8 at 3, 5-10). Omega stated that "[u]nder the [Louisiana] Plea Agreement, [Omega's] Subsidiary agreed to plead guilty to two felony counts under the Clean Water Act" and that the prosecutors and Omega's Subsidiary "will jointly recommend a sentence consisting of (i) a $1.0 million fine, (ii) a 3-year probationary period for [Omega's] Subsidiary, and (iii) a payment by [Omega's] Subsidiary of $200,000 for community service." (Doc. 42-8 at 3). Omega also disclosed that a federal district court in the Eastern District of Louisiana imposed an additional two years of probation following a hearing to determine whether Omega's Subsidiary had violated the terms of its probation. (Doc. 42-8 at 3). These additional two years of probation were to run concurrent with the three year term of probation agreed to in the Louisiana Plea Agreement. (Doc. 42-8 at 3).
Omega's Subsidiary finalized and submitted the Louisiana Plea Agreement to the court on January 18, 2017. (Doc. 42-6). The prosecutors and Omega's Subsidiary stipulated that Omega's Subsidiary, on December 8, 2014 and February 1, 2016, improperly discharged waste water from an effluent pond by failing to monitor or sample the discharged waste water and by using a pump instead of the outfall designated in its discharge permit. (Doc. 42-6).
After regular trading had closed on March 1, 2017, Omega filed its Form 10-K for 2016. (CSAC ¶ 160). In this filing, Omega disclosed, in addition to adjusted earnings per diluted share purportedly lower than expected, that "[i]n December 2016, the Company received a subpoena from the SEC requesting information in connection with an investigation relating to a Company subsidiary's compliance with its probation terms and the Company's protection of whistleblower employees." (Doc. 42-12; Doc. 42-13); SEC Form 10-K for Year Ended Dec. 31, 2016.
Several investors that acquired stock from August 6, 2013 to March 1, 2017 filed suit against Omega, Scholtes, and Johannesen. Those cases were consolidated with the present case, and IBEW was appointed lead plaintiff. (Doc. 25). IBEW, in the Consolidated Second Amended Complaint, alleges on behalf of itself and others similarly situated that defendants knowingly made material misrepresentations and omissions in Omega's filings with the SEC during the class period, ultimately causing Omega's stock price to decline on March 2, 2017. (CSAC ¶¶ 178, 188-202). It asserts a claim for securities fraud against all defendants under section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), through section 10(b)'s implementing regulation, Rule 10b-5, 17 C.F.R. 240.10b-5. (CSAC ¶¶ 188-96). IBEW also seeks to hold Scholtes and Johannesen liable under Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), as the individuals controlling Omega. (CSAC ¶¶ 197-202).
It predicates these claims not only on defendants' non-disclosure of the two Clean Water Act violations at the Louisiana facility, but also on defendants' failure to disclose that Omega's Subsidiary purportedly did not monitor pH levels or comply with pH level requirements when it disposed of waste water from its Mississippi facility. (CSAC ¶¶ 53-60; see, e.g., CSAC ¶ 77). IBEW does not allege that these purported violations at the Mississippi facility have ever been discovered by government officials, investigated, charged, or, until this lawsuit, even disclosed publicly.
Defendants have moved to dismiss the Consolidated Second Amended Complaint pursuant to Rule 12(b)(6), Fed. R. Civ. P.
LEGAL STANDARD
To survive a motion to dismiss under Rule 12(b)(6), "a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.' " Ashcroft v. Iqbal,
In addition, "[a]ny complaint alleging securities fraud must satisfy the heightened pleading requirements of the [Private Securities Litigation Reform Act] and [Federal Rule of Civil Procedure] 9(b) by stating with particularity the circumstances constituting fraud." ECA, Local 134 IBEW Joint Pension Tr. v. JP Morgan Chase Co.,
DISCUSSION
I. Section 10(b) Claim
"To sustain a claim under Section 10(b), [a plaintiff] must show (i) a material misrepresentation or omission; (ii) scienter; (iii) 'a connection with the purchase or sale of a security[;]' (iv) reliance by the plaintiff(s); (v) economic loss; and (vi) loss causation." In re Omnicom Grp., Inc. Sec. Litig.,
A. Material Misrepresentation or Omission
"Under Rule 10b-5, it is unlawful to (1) 'make any untrue statement of a material fact,' or (2) 'omit to state a material fact necessary in order to make the statements made ... not misleading.' " In re Vivendi, S.A. Sec. Litig.,
IBEW asserts that defendants made an affirmative misrepresentation, that several of defendants' statements were misleading because they omitted material facts, and that defendants had an independent duty to disclose Omega's Subsidiary's purportedly ongoing violations of environmental regulations and the terms of its probation. The Court will address the alleged misrepresentations and omissions in turn.
i. Statements Concerning the Virginia Plea Agreement
IBEW claims that defendants affirmatively misrepresented on multiple occasions that Omega had "implemented a comprehensive compliance program which cover[ed] the areas addressed by the [Virginia Plea Agreement]." (E.g., CSAC ¶ 95). The truth, IBEW maintains, is that Omega had not "properly implemented" a compliance program, as the program "was failing to prevent continued violations of environmental regulations." (Doc. 44 at 18). Regardless of whether Omega had properly implemented the compliance program, defendants' statements are "too general to cause a reasonable investor to rely on them" and are, therefore, "not actionable under the securities laws." In re Sanofi Sec. Litig.,
Numerous courts that have faced similar statements have so held. For example, in ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co.,
The Second Circuit's decision in Meyer v. Jinkosolar Holdings Co.,
IBEW maintains that certain omissions rendered other statements concerning the Virginia Plea Agreement misleading. It contends that defendants were required to disclose that Omega's Subsidiary was violating the terms of its probation and that Omega's Subsidiary had failed to put in place an effective environmental compliance system because defendants disclosed that the Virginia Plea Agreement "required" Omega's Subsidiary to "be placed on a three year term of probation" and to "implement an environmental compliance program." (E.g., CSAC ¶ 80). This duty arises, IBEW argues, because "when [a company] makes a disclosure about a particular topic, whether voluntary or required, the representation must be 'complete and accurate.' " In re Morgan Stanley Info. Fund Sec. Litig.,
Although the principle of complete and accurate disclosure is correct, IBEW's application of it is not. Defendants' disclosures
The same is true of IBEW's claim that defendants' repeated statements that Omega's Subsidiary "will be on probation until June 2016, unless the probation period is terminated earlier by the court," required defendants to disclose that Omega's Subsidiary was engaged in activity that presented a risk that its probation would be extended. (E.g., CSAC ¶ 86). Defendants' disclosures were complete and accurate statements of the term of probation that the Virginia Plea Agreement imposed. To the extent that IBEW predicates its argument on the fact that defendants stated that Omega's Subsidiary's probation could terminate earlier than June 2016 without disclosing that its probation could also be extended, no reasonable investor would view the omission of such an obvious potential result of violating a term of probation as "alter[ing] the 'total mix' of information available," and, thus, the omission is not actionable. In re Time Warner Inc. Sec. Litig.,
ii. Risk Disclosures
IBEW also argues that defendants misled investors in Omega's Forms 10-K and 10-Q by stating that "if [Omega's Subsidiary] fails to comply with the terms of its probation ..., we could be subject to criminal prosecution" and that "[i]t is possible that environmental laws and regulations could require material expenditures or otherwise adversely affect the Company's operations." (E.g., CSAC ¶¶ 95, 100). IBEW contends that these statements misled investors into believing that Omega's Subsidiary was only possibly violating the terms of its probation and that environmental laws would only possibly adversely affect Omega when Omega's Subsidiary was, in fact, actually violating those terms, violations which, if discovered, would likely adversely affect Omega.
"In all cases, ... the court must keep in mind that a complaint fails to state a claim of securities fraud if no reasonable investor could have been misled" by the statements at issue, considered together and in context, "about the nature of the risk when he invested." Halperin v. eBanker USA.com, Inc.,
This is especially so when the omission is the legal conclusion that Omega's Subsidiary had likely violated its probation. " '[D]isclosure is not a rite of confession,' and companies do not have a duty 'to disclose uncharged, unadjudicated wrongdoing.' " City of Pontiac Policemen's & Firemen's Ret. Sys. v. UBS AG,
iii. Statements Concerning the Source of Financial Success
IBEW contends that defendants misled investors about the source of Omega's financial success.
Courts in this district have held that "[w]here a company puts at issue the cause of its financial success, it may mislead investors if the company fails to disclose that a material source of its success is the use of improper or illegal business practices." In re Mylan,
The only non-conclusory allegation that even remotely indicates the impact of Omega's Subsidiary's illegal conduct on Omega's financial condition during the class period is that Omega's Subsidiary was fined $1.2 million for two violations of the Clean Water Act. (CSAC ¶ 63). This fine amounted to approximately 0.5 percent of Omega's revenue for 2013, Omega's lowest revenue year during the class period. (See CSAC ¶ 26; Doc. 42-6 at 3). The connection between the omitted illegal conduct and defendants' comments on Omega's financial results "is too tenuous a connection to render [defendants'] statements regarding [Omega's] financial success misleading." In re ITT Educ. Servs.,
iv. Item 303 of Regulation S-K
IBEW contends that Item 303 of Regulation S-K obligated defendants to disclose Omega's Subsidiary's probation violations. Item 303 requires certain issuers of securities to "[d]escribe any known trends or uncertainties ... that [the issuer] reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations."
IBEW asserts that Omega's Subsidiary's illegal conduct caused uncertainty over whether Omega would experience "financial penalties, loss of the financial benefit Omega had been enjoying from its illegal conduct, and reputational harm." (Doc.
The underlying illegal conduct at issue here does not directly pertain to the Omega's operating results or financial condition. See Lopez v. CTPartners Exec. Search Inc.,
And even then, a fine or an order requiring Omega's Subsidiary to cease the illegal conduct would have materially impacted Omega's financial condition or operating results only if the illegal conduct was materially decreasing Omega's operating costs, which-as stated earlier, IBEW has not adequately alleged was the case-if disclosure of the illegal activity would materially impact Omega's reputation in such a way as to hinder its business relationships, or if Omega would be subjected to a substantial fine. Defendants could not have "reasonably expect[ed]" such a chain of contingencies to materialize, § 229.303(a)(3)(ii), and IBEW "may not plead fraud by hindsight," Slayton v. Am. Exp. Co.,
This case stands in stark contrast to the type of conduct for which the SEC envisioned Item 303 to compel disclosure. The SEC has observed that Item 303's "[r]equired disclosure is based on currently known trends, events, and uncertainties that are reasonably expected to have material effects, such as: A reduction in the registrant's product prices; erosion in the registrant's market share; changes in insurance coverage; or the likely non-renewal of a material contract." Mgmts. Discussion,
Even if the connection between the conduct at issue and an impact on Omega's operating results or financial condition were not so tenuous, it remains true that "courts have been sensitive about forcing a company to damage its own interests as well as those of its shareholders." Lopez,
In City of Pontiac Policemen's and Firemen's Retirement System v. UBS AG,
The reasoning in City of Pontiac extends naturally to the disclosure requirements imposed by Item 303.
v. Item 503 of Regulation S-K
Nor does Item 503 of Regulation S-K create an affirmative duty to disclose that Omega's Subsidiary "had been violating the terms of its probation under the Virginia Plea Agreement." (CSAC ¶ 70). Item 503, as noted, requires certain companies to include "a discussion of the most significant factors that make the offering
B. Scienter and Loss Causation
IBEW has not alleged any actionable misrepresentation or omission. Because IBEW's failure to do so warrants dismissal, the Court does not reach defendants' scienter and loss causation arguments. The Court will grant defendants' motion to dismiss IBEW's section 10(b) claim.
II. Section 20(a) Claim
To establish liability under section 20(a), a plaintiff "must first establish a primary violation." In re Omnicom,
III. Motion to Strike
In reaching its conclusion, the Court "has not relied in any fashion" on the excerpts at issue or on any references to, or any assertions or arguments based on, these excerpts in defendants' briefing. Kowalski v. YellowPages.com, LLC, No. 10 Civ. 7318 (PGG),
CONCLUSION
For the foregoing reasons, defendants' motion to dismiss the Consolidated Second Amended Complaint is GRANTED. (Doc. 40). IBEW's motion to strike is DENIED as moot. (Doc. 45).
SO ORDERED.
Notes
A third-party acquired all of Omega's outstanding shares in 2017. (See CSAC ¶ 35).
Available at https://www.sec.gov/Archives/edgar/data/1053650/000143774917003546/ome20161231_10k.htm.
IBEW attempts to distinguish Menaldi by stating that Omega, unlike the defendants in Menaldi, failed to implement a compliance program at all. To the extent that this distinction matters, it is factually inaccurate. IBEW alleges at that "inspections would generally occur every three to six months, ... [inspections which] were mostly done as a result of the Virginia Plea Agreement." (CSAC ¶ 54). IBEW also alleges that "there may have been a ten minute training video that plant workers were shown as a result of [the Virginia Plea Agreement]." (CSAC ¶ 56).
IBEW appears to allege in the Consolidated Second Amended Complaint that Omega's actual financial results were also misleading, but it has affirmatively abandoned that claim in its briefing. (Doc. 44 at 20 n.5 ("[T]he [CSAC] does not allege that Omega's financial results were misstated. Rather, the [CSAC] alleges that [d]efendants misled investors by reporting positive financial results while misrepresenting the source of Omega's financial success." (citations omitted) ); see, e.g., CSAC ¶¶ 110-11, 124-25).
Indiana Public Retirement System v. SAIC, Inc.,